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level 3 : significant unobservable inputs that reflect the company 's own assumptions about the assumptions that market participants would use in pricing an asset or liability . the following tables show the recorded amounts of assets and liabilities measured at fair value on a recurring basis as of : replace_table_token_46_th the company did not have any material assets measured at fair value on a non recurring basis as of december 31 , 2015 and story_separator_special_tag financial condition and results of operations the following discussion and analysis is intended to facilitate the understanding and assessment of significant changes and trends in our businesses that accounted for the changes in our results of operations in the year ended december 31 , 2015 , as compared to our results of operation in the year ended december 31 , 2014 ; in our results of operations in the year ended december 31 , 2014 , as compared to our results of operations in the year ended december 31 , 2013 , and our financial condition at december 31 , 2015 as compared to our financial condition at december 31 , 2014. this discussion and analysis is based on and should be read in conjunction with our consolidated financial statements and the accompanying notes thereto contained elsewhere in this annual report on form 10-k. in addition to historical information , this discussion contains forward-looking statements that involve risks , uncertainties and assumptions that could cause results to differ materially from management 's expectations . some of the factors that could cause results to differ materially from expectations are discussed in the sections entitled “ risk factors ” and “ forward-looking statements ” contained elsewhere in this annual report on form 10-k. critical accounting policies our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the united states ( “ gaap ” ) and accounting practices in the banking industry . certain of those accounting policies are considered critical accounting policies , because they require us to make estimates and assumptions regarding circumstances or trends that could materially affect the value of those assets , such as economic conditions or trends that could impact our ability to fully collect our loans or ultimately realize the carrying value of certain of our other assets . those estimates and assumptions are made based on current information available to us regarding those economic conditions or trends or other circumstances . if changes were to occur in the events , trends or other circumstances on which our estimates or assumptions were based , or other unanticipated events were to occur that might affect our operations , we may be required under gaap to adjust our earlier estimates and to reduce the carrying values of the affected assets on our balance sheet , generally by means of charges against income , which could also affect our results of operations in the fiscal periods when those charges are recognized . utilization and valuation of deferred income tax benefits . we record as a “ deferred tax asset ” on our balance sheet an amount equal to the tax credit and tax loss carryforwards and tax deductions ( collectively “ tax benefits ” ) that we believe will be available to us to offset or reduce income taxes in future periods . under applicable federal and state income tax laws and regulations , tax benefits related to tax loss carryforwards will expire if they can not be used within specified periods of time . accordingly , the ability to fully use our deferred tax asset related to tax loss carryforwards to reduce income taxes in the future depends on the amount of taxable income that we generate during those time periods . at least once each year , or more frequently , if warranted , we make estimates of future taxable income that we believe we are likely to generate during those future periods . if we conclude , on the basis of those estimates and the amount of the tax benefits available to us , that it is more likely , than not , that we will be able to fully utilize those tax benefits prior to their expiration , we recognize the deferred tax asset in full on our balance sheet . on the other hand , if we conclude on the basis of those estimates and the amount of the tax benefits available to us that it has become more likely , than not , that we will be unable to utilize those tax benefits in full prior to their expiration , then , we would establish a valuation allowance to reduce the deferred tax asset on our balance sheet to the amount with respect to which we believe it is still more likely , than not , that we will be able to use to offset or reduce taxes in the future . the establishment of such a valuation allowance , or any increase in an existing valuation allowance , would be effectuated through a charge to the provision for income taxes or a reduction in any income tax credit for the period in which such valuation allowance is established or increased . allowance for loan and lease losses . our alll is established through a provision for loan losses charged to expense and may be reduced by a recapture of previously established loss reserves , which are also reflected in the statement of income . loans are charged against the alll when management believes that collectability of the principal is unlikely . the alll is an amount that management believes will be adequate to absorb estimated losses on existing loans that may become uncollectible based on an evaluation of the collectability of loans and prior loan loss experience . this evaluation also takes into consideration such factors as changes in the nature and volume of the loan portfolio , overall portfolio quality , review of specific problem loans , current economic conditions and certain other subjective factors that may affect the borrower 's ability to pay . story_separator_special_tag the following table provides a breakdown of noninterest expense for banking and wealth management for the years ended december 31 : replace_table_token_12_th the $ 9.5 million increase in noninterest expense in banking in 2015 as compared to 2014 was due primarily to increases in staffing and costs associated with the bank 's expansion and growth of its balances of loans and deposits . compensation and benefits for banking increased $ 6.6 million during 2015 as compared to 2014 as the number of full time equivalent employees ( “ fte ” ) in banking increased to 191.3 during 2015 from 144.5 during 2014 , as a result of the acquisition of prb and increased staffing to support the growth in loans and deposits . the $ 2.9 million increase in occupancy and depreciation , professional services and marketing and other expenses were related to increased costs related to the acquisition of prb and costs associated with its expansion into additional corporate space and opening of new offices . in addition , $ 0.3 million of costs related to the conversion of prb core processing systems were included in other expenses in the third quarter of 2015. noninterest expenses in wealth management increased $ 0.4 million in 2015 as compared to 2014 primarily due to increases in compensation and benefits . the increase in compensation and benefits reflects increased incentive compensation incurred primarily as a result of the increase in aum . years ended december 31 , 2014 and 2013. our net income for 2014 was $ 8.4 million , as compared to $ 7.9 million for 2013. the proportional increase in net income was less than the proportional increase in income before taxes because of an increase in our effective tax rate from 17 % in 2013 to 43 % in 2014. in 2013 , the valuation allowance for deferred taxes was reduced by $ 2.4 million and certain credits under california tax laws were eliminated at the beginning of 2014 resulting in a higher effective tax rate in 2014. the primary sources of revenue for banking are net interest income , fees from its deposits , trust and insurance services , certain loan fees , and , beginning in the second half of 2014 , fees charged for consulting and administrative services . the primary sources of revenue for wealth management are asset management fees assessed on the balance of aum and , up through the first half of 2015 , fees charged for consulting and administrative services . compensation and benefit costs , which represent the largest component of noninterest expense accounted for 61 % and 77 % , respectively , of the total noninterest expense for banking and wealth management in 2014. the following tables show key operating results for each of our business segments for the years ended december 31 : replace_table_token_13_th 46 general . income before taxes was $ 14.8 million in 2014 as compared to $ 9.5 million in 2013. this increase was due to increases in income before taxes for banking and wealth management of $ 6.0 million and $ 2.1 million , respectively , which were partially offset by a $ 2.8 million increase in corporate interest and noninterest expenses . the $ 6.0 million increase in income before taxes for banking in 2014 as compared to 2013 was due to higher net interest income , higher noninterest income and a lower provision for loan losses , which were partially offset by higher noninterest expenses . for wealth management , a $ 0.7 million loss before taxes in 2013 improved to income before taxes of $ 1.4 million in 2014 due to higher noninterest income which was partially offset by higher noninterest expenses . the increase in corporate interest and noninterest expenses in 2014 as compared to 2013 was primarily due to a $ 0.5 million increase in interest costs related to the higher balance of the term loan , the expensing of $ 1.0 million in ipo costs , $ 0.3 million of increased allocations of executive compensation related to the time spent on the ipo by management employees of the bank and $ 0.3 million of costs related to the implementation of a new firm-wide client relationship management system . 47 net interest income : the following tables set forth information regarding ( i ) the total dollar amount of interest income from interest-earning assets and the resultant average yields on those assets ; ( ii ) the total dollar amount of interest expense and the average rate of interest on our interest-bearing liabilities ; ( iii ) net interest income ; ( iv ) net interest rate spread ; and ( v ) net yield on interest-earning assets for the years ended december 31 : replace_table_token_14_th net interest income is impacted by the volume ( changes in volume multiplied by prior rate ) , interest rate ( changes in rate multiplied by prior volume ) and mix of interest-earning assets and interest-bearing liabilities . the following table provides a breakdown of the changes in net interest income due to volume and rate changes between 2014 as compared to corresponding period in 2013. replace_table_token_15_th 48 net interest income increased 21 % from $ 34.8 million in 2013 , to $ 42.3 million in 2014 because of a 31 % increase in interest-earning assets , which was partially offset by a decrease in our net interest rate spread . the decrease in the net interest rate spread from 3.87 % for 2013 to 3.56 % for 2014 was due to a decrease in yield on total interest earning assets which was partially offset by a decrease in rates paid on interest bearing liabilities . the yield on interest earning assets decreased from 4.43 % to 4.10 % due to an increase in the proportion of lower yielding securities to total interest earning assets and a decrease in the yield on loans .

results of operations years ended december 31 , 2015 and 2014. our net income for 2015 was $ 13.4 million , as compared to $ 8.4 million for 2014. the primary sources of revenue for banking are net interest income , fees from its deposits , trust and insurance services , gains on sales of loans , certain loan fees , and , beginning in the second half of 2014 , fees charged for consulting and administrative services . the primary sources of revenue for wealth management are asset management fees assessed on the balance of aum and , up through the first half of 2014 , fees charged for consulting and administrative services . compensation and benefit costs , which represent the largest component of noninterest expense , accounted for 63 % and 76 % , respectively , of the total noninterest expense for banking and wealth management in 2015 . 42 the following tables show key operating results for each of our business segments for the years ended december 31 : replace_table_token_7_th general . income before taxes was $ 22.8 million in 2015 as compared to $ 14.8 million in 2014. this increase was due to increases in income before taxes for banking and wealth management of $ 6.4 million and $ 0.7 million , respectively , and a $ 0.9 million decrease in corporate interest and noninterest expenses . the $ 6.4 million increase in income before taxes for banking in 2015 as compared to 2014 was due to higher net interest income and higher noninterest income , which were partially offset by a higher provision for loan losses and higher noninterest expenses . for wealth management , the $ 0.7 million increase was due to higher noninterest income which was partially offset by higher noninterest expenses . the decrease in corporate interest and noninterest expenses in 2015 as compared to 2014 was primarily due to a $ 0.9 million decrease in professional services and marketing expenses .

our principal business is to acquire , own , and operate class a and creative office assets in vibrant and improving urban communities throughout the united states . these communities are located in areas that include traditional downtown areas and suburban main streets , which have high barriers to entry , high population density , improving demographic trends and a propensity for growth . we believe that the critical mass of redevelopment in such areas creates positive externalities , which enhance the value of substantially stabilized assets in the area . we believe that these assets will provide greater returns than similar assets in other markets , as a result of the improving demographics , public commitment , and significant private investment that characterize these areas . we are operated by affiliates of cim group . cim group is a vertically-integrated owner and operator of real assets with multi-disciplinary expertise and in-house research , acquisition , credit analysis , development , finance , leasing , and asset management capabilities . cim group is headquartered in los angeles , california and has offices in oakland , california ; bethesda , maryland ; dallas , texas ; new york , new york ; chicago , illinois ; and phoenix , arizona . our wholly-owned subsidiary , cim urban , is party to an investment management agreement with the operator , an affiliate of cim group , pursuant to which the operator provides certain services to cim urban . in addition , we are party to a master services agreement with the operator , an affiliate of cim group , pursuant to which the operator provides or arranges for other service providers to provide management and administration services to us . our two primary goals are ( a ) consistently growing our nav and cash flow per share of common stock through our principal business and ( b ) providing liquidity to our common stockholders at prices reflecting our nav and cash flow prospects . in that regard , in june 2016 we completed a tender offer for 10,000,000 shares of common stock at a price of $ 21.00 per share of common stock ; in september 2016 , we repurchased in a privately negotiated transaction , 3,628,116 shares of our common stock at a price of $ 22.00 per share from urban ii ; in june 2017 , we repurchased in a privately negotiated transaction , 26,181,818 shares of our common stock at a price of $ 22.00 per share from urban ii ; and in december 2017 , we repurchased in a privately negotiated transaction , 14,090,909 shares of our common stock at a price of $ 22.00 per share from urban ii . additionally , in april 2017 , we declared and paid a special cash dividend of $ 0.28 per share of common stock , or $ 601,000 , to the common stockholders that did not participate in the september 2016 private repurchase ; in june 2017 , we declared and paid a special cash dividend of $ 1.98 per share of common stock , or $ 4,271,000 , to the common stockholders that did not participate in the june 2017 private repurchase ; and in december 2017 , we declared a special cash dividend of $ 0.73 per share of common stock , or $ 1,575,000 , to the common stockholders that did not participate in the december 2017 private repurchase , which was paid in january 2018. these special cash dividends allowed such common stockholders that did not participate in the september 2016 , june 2017 and december 2017 private repurchases to receive the economic benefits of such repurchases . we seek to utilize the cim platform to acquire and improve assets within cim 's qualified communities . we believe assets in these markets provide greater returns as a result of improving demographics , public commitment , and significant private investment within the areas . over time , we seek to expand our real estate assets in communities targeted by cim group , supported by cim group 's broad real estate capabilities , as part of our plan to prudently grow market value and earnings . as a matter of prudent management , we also regularly evaluate each asset within our portfolio as well as our strategies . such review 67 may result in dispositions when an asset no longer fits our overall objectives or strategies or when our view of the market value of such asset is equal to or exceeds its intrinsic value . as a result of such review , we sold an office property in santa ana , california in november 2015 ; a hotel in oakland , california in february 2016 ; a hotel in los angeles , california in july 2016 ; an office property in san francisco , california in march 2017 ; two multifamily properties in dallas , texas in may 2017 ; an office property in charlotte , north carolina in june 2017 ; an office property and a parking garage in sacramento , california in june 2017 ; a multifamily property in dallas , texas in june 2017 ; an office property in washington , d.c. in august 2017 ; an office property in los angeles , california in september 2017 ; a multifamily property in new york , new york in september 2017 ; an office property in washington , d.c. in october 2017 ; and a multifamily property in houston , texas in december 2017. such review may result in additional dispositions from time to time . we used a substantial portion of the net proceeds of such dispositions to provide liquidity to our common stockholders in 2017 at prices reflecting our nav and cash flow prospects . properties as of december 31 , 2017 , our real estate portfolio consisted of 20 assets , all of which are fee-simple properties . story_separator_special_tag over the next four quarters , we expect to see expiring cash rents as set forth in the table below : replace_table_token_26_th ( 1 ) all month-to-month tenants occupying a total of 24,855 square feet are included in the expiring leases in the first quarter listed . ( 2 ) other than as set forth in ( 3 ) below , represents gross monthly base rent , as of december 31 , 2017 , under leases expiring during the periods above , multiplied by twelve . this amount reflects total cash rent before abatements . where applicable , annualized rent has been grossed up by adding annualized expense reimbursements to base rent . ( 3 ) 1130 howard street was acquired in december 2017. the annualized rent as of december 31 , 2017 for 12,944 rentable square feet of the building is presented using the actual rental income under a signed lease with a different tenant who is expected to take possession in april 2018 , as the space is occupied by the prior owner and annualized rent under the short-term lease is de minimis . 69 during the year ended december 31 , 2017 , we executed leases with terms longer than 12 months totaling 424,395 square feet . the table below sets forth information on certain of our executed leases during the year ended december 31 , 2017 , excluding space that was vacant for more than one year , month-to-month leases , leases with an original term of less than 12 months , related party leases , and space where the previous tenant was a related party : replace_table_token_27_th ( 1 ) based on the number of tenants that signed leases . ( 2 ) cash rents represent gross monthly base rent , multiplied by twelve . this amount reflects total cash rent before abatements . where applicable , annualized rent has been grossed up by adding annualized expense reimbursements to base rent . fluctuations in submarkets , buildings and terms of the leases cause large variations in these numbers and make predicting the changes in rent in any specific period difficult . our rental and occupancy rates are impacted by general economic conditions , including the pace of regional and economic growth , and access to capital . therefore , we can not give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates . additionally , decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re-lease space could have further negative effects on our future financial condition , results of operations and cash flow . multifamily statistics : the following table sets forth occupancy rates and the monthly rent per occupied unit across our multifamily portfolio for the specified periods : replace_table_token_28_th ( 1 ) occupancy and monthly rent per occupied unit are not applicable as of december 31 , 2017 due to the sale of our five multifamily properties during the year ended december 31 , 2017 . ( 2 ) represents gross monthly base rent under leases commenced as of the specified period , divided by occupied units . this amount reflects total cash rent before concessions . hotel statistics : the following table sets forth the occupancy , average daily rate ( `` adr '' ) and revpar for the hotel portfolio for the specified periods : replace_table_token_29_th ( 1 ) the courtyard oakland and lax holiday inn were sold in february and july 2016 , respectively . the occupancy , adr and revpar are presented for our period of ownership only . excluding these hotel properties that were sold in 2016 , occupancy , adr , and revpar were 78.1 % , $ 152.89 and $ 119.44 for the year ended december 31 , 2016 , respectively , and 77.5 % , $ 148.24 and $ 114.83 for the year ended december 31 , 2015 , respectively . 70 lending segment in order to allow cim commercial to increase its focus on class a and creative office assets , our board of directors approved a plan in december 2014 for the lending segment that , when completed , would have resulted in the deconsolidation of the lending segment , which at that time was focused on small business lending in the hospitality industry . in july 2015 , to maximize value , we modified our strategy from a strategy of selling the lending segment as a whole to a strategy of soliciting buyers for components of the business , including our commercial mortgage loans and the sba 7 ( a ) lending platform . this change in the sale methodology resulted in the need to extend the period to complete the sale of the remainder of the lending segment beyond one year . on december 17 , 2015 , pursuant to the modified plan , we sold substantially all of our commercial mortgage loans with a carrying value of $ 77,121,000 to an unrelated third-party and recognized a gain of $ 5,151,000 . in september 2016 , we discontinued our efforts to sell the sba 7 ( a ) lending platform , and the activities related to the sba 7 ( a ) lending platform have been reclassified to continuing operations for all periods presented . on december 29 , 2016 , we sold our commercial real estate lending subsidiary , which was classified as held for sale and had a carrying value of $ 27,587,000 , which was equal to management 's estimate of fair value , to a fund managed by an affiliate of cim group . we did not recognize any gain or loss in connection with the transaction . management 's estimate of fair value was determined with assistance from an independent third-party valuation firm . through our sba 7 ( a ) lending platform , we are a national lender that primarily originates loans to small businesses .

summary segment results set forth and described below are summary segment results for our four segments included in continuing operations . replace_table_token_35_th revenues office revenue : office revenue includes rental revenues from office properties , expense reimbursements and lease termination income . office revenue decreased to $ 187,435,000 , or by 0.4 % , for the year ended december 31 , 2016 compared to $ 188,270,000 for the year ended december 31 , 2015 . the decrease was primarily due to a decrease in revenue at certain of our washington d.c. properties primarily due to the expiration of a lease with a large tenant in january 2016 , a decrease in revenue at our sacramento , california property due to the expiration of a lease with a large tenant in june 2015 , and a decrease in expense reimbursements revenue at one of our washington d.c. properties . these decreases were partially offset by revenue increases at certain properties in washington d.c. and california primarily due to a full year of occupancy for certain tenants in 2016 and increased rental rates , as well as the renewal in 2016 of a large lease at market rents at one of our san francisco properties . hotel revenue : hotel revenue decreased to $ 48,379,000 , or by 21.3 % , for the year ended december 31 , 2016 compared to $ 61,436,000 for the year ended december 31 , 2015 . the decrease was primarily due to the sale of two hotel properties in february and july 2016 , partially offset by revenue increases at the remaining hotel property due to revpar growth resulting from increases in rates and occupancy . multifamily revenue : multifamily revenue increased to $ 20,303,000 , or by 8.5 % , for the year ended december 31 , 2016 compared to $ 18,721,000 for the year ended december 31 , 2015 .

the tax reform act of 1986 and similar state provisions limit the use of net operating loss carryforwards in certain situations where equity transactions result in a change of ownership as defined by internal revenue code section 382. in the event we should experience story_separator_special_tag financial condition and results of operations the following discussion and analysis should be read in conjunction with our audited consolidated financial statements and the related notes that appear 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 21e of the securities exchange act of 1934 , as amended , or the exchange act . these statements are often identified by the use of words such as “ may , ” “ will , ” “ expect , ” “ believe , ” “ anticipate , ” “ intend , ” “ could , ” “ should , ” “ estimate , ” or “ continue , ” and similar expressions or variations . such forward-looking statements are subject to risks , uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements . factors that could cause or contribute to such differences include , but are not limited to , those discussed in the section titled “ risk factors , ” set forth in part i , item 1a of this annual report on form 10-k and elsewhere in this report . the forward-looking statements in this annual report on form 10-k represent our views as of the date of this annual report on form 10-k. we anticipate that subsequent events and developments will cause our views to change . however , while we may elect to update these forward-looking statements at some point in the future , we have no current intention of doing so except to the extent required by applicable law . you should , therefore , not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this annual report on form 10-k. business overview we develop biocatalysts for the pharmaceutical and fine chemicals markets . our proven technologies enable scale-up and implementation of biocatalytic solutions to meet customer needs for rapid , cost-effective and sustainable process development , from research to manufacturing . biocatalysts are enzymes that initiate and or accelerate chemical reactions . manufacturers have historically used naturally occurring biocatalysts to produce many goods used in everyday life . however , inherent limitations in naturally occurring biocatalysts have restricted their commercial use . our proprietary codeevolver ® protein engineering technology platform , which introduces genetic mutations into genes in order to give rise to changes in the enzymes that they produce , is able to overcome many of these limitations , allowing us to evolve and optimize biocatalysts to perform specific and desired chemical reactions at commercial scale . once potentially beneficial mutations are identified through this proprietary process , combinations of these mutations can then be tested until variant enzymes have been created that exhibit marketable performance characteristics superior to competitive products . this process allows for continuous , efficient improvements to the performance of enzymes . in the past , we implemented the codeevolver ® protein engineering technology platform through paid collaborations with our customers . in july 2014 , we entered into our first license agreement pursuant to which we granted a license to a global pharmaceutical company to use the codeevolver ® protein engineering technology platform for their internal development purposes . in august 2015 , we entered into a second license agreement involving the codeevolver ® protein engineering technology platform with another global pharmaceutical company and we continue to pursue platform licensing opportunities with additional customers . we have commercialized our technology and products in the pharmaceuticals market , which is our primary business focus . our pharmaceutical customers , which include several of the large global pharmaceutical companies , use our technology , products and services in their manufacturing processes and process development . we also use our technology to develop biocatalysts for use in the fine chemicals market . the fine chemicals market consists of several large market verticals , including food and food ingredients , animal feed , flavors and fragrances , and agricultural chemicals . we have also used our technology to develop an early stage , novel enzyme therapeutic product candidate for the potential treatment of phenylketonuria ( “ pku ” ) in humans . pku is an inherited metabolic disorder in which the enzyme that converts the essential amino acid phenylalanine into tyrosine is deficient . story_separator_special_tag satisfactory completion of the second milestone of the technology transfer process . we will also be eligible to receive payments of up to a maximum of $ 15.0 million for each commercial api that is manufactured by merck using one or more novel enzymes developed by merck using the codeevolver ® protein engineering technology platform . under the merck codeevolver ® agreement , we will transfer the codeevolver ® protein engineering technology platform to merck over an approximately 15 to 24 month period starting on the effective date of the agreement . as part of this technology transfer , we will provide to merck our proprietary enzymes , proprietary protein engineering protocols and methods , and proprietary software algorithms . upon completion of technology transfer , merck will have codeevolver ® protein engineering technology platform installed at its designated site . at the end of the technology transfer period , merck can exercise annual options that , upon payment of certain option fees , would extend merck 's license to include certain improvements to the codeevolver ® protein engineering technology platform that arise during the three-year period that begins at the end of the technology transfer period . through november 3 , 2016 , we will provide additional enzyme evolution services to merck at our laboratories in redwood city . story_separator_special_tag these costs primarily consist of ( i ) employee-related costs , which include salaries and other personnel-related expenses ( including stock-based compensation ) , ( ii ) various allocable expenses , which include occupancy-related costs , supplies , depreciation of facilities and laboratory equipment and amortization of acquired technologies , and ( iii ) external costs . research and development expenses are expensed when incurred . 2015 compared to 2014 research and development expenses decreased $ 2.1 million in 2015 to $ 20.7 million , as compared to 2014 . research and development expenses in 2014 included $ 2.7 million of non-recurring non-cash impairment charges , of which $ 1.8 million was related to the write down of assets associated with our codexol ® detergent alcohols program and the remainder related to the changes in fair value of assets held for sale . in addition , research and development expenses in 2014 included a $ 0.8 million gain from the sale of our former hungarian subsidiary . excluding the aforementioned non-recurring charges , research and development expenses decreased $ 0.3 million in 2015 compared to 2014 . the decrease was primarily driven by a decrease in depreciation expenses resulting from the aforementioned impairment charges and the sale of our hungarian subsidiary in 2014 , partially offset by a $ 0.6 million increase in employee-related expenses . 2014 compared to 2013 research and development expenses decreased $ 8.9 million in 2014 to $ 22.8 million , as compared to 2013 . the results in 2014 include non-cash impairment charges of $ 2.7 million , of which $ 1.8 million was related to the write down of assets associated with our codexol ® detergent alcohols program and the remainder related to the changes in fair value of assets held for sale . excluding non-recurring charges , research and development expenses decreased $ 11.6 million in 2014 , as compared to 2013. the decrease was primarily due to decreased employee-related expenses associated with the company-wide restructuring 43 implemented in late 2013 , as well as decreased depreciation expense resulting from the disposal and impairment of certain equipment previously used in discontinued research and development activities . our research and development headcount decreased by 34 employees to 48 employees at december 31 , 2014. research and development expenses included stock-based compensation expense of $ 1.0 million in 2014 , as compared to $ 1.2 million in 2013. selling , general and administrative expenses selling , general and administrative expenses consist of employee-related costs , which include salaries and other personnel-related expenses ( including stock-based compensation ) , hiring and training costs , consulting and outside services expenses ( including audit and legal counsel related costs ) , marketing costs , building lease costs , and depreciation and amortization expenses . 2015 compared to 2014 selling , general and administrative expenses was $ 22.3 million in 2015 compared to $ 21.9 million 2014 , an increase of $ 0.4 million or 2 % . the increase was primarily due to increases in personnel-related expenses , including an increase in stock-based compensation , partially offset by decreases in legal and contractor expenses . 2014 compared to 2013 selling , general and administrative expenses decreased $ 5.0 million in 2014 to $ 21.9 million , as compared to 2013 . the decrease was primarily due to decreases in employee related expenses , consulting and outside services . our selling , general and administrative headcount of 43 employees at december 31 , 2014 remained unchanged compared to december 31 , 2013. selling , general and administrative expenses included stock-based compensation expense of $ 3.7 million in 2014 , as compared to $ 3.2 million in 2013. restructuring charges replace_table_token_9_th during the fourth quarter of 2013 , our board of directors approved and committed to a restructuring plan to reduce our cost structure as a result of the winding down of our codexyme ® cellulase enzyme program . in 2013 , we recorded restructuring expenses of $ 0.8 million , primarily for employee severance and other termination benefits , consisting of $ 0.6 million in research and development expenses and $ 0.2 million in selling , general and administrative expenses . see note 16 - restructuring to our consolidated financial statements . other income ( expense ) , net replace_table_token_10_th interest income interest income in 2015 was relatively flat compared to 2014 . interest income decreased by $ 42.0 thousand in 2014 compared to 2013 , driven primarily by decreased balances in our cash equivalents and short-term investments . other expense other expense decreased $ 66.0 thousand in 2015 compared to 2014 and decreased $ 70.0 thousand in 2014 compared to 2013 . the decreases were primarily due to fluctuations in foreign currency . 44 benefit from income taxes replace_table_token_11_th the tax benefit for 2015 primarily related to unrealized gains from changes in the fair value of our investment in co 2 solutions . the total tax benefit in 2014 primarily consists of income tax benefit attributable to foreign operations offset by foreign country taxes , and accrued future withholding taxes on dividends . in 2014 , we recognized approximately $ 0.4 million of previously unrealized tax benefits related to our operations in singapore . the tax benefit for 2013 is primarily related to losses in international locations and changes in deferred taxes . we continue to recognize a full valuation allowance against our net deferred tax assets as we believe that it is more likely than not that the majority of our deferred tax assets will not be realized . liquidity and capital resources liquidity is the measurement of our ability to meet working capital needs and to fund capital expenditures . our sources of cash include operations and , to a lesser extent , stock option exercises . we actively manage our cash usage and investment of liquid cash to ensure the maintenance of sufficient funds to meet our working capital needs .

results of operations overview revenues were $ 41.8 million in 2015 , an 18 % increase from $ 35.3 million in 2014 . biocatalyst product sales revenues , which consist primarily of sales of biocatalyst intermediates , apis and codex® biocatalyst panels and kits , were $ 11.4 million in 2015 , a decrease of 13 % compared with $ 13.1 million in 2014 . the decrease was primarily due to the timing of customer demand in 2015 as compared to 2014. biocatalyst research and development revenues , which include license , technology access and exclusivity fees , research services , milestone payments , royalties , and optimization and screening fees , totaled $ 25.6 million in 2015 , an increase of 71 % , 39 compared with $ 14.9 million in 2014 . the increase was primarily due to the achievement of the first milestone under the merck license agreement of $ 5.0 million , $ 1.5 million increase in milestone related revenue recognized under the gsk license agreement ( $ 6.5 million in 2015 compared to $ 5.0 million in the prior year ) , $ 3.1 million settlement relating to past-due payments and settlement of future payments associated with our royalty business with a non-core customer , and $ 1.5 million in research and development revenues relating to the project we initiated with the leading biopharmaceutical company in 2015. revenue sharing arrangement sales were $ 4.8 million in 2015 , a decrease of 34 % , compared with $ 7.3 million in 2014 . the decline resulted following the expiration of the formulation patent for argatroban in june 2014 , allowing for increased generic competition in the subsequent quarters after the expiration of the patent . research and development expenses were $ 20.7 million in 2015 , a decrease of 9 % from $ 22.8 million in 2014 .

homer city is engaged in discussions with the owner-lessors regarding funding of retrofit expenditures for the homer city plant that , if successful in providing funding , will likely result in homer city 's loss of substantially all beneficial economic interest in and material control of the homer city plant . in addition , as discussed below , homer city recorded significant impairment charges during the fourth quarter of 2011. highlights of operating results homer city had a net loss of $ 686 million in 2011 compared to net income of $ 27 million in 2010. the 2011 results included a $ 295 million after-tax ( $ 478 million pre-tax ) charge resulting from the impairment of the property , plant and equipment related to the homer city plant and the impact of a $ 344 million valuation allowance on its deferred tax asset position due to the uncertainty of homer city 's ability to realize such tax benefits . the 2011 decrease in earnings , excluding the impairment charge and the deferred tax valuation allowance , was due to lower generation , lower average realized energy and capacity prices , and higher average fuel costs per mwh . for further discussion of homer city 's impairment charge , see `` critical accounting estimates and policies—impairment of long-lived assets '' and `` item 8. eme homer city generation l.p. notes to financial statements—note 12. asset impairments and other charges . '' for further discussion of the deferred tax valuation allowance , see `` item 8. eme homer city generation l.p. notes to financial statements—note 6. income taxes . '' homer city 's net income decreased $ 40 million in 2010 compared to 2009. the 2010 decrease in earnings was primarily due to unrealized losses in 2010 compared to unrealized gains in 2009 , higher coal costs , lower generation and higher plant maintenance costs in 2010 , partially offset by higher capacity revenues . energy related unrealized losses in 2010 were $ 20 million compared to unrealized gains of $ 15 million in 2009. results in 2010 included the benefit of power hedge contracts entered into during earlier periods at higher prices than current energy prices . substantial doubt that homer city will continue as a going concern homer city 's accompanying financial statements have been prepared assuming that it will continue as a going concern , which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the 12-month period following the date of these financial statements . the reduction in energy prices experienced in the fourth quarter of 2011 and into 2012 has adversely impacted cash flow , and homer city is not expected to be able to generate sufficient cash flow from operations necessary to meet its obligations , including the obligations under the homer city lease . as described further below under homer city lease , it is unlikely that homer city will continue as a going concern throughout 2012. homer city lease homer city and its indirect parent , eme , engaged a financial advisor and conducted a bidding process to obtain capital funding from third parties during the second half of 2011 to partially finance the installation of the environmental improvements at the homer city plant . during the fourth quarter of 2011 , such efforts failed to obtain sufficient interest from market participants necessary to fund the capital needed to make such improvements under the current lease arrangement . homer city does not currently have sufficient capital and does not expect to generate sufficient funds from operations to complete retrofits . restrictions under the agreements entered into as part of homer city 's 2001 sale-leaseback transaction affect , and in some cases significantly limit or prohibit , homer city 's ability to incur indebtedness or make capital expenditures . consequently , homer city 's ability to install environmental compliance equipment will be dependent on funding from the owner-lessors or third parties . homer city is currently engaged in discussions with the owner-lessors regarding the potential for such funding . homer city expects that the outcome of any such discussions , if successful in providing funding for the homer city plant , will likely result in homer city 's loss of substantially all beneficial economic interest in and material control of the homer city plant . failure to resolve the source of funding of necessary capital expenditures for the homer city plant could result in homer city 's default under the lease agreements giving rise to remedies for the owner-lessors and secured lease obligation bondholders , which could include foreclosing on the leased assets , the general partner of homer city , or both . homer city is currently engaged in discussions with the owner-lessors through general electric capital corporation ( gecc ) , one of the owner participants , regarding the funding of capital improvements at the homer city plant . under the existing 17 homer city sale-leaseback documents , homer city would be obligated to reimburse gecc for any amount gecc ultimately agrees to fund for these capital improvements . if these discussions are successful , it is expected that an affiliate of gecc will obtain the economic benefit and majority ownership of all the operating assets of homer city . the transfer of ownership would be effected on a consensual basis . in addition , gecc is currently engaged in discussions with certain of the holders of the secured lease obligation bonds regarding amendments to the terms of the 8.137 % senior secured bonds due 2019 and the 8.734 % senior secured bonds due 2026 , each issued by homer city funding llc . there is no assurance that an agreement will be reached with the owner-lessors or the existing secured lease obligation bondholders on funding the capital improvements . homer city is not expected to meet the covenant requirements of its sale-leaseback documents relating to the payment of equity rent at april 1 , 2012 and homer city will be unable to make the required equity rent payment . story_separator_special_tag to the extent available , homer city plans to fund these expenditures with cash on hand or cash generated from operations . homer city 's use of cash in its bank accounts is limited to specific operating and capital expenditures as set forth in the security deposit agreement executed as part of the sale-leaseback transaction . the amount in certain reserve accounts will be available for payments due on the equity portion of lease rent during specified periods , and in accordance with the sale-leaseback documents , unless there is a default in the payment of the senior portion of lease rent , in which case the amount will be available to pay such senior portion of the lease rent . the release of funds from these restricted cash accounts is permitted , provided homer city maintains specified reserve balances in accordance with the sale-leaseback documents , no event of default shall have occurred or be continuing and no two failed rent payments shall have occurred . homer city had $ 20 million included in restricted deposits at december 31 , 2011 related to these reserve accounts . cash flow at december 31 , 2011 , homer city had cash and cash equivalents of $ 84 million compared to $ 132 million at december 31 , 2010 . net cash provided by operating activities totaled $ 34 million , $ 106 million and $ 151 million in 2011 , 2010 and 2009 , respectively . the 2011 decrease in net cash provided by operating activities was primarily attributable to lower generation from outages at units 1 and 2 , lower energy and capacity prices , and the timing of cash receipts and disbursements related to working capital items , partially offset by an increase in interest payable to affiliate under the subordinated revolving loan agreement . the 2010 decrease was primarily due to lower net income in 2010 , partially offset by changes in derivative assets and liabilities . net cash used in financing activities totaled $ 68 million , $ 78 million and $ 74 million in 2011 , 2010 and 2009 , respectively . in 2011 , homer city borrowed $ 24 million , net more from its affiliate subordinated revolving loan , and lease financing payments were $ 14 million higher , as compared to 2010. in 2010 , homer city paid $ 4 million , net less on its affiliate subordinated revolving loan , and lease financing payments were $ 8 million higher , as compared to 2009 . 22 net cash used in investing activities primarily related to capital expenditures of $ 14 million , $ 18 million and $ 26 million in 2011 , 2010 and 2009 , respectively . in 2009 , homer city also had a $ 10 million receipt from restricted cash related to permitted withdrawals from restricted deposits pursuant to the sale-leaseback agreements . credit ratings homer city is not currently rated . credit ratings for eme and emmt are as follows : moody 's rating s & p rating fitch rating eme 1 caa1 ccc+ ccc emmt not rated ccc+ not rated 1 senior unsecured rating . all the above ratings are on negative outlook . homer city can not provide assurance that the current credit ratings above will remain in effect for any given period of time or that one or more of these ratings will not be lowered . homer city notes that these credit ratings are not recommendations to buy , sell or hold securities and may be revised at any time by a rating agency . payments made under subordinated revolving loan and tax payments the following table summarizes the payments by homer city under its subordinated revolving loan with edison mission finance co. , a subsidiary of eme , that constitute permitted distributions pursuant to the terms of the sale-leaseback transaction and any payments made pursuant to tax-allocation agreements : replace_table_token_10_th for additional information on the tax-allocation agreements , see `` item 8. eme homer city generation l.p. notes to financial statements—note 1. summary of significant accounting policies—income taxes and tax-allocation agreements . '' key ratio affecting distributions set forth below is the key ratio required under the lease covenants contained in homer city 's sale-leaseback agreements for the 12 months ended december 31 , 2011 : financial ratio covenant actual senior rent service coverage ratio greater than 1.7 to 1 1.18 to 1 as indicated above , the actual senior rent service coverage ratio of homer city was below the covenant threshold for the 12 months ended december 31 , 2011 , and homer city also did not meet the threshold for the prospective two 12-month periods , which currently precludes homer city from making distributions , including repayment of certain intercompany loans and from paying the equity portion of the rent payment . for additional information , see `` management 's overview—homer city lease . '' sale-leaseback restrictions on distributions in order to make a distribution , homer city must be in compliance with the covenants specified in the lease agreements , including the following financial performance requirements measured on the date of distribution . at the end of each quarter , the equity and debt portions of rent then due and payable must have been paid and the senior rent service coverage ratio for the prior 12-month period ( taken as a whole and projected for each of the prospective two 12-month periods ) must be greater than 1.7 to 1 in order to make the equity portion of the rent payment and other restricted payments . homer city would be 23 permanently restricted in its ability to make distributions if a failure to pay equity rent when due was not cured within nine months , or even if cured , occurred more than one additional time during the term of the lease . eme has not guaranteed homer city 's obligations under the leases .

summary the table below summarizes total revenues as well as key performance measures related to the homer city plant . replace_table_token_7_th 1 effective april 1 , 2011 , emmt allocated to homer city the benefit of an arrangement that allows emmt to deliver a portion of homer city 's power into the nyiso . to the extent this arrangement is not utilized , homer city 's power is delivered into pjm . reconciliation of non-gaap disclosures and statistical definitions average realized energy price the average realized energy price reflects the average price at which energy is sold into the market including the effects of hedges , real-time and day-ahead sales and pjm fees and ancillary services . it is determined by dividing ( i ) operating revenues less unrealized gains ( losses ) and other non-energy related revenues by ( ii ) generation as shown in the table below . revenues related to capacity sales are excluded from the calculation of average realized energy price . replace_table_token_8_th the average realized energy price is presented as an aid in understanding the operating results of the homer city plant . average realized energy price is a non-gaap performance measure since such statistical measure excludes unrealized gains or losses recorded as operating revenues . management believes that the average realized energy price is meaningful for investors as this information reflects the impact of hedge contracts at the time of actual generation in period-over-period comparisons or as compared to real-time market prices . statistical definitions equivalent availability reflects the impact of the unit 's inability to achieve full load , referred to as derating , as well as outages which result in a complete unit shutdown . the coal plants are not available during periods of planned and unplanned maintenance .

other-than-temporary impairment all of the company 's marketable securities and investments are subject to a periodic impairment review . the company recognizes an impairment charge when a decline in the fair value of its investments below the cost basis is judged to be other-than-temporary . the company considers various factors in determining whether to recognize an impairment charge , including the length of time and extent to which the fair value has been less than the company 's cost basis , the financial condition and near-term prospects of the investee , and the company 's intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in the market value . no story_separator_special_tag cautionary statement you should read the following discussion and analysis in conjunction with our consolidated financial statements and the related notes thereto contained in part iv , item 15 of this report . certain statements in this report , including statements regarding our business strategies , operations , financial condition , and prospects are forward-looking statements . use of the words “anticipates , ” “believes , ” “could , ” “estimates , ” “expects , ” “intends , ” “may , ” “plans , ” “potential , ” “predicts , ” “projects , ” “should , ” “will , ” “would” , “will likely continue , ” “will likely result” and similar expressions that contemplate future events may identify forward-looking statements . the information contained in this section is not a complete description of our business or the risks associated with an investment in our common stock . we urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the sec , which are available on the sec 's website at http : //www.sec.gov . the section entitled “risk factors” set forth in part i , item 1a of this report , and similar discussions in our other sec filings , describe some of the important factors , risks and uncertainties that may affect our business , results of operations and financial condition and could cause actual results to differ materially from those expressed or implied by these or any other forward-looking statements made by us or on our behalf . you are cautioned not to place undue reliance on these forward-looking statements , which are based on current expectations and reflect management 's opinions only as of the date thereof . we do not assume any obligation to revise or update forward-looking statements . finally , our historic results should not be viewed as indicative of future performance . overview we are one of the largest online providers of aftermarket auto parts , including body parts , engine parts , and performance parts and accessories . our user-friendly websites provide customers with a broad selection of skus , with detailed product descriptions and photographs . our proprietary product database maps our skus to product applications based on vehicle makes , models and years . we principally sell our products to individual consumers through our network of websites and online marketplaces . our flagship websites are located at www.autopartswarehouse.com , www.partstrain.com , www.jcwhitney.com , www.stylintrucks.com , www.automd.com and our corporate website is located at www.usautoparts.net . we believe our strategy of disintermediating the traditional auto parts supply chain and selling products directly to customers over the internet allows us to more efficiently deliver products to our customers while generating higher margins . our history . we were formed in delaware in 1995 as a distributor of aftermarket auto parts and launched our first website in 2000. we rapidly expanded our online operations , increasing the number of skus sold through our e-commerce network , adding additional websites , improving our internet marketing proficiency and commencing sales in online marketplaces . additionally , in august 2010 , through our acquisition of wag , we expanded our product-lines and increased our customer reach in the diy automobile and off-road accessories market . as a result , our business has grown since 2000 , generating net sales of $ 304.0 million for fiscal year ended december 29 , 2012. international operations . in april 2007 , we established offshore operations in the philippines . our offshore operations allow us to access a workforce with the necessary technical skills at a significantly lower cost than comparably experienced u.s.-based professionals . our offshore operations are responsible for a majority of our website development , catalog management , and back 22 office support . our offshore operations also house our main call center . we had 945 employees in the philippines as of december 29 , 2012. in january 2013 , we laid off 163 employees in the philippines which reduced our workforce to 782 in the philippines ( for additional details , refer to “note 16-subsequent events” of the notes to consolidated financial statements , included in part iv , item 15 of this report ) . in addition to our operations in the philippines , we have a canadian subsidiary to facilitate sales of our products in canada ; the subsidiary has no distribution center or employees . we also ship parts directly to canada and through a freight forwarding partner throughout the world . in 2012 , we shipped auto parts to over 160 different countries . we believe that the cost advantages of our offshore operations provide us with the ability to grow our business in a cost-effective manner . acquisitions . from time to time , we may acquire certain businesses , websites , domain names , or other assets . in 2009 , we completed the acquisition of the assets of a small website and the related domain names which further expanded and enhanced our product offering and our ability to reach more customers . in the first quarter of 2010 , we completed two additional website and domain name asset acquisitions , which increased our net sales and internet traffic . story_separator_special_tag further , the adjusted ebitda measure shown for the company may not be comparable to similarly titled measures used by other companies . refer to the table presented below for reconciliation of net loss to adjusted ebitda . total revenues decreased compared to the same period in 2011 due to our decreased online sales . our online sales , which include our e-commerce , online marketplace sales channels and online advertising , contributed 91.8 % of total revenues , and our offline sales , which consist of our kool-vue™ and wholesale operations , contributed 8.2 % of total revenues . our online sales decreased by $ 28.8 million , or 9.3 % , to $ 279.1 million compared to $ 307.9 million in fiscal year 2011. our offline sales performed well throughout the year . like most e-commerce retailers , our success depends on our ability to attract online consumers to our websites and convert them into customers in a cost-effective manner . historically , marketing through search engines provided the most efficient opportunity to reach millions of on-line auto part buyers . we are included in search results through paid search listings , where we purchase specific search terms that will result in the inclusion of our listing , and algorithmic searches that depend upon the searchable content on our websites . in fiscal year 2012 , we decreased the amount we spent on paid search listings , as we have determined that it does not generate a sufficient amount of revenues to justify the expense . algorithmic listings can not be purchased and instead are determined and displayed solely by a set of formulas utilized by the search engine . we have had a history of success with our search engine marketing techniques , which gave our different websites preferred positions in search results . but search engines , like google , revise their algorithms from time to time in an attempt to optimize their search results . since 2011 , google has released changes to google 's search results ranking algorithm aimed to lower the rank of certain sites and return other sites near the top of the search results based upon the quality of the particular site as determined by google . google made additional updates throughout fiscal year 2012. we were negatively impacted by the changes in methodology for how google displayed or selected our different websites for customer search results . this reduced our unique visitor count which adversely affected our financial results for fiscal year 2012. our unique visitor count decreased by 11.7 million , or 7.1 % , for fiscal year 2012 to 153.9 million unique visitors compared to 165.6 million unique visitors in fiscal year 2011. we believe we were affected by these search engine algorithm changes due to the use of our product catalog across multiple websites . to address this issue we are consolidating to a significantly smaller number of websites to ensure unique catalog content . as we are significantly dependent upon search engines for our website traffic , if we are unable to attract unique visitors , our business and results of operations will be harmed . barriers to entry in the automotive aftermarket industry are low , and current and new competitors can launch websites at a relatively low cost . we experienced significant competitive pressure from certain of our suppliers as they are now selling their products online . since our suppliers have access to merchandise at very low costs , they were able to sell products at lower prices and maintain higher gross margins , thus our financial results were negatively impacted by the increased level of competition . total orders for fiscal year 2012 went down by 10.7 % to 2.4 million compared to 2.7 million for fiscal year 2011 and our average order value went down by $ 7.5 , or 6.2 % , for fiscal year 2012 to $ 114.3 compared to $ 121.8 in fiscal year 2011 as a result of increased pricing competition . our current and potential customers may decide to purchase directly from our suppliers . continuing increased competition from our suppliers that have access to products at lower prices than us could result in reduced sales , lower operating margins , reduced profitability , loss of market share and diminished brand recognition . in addition , some of our competitors have used and may continue to use aggressive pricing tactics . we expect that competition will further intensify in the future as internet use and online commerce continue to grow worldwide . we are taking a number of steps during 2013 to attempt to reduce the selling prices of our products while increasing margins , which are discussed below . 24 total expenses increased compared to the same period in 2011. our expenses primarily consist of direct costs associated with procuring parts from suppliers and delivering products to customers , which include direct product costs , outbound freight and shipping costs , warehouse supplies and warranty costs , advertising expenses , depreciation and amortization expense and personnel costs . our personnel costs , which consist of compensation , benefits and payroll related taxes , and are primarily a function of our headcount , decreased in fiscal year 2012 compared to fiscal year 2011. our employees at the end of fiscal year 2012 decreased to 1,370 compared to 1,521 at the end of fiscal year 2011. our employees in the philippines decreased to 945 at the end of fiscal year 2012 compared to 1,005 at the end of fiscal year 2011. in addition , our headcount decreased in 2012 due to the closure of our call center operations in la salle , illinois .

results of operations the following table sets forth selected statement of operations data for the periods indicated , expressed as a percentage of net sales : replace_table_token_6_th 27 replace_table_token_7_th fifty-two weeks ended december 29 , 2012 compared to the fifty-two weeks ended december 31 , 2011 net sales and gross margin replace_table_token_8_th net sales decreased $ 23.1 million , or 7.0 % , for fiscal year 2012 compared to fiscal year 2011. our net sales consisted of online sales , representing 91.8 % of the total for fiscal year 2012 ( compared to 94.1 % in fiscal year 2011 ) , and offline sales , representing 8.2 % of the total for fiscal year 2012 ( compared to 5.9 % in fiscal year 2011 ) . the net sales decrease was due to a decline of $ 28.8 million , or 9.3 % , in online sales , partially offset by a $ 5.7 million , or 29.8 % , increase in offline sales . online sales decreased primarily due to a 7.1 % reduction in unique visitors and a decline in average order value by 6.2 % , partially offset by an increase of 2.2 % in revenue capture . the decrease in unique visitors was due to the negative impact from customer traffic losses as a result of changes search engines have made to the algorithms that they use to optimize their search results . also , our revenues were negatively impacted by the increased competition as described in further detail under “executive summary” above . our offline sales , which consist of our kool-vue™ and wholesale operations , continued to show solid growth . gross profit decreased $ 15.4 million , or 14.4 % , in fiscal year 2012 compared to fiscal year 2011. gross margin rate decreased 2.6 % to 30.1 % in fiscal year 2012 compared to 32.7 % in fiscal year 2011. gross margin decreased in fiscal year 2012 compared to fiscal year 2011 due to reduced margins from both online and offline sales .

cautionary notice regarding forward-looking statements certain statements of other than historical fact that are contained in this document and in written material , press releases and oral statements issued by or on behalf of southside bancshares , inc. , a bank holding company , may be considered to be “ forward-looking statements ” within the meaning of and subject to the protections of the private securities litigation reform act of 1995. these forward-looking statements are not guarantees of future performance , nor should they be relied upon as representing management 's views as of any subsequent date . these statements may include words such as “ expect , ” “ estimate , ” “ project , ” “ anticipate , ” “ appear , ” “ believe , ” “ could , ” “ should , ” “ may , ” “ might , ” “ will , ” “ would , ” “ seek , ” “ intend , ” “ probability , ” “ risk , ” “ goal , ” “ target , ” “ objective , ” “ plans , ” “ potential , ” and similar expressions . forward-looking statements are statements with respect to our beliefs , plans , expectations , objectives , goals , anticipations , assumptions , estimates , intentions and future performance , and are subject to significant known and unknown risks and uncertainties , which could cause our actual results to differ materially from the results discussed in the forward-looking statements . for example , discussions of the effect of our expansion , trends in asset quality and earnings from growth , and certain market risk disclosures are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations . see “ item 1. business ” and this “ item 7. management 's discussion and analysis of financial condition and results of operations. ” by their nature , certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future . as a result , actual income gains and losses could materially differ from those that have been estimated . other factors that could cause actual results to differ materially from forward-looking statements include , but are not limited to , the following : general economic conditions , either globally , nationally , in the state of texas , or in the specific markets in which we operate , including , without limitation , the deterioration of the commercial real estate , residential real estate , construction and development , energy , oil and gas , credit and liquidity markets , which could cause an adverse change in our net interest margin , or a decline in the value of our assets , which could result in realized losses ; current or future legislation , regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we are engaged , including the impact of the dodd-frank wall street reform and consumer protection act of 2010 ( “ dodd-frank act ” ) , the federal reserve 's actions with respect to interest rates , the capital requirements promulgated by the basel committee on banking supervision ( “ basel committee ” ) and other regulatory responses to current economic conditions ; adverse changes in the status or financial condition of the government-sponsored enterprises ( the “ gses ” ) impacting the gses ' guarantees or ability to pay or issue debt ; adverse changes in the credit portfolio of other u.s. financial institutions relative to the performance of certain of our investment securities ; economic or other disruptions caused by acts of terrorism in the united states , europe or other areas ; changes in the interest rate yield curve such as flat , inverted or steep yield curves , or changes in the interest rate environment that impact interest margins and may impact prepayments on the mortgage-backed securities ( “ mbs ” ) portfolio ; increases in our nonperforming assets ; our ability to maintain adequate liquidity to fund operations and growth ; the failure of our assumptions underlying allowance for loan losses and other estimates ; unexpected outcomes of , and the costs associated with , existing or new litigation involving us ; changes impacting our balance sheet and leverage strategy ; risks related to actual u.s. agency mbs prepayments exceeding projected prepayment levels ; risks related to u.s. agency mbs prepayments increasing due to u.s. government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified ; our ability to monitor interest rate risk ; 30 risks related to the price per barrel of crude oil ; significant increases in competition in the banking and financial services industry ; changes in consumer spending , borrowing and saving habits ; technological changes ; our ability to increase market share and control expenses ; the effect of changes in federal or state tax laws ; the effect of compliance with legislation or regulatory changes ; the effect of changes in accounting policies and practices ; credit risks of borrowers , including any increase in those risks due to changing economic conditions ; and risks related to loans secured by real estate , including the risk that the value and marketability of collateral could decline . all written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice . we disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments , unless otherwise required by law . critical accounting estimates our accounting and reporting estimates conform with u.s. generally accepted accounting principles ( “ gaap ” ) and general practices within the financial services industry . the preparation of financial statements in conformity with gaap requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes . story_separator_special_tag where there are price variances outside certain ranges from different pricing services for specific securities , those pricing variances are reviewed with other market data to determine which of the price estimates is appropriate for that period . impairment of investment securities and mortgage-backed securities . investment and mbs classified as available for sale ( “ afs ” ) are carried at fair value and the impact of changes in fair value are recorded on our consolidated balance sheet as an unrealized gain or loss in “ accumulated other comprehensive ( loss ) income , ” a separate component of shareholders ' equity . securities classified as afs or held to maturity ( “ htm ” ) are subject to our review to identify when a decline in value is other-than-temporary . when it is determined that a decline in value is other-than-temporary , the carrying value of the security is reduced to its estimated fair value , with a corresponding charge to earnings for the credit portion and to other comprehensive income for the noncredit portion . factors considered in determining whether a decline in value is other-than-temporary include : ( 1 ) whether the decline is substantial , the duration of the decline and the reasons for the decline in value ; ( 2 ) whether the decline is related to a credit event , a change in interest rate or a change in the market discount rate ; ( 3 ) the financial condition and near-term prospects of the issuer ; and ( 4 ) whether we have a current intent to sell the security and whether it is not more likely than not that we will be required to sell the security before the anticipated recovery of its amortized cost basis . for certain assets , we consider expected cash flows of the investment in determining if impairment exists . defined benefit pension plan . the plan obligations and related assets of our defined benefit pension plan ( the “ plan ” ) are presented in “ note 11 – employee benefits ” to our consolidated financial statements included in this report . entry into the plan by new employees was frozen effective december 31 , 2005. plan assets , which consist primarily of marketable equity and debt instruments , are valued using observable market quotations . plan obligations and the annual pension expense are determined by independent actuaries and through the use of a number of assumptions that are reviewed by management . key assumptions in measuring the plan obligations include the discount rate , the rate of salary increases and the estimated future return on the plan assets . in determining the discount rate , we utilized a cash flow matching analysis to determine a range of appropriate discount rates for our defined benefit pension and restoration plans . in developing the cash flow matching analysis , we constructed a portfolio of high quality noncallable bonds ( rated aa- or better ) to match as close as possible the timing of future benefit payments of the plan at december 31 , 2015 . based on this cash flow matching analysis , we were able to determine an appropriate discount rate . salary increase assumptions are based upon historical experience and our anticipated future actions . the expected long-term rate of return assumption reflects the average return expected based on the investment strategies and asset allocation on the assets invested to provide for the plan 's liabilities . we considered broad equity and bond indices , long-term return projections , and actual long-term historical plan performance when evaluating the expected long-term rate of return assumption . at december 31 , 2015 , the weighted-average actuarial assumptions of the plan were : a discount rate of 4.56 % ; a long-term rate of return on plan assets of 7.25 % ; and assumed salary increases of 3.50 % . material changes in pension benefit costs may occur in the future due to changes in these assumptions . future annual amounts could be impacted by changes in the number of plan 32 participants , changes in the level of benefits provided , changes in the discount rates , changes in the expected long-term rate of return , changes in the level of contributions to the plan and other factors . overview story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > and 2014 totaled $ 62.7 million and $ 64.5 million , respectively , and at december 31 , 2015 consisted of $ 2.4 million of short-term borrowings and $ 60.3 million of long-term debt compared to $ 4.2 million of short-term borrowings and $ 60.3 million of long-term debt at december 31 , 2014 . assets under management in our trust department decreased during 2015 and were approximately $ 878.3 million at december 31 , 2015 compared to $ 932.6 million at december 31 , 2014 . shareholders ' equity at december 31 , 2015 totaled $ 444.1 million compared to $ 425.2 million at december 31 , 2014 . the increase is primarily the result of net income of $ 44.0 million recorded for the year ended december 31 , 2015 , the $ 1.4 million of common stock issued under our dividend reinvestment plan and stock compensation expense of $ 1.4 million . these increases 33 were partially offset by cash dividends paid of $ 25.1 million and an increase in accumulated other comprehensive loss of $ 3.1 million . the increase in accumulated other comprehensive loss is comprised primarily of a decrease of $ 6.5 million , net of tax , in the unrealized gain on securities , net of reclassification adjustment and an increase of $ 3.4 million , net of tax , related to the change in the funded status of our defined benefit plan . see “ note 4 – accumulated other comprehensive ( loss ) income ” to our consolidated financial statements included in this report . economic conditions in our market areas have continued to perform generally better than many other parts of the country .

operating results during the year ended december 31 , 2015 , our net income increase d $ 23.2 million , or 111.2 % , to $ 44.0 million , from $ 20.8 million for the same period in 2014 . the increase in net income was primarily attributable to an increase in net interest income of $ 27.9 million and an increase in noninterest income of $ 13.4 million , combined with a decrease in the provision for loan losses . these items were partially offset by an increase in noninterest expense and income tax expense . noninterest expense increase d primarily due to expenses associated with the acquisition of omni which are reflected primarily in salaries and employee benefits as well as occupancy expense . earnings per diluted share increase d $ 0.69 , or 66.3 % , to $ 1.73 for the year ended december 31 , 2015 , from $ 1.04 for the same period in 2014 . during the year ended december 31 , 2014 , our net income decrease d $ 20.4 million , or 49.4 % , to $ 20.8 million , from $ 41.2 million for the same period in 2013 . the decrease in net income was primarily attributable to merger expenses related to the acquisition of omni , a loss on the sale of loans purchased by sfg which resulted in an increase in the provision for loan losses and an impairment of our investment in sfg , and a decrease in net gain on sale of securities available for sale . these items were partially offset by a decrease in income tax expense and an increase in net interest income . noninterest expense increased primarily due to merger related expenses which is reflected primarily in salaries and employee benefits , software and data processing expense and professional fees .

our products are distributed globally through various distribution channels including wholesale in countries where we have a physical presence , direct to the consumer through our retail stores and commercial websites and through third-party distributors in countries where we do not maintain a physical presence . our products are offered at varying price points to meet the needs of our customers , whether they are value-conscious or luxury oriented . based on our extensive range of accessory products , brands , distribution channels and price points , we are able to target style-conscious consumers across a wide age spectrum on a global basis . domestically , we sell our products through a diversified distribution network that includes department stores , specialty retail locations , specialty watch and jewelry stores , company-owned retail and outlet stores , mass market stores , through our fossil website and third party websites . our wholesale customer base includes , among others , amazon , best buy , dillard 's , jcpenney , kohl 's , macy 's , neiman marcus , nordstrom , saks fifth avenue , target and wal-mart . in the u.s. , our network of company-owned stores included 63 retail stores located in premier retail sites and 113 outlet stores located in major outlet malls as of december 29 , 2018 . in addition , we offer an extensive collection of our fossil brand products on our website , www.fossil.com , as well as proprietary and licensed watch and jewelry brands through other managed and affiliated websites . internationally , our products are sold to department stores , specialty retail stores , specialty watch and jewelry stores and through third party websites in approximately 150 countries worldwide through 23 company-owned foreign sales subsidiaries and through a network of approximately 70 independent distributors . internationally , our network of company-owned stores included 181 retail stores and 127 outlet stores as of december 29 , 2018 . our products are also sold through licensed and franchised fossil retail stores , retail concessions operated by us and kiosks in certain international markets . in addition , we offer an extensive collection of our fossil brand products on our websites in certain countries . our consolidated gross profit margin is impacted by our diversified business model that includes , but is not limited to : ( i ) a significant number of product categories we distribute , ( ii ) the multiple brands we offer within several product categories , ( iii ) the geographical presence of our businesses and ( iv ) the different distribution channels we sell to or through . the components of this diversified business model produce varying ranges of gross profit margin . generally , on a historical basis , our fashion branded watch and jewelry offerings produce higher gross profit margins than our leather goods offerings . in addition , in most product categories that we offer , brands with higher retail price points generally produce higher gross profit margins compared to those of lower retail priced brands and connected products carry relatively lower margins than traditional products . gross profit margins related to sales in our europe and asia businesses are historically higher than our americas business , primarily due to the following factors : ( i ) premiums charged in comparison to retail prices on products sold in the u.s. ; ( ii ) the product sales mix in our international businesses , in comparison to our americas business , is comprised more predominantly of watches and jewelry that generally produce higher gross profit margins than leather goods ; and ( iii ) the watch sales mix in our europe and asia businesses , in comparison to our americas business , are comprised more predominantly of higher priced licensed brands . our business is subject to the risks inherent in global sourcing supply . certain key components in our products come from limited sources of supply , which exposes us to potential supply shortages that could disrupt the manufacture and sale of our products . any interruption or delay in the supply of key components could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales . interruptions or delays in supply may be caused by a number of factors that are outside of our and our contractor manufacturers ' control . effective for the fourth quarter of fiscal year 2018 , we made changes to the presentation of reportable segments to reflect changes in the way our chief operating decision maker evaluates the performance of our operations , develops strategy , and allocates capital resources . certain peripheral revenue generating activities related to our factories and intellectual property previously recorded within the americas , asia and europe segments have been reclassified to corporate . for comparison purposes , our historical segment disclosures have been recast to be consistent with the current presentation . this discussion should be read in conjunction with our consolidated financial statements and the related notes included therewith . 26 critical accounting policies and estimates the preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the u.s. requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period . on an ongoing basis , we evaluate our estimates and judgments , including those related to product returns , bad debt , inventories , long-lived asset impairment , impairment of goodwill and trade names , income taxes , warranty costs and litigation liabilities . we base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances . our estimates 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 . story_separator_special_tag if it is determined that assets are impaired , an impairment loss is recognized for the amount that the asset 's book value exceeds its fair value . should actual results or market conditions differ from those anticipated , additional losses may be recorded . we recorded impairment losses in restructuring charges of approximately $ 1.7 million , $ 8.0 million and $ 13.5 million in fiscal years 2018 , 2017 and 2016 , respectively . we recorded impairment losses in selling , general , and administrative expenses of approximately $ 1.9 million , $ 1.3 million and $ 0.8 million in fiscal years 2018 , 2017 and 2016 , respectively . in fiscal year 2018 , an increase of 100 basis points to the discount rate used in our impairment testing would not have resulted in additional impairment expense . a 10 % decrease in future expected cash flows would have increased impairment expense by $ 0.3 million . we recorded non-impairment restructuring charges related to the write off of property , plant and equipment of approximately $ 0.6 million , $ 0.4 million and $ 1.5 million in fiscal years 2018 , 2017 and 2016 , respectively . i ncome taxes . we record valuation allowances against our deferred tax assets , when necessary , in accordance with asc 740 , income taxes ( `` asc 740 '' ) . realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain . at least quarterly , we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income . to the extent we believe that recovery is not likely , we establish a valuation allowance against our deferred tax asset , increasing our income tax expense in the period such determination is made . the valuation allowance for fiscal years 2018 , 2017 and 2016 was $ 95.8 million , $ 78.3 million , and $ 19.4 million , respectively . in addition , in fiscal year 2018 , we recorded a state deferred tax liability of $ 0.5 million on foreign earnings not considered to be indefinitely reinvested outside of the u.s. our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense . we accrue an amount for our estimate of additional income tax liability which we believe we are more likely than not to incur as a result of the ultimate resolution of tax audits ( `` uncertain tax positions '' ) . we review and update the estimates used in the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities , upon completion of tax audits , upon expiration of statutes of limitation , or upon occurrence of other events . the results of operations and financial position for future periods could be impacted by changes in assumptions or resolutions of tax audits . the new global intangible low-taxed income ( “ gilti ” ) provisions of the tax cuts and jobs act ( the `` tax act '' ) requiring the inclusion of certain foreign earnings in u.s. taxable income increased our effective tax rate in fiscal 2018 and could have an adverse impact in future years . due to the complexity of these new tax rules , we are continuing to evaluate these provisions of the tax act as the internal revenue service ( `` irs '' ) and the u.s. treasury department ( `` treasury '' ) issue guidance and regulations . the gilti impact will be accounted for as incurred under the period cost method . accounting for the income tax effects of the tax act requires significant judgments and estimates in the interpretation and calculations of the provisions of the tax act . due to the timing of the enactment and the complexity involved in applying the provisions of the tax act , we made reasonable estimates of the effects and recorded provisional amounts in our financial statements for fiscal year 2017 as permitted under staff accounting bulletin no . 118 , ( “ sab 118 ” ) income tax accounting implications of the tax cuts and jobs act , which provides guidance on accounting for the tax act 's impact . additional guidance was subsequently issued by treasury and the irs , particularly with regard to the one-time repatriation tax on deferred foreign earnings . during fiscal 2018 , we completed our accounting for the tax effects of the tax act and made adjustments to the provisional amounts . in addition , our valuation allowance analysis is affected by various aspects of the tax act , including the new limitation on the deductibility of interest expense and the impact of the gilti . those adjustments materially impacted the provision for income taxes and the effective tax rate in fiscal 2018. warranty costs . our watch products are covered by limited warranties against defects in materials or workmanship . historically , our fossil and relic watch products sold in the u.s. have been covered for warranty periods of 11 years and 12 years , respectively , and our skagen branded watches have been covered by a lifetime warranty . beginning in 2017 , these brands are covered by a two year warranty . generally , all other products , including leathers and jewelry , sold in the u.s. and internationally are covered by a comparable one to two year warranty . we determine our warranty liability using historical warranty repair experience . as changes occur in sales volumes and warranty costs , the warranty accrual is adjusted as necessary . due to the nature of connected products , their warranty costs are usually more than traditional products . a shift in 28 product mix from traditional to connected products generally results in an increase in warranty liabilities . the year-end warranty liability for fiscal years 2018 , 2017 and 2016 was $ 22.8 million , $ 19.4 million and $ 15.4 million , respectively .

results of operations executive summary our approach for fiscal 2018 was to plan our sales prudently , but operate all elements of our business with the goal of improving profitability . during fiscal year 2018 , net sales decreased 9 % ( 10 % in constant currency ) as compared to fiscal year 2017. the watch and accessory business is changing at a rapid pace around the globe , and we are on a multi-year journey to transform our company . consumer preferences and shopping patterns continue to shift . product innovation , particularly in watches , has expanded the category overall , but has caused a move away from traditional product to connected watches . marketing , product information and consumer research on watches and fashion accessories are shifting from our traditional brick and mortar channels to online sites . with our focus on profitability , we are exiting marginal businesses , closing underperforming store locations , and as previously announced , we have terminated certain licensing agreements . these exits and store closures had a negative impact on net sales year-over-year , reducing fiscal year 2018 net sales by approximately 490 basis points when compared to fiscal year 2017 , while improving overall profitability . we also continued to make progress strengthening our overall financial position and our capital structure , as we improved the efficiency of our working capital , with particular focus on inventory productivity and turnover . we have four overall objectives driving our strategies and initiatives . our first and most important priority this past year was to improve our profitability and our financial condition . due to structural changes in the watch and accessory categories , we recognized the need to be highly focused on our overall profitability , which meant , at times , exiting less profitable parts of our business , such as unprofitable stores , businesses and product lines .

risk factors and below under the caption “ factors affecting our results of operations. ” actual results may differ materially from those contained in any forward-looking statements . our annual report on form 10-k for the year ended december 31 , 2018 includes a discussion and analysis of our financial condition and results of operations for the year ended december 31 , 2017 in item 7 of part ii , “ management 's discussion and analysis of financial condition and results of operations. ” overview we are a leading global sustainable specialty chemicals company that manufactures styrenic block copolymers ( “ sbcs ” ) , specialty polymers , and high-value performance products primarily derived from pine wood pulping co-products . our operations are managed through two operating segments : ( i ) polymer segment and ( ii ) chemical segment . polymer segment sbcs are highly-engineered synthetic elastomers , which we invented and commercialized over 50 years ago . we developed the first unhydrogenated styrenic block copolymers ( “ usbc ” ) in 1964 and the first hydrogenated styrenic block copolymers ( “ hsbc ” ) in the late 1960s . our sbcs enhance the performance of numerous products by imparting greater flexibility , resilience , strength , durability , and processability , and are used in a wide range of applications , including adhesives , coatings , consumer and personal care products , sealants , lubricants , medical , packaging , automotive , paving , roofing , and footwear products . we also sell isoprene rubber ( “ ir ” ) and isoprene rubber latex ( “ irl ” ) , which are non-sbc products primarily used in applications such as medical products , personal care , adhesives , tackifiers , paints , and coatings . our polymers are typically formulated or compounded with other products to achieve improved , customer-specific performance characteristics in a variety of applications . we seek to maximize the value of our product portfolio by emphasizing complex or specialized polymers and innovations that yield higher margins than more commoditized products . we sometimes refer to these complex or specialized polymers or innovations as being more “ differentiated. ” our products are found in many everyday applications , including personal care products , such as disposable diapers , and in the rubberized grips of toothbrushes , razor blades , and power tools . our products are also used to impart tack and shear properties in a wide variety of adhesive products and to impart characteristics such as flexibility and durability in sealants and corrosion resistance in coatings . our paving and roofing applications provide durability , extending road and roof life . we also produce cariflex tm isoprene rubber and isoprene rubber latex . our cariflex products are based on synthetic polyisoprene polymer and do not contain natural rubber latex or other natural rubber products making them an ideal substitute for natural rubber latex , particularly in applications with high purity requirements such as medical , healthcare , personal care , and food contact . we believe the versatility of cariflex provides opportunities for new , differentiated applications . chemical segment effective january 1 , 2018 , results for our roads and construction product line have been consolidated into our adhesives and performance chemicals product lines to better align customer portfolio and end usage . we have adjusted the presentations for the years ended december 31 , 2018 and 2017 to conform to the respective 2018 presentations . we manufacture and sell high value sustainable products primarily derived from pine wood pulping co-products . we refine and further upgrade two primary feedstocks , crude tall oil ( “ cto ” ) and crude sulfate turpentine ( “ cst ” ) , both of which are co-products of the wood pulping process , into value-added biobased specialty chemicals . we refine cto through a distillation process into four primary constituent fractions : tall oil fatty acids ( “ tofa ” ) ; tall oil rosin ( “ tor ” ) ; distilled tall oil ( “ dto ” ) ; and tall oil pitch . we further upgrade tofa and tor into derivatives such as dimer acids , polyamide resins , rosin resins , dispersions , and disproportionated resins . we refine cst into terpene fractions , which can be further upgraded into specialty terpene resins . the various fractions and derivatives resulting from our cto and cst refining process provide for distinct functionalities and properties , determining their respective applications and end markets . we focus our resources on three product groups : adhesives , performance chemicals , and tires . within our product groups , our products are sold into a diverse range of submarkets , including packaging , tapes and labels , pavement marking , high performance tires , fuel additives , oilfield and mining , coatings , metalworking fluids and lubricants , inks , and flavor and fragrances , among others . while this business is based predominantly on the refining and upgrading of cto and cst , we have the capacity to use both hydrocarbon-based raw materials , such as alpha-methyl-styrene , rosins , and gum rosins where appropriate and , accordingly , are able to offer tailored solutions for our customers . 33 recent developments and known trends our business is subject to a number of known risks and uncertainties , some of which are a result of recent developments . coronavirus . the recent emergence of the coronavirus in china , and other affected countries , has resulted in certain emergency measures to combat the spread of the virus , including extension of the lunar new year holidays , implementation of travel restrictions and extended shutdown of certain businesses in regions in which we operate and could also substantially interfere with general commercial activity related to our supply chain and customer base . while the full impact of the outbreak is unknown at this time , we have restricted employee travel to china , and other countries as appropriate , as a safety precaution . story_separator_special_tag the decrease was driven by lower average sales prices resulting from lower raw material costs and lower sales volumes . sales volumes were 296.0 kilotons for the year ended december 31 , 2019 , a decrease of 23.6 kilotons , or 7.4 % . specialty polymers volumes decrease d 11.1 % , performance products volumes decrease d 7.0 % , and cariflex volumes increase d 1.8 % . the decrease in specialty polymers revenue is a result of a previously announced inventory management program by a significant lubricant additives customer and lower demand in asia and europe , partially offset by higher innovation-led volume in north america . the decrease in performance products revenues was driven primarily by lower sales into paving and roofing applications due to the impacts of weather . the increase in cariflex revenue was primarily the result of higher latex sales into surgical glove applications . the negative effect from changes in currency exchange rates between the periods was $ 25.7 million . cost of goods sold was $ 820.4 million for the year ended december 31 , 2019 compared to $ 872.5 million for the year ended december 31 , 2018 , a decrease of $ 52.1 million , or 6.0 % . the decrease in cost of goods sold reflects lower sales volumes and lower raw material costs . these decreases are partially offset by the cost of consumed raw materials , which has higher average costs on a fifo measurement basis of accounting . additionally , changes in currency exchange rates between the periods resulted in a positive impact of $ 19.2 million . for the year ended december 31 , 2019 , the polymer segment operating income was $ 57.3 million compared to $ 159.2 million for the year ended december 31 , 2018 . this decrease is largely attributable to higher raw material costs on a fifo basis and decreases in sales volumes . for the year ended december 31 , 2019 , the polymer segment generated adjusted ebitda ( non-gaap ) of $ 188.2 million compared to $ 214.8 million for the year ended december 31 , 2018 . the decrease in adjusted ebitda was due to a previously announced inventory management program by a significant lubricant additives customer , the deterioration of market conditions in china , broader asia , and europe , which adversely affected sales of specialty polymers . our performance polymers business sales into paving and roofing applications were negatively affected by weather conditions , along with competitive pricing pressures from asia . this was partially offset by higher sales volumes in the cariflex product group and lower selling , general , and administrative expenses . the negative effect from changes in currency exchange rates between the periods was $ 3.8 million . see item 6. selected financial data for a reconciliation of u.s. gaap operating income to adjusted ebitda ( non-gaap ) . 38 chemical segment replace_table_token_12_th ( 1 ) see item 6. selected financial data for a reconciliation of u.s. gaap operating income to non-gaap adjusted ebitda . ( 2 ) defined as adjusted ebitda as a percentage of revenue . ( 3 ) for the years ended december 31 , 2019 and 2018 , adjusted ebitda margin adjusted for lost revenues from hurricane michael would be 17.4 % and 20.2 % , respectively . effective january 1 , 2018 , results for our roads and construction product line have been consolidated into our adhesives and performance chemicals product lines to better align customer portfolio and end usage . we have adjusted the presentations for the year ended december 31 , 2017 to conform to the respective 2019 and 2018 presentations . year ended december 31 , 2019 compared to year ended december 31 , 2018 revenue for the chemical segment was $ 751.5 million for the year ended december 31 , 2019 compared to $ 790.1 million for the year ended december 31 , 2018 . the decrease was primarily attributable to lower sales volumes and a decline in rosin pricing . sales volumes were 398.6 kilotons for the year ended december 31 , 2019 , a decrease of 29.9 kilotons , or 7.0 % , primarily impacting performance chemicals as a result of constrained availability of raw materials , continued weakness in the rosin demand , and lower non-recurring raw materials sales when compared to the year ended december 31 , 2018 . performance chemicals volumes decrease d 10.9 % , tires and adhesives volumes increased by 6.5 % and 0.5 % , respectively . the negative effect from changes in currency exchange rates between the periods was $ 21.3 million . cost of goods sold was $ 569.6 million for the year ended december 31 , 2019 compared to $ 558.6 million for the year ended december 31 , 2018 , an increase of $ 11.0 million , or 2.0 % . the increase was driven by higher raw material prices and other variable energy prices , partially offset by lower sales volumes . additionally , the changes in currency exchange rates between the periods resulted in a positive impact of $ 20.4 million . as of december 31 , 2019 , we finalized our insurance claims with our carrier related to hurricane michael . during the year ended december 31 , 2019 , we incurred an incremental $ 14.2 million of direct costs as we finalized the production ramp up back to operating capacity . our insurance carrier provided an additional $ 32.9 million , of which $ 1.1 million was received in 2018 and deferred into 2019 when realized , of reimbursements under our insurance policies , which we recorded as a gain on insurance proceeds in the consolidated statement of operations . this brings our total insurance proceeds to $ 41.8 million , which offsets the lost margin and reimburses us for the direct costs and capital expenditures known to date .

consolidated results year ended december 31 , 2019 compared to year ended december 31 , 2018 revenue was $ 1,804.4 million for the year ended december 31 , 2019 compared to $ 2,011.7 million for the year ended december 31 , 2018 , a decrease of $ 207.2 million , or 10.3 % . revenue for the polymer segment decrease d $ 168.6 million and revenue for the chemical segment decrease d $ 38.6 million . for additional information regarding the changes in revenue , see our segment disclosures below . cost of goods sold was $ 1,390.0 million for the year ended december 31 , 2019 compared to $ 1,431.1 million for the year ended december 31 , 2018 , a decrease of $ 41.1 million , or 2.9 % . cost of goods sold decrease d $ 52.1 million for the polymer segment and increase d $ 11.0 million for the chemical segment . for additional information regarding the changes in cost of goods sold , see our segment disclosures below . selling , general , and administrative expenses were $ 149.8 million for the year ended december 31 , 2019 compared to $ 153.9 million for the year ended december 31 , 2018 . the $ 4.1 million decrease is primarily attributable to lower employee related costs , partially offset by higher transaction , acquisition , and restructuring costs . depreciation and amortization was $ 136.2 million for the year ended december 31 , 2019 compared to $ 141.4 million for the year ended december 31 , 2018 . the decrease of $ 5.2 million was primarily attributable to certain assets being fully depreciated as of december 31 , 2018 , partially offset by accelerated depreciation on certain chemical segment assets . 36 other income was $ 3.3 million for the year ended december 31 , 2019 compared to other expense of $ 3.5 million for the year ended december 31 , 2018 .

the benefits of story_separator_special_tag the following discussion should be read in conjunction with the consolidated financial statements and notes thereto contained elsewhere herein . overview we are a major supplier to the aerospace industry and have three operating segments : ( i ) triumph aerostructures group , whose companies ' revenues are derived from the design , manufacture , assembly and integration of metallic and composite aerostructures and structural components for the global aerospace original equipment manufacturers , or oem , market ; ( ii ) triumph aerospace systems group , whose companies design , engineer and manufacture a wide range of proprietary and build-to-print components , assemblies and systems also for the oem market ; and ( iii ) triumph aftermarket services group , whose companies serve aircraft fleets , notably commercial airlines , the u.s. military and cargo carriers , through the maintenance , repair and overhaul of aircraft components and accessories manufactured by third parties . effective december 30 , 2014 , a wholly-owned subsidiary of the company , triumph aerostructures-tulsa llc , doing business as triumph aerostructures-vought aircraft division-tulsa , completed the acquisition of the gulfstream g650 and g280 wing programs ( the `` tulsa programs '' ) located in tulsa , oklahoma , from spirit aerosystems , inc. the acquisition of the tulsa programs establishes the company as a leader in fully integrated wing design , engineering and production and advances its standing as a strategic tier one capable aerostructures supplier . the acquired business will operate as triumph aerostructures-vought aircraft division-tulsa and its results are included in the aerostructures group from the date of acquisition . effective october 17 , 2014 , the company acquired the ownership of all of the outstanding shares of north american aircraft services , inc. and its affiliates ( `` naas '' ) . naas is based in san antonio , texas , with fixed-based operator units throughout the united states as well as international locations and delivers line maintenance and repair , fuel leak detection and fuel bladder cell repair services . the acquired business will operate as triumph aviation services-naas division and its results are included in aftermarket services group from the date of acquisition . effective june 27 , 2014 , the company acquired the hydraulic actuation business of ge aviation ( `` ge '' ) . ge 's hydraulic actuation business consists of three facilities located in yakima , washington , cheltenham , england and the isle of man and is a technology leader in actuation systems . ge 's key product offerings include complete landing gear actuation systems , door actuation , nose-wheel steerings , hydraulic fuses , manifolds flight control actuation and locking mechanisms for the commercial , military and business jet markets . the acquired business will operate as triumph actuation systems-yakima and triumph actuation systems-uk & iom and its results are included in aerospace systems group from the date of acquisition . on june 18 , 2014 , the company announced it had settled all pending litigation involving the company , its subsidiary , certain employees of the company and its subsidiary and eaton corporation and several of its subsidiaries ( `` eaton '' ) . as part of the settlement , eaton agreed to pay the company $ 135.3 million in cash . during the fiscal year ended march 31 , 2015 , the company received payment representing a gain on legal settlement , net of expense , of $ 134.7 million , which is included on the condensed consolidated statements of income . financial highlights for the fiscal year ended march 31 , 2015 include : net sales for fiscal 2015 increased 3.3 % to $ 3.89 billion , including a 4.8 % decrease in organic sales . operating income in fiscal 2015 increased 8.7 % to $ 434.7 million . net income for fiscal 2015 increased 15.7 % to $ 238.7 million . backlog increased 5.8 % over the prior year to $ 5.03 billion . for the fiscal year ended march 31 , 2015 , net sales totaled $ 3.89 billion , a 3.3 % increase from fiscal year 2014 net sales of $ 3.76 billion . net income for fiscal year 2015 increased 15.7 % to $ 238.7 million , or $ 4.68 per diluted common share , versus $ 206.3 million , or $ 3.91 per diluted common share , for fiscal year 2014 . as previously mentioned above , included in net income is a gain on legal settlement , net of expenses and as discussed in further detail below , forward losses on the 747-8 program . 22 our working capital needs are generally funded through cash flows from operations and borrowings under our credit arrangements . for the fiscal year ended march 31 , 2015 , we generated $ 467.3 million of cash flows from operating activities , used $ 67.9 million in investing activities and used $ 395.2 million in financing activities . cash flows from operating activities in fiscal year 2015 included $ 112.3 million in pension contributions versus $ 46.3 million in fiscal year 2014 . we continue to remain focused on growing our core businesses as well as growing through strategic acquisitions . our organic sales decreased in fiscal 2015 due to production rate cuts by our customers on the 747-8 , v-22 , g450/g550 and c-17 programs . our company has an aggressive but selective acquisition approach that adds capabilities and increases our capacity for strong and consistent internal growth . u.s. government appropriation levels remain subject to significant uncertainty . in august 2011 , the budget control act ( `` the act '' ) established limits on u.s. government discretionary spending , including a reduction of defense spending by approximately $ 490 billion between the 2012 and 2021 u.s. government fiscal years . the act also provided that the defense budget would face “ sequestration ” cuts of up to an additional $ 500 billion during that same period to the extent that discretionary spending limits are exceeded . story_separator_special_tag contingency plans have been developed that would allow production to continue in the event of a strike . in fiscal 2012 , we began efforts to establish a new facility in red oak , texas to expand our manufacturing capacity , particularly under the bombardier global 7000/8000 program . in fiscal 2013 , we started construction on a second facility in association with our relocation from our jefferson street facilities . as of march 31 , 2015 , we have incurred approximately $ 238.9 million in inventory costs associated with the bombardier global 7000/8000 program , for which we have not yet begun to deliver . additionally , we incurred approximately $ 155.6 million in capital expenditures associated with construction of the two aforementioned facilities . the move from jefferson street was substantially completed during the fiscal year ended march 31 , 2014. we currently have a few new programs that are either in the pre-production phase or the early stages of recurring production . we expect that inventory balances will continue to grow between $ 60.0 million - $ 80.0 million during fiscal 2016. inventory costs are evaluated for recoverability through their inclusion in the total costs used in the calculation of each contract 's estimated profit margin . when the estimated total contract costs exceed total estimated contract revenues , an inventory reserve is established . contract block quantity is projected to fully absorb the balance of deferred production inventory . capitalized pre-production and deferred production inventories are at risk to the extent that we do not achieve the orders in the forecasted blocks or if future actual costs exceed current projected estimates , as those categories of inventory are recoverable over future deliveries . in the case of capitalized pre-production this may be over multiple blocks . should orders not materialize in future periods to fulfill the block , potential forward loss charges may be necessary to the extent the final delivered quantity does not absorb deferred inventory costs . as previously announced by boeing in september 2013 and then subsequently revised in march 2014 , the decision has been made to cease production of the c-17 during calendar year 2015. major production related to this program is expected to cease in fiscal 2016. we have received orders for spares and maintenance parts which will extend production through the end of fiscal 2017. effective october 4 , 2013 , the company acquired all of the issued and outstanding shares of general donlee . general donlee is based in toronto , canada and is a leading manufacturer of precision machined products for the aerospace , nuclear and oil and gas industries . the acquired business now operates as triumph gear systems-toronto and its results are included in the aerospace systems group . effective may 6 , 2013 , the company acquired four related entities collectively comprising primus from precision castparts corp. the acquired business , which includes two manufacturing facilities in farnborough , england and rayong , thailand , operates as triumph structures-farnborough and triumph structures-thailand and is included in the aerostructures segment from the date of acquisition . together , triumph structures-farnborough and triumph structures-thailand constitute a global supplier of composite and metallic propulsion and structural composites and assemblies . in addition to its composite 24 operations , the thailand operation also machines and processes metal components . in november 2013 , the operations in farnborough lost its national aerospace and defense contractors accreditation program ( `` nadcap '' ) certification . this loss in certification has resulted in unanticipated delays in production and deliveries , lower performance impact across the facility and has slowed our planned transition of work to a sister company in thailand . these items have resulted in approximately $ 13.9 million of charges related to losses , as well as an inventory writedown during the fiscal year ended march 31 , 2015. results of operations the following includes a discussion of our consolidated and business segment results of operations . the company 's diverse structure and customer base do not provide for precise comparisons of the impact of price and volume changes to our results . however , we have disclosed the significant variances between the respective periods . non-gaap financial measures we prepare and publicly release quarterly unaudited financial statements prepared in accordance with gaap . in accordance with securities and exchange commission ( the `` sec '' ) guidance on compliance and disclosure interpretations , we also disclose and discuss certain non-gaap financial measures in our public releases . currently , the non-gaap financial measure that we disclose is adjusted ebitda , which is our income from continuing operations before interest , income taxes , amortization of acquired contract liabilities , curtailments , settlements and early retirement incentives and depreciation and amortization . we disclose adjusted ebitda on a consolidated and a reportable segment basis in our earnings releases , investor conference calls and filings with the sec . the non-gaap financial measures that we use may not be comparable to similarly titled measures reported by other companies . also , in the future , we may disclose different non-gaap financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations . we view adjusted ebitda as an operating performance measure and , as such , we believe that the gaap financial measure most directly comparable to it is income from continuing operations . in calculating adjusted ebitda , we exclude from income from continuing operations the financial items that we believe should be separately identified to provide additional analysis of the financial components of the day-to-day operation of our business . we have outlined below the type and scope of these exclusions and the material limitations on the use of these non-gaap financial measures as a result of these exclusions .

fiscal year ended march 31 , 2014 compared to fiscal year ended march 31 , 2013 replace_table_token_12_th net sales increased by $ 60.6 million , or 1.6 % , to $ 3.8 billion for the fiscal year ended march 31 , 2014 from $ 3.7 billion for the fiscal year ended march 31 , 2013. the fiscal 2014 and fiscal 2013 acquisitions , net of current year and prior year divestitures contributed $ 282.6 million . organic sales decreased $ 222.0 million , or 6.1 % , due to production rate cuts by our customers on the 747-8 program and , as it transitions from the commercial variant to the tanker , the 767 program , and a decrease in military sales . the prior fiscal year was positively impacted by our customers ' increased production rates on existing programs and new product introductions . cost of sales increased by $ 148.3 million , or 5.4 % , to $ 2.9 billion for the fiscal year ended march 31 , 2014 from $ 2.8 billion for the fiscal year ended march 31 , 2013. this increase in cost of sales was largely due to increased sales . gross margin for the fiscal year ended march 31 , 2014 was 22.6 % compared with 25.4 % for the fiscal year ended march 31 , 2013. this change was impacted by reductions in profitability estimates on the 747-8 program , driven largely by the identification of additional 747-8 program costs ( $ 85.0 million ) identified during the year , additional program costs resulting from disruption and accelerated depreciation associated with the relocation from our jefferson street facilities ( $ 38.4 million ) , price concessions ( $ 4.0 million ) and a non-recurring termination customer settlement ( $ 9.5 million ) which had a favorable impact on the prior year gross margin .

for over two and a half decades , mis has reduced trauma to patients by allowing selected surgeries to be performed through small ports rather than large incisions . mis has been widely adopted for certain surgical procedures , but has not yet been widely adopted for reconstructive surgeries . da vinci surgical systems enable surgeons to extend the benefits of mis to many patients who would otherwise undergo a more invasive surgery by using computational , robotic and imaging technologies to overcome many of the limitations of conventional mis . surgeons using a da vinci surgical system operate while seated comfortably at a console viewing a three dimensional ( “ 3-d ” ) representation of a high definition ( “ hd ” ) image of the surgical field . this immersive visualization connects surgeons to the surgical field and their instruments . while seated at the console , the surgeon manipulates instrument controls in a natural manner , similar to the open surgery technique . our technology is designed to provide surgeons with a range of motion of mis instruments in the surgical field analogous to the motions of a human wrist , while filtering out the tremor inherent in a surgeon 's hand . in designing our products , we focus on making our technology easy and safe to use . our products fall into four broad categories - the da vinci surgical systems , insite and firefly fluorescence imaging systems ( “ firefly ” ) , instruments and accessories ( e.g. , endowrist , endowrist one vessel sealer , da vinci single-site and endowrist stapler ) , and training technologies . we have commercialized four generations of da vinci surgical systems : the first is our da vinci standard surgical system , commercialized in 1999 , the second is our da vinci s surgical system , commercialized in 2006 , the third is our da vinci si surgical system , commercialized in 2009 , and the fourth is our da vinci xi surgical system , commercialized in the second quarter of 2014. systems include a surgeon 's console ( or consoles ) , imaging electronics , a patient-side cart , and computational hardware and software . we offer over 65 different multiport da vinci instruments enabling surgeons ' flexibility in choosing the types of tools needed in a particular surgery . these multiport instruments are generally robotically controlled versions of surgical tools that surgeons would use in either open or laparoscopic surgery . we offer single-site instruments for use with the da vinci si surgical system in cholecystectomy , benign hysterectomy , and salpingo-oophorectomy procedures . single-site instruments enable surgeons to also perform surgery through a single port via the patient 's belly button , resulting in the potential for virtually scarless results . for the da vinci si and da vinci xi platforms , we offer advanced energy instrumentation , including the endowrist one vessel sealer , and endowrist stapler 45 , to provide surgeons with sophisticated , computer-aided tools to precisely and efficiently interact with tissue . training technologies include our da vinci skills simulator , da vinci connect remote case observation and mentoring tool , and our dual console for use in surgeon proctoring and collaborative surgery . procedures we model patient value as equal to procedure efficacy / invasiveness . in this equation procedure efficacy is defined as a measure of the success of the surgery in resolving the underlying disease and invasiveness is defined as a measure of patient pain and disruption of regular activities . when the patient value of a da vinci procedure is greater than that of alternative treatment options , patients may benefit from seeking out surgeons and hospitals that offer da vinci surgery , which could potentially result in a local market share shift . da vinci procedure adoption occurs procedure by procedure , market by market , and is driven by the relative patient value and total treatment costs of da vinci procedures as compared to alternative treatment options for the same disease state or condition . worldwide procedures da vinci systems and instruments are regulated independently in various countries and regions of the world . the discussion of indications for use and representative or target procedures is intended solely to provide an understanding of the market for da vinci products but is not intended to promote for sale or use any intuitive surgical product outside of its licensed or cleared labeling and indications for use . the adoption of da vinci surgery has the potential to grow for those procedures that offer greater patient value than non- da vinci alternatives , within the prevailing economics of healthcare providers . da vinci surgical systems are used primarily in gynecologic surgery , general surgery , urologic surgery , cardiothoracic surgery , and head and neck surgery . we focus our organization and investments on developing , marketing , and training for those products and procedures where da vinci can bring greater patient value relative to alternative treatment options and or economic benefit to health care providers . target procedures in gynecology include da vinci hysterectomy ( “ dvh ” ) , for both cancer and benign procedures , and sacrocolpopexy . target procedures in general surgery include hernia repair ( both ventral and inguinal ) , colorectal procedures , and cholecystectomy . target procedures in urology 37 include da vinci prostatectomy ( “ dvp ” ) and partial nephrectomy . in cardiothoracic surgery , target procedures include da vinci lobectomy and da vinci mitral valve repair . in head and neck surgery , target procedures include certain procedures resecting benign and malignant tumors classified as t1 and t2 . not all the indications , procedures , or products described may be available in a given country or region or on all generations of da vinci surgical systems . patients need to consult the product labeling in a specific country and for each product in order to determine the actual authorized uses , as well as important limitations , restrictions , or contraindications . story_separator_special_tag regulatory activities clearances and approvals we have obtained the clearances required to market our multiport products associated with the first three generations of our da vinci surgical systems ( standard , s , and si systems ) for our targeted surgical specialties within the u.s. and most of europe . in february 2013 , we received fda clearance to market our single-site instruments for benign hysterectomy and salpingo-oophorectomy procedures . in september 2014 , we received fda clearance to market the wristed version of our single-site needle driver product for use in benign hysterectomy , cholecystectomy , and salpingo-oophorectomy procedures . in march 2014 , we received fda clearance to market our da vinci xi surgical system in the u.s. , our fourth generation da vinci surgical system ( see the complete description of the da vinci xi surgical system in the new product introductions section ) . in june 2014 , we received ce mark clearance for our da vinci xi surgical system in europe . in october 2014 , we received regulatory clearance for our da vinci xi surgical system in south korea . in march 2015 , we received regulatory clearance for the da vinci xi surgical system in japan . the regulatory status of the da vinci xi surgical system in other ous markets varies by country . we also received fda clearance on an initial set of instruments for the xi surgical system with the initial launch of the system in april 2014. later in 2014 , we received fda clearances for xi versions of our endowrist one vessel sealer , firefly , and endowrist stapler 45. in the second quarter of 2015 , we received fda clearance for an additional set of da vinci xi instruments . in june 2015 , we received ce mark clearance for our integrated table motion product in europe ( see the complete description of the da vinci xi integrated table motion in the new product introductions section ) . we received fda clearance for the integrated table motion product in january 2016. we filed for fda 510 ( k ) clearances in the u.s. for the single-site instruments and the 30mm endowrist stapler products for the da vinci xi surgical system in august 2015 ( see the complete description of the endowrist stapler 30 in the new product introductions section ) . in the future , we plan to apply for additional clearances to expand the da vinci xi platform product and feature set , including the da vinci single port surgical system , as described below . in april 2014 , we received fda clearance to market our da vinci single port surgical system in the u.s. for single-port urologic surgeries . we are in the process of modifying the da vinci single port surgical system to be compatible with the da vinci xi surgical system . we plan to seek additional fda clearance ( s ) for the da vinci single port surgical system for procedure ( s ) in which a single small entry point to the body and parallel delivery of instruments is important . such surgeries could include those performed through a natural orifice like the mouth for head and neck procedures or those performed through a single skin incision . we anticipate increased clinical evaluation of da vinci single port surgical system in 2016 , particularly in transoral and transabdominal applications . we obtained approval from the japanese ministry of health , labor , and welfare ( “ mhlw ” ) for our da vinci si surgical system in october 2012 and for our da vinci xi surgical system in march 2015. effective april 2012 , we obtained national reimbursement for dvp procedures in japan , our only broadly reimbursed procedure to date . we are currently seeking reimbursement for additional procedures through the mhlw 's senshin iryo processes as well as alternative reimbursement processes . our senshin iryo approvals require in-country clinical data and are considered for reimbursed status in april of even numbered years . japanese surgeons have submitted clinical data for consideration of partial nephrectomy reimbursement in the april 2016 cycle . there can be no assurance that we will gain additional senshin iryo reimbursements for the procedures or at the times we have targeted . we are continuing our discussions with stakeholders concerning the reimbursement for several other procedures ; however inclusion of other procedures in reimbursement guidelines in 2016 is unlikely . if we are not successful in obtaining additional regulatory clearances , importation licenses , and adequate procedure reimbursements for future products and procedures , then the demand for our products in japan could be limited . fda inspections during october 2015 , the fda conducted a routine inspection at our sunnyvale facilities . the scope of the inspection included general surveillance in the form of a quality system inspection technique ( “ qsit ” ) and follow-up on previous observations identified in the form fda 483 that was issued in 2014. no observations were communicated to us at the close of the october audit or in the final establishment inspection report ( “ eir ” ) received from the fda in december of 2015 . 39 recalls and corrections medical device companies have regulatory obligations to correct or remove medical devices in the field that could pose a risk to health . the definition of “ recalls and corrections ” is expansive and includes repair , replacement , inspections , re-labeling and issuance of new , added or reinforcement of instructions for use and training when such actions are taken for specific reasons of safety or compliance . these field actions require stringent documentation , reporting and monitoring worldwide . there are other actions which a medical device manufacturer may take in the field without reporting , including routine servicing , the introduction of new products , and new indications for use and stock rotations . as we determine whether a field action is reportable in any regulatory jurisdiction , we prepare and submit notifications to the appropriate regulatory agency for the particular jurisdiction .

financial highlights total revenue increased by 12 % to $ 2.4 billion during the year ended december 31 , 2015 , compared with $ 2.1 billion for the year ended december 31 , 2014. approximately 652,000 da vinci procedures were performed during the year ended december 31 , 2015 , an increase of approximately 14 % compared with the year ended december 31 , 2014 . instruments and accessories revenue increased by 12 % to $ 1.2 billion during the year ended december 31 , 2015 , compared with $ 1.1 billion for the year ended december 31 , 2014 . recurring revenue increased by 11 % to $ 1.7 billion for the year ended december 31 , 2015 , compared with $ 1.5 billion for the year ended december 31 , 2014 . recurring revenue made up 70 % of total revenue for both years . system revenue increased by 14 % to $ 721.9 million during the year ended december 31 , 2015 , compared with $ 632.5 million during the year ended december 31 , 2014 . 492 da vinci surgical systems were shipped during the year ended december 31 , 2015 , compared with 431 for the year ended december 31 , 2014 . as of december 31 , 2015 , we had a da vinci surgical system installed base of approximately 3,597 systems , consisting of 2,399 in the u.s. , 608 in europe , 423 in asia and 167 in the rest of the world . operating income increased by 36 % to $ 740.0 million during the year ended december 31 , 2015 , compared with $ 544.8 million during the year ended december 31 , 2014 . operating income included $ 168.1 million and $ 169.1 million of share-based compensation expense related to employee stock plans for the years ended december 31 , 2015 , and 2014 , respectively .

a subsidiary of story_separator_special_tag the following discussion should be read in conjunction with the company 's consolidated financial statements and notes thereto appearing in item 8 of this annual report on form 10-k. story_separator_special_tag block ; margin-left : 0pt ; margin-right : 0pt '' > historically , credit losses , on a percentage basis , tend to be higher at new and developing dealerships than at mature dealerships . generally , this is the case because the management at new and developing dealerships tends to be less experienced in making credit decisions and collecting customer accounts and the customer base is less seasoned . normally the older , more mature dealerships have more repeat customers and on average , repeat customers are a better credit risk than non-repeat customers . negative macro-economic issues do not always lead to higher credit loss results for the company because the company provides basic affordable transportation which in many cases is not a discretionary expenditure for customers . however , the company does believe that general inflation , particularly within staple items such as groceries and gasoline , as well as overall unemployment levels and potentially lower or stagnant personal income levels affecting customers can have , and have had in recent quarters , a negative impact on collections . additionally , increased competition for used vehicle financing can have , and management believes it is currently having , a negative effect on collections and charge-offs . in an effort to offset the elevated credit losses and lower collection levels and to operate more efficiently , the company continues to look for improvements to its business practices , including better underwriting and better collection procedures . the company has a proprietary credit scoring system which enables the company to monitor the quality of contracts . corporate office personnel monitor proprietary credit scores and work with dealerships when the distribution of scores falls outside of prescribed thresholds . the company has implemented credit reporting and has begun installing global positioning system ( “ gps ” ) units on vehicles . additionally , the company has placed significant focus on the collection area as the company 's training department continues to spend significant time and effort on collections improvements . the support operations officer oversees the collections department and provides timely oversight and additional accountability on a consistent basis . in addition , the company has a collections compliance manager who assists with managing the company 's servicing and collections practices and provides additional monitoring and training . also , turnover at the dealership level for collections positions is down compared to historical levels , which management believes has a positive effect on collection results . the company believes that the proper execution of its business practices is the single most important determinant of its long term credit loss experience . 22 the company 's gross margins as a percentage of sales have been fairly consistent from year to year . over the last five fiscal years , the company 's gross margins as a percentage of sales have ranged between approximately 42 % and 44 % . gross margin as a percentage of sales for fiscal 2014 was 42.2 % . the company 's gross margins are based upon the cost of the vehicle purchased , with lower-priced vehicles typically having higher gross margin percentages . gross margins in recent years have been negatively affected by the increase in the average retail sales price ( a function of a higher purchase price ) and higher operating costs , mostly related to increased vehicle repair costs and higher fuel costs . additionally , the percentage of wholesale sales to retail sales , which relate for the most part to repossessed vehicles sold at or near cost , can have a significant effect on overall gross margins . annual gross margin percentages over the five-year period peaked in fiscal 2010 partially as a result of higher retail sales levels and a strong wholesale market for repossessed vehicles due to overall used vehicle supply shortages . the gross margin percentage in fiscal 2011 and fiscal 2012 was negatively affected by higher wholesale sales , increased average retail selling price , higher inventory repair costs and lower margins on the payment protection plan and service contract products . gross margin improved slightly in fiscal 2013 due to improved wholesale results partially offset by higher losses under the payment protection plan . the gross margin for fiscal 2014 was affected by higher inventory repair costs resulting from continued efforts to help our customers succeed and to meet competitive pressures and higher claims under the payment protection plan . the company expects that its gross margin percentage will not change significantly in the near term from the current level ( 42 % range ) . hiring , training and retaining qualified associates are critical to the company 's success . the rate at which the company adds new dealerships and is able to implement operating initiatives is limited by the number of trained managers and support personnel the company has at its disposal . excessive turnover , particularly at the dealership manager level , could impact the company 's ability to add new dealerships and to meet operational initiatives . the company has added resources to recruit , train , and develop personnel , especially personnel targeted to fill dealership manager positions . the company expects to continue to invest in the development of its workforce . story_separator_special_tag 2013 compared to 2012 total revenues increased $ 34.5 million , or 8.0 % , in fiscal 2013 , as compared to revenue growth of 13.4 % in fiscal 2012 , principally as a result of ( i ) revenue growth from dealerships that operated a full 12 months in both periods ( $ 13.8 million ) , ( ii ) revenue growth from dealerships opened during fiscal 2012 ( $ 12.2 million ) , and ( iii ) revenues from dealerships opened during fiscal 2013 ( $ 8.5 million ) . the increase in revenue for fiscal 2013 is attributable to ( i ) an 8.0 % increase in retail unit volumes together with a 0.5 % increase in the average unit sales price , ( ii ) a 13.0 % increase in interest and other income , partially offset by ( iii ) a $ 2.2 million decrease in wholesale sales . 25 cost of sales , as a percentage of sales , decreased to 57.5 % in fiscal 2013 from 57.7 % in fiscal 2012. the company 's cost of sales as a percentage of sales was positively affected by pricing efficiencies in the average selling price and the effect of lower wholesale sales , offset by higher losses on the payment protection plan product . the company 's selling prices are based upon the cost of the vehicle purchased , with lower-priced vehicles typically having higher gross margin percentages . the company will continue to focus efforts on minimizing the average retail sales price in order to help keep the contract terms shorter , which helps customers to maintain appropriate equity in their vehicles . the consumer demand for vehicles the company purchases for resale remains high . this high demand has been exacerbated by the overall decrease in new car sales during the last few years when compared to pre-recession levels , which can result in higher purchase costs for the company . selling , general and administrative expenses , as a percentage of sales , increased 0.1 % to 17.6 % in fiscal 2013 from 17.5 % in fiscal 2012. the percentage increase was principally the result of lower sales levels during the second quarter as a large majority of the company 's operating costs are more fixed in nature . in dollar terms , overall selling , general and administrative expenses increased $ 5.4 million from fiscal 2012 , which consisted primarily of increased payroll costs and other incremental costs related to new lot openings . many of the company 's compensation arrangements are tied to financial performance and as such , more payroll costs are incurred during periods of improved financial results . provision for credit losses , as a percentage of sales , increased 2.0 % from 21.1 % in fiscal 2012 ( 21.5 % excluding the effect of the reduction in the allowance for credit losses ) to 23.1 % in fiscal 2013. credit losses as a percentage of sales increased due to the lower principal collections as a percentage of average finance receivables , continuing negative macro-economic and competitive factors especially related to increased funding to the deep subprime automobile industry . the company has implemented several operational initiatives for the collections area and continues to push for improvements and better execution of its collection practices . however , the extended negative macro-economic issues are expected to continue to put pressure on our customers and the resulting collections of our finance receivables . the company believes that the proper execution of its business practices is the single most important determinant of credit loss experience . interest expense as a percentage of sales increased to 0.7 % for fiscal 2013 compared to 0.6 % for fiscal 2012. higher average borrowings during the fiscal year 2013 ( $ 93.3 million compared to $ 70.2 million in the prior year ) were partially offset by lower interest rates on the company 's variable rate debt . financial condition the following table sets forth the major balance sheet accounts of the company at april 30 , 2014 , 2013 and 2012 ( in thousands ) : replace_table_token_7_th 26 historically , finance receivables has tended to grow slightly faster than revenue growth . this has been due , to a large extent , to an increasing weighted average term necessitated by increases in the average retail sales price over recent years . the following table shows receivables growth compared to revenue growth . the average term for installment sales contracts at april 30 , 2014 was 29.8 months compared to 29.3 months at april 30 , 2013. benefits related to software and operational changes made in an effort to shorten relative terms by maximizing up-front equity and scheduling payments to coincide with anticipated income tax refunds have helped maintain the overall term length in the face of the increasing average retail sales prices . however , in response to current competitive and economic conditions , the company has made and is continuing to make some structural changes to its customer contracts which include increases to the overall length of contract terms . revenue growth results from same store revenue growth and the addition of new dealerships . the decreased sales in the fourth quarter of fiscal 2014 compared to the prior year fourth quarter and the increase in the allowance for credit losses made in the third quarter of fiscal 2014 contributed to a lower growth in finance receivables , n et , compared to revenue growth . the lower fourth quarter sales resulted to a large extent from efforts to improve more current deal structures in light of recent higher charge-off levels . t he company currently anticipates going forward that the growth in finance receivables will be slightly higher than overall revenue growth on an annual basis due to the overall term length increases partially offset by improvements in underwriting and collection procedures . replace_table_token_8_th in fiscal 2014 , inventory decreased 8.3 % ( $ 2.7 million ) as compared to revenue growth of 5.3 % .

overview america 's car-mart , inc. , a texas corporation ( the “ company ” ) , is one of the largest publicly held automotive retailers in the united states focused exclusively on the “ integrated auto sales and finance ” segment of the used car market . references to the company include the company 's consolidated subsidiaries . the company 's operations are principally conducted through its two operating subsidiaries , america 's car mart , inc. , an arkansas corporation ( “ car-mart of arkansas ” ) , and colonial auto finance , inc. , an arkansas corporation ( “ colonial ” ) . collectively , car-mart of arkansas and colonial are referred to herein as “ car-mart. ” the company primarily sells older model used vehicles and provides financing for substantially all of its customers . many of the company 's customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit problems . as of april 30 , 2014 , the company operated 134 dealerships located primarily in small cities throughout the south-central united states . car-mart has been operating since 1981. car-mart has grown its revenues between approximately 3 % and 16 % per year over the last ten years ( average 11 % ) . growth results from same dealership revenue growth and the addition of new dealerships . revenue increased 5.3 % for the fiscal year ended april 30 , 2014 compared to fiscal 2013 primarily due to a 4.5 % increase in retail units sold , a 0.5 % increase in average retail sales price and an 11.7 % increase in interest income . the company earns revenue from the sale of used vehicles , and in most cases a related service contract and a payment protection plan product , as well as interest income and late fees from the related financing . the company 's cost structure is more fixed in nature and is sensitive to volume changes .

our actual results and the timing of events could differ materially from those expressed or implied in our forward-looking statements due to various important factors , including those set forth under “ risk factors ” in item 1a . and elsewhere in this annual report on form 10-k. the following discussion and analysis should be read together with the “ selected financial data ” and consolidated financial statements , including the related notes included elsewhere in this annual report on form 10-k. overview the consolidated financial statements include the accounts of axos financial , inc. ( “ axos ” ) and its wholly owned subsidiaries , axos bank ( the “ bank ” ) and axos nevada holding , llc ( “ axos nevada holding ” ) , collectively , the “ company. ” axos nevada holding wholly owns its subsidiary axos securities , llc , which wholly owns subsidiaries axos clearing llc ( “ axos clearing ” ) , a clearing broker-dealer , axos invest , inc. , a registered investment advisor , and axos invest llc , an introducing broker-dealer . with approximately $ 13.9 billion in assets , axos bank provides consumer and business banking products through its low-cost distribution channels and affinity partners . axos clearing and axos invest llc , provide comprehensive securities clearing services to introducing broker-dealers and registered investment advisor correspondents and digital investment advisory services to retail investors , respectively . axos financial , inc. 's common stock is listed on the nyse under the symbol “ ax ” and is a component of the russell 2000 ® index and the s & p smallcap 600 ® index . for more information on axos bank , please visit axosbank.com . net income for the fiscal year ended june 30 , 2020 was $ 183.4 million compared to $ 155.1 million and $ 152.4 million for the fiscal years ended june 30 , 2019 and 2018 , respectively . net income attributable to common stockholders for the fiscal year ended june 30 , 2020 was $ 183.1 million , or $ 2.98 per diluted share compared to $ 154.8 million , or $ 2.48 per diluted share and $ 152.1 million , or $ 2.37 per diluted share for the years ended june 30 , 2019 and 2018 , respectively . growth in our interest earning assets , particularly the loan and lease portfolio , and a reduced income tax rate were the primary reasons for the increase in our net income from fiscal 2018 to fiscal 2020 . net interest income increased $ 69.0 million for the year ended june 30 , 2020 compared to the year ended june 30 , 2019 . net interest income for the year ended june 30 , 2020 was $ 477.6 million compared to $ 408.6 million and $ 368.5 million for the years ended june 30 , 2019 and 2018 , respectively . the growth of net interest income from fiscal year 2018 through 2020 is primarily due to net loan and lease portfolio growth . provision for loan and lease losses for the year ended june 30 , 2020 was $ 42.2 million , compared to $ 27.4 million and $ 25.8 million for the years ended june 30 , 2019 and 2018 , respectively . the increase of $ 14.9 million for fiscal year 2020 is the result of additional provisions for changes in economic and business conditions resulting from the covid-19 pandemic , overall loan portfolio growth , and changes in the loan mix . the increase of $ 1.6 million for fiscal year 2019 is the result of growth and changes in the loan and lease mix of the portfolio . non-interest income was $ 103.0 million compared to non-interest income of $ 82.8 million and $ 70.9 million for the fiscal years ended june 30 , 2020 , 2019 and 2018 . the increase from fiscal year 2019 to fiscal year 2020 was primarily the result of an increase of mortgage banking and an full year of broker-dealer fees . the increase from 2018 to 2019 was primarily the result of an increase of $ 11.7 million in broker-dealer fees and $ 6.1 million in banking and service fees due to increased fees from our trustee and fiduciary services , increased levels of prepayment penalty fee income of $ 2.0 million , partially offset by a mortgage banking income decrease of $ 8.5 million . non-interest expense for the fiscal year ended june 30 , 2020 was $ 275.8 million compared to $ 251.2 million and $ 173.9 million for the years ended june 30 , 2019 and 2018 , respectively . the increase was primarily due to an increase of $ 16.9 million in staffing for lending , information technology infrastructure development , clearing services , trustee and fiduciary services and regulatory compliance , an increase in depreciation and amortization of $ 8.0 million , an increase in data processing and internet of $ 6.5 million , and a decrease in other general and administrative costs of $ 11.2 million . our staffing rose to 1099 employees compared to 1007 and 801 at june 30 , 2020 , 2019 and 2018 , respectively . total assets were $ 13.9 billion at june 30 , 2020 compared to $ 11.2 billion at june 30 , 2019 . assets grew $ 2.6 billion or 23.5 % during the last fiscal year , primarily due to loan originations , primarily from c & i and income property lending and total cash from increased deposits . the loan growth was funded primarily with growth in deposits . covid-19 impact . we are closely monitoring the rapid developments of and uncertainties caused by the covid-19 pandemic . story_separator_special_tag the goodwill recognized results from the expected synergies and potential earnings from this combination . nationwide bank deposit acquisition . on november 16 , 2018 , the bank completed the acquisition of substantially all of nationwide bank 's ( “ nationwide ” ) deposits at the time of closing , adding $ 2.4 billion in deposits , including $ 661.4 million in checking , savings and money market accounts and $ 1.7 billion in time deposit accounts . the bank received cash for the deposit balances transferred less a premium of $ 13.5 million , recorded in intangibles , commensurate with the fair market value of the deposits purchased . bankruptcy trustee and fiduciary services business of epiq systems , inc . on april 4 , 2018 , the company completed the acquisition of the bankruptcy trustee and fiduciary services business of epiq systems , inc. ( “ epiq ” ) . the assets acquired by the company include comprehensive software solutions , trustee customer relationships , trade name , accounts receivable and fixed assets . the business provides specialized software and consulting services to chapter 7 bankruptcy and non-chapter 7 trustees and fiduciaries in all fifty states . this business is expected to generate fee income from bank partners and bankruptcy cases , as well as opportunities to source low cost deposits . no deposits were acquired as part of the transaction . under the terms of the purchase agreement , the aggregate purchase price included the payment of $ 70.0 million in cash . the company acquired intangible assets with fair values of $ 32.7 million , including customer relationships , developed technologies , a covenant not to compete and the trade name , and accounts receivable and fixed assets of $ 1.6 million , resulting in goodwill of $ 35.7 million . transaction-related expenses were de minimis . 49 critical accounting policies the following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and the notes thereto , which have been 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 a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements . on an ongoing basis , we evaluate our estimates and assumptions based upon historical experience and various factors and circumstances . we believe that our estimates and assumptions are reasonable under the circumstances . however , actual results may differ significantly from these estimates and assumptions that could have a material effect on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods . securities . we classify securities as either trading , available-for-sale or held-to-maturity . trading securities are those securities for which we have elected fair value accounting . trading securities are recorded at fair value with changes in fair value recorded in earnings each period . securities available-for-sale are reported at estimated fair value , with unrealized gains and losses , net of the related tax effects , excluded from operations and reported as a separate component of accumulated other comprehensive income or loss . the fair values of securities traded in active markets are obtained from market quotes . if quoted prices in active markets are not available , we determine the fair values by utilizing industry-standard tools to calculate the net present value of the expected cash flows available to the securities . for securities other than non-agency rmbs , we use observable market participant inputs and categorize these securities as level ii in determining fair value . for non-agency rmbs securities , we use a level iii fair value model approach . to determine the performance of the underlying mortgage loan pools , we consider where appropriate borrower prepayments , defaults , and loss severities based on a number of macroeconomic factors , including housing price changes , unemployment rates , interest rates and borrower attributes such as credit score and loan documentation at the time of origination . we input for each security our projections of monthly default rates , loss severity rates and voluntary prepayment rates for the underlying mortgages for the remaining life of the security to determine the expected cash flows . the projections of default rates are derived by the company from the historic default rate observed in the pool of loans collateralizing the security , increased by ( or decreased by ) the forecasted increase or decrease in the national unemployment rate as well as the forecasted increase or decrease in the national home price appreciation ( hpa ) index . the projections of loss severity rates are derived by the company from the historic loss severity rate observed in the pool of loans , increased by ( or decreased by ) the forecasted decrease or increase in the hpa index . to determine the discount rates used to compute the present value of the expected cash flows for these non-agency rmbs securities , we separate the securities by the borrower characteristics in the underlying pool . for example , non-agency rmbs “ prime ” securities generally have borrowers with higher fico scores and better documentation of income . “ alt-a ” securities generally have borrowers with lower fico and less documentation of income . “ pay-option arms ” are alt-a securities with borrowers that tend to pay the least amount of principal ( or increase their loan balance through negative amortization ) . separate discount rates are calculated for prime , alt-a and pay-option arm non-agency rmbs securities using market-participant assumptions for risk , capital and return on equity . at each reporting date , we monitor our available-for-sale and held-to-maturity securities for other-than-temporary impairment . the company measures its debt securities in an unrealized loss position at the end of the reporting period for other-than-temporary impairment by comparing the present value of the cash flows currently expected to be collected from the security with its amortized cost basis .

segment results the company determines reportable segments based on the services offered , the significance of the services offered , the significance of those services to the company 's financial condition and operating results and management 's regular review of the operating results of those services . the company operates through two operating segments : banking business and securities business . in order to reconcile the two segments to the consolidated totals , the company includes parent-only activities and intercompany eliminations . the following tables present the operating results of the segments : replace_table_token_22_th 57 replace_table_token_23_th banking business for the fiscal year ended june 30 , 2020 , we had pre-tax income of $ 285.7 million compared to pre-tax income of $ 255.5 million for the fiscal year ended june 30 , 2019 . for the fiscal year ended june 30 , 2020 , the increase in pre-tax income was primarily related to increased net interest income due to loan and deposit growth . we consider the ratios shown in the table below to be key indicators of the performance of our banking business segment : replace_table_token_24_th our banking segment 's net interest margin exceeds our consolidated net interest margin . our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking business and reduce our consolidated net interest margin , such as the borrowing costs at our holding company and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in our securities business , including items related to securities financing operations .

“2012 overview and outlook” , and other portions of this report , contains forward-looking statements within the meaning of section 27a of the securities act of 1933 , as amended , and section 21e of the exchange act of 1934 , as amended . these statements may relate to , among other things , capital expenditures , cost reductions , cash flow , and operating improvements and are indicated by words or phrases such as “anticipate , ” “estimate , ” “plans , ” “expects , ” “projects , ” “should , ” “will , ” “management believes , ” “the company believes , ” “we believe , ” “the company intends” and similar words or phrases . these statements are subject to inherent uncertainties and risks that could cause actual results to differ materially from the results described in those statements . these risks and uncertainties include , but are not limited to , economic and political consequences resulting from terrorist attacks and wars ; levels of industrial activity and economic conditions in the u.s. and other countries around the world ; pricing pressures and other competitive factors , and levels of capital spending in certain industries — all of which could have a material impact on our order rates and results , particularly in light of the low levels of order backlogs we typically maintain ; our ability to make acquisitions and to integrate and operate acquired businesses on a profitable basis ; the relationship of the u.s. dollar to other currencies and its impact on pricing and cost competitiveness ; political and economic conditions in foreign countries in which we operate ; interest rates ; capacity utilization and its effect on costs ; labor markets ; market conditions and material costs ; and developments with respect to contingencies , such as litigation and environmental matters . the forward-looking statements included in this report are only made as of the date of this report , and we undertake no obligation to update them to reflect subsequent events or circumstances . investors are cautioned not to rely unduly on forward-looking statements when evaluating the information presented here . 2012 overview and outlook idex is an applied solutions company specializing in fluid and metering technologies , health and science technologies , and fire , safety and other diversified products built to customer specifications . idex 's products are sold in niche markets to a wide range of industries throughout the world . accordingly , our businesses are affected by levels of industrial activity and economic conditions in the u.s. and in other countries where we do business and by the relationship of the u.s. dollar to other currencies . levels of capacity utilization and capital spending in the industries that use our products and overall industrial activity are important factors that influence the demand for our products . the company has three reportable business segments : fluid & metering technologies , health & science technologies and fire & safety/diversified products . within these three reportable segments , the company maintains six strategic platforms , where we will primarily invest organically and through acquisitions , and eight groups , where we will primarily focus on organic growth to drive these businesses . the fluid & metering technologies segment is comprised of the energy , ddpt , and cfp platforms as well as the wst and agricultural groups . the health & science technologies segment is comprised of the iop , scientific fluidics and mpt platforms as well as the containment and industrial groups . the fire & safety/diversified products segment is comprised of the dispensing , rescue , band-it , and fire suppression groups . the fluid & metering technologies segment designs , produces and distributes positive displacement pumps , flow meters , injectors , and other fluid-handling pump modules and systems and provides flow monitoring and other services for the food , chemical , general industrial , water and wastewater , agricultural and energy industries . the health & science technologies segment designs , produces and distributes a wide range of precision fluidics , rotary lobe pumps , centrifugal and positive displacement pumps , roll compaction and drying systems used in beverage , food processing , pharmaceutical and cosmetics , pneumatic components and sealing solutions , including very high precision , low-flow rate pumping solutions required in analytical instrumentation , clinical diagnostics and drug discovery , high performance molded and extruded , biocompatible medical devices and implantables , air compressors used in medical , dental and industrial applications , optical components and 14 coatings for applications in the fields of scientific research , defense , biotechnology , aerospace , telecommunications and electronics manufacturing , laboratory and commercial equipment used in the production of micro and nano scale materials , precision photonic solutions used in life sciences , research and defense markets , and precision gear and peristaltic pump technologies that meet exacting original equipment manufacturer specifications . the fire & safety/diversified products segment produces firefighting pumps and controls , rescue tools , lifting bags and other components and systems for the fire and rescue industry , and engineered stainless steel banding and clamping devices used in a variety of industrial and commercial applications , precision equipment for dispensing , metering and mixing colorants and paints used in a variety of retail and commercial businesses around the world . some of our 2012 financial results are as follows : sales of $ 1.95 billion rose 6 % ; organic sales — excluding acquisitions and foreign currency translation — were up 3 % . asset impairment charge recorded for $ 198.5 million . operating income of $ 128.2 million decreased 58 % . net income decreased 81 % to $ 37.6 million . diluted eps of $ 0.45 decreased $ 1.87 or 81 % compared to 2011. on a regional basis north america has remained strong , the asian markets are improving and we see stabilization in europe . story_separator_special_tag sales within our fire suppression group increased as a result of geographic expansions into asian markets and through the penetration into product adjacencies . sales within our rescue group increased as a result of robust demand for our rescue tools within north american markets and traction in south and central america initiatives . operating income of $ 96.1 million was higher than the $ 85.9 million recorded in 2011 , primarily due to volume leverage and productivity , partially offset by an increase of $ 3.1 million in restructuring charges and a $ 2.8 million gain on the sale of a facility in 2011. operating margin of 22.0 % in 2012 was up from 21.3 % in 2011 , primarily due to improved productivity and cost reduction initiatives , partially offset by current period restructuring charges and the gain on the sale of a facility in 2011. performance in 2011 compared with 2010 replace_table_token_10_th sales in 2011 of $ 1,838.5 million were 22 % higher than the $ 1,513.1 million recorded in 2010. this increase reflected a 9 % increase in organic sales , 11 % from seven acquisitions ( ppe — april 2010 , obl — july 2010 , periflo — september 2010 , fitzpatrick — november 2010 , at films — january 2011 , microfluidics — march 2011 and cvi mg — june 2011 ) and 2 % favorable foreign currency translation . organic sales increased in fluid & metering technologies , health & science technologies and fire & safety/diversified products segments . domestic organic sales were up 4 % versus the prior year , while international organic sales increased 15 % . organic sales to customers outside the u.s. represented 52 % of total sales in 2011 and 49 % in 2010 . 19 in 2011 , fluid & metering technologies contributed 45 % of sales and 46 % of operating income ; health & science technologies accounted for 33 % of sales and 30 % of operating income ; and fire & safety/diversified products represented 22 % of sales and 24 % of operating income . gross profit of $ 738.7 million in 2011 was $ 120.2 million , or 19 % , higher than 2010. as a percentage of sales , gross profit was 40.2 % in 2011 , a 70 basis-point decrease from 40.9 % in 2010. the decrease in gross margin primarily reflected acquisition fair value inventory charges of $ 15.8 million related to our cvi mg acquisition , partially offset by higher volume and product mix . sg & a expenses increased to $ 421.7 million in 2011 from $ 358.3 million in 2010. the $ 63.4 million increase reflected approximately $ 16.7 million in volume-related expenses , $ 46.4 million for incremental costs associated with acquisitions and $ 5.8 million of acquisition-related costs , partially offset by a $ 2.8 million gain from the sale of a facility in italy and $ 2.7 million from the reversal of previously recorded share based compensation costs related to the ceo transition . as a percentage of sales , sg & a expenses were 22.9 % for 2011 and 23.7 % for 2010. during 2011 , the company recorded pre-tax restructuring expenses totaling $ 12.3 million , while $ 11.1 million was recorded for the same period in 2010. these restructuring expenses were mainly attributable to employee severance related to employee reductions across various functional areas and facility rationalization resulting from the company 's cost savings initiatives . these initiatives included severance benefits for 292 employees in 2011 and 215 in 2010. operating income increased $ 55.5 million , or 22 % , to $ 304.7 million in 2011 from $ 249.1 million in 2010. this increase primarily reflected an increase in volume , improved productivity and a gain from the sale of a facility in italy , partially offset by acquisition fair value inventory charges and acquisition-related costs . operating margins in 2011 were 16.6 % of sales compared with 16.5 % recorded in 2010. other expense of $ 1.4 million in 2011 was higher than the $ 1.1 million expense in 2010 , primarily due to higher losses on foreign currency transactions and a loss on an interest rate contract settlement , partially offset by an increase in interest income . interest expense increased to $ 29.3 million in 2011 from $ 16.2 million in 2010. the increase was principally due to higher debt levels resulting from the funding of the cvi mg acquisition and a higher interest rate associated with the 4.5 % senior notes issued in december 2010 with a 5.8 % effective interest rate . the provision for income taxes is based upon estimated annual tax rates for the year applied to federal , state and foreign income . the provision for income taxes increased to $ 80.0 million for 2011 compared to $ 74.8 million in 2010. the effective tax rate decreased to 29.2 % for 2011 compared to 32.2 % in 2010 primarily due to the mix of global pre-tax income among jurisdictions and as a result of recent acquisitions . net income in 2011 of $ 193.9 million increased from the $ 157.1 million earned in 2010. diluted earnings per share of $ 2.32 in 2011 increased $ 0.42 , or 22 % , compared with diluted earnings per share of $ 1.90 in 2010. fluid & metering technologies segment replace_table_token_11_th 20 sales of $ 831.3 million in 2011 increased $ 113.0 million , or 16 % , compared with 2010. this increase reflected a 13 % increase in organic sales , 1 % for acquisitions ( obl and periflo ) and 2 % favorable foreign currency translation . the increase in organic sales was driven by strong global growth in our agriculture , chemical and energy end markets . in 2011 , organic sales increased approximately 9 % domestically and 19 % internationally .

results of operations the following is a discussion and analysis of our results of operations for each of the three years in the period ended december 31 , 2012. for purposes of this item , reference is made to the consolidated statements of operations in part ii , item 8 , “financial statements and supplementary data.” segment operating income excludes unallocated corporate operating expenses . certain prior year amounts have been revised to include the dispensing equipment segment as part of the fire & safety/diversified products segment and to reflect the movement of our trebor business unit from the health & science technologies segment to the fluid & metering technologies segment . in this report , references to organic sales , a non-gaap measure , refers to sales from continuing operations calculated according to generally accepted accounting principles in the united states but excludes ( 1 ) sales from acquired businesses during the first twelve months of ownership and ( 2 ) the impact of foreign currency translation . the portion of sales attributable to foreign currency translation is calculated as the difference between ( a ) the period-to-period change in organic sales and ( b ) the period-to-period change in organic sales after applying prior period foreign exchange rates to the current year period . management believes that reporting organic sales provides useful information to investors by helping identify underlying growth trends in our business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers . the company excludes the effect of foreign currency translation from organic sales because foreign currency translation is not under management 's control , is subject to volatility and can obscure underlying business trends . the company excludes the effect of acquisitions because the nature , size , and number of acquisitions can vary dramatically from period to period and between the company and its peers and can also obscure underlying business trends and make comparisons of long-term performance difficult .

limitations under the indentures the indentures governing the 2022 and 2021 notes , among other things , limits the company 's ability to incur indebtedness ; to pay dividends or make other distributions ; to make certain investments and other restricted payments ; to create liens ; consolidate , merge , sell or otherwise dispose of all or substantially all of its assets ; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments ; and to enter into certain transactions with its affiliates . limitations on the ability to incur additional indebtedness ( excluding iru agreements incurred in the normal course of business ) include a restriction on incurring additional indebtedness if the company 's consolidated leverage ratio , as defined in the indenture is greater than 5.0. permitted investments and payments that are not restricted total $ 43.2 million as of december 31 , 2015 plus holdings permitted investments of $ 0.8 million as of december 31 , 2015 which are not subject to these limitations story_separator_special_tag you should read the following discussion and analysis together with `` item 6. selected consolidated financial data '' and our consolidated financial statements and related notes included in this report . the discussion in this report contains forward-looking statements that involve risks and uncertainties , such as statements of our plans , objectives , expectations and intentions . the cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report . factors that could cause or contribute to these differences include those discussed in `` item 1a . risk factors , '' as well as those discussed elsewhere . you should read `` item 1a . risk factors '' and `` special note regarding forward-looking statements . '' our actual results could differ materially from those discussed here . factors that could cause or contribute to these differences include , but are not limited to : future economic instability in the global economy , which could affect spending on internet services ; the impact of changing foreign exchange rates ( in particular the euro to us dollar and canadian dollar to us dollar exchange rates ) on the translation of our non-us dollar denominated revenues , expenses , assets and liabilities ; legal and operational difficulties in new markets ; the imposition of a requirement that we contribute to the united states universal service fund ; changes in government policy and or regulation , including rules regarding data protection , cyber security and net neutrality ; increasing competition leading to lower prices for our services ; our ability to attract new customers and to increase and maintain the volume of traffic on our network ; the ability to maintain our internet peering arrangements on favorable terms ; our reliance on an equipment vendor , cisco systems inc. , and the potential for hardware or software problems associated with such equipment ; the dependence of our network on the quality and dependability of third-party fiber providers ; our ability to retain certain customers that comprise a significant portion of our revenue base ; the management of network failures and or disruptions ; and outcomes in litigation as well as other risks discussed from time to time in our filings with the securities and exchange commission , including , without limitation , this annual report on form 10-k. general overview we are a leading facilities-based provider of low-cost , high-speed internet access and ip communications services . our network is specifically designed and optimized to transmit data using ip . we deliver our services primarily to small and medium-sized businesses , communications service providers and other bandwidth-intensive organizations in north america , europe and in asia . our on-net service consists of high-speed internet access and ip connectivity ranging from 100 megabits per second to 100 gigabits per second of bandwidth . we offer our on-net services to customers located in buildings that are physically connected to our network . we provide on-net internet access to corporate customers and net-centric customers . our corporate customers are located in multi-tenant office buildings and in our data centers and typically include law firms , financial services firms , advertising and marketing firms and other professional services businesses . our net-centric customers include bandwidth-intensive users such as universities , other internet service providers , telephone companies , cable television companies , web hosting companies , content delivery networks and commercial content and application service providers . these net-centric customers generally receive our services in colocation facilities and in our data centers . our off-net services are sold to businesses that are connected to our network primarily by means of `` last mile '' access service lines obtained from other carriers , primarily in the form of metropolitan ethernet circuits . our non-core services , which consist primarily of legacy services of companies whose assets or businesses we have acquired , primarily include voice services ( only provided in toronto , canada ) . we do not actively market these non-core services and expect the service revenue associated with them to continue to decline . 28 our network is comprised of in-building riser facilities , metropolitan optical fiber networks , metropolitan traffic aggregation points and inter-city transport facilities . our network is physically connected entirely through our facilities to 2,251 buildings in which we provide our on-net services , including 1,541 multi-tenant office buildings . we also provide on-net services in carrier-neutral data centers , cogent controlled data centers and single-tenant office buildings . we operate 51 cogent controlled data centers totaling 565,000 square feet . because of our integrated network architecture , we are not dependent on local telephone companies or cable companies to serve our on-net customers . we emphasize the sale of our on-net services because we believe we have a competitive advantage in providing these services and these services generate gross profit margins that are greater than the gross profit margins of our off-net services . story_separator_special_tag in march 2015 , we redeemed our $ 240.0 million 8.375 % senior notes due in 2018 at a redemption price of 104.188 % of the $ 240.0 million principal amount thereof plus accrued and unpaid interest with the proceeds from our february 2015 issuance of $ 250.0 million of 5.375 % senior secured notes and existing cash on hand . as a result of this transaction we incurred a loss on debt extinguishment and redemption of $ 10.1 million in 2015. interest expense . interest expense results from interest incurred on our $ 250.0 million of senior secured notes that we issued on february 20 , 2015 , $ 200.0 million of senior unsecured notes that we issued on april 9 , 2014 , $ 240.0 million of senior secured notes that we issued in august 2013 and january 2011 and redeemed in march 2015 , $ 92.0 million of convertible senior notes that we issued in june 2007 and repaid in june 2014 , and interest on our capital lease obligations . our interest expense decreased by 17.3 % due to the march 2015 redemption of our $ 240 million of 8.375 % senior secured notes that carried a higher interest rate than our $ 250.0 million of 5.375 % senior secured notes that we 32 issued in february 2015 and the repayment of our convertible notes . additionally , in march 2015 we elected to terminate $ 29.9 million of capital lease obligations in spain with a vendor reducing our interest expense on our capital leases . income tax expense . our income tax expense was $ 7.8 million for 2015 and our income tax expense was $ 3.7 million for 2014. the net income tax expense for 2015 includes united states federal income taxes of $ 5.9 million and state income taxes of $ 1.9 million . the net income tax expense for 2014 includes united states federal income taxes of $ 2.5 million and state income taxes of $ 1.1 million . the increase in income tax expense was related to an increase in deferred income tax expense in the united states . buildings on-net . as of december 31 , 2015 and 2014 we had a total of 2,251 and 2,125 on-net buildings connected to our network , respectively . year ended december 31 , 2014 compared to the year ended december 31 , 2013 our management reviews and analyzes several key financial measures in order to manage our business and assess the quality of and variability of our service revenue , operating results and cash flows . the following summary tables present a comparison of our results of operations for the years ended december 31 , 2014 and 2013 with respect to certain key financial measures . the comparisons illustrated in the tables are discussed in greater detail below . replace_table_token_7_th nm—not meaningful ( 1 ) includes non-cash equity-based compensation expense of $ 488 and $ 507 for 2014 and 2013 , respectively . ( 2 ) includes non-cash equity-based compensation expense of $ 9,083 and $ 8,212 for 2014 and 2013 , respectively . 33 replace_table_token_8_th service revenue . our service revenue increased 9.2 % from 2013 to 2014. exchange rates negatively impacted our increase in service revenue by approximately $ 1.4 million . all foreign currency comparisons herein reflect results for 2014 translated at the average foreign currency exchange rates for 2013. for 2014 and 2013 , on-net , off-net and non-core revenues represented 74.2 % , 25.5 % and 0.3 % and 73.3 % , 26.2 % and 0.5 % of our service revenue , respectively . revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include , but is not limited to , gross receipts taxes , universal service fund fees and certain state regulatory fees . we record these taxes billed to our customers on a gross basis ( as service revenue and network operations expense ) in our consolidated statements of operations . the impact of these taxes including resulted in an increase of our revenues for 2014 of approximately $ 0.2 million . revenue from our corporate and net-centric customers represented 53.1 % and 46.9 % of our service revenue , respectively , for 2014 , and represented 51.6 % and 48.4 % of our service revenue , respectively , for 2013. revenue from corporate customers increased 12.3 % from $ 179.6 million for 2013 to $ 201.8 million for 2014. revenue from our net-centric customers increased 5.9 % from $ 168.4 million for 2013 to $ 178.2 million for 2014. our on-net revenue increased 10.6 % from 2013 to 2014. we increased the number of our on-net customer connections by 14.8 % from december 31 , 2013 to december 31 , 2014. on-net customer connections increased at a greater rate than on-net revenues primarily due to the 4.2 % decline in our on-net arpu , primarily from a decline in arpu for our net centric customers . arpu is determined by dividing revenue for the period by the average customer connections for that period . our average price per megabit for our installed base of customers is determined by dividing the aggregate monthly recurring fixed charges for those customers by the aggregate committed data rate for the same customers . the decline in on-net arpu is partly attributed to volume and term based pricing discounts . additionally , on-net customers who cancel their service from our installed base of customers , in general , have an arpu that is greater than the arpu for our new customers due to declining prices primarily for our on-net services sold to our net-centric customers . these trends resulted in the reduction to our on-net arpu and a 23.8 % decline in our average price per megabit for our installed base of customers .

results of operations year ended december 31 , 2015 compared to the year ended december 31 , 2014 our management reviews and analyzes several key financial measures in order to manage our business and assess the quality of and variability of our service revenue , operating results and cash flows . the following summary tables present a comparison of our results of operations with respect to certain key financial measures . the comparisons illustrated in the tables are discussed in greater detail below . replace_table_token_5_th nm—not meaningful ( 1 ) includes non-cash equity-based compensation expense of $ 584 and $ 488 for 2015 and 2014 , respectively . ( 2 ) includes non-cash equity-based compensation expense of $ 10,931 and $ 9,083 for 2015 and 2014 , respectively . replace_table_token_6_th 30 service revenue . our service revenue increased 6.4 % from 2014 to 2015. exchange rates negatively impacted our increase in service revenue by approximately $ 16.6 million . all foreign currency comparisons herein reflect results for 2015 translated at the average foreign currency exchange rates for 2014. for 2015 and 2014 , on-net , off-net and non-core revenues represented 72.9 % , 26.8 % and 0.3 % and 74.2 % , 25.5 % and 0.3 % of our service revenue , respectively . revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer and may include , but is not limited to , gross receipts taxes , universal service fund fees and certain state regulatory fees . we record these taxes billed to our customers on a gross basis ( as service revenue and network operations expense ) in our consolidated statements of operations . the impact of these taxes including the universal service fund resulted in an increase of our revenues for 2015 of approximately $ 3.4 million .

the warrant was immediately exercisable and expires in june 2024. the warrant was fully exercised in may 2019. note 9. stock option plan on december 4 , 2014 , the company 's stockholders approved the 2014 stock plan ( “ 2014 plan ” ) , and most recently amended the 2014 plan on april 25 , 2019. the 2014 plan was amended , restated and re-named the 2019 equity incentive plan ( the “ 2019 plan ” ) , which became effective 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 included elsewhere in this annual report of form 10-k. this discussion contains forward-looking statements that involve risk and uncertainties , such as statements of our plans , objectives , expectations , and intentions , that are based on the beliefs of our management . our actual results could differ materially from those discussed in these forward-looking statements . factors that could cause or contribute to such differences include , but are not limited to , those discussed in the “ risk factors ” section of this annual report on form 10-k overview we are a clinical stage biopharmaceutical company pioneering a novel disease-modifying therapeutic approach to treat what we believe to be a key underlying cause of alzheimer 's and other degenerative diseases . our approach is based on the seminal discovery of the presence of porphyromonas gingivalis , or p. gingivalis , and its secreted toxic virulence factor proteases , called gingipains , in the brains of greater than 90 % of more than 100 alzheimer 's patients observed across multiple studies to date . additionally , we have observed that p. gingivalis infection causes alzheimer 's pathology in animal models , and these effects have been successfully treated with a gingipain inhibitor in preclinical studies . our proprietary lead drug candidate , cor388 , is an orally administered , brain-penetrating small molecule gingipain inhibitor . cor388 was well-tolerated with no concerning safety signals in our phase 1a and phase 1b clinical trials conducted to date , which enrolled a total of 67 subjects , including nine patients with mild to moderate alzheimer 's disease . we initiated a global phase 2/3 clinical trial of cor388 , called the gain trial , in mild to moderate alzheimer 's patients in april 2019 in the united states and in september 2019 in europe and expect top-line results by the end of 2021. financial overview since commencing material operations in 2014 , we have devoted substantially all of our efforts and financial resources to building our research and development capabilities , establishing our corporate infrastructure and most recently , executing our phase 1a , phase 1b and phase 2/3 clinical trials of cor388 . to date , we have not generated any revenue and we have never been profitable . we have incurred net losses since the commencement of our operations . as of december 31 , 2019 , we had an accumulated deficit of $ 69.8 million . we incurred a net loss of $ 37.0 million in the year ended december 31 , 2019. we do not expect to generate product revenue unless and until we obtain marketing approval for and commercialize a drug candidate , and we can not assure you that we will ever generate significant revenue or profits . to date , we have financed our operations primarily through the issuance and sale of convertible promissory notes and redeemable convertible preferred stock and common stock . from inception through december 31 , 2019 , we received net proceeds of approximately $ 177.3 million from the issuance of redeemable convertible preferred stock , convertible promissory notes and common stock . in february 2020 , we also received net proceeds of approximately $ 117.6 million from the issuance and sale of common stock in a private placement to certain accredited investors as of december 31 , 2019 and 2018 , we had cash , cash equivalents and short-term investments of $ 99.9 million and $ 71.7 million , respectively . the balances exclude long-term investments of $ 16.8 million and $ 0 as of those same periods . our cash equivalents , short-term and long-term investments are held in money market funds , certificate of deposits , repurchase agreements , investments in corporate debt securities and government agency obligations . we believe that our existing cash , cash equivalents and short-term investments will be sufficient to fund our planned operations through 2021 , including through the completion and the announcement of the top-line results of our phase 2/3 gain trial . we have based this estimate on assumptions that may prove to be wrong , and we could utilize our available capital resources sooner than we expect . we expect to incur substantial expenditures in the foreseeable future as we expand our pipeline and advance our drug candidates through clinical development , the regulatory approval process and , if approved , commercial launch activities . specifically , in the near term we expect to incur substantial expenses relating to our ongoing and planned clinical trials , the development and validation of our manufacturing processes , and other development activities . 59 we will need substantial additional funding to support our continuing operations and pursue our development strategy . until such time as we can generate significant revenue from sales of an approved drug , if ever , we expect to finance our operations through the sale of equity , debt financings or other capital sources . adequate funding may not be available to us on acceptable terms , or at all . if we fail to raise capital or enter into such agreements as , and when , needed , we may have to significantly delay , scale back or discontinue the development and commercialization of our drug candidates or delay our efforts to expand our product pipeline . story_separator_special_tag we estimate the fair value of all stock option grants using the black-scholes option pricing model and recognize forfeitures as they occur . the fair value of a stock-based award is recognized over the period during which an optionee is required to provide services in exchange for the option award , known as the requisite service period ( usually the vesting period ) on a straight-line basis . stock-based compensation expense is recognized based on the fair value determined on the date of grant and is reduced for forfeitures as they occur . estimating the fair value of equity-settled awards as of the grant date using valuation models , such as the black-scholes option pricing model , is affected by assumptions regarding a number of complex variables . changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized . these inputs are subjective and generally require significant analysis and judgment to develop . we estimate the fair value of stock-based compensation utilizing the black-scholes option-pricing model , which is impacted by the following variables : expected term —we have opted to use the “ simplified method ” for estimating the expected term of options , whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option ( generally 10 years ) . expected volatility —due to our limited operating history and a lack of company specific historical and implied volatility data , we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded . the historical volatility data was computed using the daily closing prices for the selected companies ' shares during the equivalent period of the calculated expected term of the stock-based awards . risk-free interest rate —the risk-free rate assumption is based on the u.s. treasury instruments with maturities similar to the expected term of our stock options . expected dividend —we have not issued any dividends in our history and do not expect to issue dividends over the life of the options and therefore have estimated the dividend yield to be zero . 61 common stock valuations the estimated fair value of the common stock underlying our stock options was determined at each grant date by our board of directors , with input from management . all options to purchase shares of our common stock are intended to be exercisable at a price per share not less than the per-share fair value of our common stock underlying those options on the date of grant . prior to our ipo in may 2019 , on each grant date , our board of directors made a reasonable determination of the fair value of our common stock based on the information known to us on the date of grant , upon a review of any recent events and their potential impact on the estimated fair value per share of the common stock , and timely valuations from an independent third-party valuation in accordance with guidance provided by the american institute of certified public accountants practice aid , valuation of privately-held-company equity securities issued as compensation ( the practice aid ) . the methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using a market approach , which estimates the fair value of the company by including an estimation of the value of the business based on guideline public companies under a number of different scenarios . in determining the fair value of our common stock on each grant date , our board of directors considered numerous objective and subjective factors , including the results of independent third party valuations , external market conditions affecting the pharmaceutical and biotechnology industry and trends within the industry ; our stage of development ; the rights , preferences and privileges of our redeemable convertible preferred stock relative to those of our common stock ; the prices at which we sold shares of our redeemable convertible preferred stock ; our financial condition and operating results , including our levels of available capital resources ; the progress of our research and development efforts , our stage of development and business strategy ; equity market conditions affecting comparable public companies ; general u.s. market conditions and the lack of marketability of our common stock . following our ipo in may 2019 , our board of directors determined the fair value of our common stock based on the closing price of our common stock on the date of grant . income taxes we account for income taxes under the asset and liability method . current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year . deferred income tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse . deferred income tax assets are reduced , as necessary , by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized . we account for uncertain tax positions in accordance with asc 740-10 , accounting for uncertainty in income taxes . we assess all material positions taken in any income tax return , including all significant uncertain positions , in all tax years that are still subject to assessment or challenge by relevant taxing authorities . assessing an uncertain tax position begins with the initial determination of the position 's sustainability and is measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement .

summary statement of cash flows the following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below ( in thousands ) : replace_table_token_3_th cash used in operating activities net cash used in operating activities was $ 33.3 million for the year ended december 31 , 2019 and $ 11.7 million for the year ended december 31 , 2018. cash used in operating activities in the year ended december 31 , 2019 was primarily due to our net loss for the period of $ 37.0 million , which included non-cash expenses of $ 2.6 million and changes to operating assets and liabilities of $ 1.9 million offset by non-cash interest income of $ 0.8 million . cash used in operating activities in the year ended december 31 , 2018 was primarily due to our net loss for the period of $ 12.5 million , and was also affected by changes to accrued interest , debt discount on conversion features , operating assets and liabilities , other current assets and long-term assets that totaled $ 1.5 million . cash used in operating activities was also affected by changes in operating assets and liabilities , a decrease in prepaids of $ 0.7 million and increase in accrued liabilities of $ 0.3 million , and non-cash charges relating to depreciation and amortization and stock-based compensation expense of $ 0.1 million . cash used in investing activities cash used in investing activities was $ 17.7 million in the year ended december 31 , 2019 , primarily related to the purchase of investments of $ 135.4 million and maturities of debt investments of $ 117.7 million . cash used in investing activities was $ 46.8 million in the year ended december 31 , 2018 , primarily related to the purchase of investments of $ 55.2 million , and maturities of short-term investments of $ 8.7 million .

when we determine that such services are not essential to the functionality of the licensed software , we record revenue story_separator_special_tag forward-looking statements statements in this annual report about anticipated financial results and growth , as well as about the development of our products and markets , are forward-looking statements that are based on our current plans and assumptions . important information about the bases for these plans and assumptions and factors that may cause our actual results to differ materially from these statements is contained below and in item 1a . “ risk factors ” of this annual report . unless otherwise indicated , all references to a year reflect our fiscal year that ends on september 30. operating and non-gaap financial measures our discussion of results includes discussion of our operating measures ( including “ license and subscription bookings ” and other subscription-related measures ) and non-gaap financial measures . our operating measures and non-gaap financial measures , including the reasons we use those measures , are described below in results of operations - operating measures and results of operations - non-gaap financial measures , respectively . you should read those sections to understand those operating and non-gaap financial measures . revenue sources and recognition we sell subscription and perpetual licenses to our software , support for perpetual licenses , cloud services and professional services . subscription revenue is comprised of time-based licenses whereby customers use our software and receive related support for a specified term , and for which through 2018 revenue is recognized ratably over the term of the contract . perpetual licenses are a perpetual right to use the software , for which revenue is generally recognized up front upon shipment to the customer . support revenue is comprised 16 of contracts to maintain new and or previously purchased perpetual licenses , for which revenue is recognized ratably over the term of the contract . our subscription revenue includes an immaterial amount of software as a service ( saas ) and cloud services for which revenue is generally recognized ratably over the term of the contract . consulting and training professional services engagements typically result from sales of new licenses , and for which revenue is recognized over the term of the engagement . our revenue recognition practices are described below in “ critical accounting policies and estimates ” and in note b. story_separator_special_tag million of borrowings under our credit facility in 2018. at september 30 , 2018 , the balance outstanding under our credit facility was $ 148 million and total debt outstanding was $ 648 million . operating measures we provide these measures to help investors understand the progress of our subscription transition . these measures are not necessarily indicative of revenue for the period or any future period . license and subscription bookings license and subscription bookings for 2018 were $ 466 million , up 11 % over 2017 ( up 9 % on a constant currency basis ) and up 16 % over 2016. over the past two years , cad , core plm and iot have delivered bookings cagrs at the high end of market growth rates , as cad and plm customers have converted existing license contracts to subscriptions and customers have adopted and expanded iot implementations . subscription acv s ubscription acv increased 24 % over 2017 to $ 177 million due to continued adoption of our subscription offerings around the globe . 19 annualized recurring revenue ( arr ) arr was approximat ely $ 1,012 m illion as of the fourth quarter of 2018 , an increase of 12 % compared to the fourth quarter of 2017 and the seventh consecutive quarter of double-digit year-over-year growth . deferred revenue and backlog ( unbilled deferred revenue ) deferred revenue primarily relates to software agreements invoiced to customers for which the revenue has not yet been recognized . unbilled deferred revenue ( backlog ) is the aggregate of booked orders for license , support and subscription ( including multi-year subscription contracts with start dates after october 1 , 2018 that are subject to a limited annual cancellation right , of which approximately $ 50 million was cancellable at september 30 , 2018 ) for which the associated revenue has not been recognized and the customer has not yet been invoiced . we do not record unbilled deferred revenue on our consolidated balance sheets ; such amounts are recorded as deferred revenue when we invoice the customer . we provide this view of deferred revenue and backlog to enable investors to understand the significant contractual commitments we have to customers , and to provide a view of future revenue that we expect will be recognized , even if those commitments are not reflected on our balance sheet . replace_table_token_2_th of the unbilled deferred revenue balance at september 30 , 2018 , we expect to invoice customers approximately $ 560 million within the next twelve months . unbilled deferred revenue grew 44 % year over year due to the high volume of new subscription bookings . many of our subscription bookings are for multiple years and are typically billed annually at the start of each annual subscription period . the average contract duration was approximately 2 years for new subscription contracts in 2018 and 2017. we expect that the amount of deferred revenue and unbilled deferred revenue will fluctuate from quarter to quarter due to the specific timing , duration and size of customer subscription and support agreements , varying billing cycles of such agreements , the specific timing of customer renewals , foreign currency fluctuations , the timing of when deferred revenue is recognized as revenue and the timing of our fiscal quarter ends . 20 the effects of our adoption of asc 606 , including expected adjustments to retained earnings related to billed and unbilled deferred revenue , are described below in “ recent accounting pronouncements ” and in note b. summary of significant accounting policies in the notes to consolidated financial statements . story_separator_special_tag replace_table_token_3_th ( 1 ) see non-gaap financial measures below for a reconciliation of our gaap results to our non-gaap measures . ( 2 ) we have a full valuation allowance against our u.s. net deferred tax assets and a valuation allowance against net deferred tax assets in certain foreign jurisdictions . as we are profitable on a non-gaap basis , the 2018 and 2017 non-gaap tax provisions are calculated assuming there is no valuation allowance . income tax adjustments reflect the tax effects of non-gaap adjustments which are calculated by applying the applicable tax rate by jurisdiction to the non-gaap adjustments listed above . we recorded the impact of the tax cuts and jobs act in our 2018 gaap earnings , resulting in a non-cash benefit of approximately $ 12 million . we have excluded this benefit from our non-gaap results . 23 ( 3 ) cash flow from operations for 2018 includes $ 3 million of restructuring payments . cash flow from operations for 2017 includes $ 37 million of restructuring payments , a $ 12 million payment related to a korea tax audit and $ 3 million of legal settlement payments . cash flow from operations for 2016 includes $ 55 million of restructuring payments and a $ 28 million payment of a legal accrual recorded in 2015 related to the settlement of an investigation in china . impact of foreign currency exchange on results of operations approximately two thirds of our revenue and half of our expenses are transacted in currencies other than the u.s. dollar . currency translation affects our reported results , which are in u.s. dollars . if actual reported results were converted into u.s. dollars based on the corresponding prior year 's foreign currency exchange rates , 2018 and 2017 revenue would have been lower by $ 32 million and higher by $ 1 million , respectively , and expenses would have been lower by $ 20 million and higher by $ 3 million , respectively . the net impact on year-over-year results would have been a decrease in operating income of $ 12 million in 2018 and a decrease in operating income of $ 2 million in 2017. the results of operations , revenue by line of business and revenue by geographic region in the tables that follow present both actual percentage changes year over year and percentage changes on a constant currency basis . revenue revenue is reported below by line of business ( subscription , support , perpetual license and professional services ) , by product area ( solutions and iot ) and by geographic region ( americas , europe , asia pacific ) . results include combined revenue from direct sales and our channel . revenue by line of business software as our mix of subscription sales relative to perpetual license sales has increased , perpetual license revenue and support revenue have declined and are expected to continue to decline as customers purchase our solutions as subscriptions and convert existing perpetual licenses with support contracts to subscriptions . as our subscription business matures , recurring software revenue growth is expected to continue due to the compounding benefit of a subscription business model . professional services professional services revenue was down 13 % ( 16 % constant currency ) in 2018 compared to 2017. professional services revenue in 2018 reflects a $ 14.5 million write-down related to a settlement of a customer dispute concerning a receivable . these results are in line with our expectation that professional services revenue will trend flat-to-down over time due to our strategy to expand margins by migrating 24 more services engagements to our partners and delivering products that require less consulting and training services . revenue by product replace_table_token_4_th solutions software revenue grew 8 % in 2018 compared to 2017 as a result of strong cad , plm and global channel license and subscription bookings over the past several years , offset by a significant increase in the subscription mix in the current period . subscription sales have increased in part due to our support conversion programs that we have been offering over the past few years whereby customers may convert existing perpetual licenses and support to a new subscription . recurring software revenue grew 12 % in 2018 over 2017 , and has grown double-digits for seven consecutive quarters . as our transition matures , recurring software revenue growth is expected to continue due to the compounding benefit of a subscription business model . professional services revenue in 2018 includes a $ 14.5 million write-down related to a settlement of a previously disclosed customer dispute concerning a receivable . in addition , professional services revenue in 2018 declined compared to 2017 due to our strategy to limit the amount of professional services we provide . iot software revenue in 2018 increased by 32 % compared to 2017 due to increases in license and subscription bookings over the past several years , offset by an 800 basis points increase in the subscription mix . recurring software revenue grew 42 % in 2018 over 2017 due to strong iot bookings growth over the past several years . software revenue includes $ 5.2 million of new subscription revenue related to the settlement of a customer dispute concerning a professional services receivable , which settlement included new subscription purchases . professional services revenue increased in 2018 compared to 2017 in part due to implementation and adoption services we provide to our iot customers as part of our efforts to help their iot initiatives be successful . 25 revenue by geographic region total r evenue grew in all regions for 2018 compared to 2017. replace_table_token_5_th americas americas software revenue has benefited from strong license and subscription bookings growth over the past two years ( 10 % cagr ) . new license and subscriptions bookings were up 20 % in 2018 compared to 2017 , despite an 800 basis point increase in the subscription mix .

summary of significant accounting policies in the notes to consolidated financial statements in this annual report . beginning with 2019 , we will recognize revenue under the accounting standards update no . 2014-09 , revenue from contracts with customers : topic 606 ( asc 606 ) revenue recognition standard , which differs significantly from the previous accounting rules . under asc 606 , all performance obligations under the product that can be separately identified are , and revenue is recognized for each performance obligation . accordingly , our on-premise subscription contracts will be unbundled into multiple performance obligations ( i.e. , license , cloud and support ) . the license portion of such subscription contracts ( approximately 50 % to 55 % ) will be recognized upfront and the cloud and support portions ( approximately 45 % to 50 % ) of such subscription contracts will be recognized ratably over the term . the effects of our adoption of asc 606 , including expected adjustments to retained earnings related to billed and unbilled deferred revenue , are described below in “ recent accounting pronouncements ” and in note b. summary of significant accounting policies in the notes to consolidated financial statements in this annual report . executive overview our revenue results for the year reflect the adoption of subscription licensing by our customers and the compounding effect of the subscription business model as subscription revenue recurs and new subscription revenue is added in the year . subscription revenue , software revenue and total revenue were all up over fiscal 2017 , despite an 800 basis point increase in subscription mix year over year . recurring software revenue represented approximately 90 % of our software revenue in 2018 , up from 86 % a year ago . our revenue results also drove our operating margin improvements for the year . despite increases in sales and marketing and research and development expenses , operating margins and eps were up over the prior year .

we work with both independent advisors ( rias ) , as well as advisors associated with financial institutions ( broker-dealers , banks ) . the services we offer and market to financial advisors address advisors ' ability to grow their practice as well as operate more efficiently—the envestnet platforms span from the initial meeting an advisor has with a prospective client to the ongoing day-to-day operations of managing an advisory practice . our centrally-hosted technology platforms , which we refer to as having `` open architecture '' because of their flexibility , provide financial advisors with access to a series of integrated services to help them better serve their clients . these services include risk assessment and selection of investment strategies and solutions , asset allocation models , research and due diligence , portfolio construction , proposal generation and paperwork preparation , model management and account rebalancing , account monitoring , customized fee billing , overlay services covering asset allocation , tax management and socially responsible investing , aggregated multi-custodian performance reporting and communication tools , as well as access to a wide range of leading third-party asset custodians . the services delivered through our software are enabled and supported by our employees . in addition to the u.s.-based employees that provide operations , investment management and research , and other support services to our advisor clients , we maintain a presence in india where our employees provide back-office support , including overnight data reconciliation services , as well as quality control , technology operations support and software development . we offer these solutions principally through the following product and services suites : envestnet 's wealth management software empowers advisors to better manage client outcomes and strengthen their practice . our software unifies the applications and services advisors use to manage their practice and advise their clients , including financial planning ; capital markets assumptions ; asset allocation guidance ; research and due diligence on investment managers and funds ; portfolio management , trading and rebalancing ; multi-custodial , aggregated performance reporting ; and billing calculation and administration . 38 envestnet | pmc® , our portfolio management consultants group , primarily engages in consulting services aimed at providing financial advisors with additional support in addressing their clients ' needs , as well as the creation of proprietary investment solutions and products . envestnet | pmc 's investment solutions and products include managed account and multi-manager portfolios , mutual fund portfolios and etf portfolios . envestnet | pmc also offers prima premium research , comprising institutional-quality research and due diligence on investment managers , mutual funds , etfs and liquid alternatives funds . envestnet | tamarac tm provides leading portfolio accounting , rebalancing , trading , performance reporting and crm software , principally to high-end rias . vantage reporting solution tm software aggregates and manages investment data , provides performance reporting and benchmarking , giving advisors an in-depth view of clients ' various investments , empowering advisors to give holistic , personalized advice . envestnet | wms tm offers financial institutions access to an integrated wealth platform , which helps construct and manage sophisticated portfolio solutions across an entire account life cycle , particularly in the area of uma trading . envestnet | wms 's overlay portfolio management console helps wealth managers efficiently build customized client portfolios that consider both proprietary and open-architecture investment solutions . envestnet | placemark tm develops uma programs and other portfolio management outsourcing solutions , including patented portfolio overlay and tax optimization services , for banks , full service broker-dealers and ria firms . we believe that our business model results in a high degree of recurring and predictable financial results . revenues overview we earn revenues primarily under two pricing models . first , a majority of our revenues is derived from fees charged as a percentage of the assets that are managed or administered on our technology platforms by financial advisors . these revenues are recorded under revenues from assets under management ( `` aum '' ) or administration ( `` aua '' ) or collectively ( `` aum/a '' ) . our asset-based fees vary based on the types of investment solutions and services that financial advisors utilize . asset-based fees accounted for approximately 84 % , 83 % and 81 % of our total revenues for the years ended december 31 , 2014 , 2013 and 2012 , respectively . in future periods , the percentage of our total revenues attributable to asset-based fees is expected to vary based on fluctuations in securities markets , whether we enter into significant license agreements , the mix of aum or aua , and other factors . as of december 31 , 2014 , approximately $ 246 billion of investment assets subject to asset-based fees were managed or administered utilizing our technology platforms by approximately 29,000 financial advisors through approximately 978,000 investor accounts . we also generate revenues from recurring , contractual licensing fees for providing access to our technology platforms . these revenues are recorded under revenues from licensing and professional services . licensing fees are generally fixed in nature for the contract term and are based on the level of investment solutions and services provided , rather than on the amount of client assets on our technology platforms . licensing fees accounted for 14 % , 15 % and 15 % of our total revenues for the years ended december 31 , 2014 , 2013 and 2012 , respectively . fees received in connection with professional services and other revenue accounted for the remainder of our total revenues . as of december 31 , 2014 , approximately $ 467 billion of investment assets for which we receive licensing fees for utilizing our technology platforms were serviced by approximately 12,000 financial advisors through approximately 1,881,000 investor accounts . 39 the following table provides information regarding the amount of assets utilizing our platform technology , investor accounts and financial advisors in the periods indicated . story_separator_special_tag depreciation and amortization depreciation and amortization expenses include depreciation and amortization related to : fixed assets , including computer equipment and software , leasehold improvements , office furniture and fixtures and other office equipment ; internally developed software ; and intangible assets , primarily related to customer lists , proprietary technology and trade names , the value of which are capitalized in connection with our acquisitions . furniture and equipment are depreciated using the straight-line method based on the estimated useful lives of the depreciable assets . leasehold improvements are amortized using the straight-line method over their estimated economic useful lives or the remaining lease term , whichever is shorter . 42 improvements are capitalized , while repairs and maintenance costs are recorded as expenses in the period they are incurred . assets are tested for recoverability whenever events or circumstances indicate that the carrying value of the assets may not be recoverable . internally developed software is amortized on a straight-line basis over its estimated useful life . we evaluate the useful lives of these assets on an annual basis and test for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets . intangible assets are depreciated using an accelerated or straight-line basis over their estimated economic useful lives and are reviewed for possible impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets . interest expense interest expense includes coupon interest , discount amortization , and issuance cost amortization related to the convertible notes as well as amortization of upfront fees and monthly fees related to the credit agreement . the discount , issuance costs , and upfront fees are amortized over the term of the related agreements . general conditions and trends affecting our business our exposure to market risk is directly related to the market value of assets on our platforms , as we earn revenues from assets under management ( `` aum '' ) or administration ( `` aua '' ) based upon a contractual percentage of aum or aua . as a result , our net flows , revenues and profitability have been and could be impacted negatively or positively by changes in overall market conditions going forward . the broad equity markets improved during 2014 compared to 2013 , as the nasdaq composite index , standard & poor 's 500 index , msci world index , dow jones industrial average and barclays u.s. aggregate index increased 13.4 % , 11.4 % , 2.1 % , 7.5 % and 6.0 % , respectively . during the year ended december 31 , 2014 , our aum and aua increased by $ 6 billion due to the overall favorable market impact . market trends the wealth management industry has experienced significant growth in terms of assets invested by retail investors in the past several years . according to the federal reserve , u.s. household and non-profit organization financial assets totaled $ 66.8 trillion as of september 30 , 2014 , up 2.7 % from $ 65.0 trillion at december 31 , 2013. as a leading provider of unified wealth management software and services to financial advisors , we believe we are well positioned to take advantage of favorable secular trends in the wealth management industry , including those described below : increase in independent financial advisors . based on industry news reports and channel shifts in the advisor population , we believe that over the past several years an increasing number of financial advisors have elected to leave large financial institutions and start their own financial advisory practices or move to smaller , more independent firms . according to an analysis done by cerulli associates , the number of rias and dually-registered advisors has grown 26 % over the past five years from 42,000 in 2008 to 53,000 in 2013. increased reliance on technology among independent financial advisors . in order to compete effectively in the marketplace , independent financial advisors are increasingly relying on technology service providers to help them provide comparable services cost effectively and efficiently . increased use of fee-based investment solutions . based on our industry experience , we believe that in order for financial advisors to effectively manage their clients ' assets , they are seeking account types that offer the flexibility to choose among the widest range of investment solutions . financial advisors typically charge their fees for these types of flexible accounts based on a percentage of assets rather than on a commission or other basis . 43 our growth strategy we serve the fastest growing segments of the wealth management industry . we intend to grow by increasing our advisor base , increasing the share of our clients ' business on our platforms , expanding our services utilized by each advisor and obtaining new enterprise clients through the use of marketing and internal sales personnel . in addition , we intend to selectively pursue acquisitions , investments and other relationships that we believe can enhance the attractiveness of our technology platforms or expand our client base . acquisitions involve a number of risks , including our ability to integrate acquired companies into ours in an effective and timely manner . we have historically financed our acquisitions with available cash and debt ; however , the financing of future acquisitions could result in dilution from issuing equity securities or a weakening of our balance sheet from using available cash or incurring debt . recent developments 2014 developments non-controlling interest effective february 1 , 2014 , we formed envestnet retirement solutions , llc ( `` ers , llc '' ) with various third parties . ers , llc offers advisory and technology enabled services to financial advisors and retirement plans . in exchange for an initial 64.5 % ownership interest in ers , llc , we contributed certain assets and have agreed to fund a certain amount of the operating expenses of ers , llc .

results of operations year ended december 31 , 2014 compared to year ended december 31 , 2013 replace_table_token_11_th * not meaningful revenues total revenues increased 44 % from $ 242,535 in 2013 to $ 348,748 in 2014. the increase was primarily due to an increase in revenues from assets under management or administration of $ 93,655 . 51 revenues from assets under management or administration comprised 84 % and 83 % of total revenues in 2014 and 2013 , respectively . assets under management or administration revenues earned from assets under management or administration increased 47 % from $ 200,568 in 2013 to $ 294,223 in 2014. the increase was primarily due to an increase in asset values applicable to our quarterly billing cycles in 2014 , relative to the corresponding period in 2013. in 2014 , revenues were positively affected by new account growth , market appreciation and positive net flows of aum or aua during 2013 and 2014 , as well as an increase in revenues related to the july 1 , 2013 acquisition of wms , and the october 1 , 2014 acquisition of placemark . the number of financial advisors with aum or aua on our technology platforms increased from 22,838 as of december 31 , 2013 to 28,605 as of december 31 , 2014 and the number of aum or aua client accounts increased from approximately 736,000 as of december 31 , 2013 to approximately 978,000 as of december 31 , 2014. licensing and professional services licensing and professional services revenues increased 30 % from $ 41,967 in 2013 to $ 54,525 in 2014. this increase was primarily due to an increase in licensing and other revenue of $ 13,668 , primarily due to an increase in tamarac related revenue , and offset by a decrease in professional services revenue of $ 1,111. cost of revenues cost of revenues increased 52 % from $ 98,970 in 2013 to $ 150,067 in 2014

the number of shares of our common stock that may be issued under the 2014 incentive plan is 3,000,000 , less one share for every one share of common stock issued or issuable pursuant to awards made after may 3 , 2014 under the 2007 stock plan or 2010 stock plan . awards that may be settled only in cash will not reduce the number of shares available for issuance under the 2014 incentive plan . shares issuable under the 2014 incentive plan may be authorized but unissued shares or treasury shares . if any award granted under the 2014 incentive plan ( or , after may 3 , 2014 , an award under the 2007 stock plan or 2010 stock plan ) expires , terminates , is forfeited or canceled , is settled in cash in lieu of shares of common stock , or is exchanged for a non-stock award under certain circumstances story_separator_special_tag overview we are a global manufacturer of component and subsystem devices with manufacturing , design and testing facilities in china , egypt , germany , india , italy , lebanon , malta , mexico , singapore , switzerland , the united kingdom and the united states . our primary manufacturing locations are located in shanghai , china ; cairo , egypt ; mriehel , malta ; and monterrey , mexico . we design , manufacture and market devices employing electrical , radio remote control , electronic , wireless and sensing technologies . our business is managed on a segment basis , with those segments being automotive , interface , power products and other . for more information regarding the business and products of these segments , see “ item 1. business. ” our components are found in the primary end-markets of the aerospace , appliance , automotive , construction , consumer and industrial equipment , communications ( including information processing and storage , networking equipment , wireless and terrestrial voice/data systems ) , medical device , rail and other transportation industries . plan to repurchase common stock in september 2015 , the board of directors authorized the repurchase of up to $ 100.0 million of the company 's outstanding common stock through september 1 , 2017. the company purchased 280,168 shares of outstanding common stock for $ 9.8 million in fiscal 2017 and 1,997,298 shares for $ 62.3 million in fiscal 2016. in total , the company has purchased 2,277,466 shares of outstanding common stock for $ 72.1 million under the plan . the program may be suspended or terminated at any time . hetronic germany-gmbh matters for several years , hetronic germany-gmbh and hydronic-steuersysteme-gmbh ( the “ fuchs companies ” ) served as our distributors for germany , austria and other central and eastern european countries pursuant to their respective intellectual property licenses and distribution and assembly agreements . we became aware that the fuchs companies and their managing director , albert fuchs , had materially violated those agreements . as a result , we terminated all of our agreements with the fuchs companies . on june 20 , 2014 , we filed a lawsuit against the fuchs companies in the federal district court for the western district of oklahoma alleging material breaches of the distribution and assembly agreements and seeking damages , as well as various forms of injunctive relief . the defendants have filed counterclaims alleging breach of contract , interference with business relations and business slander , and an affiliated company has filed a suit in front of the european union intellectual property office seeking to invalidate the company 's nova trademark in the eu . on april 2 , 2015 , we amended our complaint against the fuchs companies to add additional unfair competition and lanham act claims and to add additional affiliated parties . as of april 29 , 2017 , the matter remains in the discovery stage . we incurred legal fees of $ 11.0 million , $ 9.9 million and $ 3.1 million in fiscal 2017 , fiscal 2016 and fiscal 2015 , respectively , related to the lawsuits . these amounts are included in the selling and administrative expenses in the interface segment . 13 results of operations results of operations for the fiscal year ended april 29 , 2017 , as compared to the fiscal year ended april 30 , 2016 . consolidated results below is a table summarizing results for the fiscal years ended : replace_table_token_4_th net sales . consolidated net sales increased $ 7.4 million , or 0.9 % , to $ 816.5 million for the fiscal year ended april 29 , 2017 , from $ 809.1 million for the fiscal year ended april 30 , 2016 . the automotive segment 's net sales increased $ 17.9 million , or 2.9 % , to $ 632.2 million for fiscal 2017 , from $ 614.3 million for fiscal 2016 . the interface segment 's net sales decreased $ 13.4 million , or 9.5 % , to $ 127.4 million for fiscal 2017 , compared to $ 140.8 million for fiscal 2016 . the power products segment 's net sales increased $ 2.8 million , or 5.2 % , to $ 56.3 million for fiscal 2017 , compared to $ 53.5 million for fiscal 2016 . translation of foreign operations ' net sales for fiscal 2017 decreased net sales by $ 5.5 million , or 0.7 % , compared to the average currency rates in fiscal 2016 , primarily due to the strengthening of the u.s. dollar compared to the chinese yuan and the euro . cost of products sold . consolidated cost of products sold increased $ 2.0 million , or 0.3 % , to $ 598.2 million for the fiscal year ended april 29 , 2017 , compared to $ 596.2 million for the fiscal year ended april 30 , 2016 . consolidated cost of products sold as a percentage of net sales decreased to 73.3 % for fiscal 2017 , compared to 73.7 % for fiscal 2016 . story_separator_special_tag automotive segment net sales increased $ 17.9 million , or 2.9 % , to $ 632.2 million for the fiscal year ended april 29 , 2017 , from $ 614.3 million for the fiscal year ended april 30 , 2016 . net sales increased in north america by $ 28.5 million , or 8.4 % , to $ 369.4 million for fiscal 2017 , compared to $ 340.9 million for fiscal 2016. sales volumes increased for our gm center console program ( with the launch of new platforms in the fourth quarter of fiscal 2016 ) , user interface assemblies , and for transmission lead-frame assemblies . sales volumes decreased $ 2.3 million for the ford center console program . north american sales were negatively impacted by pricing concessions on certain products . net sales decreased in europe by $ 7.8 million , or 4.9 % , to $ 151.9 million in fiscal 2017 , compared to $ 159.7 million in fiscal 2016 , primarily due to lower sales volumes of ignition switch products and decreased sales of customer funded tooling and design and development services . europe experienced higher sales volumes of certain integrated center panels and steering wheel switch products . net sales in asia decreased $ 2.8 million , or 2.5 % , to $ 110.9 million in fiscal 2017 , compared to $ 113.7 million in fiscal 2016. the asian sales were negatively impacted by $ 3.7 million due to the strengthening of the u.s dollar as compared to the chinese yuan . sales volumes increased for linear position sensor products and transmission lead-frame assemblies , partially offset by lower sales volumes of steering-angle sensor products . translation of foreign operations ' total automotive net sales for the fiscal year ended april 29 , 2017 decreased by $ 5.5 million , or 0.9 % , in fiscal 2017 , compared to the average currency rates in fiscal 2016 , primarily due to the strengthening of the u.s. dollar compared to the euro and the chinese yuan . cost of products sold . automotive segment cost of products sold increased $ 5.8 million , or 1.3 % , to $ 449.4 million for the fiscal year ended april 29 , 2017 , from $ 443.6 million for the fiscal year ended april 30 , 2016 . the automotive segment cost of products sold as a percentage of net sales decreased to 71.1 % in fiscal 2017 , compared to 72.2 % in fiscal 2016. the results for fiscal 2017 include $ 1.0 million of commodity pricing adjustments and the reversal of accruals of $ 1.0 million related to resolved customer commercial issues . in addition , the decrease is due to favorable commodity pricing of raw materials and the favorable currency impact on both the purchase of certain raw materials and labor costs , primarily in mexico and china . fiscal 2016 was favorably impacted by $ 1.3 million due to a refund of import duties from prior periods . gross profit . automotive segment gross profit increased $ 12.1 million , or 7.1 % , to $ 182.8 million for the fiscal year ended april 29 , 2017 , as compared to $ 170.7 million for the fiscal year ended april 30 , 2016 . the automotive segment gross margins as a percentage of net sales increased to 28.9 % for the fiscal year ended april 29 , 2017 , as compared to 27.8 % for the fiscal year ended april 30 , 2016 . the gross profit for fiscal 2017 was favorably impacted by $ 1.0 million for commodity pricing adjustments and the reversal of accruals of $ 1.0 million related to resolved customer commercial issues . in addition , gross profit was favorably impacted due to favorable commodity pricing of raw materials and the favorable currency impact on both the purchase of certain raw materials and labor costs , primarily in mexico and china . fiscal 2016 was favorably impacted by $ 1.3 million due to a refund of import duties from prior periods . 16 selling and administrative expenses . selling and administrative expenses increased $ 0.6 million , or 1.8 % , to $ 34.5 million for the fiscal year ended april 29 , 2017 , compared to $ 33.9 million for the fiscal year ended april 30 , 2016 . selling and administrative expenses as a percentage of net sales remained constant at 5.5 % for the fiscal year ended april 29 , 2017 , compared to the fiscal year ended april 30 , 2016 . the increase in expenses in fiscal 2017 is primarily due to higher stock award amortization expense , partially offset with lower bonus , commission and travel expenses . income from operations . automotive segment income from operations increased $ 11.5 million , or 8.4 % , to $ 148.3 million for the fiscal year ended april 29 , 2017 , compared to $ 136.8 million for the fiscal year ended april 30 , 2016 . income from operations increased in fiscal 2017 due to increased sales volumes , commodity pricing adjustments and a one-time reversal of accruals related to resolved customer commercial issues , favorable commodity pricing of raw materials and the favorable currency impact on both the purchase of certain raw materials and labor costs in our foreign operations and lower bonus and travel expenses . income from operations was negatively impacted in fiscal 2017 due to higher stock award amortization expenses . interface segment results below is a table summarizing results for the fiscal years ended : replace_table_token_6_th net sales . interface segment net sales decreased $ 13.4 million , or 9.5 % , to $ 127.4 million for the fiscal year ended april 29 , 2017 , from $ 140.8 million for the fiscal year ended april 30 , 2016 .

other segment results below is a table summarizing results for the fiscal years ended : replace_table_token_8_th net sales . the reporting units in this segment ( including medical devices , inverters and battery systems ) had minimal net sales in fiscal 2017 and fiscal 2016 due to the products being newly launched . cost of products sold . other segment cost of products sold was $ 6.5 million for the fiscal year ended april 29 , 2017 , compared to $ 4.3 million for the fiscal year ended april 30 , 2016 . cost of products sold for fiscal 2017 includes exit costs of $ 1.2 million for our active energy solutions ( inverters and battery systems ) reporting unit . the business was shuttered at the end of fiscal 2017 due to market conditions . in addition to the exit costs , the increase primarily relates to research and development initiatives for the medical device business . gross profit . the other segment gross profit was a loss of $ 6.2 million and $ 4.0 million for the fiscal years ended april 29 , 2017 and april 30 , 2016 , respectively . gross profit was negatively impacted by $ 1.2 million of exit costs for our active energy solutions reporting unit . in addition to the exit costs , the increased loss primarily relates to research and development initiatives for the medical device business . selling and administrative expenses . selling and administrative expenses increased $ 1.4 million , or 29.2 % , to $ 6.2 million for the fiscal year ended april 29 , 2017 , compared to $ 4.8 million for the fiscal year ended april 30 , 2016 . the increase primarily is due to higher outside professional fees and marketing expenses related to new product introductions for our medical device business .

for tax positions that the company considers to be uncertain , current and deferred tax liabilities are recognized , or assets derecognized , when it is probable that an income tax liability has been incurred and the amount of the liability is reasonably estimable , or when it is probable that a tax benefit , such as a tax credit or loss carryforward , will be disallowed by a taxing authority . the amount of unrecognized tax benefits related to tax positions is insignificant . research and product development we recognize research and product development costs as expenses as incurred . we incurred product development and research costs related to the commercial development , patent approval and regulatory approval of new products , including iron supplemented dialysate , aggregating approximately $ 17,805,000 , $ 3,422,000 , and $ 6,454,000 in 2011 , 2010 and 2009 , respectively . we are conducting human clinical trials on iron supplemented dialysate and we recognize the costs of the human clinical trials as the costs are incurred and services performed over the duration of the trials . share based compensation we measure the cost of employee services received in exchange for equity awards , including stock options , based on the grant date fair value of the awards in accordance with asc 718-10 , compensation — stock compensation . the cost of equity based compensation is recognized as compensation expense over the vesting period of the awards . we estimate the fair value of compensation involving stock options utilizing the black-scholes option pricing model . this model requires the input of several factors such as the expected option term , expected volatility of our stock price over the expected option term , and an expected forfeiture rate , and is subject to various assumptions . we believe the valuation methodology is appropriate for estimating the fair value of stock options we grant to employees and directors which are subject to asc 718-10 requirements . these amounts are estimates and thus may not be reflective of actual future results or amounts ultimately realized by recipients of these grants . employee retirement plans we are the sponsor of a non-contributory 401 ( k ) employee savings plan . f-9 net earnings per share we computed our basic earnings ( loss ) per share using weighted average shares outstanding for each respective period . diluted earnings per share also reflect the weighted average impact from the date of issuance of all potentially dilutive securities , consisting of stock options and common share purchase warrants , unless inclusion would have had an anti-dilutive effect . actual weighted average shares outstanding used in calculating basic and diluted earnings per share were : replace_table_token_9_th for 2011 , 2010 and 2009 , the dilutive effect of stock options and common share purchase warrants have not been included in the average shares outstanding for the calculation of diluted loss per share as the effect would be anti-dilutive as a result of our net loss in these periods . at december 31 , 2011 potentially dilutive securities comprised 5,482,135 stock options exercisable at prices from $ .55 to $ 10.20 , 2,607,440 common share purchase warrants exercisable at prices ranging from $ 6.14 to $ 10.25 and 310,000 unvested restricted common shares . at december 31 , 2010 , potentially dilutive securities comprised 5,289,334 stock options exercisable at prices from $ .55 to $ 8.35 , 3,338,569 common share purchase warrants exercisable at prices ranging from $ 1.99 to $ 10.00 and 310,000 unvested restricted common shares . at december 31 , 2009 , potentially dilutive securities comprised 4,441,500 stock options exercisable at prices from $ .55 to $ 8.35 , 3,318,569 common share purchase warrants exercisable at prices ranging from $ 1.99 to $ 10.00 and 150,000 unvested restricted common shares . disclosures about fair value of financial instruments the carrying amounts of all significant financial instruments , comprising cash and cash equivalents , accounts receivable , and accounts payable approximate fair value because of the short maturities of these instruments . fair market value measurements accounting standards require certain assets and liabilities be reported at fair value in the financial statements and provides a framework for establishing that fair value . the framework for determining fair value is based on a hierarchy that prioritizes observable and unobservable story_separator_special_tag overview and recent developments rockwell medical operates in a single business segment as a specialty pharmaceutical company offering innovative products targeting end-stage renal disease , chronic kidney disease and iron deficiency anemia . as an established manufacturer delivering high-quality hemodialysis concentrates to dialysis providers and distributors in the u.s. and abroad , we provide products used to maintain human life , remove toxins and replace critical nutrients in the dialysis patient 's bloodstream . we are currently developing unique , proprietary renal drug therapies . these novel renal drug therapies support disease management initiatives to improve the quality of life and care of dialysis patients and are designed to deliver safe and effective therapy , while decreasing drug administration costs and improving patient convenience and outcome . our strategy is to develop high potential drug candidates while also expanding our dialysis products business , which had sales of $ 49.0 million in 2011. our dialysis products business was cash flow positive in 2011 , excluding research and development expenses , and provides an in-place sales and distribution infrastructure and conduit with established business relationships to market pharmaceutical and additional products into the dialysis market . our product development costs were primarily related to sfp , our lead drug candidate . we believe our sfp product has unique and substantive benefits compared to current treatment options and has the potential to compete in the iron maintenance therapy market . story_separator_special_tag if we underestimate the allowance , we would incur a current period expense which could have a material adverse effect on earnings . impairments of long-lived assets we account for impairment of long-lived assets , which include property and equipment , amortizable and non-amortizable intangible assets and goodwill , in accordance with authoritative accounting pronouncements . an impairment review is performed annually or whenever a change in condition occurs which indicates that the carrying amounts of assets may not be recoverable . such changes may include changes in our business strategies and plans , changes to our customer contracts , changes to our product lines and changes in our operating practices . we use a variety of factors to assess the realizable value of long-lived assets depending on their nature and use . goodwill is not amortized ; however , it must be tested for impairment at least annually . the goodwill impairment analysis is based on the fair market value of our common shares . amortization continues to be recorded for other intangible assets with definite lives over the estimated useful lives . intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable based on future cash flows . if we determine that goodwill has been impaired , the change in value will be accounted for as a current period expense and could have a material adverse effect on earnings . 28 accounting for income taxes we estimate our income tax provision to recognize our tax expense and our deferred tax liabilities and assets for future tax consequences of events that have been recognized in our financial statements using current enacted tax laws . deferred tax assets must be assessed based upon the likelihood of recoverability from future taxable income and to the extent that recovery is not likely , a valuation allowance is established . the allowance is regularly reviewed and updated for changes in circumstances that would cause a change in judgment about whether the related deferred tax asset may be realized . these calculations and assessments involve complex estimates and judgments because the ultimate tax outcome can be uncertain and future events unpredictable . if we determine that the deferred tax asset will be realized in the future , it may result in a material beneficial effect on earnings . new accounting pronouncements no new accounting pronouncements that were issued or became effective during the year have had or are expected to have a material impact on our consolidated financial statements . for a discussion of new accounting pronouncements , see note 2 to our consolidated financial statements . liquidity and capital resources our strategy is centered on obtaining regulatory approval to market sfp and developing other high potential drug candidates , while also expanding our dialysis products business . we expect to expend substantial amounts in support of our clinical development plan and regulatory approval of sfp and its extensions and other product development opportunities . these initiatives will require the expenditure of substantial cash resources . we expect our cash needs for research and development spending to be significant over the next two years as we execute our clinical development program for sfp . we will invest in our phase iii clinical development program for sfp as well as other development initiatives over the next two years . we are also required to make an additional cash payment of $ 550,000 in connection with our acquisition of the right to market calcitriol and funding will be necessary to obtain fda approval for our contract manufacturer to manufacture the product for us . however , these expenditures are not expected to have a material effect on our liquidity or financial position . our cash resources include cash generated from our business operations and from proceeds of equity offerings . as of december 31 , 2011 , we had $ 17.5 million in cash and investments . in february 2012 , we completed a common stock offering for $ 17.5 million in gross proceeds and approximately $ 16.2 million in net proceeds . we expect to generate additional cash from our business operations and from other sources , which may include the exercise of warrants , the possible out-licensing of sfp outside the united states , out-licensing of certain sfp uses outside the dialysis market , and other capital raising alternatives as needed . our current assets exceeded our current liabilities by over $ 12.2 million as of december 31 , 2011 and included $ 17.5 million in cash and short term investments . in 2011 , we used $ 10.9 million in cash from operating activities which included research and product development costs of $ 17.8 million . in 2011 , operational related liabilities net of assets increased by approximately $ 5.0 million primarily related to research and development activities . these liabilities will be paid in future periods . as of december 31 , 2011 , we have advanced $ 2.3 million in cash that will be used to offset future research and development costs . in 2011 , we invested $ 0.4 million in capital expenditures compared to depreciation expense of $ 1.1 million . we also realized cash from financing activities aggregating $ 4.8 million , primarily from the exercise of warrants . we believe our current and prospective sources of cash resources are sufficient to fund our anticipated research and development activities as well as our ordinary course operating cash requirements in 2012. we expect to generate positive cash flow from operations in 2012 , excluding the effect of our research and development expenses , assuming relative stability in the markets for fuel and our key raw materials and relatively stable revenues . in addition , we may realize substantial cash proceeds from in-the-money warrants that expire in 2012 aggregating $ 11.2 million . however , if we use more cash than anticipated for sfp development , are required

results of operations for the year ended december 31 , 2011 compared to the year ended december 31 , 2010 sales in 2011 , our sales were $ 49.0 million compared to $ 59.6 million in 2010. sales decreased $ 10.6 million or 17.8 % with $ 7.6 million due to lower international sales and $ 2.8 million due to lower domestic sales and $ 0.2 million due to a government research grant received in 2010 that did not recur in 2011. international sales decreased due to lower sales to a single international distributor . domestic sales decreased due to a change in product mix and due to lower sales volumes with approximately half of the sales decrease due to a loss of certain customers following their acquisition by competitors or by chains that buy product from our competitors . over the last year , customers have continued to convert to our dri-sate dry acid concentrate product line , which lowers providers ' cost per treatment and reduces our sales , but improves our gross profit margins due to a reduction in shipping costs . our dri-sate dry acid concentrate displaced liquid acid concentrate volume , increasing to 58 % of 2011 acid concentrate equivalent treatment gallons from 49 % in 2010. we also experienced some downward pricing pressure with the implementation of the bundled reimbursement program by cms ( medicare ) in 2011. gross profit our gross profit in 2011 was $ 5.6 million compared to $ 9.9 million in 2010. gross profit margins were 11.5 % in 2011 compared to 16.6 % in 2010. the decreases in gross profit and margin were primarily due to lower sales volumes , increased sales incentives and inflationary cost increases to fuel , material and labor costs .

forward-looking statements can be identified by the use of words such as `` may , '' `` should , '' `` will , '' `` could , '' `` estimates , '' `` predicts , '' `` potential , '' `` continue , '' `` anticipates , '' `` believes , '' `` plans , '' `` expects , '' `` future , '' `` intends '' and similar expressions which are intended to identify forward-looking statements . statements relating to the `` outlook '' or `` outlook for 2015 '' contained herein are forward-looking statements . these forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties , some of which are beyond the corporation 's control and ability to predict , that could cause actual results to differ materially from those expressed in the forward-looking statements . the corporation undertakes no obligation , other than as required by law , to update or revise any forward-looking statements , whether as a result of new information , future events or otherwise . many factors could affect future financial results including , without limitation : the effects of market interest rates , and the relative balances of rate-sensitive assets to rate-sensitive liabilities , on net interest margin and net interest income ; the effects of changes in interest rates on demand for the corporation 's products and services ; the effects of changes in interest rates or disruptions in liquidity markets on the corporation 's sources of funding ; the corporation 's ability to manage liquidity , both at the holding company level and at its subsidiary banks ; the impact of increased regulatory scrutiny of the banking industry ; the effects of the increasing amounts of time and expense associated with regulatory compliance and risk management ; the potential for negative consequences from regulatory violations , including potential supervisory actions and the assessment of fines and penalties ; the additional time , expense and investment required to comply with , and the restrictions on potential growth and investment activities resulting from , the existing enforcement orders by federal and state bank regulatory agencies requiring improvement in compliance functions and other remedial actions , or any future enforcement orders ; the corporation 's ability to manage the uncertainty associated with the delay in implementing many of the regulations mandated by the dodd-frank act ; the effects of negative publicity on the corporation 's reputation ; the corporation 's ability to successfully transform its business model ; the corporation 's ability to achieve its growth plans ; the effects of competition on deposit rates and growth , loan rates and growth and net interest margin ; the corporation 's ability to manage the level of non-interest expenses , including salaries and employee benefits expenses , operating risk losses and goodwill impairment ; the impact of adverse conditions in the economy and capital markets on the performance of the corporation 's loan portfolio and demand for the corporation 's products and services ; increases in non-performing assets , which may require the corporation to increase the allowance for credit losses , charge off loans and incur elevated collection and carrying costs related to such non-performing assets ; investment securities gains and losses , including other-than-temporary declines in the value of securities which may result in charges to earnings ; the impact of operational risks , including the risk of human error , inadequate or failed internal processes and systems , computer and telecommunications systems failures , faulty or incomplete data and an inadequate risk management framework ; the impact of failures of third parties upon which the corporation relies to perform in accordance with contractual arrangements ; the failure or circumvention of the corporation 's system of internal controls ; the loss of , or failure to safeguard , confidential or proprietary information ; the corporation 's failure to identify and to address cyber-security risks ; the corporation 's ability to keep pace with technological changes ; the corporation 's ability to attract and retain talented personnel ; 33 capital and liquidity strategies , including the corporation 's ability to comply with applicable capital and liquidity requirements , and the corporation 's ability to generate capital internally or raise capital on favorable terms ; the corporation 's reliance on its subsidiaries for substantially all of its revenues and its ability to pay dividends or other distributions ; and the effects of any downgrade in the corporation 's credit ratings on its borrowing costs or access to capital markets . overview and outlook fulton financial corporation is a financial holding company comprised of six wholly owned banking subsidiaries which provide a full range of retail and commercial financial services in pennsylvania , delaware , maryland , new jersey and virginia . the corporation generates the majority of its revenue through net interest income , or the difference between interest earned on loans and investments and interest paid on deposits and borrowings . growth in net interest income is dependent upon balance sheet growth and or maintaining or increasing the net interest margin , which is net interest income ( fully taxable-equivalent , or fte ) as a percentage of average interest-earning assets . the corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets , such as loans , investments , lines of business or properties . offsetting these revenue sources are provisions for credit losses on loans , non-interest expenses and income taxes . the following table presents a summary of the corporation 's earnings and selected performance ratios : replace_table_token_9_th ( 1 ) ratio represents a financial measure derived by methods other than generally accepted accounting principles ( `` gaap '' ) . see reconciliation of this non-gaap financial measure to the most directly comparable gaap measure under the heading , `` supplemental reporting of non-gaap based financial measures '' in item 6 , `` selected financial data . '' story_separator_special_tag the outlook for 2015 anticipates annual non-interest expense growth in the low-single digit rate , reflecting higher staffing costs , which will be largely offset by the impact of cost savings initiatives and lower outside services expense . compliance , risk management and information technology infrastructures - in recent years , a combination of financial reform legislation and heightened scrutiny by banking regulators have significantly increased expectations regarding what constitutes an effective risk and compliance management infrastructure . to keep pace with these expectations , the corporation has invested considerable resources in initiatives designed to strengthen its risk management framework and regulatory compliance programs , including those designed to comply with the requirements of the bank secrecy act , the usa patriot act of 2001 and related anti-money laundering regulations ( collectively , the bsa/aml requirements ) . nonetheless , during 2014 , the corporation and five of its banking subsidiaries became subject to regulatory enforcement orders issued by banking regulatory agencies relating to identified deficiencies in a largely centralized compliance program ( the bsa/aml compliance program ) designed to comply with the bsa/aml requirements ( the 2014 regulatory orders ) . the 2014 regulatory orders are described in current reports on form 8-k filed with the securities and exchange commission on july 18 , 2014 , september 9 , 2014 , and december 29 , 2014. on february 25 , 2015 , fulton bank of new jersey ( fbnj ) , the corporation 's sixth banking subsidiary , entered into a stipulation and consent to the issuance of a consent order with the federal deposit insurance corporation ( the fdic ) consenting to the issuance by the fdic of a consent order ( the 2015 fdic consent order ) . in addition , on february 25 , 2015 , fbnj entered into a consent order with the commissioner of banking and insurance for the state of new jersey ( the new jersey consent order and , together with the fdic consent order , the 2015 consent orders ) . see part ii , item 9b `` other information '' for additional information regarding the 2015 consent orders . 35 the 2014 regulatory orders and the 2015 consent orders ( collectively , the regulatory orders ) require , among other things , that the corporation and its banking subsidiaries review , assess and take actions to strengthen and enhance the bsa/aml compliance program , and , in some cases , conduct retrospective reviews of past account activity and transactions , as well as certain reports filed in accordance with the bsa/aml requirements , to determine whether suspicious activity and certain transactions in currency were properly identified and reported in accordance with the bsa/aml requirements . in addition to requiring strengthening and enhancement of the bsa/aml compliance program , while the regulatory orders remain in effect , the corporation is subject to certain restrictions on expansion activities of the corporation and its subsidiary banks . further , any failure to comply with the requirements of any of the regulatory orders involving the corporation or its subsidiary banks could result in further enforcement actions , the imposition of material restrictions on the activities of the corporation or its subsidiary banks , or the assessment of fines or penalties . during the year ended december 31 , 2014 the corporation incurred approximately $ 8 million of outside services expense related to strengthening and enhancing the bsa/aml compliance program . additional expenses and investments have been incurred as the corporation further expanded its hiring of personnel and use of outside professionals , such as consulting and legal services , and capital investments in operating systems to strengthen and support the bsa/aml compliance program , as well as the corporation 's broader compliance and risk management infrastructures . the expense and capital investment associated with all of these efforts , including in connection with the regulatory orders , have had an adverse effect on the corporation 's results of operations in recent periods and could have a material adverse effect on the corporation 's results of operations in future periods . capital management - during 2014 , the corporation repurchased 8.0 million shares of its common stock for a total cost of $ 95.3 million . in addition , in november 2014 the corporation issued $ 100.0 million in subordinated debt and contemporaneously entered into an accelerated share repurchase agreement ( asr ) with a third party to repurchase $ 100.0 million of its common stock . final settlement of the asr is scheduled for no later than april 17 , 2015 , and may occur earlier at the option of the third party . for more details on the asr see note n , `` shareholders ' equity , '' in the notes to consolidated financial statements . critical accounting policies the following is a summary of those accounting policies that the corporation considers to be most important to the presentation of its financial condition and results of operations , as they require management 's most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain . see additional information regarding these critical accounting policies in note a , `` summary of significant accounting policies , '' in the notes to the consolidated financial statements . allowance for credit losses - the allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments . the allowance for loan losses represents management 's estimate of incurred losses in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans . the reserve for unfunded lending commitments represents management 's estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet .

results of operations net interest income net interest income is the most significant component of the corporation 's net income . the corporation manages the risk associated with changes in interest rates through the techniques described within item 7a , `` quantitative and qualitative disclosures about market risk . '' the following table provides a comparative average balance sheet and net interest income analysis for 2014 compared to 2013 and 2012 . interest income and yields are presented on an fte basis , using a 35 % federal tax rate and statutory interest expense disallowances . the discussion following this table is based on these tax-equivalent amounts . replace_table_token_10_th ( 1 ) includes dividends earned on equity securities . ( 2 ) includes non-performing loans . ( 3 ) includes amortized historical cost for available for sale securities ; the related unrealized holding gains ( losses ) are included in other assets . 40 the following table summarizes the changes in fte interest income and expense resulting from changes in average balances ( volumes ) and changes in rates : replace_table_token_11_th note : changes which are partially attributable to both volume and rate are allocated to the volume and rate components presented above based on the percentage of the direct changes that are attributable to each component . comparison of 2014 to 2013 fte net interest income decreased $ 12.3 million , or 2.3 % , to $ 514.9 million in 2014 . net interest margin decreased 11 basis points , or 3.1 % , to 3.39 % in 2014 from 3.50 % in 2013 . fte interest income decreased $ 13.4 million , or 2.1 % , as average yields on interest earning assets decreased 12 basis points . this decrease in yields resulted in a $ 20.7 million decrease in fte interest income , partially offset by a $ 7.3 million increase in fte interest income as a result of a $ 142.3 million , or 0.9 % , increase in average interest-earning assets .

this discussion includes both historical information and forward-looking information that involves risks , uncertainties and assumptions . our actual results may differ materially from management 's expectations as a result of various factors , including but not limited to those discussed in the sections entitled `` risk factors '' and `` cautionary statement regarding forward-looking information . '' company overview lendingtree , inc. is the parent of lt intermediate company , llc , which holds all of the outstanding ownership interests of lendingtree , llc , and lendingtree , llc owns several companies . we operate what we believe to be the leading online consumer platform that connects consumers with the choices they need to be confident in their financial decisions . our online consumer platform provides consumers with access to product offerings from our network partners , including mortgage loans , home equity loans and lines of credit , reverse mortgage loans , auto loans , credit cards , deposit accounts , personal loans , student loans , small business loans , insurance quotes and other related offerings . in addition , we offer tools and resources , including free credit scores , that facilitate comparison shopping for loans , deposit products , insurance and other offerings . we seek to match consumers with multiple providers , who can offer them competing quotes for the product , or products , they are seeking . we also serve as a valued partner to lenders and other providers seeking an efficient , scalable and flexible source of customer acquisition with directly measurable benefits , by matching the consumer inquiries we generate with these network partners . our my lendingtree platform offers a personalized comparison-shopping experience by providing free credit scores and credit score analysis . this platform enables us to monitor consumers ' credit profiles and then identify and alert them to loans and other offerings on our marketplace that may be more favorable than the terms they may have at a given point in time . this is designed to provide consumers with measurable savings opportunities over their lifetimes . we are focused on developing new product offerings and enhancements to improve the experiences that consumers and network partners have as they interact with us . by expanding our portfolio of financial services offerings , we are growing and diversifying our business and sources of revenue . we intend to capitalize on our expertise in performance marketing , product development and technology , and to leverage the widespread recognition of the lendingtree brand , to effect this strategy . we believe the consumer and small business financial services industry is still in the early stages of a fundamental shift to online product offerings , similar to the shift that started in retail and travel many years ago and is now well established . we believe that like retail and travel , as consumers continue to move towards online shopping and transactions for financial services , suppliers will increasingly shift their product offerings and advertising budgets toward the online channel . we believe the strength of our brands and of our partner network place us in a strong position to continue to benefit from this market shift . the lendingtree loans business is presented as discontinued operations in the accompanying consolidated balance sheets , consolidated statements of operations and comprehensive income ( loss ) and consolidated cash flows for all periods presented . except for the discussion under the heading `` discontinued operations , '' the analysis within management 's discussion and analysis of financial condition and results of operations reflects our continuing operations . economic conditions during march 2020 , a global pandemic was declared by the world health organization related to the rapidly growing outbreak of covid-19 . the pandemic has significantly impacted the economic conditions in the u.s. , as federal , state and local governments react to the public health crisis , creating significant uncertainties in the u.s. economy . the downstream impact of various lockdown orders and related economic pullback are affecting our business and marketplace participants to varying degrees . we are continuously monitoring the impacts of the current economic conditions related to the covid-19 pandemic and the effect on our business , financial condition and results of operations . of our three reportable segments , the consumer segment has been most impacted as unsecured credit and the flow of capital in certain areas of the market have contracted . the impact to our home and insurance segments was much less substantial and these segments recovered by the end of 2020. while forecasting the timeline of full recovery for the consumer segment remains challenging , the momentum of recovery has increased in each quarter subsequent to the onset of the covid-19 pandemic . we are encouraged by the progress made , and continue to view the consumer segment with optimism over the medium to long term . most of our selling and marketing expenses are variable costs that we adjust dynamically in relation to revenue opportunities to profitably meet demand . thus , as our revenue was negatively impacted during the recession , our marketing expenses generally decreased in line with revenue . 35 segment reporting we have three reportable segments : home , consumer and insurance . recent business acquisitions on february 28 , 2020 , we acquired an equity interest in stash for $ 80.0 million . stash is a consumer investing and banking platform . stash brings together banking , investing , and financial services education into one seamless experience offering a full suite of personal investment accounts , traditional and roth iras , custodial investment accounts , and banking services , including checking accounts and debit cards with a stock-back® rewards program . on january 10 , 2019 , we acquired valuepenguin , a personal finance website that offers consumers objective analysis on a variety of financial topics from insurance to credit cards , for $ 106.2 million . story_separator_special_tag total refinance origination dollars increased by 70 % in 2019 over 2018 and by 109 % in 2020 over 2019. industry-wide mortgage origination dollars increased by 34 % in 2019 over 2018 and by 59 % in 2020 over 2019. looking forward , the mba is projecting 30-year mortgage interest rates to increase slightly in 2021 to an average 3.4 % . according to mba projections , the mix of mortgage origination dollars is expected to move back towards purchase mortgages with the refinance share representing just 42 % for 2021. the u.s. real estate market the health of the u.s. real estate market and interest rate levels are the primary drivers of consumer demand for new mortgages . consumer demand , in turn , affects lender demand for purchase mortgage leads from third-party sources . typically , a strong real estate market will lead to reduced lender demand for leads , as there are more consumers in the marketplace seeking financing and , accordingly , lenders receive more organic lead volume . conversely , a weaker real estate market will typically lead to an increase in lender demand , as there are fewer consumers in the marketplace seeking mortgages . according to the national association of realtors ( `` nar '' ) , nationwide existing home sales in 2018 declined approximately 3 % compared to 2017 due to limited inventory of homes for sale and rising interest rates . existing home sales in 2019 remained consistent with 2018 levels . in 2020 , existing home sales grew by 6 % over 2019 , fueled by increased competition for low inventory as well as an increase in first-time home buyers . the nar expects a 15 % increase in existing home sales in 2021 . 37 convertible senior notes and hedge and warrant transactions on july 24 , 2020 , we issued $ 575.0 million aggregate principal amount of our 0.50 % convertible senior notes due july 15 , 2025 and , in connection therewith , entered into convertible note hedge and warrant transactions with respect to our common stock . on may 31 , 2017 , we issued $ 300.0 million aggregate principal amount of our 0.625 % convertible senior notes due june 1 , 2022 and , in connection therewith , entered into convertible note hedge and warrant transactions with respect to our common stock . on july 24 , 2020 , a portion of the net proceeds from the issuance of the 2025 notes was used to repurchase approximately $ 130.3 million principal amount of the 2022 notes . a portion of the call spread transactions associated with the 2022 notes was also terminated on july 24 , 2020 in notional amounts corresponding to the principal amount of the 2022 notes repurchased . for more information , see note 15—debt , in the notes to the consolidated financial statements included elsewhere in this report . north carolina office properties in december 2016 , we completed the acquisition of two office buildings in charlotte , north carolina , for $ 23.5 million in cash . the buildings were acquired with the intent to use such buildings as our corporate headquarters and rent any unused space . in november 2018 , the office buildings were classified as held for sale . in may 2019 , we sold these buildings to an unrelated third party for a sale price of $ 24.4 million . our new corporate office is currently in the final stages of construction and will be located on approximately 176,000 square feet of office space in charlotte , north carolina under an approximate 15-year lease that is expected to contractually commence in the first quarter of 2021. with our expansion in north carolina , in december 2016 , we received a grant from the state that provides up to $ 4.9 million in reimbursements over 12 years beginning in 2017 for investing in real estate and infrastructure in addition to increasing jobs in north carolina at specific targeted levels through 2020 , and maintaining the jobs thereafter . additionally , the city of charlotte and the county of mecklenburg provided a grant that will be paid over five years and is based on a percentage of new property tax we pay on the development of a corporate headquarters . in december 2018 , we received an additional grant from the state that provides up to $ 8.4 million in reimbursements over 12 years beginning in 2020 for increasing jobs in north carolina at specific targeted levels through 2023 , and maintaining the jobs thereafter . 38 results of operations for the years ended december 31 , 2020 and 2019 for information on fiscal 2018 results and similar comparisons , see item 7. management 's discussion and analysis of financial condition and results of operations—results of operations for the years ended december 31 , 2019 and 2018 of our form 10-k for the fiscal year ended december 31 , 2019. replace_table_token_3_th revenue revenue decreased in 2020 compared to 2019 due to decreases in our consumer segment and other category , partially offset by increases in our insurance and home segments . our consumer segment includes the following products : credit cards , personal loans , small business loans , student loans , auto loans , deposit accounts , and other credit products such as credit repair and debt settlement . many of our consumer segment products are not individually significant to revenue . revenue from our consumer segment decreased $ 261.8 million in 2020 from 2019 , or 51 % , primarily due to decreases in our credit cards , personal loans , small business loans and student loans products . revenue from our credit cards product decreased $ 133.9 million to $ 77.4 million in 2020 from $ 211.3 million in 2019 , or 63 % , primarily due to the impact of economic conditions related to the covid-19 pandemic that caused lower issuer demand , resulting in a decrease in the number of approvals and a decrease in revenue earned per approval .

summary of contractual obligations the following table sets forth our contractual obligations and commercial commitments as of december 31 , 2020. replace_table_token_9_th ( a ) excludes potential obligations under surety bonds . excludes a $ 2.6 million accrual related to uncertain tax position , as we are unable to determine when , or if , payments for these taxes will ultimately be made . ( b ) our operating lease obligations are associated with office space and office equipment . ( c ) includes a liability of $ 8.2 million for the estimated fair value of the contingent consideration obligation reflected on the balance sheet for the quotewizard acquisition . the actual contingent consideration payment could range from zero to $ 23.4 million for quotewizard . also includes $ 14.9 million of certain other commitments . critical accounting policies and estimates the following disclosure is provided to supplement the description of our accounting policies contained in note 2—significant accounting policies to the consolidated financial statements included elsewhere in this report in regard to significant areas of judgment . this disclosure includes accounting policies related to both continuing operations and discontinued operations . management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with generally accepted accounting principles . these estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements . they also impact the reported amount of net earnings during any period . actual results could differ from those estimates . because of the size of the financial statement elements to which they relate , some of our accounting policies and estimates have a more significant impact on our consolidated financial statements than others . a discussion of some of our more significant accounting policies and estimates follows .

we assume no obligation to update these forward‑looking statements to reflect actual results or changes in factors or assumptions affecting forward‑looking statements , except as may be required by law . overview the semiconductor capital equipment industry is subject to cyclical swings in capital spending by semiconductor chip manufacturers . capital spending is influenced by demand for semiconductors and the products using them , the utilization rate and capacity of existing semiconductor chip manufacturing facilities and changes in semiconductor technology , all of which are outside of our control . as a result , our revenue may fluctuate from year to year and period to period . our established cost structure does not vary significantly with changes in volume . we may also experience fluctuations in operating results and cash flows depending on our revenue level . 2017 was a very strong year for the company . our 2017 revenues of $ 410.6 million were $ 143.6 million higher than our 2016 revenues , driven mainly by strong system sales . axcelis made progress towards our long-term strategic goal of regaining a position of market share leadership in the ion implant semiconductor capital equipment market with our purion systems now a tool of record at seven of the top ten semiconductor capital equipment spenders . in 2017 we continued to invest a significant portion of our resources in research and development programs related to our purion ion implantation platform . the strong semiconductor market in 2017 provided the backdrop for additional market share growth for the company . systems revenue grew by 88.6 % from 2016 to 2017 , with purion ion implanters representing 89.0 % of 2017 systems revenue . during the year , axcelis shipped purion systems to 18 new customer fabs . seven of these sites represent new purion customers , and the other eleven locations are first in-fab purion placements by existing purion customers . the company 's gross margin for 2017 was 36.6 % , down from 37.3 % in 2016 . 2017 gross margin was impacted by a $ 6.2 million excess inventory reserve charge taken on legacy tools and parts in the fourth quarter of 2017 , which reduced full year 2017 gross margin by 1.5 percentage points . without the impact of this excess inventory charge , gross margins in 2017 would have been at the company 's highest annual level in 11 years . we also worked diligently to ensure that manufacturing and operating expense levels remain well aligned to business conditions . consolidation and partnering within the semiconductor chip manufacturing industry has resulted in a smaller number of customers . our net revenue from our ten largest customers accounted for 73.3 % of total revenue for the year ended december 31 , 2017 compared to 70.2 % and 76.8 % of revenue for the years ended december 31 , 2016 and 2015 , respectively . for the year ended december 31 , 2017 , the company had two customers representing 24.9 % and 13.1 % of total revenue , respectively . critical accounting estimates management 's discussion and analysis of our financial condition and results of operations are based upon axcelis ' 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 judgments that affect the reported amounts of assets , liabilities , revenue and expenses , and related disclosure of contingent assets and liabilities . on an on‑going basis , we evaluate our estimates and assumptions . management 's estimates are based on historical experience and on various other assumptions that are believed to be reasonable under 18 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 accounting policies are critical in the portrayal of our financial condition and results of operations and require management 's most significant judgments and estimates in the preparation of our consolidated financial statements . for additional accounting policies see note 2 to the consolidated financial statements for the year ended december 31 , 2017 included in this annual report on form 10-k. revenue recognition our revenue recognition policy involves significant judgment by management . as described below , we consider a broad array of facts and circumstances in determining when to recognize revenue , including contractual service obligations to the customer , the complexity of the customer 's post‑delivery acceptance provisions , payment history , customer creditworthiness and the installation process . our system sales transactions are made up of multiple elements , including the system itself and elements that are not delivered simultaneously with the system . these undelivered elements might include a combination of installation services , extended warranty and support and spare parts , all of which are generally covered by a single sales price . our system revenue arrangements with multiple elements are divided into separate units of accounting if specified criteria are met , including whether the delivered element has stand‑alone value to the customer . if the criteria are met , then the consideration received is allocated among the separate units based on their relative selling price , and the revenue is recognized separately for each of the separate units . we determine selling price for each unit of accounting ( element ) using vendor specific objective evidence ( “ vsoe ” ) or third‑party evidence ( “ tpe ” ) , if they exist , otherwise , we use best estimated selling price ( “ besp ” ) . we generally expect that we will not be able to establish tpe due to the nature of our products , and , as such , we typically will determine selling price using vsoe or besp . story_separator_special_tag 20 stock-based compensation stock‑based compensation expense for stock options with time‑based conditions is estimated as of the grant date based on the fair value of the award and is recognized as expense over the requisite service period , which generally equals the vesting period , based on the number of awards that are expected to vest . estimating the fair value for stock options requires judgment , including the expected term of our stock options , volatility of our stock , expected dividends , risk‑free interest rates over the expected term of the options and the expected forfeiture rate . we consider a number of factors when estimating volatility . our method of estimating expected volatility for all stock options granted relies on a combination of historical and implied volatility . we believe that this blended volatility results in a more accurate estimate of the grant‑date fair value of employee stock options because it more appropriately reflects the market 's current expectations of future volatility . in limited circumstances , we also issue stock option grants with vesting based on performance or market conditions , such as the price of our common stock , or , a combination of time , performance or market conditions . the fair values and derived service periods for all grants that have vesting based on performance or market conditions are estimated using the monte carlo valuation method . for each stock option grant with vesting based on a combination of time or market conditions , where vesting will occur if either condition is met , the related compensation costs are recognized over the shorter of the explicit service period or the derived service period . we use the straight‑line attribution method to recognize expense for stock‑based awards such that the expense associated with awards is evenly recognized throughout the period . the amount of stock‑based compensation recognized is based on the value of the portion of the awards that are ultimately expected to vest . we estimate forfeitures at the time of grant and revise them , if necessary , in subsequent periods if actual forfeitures differ from those estimates . the term “ forfeitures ” is distinct from “ cancellations ” or “ expirations ” and represents only the unvested portion of the surrendered stock‑based award . the benefits of tax deductions in excess of recognized compensation cost is reported as a financing cash flow , rather than as an operating cash flow . income taxes we record income taxes using the asset and liability method . deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis , and net operating loss and tax credit carryforwards . our consolidated financial statements contain certain deferred tax assets which have arisen primarily as a result of operating losses , as well as other temporary differences between financial and income tax accounting . we establish a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized . significant management judgment is required in determining our provision for income taxes , the deferred tax assets and liabilities and any valuation allowance recorded against those net deferred tax assets . we evaluate the weight of all available evidence such as historical losses , the expected timing of the reversals of existing temporary differences and projected future taxable income to determine whether it is more likely than not that some portion or all of the net deferred income tax assets will not be realized . our income tax expense includes the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position . settlements with tax authorities , the expiration of statutes of limitations for particular tax positions , or obtaining new information on particular tax positions may cause a change to the effective tax rate . the company recognizes accrued interest related to unrecognized tax benefits as interest expense and penalties as operating expense . 21 story_separator_special_tag compared to 17.2 % for the twelve months ended december 31 , 2015. the increase in gross margin is attributable to lower service costs and higher margin service revenues . operating expenses the following table sets forth our operating expenses : replace_table_token_5_th our operating expenses consist primarily of personnel costs , including salaries , commissions , bonuses , stock-based compensation and related benefits and taxes ; project material costs related to the design and development of new products and enhancement of existing products ; and professional fees , travel and depreciation expenses . personnel costs are our largest expense , representing $ 64.5 million , or 63.0 % of our total operating expenses , for the year ended december 31 , 2017 ; $ 47.6 million , or 57.5 % , of our total operating expenses for the year ended december 31 , 2016 ; and $ 47.9 million , or 59.1 % , of our total operating expenses for the year ended december 31 , 2015. research and development replace_table_token_6_th 25 our ability to remain competitive depends largely on continuously developing innovative technology , with new and enhanced features and systems and introducing them at competitive prices on a timely basis . accordingly , based on our strategic plan , we establish annual r & d budgets to fund programs that we expect will drive competitive advantages . 2017 compared with 2016 research and development expense was $ 43.1 million in 2017 , an increase of approximately $ 8.7 million , or 25.2 % , compared with $ 34.4 million in 2016. the increase was primarily due to variable incentive plan expense and to a lesser extent to increased headcount .

results of operations the following table sets forth our results of operations as a percentage of total revenue : replace_table_token_2_th revenue the following table sets forth our revenue : replace_table_token_3_th 22 2017 compared with 2016 product product revenue , which includes new system sales , sales of spare parts , product upgrades and used system sales was $ 387.1 million or 94.3 % of revenue in 2017 , compared with $ 244.3 million , or 91.5 % of revenue in 2016. the increase in product revenue in 2017 was primarily driven by an increase in the number of purion systems sold . approximately 34.2 % of systems revenue in 2017 was from sales of 200mm products and 65.8 % was from sales of 300mm products , compared with 38.9 % and 61.1 % for sales of 200mm products and 300mm products in 2016 , respectively . a portion of our revenue from system sales is deferred until installation and other services related to future deliverables are performed . the total amount of deferred revenue at december 31 , 2017 and 2016 was $ 18.1 million and $ 11.0 million , respectively . the increase was primarily due to the increased number of systems sold in the current year . services services revenue , which includes the labor component of maintenance and service contracts and fees for service hours provided by on‑site service personnel , was $ 23.4 million , or 5.7 % of revenue for 2017 , compared with $ 22.7 million , or 8.5 % of revenue for 2016. although services revenue should increase with the expansion of the installed base of systems , it can fluctuate from period to period based on capacity utilization at customers ' manufacturing facilities , which affects the need for equipment service .

the company had drawn down a total amount of $ 1,600,000 as of june 15 , 2016. we issued the note in consideration for loans from the payee to fund the company 's working capital requirements . funds in the trust account will not be used to repay any of the note . the note includes an option for up to $ 500,000 of the principal outstanding under the note to be convertible , in whole or in part , at the payee 's election , upon the consummation of the business combination . upon such election , up to $ 500,000 of the principal outstanding under the note will convert into units , at a price of $ 10.00 per unit . these units will be identical to the private units issued in a private placement in connection with our initial public offering . as such , each unit will be comprised of one ordinary share , one right to receive one-tenth of one ordinary share upon consummation of a business combination , and one warrant to purchase one-half of an ordinary share at an exercise price of $ 12.00 per full share . in connection with a deed of release dated december 17 , 2015 executed among our sponsor , luck key and mr. miao yang , our sponsor undertook to transfer to mr. miao 380,000 of the sponsor 's ordinary shares of dt asia at the closing of the business combination . as a permitted transferee , mr. miao will be subject to the same restrictions as the other founder shares , as described above . on april 1 , 2016 , our sponsor deposited into the trust account approximately $ 96,000 ( the “ contribution ” ) , which amount was equal to $ 0.06 for each of the 1,604,406 public shares of the company that were not redeemed in connection with the extension meeting . as a result of the contribution and following redemption of the public shares in connection with the extension meeting , the pro rata portion of the funds available in the trust account for the public shares that were not redeemed increased from approximately $ 10.20 per share to approximately $ 10.26 per share . after our initial business combination , members of our management team who remain with us may be paid consulting , management or other fees from the combined company with any and all amounts being fully disclosed to our shareholders , to the extent then known , in the tender offer or proxy solicitation materials , as applicable , furnished to our shareholders . it is unlikely the amount of such compensation will be known at the time of distribution of such tender offer materials or at the time of a shareholder meeting held to consider our initial business combination , as applicable , as it will be up to the directors of the post-combination business to determine executive and director compensation . all ongoing and future transactions between us and any member of our management team or his or her respective affiliates will be on terms believed by us at that time , based upon other similar arrangements known to us , to be no less favorable to us than are available from unaffiliated third parties . it is our intention to obtain estimates from unaffiliated third parties for similar goods or services to ascertain whether such transactions with affiliates are on terms that are no less favorable to us than are otherwise available from such unaffiliated third parties . if a transaction with an affiliated third party were found to be on terms less favorable to us than with an unaffiliated third party , we would not engage in such transaction . we are not prohibited from pursuing an initial business combination with a company that is affiliated with our sponsor , officers or directors . in the event we seek to complete our initial business combination with a company that is affiliated with our sponsor , officers or directors , we , or a committee of independent directors , would obtain an opinion from an independent investment banking firm that our initial business story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this report . certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties . overview we are a blank check company incorporated on april 8 , 2014 in the british virgin islands with limited liability ( meaning our public shareholders have no liability , as members of the company , for the liabilities of the company over and above the amount paid for their shares ) formed for the purpose of acquiring , engaging in a share exchange , share reconstruction and amalgamation , purchasing all or substantially all of the assets of , or engaging in any other similar business combination with one or more businesses or entities . we intend to effectuate our initial business combination using cash from the proceeds of our initial public offering and the private placement of the private units , our shares , debt securities or a combination of cash , shares and debt securities . the issuance of additional shares in our initial business combination : ● may significantly dilute the equity interest of investors in our initial public offering who would do not have pre-emption rights in respect of any such issue ; ● may subordinate the rights of holders of ordinary shares if the rights , preferences , designations and limitations attaching to the preferred shares are created by amendment of our memorandum and articles of association by resolution of the board of directors and preferred shares are story_separator_special_tag the underwriters exercised the option in part and , on october 14 , 2014 , the underwriters purchased 860,063 over-allotment units , which were sold at an offering price of $ 10.00 per unit , generating gross proceeds of $ 8,600,630. on october 14 , 2014 , simultaneously with the sale of the over-allotment units , the company consummated the private sale of an additional 32,253 private units at a price of $ 10.00 per unit , for an aggregate purchase price of $ 322,530. each private unit is comprised of one ordinary share , one right , and one warrant . in addition , simultaneously with the sale of the over-allotment units , the company consummated the private sale of an additional 258,007 sponsor warrants at a price of $ 0.50 per sponsor warrant , for an aggregate purchase price of $ 129,004. the private placements on october 14 , 2014 generated an additional $ 451,534. in addition , the 1,725,000 shares held by our initial shareholders ( prior to the exercise of the over-allotment ) included an aggregate of up to 225,000 shares subject to forfeiture by our sponsor to the extent that the underwriters ' over-allotment option was not exercised in full , so that the initial shareholders would collectively own 20.0 % of issued and outstanding shares of the company ( excluding the sale of the private units and sponsor warrants ) . since the underwriters exercised the over-allotment option in part , and purchased 860,063 of the total possible 900,000 additional units , our sponsor has forfeited 9,985 shares , which were canceled by the company , in order to maintain this 20.0 % limitation . 44 the company received total gross proceeds of $ 73,152,164 from the sale of units in the initial public offering ( including over-allotment units ) and all related private placements on october 6 , 2014 and october 14 , 2014. a total of $ 69,972,643 of the net proceeds were deposited in a trust account established for the benefit of our public shareholders . we incurred offering costs totaling approximately $ 4,440,838 , consisting of $ 2,229,520 in underwriters ' fees , plus $ 442,218 of other cash expenses , $ 100,000 in deferred expenses and a non-cash charge of $ 1,669,100. on march 31 , 2016 , we held a special meeting of shareholders in lieu of any annual meeting to : ( i ) approve an extension of the date to complete an initial business combination from april 6 , 2016 to july 6 , 2016 , ( ii ) elect hai wang as a class i director , to serve on the company 's board of directors until the 2019 annual meeting of shareholders or until his successor is elected and qualified , and ( iii ) to ratify the selection by company 's audit committee of uhy llp to serve as the company 's independent registered public accounting firm for the year ending march 31 , 2016 ( the “ extension meeting ” ) . in connection with the extension meeting , a total of 5,255,657 ordinary shares ( equivalent to approximately $ 53,607,701 ) were redeemed . on april 1 , 2016 , detiger holdings limited ( “ sponsor ” ) deposited into the trust account approximately $ 96,000 ( the “ contribution ” ) , which amount was equal to $ 0.06 for each of the 1,604,406 public shares of the company that were not redeemed in connection with the extension meeting . as a result of the contribution and following redemption of the public shares in connection with the extension meeting , the pro rata portion of the funds available in the trust account for the public shares that were not redeemed increased from approximately $ 10.20 per share to approximately $ 10.26 per share . story_separator_special_tag times new roman , times , serif ; margin : 0 ; text-indent : 0.5in '' > we intend to use substantially all of our cash , including the funds held in the trust account and proceeds of the pipe preferred investment , to acquire a target business or businesses and to pay our expenses , including a fee payable to earlybirdcapital in an amount equal to 4 % of the total gross proceeds raised in our initial public offering ( approximately $ 2.7 million ) for its services in connection with our initial business combination . we believe that the cash not held in the trust account , plus the interest earned on the trust account balance ( net of income , and other tax obligations ) that may be released to us to fund our working capital requirements , together with the loan for up to $ 1,600,000 ( $ 1,187,989 outstanding as of march 31 , 2016 ) from our sponsor mentioned below , will be sufficient to allow us to operate until at least july 6 , 2016 , assuming that a business combination is not consummated prior to that time . however , as noted above the company will need to raise additional financing from the pipe preferred investment of up to $ 12,000,000 in the event that some or all of the remaining publicly-held shares are redeemed prior to completion of the business combination . as of june 28 , 2016 , we have received signed subscription agreements for an aggregate subscription amount of $ 10,320,000 for the pipe preferred investment . the pipe preferred investment subscription agreements require each subscriber to deposit 10 % of his/her total subscription into escrow on the effective date of the relevant escrow agreement , and the balance of 90 % is to be paid into the escrow account 6 days before shareholders vote to approve the proposed business combination .

results of operations our entire activity from inception up to october 6 , 2014 was in preparation for our initial public offering , which was consummated on october 6 , 2014. following the offering , our activity has been limited to the evaluation and due diligence of business combination candidates , preparing and negotiating the share exchange agreement with china lending group , preparing and filing proxy statements with sec , presenting and soliciting investment in the private placement issue of our unregistered series a convertible preferred stock ( “ preferred shares ” ) . we will not be generating any operating revenues until the closing and completion of our initial business combination . we have generated small amounts of non-operating income in the form of interest income on cash and cash equivalents . interest income has not been significant in view of current low interest rates on risk-free investments ( treasury securities ) . we have incurred increased expenses as a result of being a public company ( for legal , financial reporting , accounting and auditing compliance ) , as well as for due diligence expenses . as of june 20 , 2016 , we have a total of approximately $ 252,000 available ( $ 141,000 cash in bank and $ 111,000 in interest earned from the trust held by continental stock transfer & trust company acting as trustee ) . further , we have approximately $ 60,000 in payables and $ 45,000 of accrued expenses , both payable before a business combination , and we expect to incur an additional $ 120,000 in expenses to complete the business combination before july 6 , 2016. furthermore , there are an estimated $ 450,000 of payables and contingent expenses which are deferred and are not payable unless there is a closing of a business combination .

allowances for doubtful accounts have been determined through specific identification of amounts considered to be uncollectible and potential write-offs , plus a non-specific allowance for other amounts for which story_separator_special_tag this annual report on form 10-k contains forward-looking statements within the meaning of the safe harbor provisions of the private securities litigation reform act of 1995 that are not limited to historical facts , but reflect the company 's current beliefs , expectations or intentions regarding future events . statements that are not historical facts , without limitation , including statements that use terms such as `` anticipates , '' `` believes , '' `` expects , '' `` intends , '' `` plans , '' `` projects , '' `` seeks , '' and `` will '' and that relate to our plans and objectives for future operations , are forward-looking statements . in light of the risks and uncertainties inherent in all forward-looking statements , the inclusion of such statements in this annual report should not be considered as a representation by us or any other person that our objectives or plans will be achieved . although management believes that the assumptions underlying the forward-looking statements are reasonable , these assumptions and the forward-looking statements are subject to various factors , risks and uncertainties , many of which are beyond our control , including , but not limited to , the fact that demand for our services is cyclical and vulnerable to economic downturns and reduction in government and private industry spending , our dependence on long-term government contracts , which are subject to uncertainties concerning the government 's budgetary approval process , the possibility that our government contracts may be terminated by the government ; the risk of employee misconduct or our failure to comply with laws and regulations ; legal , security , political , and economic risks in the countries in which we operate ; competition in our industry ; cyber security breaches ; information technology interruptions or data losses ; liabilities under environmental laws ; fluctuations in demand for oil and gas services ; our substantial indebtedness ; covenant restrictions in our indebtedness ; the ability to successfully integrate our operations and employees with that of urs ; the ability to realize anticipated benefits and synergies from the urs acquisition ; the ability to retain key personnel ; changes in financial markets , interest rates and foreign currency exchange rates ; and those additional risks and factors discussed in this annual report on form 10-k and any subsequent reports we file with the sec . accordingly , actual results could differ materially from those contemplated by any forward-looking statement . all subsequent written and oral forward-looking statements concerning the company or other matters attributable to the company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements above . you are cautioned not to place undue reliance on these forward-looking statements , which speak only to the date they are made . the company is under no obligation ( and expressly disclaims any such obligation ) to update or revise any forward-looking statement that may be made from time to time , whether as a result of new information , future developments or otherwise . please review `` part i , item 1a—risk factors '' in this annual report for a discussion of the factors , risks and uncertainties that could affect our future results . our fiscal year consists of 52 or 53 weeks , ending on the friday closest to september 30. for clarity of presentation , we present all periods as if the year ended on september 30. we refer to the fiscal year ended september 30 , 2014 as `` fiscal 2014 '' and the fiscal year ended september 30 , 2015 as `` fiscal 2015 . '' 36 overview we are a leading provider of planning , consulting , architectural and engineering design services for public and private clients around the world . we provide our services in a broad range of end markets through a network of over 92,000 employees . on october 17 , 2014 , we completed the acquisition of urs . in connection with the acquisition of urs , our reportable segments have been realigned to reflect the operations of the combined company , including the ability to deliver more fully integrated project execution . we now report our business through three segments : design and consulting services ( dcs ) , construction services ( cs ) , and management services ( ms ) . such segments are organized by the types of services provided , the differing specialized needs of the respective clients , and how the company manages its business . we have aggregated various operating segments into our reportable segments based on their similar characteristics , including similar long-term financial performance , the nature of services provided , internal processes for delivering those services , and types of customers . prior year amounts have been revised to conform to the current year presentation . our dcs segment delivers planning , consulting , architectural and engineering design services to commercial and government clients worldwide in major end markets such as transportation , facilities , environmental , energy , water and government . our cs segment provides construction services , including building construction and energy , infrastructure and industrial construction , primarily in the americas . our ms segment provides program and facilities management and maintenance , training , logistics , consulting , technical assistance , and systems integration and information technology services , primarily for agencies of the u.s. government and also for national governments around the world . our revenue is dependent on our ability to attract and retain qualified and productive employees , identify business opportunities , integrate and maximize the value of our recent acquisitions , allocate our labor resources to profitable and high growth markets , secure new contracts and renew existing client agreements . story_separator_special_tag due to uncertainties inherent in the estimation process , it is possible that actual completion costs may vary from estimates . if estimated total costs on contracts indicate a loss , we recognize that estimated loss in the period the estimated loss first becomes known . claims recognition claims are amounts in excess of the agreed contract price ( or amounts not included in the original contract price ) that we seek to collect from customers or others for delays , errors in specifications and designs , contract terminations , change orders in dispute or unapproved contracts as to both scope and price or other causes of unanticipated additional costs . we record contract revenue related to claims only if it is probable that the claim will result in additional contract revenue and if the amount can be reliably 39 estimated . in such cases , we record revenue only to the extent that contract costs relating to the claim have been incurred . the amounts recorded , if material , are disclosed in the notes to the financial statements . costs attributable to claims are treated as costs of contract performance as incurred . government contract matters our federal government and certain state and local agency contracts are subject to , among other regulations , regulations issued under the federal acquisition regulations ( far ) . these regulations can limit the recovery of certain specified indirect costs on contracts and subject us to ongoing multiple audits by government agencies such as the defense contract audit agency ( dcaa ) . in addition , most of our federal and state and local contracts are subject to termination at the discretion of the client . audits by the dcaa and other agencies consist of reviews of our overhead rates , operating systems and cost proposals to ensure that we account for such costs in accordance with the cost accounting standards of the far ( cas ) . if the dcaa determines we have not accounted for such costs consistent with cas , the dcaa may disallow these costs . there can be no assurance that audits by the dcaa or other governmental agencies will not result in material cost disallowances in the future . allowance for doubtful accounts we record accounts receivable net of an allowance for doubtful accounts . this allowance for doubtful accounts is estimated based on management 's evaluation of the contracts involved and the financial condition of its clients . the factors we consider in our contract evaluations include , but are not limited to : client type—federal or state and local government or commercial client ; historical contract performance ; historical collection and delinquency trends ; client credit worthiness ; and general economic conditions . unbilled accounts receivable and billings in excess of costs on uncompleted contracts unbilled accounts receivable represents the contract revenue recognized but not yet billed pursuant to contract terms or accounts billed after the period end . billings in excess of costs on uncompleted contracts represent the billings to date , as allowed under the terms of a contract , but not yet recognized as contract revenue using the percentage-of-completion accounting method . investments in unconsolidated joint ventures we have noncontrolling interests in joint ventures accounted for under the equity method . fees received for and the associated costs of services performed by us and billed to joint ventures with respect to work done by us for third-party customers are recorded as our revenues and costs in the period in which such services are rendered . in certain joint ventures , a fee is added to the respective billings from both ourselves and the other joint venture partners on the amounts billed to the third-party customers . these fees result in earnings to the joint venture and are split with each of the joint venture partners and paid to the joint venture partners upon collection from the third-party customer . we record our allocated share of these fees as equity in earnings of joint ventures . 40 income taxes we provide for income taxes in accordance with principles contained in asc topic 740 , income taxes . under these principles , we recognize the amount of income tax payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our financial statements or tax returns . deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period when the new rate is enacted . deferred tax assets are evaluated for future realization and reduced by a valuation allowance if it is more likely than not that a portion will not be realized . we measure and recognize the amount of tax benefit that should be recorded for financial statement purposes for uncertain tax positions taken or expected to be taken in a tax return . with respect to uncertain tax positions , we evaluate the recognized tax benefits for recognition , measurement , derecognition , classification , interest and penalties , interim period accounting and disclosure requirements . judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns . valuation allowance . deferred income taxes are provided on the liability method whereby deferred tax assets and liabilities are established for the difference between the financial reporting and income tax basis of assets and liabilities , as well as for tax attributes such as operating loss and tax credit carry forwards . deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and tax rates on the date of enactment of such changes to laws and tax rates .

consolidated results replace_table_token_20_th * not meaningful the following table presents the percentage relationship of certain items to revenue : replace_table_token_21_th 50 revenue our revenue for the year ended september 30 , 2014 increased $ 203.3 million , or 2.5 % , to $ 8,356.8 million as compared to $ 8,153.5 million for the year ended september 30 , 2013. revenue provided by acquired companies was $ 189.1 million for the year ended september 30 , 2014. excluding the revenue provided by acquired companies , revenue increased $ 14.2 million , or 0.2 % , from the year ended september 30 , 2013. the increase in revenue , excluding acquired companies , for the year ended september 30 , 2014 was primarily attributable to an increase in the europe , middle east , and africa region of $ 340 million , including $ 150 million provided by newly consolidated aecom arabia , an increase in our cs segment of approximately $ 292 million and an increase in asia of $ 60 million . these increases were partially offset by decreases in the americas of approximately $ 310 million substantially from engineering and program management services , in australia of approximately $ 150 million , and in our ms segment of $ 136 million , as noted below coupled with a negative foreign exchange impact of $ 70 million . gross profit our gross profit for the year ended september 30 , 2014 decreased $ 46.8 million , or 10.4 % , to $ 403.2 million as compared to $ 450.0 million for the year ended september 30 , 2013. gross profit provided by acquired companies was $ 2.7 million .

this discussion should be read in conjunction with the consolidated financial statements ( `` financial statements '' ) and accompanying notes contained in this report . summary berkshire achieved record revenue and earnings in 2018 , together with record return on assets . this was achieved with a full year of results from acquired operations of worcester-based commerce bank , which was acquired on october 13 , 2017. merger related cost saving efficiencies were achieved on schedule and on target following the completion of commerce systems and operations integration . this acquisition , together with the expansion of berkshire 's regional banking teams at its new boston corporate headquarters , solidified berkshire 's emerging eastern massachusetts market presence . organic loan growth further contributed to the year 's results . berkshire 's sba lending business achieved record business volume and profitability ; this group broke into the top 30 producers nationally based on both the number and dollar volume of loans originated . these results partially offset a contraction in residential mortgage banking revenues , resulting from lower demand in the industry due to higher interest rates and heightened fintech competition . berkshire managed operating expenses closely to offset these revenue pressures as well as margin pressure from higher funding costs . expense discipline also cushioned the additional cost and revenue impacts from the expanded regulatory burden tied to crossing the $ 10 billion asset threshold . berkshire initiated the consolidation of six branch offices which is targeted for completion in the first quarter of 2019. additionally , the company engaged in a core systems strategic analysis and vendor review , concluding in the restructuring of its core systems contract to improve its future competitive profile and technology cost . federal income tax reform was enacted at the end of 2017 , effective beginning in 2018. this reform reduced the statutory federal income tax rate from 35 % to 21 % , and adjustments were made to various elements of income tax computation . due to this reform , the company recorded a one-time charge in december 2017 to reduce the carrying value of its net deferred tax asset . the company 's 2018 effective income tax rate was reduced by an estimated 11 % to 21 % due to the net impact of the federal tax reform . in response to this reform , berkshire announced one time employee bonuses and community support contributions which were recorded in 2017. the company also increased its hourly minimum wage to $ 15.00 per hour at the beginning of 2018. purchased loan accretion accounted for 17 % of pretax earnings in 2018 and 15 % of pretax earnings in 2017. the company anticipates this revenue source will decrease significantly in 2019. in order to support future earnings , the company has initiated a strategic review targeted for the first half of 2019. this review is expected to include : ( 1 ) balance sheet composition ; ( 2 ) line of business profitability ; ( 3 ) expense structure ; and ( 4 ) capital management . berkshire 's longtime ceo and president , michael daly , resigned from the company on november 26 , 2018 pursuant to a resignation and separation agreement . richard marotta , the bank 's president , was promoted to the positions that mr. daly had held . sean gray , the bank 's chief operating officer , was promoted to president of the bank . during 2018 , mr. marotta initiated a diversity and inclusion initiative , and the company also appointed a corporate social responsibility ( “ csr ” ) officer . in 2018 , the company implemented the massachusetts equal pay law . in the third quarter , the company received an impact2030 award from the united nations , citing its support of volunteerism . on december 11 , 2018 , the company entered into an agreement to acquire si financial group ( “ si financial ” ) , the parent of savings institute bank & trust , a $ 1.6 billion bank headquartered in willimantic , connecticut with 23 branch offices serving eastern connecticut and southern rhode island . under this agreement , each outstanding si financial common share will be exchanged for 0.48 berkshire common shares . this business combination is targeted to be completed in the second quarter of 2019 , subject to shareholder and regulatory approval . this is 46 viewed as a complementary market extension business combination that expands berkshire 's presence in southeastern new england , adding a stable deposit franchise and targeting attractive earnings accretion . berkshire increased its quarterly common stock cash dividend by 5 % to $ 0.22 per share in january 2018 , and the common stock dividend was further increased by 5 % to $ 0.23 per share in january 2019. in june , berkshire 's stock was added to the s & p 600 smallcap r index ; this index tracks u.s. small cap companies and is included in the s & p composite 1500 r index . this event widened the visibility of berkshire 's stock . during 2018 , the company obtained an investment grade senior debt rating from a recognized credit rating agency . u.s and regional economic growth were elevated in 2018 compared to prior years . u.s. unemployment fell to the lowest rate in nearly 50 years . the company 's asset quality and credit performance remained favorable throughout the year . the federal reserve board increased its target federal funds interest rate by 0.25 % in each quarter , with the target standing at 2.5 % at year-end . the yield curve flattened , with the ten year treasury rate increasing to 2.63 % from 1.76 % over the course of the year . deposit competition intensified and lending spreads remained pressured in this environment . residential mortgage volumes declined and gain on sale margins remained under pressure . story_separator_special_tag berkshire monitors its commercial real estate lending risk using the enhanced processes required for banks exceeding the monitoring thresholds even though it is well margined below those thresholds . berkshire 's commercial specialty lending includes asset based lending ( `` abl '' ) , business equipment lending , and sba lending . abl outstandings totaled $ 452 million at year-end 2018. business equipment loans , through berkshire 's firestone division , totaled $ 265 million at year-end 2018. the bank originates sba 7 ( a ) loans for sale through its 44 business capital division ( primarily in the mid-atlantic area ) , as well as direct loans by its business banking teams throughout its regions . based on the annual sba national originations rankings as of september 30 , 2018 , berkshire was among the top 30 originators both in loan count and dollars loaned . most earnings related to sba lending are included in loan fee income arising from the sale of guaranteed portions of sba loans . the full year loan yield increased by 0.39 % to 4.74 % in 2018 , reflecting the benefit of higher interest rates as well as the contributions from the fair value marked commerce loans . purchased loan accretion contributed 0.27 % to the 2018 loan yield , compared to 0.21 % in the prior year . most of the portfolio growth in 2018 was in lower yielding residential mortgages , which declined slightly in yield from the fourth quarter of 2017. the fourth quarter loan yield was 4.94 % in 2018 , compared to 4.47 % in 2017. the repricing terms of the total loan portfolio shortened slightly in 2018 , with 43 % repricing in one year , 22 % in one to five years , and 35 % over five years . growth in variable rate commercial loans generally offset growth in long maturity residential mortgages . asset quality . berkshire 's chief risk officer and the risk management and capital committee of the board oversee risk management and asset quality . this includes setting loan portfolio objectives , maintaining sound underwriting , close portfolio oversight , and careful management of problem assets and potential problem assets . additionally , merger due diligence is an integral component of maintaining asset quality . acquired loans are recorded at fair value and are deemed performing regardless of their payment status . therefore , some overall 48 portfolio measures of asset quality are not comparable between years or among institutions as a result of recent business combinations . a general goal is to achieve significant resolutions of impaired loans acquired in bank mergers primarily in the first two years following the acquisition date . berkshire 's asset quality has reflected its strong credit disciplines together with the generally favorable economic environment in the extended u.s. recovery and asset values supported by the low inflation environment . asset quality metrics remained favorable during the year . at period-end , non-performing assets were 0.28 % of total assets . net loan charge-offs were 0.18 % of average loans in 2018. the balance of troubled debt restructurings decreased to $ 27 million at year-end from $ 42 million at the start of the year . at year-end , the total contractual balance of purchased credit impaired loans was $ 124 million , with a $ 47 million carrying value . this balance includes taxi medallion loans acquired at a significant discount from commerce bank , with a net carrying value less than $ 30 million at year-end 2018. due to successful asset recoveries during 2018 , the total balance of purchased credit impaired loans declined from a $ 209 million contractual amount and a $ 97 million carrying value at the start of the year . loan loss allowance . the determination of the allowance for loan losses is a critical accounting estimate . the company 's methodologies for determining the loan loss allowance are discussed in item 1 of this report , and item 8 includes further information about the accounting policy for the loan loss allowance and the company 's accounting for the allowance in the consolidated financial statements . the company considers the allowance for loan losses appropriate to cover probable incurred losses which can be reasonably estimated and which are inherent in the loan portfolio as of the balance sheet date . under accounting standards for business combinations , acquired loans are recorded at fair value with no loan loss allowance on the date of acquisition . the fair value of acquired loans includes the impact of estimated loan losses for the life of the portfolio , including subjective assessments of risk . a loan loss allowance is recorded by the company for the emergence of new probable and estimable losses relating to acquired loans which were not impaired as of the acquisition date . in the first period of combined operations , the company may also establish an environmental component of the allowance related to newly acquired loans . because of the accounting for acquired loans , some measures of the loan loss allowance are not comparable to periods prior to the acquisition date or to other financial institutions . loans acquired in business combinations totaled $ 1.7 billion , or 19 % of total loans at year-end 2018 , compared to $ 2.2 billion , or 26 % of total loans at year-end 2017. the loan loss allowance increased by $ 10 million , or 19 % , to $ 61 million in 2018. the allowance increased to 0.68 % percent of loans at year-end 2018 , compared to 0.62 % at year-end 2017 , due to a decline in the percentage of acquired loans noted above . for business activities loans , the ratio of the allowance to loans increased slightly to 0.76 % from 0.75 % of related loans . for acquired loans , this ratio increased to 0.32 % from 0.27 % . the year-end allowance coverage of net charge-offs remained unchanged at 3.9x . the allowance provided 1.9x coverage of year-end non-accrual loans in 2018 compared to 2.3x

summary : berkshire 's results in 2017 included growth from acquisitions and a significant amount of charges , viewed as non-operating , which depressed gaap results . based on its adjusted measures , discussed further below , berkshire produced improvement in its earnings per share and roa measures , which are its primary strategic focus . berkshire 's 2017 results included the first choice operations acquired in december 2016 , including the targeted efficiencies which resulted from the integration of these operations in 2017. results also included the commerce operations acquired in october 2017 , and the company is targeted efficiencies in 2018 from integration of those operations . due to these business combinations , most measures of revenue , expense , income , and average balances increased in 2017 compared to 2016. additionally , per share measures were affected by the issuance of shares as merger consideration , together with the stock offering in may 2017 which was simultaneous with the commerce announcement . all acquisitions were targeted to be accretive to earnings and earnings per share when fully integrated , and to provide a long term double digit return on equity . net income decreased in 2017 by 6 % to $ 55 million , while adjusted net income increased by 33 % to $ 91 million . on a per share basis , net income decreased by 26 % to $ 1.39 , while adjusted net income increased by 4 % to $ 2.29. the company targets ongoing improvement in this measure to benefit from its investments in organic growth and acquisitions , and to improve profitability . return on assets decreased by 24 % to 0.56 % , while adjusted return on assets increased by 8 % to 0.93 % as the company moved closer to its target of 1.00 % or higher .

our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors , including but not limited to those discussed in “ special note regarding forward-looking statements ” and item i , part 1a , “ risk factors ” included elsewhere in this annual report on form 10-k. overview leaf group is a diversified consumer internet company that builds enduring , digital-first brands that reach passionate audiences in large and growing lifestyle categories , including fitness and wellness and art and design . our business is comprised of two segments : marketplaces and media . marketplaces through our marketplaces segment , we operate leading art and design marketplaces where large communities of artists and designers can market and sell their original art and designs printed on a wide variety of products . our made-to-order marketplaces , consisting of society6.com ( “ society6 ” ) and our wholesale channel , deny designs ( collectively “ society6 group ” ) , provide artists and designers with an online commerce platform to feature and sell their original art and designs on an array of consumer products primarily in the home décor category . saatchi art , inclusive of saatchiart.com ( “ saatchi art ” ) and its art fair event brand , the other art fair ( collectively , “ saatchi art group ” ) , is a leading online art gallery where a global community of artists exhibit and sell their original artwork directly to consumers through a curated online gallery or in-person at art fairs hosted in the united kingdom , australia , and the united states . saatchi art 's online art gallery features a wide selection of original paintings , drawings , sculptures and photography . our marketplaces segment primarily generates revenue from the sale of products and services through our art and design marketplaces . on society6 group , revenue is generated from the sale of made-to-order products . saatchi art group primarily generates revenue through commissions on the final sale price of original works of art and from various sources relating to the hosting of in-person art fairs , including commissions from the sale of original art , fees paid by artists for stands and through sponsorship opportunities with third-party brands and advertisers . media our media segment includes our leading owned and operated media properties that publish content , including videos , articles and other content formats , on various category-specific properties with distinct editorial voices . our media properties include well+good , a wellness destination and brand that we acquired in june 2018 ; livestrong.com , a fitness , health and wellness destination ; hunker , a home and space inspiration destination ; and over 50 other media properties focused on specific categories or interests that we either own and operate or host and operate for our partners . in order to improve the quality of our products , we continually redesign and update our websites ; refine our content library ; rationalize ad unit density ; and develop a greater variety of content formats , particularly video content and formats better suited for mobile devices and consumption on other platforms , such as social media sites . we are also working with a curated network of contributors and influencers to create more authoritative and engaging content and we are focused on building strong followings on various social media platforms such as facebook , instagram and pinterest , where we also publish our content . we believe that by providing consumers with an improved user and content experience , we will be able to continue to increase the number of visits and revenue in a sustained fashion over the long-term . we also believe that there are opportunities to increase our advertising revenue by continuing to optimize our ad product stack , increasing branded ad sales through direct sellers and offering more innovative products such as native 33 advertisements and sponsored content in order to increase the overall ad unit rates we receive from our advertising partners . historically , the majority of our advertising revenue has been generated by our relationship with google . while google continues to be our primary advertising vendor for advertising monetization , we have been significantly diversifying our monetization partners and expect to continue to do so in the future . google also serves as one of our primary technology platform partners in connection with our programmatic advertising sales offering . any change in the type of services that google provides to us , or to the terms of our agreements with google , could adversely impact our results of operations . sale of cracked business in april 2016 , we completed the sale of substantially all of the assets relating to our cracked business , including the cracked.com humor website , to scripps media , inc. , a subsidiary of the e.w . scripps company , for a cash purchase price of $ 39.0 million . a portion of the purchase price equal to $ 3.9 million was placed into escrow at closing to secure certain of our post-closing indemnification obligations . in july 2017 , the full escrow amount of $ 3.9 million was released and paid to us following the expiration of the indemnification period . revenue for the cracked business for the year ended december 31 , 2016 ( through the sale date of april 12 , 2016 ) was $ 1.8 million . the cracked business had a pre-tax loss of $ 1.9 million for the year ended december 31 , 2016 ( through the sale date of april 12 , 2016 ) , excluding allocations for corporate costs and including stock-based compensation expense resulting from the sale . content studio realignment in june 2016 , we took certain actions to streamline our content publishing studio business and better integrate the business into our broader media segment . as part of this realignment , we reduced the staffing within this business by 35 full-time employees and integrated the remaining employees into our other media businesses . story_separator_special_tag in each case , breaks of access of at least 30 minutes constitute a unique visit . · visits – google analytics : visits per google analytics is defined as the total number of times users access our content across ( a ) one of our owned and operated properties and or ( b ) one of our customers ' properties , to the extent that the visited customer web pages are hosted by our content services . in each case , breaks of access of at least 30 minutes constitute a unique visit . additionally , a visit is also considered to have ended at midnight or if a user arrives via one campaign , leaves , and then comes back via a different campaign . · revenue per visit ( “ rpv ” ) : we define rpv as media revenue per one thousand visits . 35 the following table sets forth our key business metrics for the periods presented : replace_table_token_6_th ( 1 ) marketplaces metrics excludes transactions and the associated revenue generated by saatchi art 's the other art fair , such as the sales of stand space to artists at fairs , sponsorship fees and ticket sales . ( 2 ) for a discussion of these period-to-period changes in the number of transactions , gross transaction value , number of visits and rpv , and how they impacted our financial results , see “ results of operations ” below . ( 3 ) media metrics include visits and revenue generated by well+good subsequent to its acquisition in june 2018. media metrics also includes visits and revenue generated by cracked.com prior to its disposition in april 2016 and other non-core media properties prior to their respective disposition dates and are not adjusted to be shown on a pro forma basis . basis of presentation revenue our revenue is primarily derived from products and services sold through our art and design marketplaces and from sales of advertising . revenues are recognized when control of the promised goods or services is transferred to our customers , in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services . our contracts with customers may include multiple performance obligations . for such arrangements , we allocate the transaction price to each performance obligation based on the estimated standalone selling price of the promised good or service . we allocate any arrangement fee or other incentive or promotional offers to each of the elements based on their relative selling prices . our revenue is principally derived from the following products and services : product revenue marketplaces we recognize product revenue from sales of products when we transfer control of promised goods to our customers in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods . in determining the amount of consideration we expect to be entitled to , we take into account sales allowances , estimated returns based on historical experience and any incentive offers provided to customers to encourage purchases , including percentage discounts off current purchases , free shipping and other promotional offers . because we are the principal in a transaction and obtain control of the goods before they are transferred to the customer , we record product revenue at the gross amount . value-added taxes ( “ vat ” ) , sales tax and other taxes are not included in product revenue because we are a pass-through conduit for collecting and remitting any such taxes . during the first quarter of 2017 , we revised the terms of sales for society6 to provide for the transfer of title and risk of loss upon shipment and began recognizing revenue upon the shipment of fulfilled orders . the impact of this change was an increase in product revenue of approximately $ 1.1 million for the year ended december 31 , 2017. such amounts would have been otherwise recorded as deferred revenue at the end of that period . 36 service revenue marketplaces we generate marketplaces service revenue from commissions we receive from facilitating the sale of original art by artists to customers through saatchi art . we also generate marketplaces service revenue from various sources relating to saatchi art 's the other art fair , including commissions from the sale of original art , fees paid by artists for stands at fairs and through sponsorship opportunities with third-party brands and advertisers . we generally recognize fair related service revenue upon completion of each fair . we recognize service revenue arising from the sale of original art net of amounts paid to the artist because we are not the principal in the transaction and we do not obtain control over the original art . revenue is recognized when we transfer control of the promised service , which is after the original art has been delivered and the return period has expired . we provide incentive offers to saatchi art customers to encourage purchases , including percentage discounts off current purchases , free shipping and other promotional offers . vat , sales tax and other taxes are not included in marketplaces service revenue because we are a pass-through conduit for collecting and remitting any such taxes . media advertising revenue . we generate media service revenue primarily from advertisements displayed on our online media properties and on certain webpages of our partners ' media properties that are hosted by our content services . articles , videos and other forms of content generate advertising revenue from a diverse mix of advertising methods including display advertisements , where revenue is dependent upon the number of advertising impressions delivered ; performance-based cost-per-click advertising , in which an advertiser pays only when a visitor clicks on an advertisement ; sponsored content ; or advertising links . performance obligations pursuant to our advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of other performance criteria . revenue from performance-based arrangements is recognized as the related performance criteria are met .

results of operations the following tables set forth our results of operations for the periods presented ( in thousands ) . the period-to-period comparison of financial results is not necessarily indicative of future results . replace_table_token_7_th 40 as a percentage of revenue : replace_table_token_8_th segment results ( in thousands ) : replace_table_token_9_th ( 1 ) segment operating expenses reflects operating expenses that are directly attributable to the operating segment , not including corporate and unallocated expenses , and also excluding the following : ( a ) depreciation expense ; ( b ) amortization of intangible assets ; ( c ) share-based compensation expense ; ( d ) interest and other income ( expense ) ; ( e ) income taxes ; and ( f ) contingent payments to certain key employees/equity holders of acquired businesses . 41 ( 2 ) corporate expenses include operating expenses that are not directly attributable to the operating segments , including : corporate information technology , marketing , and general and administrative support functions and also excludes the following : ( a ) depreciation expense ; ( b ) amortization of intangible assets ; ( c ) share-based compensation expense ; ( d ) interest and other income ( expense ) ; and ( e ) income taxes . ( 3 ) segment operating contribution reflects segment revenue less segment operating expenses . operating contribution has certain limitations in that it does not take into account the impact to the statements of operations of certain expenses and is not directly comparable to similar measures used by other companies . ( 4 ) represents such items , when applicable , as ( a ) legal , accounting and other professional service fees directly attributable to acquisition , disposition or corporate realignment activities , ( b ) employee severance , ( c ) contingent payments to certain key employees/equity holders of acquired businesses , and ( d ) other payments attributable to acquisition , disposition or corporate realignment activities .

this section of the form 10-k discusses the results of operations for the year ended december 31 , 2020 compared to the year ended december 31 , 2019. overview we are a global systems and process company offering solutions in the oil , gas , water and power markets . we are a leader in natural gas processing and treatment and compression products , solutions , and services providing critical midstream infrastructure solutions to customers throughout the world . we provide our products , solutions , and services to a global customer base consisting of companies engaged in all aspects of the oil and natural gas industry , including large integrated oil and natural gas companies , national oil and natural gas companies , independent oil and natural gas producers and oil and natural gas processors , gatherers and pipeline operators . we operate in three primary business lines : contract operations , aftermarket services and product sales . the nature and inherent interactions between and among our business lines provide us with opportunities to cross-sell and offer integrated product and service solutions to our customers . in our contract operations business line , we provide processing , treating , compression and water treatment services through the operation of our natural gas compression equipment , crude oil and natural gas production and process equipment and water treatment equipment for our customers . in our aftermarket services business line , we sell parts and components and provide operations , maintenance , repair , overhaul , upgrade , startup and commissioning and reconfiguration services to customers who own their own oil and natural gas compression , production , processing , treating and related equipment . in our product sales business line , we design , engineer , manufacture , install and sell equipment used in the treating and processing of crude oil , natural gas and water as well as natural gas compression packages to our customers throughout the world and for use in our contract operations business line . we also offer our customers , on either a contract operations basis or a sale basis , the engineering , design , project management , procurement and construction services necessary to incorporate our products into production , processing and compression facilities , which we refer to as integrated projects . we have continued to work toward our strategy to be a company that leverages sustainable technology and operational excellence to provide complete systems and process solutions in energy and industrial applications . over the past several years , we have made significant progress in this journey by taking actions to protect our core business , develop important organizational capabilities , commercialize new products , solutions , and services and implement new processes to position exterran for success . we are focused on optimizing our portfolio of products , solutions , and services to better serve our global customers while providing a more attractive investment option for our investors . as we continue on this path , we decided that our u.s. compression fabrication business was non-core to our strategy going forward and during the third quarter of 2020 , we entered into an agreement to sell the business which closed on november 2 , 2020. during the third quarter of 2020 , this business met the held for sale criteria and is also now reflected as discontinued operations in our financial statements for all periods presented . the u.s. compression fabrication business was previously included in our product sales segment and has been reclassified to discontinued operations in our financial statements for all periods presented . compression revenue from sales to international customers continues to be included in our product sales segment . our chief operating decision maker manages business operations , evaluates performance and allocates resources based on the company 's three primary business lines , which are also referred to as our segments . in order to more efficiently and effectively identify and serve our customer needs , we classify our worldwide operations into four geographic regions . the north america region is primarily comprised of our operations in the u.s. the latin america region is primarily comprised of our operations in argentina , bolivia , brazil , and mexico . the middle east and africa region is primarily comprised of our operations in bahrain , iraq , oman , nigeria and the united arab emirates . the asia pacific region is primarily comprised of our operations in china , indonesia , singapore and thailand . 30 industry conditions and trends our business environment and corresponding operating results are affected by the level of energy industry spending for the exploration , development and production of oil and natural gas reserves , along with spending within the midstream space . spending by oil and natural gas exploration and production companies and midstream providers is dependent upon these companies ' forecasts regarding the expected future supply , demand and pricing of oil and natural gas products as well as their estimates of risk-adjusted costs to find , develop , produce , transport , and treat these reserves . although we believe our contract operations business is typically less impacted by short-term commodity prices than certain other energy products , solutions , and service providers , changes in oil and natural gas exploration and production spending normally result in changes in demand for our products , solutions and services . beginning in 2019 , there has been a shift in the industry that was exacerbated by the covid-19 pandemic . the industry has seen a structural change in the behavior of exploration and production producers and midstream providers , predominately in the u.s. , but internationally as well , to change their focus from growth to one emphasizing cash flow and returns . this has caused a significant reduction in their capital spending plans in order to drive incremental cash flow and has put constraints on the amount of new projects that customers sanction . story_separator_special_tag if oil and natural gas exploration and development activity and the number of well completions decline due to the reduction in oil and natural gas prices or significant instability in energy markets , we would anticipate a decrease in demand and pricing for our natural gas compression and oil and natural gas production and processing equipment and services . for example , unfavorable market conditions or financial difficulties experienced by our customers may result in cancellation of contracts or the delay or abandonment of projects , which could cause our cash flows generated by our product sales and services to decline and have a material adverse effect on our results of operations and financial condition . execution on larger contract operations and product sales projects . some of our projects are significant in size and scope , which can translate into more technically challenging conditions or performance specifications for our products , solutions and services . contracts with our customers generally specify delivery dates , performance criteria and penalties for our failure to perform . any failure to execute such larger projects in a timely and cost effective manner could have a material adverse effect on our business , financial condition , results of operations and cash flows . personnel , hiring , training and retention . we believe our ability to grow may be challenged by our ability to hire , train and retain qualified personnel . although we have been able to satisfy our personnel needs thus far , retaining employees in our industry continues to be a challenge . our ability to continue our growth will depend in part on our success in hiring , training and retaining these employees . impact of covid-19 on our business in march 2020 , the world health organization declared the outbreak of covid-19 a pandemic . the covid-19 pandemic has negatively impacted the global economy , disrupted global supply chains and created significant volatility and disruption across most industries . efforts to mitigate the spread of covid-19 have also resulted in decreased energy demand and additional weakness in energy pricing . the company took proactive steps earlier in the first quarter of 2020 to enable and verify the ability to ensure the safety of our employees while still carrying on the majority of business functions . these steps included : establishing a daily global operating process to identify , monitor and discuss impacts to our business whether originating from governmental actions or as a direct result of employee illness ; investing in additional it capabilities to enable employees to work remotely ; closing operations where and until assessments were completed to ensure we could operate in a safe manner ; and reestablishing operations once safety mechanisms were in place . this included the acquisition of additional personal protective equipment and establishing screening and other workplace processes . to date our actions in response to the pandemic and the primary impacts on our business are summarized below : as most of our operations are considered essential by local government authorities , our service operations that are provided under long-term contracts have to a large extent continued to operate under substantially normal conditions ; 32 we are following local governmental guidance for viral spread mitigation , including having many of our employees who would traditionally work in an office work from home ; we have put in place additional health and safety measures to protect our employees , customers and other parties who are working at our operating sites ; although early in 2020 we recorded significant new product sales bookings , more recently we have seen a decrease in purchasing activity from our customers which we believe is due to both the work at home mitigation measures our customers are also taking and weakness in commodity prices , causing us to lower our expectations for additional new bookings in the near term ; given travel restrictions and other mitigation efforts , certain of our employees were not able to travel to work assignments , therefore although we have taken additional steps to be able to continue to provide services required by our customers , some services were delayed until mitigation measures were eased ; while our operations have been impacted by lower product sale bookings in 2019 and we started cost reduction efforts even prior to the current pandemic , we have continued our efforts to optimize our cost structure to align with the expected demand in our business including making work force reductions ; we are continuing to have discussions with customers at their request to save them costs by collaborating with them on how we can manage costs and or optimize the projects performance to potentially improve our and their results ; we evaluated our accounts receivable and given the current energy environment and expected impact to the financials of our customers , we increased our reserve for uncollectible accounts by $ 4.8 million ; given covid-19 's impact on demand for energy and decreased commodity prices which impact our customer 's capital spending , during the three months ended march 31 , 2020 , we tested our long-term assets for impairment and concluded that no impairment was indicated ; as many of our suppliers increased delivery times including as a result of disruptions , we are working with customers on revising expected due-dates for delivery , and have pushed out the timing of our recognition of revenue and adjusted gross margin on certain projects as a result of these and other delays caused by the pandemic ; and we have participated in certain covid-19 tax incentive programs in certain jurisdictions in which we operate . these primarily allowed a delay in filing and or paying of taxes for short periods of time . in the u.s. , we filed a request for refund and received a $ 4.9 million alternative minimum tax refund in 2020 , which was earlier than originally scheduled due to the provisions of the coronavirus aid , relief , and economic security act ( the “ cares act ” ) .

operating highlights the following table summarizes the expected timing of revenue recognition from our contract operations backlog ( in thousands ) : replace_table_token_5_th ( 1 ) as of december 31 , 2020 , the total value of our contract operations backlog accounted for as operating leases was approximately $ 149 million , of which $ 33 million is expected to be recognized in 2021 , $ 44 million is expected to be recognized in 2022 , $ 44 million is expected to be recognized in 2023 and $ 28 million is expected to be recognized in 2024. contract operations revenues recognized as operating leases for the year ended december 31 , 2020 was approximately $ 35 million . the following table summarizes our product sales backlog ( in thousands ) : replace_table_token_6_th ( 1 ) we expect that approximately $ 177 million of our product sales backlog as of december 31 , 2020 will be recognized as revenue before december 31 , 2021 . ( 2 ) compression equipment includes sales to customers outside of the u.s. the u.s. compression fabrication business that was previously included in our product sales segment , is now included in discontinued operations . 35 results of operations the year ended december 31 , 2020 compared to the year ended december 31 , 2019 contract operations ( dollars in thousands ) replace_table_token_7_th the decrease in revenue during the year ended december 31 , 2020 compared to the year ended december 31 , 2019 was primarily due to decreases of approximately $ 36.4 million for changes in rates , $ 15.8 million in contract stops , $ 10.1 million impact of devaluation on the argentine peso during the current year period , $ 8.8 million impact of foreign currency exchange rates in brazil , and $ 7.6 million from the sale of equipment pursuant to a purchase option exercised by customers during the fourth quarter of 2019. these revenue decreases were partially offset by

76 included below is a summary of the tax years , by jurisdiction , that remain subject to examination by taxing authorities at september 30 , 2013 : jurisdiction fiscal years open u.s. federal 2010 – 2012 various u.s. states 2010 – 2012 canada federal 2005 – 2012 various canadian provinces 2005 – 2012 12. reduction of carrying value of assets during fiscal years story_separator_special_tag the following discussion is intended to assist in the understanding of the consolidated balance sheets of barnwell industries , inc. and subsidiaries ( collectively referred to herein as “barnwell , ” “we , ” “our , ” “us” or the “company” ) as of september 30 , 2013 and 2012 , and the related consolidated statements of operations , comprehensive loss , cash flows , and equity for the years ended september 30 , 2013 and 2012. this discussion should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in this report . use of estimates in the preparation of financial statements the preparation of the financial statements in conformity with u.s. gaap requires management of barnwell to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues and expenses and the disclosure of contingent assets and liabilities . actual results could differ significantly from those estimates . critical accounting policies and estimates the company considers an accounting estimate to be critical if the accounting estimate requires the company to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made , and changes in the estimate that are reasonably likely to occur in periods subsequent to the period in which the estimate was made , or use of different estimates that the company could have used in the current period , would have a material impact on the financial condition or results of operations . the most critical accounting policies inherent in the preparation of the company 's financial statements are described below . we continue to monitor our accounting policies to ensure proper application of current rules and regulations . oil and natural gas properties - full cost ceiling calculation and depletion policy description we use the full cost method of accounting for our oil and natural gas properties under which we are required to conduct quarterly calculations of a “ceiling , ” or limitation , on the carrying value of oil and natural gas properties . the ceiling limitation is the sum of 1 ) the discounted present value ( at 10 % ) , using average first-day-of-the-month prices during the 12-month period ending in the reporting period on a constant basis , of barnwell 's estimated future net cash flows from estimated production of proved oil and natural gas reserves , less estimated future expenditures to be incurred in developing and producing the proved reserves but excluding future cash outflows associated with settling asset retirement obligations ; plus 2 ) the cost of major development projects and unproven properties not subject to depletion , if any ; plus 3 ) the lower of cost or estimated fair value of unproven properties included in costs subject to depletion ; less 4 ) related income tax effects . if net capitalized costs exceed this limit , the excess is expensed . judgments and assumptions the estimate of our oil and natural gas reserves is a major component of the ceiling calculation and represents the component that requires the most subjective judgments . estimates of reserves are forecasts based on engineering data , historical data , projected future rates of production and the timing of future expenditures . the process of estimating oil and natural gas reserves requires substantial 31 judgment , resulting in imprecise determinations , particularly for new discoveries . our reserve estimates are prepared at least annually by independent petroleum reserve engineers and quarterly by internal personnel . the passage of time provides more quantitative and qualitative information regarding estimates of reserves , and revisions are made to prior estimates to reflect updated information . in the last three fiscal years , annual revisions to our reserve volume estimates have averaged 3.6 % of the previous year 's estimate . however , there can be no assurance that more significant revisions will not be necessary in the future . if future significant revisions are necessary that reduce previously estimated reserve quantities , such revisions could result in a write-down of oil and natural gas properties . if reported reserve volumes were revised downward by 5 % at the end of fiscal 2013 , the ceiling limitation would have decreased approximately $ 2,427,000 before income taxes , which would have resulted in a $ 643,000 reduction of the carrying value of oil and gas properties before income taxes . in addition to the impact of the estimates of proved reserves on the calculation of the ceiling , estimated proved reserves are also a significant component of the quarterly calculation of depletion expense . the lower the estimated reserves , the higher the depletion rate per unit of production . conversely , the higher the estimated reserves , the lower the depletion rate per unit of production . if reported reserve volumes were revised downward by 5 % as of the beginning of fiscal 2013 , depletion for fiscal 2013 would have increased by approximately $ 366,000. while the quantities of proved reserves require substantial judgment , the associated prices of oil , natural gas and natural gas liquids reserves are the average first-day-of-the-month prices during the 12-month period ending in the reporting period on a constant basis as prescribed by sec regulations . additionally , the applicable discount rate that is used to calculate the discounted present value of the reserves is mandated at 10 % . costs included in future net revenues are determined in a similar manner . as such , the future net revenues associated with the estimated proved reserves are not based on an assessment of future prices or costs . story_separator_special_tag the present value calculation includes numerous estimates , assumptions and judgments regarding the existence of liabilities , the amount and timing of cash outflows required to settle the liability , what constitutes adequate restoration , inflation factors , credit adjusted discount rates , and consideration of changes in legal , regulatory , environmental and political environments . abandonment and restoration cost estimates are determined in conjunction with barnwell 's reserve engineers based on historical information regarding costs incurred to abandon and restore similar well sites , information regarding current market conditions and costs , and knowledge of subject well sites and properties . the process of estimating the asset retirement obligation requires substantial judgment and use of estimates , resulting in imprecise determinations . actual asset retirement obligations through the end of fiscal 2013 have not materially differed from our estimates . however , because of the inherent imprecision of estimates as described above , there can be no assurance that material differences will not occur in the future . a 20 % increase in accretion and depletion of the asset retirement obligation would have increased barnwell 's fiscal 2013 expenses before taxes by approximately $ 236,000. overview barnwell is engaged in the following lines of business : 1 ) exploring for , developing , producing and selling oil and natural gas in canada ( oil and natural gas segment ) , 2 ) investing in land interests in hawaii ( land investment segment ) , 3 ) drilling wells and installing and repairing water pumping systems in hawaii ( contract drilling segment ) , and 4 ) developing homes for sale in hawaii ( residential real estate segment ) . oil and natural gas segment barnwell is involved in the acquisition , exploration and development of oil and natural gas properties in canada where we initiate and participate in exploratory and developmental operations for oil and natural gas on properties in which we have an interest , and evaluate proposals by third parties with regard to participation in such exploratory and developmental operations elsewhere . 34 barnwell sells substantially all of its oil and natural gas liquids production under short-term contracts with marketers of oil . natural gas sold by barnwell is generally sold under short-term contracts with prices indexed to market prices . the price of natural gas , oil and natural gas liquids is freely negotiated between the buyers and sellers . oil and natural gas prices are determined by many factors that are outside of our control . market prices for oil and natural gas products are dependent upon factors such as , but not limited to , changes in market supply and demand , which are impacted by overall economic activity , changes in weather , pipeline capacity constraints , inventory storage levels , and output . petroleum and natural gas prices are very difficult to predict and fluctuate significantly . natural gas prices tend to be higher in the winter than in the summer due to increased demand , although this trend has become less pronounced due to the increased use of natural gas to generate electricity for air conditioning in the summer and increased natural gas storage capacity in north america . oil and natural gas exploration , development and operating costs generally follow trends in product market prices , thus in times of higher product prices the cost of exploring , developing and operating the oil and natural gas properties will tend to escalate as well . capital expenditures are required to fund the exploration , development , and production of oil and natural gas . cash outlays for capital expenditures are largely discretionary , however , a minimum level of capital expenditures is required to replace depleting reserves . due to the nature of oil and natural gas exploration and development , significant uncertainty exists as to the ultimate success of any drilling effort . land investment segment the land investment segment is comprised of the following components : 1 ) barnwell owns a 77.6 % controlling interest in kaupulehu developments , a hawaii general partnership which owns interests in leasehold land at kaupulehu located approximately six miles north of the kona international airport in the north kona district of the island of hawaii , adjacent to hualalai resort at historic ka'upulehu , between the queen kaahumanu highway and the pacific ocean . kaupulehu developments ' interests include the following : · the right to receive payments from wb and wbkd , entities not affiliated with barnwell and its subsidiaries , resulting from the sale of lots and or residential units within approximately 870 acres of the kaupulehu lot 4a area by wb and wbkd in two increments ( “increment i” and “increment ii” ) . increment i is an area zoned for approximately 80 single-family lots and a beach club on the portion of the property bordering the pacific ocean , and is partially developed . the purchasers of the 80 single-family lots will have the right to apply for membership in the kuki ' o golf and beach club , which is located adjacent to and south of the four seasons resort hualalai at historic ka'upulehu . increment ii is the remaining portion of the approximately 870-acre property , is zoned for single-family and multi-family residential units and a golf course and clubhouse , and is not yet developed . · approximately 1,000 acres of vacant leasehold land zoned conservation in the kaupulehu lot 4c area located adjacent to the 870-acre lot 4a described above . 2 ) barnwell owns an 80 % controlling interest in kaupulehu 2007 , a hawaii limited liability limited partnership . kaupulehu 2007 owns two residential parcels in the kaupulehu area that are held for investment . 35 3 ) barnwell owns acquisition rights as to 14 lots in the upland area of kaupulehu ( “mauka lands” ) situated between the queen kaahumanu highway and the mamalahoa highway . the acquisition rights give barnwell the right to acquire 14 residential lots , which may be developed on the mauka lands .

summary barnwell incurred a net loss for fiscal 2013 of $ 8,563,000 , a $ 1,573,000 increase in operating results from a net loss of $ 10,136,000 in fiscal 2012. the following factors affected the results of operations for the current fiscal year as compared to the prior fiscal year : 37 · a $ 2,141,000 decrease in reductions of the carrying value of assets in the current year as compared to the prior year . the current year includes a $ 4,506,000 reduction in the carrying value of oil and natural gas properties whereas the prior year includes a $ 6,647,000 reduction in carrying values comprised of a $ 2,551,000 reduction of the carrying value of oil and natural gas properties , a $ 1,854,000 write-down of real estate held for sale , a $ 1,754,000 write-off of our investment in joint ventures , and a $ 488,000 write-off of our lot acquisition rights . · a $ 448,000 decrease in oil and natural gas segment operating profit , before reduction in carrying value of assets and taxes , primarily resulting from : · lower net production for all products , lower prices received for oil and natural gas liquids , partially offset by increased natural gas prices , and · operating expenses incurred to remediate soil contamination issues . · an $ 865,000 increase in contract drilling operating results , before taxes , primarily resulting from higher contract margins on water well drilling activity in the current year and losses on certain pump installation and repair contracts due to unforeseen difficulties that were incurred in the prior year . · a $ 643,000 increase in general and administrative expenses . general barnwell conducts operations in the u.s. and canada . consequently , barnwell is subject to foreign currency translation and transaction gains and losses due to fluctuations of the exchange rates between the canadian dollar and the u.s. dollar .

investments , at fair value , represent investments of the consolidated funds , investments of the consolidated vies and certain financial instruments for which the fair value option was elected and the unrealized gains and losses resulting from changes in the fair value are reflected as net gains ( losses ) from investment activities and net gains ( losses ) from investment activities of the consolidated variable interest entities , respectively , in the consolidated statements of operations . in accordance with u.s. gaap , investments measured and reported at fair value are classified and disclosed in one of the following categories : level i —quoted prices are available in active markets story_separator_special_tag the following discussion should be read in conjunction with apollo global management , llc 's consolidated financial statements and the related notes as of december 31 , 2011 and 2010 and for the years ended december 31 , 2011 , 2010 and 2009. this discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties . actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors , including those included in the section of this report entitled “item 1a . risk factors.” the highlights listed below have had significant effects on many items within our consolidated financial statements and affect the comparison of the current period 's activity with those of prior periods . general our businesses founded in 1990 , apollo is a leading global alternative investment manager . we are contrarian , value-oriented investors in private equity , credit-oriented capital markets and real estate with significant distressed expertise and a flexible mandate in the majority of our funds that enables our funds to invest opportunistically across a company 's capital structure . we raise and invest funds and managed accounts on behalf of some of the world 's most prominent pension and endowment funds as well as other institutional and individual investors . apollo conducts its management and incentive businesses primarily in the united states and substantially all of its revenues are generated domestically . these businesses are conducted through the following three reportable segments : ( i ) private equity —invests in control equity and related debt instruments , convertible securities and distressed debt instruments ; ( ii ) capital markets —primarily invests in non-control debt and non-control equity instruments , including distressed debt instruments ; and ( iii ) real estate —invests in legacy commercial mortgage-backed securities , commercial first mortgage loans , mezzanine investments and other commercial real estate-related debt investments . additionally , the company sponsors real estate funds that focus on opportunistic investments in distressed debt and equity recapitalization transactions . these business segments are differentiated based on the varying investment strategies . the performance is measured by management on an unconsolidated basis because management makes operating decisions and assesses the performance of each of apollo 's business segments based on financial and operating metrics and data that exclude the effects of consolidation of any of the affiliated funds . our financial results vary since carried interest , which generally constitutes a large portion of the income we receive from the funds that we manage , as well as the transaction and advisory fees that we receive , can vary significantly from quarter to quarter and year to year . as a result , we emphasize long-term financial growth and profitability to manage our business . business environment global equity markets remained volatile during 2011. the debate over the united states debt ceiling and continued concerns over european sovereign debt resulted in considerable volatility and declines in financial markets around the world . the s & p 500 and dow jones industrial average were up approximately 2 % and 8 % , respectively , during 2011 , while the vix ( a measure of market volatility ) surged approximately 32 % during the same period . the credit markets in which apollo is most active also suffered losses , and financing activity in 76 those markets slowed . during the volatile economic environment , which we believe began in the third quarter of 2007 , we have been relying on our deep industry , credit and financial structuring experience , coupled with our strengths as value-oriented , distressed investors , to deploy a significant amount of new capital . as examples of this , from the beginning of the third quarter of 2007 and through december 31 , 2011 , we have deployed approximately $ 28.5 billion of gross invested capital across our private equity and certain capital markets funds , focused on control , distressed and buyout investments , leveraged loan portfolios and mezzanine , non-control distressed and non-performing loans . in addition , from the beginning of the fourth quarter of 2007 through december 31 , 2011 , the funds managed by apollo have acquired approximately $ 15.6 billion in face value of distressed debt at discounts to par value and purchased approximately $ 37.4 billion in face value of leveraged senior loans at discounts to par value from financial institutions . since we purchased these leveraged loan portfolios from highly motivated sellers , we were able to secure , in certain cases , attractive long-term , low cost financing . in addition to deploying capital in new investments , we have been depending on our over 20 years of experience to enhance value in the current investment portfolio of the funds to which we serve as an investment manager . we have been relying on our restructuring and capital markets experience to work proactively with our funds ' portfolio company management teams to generate cost and working capital savings , reduce capital expenditures , and optimize capital structures through several means such as debt exchange offers and the purchase of portfolio company debt at discounts to par value . story_separator_special_tag if this market volatility continues , we and the funds we manage may experience further tightening of liquidity , reduced earnings and cash flow , impairment charges , as well as challenges in raising additional capital , obtaining investment financing and making investments on attractive terms . these market conditions can also have an impact on our ability to liquidate positions in a timely and efficient manner . for a more detailed description of how economic and global financial market conditions can materially affect our financial performance and condition , see “item 1a . risk factors—risks related to our businesses—difficult market conditions may adversely affect our businesses in many ways , including by reducing the value or hampering the performance of the investments made by our funds or reducing the ability of our funds to raise or deploy capital , each of which could materially reduce our revenue , net income and cash flow and adversely affect our financial prospects and condition.” uncertainty remains regarding apollo 's future taxation levels . on may 28 , 2010 , the house of representatives passed legislation that would , if enacted in its present form , preclude us from qualifying for treatment as a partnership for u.s. federal income tax purposes under the publicly traded partnership rules . 78 see “item 1a . risk factors—risks related to taxation—the u.s. federal income tax law that determines the tax consequences of an investment in class a shares is under review and is potentially subject to adverse legislative , judicial or administrative change , possibly on a retroactive basis , including possible changes that would result in the treatment of our long-term capital gains as ordinary income , that would cause us to become taxable as a corporation and or have other adverse effects , ” “item 1a . risk factors—risks related to our organization and structure—members of the u.s. congress have introduced and the house of representatives has passed legislation that would , if enacted , preclude us from qualifying for treatment as a partnership for u.s. federal income tax purposes under the publicly traded partnership rules . if this or any similar legislation or regulation were to be enacted and apply to us , we would incur a substantial increase in our tax liability and it could well result in a reduction in the value of our class a shares.” managing business performance we believe that the presentation of economic net income ( loss ) supplements a reader 's understanding of the economic operating performance of each segment . economic net income ( loss ) eni is a measure of profitability and does not take into account certain items included under u.s. gaap . eni represents segment income ( loss ) attributable to apollo global management , llc , which excludes the impact of non-cash charges related to rsus granted in connection with the 2007 private placement and amortization of apollo operating group units ( “aog units” ) , income tax expense , amortization of intangibles associated with the 2007 reorganization as well as acquisitions and non-controlling interests excluding the remaining interest held by certain individuals who receive an allocation of income from certain of our capital markets management companies . in addition , segment data excludes the assets , liabilities and operating results of the funds and vies that are included in the consolidated financial statements . adjustments relating to income tax expense , intangible asset amortization and non-controlling interests are common in the calculation of supplemental measures of performance in our industry . we believe the exclusion of the non-cash charges related to our reorganization for equity-based compensation provides investors with a meaningful indication of our performance because these charges relate to the equity portion of our capital structure and not our core operating performance . during the fourth quarter of 2011 , the company modified the measurement of eni to better evaluate the performance of apollo 's private equity , capital markets and real estate segments in making key operating decisions . these modifications include a reduction to eni for equity-based compensation for rsus ( excluding rsus granted in connection with the 2007 private placement ) and share options , reduction for non-controlling interests related to the remaining interest held by certain individuals who receive an allocation of income from certain of our capital markets management companies and an add-back for amortization of intangibles associated with the 2007 reorganization and acquisitions . these modifications to eni have been reflected in the prior period presentation of our segment results . the impact of this modification on eni is reflected in the table below for the years ended december 31 , 2011 , 2010 and 2009 , respectively . replace_table_token_3_th eni is a key performance measure used for understanding the performance of our operations from period to period and although not every company in our industry defines these metrics in precisely the same way that we 79 do , we believe that this metric , as we use it , facilitates comparisons with other companies in our industry . we use eni to evaluate the performance of our private equity , capital markets and real estate segments . management also believes the components of eni such as the amount of management fees , advisory and transaction fees and carried interest income are indicative of the company 's performance . management also uses eni in making key operating decisions such as the following : decisions related to the allocation of resources such as staffing decisions including hiring and locations for deployment of the new hires . as the amount of fees , investment income , and eni is indicative of the performance of the management companies and advisors within each segment , management can assess the need for additional resources and the location for deployment of the new hires based on the results of this measure . for example , a positive eni could indicate the need for additional staff to manage the respective segment whereas a negative eni could indicate the need to reduce staff assigned to manage the respective segment .

results of operations below is a discussion of our consolidated results of operations for the years ended december 31 , 2011 , 2010 and 2009 , respectively . for additional analysis of the factors that affected our results at the segment level , refer to “—segment analysis” below : replace_table_token_24_th “nm” denotes not meaningful . changes from negative to positive amounts and positive to negative amounts are not considered meaningful . increases or decreases from zero and changes greater than 500 % are also not considered meaningful . 103 revenues our revenues and other income include fixed components that result from measures of capital and asset valuations and variable components that result from realized and unrealized investment performance , as well as the value of successfully completed transactions . year ended december 31 , 2011 compared to year ended december 31 , 2010 advisory and transaction fees from affiliates , including directors ' fees and reimbursed broken deal costs , increased by $ 2.2 million for the year ended december 31 , 2011 as compared to the year ended december 31 , 2010. this increase was primarily attributable to an increase of advisory fees in the private equity segment during the period of $ 6.5 million , partially offset by a decline in transaction fees in the capital markets segment of $ 4.6 million . during the year ended december 31 , 2011 , gross and net advisory fees , including directors ' fees , were $ 143.1 million and $ 56.1 million , respectively , and gross and net transaction fees were $ 62.9 million and $ 30.7 million , respectively . during the year ended december 31 , 2010 , gross and net advisory fees , including directors ' fees , were $ 120.7 million and $ 43.4 million , respectively , and gross and net transaction fees were $ 102.0 million and $ 38.2 million , respectively .

the divested zohydro er business included the registered patents and trademarks , certain contracts , the new drug application , or nda , and other regulatory approvals , documentation and authorizations , the books and records , marketing materials and product data relating to zohydro er . we received consideration of $ 80.0 million in cash , $ 10.0 million of which has been deposited in escrow to fund potential indemnification claims for a period of 12 months , and $ 10.6 million in pernix therapeutics common stock . further , ferrimill purchased $ 0.9 million of zohydro er inventory from us . we agreed to indemnify the purchaser for certain intellectual property matters up to an aggregate amount of $ 5.0 million . in addition to the cash payment paid at closing , we are eligible to receive cash payments of up to $ 283.5 million based on the achievement of certain regulatory and sales milestones . as of december 31 , 2016 , we have not received and do not expect to receive any additional cash payments . critical accounting policies and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements , which have been prepared in conformity with generally accepted accounting principles in the united states , or gaap . the preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , expenses and related disclosures . we evaluate our estimates and assumptions on an ongoing basis . our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances . actual results could differ from those estimates . we believe that the assumptions and estimates associated with revenue recognition , the impairment assessments related to goodwill , indefinite-lived intangible assets and other long-lived assets , business combinations , discontinued operations , fair value measurements , clinical trials expense accrual and stock-based compensation 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 note 2 to our consolidated financial statements included in this form 10-k. revenue recognition we historically generated revenue from contract manufacturing , service fees earned on collaborative arrangements and product revenue related to sumavel dosepro prior to the sale of the business in may 2014. we also generate revenue from the sale of zohydro er , which is included in net income ( loss ) from discontinued operations in the consolidated statement of operations and comprehensive income ( loss ) . revenue is recognized when ( i ) persuasive evidence of an arrangement exists , ( ii ) delivery has occurred and title has passed , ( iii ) the price is fixed or determinable and ( iv ) collectability is reasonably assured . revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if ( a ) our price to the buyer is substantially fixed or determinable at the date of sale , ( b ) the buyer has paid us , or the buyer is obligated to pay us and the obligation is not contingent on resale of the product , ( c ) the buyer 's obligation to us would not be changed in the event of theft or physical destruction or damage of the product , ( d ) the buyer acquiring the product for resale has economic substance apart from that provided by us , ( e ) we do not have significant obligations for future performance to directly bring about resale of the product by the buyer , and ( f ) the amount of future returns can be reasonably estimated . we deferred recognition of revenue on product shipments of zohydro er until the right of return lapsed , as we were not able to reliably estimate expected returns of the product at the time of shipment given the limited sales and return history of zohydro er . 58 revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met , including whether the delivered element has stand-alone value to the customer . the consideration received is allocated among the separate units based on their respective fair values , and the applicable revenue recognition criteria are applied to each of the separate units . the application of the multiple element guidance requires subjective determinations , and requires us to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship . deliverables are considered separate units of accounting provided that : ( 1 ) the delivered item ( s ) has value to the customer on a stand-alone basis and ( 2 ) if the arrangement includes a general right of return relative to the delivered item ( s ) , delivery or performance of the undelivered item ( s ) is considered probable and substantially in our control . in determining the units of accounting , we evaluate certain criteria , including whether the deliverables have stand-alone value , based on the consideration of the relevant facts and circumstances for each arrangement . in addition , we consider whether the buyer can use the other deliverable ( s ) for their intended purpose without the receipt of the remaining element ( s ) , whether the value of the deliverable is dependent on the undelivered item ( s ) , and whether there are other vendors that can provide the undelivered element ( s ) . arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method , and the applicable revenue recognition criteria , as described above , are applied to each of the separate units of accounting in determining the appropriate period or pattern of recognition . story_separator_special_tag the goodwill impairment test consists of a two-step process . the first step of the goodwill impairment test , used to identify potential impairment , compares the fair value of the reporting unit to its carrying value . if the fair value of the reporting unit exceeds its carrying amount , goodwill of the reporting unit is considered not impaired , and the second step of the impairment test is not required . we use our market capitalization as an indicator of fair value . we believe that since our reporting unit is publicly traded , the ability of a controlling shareholder to benefit from synergies and other intangible assets that arise from control might cause the fair value of our reporting unit as a whole to exceed our market capitalization . however , we believe that the fair value measurement need not be based solely on the quoted market price of an individual share of our common stock , but also can consider the impact of a control premium in measuring the fair value of its reporting unit . should our market capitalization be less than our total stockholder 's equity as of our annual test date or as of any interim impairment testing date , we would also consider market comparables , recent trends in our stock price over a reasonable period and , if appropriate , use an income approach ( discounted cash flow ) to determine whether the fair value of our reporting unit is greater than our carrying amount . if we were to use an income approach , we would establish a fair value by estimating the present value of our projected future cash flows expected to be generated from our business . the discount rate applied to the projected future cash flows to arrive at the present value would be intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows . our discounted cash flow methodology would consider projections of financial performance for a period of several years combined with an estimated residual value . the most significant assumptions we would use in a discounted cash flow methodology are the discount rate , the residual value and expected future revenues , gross margins and operating costs , along with considering any implied control premium . the second step , if required , compares the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill . if the carrying amount of the reporting unit 's goodwill exceeds its implied fair value , an impairment charge is recognized in an amount equal to that excess . implied fair value is the excess of the fair value of the reporting unit over the fair value of all identified assets and liabilities . based on our goodwill impairment tests for 2016 , 2015 and 2014 , we concluded that the fair value of the reporting unit exceeded the carrying value and no impairment existed . indefinite-lived intangibles our indefinite-lived intangible asset consists of in-process research and development ( ipr & d ) acquired in a business combination ( see note 7 ) that are used in research and development activities but have not yet reached technological feasibility , regardless of whether they have alternative future use . the primary basis for determining the technological feasibility or completion of these projects is obtaining regulatory approval to market the underlying products in an applicable geographic region . we classify in-process research and development acquired in a business combination as an indefinite-lived intangible asset until the completion or abandonment of the associated research and development efforts . upon completion of the associated research and development efforts , we will determine the useful life of the technology and begin amortizing the assets to reflect their use over their remaining lives . upon permanent abandonment , we would write-off the remaining carrying amount of the associated in-process research and development intangible asset . we use the income approach to determine the fair value of our ipr & d . this approach calculates fair value by estimating the after-tax cash flows attributable to an in-process project over its useful life and then discounting these after-tax cash flows back to a present value . we base our revenue assumptions on estimates of relevant market sizes , expected market growth rates , expected trends in technology and expected 60 levels of market share . in arriving at the value of the in-process projects , we consider , among other factors : the in-process projects ' stage of completion ; the complexity of the work completed as of the acquisition date ; the costs already incurred ; the projected costs to complete ; the contribution of other acquired assets ; the expected regulatory path and introduction dates by region ; and the estimated useful life of the technology . we apply a market-participant risk-adjusted discount rate to arrive at a present value as of the date of acquisition . based on our ipr & d impairment tests for 2016 , 2015 and 2014 , we concluded that the fair value of the indefinite-lived intangible asset exceeded the carrying value and no impairment existed . for asset purchases outside of business combinations , we expense any purchased research and development assets as of the acquisition date if they have no alternative future uses . impairment of long-lived assets we evaluate long-lived assets , consisting of property and equipment , periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset ( group ) may not be recoverable . if the sum of our estimated undiscounted future cash flows is less than the asset 's ( group ) carrying value , we then estimated the fair value of the asset ( group ) to measure the impairment , if any .

and results of operations the following discussion and analysis of our financial condition and results of operations should be read in conjunction with “ selected financial data ” and our consolidated financial statements and related notes appearing elsewhere in this annual report on form 10-k. in addition to historical information , this 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 certain factors , including , but not limited , to those set forth under “ item 1a — risk factors ” and elsewhere in this annual report on form 10-k. overview we are a pharmaceutical company committed to developing and commercializing central nervous system , or cns , therapies that address specific clinical needs for people living with orphan and other cns disorders who need innovative treatment alternatives to help them improve their daily functioning . our current primary area of focus is epilepsy and related seizure disorders . we have worldwide development and commercialization rights to zx008 , our lead product candidate . zx008 is a low-dose fenfluramine for the treatment of seizures associated with dravet syndrome . dravet syndrome is a rare and catastrophic form of pediatric epilepsy with life threatening consequences for patients and for which current treatment options are very limited . zx008 has received orphan drug designation in the united states and european union , or the eu , for the treatment of dravet syndrome . in january 2016 , we received notification of fast track designation from the u.s. food and drug administration , or fda , for zx008 for the treatment of dravet syndrome . we initiated phase 3 clinical trials in north america ( study 1501 ) in january 2016 and in europe and australia in june 2016 ( study 1502 ) .

sales increases were partially offset by the negative impact of foreign currency translation . the company 's consolidated gross profit was $ 331.5 million for 2013 , an increase of $ 29.8 million or about 10 percent from 2012. the gross profit as a percent of net sales increased 50 basis points to 34.3 percent in 2013 from 33.8 percent in 2012. the gross profit margin improvement was due to leveraging fixed costs on higher sales , lower labor and burden costs . direct materials as a percentage of sales was unchanged compared to last year . for 2013 , diluted earnings per share were $ 1.68 , a decrease of 3 percent compared to 2012 diluted earnings per share of $ 1.73. adjusted earnings per share were $ 1.72 , an increase of 10 percent versus the $ 1.57 adjusted earnings per share in 2012 ( see the table below for a reconciliation of the gaap eps to the adjusted eps ) . the company completed a 2-for-1 stock split on march 18 , 2013 and all eps amounts are presented on a post-split basis . results of operations net sales net sales in 2013 were $ 965.5 million , an increase of $ 74.2 million or about 8 percent compared to 2012 sales of $ 891.3 million . the incremental impact of sales from acquired businesses was $ 30.1 million or about 3 percent . sales revenue decreased by $ 14.7 million or about 2 percent in 2013 due to foreign currency translation . the sales change in 2013 , excluding acquisitions and foreign currency translation , was an increase of $ 58.8 million or about 7 percent . replace_table_token_6_th net sales-water systems water systems sales were $ 766.4 million in 2013 , an increase of $ 51.4 million or 7 percent versus 2012. the incremental impact of sales from acquired businesses was $ 19.0 million or about 3 percent . foreign currency translation rate changes decreased sales $ 16.0 million , or about 2 percent , compared to sales in 2012. the sales change in 2013 , excluding acquisitions and foreign currency translation , was an increase of $ 48.4 million or about 7 percent . water systems sales in the u.s. and canada were 40 percent of consolidated sales and grew by about 11 percent compared to 2012. acquisition related sales during 2013 were about $ 17.2 million . foreign currency translation rate changes decreased sales $ 0.9 million compared to sales in 2012. the sales change in 2013 , excluding acquisitions and foreign currency translation , was an increase of $ 22.3 million or about 6 percent . there were three primary drivers for the sales growth in the u.s. and canada : dewatering equipment , groundwater pumps , and drives and controls , as demand for these three products increased in 2013. water systems sales in latin america were about 13 percent of consolidated sales for 2013 and grew by about 4 percent compared to the prior year . foreign currency translation rate changes decreased sales $ 6.3 million , or about 5 percent , compared to sales in 2012. excluding foreign currency translation , sales in latin america grew by about 9 percent during 2013. most of the sales growth in latin america occurred in brazil , and most of the growth in brazil came from continued growth in demand for the line of 4 inch groundwater pumps and motors that the company launched in brazil two years ago . in total , sales in brazil grew organically by 21 percent excluding foreign exchange . water systems sales in the middle east and africa were about 12 percent of consolidated sales and increased by about 3 percent compared to 2012. water systems sales in the middle east and africa were reduced by $ 7.2 million or about 6 percent in the year due to foreign currency translation . excluding acquisitions and the impact of foreign currency translation , sales were up about 9 percent compared to 2012. sales in the gulf region increased by about 17 percent as the governments in both saudi arabia and the uae are supporting investments in groundwater based irrigation projects . sales in turkey increased by about 10 percent as growing demand for the value line of impo branded groundwater pumps and motors , produced in the company 's 15 turkish factory , accounted for much of the growth during 2013. sales in local currency were up in south africa and zambia in 2013 offsetting lower sales in botswana . water systems sales in europe were about 8 percent of consolidated sales and grew by about 6 percent compared to the prior year . acquisition related sales during 2013 were about $ 1 million in europe , or about 1 percent . foreign currency translation rate changes had no impact on sales compared to sales in 2012. excluding acquisitions and foreign currency translation , european sales grew by about 5 percent during 2013 led by growing demand for the company 's pioneer branded mobile dewatering equipment . water systems sales in the asia pacific region were 6 percent of consolidated sales and grew by about 2 percent compared to the prior year . acquisition related sales during 2013 increased sales by about 1 percent in asia . foreign currency translation rate changes decreased sales in 2013 in the asia pacific region by about 3 percent . excluding acquisitions and foreign currency translation , sales grew by about 4 percent during 2013. the year-on-year sales increased 22 percent in southeast asia and china , with strong sales in singapore , thailand , philippines , and indonesia . this growth more than offset a modest decline in sales in the more mature asian markets including japan , korea , and australia . story_separator_special_tag other income or expense other income or expense was a gain of $ 1.7 million in 2013 and a gain of $ 14.9 million in 2012. included in other income or expense in 2013 was interest income of $ 1.8 million , primarily derived from the investment of cash balances in short-term securities . included in other income in 2012 was a one-time gain on the pioneer transaction worth $ 12.2 million . the gain on the original investment the company held in pioneer arose as a the result of a new enterprise valuation of the pioneer entity compared to the book value of franklin electric 's equity investment in pioneer . also included in other income in 2012 was income from equity investments of $ 0.6 million and interest income of $ 2.3 million , primarily derived from the investment of cash balances in short-term securities . foreign exchange foreign currency-based transactions produced a loss for 2013 of $ 3.3 million , primarily due to the turkish lira , the euro , south african rand , brazilian real and canadian dollar relative to the u.s. dollar , none of which individually were significant . foreign currency-based transactions produced a loss for 2012 of $ 1.7 million , primarily due to the mexican peso , the euro , south african rand , brazilian real and czech koruna relative to the u.s. dollar , none of which individually were significant . income taxes the provision for income taxes in 2013 and 2012 was $ 28.9 million and $ 32.2 million , respectively . the tax rate for 2013 was 25.9 percent and 2012 was 27.8 percent . the effective tax rate may differ from the statutory rate primarily due to the indefinite reinvestment of foreign earnings taxed at rates below the u.s. statutory rate as well as recognition of foreign tax credits . the company has the ability to indefinitely reinvest these foreign earnings based on the earnings and cash projections of its other operations as well as cash on hand and available credit . net income net income for 2013 was $ 82.7 million compared to 2012 net income of $ 83.7 million . net income attributable to franklin electric co. , inc. for 2013 was $ 82.0 million , or $ 1.68 per diluted share , compared to 2012 net income attributable to franklin electric co. , inc. of $ 82.9 million or $ 1.73 per diluted share . net income attributable to franklin electric co. , inc. after non-gaap adjustments for 2013 was $ 82.9 million , or $ 1.72 per diluted share , compared to 2012 net income attributable to franklin electric co. , inc. after non-gaap adjustments of $ 74.7 million or $ 1.57 per diluted share . there were specific items in 2013 and 2012 that impacted net income attributable to franklin electric co. , inc. that were not operational in nature . the company refers to these items as “ non-gaap adjustments ” for purposes of presenting the non-gaap financial measures of net income attributable to franklin electric co. , inc. and adjusted eps . the company believes this information helps investors understand underlying trends in the company 's business more easily . the differences between these non-gaap financial measures and the most comparable gaap measures are reconciled in the following tables : 18 replace_table_token_9_th replace_table_token_10_th 2012 vs. 2011 overview sales and earnings in 2012 increased from the prior year . net sales in 2012 were $ 891.3 million , an increase of about 9 percent compared to 2011 sales of $ 821.1 million . the sales increase was primarily from the company 's acquisitions , as well as sales volume and price increases . sales increases were partially offset by the negative impact of foreign currency translation . the company 's consolidated gross profit was $ 301.7 million for 2012 , an increase of $ 29.4 million or about 11 percent from 2011. the gross profit as a percent of net sales increased 60 basis points to 33.8 percent in 2012 from 33.2 percent in 2011. the gross profit margin improvement was attributable to leveraging of fixed costs on higher sales , reductions in inventory obsolescence costs , and lower labor and burden cost , partially offset by higher material costs . for 2012 , diluted earnings per share were $ 1.73 , an increase of 30 percent compared to 2011 diluted earnings per share of $ 1.33. adjusted earnings per share were $ 1.57 , an increase of 16 percent versus the $ 1.35 adjusted earnings per share in 2011 ( see the table below for a reconciliation of the gaap eps to the adjusted eps ) . for the full year 2012 , adjusted net income of $ 74.7 million compared to $ 64.1 million and 19 adjusted earnings per share of $ 1.57 compared to $ 1.35 were records for any year in the company 's history . during the year , the company completed the acquisition of a controlling interest of pioneer pump , and the acquisition of all of the outstanding stock of cerus industrial corporation and flex-ing , incorporated . story_separator_special_tag style= '' line-height:120 % ; text-align : left ; font-size:10pt ; '' > selling , general and administrative ( “ sg & a ” ) selling , general , and administrative ( sg & a ) expenses were $ 188.5 million in 2012 and increased by $ 11.2 million or about 6 percent in 2012 compared to last year . in 2012 , increases in sg & a attributable to acquisitions were $ 8.9 million . additional year over year changes in sg & a costs were increases in marketing and selling-related expenses and higher research , development , and engineering expenses . restructuring expenses restructuring expenses for 2012 were $ 0.2 million and had less than $ 0.01 impact to diluted earnings per share .

results of operations net sales net sales in 2012 were $ 891.3 million , an increase of $ 70.2 million or about 9 percent compared to 2011 sales of $ 821.1 million . the incremental impact of sales from acquired businesses was $ 59.1 million or about 7 percent . sales revenue decreased by $ 33.0 million or about 4 percent in 2012 due to foreign currency translation . the sales change in 2012 , excluding acquisitions and foreign currency translation , was an increase of $ 44.1 million or about 5 percent . replace_table_token_11_th net sales-water systems water systems sales were $ 715.0 million in 2012 , an increase of $ 60.9 million or 9 percent versus 2011. the incremental impact of sales from acquired businesses was $ 57.9 million or about 9 percent . foreign currency translation rate changes decreased sales $ 29.2 million , or about 4 percent , compared to sales in 2011. the sales change in 2012 , excluding acquisitions and foreign currency translation , was an increase of $ 32.2 million or about 5 percent . water systems sales in the u.s. and canada were 40 percent of consolidated sales and grew by about 14 percent compared to 2011. acquisition related sales during 2012 were about $ 39 million . foreign currency translation rate changes decreased sales $ 1 million compared to sales in 2011. the sales change in 2012 , excluding acquisitions and foreign currency translation , was an increase of $ 6 million or about 2 percent . sales of groundwater pumping equipment in the u.s. and canada grew by about 7 percent compared to the prior year as the company continued to gain share in this market . wastewater pump sales in the u.s. and canada were lower as drier weather reduced demand for residential sump , sewage , and effluent pumps compared to the prior year .

59 oxbridge re holdings limited index to exhibits exhibit title 3 third amended and restated memorandum and articles of association of oxbridge re holdings limited , as amended through december 19 , 2014 ( incorporated by reference to exhibit 3.1 to oxbridge re holdings limited 's current report on form 8-k filed december 24 , 2014 story_separator_special_tag the following discussion and analysis is intended to help the reader understand our business , financial condition , results of operations , liquidity and capital resources . you should read this discussion in conjunction with our consolidated financial statements and the related notes contained elsewhere in this annual report on form 10-k for the fiscal year ended december 31 , 2014. this discussion contains forward-looking statements that are not historical facts , including statements about our beliefs and expectations . these statements are based upon current plans , estimates and projections . our actual results may differ materially from those projected in these forward-looking statements as a result of various factors . see “ forward looking statements ” appearing at the beginning of this annual report on form 10-k and item 1a , “ risk factors .” overview and trends we are a cayman islands specialty property and casualty reinsurer that provides reinsurance solutions through our subsidiary , oxbridge reinsurance limited . we focus on underwriting fully-collateralized reinsurance contracts primarily for property and casualty insurance companies in the gulf coast region of the united states , with an emphasis on florida . we specialize in underwriting medium frequency , high severity risks , where we believe sufficient data exists to analyze effectively the risk/return profile of reinsurance contracts . we underwrite reinsurance contracts on a selective and opportunistic basis as opportunities arise based on our goal of achieving favorable long-term returns on equity for our shareholders . our goal is to achieve long-term growth in book value per share by writing business that generates attractive underwriting profits relative to the risk we bear . unlike other insurance and reinsurance companies , we do not intend to pursue an aggressive investment strategy and instead will focus our business on underwriting profits rather than investment profits . however , we intend to complement our underwriting profits with investment profits on an opportunistic basis . our primary business focus is on fully collateralized reinsurance contracts for property catastrophes , primarily in the gulf coast region of the united states , with an emphasis on florida . within that market and risk category , we attempt to select the most economically attractive opportunities across a variety of property and casualty insurers . as our capital base grows , however , we expect that we will consider growth opportunities in other geographic areas and risk categories . our level of profitability is primarily determined by how adequately our premiums assumed and investment income cover our costs and expenses , which consist primarily of acquisition costs and other underwriting expenses , claim payments and general and administrative expenses . one factor leading to variation in our operational results is the timing and magnitude of any follow-on offerings we undertake ( if any ) , as we are able to deploy new capital to collateralize new reinsurance treaties and consequently , earn additional premium revenue . in addition , our results of operations may be seasonal in that hurricanes and other tropical storms typically occur during the period from june 1 through november 30. further , our results of operations may be subject to significant variations due to factors affecting the property and casualty insurance industry in general , which include competition , legislation , regulation , general economic conditions , judicial trends , and fluctuations in interest rates and other changes in the investment environment . because we employ an opportunistic underwriting and investment philosophy , period-to-period comparisons of our underwriting results may not be meaningful . in addition , our historical investment results may not necessarily be indicative of future performance . due to the nature of our reinsurance and investment strategies , our operating results will likely fluctuate from period to period . 35 due to influx of new risk capital from alternative capital market participants such as hedge funds and pension funds , we believe that the reinsurance industry is currently over-capitalized , and will continue in this trend for the foreseeable future . the over-capitalization of the market is not uniform as there are a number of insurers and reinsurers that have suffered and continue to suffer from capacity issues . we continue to assess the opportunities that may be available to us with insurance and reinsurance companies with this profile . if the reinsurance market continues to soften , our strategy is to reduce premium writings rather than accept mispriced risk , and conserve our capital for a more opportune environment . significant rate increases could occur if financial and credit markets experience adverse shocks that result in the loss of capital of insurers and reinsurers , or if there are major catastrophic events , especially in north america . the persistent low interest rate environment has reduced the earnings of many insurance and reinsurance companies and we believe that the continuation of low interest rates , coupled with the reduction of prior years ' reserve redundancies , could cause the industry to adopt overall higher pricing . principal revenue and expense items revenues we derive our revenues from two principal sources : premiums assumed from reinsurance on property and casualty business ; and income from investments . premiums assumed include all premiums received by a reinsurance company during a specified accounting period , even if the policy provides coverage beyond the end of the period . premiums are earned over the term of the related policies . at the end of each accounting period , the portion of the premiums that are not yet earned are included in the unearned premiums reserve and are realized as revenue in subsequent periods over the remaining term of the policy . our policies typically have a term of twelve months . story_separator_special_tag as of december 31 , 2014 , our loss experience refund payable increased by $ 5.7 million , or 422 % , to $ 7.1 million , from $ 1.4 million at december 31 , 2013. the increase is due primarily to the recognition of a pro-rated liability over the year ended december 31 , 2014 , because the absence of loss experience under two of our reinsurance contracts obligates us to refund premium to two of our ceding reinsurers . unearned premiums reserve . as of december 31 , 2014 , our unearned premiums reserve increased by $ 3.7 million , or 182 % , to $ 5.7 million , from $ 2 million at december 31 , 2013. the increase is due primarily to the successful placement of additional and larger reinsurance contracts for the treaty year effective june 1 , 2014. shareholders ' equity . as of december 31 , 2014 , shareholders ' equity increased by $ 29.3 million to $ 36.7 million , or 392 % , from $ 7.5 million at december 31 , 2013. the increase is due to the net proceeds received upon completion of our initial public offering on march 26 , 2014 as well as our net income of $ 4 million for the year ended december 31 , 2014 offset by dividends paid to shareholders of $ 1.7 million . see the disclosure in note 6 of the notes to the consolidated financial statements included within this annual report on form 10-k for additional information . 41 liquidity and capital resources general we are organized as a holding company with substantially no operations of our own . our operations are conducted through our sole reinsurance subsidiary , oxbridge reinsurance limited , which underwrites risks associated with our property and casualty reinsurance programs . we have minimal continuing cash needs which are principally related to the payment of administrative expenses and shareholder dividends . there are restrictions on oxbridge reinsurance limited 's ability to pay dividends which are described in more detail below . sources and uses of funds our sources of funds primarily consist of premium receipts ( net of brokerage fees and federal excise taxes , where applicable ) and investment income , including interest , dividends and realized gains . we use cash to pay losses and loss adjustment expenses , other underwriting expenses , dividends , and general and administrative expenses . substantially all of our surplus funds , net of funds required for cash liquidity purposes , are invested in accordance with our investment guidelines . our investment portfolio is primarily comprised of cash and highly liquid securities , which can be liquidated , if necessary , to meet current liabilities . we believe that we have sufficient flexibility to liquidate any long-term securities that we own in a rising market to generate liquidity . since inception , we have financed our cash flow requirements through the proceeds from the issuance of our securities and net premiums received . in may 2013 , we issued and sold 1,115,350 ordinary shares in a private placement to a group of accredited investors , including certain of our officers and directors , for an aggregate purchase price of approximately $ 6.7 million . during the year ended december 31 , 2014 , our cash positions increased by approximately $ 4.6 million primarily as a result of the completion of our initial public offering on march 26 , 2014 and the use of approximately half of the proceeds from our initial public offering to increase the statutory capital and surplus of our insurance subsidiary and to use as collateral under our new reinsurance contracts . we believe our cash from the proceeds from the issuance of our securities , net premiums and investment income will be sufficient to cover our cash outflows for at least the next 12 months . operating activities for the year ended december 31 , 2014 and period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013 , the net cash provided by operating activities was $ 8.7 million and $ 4.2 million , respectively . the increase in operating cash was primarily driven by our continuous operating profitability over the year ended december 31 , 2014 , compared with only seven months of operations during the period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013. investing activities for the year ended december 31 , 2014 and period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013 , the net cash used in investing activities was $ 29.3 million and $ 10.1 million , respectively . the increase in cash used in investing activities was primarily driven by additional restricted cash and cash equivalents being placed in trust accounts , along with net investment purchases being made during the year ended december 31 , 2014. financing activities for the year ended december 31 , 2014 and period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013 , the net cash provided by financing activities was $ 25.2 million and $ 6.6 million , respectively . the increase in net cash provided by financing activities was due to the proceeds we received through the initial public offering ( net of offering expenses ) , partially offset by $ 1.7 million in total dividends paid to shareholders . on january 19 , 2014 , our board of directors declared a dividend of $ 0.12 per ordinary share for each of the third quarter and the fourth quarter of 2013. additionally , on july 6 , 2014 and november 1 , 2014 , our board of directors declared a dividend of $ 0.12 per ordinary share for the second and third quarter of 2014 , respectively . 42 as of december 31 , 2014 , we believe we had sufficient cash flows from operations to meet our liquidity requirements .

results of operations the following table summarizes our results of operations for the year ended december 31 , 2014 and for the period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013 ( dollars in thousands , except per share amounts ) : replace_table_token_4_th comparison of the year ended december 31 , 2014 to the period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013 general . net income for the year ended december 31 , 2014 was $ 4 million , or $ 0.82 per basic and diluted share , compared to a net income of $ 853 thousand , or $ 0.88 per basic and diluted share , for the period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013. the increase in net income of $ 3.15 million , from $ 853 thousand to $ 4 million was primarily due to an increase in net premiums earned coupled with the fact that we began operating and underwriting in june 2013 , and as such , only seven months of revenue was recognized during the period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013 , compared with recognition of one year of revenue in 2014. additionally , all preopening and organizational costs amounting to $ 145 thousand were expensed during the period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013. finally , we began investing in fixed-maturity and equity securities during august 2014 and earned $ 740 thousand of investment income , compared to $ 0 of investment income in the period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013. although net income increased for the year ended december 31 , 2014 when compared to the period from april 4 , 2013 ( date of incorporation ) to december 31 , 2013 , the basic and diluted share value fell slightly from $ 0.88 to $ 0.82. this was

our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors , including those set forth in this form 10-k under “ item 1a . risk factors. ” overview we are a clinical stage biotechnology company advancing two innovative platform programs : a new class of oral therapeutic candidates for the treatment of hepatitis b virus ( hbv ) infection and a novel class of oral synthetic live biotherapeutic candidates , which are designed to treat disorders associated with the microbiome . over 250 million people worldwide are chronically infected with hbv . our hbv-cure program is pursuing multiple drug candidates that inhibit the hbv lifecycle and block the generation of covalently closed circular dna ( cccdna ) , with the aim of increasing the current low cure rate for patients with hbv . we have discovered multiple novel core protein allosteric modifiers ( cpams ) , which are small molecules that directly target and allosterically modulate the hbv core ( hbc ) protein . the lead product candidate from this program , abi-h0731 , has completed the phase 1a portion of a phase 1a/1b human clinical trial in new zealand , and commenced the phase 1b portion of the clinical trial in the second quarter of 2017 in new zealand and other countries outside the united states . we expect topline interim data from the phase 1b portion of the clinical trial and full results in the first half of 2018. assuming a successful phase 1b monotherapy clinical trial , we expect to initiate a longer phase 2 combination clinical trial in mid-2018 and have initial data in the second half of 2018. a larger phase 2b combination clinical trial is anticipated for 2019. we have also successfully filed an investigational new drug application ( ind ) and have initiated an additional phase 1a pharmacokinetic , safety and tolerability study of abi-h0731 in the united states . in the fourth quarter of 2017 , we announced the selection of our second product candidate from this program , abi-h2158 , which is currently undergoing ind enabling studies . abi-h2158 is an internally discovered and developed drug product candidate . our microbiome program consists of a fully integrated platform that includes a disease targeted strain identification and selection process , methods for strain isolation and growth under current good manufacturing practice ( cgmp ) conditions , and a patent pending delivery system that we call gemicel® , which is designed to allow for targeted oral delivery of live biologic and conventional therapies to the lower gastrointestinal ( gi ) tract . the microbiome program is prioritizing efforts on optimizing our lead product candidates , abi-m201 ( ulcerative colitis ) and abi-m301 ( crohn 's disease ) , in preparation for studies to support potential inds . using our microbiome platform , we are exploring additional product candidates for other disease indications , including irritable bowel syndrome , non-alcoholic steatohepatitis ( nash ) , immuno-oncology and clostridium difficile infections ( cdi ) , which indications we may pursue either internally or in collaboration with partners . in september 2017 , we elected not to initiate a phase 1b clinical trial of our initial product candidate , abi-m101 , in patients with clostridium difficile infections ( cdi ) who have relapsed after two or three standard antibiotic regimens . 40 on january 6 , 2017 , we entered into the research , development , collaboration and license agreement ( the collaboration agreement ) with allergan pharmaceuticals international limited ( allergan ) to develop and commercialize select microbiome gastrointestinal programs . pursuant to the terms of the collaboration agreement , in connection with the closing of the transaction on february 10 , 2017 , allergan paid us an upfront payment of $ 50 million . additionally , we are eligible to receive up to approximately $ 630 million in payments related to seven development milestones and up to approximately $ 2.15 billion in payments related to 12 commercial development and sales milestones in connection with the successful development and commercialization of licensed compounds for up to six different indications . we have agreed with allergan to share development costs up to an aggregate of $ 75 million through proof-of-concept ( poc ) studies on a ⅔ , ⅓ basis , respectively , and allergan has agreed to assume all post-poc development costs . additionally , we have an option to co-promote the licensed programs in the united states and china , subject to certain conditions set forth in the collaboration agreement . 41 we currently have corporate and administrative offices in carmel , indiana and research facilities in groton , connecticut and san francisco , california . since our inception , we have had no revenue from product sales , and have funded our operations principally through debt financings prior to our initial public offering in 2010 and through equity financings and collaborations since then . our operations to date have been primarily limited to organizing and staffing our company , licensing our product candidates , discovering and developing our product candidates , establishing initial manufacturing capabilities for our product candidates , maintaining and improving our patent portfolio and raising capital . we have generated significant losses to date , and we expect to continue to generate losses as we continue to develop our product candidates . as of december 31 , 2017 , we had an accumulated deficit of approximately $ 251.0 million . because we do not generate revenue from any of our product candidates , our losses will continue as we further develop and seek regulatory approval for , and commercialize , our product candidates . as a result , our operating losses are likely to be substantial over the next several years as we continue the development of our product candidates and thereafter if none is approved or successfully launched . we are unable to predict the extent of any future losses or when we will become profitable , if at all . story_separator_special_tag on an ongoing basis , we evaluate our estimates and judgments , including those described in greater detail below . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . while our significant accounting policies are described in more detail in the notes to our consolidated financial statements included elsewhere in this annual report on form 10-k , we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our financial condition and results of operations . revenue recognition we recognize revenue from the sale of products and services to end customers and distributors under the provisions of fasb asc 605 , revenue recognition . accordingly , revenue is recognized only when persuasive evidence of an arrangement exists , delivery has occurred or services have been rendered , and collectability of the fixed or determinable sales price is reasonably assured . we recognize revenue under the collaboration agreement based on the relevant accounting literature . under this guidance , multiple elements or deliverables may include ( i ) grants of licenses , or options to obtain licenses , to intellectual property , ( ii ) research and development services , ( iii ) participation on joint research and or joint development committees , and or ( iv ) manufacturing or supply of services . the payments entities may receive under these arrangements typically include one or more of the following : non-refundable , upfront license fees ; option exercise fees ; funding of research and or development efforts ; amounts due upon the achievement of specified objectives ; and or royalties on future product sales . 43 multiple-element arrangements require the separability of deliverables included in an arrangement into different units of accounting and the allocation of arrangement consideration to the units of accounting . the evaluation of multiple-element arrangements requires management to make judgments about ( i ) the identification of deliverables , ( ii ) whether such deliverables are separable from the other aspects of the contractual relationship , ( iii ) the estimated selling price of each deliverable , and ( iv ) the expected period of performance for each deliverable . to determine the units of accounting under a multiple-element arrangement , management evaluates certain separation criteria , including whether the deliverables have stand-alone value , based on the relevant facts and circumstances for each arrangement . management then estimates the selling price for each unit of accounting and allocates the arrangement consideration to each unit using the relative selling price method . the relative selling price for each deliverable is determined using vendor specific objective evidence ( vsoe ) , of selling price or third-party evidence of selling price if vsoe does not exist . if neither vsoe nor third-party evidence of selling price exists , we use our best estimate of the selling price for the deliverable . the allocated consideration for each unit of accounting is recognized based on the method most appropriate for that unit of account and in accordance with the revenue recognition criteria detailed above . if there are deliverables in an arrangement that are not separable from other aspects of the contractual relationship , they are treated as a combined unit of accounting , with the allocated revenue for the combined unit recognized in a manner consistent with the revenue recognition applicable to the final deliverable in the combined unit . payments received prior to satisfying the relevant revenue recognition criteria are recorded as deferred revenue in the accompanying balance sheets and recognized as revenue when the related revenue recognition criteria are met . the collaboration agreement provides for non-refundable milestone payments . we recognize revenue that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved . a milestone is considered substantive when the consideration payable to us for such milestone ( i ) is consistent with our performance necessary to achieve the milestone or the increase in value to the collaboration resulting from our performance , ( ii ) relates solely to our past performance and ( iii ) is reasonable relative to all of the other deliverables and payments within the arrangement . in making this assessment , we consider all facts and circumstances relevant to the arrangement , including factors such as the scientific , regulatory , commercial and other risks that must be overcome to achieve the milestone , the level of effort and investment required to achieve the milestone and whether any portion of the milestone consideration is related to future performance or deliverables . the collaboration agreement provides allergan with options to license additional intellectual property rights , or purchase additional research , development , or supply services . we concluded that these were `` substantive options '' under the multiple-element arrangement guidance , and accordingly , associated fees have not been considered in allocating contract consideration among deliverables with stand-alone value . if allergan exercises one or more of these options , the associated revenue would be recognized using the method most appropriate for the particular deliverable . we will periodically review the estimated performance periods under the collaboration agreement , which provides for non-refundable upfront payments and fees . we will adjust the periods over which revenue should be recognized when appropriate to reflect changes in assumptions relating to the estimated performance periods . we could accelerate revenue recognition in the event of early termination of programs or if our expectations change . alternatively , we could decelerate revenue recognition if programs are extended or delayed . while such changes to our estimates have no impact on our reported cash flows , the amount of revenue recorded in future periods could be materially impacted .

results of operations general during the year ended december 31 , 2017 , we generated approximately $ 9.0 million of collaboration revenue , which included the amortization of deferred revenue and reimbursement revenue in each case incurred under the collaboration agreement . at december 31 , 2017 , we had an accumulated deficit of approximately $ 251.0 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 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 . comparison of the years ended december 31 , 2017 and december 31 , 2016 research and development expense research and development expense , excluding stock-based compensation expense , was approximately $ 38.8 million for the year ended december 31 , 2017 , an increase of approximately $ 8.7 million from approximately $ 30.1 million for the same period in 2016. the net increase in research and development expenses was primarily due to an increase of $ 3.2 million in research expenses for our hbv-cure program and an increase of approximately $ 5.6 million for nonclinical development of our microbiome program .

the new standard is effective for interim and annual periods beginning after december 15 , 2017 , with early application for interim and annual periods beginning after december 15 , 2016 , permitted , and allows two methods of adoption : the full retrospective method , which requires the standard to be applied to each prior period presented , or the modified retrospective method , which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption . the company is finalizing its assessment of the impact of this guidance on its consolidated results of operations and financial position and disclosures . the company will apply the modified retrospective method upon adoption of this standard effective story_separator_special_tag financial condition and results of operations . you should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes and other financial information appearing in this annual report . some of the information contained in this discussion and analysis or set forth elsewhere in this annual report , including information with respect to our plans and strategy for our business , operations , and product candidates , includes forward-looking statements that involve risks and uncertainties . you should review the sections of this annual report on form 10-k captioned “ risk factors ” and “ special note regarding forward-looking statements ” for a discussion of important factors that could cause our actual results to 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 clinical stage biopharmaceutical company focused on identifying , developing , and commercializing therapeutics to address serious and life-threatening diseases with few or no approved therapies by targeting molecular pathways that regulate cellular metabolism and inflammation . we are currently conducting three registrational trials with our lead product candidates , bardoxolone methyl and omaveloxolone , which activate the transcription factor nrf2 to restore mitochondrial function , reduce oxidative stress , and resolve inflammation . our lead registrational programs are evaluating our product candidates for the treatment of a rare form of ckd caused by alport syndrome , a rare form of degenerative neuromuscular disease called fa , and a rare and severe form of ctd-pah . we are developing bardoxolone methyl for the treatment of patients with ckd caused by alport syndrome and four additional rare forms of ckd that , in the aggregate , affect more than a half million patients in the united states . ckd is characterized by a progressive worsening in the rate at which the kidney filters waste products from the blood , called the gfr . when gfr gets too low , patients develop esrd and require dialysis or a kidney transplant to survive . in 11 clinical trials , bardoxolone methyl has been shown to consistently improve kidney function , as assessed by egfr in patients with a variety of diseases that result in decreased kidney function . we believe that bardoxolone methyl treatment has the potential to delay or prevent the gfr declines that cause the need for dialysis or a transplant in patients with alport syndrome and other rare forms of ckd . we are conducting the phase 3 portion of cardinal in patients with ckd caused by alport syndrome , which will enroll approximately 150 patients randomized evenly to either bardoxolone methyl or placebo . the fda has provided us with guidance that , in patients with ckd caused by alport syndrome , retained egfr demonstrating an improvement versus placebo after one year of bardoxolone methyl treatment may support accelerated approval , and retained egfr demonstrating an improvement versus placebo after two years of treatment may support full approval . we expect to have one year top-line results from the phase 3 portion of cardinal available in the second half of 2019. if successful , we believe the results from the phase 3 portion of cardinal , together with other data from our development program , will be sufficient to form the basis of an nda submission to the fda seeking approval for bardoxolone methyl in the united states . we are developing omaveloxolone for the treatment of patients with fa , an inherited , debilitating , and degenerative neuromuscular disorder , caused by mutations in the gene for frataxin , a mitochondrial protein . patients with fa are typically dependent on wheelchair use 10 to 15 years after disease onset , and their median age of death is in the mid-30s . there are no currently approved therapies for the treatment of fa . omaveloxolone is being studied in the registrational part 2 of our moxie trial . in part 1 of moxie , at the optimal dose level , omaveloxolone demonstrated a statistically significant improvement in mfars scores of 3.8 points ( p=0.0001 ) versus baseline and a placebo-corrected improvement in mfars scores of 2.3 points ( p=0.06 ) . we expect to have top-line data from the moxie trial in the second half of 2019. if successful , we believe the results from the moxie clinical trial , together with other data from the omaveloxolone program , will be sufficient to form the basis of an nda submission to the fda seeking approval for omaveloxolone in the united states . we are studying bardoxolone methyl in ctd-pah , which is a serious and progressive disease that leads to heart failure and death . ctd-pah patients are less responsive to existing vasodilator therapies than i-pah patients and have a worse prognosis . bardoxolone methyl is being studied for the treatment of ctd-pah in the phase 3 catalyst trial . we initiated catalyst following review of data from our phase 2 clinical trial , lariat , which demonstrated a statistically significant , mean time averaged increase in 6mwd at 16 weeks in ctd-pah patients compared to baseline . story_separator_special_tag under our revenue recognition policy , license revenue associated with upfront , non-refundable license payments received under the license and collaboration agreements with abbvie and khk are deferred and recognized ratably over the expected term of the performance obligations under the agreements , which extend through 2017 , 2021 , and 2026 for the abbvie license agreement , the khk license agreement , and the abbvie collaboration agreement , respectively . as of november 2017 , the deferred revenue related to the abbvie license agreement has been fully recognized , which will result in a decrease in license revenue recognized in 2018. we expect to recognize $ 30 million in deferred revenue related to a milestone from khk during 2018 , which we will ratably recognize in revenue over our estimated performance obligation period ending december 2021. we would also recognize approximately $ 3.6 million in related license and other fees when the milestone payment is received . we also have other license revenue , which consists of milestone payments from a disease advocacy organization in 2017 and 2015 , and other revenue , which consists of reimbursements from khk for expenses incurred to obtain drug supplies . 75 research and development expenses the largest component of our total operating expenses has historically been our investment in research and development activities , including the clinical development of our product candidates . from our inception through december 31 , 2017 , we have incurred a total of $ 549.5 million in research and development expense , a majority of which relates to the development of bardoxolone methyl and omaveloxolone . we expect our research and development expense to continue to increase in the future as we advance our product candidates through clinical trials and expand our product candidate portfolio . the process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming , and we consider the active management and development of our clinical pipeline to be crucial to our long-term success . the actual probability of success for each product candidate and preclinical program may be affected by a variety of factors , including the safety and efficacy data for product candidates , investment in the program , competition , manufacturing capability , and commercial viability . research and development expenses include : expenses incurred under agreements with clinical trial sites that conduct research and development activities on our behalf ; expenses incurred under contract research agreements and other agreements with third parties ; employee and consultant-related expenses , which include salaries , benefits , travel , and stock-based compensation ; laboratory and vendor expenses related to the execution of preclinical and non-clinical studies and clinical trials ; the cost of acquiring , developing , manufacturing , and distributing clinical trial materials ; and facilities , depreciation , and other expenses , which include direct and allocated expenses for rent and maintenance of facilities , insurance , and other supply costs . research and development costs are expensed as incurred . costs for certain development activities such as clinical trials are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and our clinical sites . we base our expense accruals related to clinical trials on our estimates of the services received and efforts expended pursuant to contracts with multiple research institutions and cros that conduct and manage clinical trials on our behalf . the financial terms of these agreements vary from contract to contract and may result in uneven payment flows . payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical trial milestones . in accruing costs , we estimate the time period over which services will be performed and the level of effort to be expended in each period . if we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services , our actual expenses could differ from our estimates . to date , we have not experienced significant changes in our estimates of accrued research and development expenses after a reporting period . however , due to the nature of estimates , we can not assure you that we will not make changes to our estimates in the future as we become aware of additional information about the status or conduct of our clinical trials and other research activities . currently , abbvie is not participating in the development of bardoxolone methyl for the treatment of ckd caused by alport syndrome , ctd-pah , ph-ild , or other rare kidney diseases , and we are therefore incurring all costs for this program . abbvie has the right to opt-in to these programs at any time during development . upon opting-in , abbvie would be required to pay an agreed upon amount of all development costs accumulated up to the point of exercising their opt-in right . all development costs incurred after abbvie 's opt-in would be split equally . with respect to our omaveloxolone programs and our collaboration agreement with abbvie , we were responsible for a certain initial amount in early development costs before abbvie began sharing development costs equally . in april 2016 , we had incurred all of these initial costs , after which payments from abbvie with respect to research and development costs incurred by us were recorded as a reduction in research and development expenses . our expenses were reduced by $ 1.4 million for abbvie 's share of research and development costs for the year ended december 31 , 2016. in september 2016 , we and abbvie mutually agreed that we would continue unilateral development of omaveloxolone . therefore , abbvie no longer co-funds the exploratory development costs of this program , but retains the right to opt back in at certain points in development .

results of operations comparison of the years ended december 31 , 2017 , 2016 , and 2015 the following table sets forth our results of operations for the years ended december 31 : replace_table_token_13_th revenue license and milestone revenue represented approximately 98 % , 100 % , and 100 % of total revenue for the years ended december 31 , 2017 , 2016 , and 2015 , respectively , and consisted primarily of the recognition of deferred revenue . license and milestone revenue decreased by 5 % during 2017 compared to 2016. the decrease was primarily due to full recognition of deferred revenue for the abbvie license agreement in november 2017 after which total revenue expected to be recognized from deferred revenue for the abbvie collaboration agreement in 2018 will be $ 26,647,000 , compared to total revenue from the abbvie license and collaboration agreements of $ 45,067,000 in 2017. license and milestone revenue decreased by 1 % during 2016 compared to 2015. the decrease was primarily due to a milestone payment of $ 0.7 million received from a research collaboration with a disease advocacy organization in 2015. other revenue increased by 658 % during 2017 compared to 2016 and by 425 % during 2016 compared to 2015 , primarily due to revenue recognized for reimbursements of expenses from khk for expenses incurred .

risk factors.” certain statements contained in this annual report on form 10-k , including statements regarding the development , growth and expansion of our business , our intent , belief or current expectations , primarily with respect to our future operating performance , and the products we expect to offer and other statements regarding matters that are not historical facts , are “forward-looking statements” within the meaning of section 27a of the securities act and section 21e of the securities exchange act of 1934 , as amended , and are subject to the “safe harbor” created by these sections . future filings with the sec , future press releases and future oral or written statements made by us or with our approval , which are not statements of historical fact , may also contain forward-looking statements . because such statements include risks and uncertainties , many of which are beyond our control , actual results may differ materially from those expressed or implied by such forward-looking statements . some of the factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements can be found under the caption “risk factors” and elsewhere in this annual report on form 10-k. readers are cautioned not to place undue reliance on forward-looking statements . the forward-looking statements speak only as of the date on which they are made , and we undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made . overview we are a medical device company with an innovative approach to the design , development and commercialization of products for people with insulin-dependent diabetes . we designed and commercialized our flagship product , the t : slim insulin delivery system , or t : slim , based on our proprietary technology platform and unique consumer-focused approach . our technology platform features our patented micro-delivery technology , a miniaturized pumping mechanism which draws insulin from a flexible bag within the pump 's cartridge rather than relying on a syringe and plunger mechanism . it also features an easy-to-navigate embedded software architecture , a vivid color touchscreen and a micro-usb connection that supports both a rechargeable battery and t : connect , our data management application . our innovative approach to product design and development is also consumer-focused and based on our extensive market research as we believe the user is the primary decision maker when purchasing an insulin pump . we also apply the science of human factors to our design and development process , which seeks to optimize our devices to the intended users , allowing users to successfully operate our devices in their intended environment . leveraging our technology platform and consumer-focused approach , we develop products to address unmet needs of people in all segments of the large and growing insulin-dependent diabetes market . the fda cleared t : slim in november 2011. we commenced commercial sales of t : slim in the united states in the third quarter of 2012. we consider the number of units shipped per quarter to be an important metric for managing our business . since the launch of t : slim , the number of units shipped has increased each quarter , and we have shipped approximately 7,500 pumps as of december 31 , 2013 broken down by quarter as follows : replace_table_token_3_th 62 for the years ended december 31 , 2013 and 2012 , our sales were $ 29.0 million and $ 2.5 million , respectively . for the years ended december 31 , 2013 and 2012 , our net loss was $ 63.1 million and $ 33.0 million , respectively . our accumulated deficit as of december 31 , 2013 was $ 169.2 million . we believe we can achieve profitability because our proprietary technology platform will allow us to maximize efficiencies in the development , production and sales of our products . by leveraging our core technology , we believe we can develop and bring to market products rapidly and greatly reduce our design and development costs . we expect to continue to increase production volume , and to reduce the per unit production cost for the t : slim pump and its disposable cartridge over time . further , due to shared product design features , our production system is adaptable to new products and we intend to leverage our shared manufacturing infrastructure to reduce our product costs and drive operational efficiencies . by expanding our product offerings to address people in all segments of the large and growing insulin-dependent diabetes market , we believe we can increase the productivity of our sales force , thereby improving our operating margin . from inception through december 31 , 2013 , we have primarily financed our operations through sales of equity securities , and , to a lesser extent , debt financings . we expect to continue to incur net losses for the next several years and may require additional capital through equity financings and debt financings in order to fund our operations to a level of revenues adequate to support our cost structure . we have experienced consecutive quarterly revenue growth since the commercial launch of t : slim in the third quarter of 2012 , while incurring quarterly operating losses since our inception . our operating results may fluctuate on a quarterly or annual basis in the future and our growth or operating results may not be consistent with predictions made by securities analysts . we may not be able to achieve profitability in the future . for additional information about the risks and uncertainties associated with our business , see the section entitled “risk factors” in part i , item 1a of this annual report . subsequent event voluntary recall on january 10 , 2014 , we announced a voluntary recall of select lots of cartridges used with the t : slim that may be at risk of leaking . the cause of the recall was identified during our internal product testing . story_separator_special_tag story_separator_special_tag technology expense related to the sg & a functions increased $ 1.3 million . additionally , we expensed $ 1.8 million relating to the acquisition of patent rights for non-commercialized products . research and development expenses . r & d expenses increased 9 % to $ 9.0 million for 2012 from $ 8.3 million for 2011. the increase in r & d expenses for 2012 was primarily due to a $ 1.0 million milestone payment under a collaboration agreement . other income ( expense ) . other income ( expense ) increased to $ 33,000 for 2012 from ( $ 1.3 ) million for 2011. interest and other expense for 2012 was primarily related to interest associated with convertible notes payable to certain stockholders at a rate of 8 % per annum that were converted to series d preferred stock in august 2012 , and interest paid on a $ 5 million loan from silicon valley bank entered into in march 2012 at a rate ranging from 7.5 % to 10 % per annum . interest and other expense for 2011 was primarily related to interest associated with the convertible notes issued in august 2011 , which were subsequently converted to series d preferred stock in august 2012. the decrease in fair value of the stock warrants was $ 2.6 million for 2012 compared to an increase of $ 0.8 million for 2011. the change was due to the revaluation of the fair value of the common and preferred stock warrants . liquidity and capital resources at december 31 , 2013 , we had $ 129.5 million in cash and cash equivalents and short-term investments . we believe that our cash on hand , cash available under our term loan agreement and proceeds from the exercise of options and warrants will be sufficient to satisfy our liquidity requirements for at least the next 18 months . we expect that our sales performance and the resulting operating income or loss , as well as the status of each of our new product development programs , will significantly impact our cash management decisions . we have utilized , and may continue to utilize , debt arrangements with debt providers and financial institutions to finance our operations . factors such as interest rates and available cash will impact our decision to continue to utilize debt arrangements as a source of cash . historically , our sources of cash have included private placements and a public offering of equity securities , debt arrangements , and cash generated from operations . our historical cash outflows have primarily been associated with cash used for operating activities such as the purchase of inventory , expansion of our sales and marketing infrastructure , increase in our r & d activities , the acquisition of intellectual property , expenditures related to equipment and improvements used to increase our manufacturing capacity and improve our manufacturing efficiency , overall facility expansion and other working capital needs . 67 the following table shows a summary of our cash flows for the years ended december 31 , 2013 , 2012 , and 2011 : replace_table_token_5_th operating activities . net cash used in operating activities was $ 47.8 million for the year ended december 31 , 2013 , compared to $ 33.5 million and $ 21.5 million for the same periods in 2012 and 2011 , respectively . the increase in net cash used in operating activities for the 2012 and 2013 periods presented was primarily associated with increased costs related to the initiation of commercial operations in august 2012 and continued expansion during 2013. our employee headcount , employee-related expenses and working capital needs , including accounts receivable and inventory , increased significantly as a result of our initiation of commercial operations . investing activities . net cash used in investing activities was $ 11.1 million for the year ended december 31 , 2013 , compared to net cash used of $ 5.5 million in 2012 and net cash generated of $ 5.9 million in 2011. the increase in net cash used in investing activities for the 2012 and 2013 periods was primarily related to the purchase of short-term investments , the acquisition of patents , and the purchase of capital equipment . the net cash provided in 2011 was primarily related to the sale of securities to fund our operating activities . financing activities . net cash provided by financing activities was approximately $ 166.1 million for the year ended december 31 , 2013 , compared to $ 47.5 million and $ 13.2 million for the same periods in 2012 and 2011 , respectively . the net cash provided in 2013 is a result of net proceeds from our initial public offering of approximately $ 125.0 million in november 2013 , net proceeds from issuance of preferred stock of $ 28.9 million , net proceeds from issuance of notes payable of $ 16.0 million and proceeds from warrant and stock option exercises of $ 2.6 million , offset by principal payments on notes payable of $ 4.4 million and $ 2.0 million used in restricted cash . the net cash provided by 2012 financing activities not reoccurring in 2013 included proceeds from issuance of preferred stock of $ 30.9 million and proceeds from issuance of notes payable and convertible notes payable of $ 17.2 million while 2011 net cash proceeds from financing activities was driven by the issuance of convertible notes payable . our liquidity position and capital requirements are subject to fluctuation based on a number of factors . for example , our cash inflow and outflow may be impacted by the following : fluctuations in gross margins and operating margins ; our ability to generate sales ; and fluctuations in working capital .

results of operations replace_table_token_4_th comparison of years ended december 31 , 2013 and 2012 sales . we began selling our products in the third quarter of 2012. sales for the years ended december 31 , 2013 and 2012 were $ 29.0 million and $ 2.5 million , respectively . sales from the t : slim pump accounted for 90 % and 91 % of sales , respectively , for the years ended december 31 , 2013 and 2012 , while pump-related supplies primarily accounted for the remainder in each year . sales of accessories were not material in either year . the commercialization of the t : slim pump and pump-related supplies and accessories initially involved a sales force of limited size . during 2013 , we expanded the number of our sales territories to 36 from 11 at commercial launch in 2012. sales to distributors accounted for 69 % and 73 % of our total sales for the years ended december 31 , 2013 and 2012 , respectively . cost of sales and gross profit ( loss ) . our cost of sales for 2013 was $ 22.8 million resulting in gross profit of $ 6.2 million , compared to $ 3.8 million in cost of sales recognized in 2012 resulting in negative gross profit of ( $ 1.3 ) million . the gross margin for 2013 was 21 % , compared to a negative gross margin of ( 54 % ) in 2012. the improvement in the gross margin was primarily a result of manufacturing efficiencies associated with an increase in the production output and improvement in our manufacturing processes . the 2013 gross margin included $ 1.3 million of costs , or a reduction of the gross margin of 5 % , associated with our voluntary product recall of selected lots of cartridges , including the write-off of affected inventory on hand and the return and replacement of product in the field .

the fair value of notes receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities . as of june 30 , 2010 and 2009 , the fair value of the notes receivable , net approximated the carrying value . concentration of credit risk financial instruments that potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents and receivables . we place cash and cash equivalents in high credit quality financial institutions and in short-duration , high-quality securities . with the exception of u.s. government and agency securities and overnight investment sweeps , our short-term investment policy limits the amount of credit exposure in any one financial institution , industry group or type of investment . cash on deposit may be in story_separator_special_tag the following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this report . this discussion and analysis also contains forward-looking statements and should also be read in conjunction with the disclosures and information contained in “cautionary note” and item 1a . “risk factors” in this report . the following discussion and analysis is intended to enhance the reader 's understanding of our business environment . as used in this report , the terms “we” , “us” , “our” and “wms” mean wms industries inc. , a delaware corporation , and its subsidiaries . all references to years , unless otherwise noted , refer to our fiscal year , which ends on june 30. all references to quarters , unless otherwise noted , refer to the quarters of our fiscal year . overview our mission is : through imagination , talent and technology , we create and provide the world 's most compelling gaming experiences . we serve the legalized gaming industry by designing , manufacturing and distributing games , video and mechanical reel-spinning gaming machines and video lottery terminals ( “vlts” ) to authorized customers in legal gaming venues worldwide . we generate revenue in two principal ways : product sales and gaming operations , as further described below . our gaming machines are installed in all of the major regulated gaming jurisdictions in the united states , as well as in over 100 international gaming jurisdictions . in fiscal 2010 , we expanded the markets where we directly distribute our products by launching directly into class ii gaming markets in the united states and entering the mexican and new south wales , australia markets . we had previously served these markets through content licensing agreements with third parties for our game themes . in fiscal 2011 , we expect to further penetrate these new markets and to expand our distribution channels to provide fully networked gaming business service solutions to our customers that are aimed at increasing the revenue generating capabilities and operational efficiency of casino gaming floors . these solutions use industry standard communication protocols in order to be interoperable with our competitor 's games and gaming systems that utilize industry standard communication . we also expect to launch an online gaming site for residents in the united kingdom in fiscal 2011. the financial market crisis that began in 2008 has continued to disrupt credit and equity markets worldwide , reduced consumer discretionary spending and has led to a weakened global economic environment . the effect of the weakened global economy and the fallout from the financial market crisis has been a challenge for our industry . some gaming operators delayed or canceled construction projects , resulting in fewer new casino openings and expansions in calendar 2010 than in calendar 2009 , coupled with many customers reducing their annual capital budgets for replacing gaming machines for calendar 2009 with only modestly higher replacement capital budgets in calendar 2010. the economic crisis reduced disposable income for casino patrons and resulted in fewer patrons visiting casinos . in anticipation of the further lengthening of the replacement cycle and in 29 response to the challenging economic environment , we reduced the number of new employees we previously planned to hire in fiscal 2009 and in fiscal 2010 , and took actions to contain non-payroll related spending while still supporting our growing revenue base . in fiscal 2010 , we remained focused on controlling spending and prioritizing capital expenditures and other discretionary items . the economic crisis lowered the number of new units we sold in fiscal 2009 , and this continued in the first half of fiscal 2010 , with modest year-over-year increases in the march and june 2010 quarters . we had expected that with our launch of the network gaming-enabled bluebird2 gaming machines in the december 2008 quarter , concurrent with certain of our competitors launching their networked gaming-enabled products , the industry would experience an improvement in the replacement cycle , which has been at an abnormally low level for the past few years . however , as discussed above , the economy slowed just as the new gaming machines were being launched , so we did not see the expected improvement in the replacement cycle . even with the adverse economic environment and its impact on our industry causing customers to constrain their capital budgets , we launched our bluebird2 gaming machines in the december 2008 quarter with premium features at a significantly higher price , and demand outpaced our expectations . for fiscal 2009 , bluebird2 units accounted for 35 % of our total new units shipped and , with the continuing transition in the market to this new product , accounted for approximately 83 % of new unit shipments in fiscal 2010. we sold slightly more new units in the march and june 2010 quarters than in the march and june 2009 quarters due to the popularity of our products enabling us to increase our share of units shipped in the united states and canada . story_separator_special_tag we believe capital budgets for replacing gaming 31 machines improved modestly for calendar 2010 over calendar 2009 ; however , new casino openings and casino expansions declined over prior year levels . in this challenging environment our year-over-year new unit shipment volume was down 3.7 % from the prior year for u.s. and canadian shipments . to further diversify our revenue streams , we directly entered the class ii and central determinant market in fiscal 2010 following expiration of our previous licensing agreements for those markets . through an agreement with bluberi gaming technologies inc. ( “bluberi” ) , a canadian-based technology firm , over time we expect to combine our existing library of for-sale games with bluberi 's proven system capabilities for the class ii and central determinant markets . we shipped our first gaming machines to a class ii market in the september 2009 quarter , and shipments grew throughout the remainder of fiscal 2010 as we received additional regulatory approvals , and we expect to increase shipments into these markets in fiscal 2011. we launched our new bluebird xd gaming cabinet late in the june 2010 quarter and , given initial customer response , we expect strong demand for this new product in fiscal 2011. we are dependent , in part , on innovative new products , casino expansions and new market opportunities to generate growth . we have continued to invest in research and development activities to be able to offer creative and high earning products to our customers and in fiscal 2010 , such expenses were $ 105.9 million or 13.8 % of revenues , up $ 7.5 million , or 7.6 % , compared to the prior year . expansion and new market opportunities may come from political action as governments look to gaming to provide tax revenues in support of public programs and view gaming as a key driver for tourism . based on publicly disclosed information , we believe our share of new units shipped among the four major companies serving the united states and canadian gaming market , increased to 29 % in fiscal 2010 from 22 % in fiscal 2009 . 2. strategic priority : expand the breadth and profitability of our international business . fiscal 2010 result : shipments to international markets represented 35.4 % of our total new unit shipments in fiscal 2010 , compared with 36.6 % for the prior year . during fiscal 2010 , international new unit shipments decreased 8.8 % from the prior year , as economic challenges are evident in several regions , principally in western european and latin american markets , as well as the impact on unit volume of the higher-priced bluebird2 units . in january 2010 , we had a soft product launch of a new value-priced gaming cabinet called helios that is targeted at select international markets where the economics of the facilities do not justify the premium priced points of the bluebird , bluebird2 or orion gaming 's twinstar or twinstar2 gaming machines . we directly entered two new markets in fiscal 2010 that we had previously served through content licensing arrangements : new south wales , australia and mexico . in the march 2010 quarter in new south wales , australia , we began shipping products as our distributor received regulatory approval for our bluebird2 gaming machine and the first three game themes . we have since received additional game theme approvals and due to the popularity and earnings performance of our products , shipments and revenues increased in the june quarter . we expect continued growth in fiscal 2011. we shipped our first direct shipment of gaming machines into mexico in the june 2009 quarter and expanded shipments to this market in each quarter of fiscal 2010. we continue to make progress in preparing for the opening of the new vlt market in italy . although much effort is still needed before the first gaming machines are placed in italy , we anticipate we will see the first shipments in mid-fiscal 2011. also , we continue to achieve benefits from the opening of new international offices and the addition of new geographically dispersed sales account executives . we also launched the new bluebird xd gaming cabinet in late june 2010 , which will benefit our shipments into the international markets in fiscal 2011 . 3. strategic priority : drive growth in our gaming operations business , while selectively investing our capital deployed in that business . fiscal 2010 result : during the year ended june 30 , 2010 , our average installed base of participation gaming machines increased 6.5 % over the prior year and , at june 30 , 2010 , our total installed participation footprint stood at 10,421 units compared to 10,350 units at june 30 , 2009. our focus in fiscal 2010 was to increase the percentage of the installed base that were wap gaming machines as they generate the highest gross profit dollars . we were successful in this effort as wap gaming machines grew 32 from 24.4 % of the installed base at june 30 , 2009 to 33.6 % of the installed base at june 30 , 2010. the 987 unit increase in wap footprint largely reflects the successful launch of new wap games on our new participation product lines . the wap gaming machines have a higher daily lease rate than the other participation gaming machines and the increase in the wap percentage of the installed base was the primary driver of the 9.4 % increase in the average daily lease rate to $ 76.53 in fiscal 2010. we implemented a shift in strategy in fiscal 2007 to focus on return on investment of our gaming operations assets , which includes limiting the number of gaming machines for a new theme at each casino and re-deploying gaming machines from casinos generating lower revenue per day to casinos generating higher revenue per day . by controlling the initial placement of participation products , we continued to reduce the capital invested in gaming operations compared to the prior year .

results of operations seasonality sales of our gaming machines to casinos are generally strongest in the spring and slowest in the summer months , while gaming operations revenues are generally strongest in the spring and summer . typically our total revenues are lowest in the september quarter and build in each subsequent quarter with the june quarter generating our highest total quarterly revenues . in addition , quarterly revenues and net income may increase when we receive a larger number of approvals for new games from regulators than in other quarters , when a game or platform that achieves significant player appeal is introduced , if a significant number of new casinos open or existing casinos expand or if gaming is permitted in a significant new jurisdiction . impact of inflation during the past three years , the general level of inflation affecting us has been relatively low . our ability to pass on future cost increases in the form of higher sales prices will depend on the prevailing competitive environment and the acceptance of our products in the marketplace . 40 fiscal year ended june 30 , 2010 compared to fiscal year ended june 30 , 2009 below are our revenues , gross margins and key performance indicators . this information should be read in conjunction with our consolidated statements of income ( in millions , except unit , per unit and per day data ) : replace_table_token_6_th bp basis points ( 1 ) as used herein , gross profit and gross margin exclude depreciation and distribution expense .

the financial review is provided as a supplement to , and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this report . overview historically , our principal business has consisted of attracting deposits from the general public and the business community and making loans secured by various types of collateral , including real estate and other consumer assets . we are significantly affected by prevailing economic conditions , particularly interest rates , as well as government policies concerning , among other things , monetary and fiscal affairs , housing and financial institutions and regulations regarding lending and other operations , privacy and consumer disclosure . attracting and maintaining deposits is influenced by a number of factors , including interest rates paid on competing investments offered by other financial and non-financial institutions , account maturities , fee structures and levels of personal income and savings . lending activities are affected by the demand for funds and thus are influenced by interest rates , the number and quality of lenders and regional economic conditions . sources of funds for lending activities include deposits , borrowings , repayments on loans , cash flows from maturities of investment securities and income provided from operations . our earnings depend primarily on our level of net interest income , which is the difference between interest earned on our interest-earning assets , consisting primarily of loans , mortgage-backed securities and other investment securities , and the interest paid on interest-bearing liabilities , consisting primarily of deposits , borrowed funds , and trust-preferred securities . net interest income is a function of our interest rate spread , which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest- bearing liabilities , as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities . also contributing to our earnings is noninterest income , which consists primarily of service charges and fees on loan and deposit products and services , net gains and losses on sale of assets , and mortgage loan service fees . net interest income and noninterest income are offset by provisions for loan losses , general administrative and other expenses , including salaries and employee benefits and occupancy and equipment costs , as well as by state and federal income tax expense . the bank has a strong mortgage lending focus , with the majority of its loan originations in single-family residential mortgages , which has enabled it to successfully market home equity loans , as well as a wide range of shorter term consumer loans for various personal needs ( automobiles , recreational vehicles , etc. ) . in recent years we have also focused on adding commercial loans to our portfolio , both real estate and non-real estate . we have made significant progress in this initiative . as of december 31 , 2016 , commercial real estate and land loans and commercial business loans represented 46.0 % and 11.7 % of the total loan portfolio , respectively . the purpose of this diversification is to mitigate our dependence on the mortgage market , as well as to improve our ability to manage our interest rate spread . the bank 's management recognizes that fee income will also enable it to be less dependent on specialized lending and it maintains a significant loan serviced portfolio , which provides a steady source of fee income . as of december 31 , 2016 , we had mortgage servicing rights , net of $ 5.85 million compared to $ 4.97 million as of december 31 , 2015. gain on sale of loans also provides significant fee income or noninterest income in periods of high mortgage loan origination volumes . such income will be adversely affected in periods of lower mortgage activity . fee income is also supplemented with fees generated from our deposit accounts . the bank has a high percentage of non-maturity deposits , such as checking accounts and savings accounts , which allows management flexibility in managing its spread . non-maturity deposits and certificates of deposit do not automatically reprice as interest rates rise . in recent years , management 's focus has been on improving our core earnings . core earnings can be described as income before taxes , with the exclusion of gain on sale of loans and adjustments to the market value of our loans serviced portfolio . management believes that we will need to continue to focus on increasing net interest margin , other areas of fee income , and control operating expenses to achieve earnings growth going forward . management 's strategy of growing the loan portfolio and deposit base is expected to help achieve these goals : loans typically earn higher rates of return than investments ; a larger deposit base will yield higher fee income ; increasing the asset base will reduce the relative impact of fixed operating costs . the biggest challenge to management 's strategy is funding the growth of our balance sheet in an efficient manner . though deposit growth this last year was steady , it may become more difficult to maintain due to significant competition and possible reduced customer demand for deposits as customers may shift into other asset classes . 21 other than in limited circumstances for certain high-credit-quality customers , we do not offer “ interest only ” mortgage loans on residential ( 1-4 family ) properties ( where the borrower pays interest but no principal for an initial period , after which the loan converts to a fully amortizing loan ) . we also do not offer loans that provide for negative amortization of principal , such as “ option arm ” loans , where the borrower can pay less than the interest owed on their loan , resulting in an increased principal balance during the life of the loan . story_separator_special_tag the company believes the amendments in this update will have an impact on the company 's consolidated financial statements and is working to evaluate the significance of that impact . 22 critical accounting policies certain accounting policies are important to the understanding of our financial condition , since they require management to make difficult , complex or subjective judgments , some of which may relate to matters that are inherently uncertain . estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances , including , but without limitation , changes in interest rates , performance of the economy , financial condition of borrowers and laws and regulations . the following are the accounting policies we believe are critical . allowance for loan losses we recognize that losses will be experienced on loans and that the risk of loss will vary with , among other things , the type of loan , the creditworthiness of the borrower , general economic conditions and the quality of the collateral for the loan . we maintain an allowance for loan losses to absorb losses inherent in the loan portfolio . the allowance for loan losses represents management 's estimate of probable losses based on all available information . the allowance for loan losses is based on management 's evaluation of the collectability of the loan portfolio , including past loan loss experience , known and inherent losses , information about specific borrower situations and estimated collateral values , and current economic conditions . the loan portfolio and other credit exposures are regularly reviewed by management in its determination of the allowance for loan losses . the methodology for assessing the appropriateness of the allowance includes a review of historical losses , internal data including delinquencies among others , industry data , and economic conditions . as an integral part of their examination process , the frb and the montana division of banking will periodically review our allowance for loan losses and may require us to make additional provisions for estimated losses based upon judgments different from those of management . in establishing the allowance for loan losses , loss factors are applied to various pools of outstanding loans . loss factors are derived using our historical loss experience and may be adjusted for factors that affect the collectability of the portfolio as of the evaluation date . commercial business loans that are criticized are evaluated individually to determine the required allowance for loan losses and to evaluate the potential impairment of such loans under fasb asc topic 310 receivables . although management believes that it uses the best information available to establish the allowance for loan losses , future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations . because future events affecting borrowers and collateral can not be predicted with certainty , there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of loans deteriorate as a result of the factors discussed previously . any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations . the allowance is based on information known at the time of the review . changes in factors underlying the assessment could have a material impact on the amount of the allowance that is necessary and the amount of provision to be charged against earnings . such changes could impact future results . valuation of investment securities all of our investment securities are classified as available-for-sale and recorded at current fair value . unrealized gains or losses , net of deferred taxes , are reported in other comprehensive income as a separate component of shareholders ' equity . in general , fair value is based upon quoted market prices of identical assets , when available . if quoted market prices are not available , fair value is based upon valuation models that use cash flow , security structure and other observable information . where sufficient data is not available to produce a fair valuation , fair value is based on broker quotes for similar assets . broker quotes may be adjusted to ensure that financial instruments are recorded at fair value . adjustments may include unobservable parameters , among other things . no adjustments were made to any broker quotes received by us . 23 we conduct a quarterly review and evaluation of our investment securities to determine if any declines in fair value are other than temporary . in making this determination , we consider the period of time the securities were in a loss position , the percentage decline in comparison to the securities ' amortized cost , the financial condition of the issuer , if applicable , and the delinquency or default rates of underlying collateral . we consider our intent to sell the investment securities and the likelihood that we will not have to sell the investment securities before recovery of their cost basis . if impairment exists , credit related impairment losses are recorded in earnings while noncredit related impairment losses are recorded in accumulated other comprehensive income . deferred income taxes we use the asset and liability method of accounting for income taxes as prescribed in fasb asc topic 740 income taxes . using this method , deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases . if current available information raises doubt as to the realization of the deferred tax assets , a valuation allowance is established . deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled .

results of operations comparison of operating results for the years ended december 31 , 201 6 and 201 5 net income eagle 's net income for the year ended december 31 , 2016 was $ 5.13 million compared to $ 2.58 million for the year ended december 31 , 2015. the increase of $ 2.55 million was primarily due to an increase in net interest income after loan loss provision of $ 2.25 million and an increase in noninterest income of $ 4.23 million , partially offset by an increase in noninterest expense of $ 2.29 million and an increase in income tax expense of $ 1.64 million . basic and diluted earnings per share were $ 1.36 and $ 1.32 , respectively , for the year ended december 31 , 2016 compared to $ 0.68 and $ 0.67 , respectively , for the prior period . net interest income net interest income increased to $ 20.79 million for the year ended december 31 , 2016 , from $ 18.01 million for the year ended december 31 , 2015. this increase of $ 2.78 million , or 15.4 % , was due to an increase in interest and dividend income of $ 3.44 million partially offset by an increase in interest expense of $ 663,000 and an increase in the loan loss provision of $ 530,000. interest and dividend income total interest and dividend income was $ 23.91 million for the year ended december 31 , 2016 , compared to $ 20.47 million for the year ended december 31 , 2015 , an increase of $ 3.44 million , or 16.8 % .

see also item 1a , risk factors . this md & a is designed to provide the reader with information that will assist in understanding our consolidated financial statements , the changes in certain key items in those financial statements from year to year , and the primary factors that accounted for those changes , as well as how certain accounting principles affect our consolidated financial statements . executive overview our business we operate inpatient rehabilitation hospitals and long-term acute care hospitals ( “ ltchs ” ) and provide treatment on both an inpatient and outpatient basis . as of december 31 , 2010 , we operated 97 inpatient rehabilitation hospitals ( including 3 hospitals that operate as joint ventures which we account for using the equity method of accounting ) , 6 freestanding ltchs , 32 outpatient rehabilitation satellite clinics ( operated by our hospitals , including one joint venture satellite ) , and 25 licensed , hospital-based home health agencies . in addition to healthsouth hospitals , we manage four inpatient rehabilitation units through management contracts . while our national network of inpatient hospitals stretches across 26 states and puerto rico , our inpatient hospitals are concentrated in the eastern half of the united states and texas . our core business is providing inpatient rehabilitative services . we are the nation 's largest provider of inpatient rehabilitative healthcare services in terms of revenues , number of hospitals , and patients treated and discharged . our inpatient rehabilitation hospitals offer specialized rehabilitative care across a wide array of diagnoses and deliver comprehensive , high-quality , cost-effective patient care services . the majority of patients we serve experience significant physical disabilities due to medical conditions , such as strokes , hip fractures , head injuries , spinal cord injuries , and neurological disorders , that are generally non-discretionary in nature and which require rehabilitative healthcare services in an inpatient setting . our team of highly skilled nurses and physical , occupational , and speech therapists working with our physician partners utilize the latest in technology and clinical protocols with the objective of returning patients to home and work . patient care is provided by nursing and therapy staff as directed by physician orders . internal case managers monitor each patient 's progress and provide documentation of patient status , achievement of goals , discharge planning , and functional outcomes . our hospitals provide a comprehensive interdisciplinary clinical approach to treatment that leads to a higher level of care and superior outcomes . net patient revenue from our hospitals was 5.6 % higher in 2010 than in 2009 due to a 2.8 % increase in patient discharges and higher net patient revenue per discharge , as discussed below . operating earnings ( as defined in note 23 , quarterly data ( unaudited ) , to the accompanying consolidated financial statements ) were $ 310.0 million in 2010 compared to $ 244.6 million in 2009. operating earnings in 2009 included a net charge of $ 36.7 million associated with government , class action , and related settlements , compared to $ 1.1 million of similar 28 charges in 2010 , as discussed below . net cash provided by operating activities was $ 331.0 million and $ 406.1 million in 2010 and 2009 , respectively . net cash provided by operating activities in 2010 included $ 13.5 million of state income tax refunds associated with prior periods . net cash provided by operating activities in 2009 included $ 73.8 million in net cash proceeds related to the ubs settlement and the receipt of $ 63.7 million in federal and state income tax refunds for prior periods . see the “ results of operations ” and “ liquidity and capital resources ” sections of this item for additional information . in anticipation of the continuing capital market volatility throughout 2010 and the significant changes in the broader healthcare regulatory landscape , we focused our 2010 strategy on : further deleveraging our balance sheet , growing organically , providing high-quality , cost-effective care , pursuing acquisitions of inpatient rehabilitation facilities on a disciplined , opportunistic basis , and adapting to regulatory changes affecting our industry . while growth in adjusted ebitda was the focus of our 2010 deleveraging efforts , we also reduced our total debt outstanding by approximately $ 151 million . additionally , we improved our overall debt profile in october 2010 by refinancing our credit agreement . in that refinancing , we extended debt maturities and reduced floating interest rate exposure by replacing our term loans with later maturing fixed rate senior notes . we used cash on hand , a draw under our new revolving credit facility , and the net proceeds from the october 2010 issuance of $ 275.0 million of 7.25 % senior notes due 2018 and $ 250.0 million of 7.75 % senior notes due 2022 to repay all $ 743.1 million of our former term loans . we also improved the flexibility of our capital structure by amending other terms of our credit agreement to provide for a senior secured revolving credit facility of up to $ 500.0 million , including a $ 260.0 million letter of credit subfacility maturing in october 2015 , and to make other changes that are more consistent with our financial position . for a more detailed discussion of these transactions , our debt profile , leverage , and liquidity , see item 1a , risk factors , the “ liquidity and capital resources ” section of this item , and note 8 , long-term debt , to the accompanying consolidated financial statements . our organic growth resulted , and will continue to result , from increasing our inpatient discharges , actively managing expenses , and pursuing capacity expansions in existing hospitals to meet growing demand in certain markets . our growth from development activities during 2010 consisted of the following : · effective january 1 , 2010 , we purchased a 23-bed inpatient rehabilitation unit in little rock , arkansas through an existing joint venture in which we participate . story_separator_special_tag however , as discussed below , on march 23 , 2010 , president obama signed the patient protection and affordable care act ( the “ ppaca ” ) into law . on march 30 , 2010 , president obama signed into law the health care and education reconciliation act of 2010 , which amended the ppaca ( together , the “ 2010 healthcare reform laws ” ) . these laws include a reduction in annual market basket updates to providers . starting on april 1 , 2010 , the market basket increase of 2.5 % we received on october 1 , 2009 was reduced to 2.25 % . similar reductions to our annual market basket updates are scheduled to occur each year through 2019 , although the amount of each year 's decrease will vary over time and will include to-be-determined productivity adjustments , as discussed below . the 2010 rule includes requirements , referred to as “ coverage requirements , ” for preadmission screening , post-admission evaluations , and individual treatment planning that all delineate the role of physicians in ordering and overseeing patient care . although these changes , that were effective january 1 , 2010 , have not resulted in material modifications to our clinical or business models , they have resulted in significantly increased procedural and documentation requirements for all irfs . in addition , due to the complexity of the changes within the 2010 rule , cms continues to clarify these revised coverage requirements . we have undertaken efforts to educate our employees and affiliated physicians on compliance with these new requirements , and we will continue to train our employees as these requirements are further clarified . in addition , on july 22 , 2010 , cms published in the federal register its irf-pps final rule for fiscal year 2011 ( the “ 2011 rule ” ) . the 2011 rule will be effective for medicare discharges between october 1 , 2010 and september 30 , 2011. the pricing changes in this rule include a 2.5 % market basket update that will be reduced to 2.25 % under the requirements of the 2010 healthcare reform laws discussed above , as well as other pricing changes that impact our hospital-by-hospital base rate for medicare reimbursement . based on our analysis which includes the acuity of our patients over the twelve–month period prior to the rule 's release and incorporates other adjustments of the 2011 rule , we believe the 2011 rule will increase our medicare-related net operating revenues for our irfs by approximately 2.1 % annually . beginning on october 1 , 2011 , the 2010 healthcare reform laws require for the first time a to-be-determined productivity adjustment ( reduction ) to the market basket update on an annual basis . our outpatient services are primarily reimbursed under medicare 's physician fee schedule . by statute , the physician fee schedule is subject to annual automatic adjustment by a sustainable growth rate formula that has resulted in reductions in reimbursement rates every year since 2002. however , in each case , congress has acted to suspend or postpone the effectiveness of these automatic reimbursement reductions . for example , congress passed , and on june 25 , 2010 president obama signed into law , a 2.2 % increase to medicare physician fee schedule payment rates from june 1 , 2010 through november 30 , 2010 , further postponing the statutory reduction of 21.3 % that briefly became effective on june 1 , 2010. subsequently , congress acted to postpone the statutory reduction through december 31 , 2010 and then again through december 31 , 2011. if congress does not extend this relief , as it has done since 2002 , or permanently modify the sustainable growth rate formula by january 1 , 2012 , payment levels for outpatient services under the physician fee schedule will be reduced at that point by more than 25 % . on november 2 , 2010 , cms released its notice of final rulemaking for the medicare physician fee schedule for calendar year 2011. congress further modified this final rule through the physician and therapy relief act of 2010. collectively , these changes would implement a 25 % rate reduction to the practice expense component for reimbursement of therapy expenses for additional procedures when 31 multiple therapy services are provided to the same patient on the same day in a hospital outpatient department . while we will look to mitigate the impact of this rule on our earnings , we currently estimate the reimbursement and other pricing changes will result in a net decrease to our net operating revenues of approximately $ 1.4 million annually , beginning in 2011. however , we can not predict what action , if any , congress will take on the physician fee schedule or what future rule changes cms will implement . we have invested , and will continue to invest , substantial time , effort , and expense in implementing internal controls and procedures designed to ensure regulatory compliance , and we are committed to continued adherence to these guidelines . more specifically , because medicare comprises a significant portion of our net operating revenues , it is important for us to remain compliant with the laws and regulations governing the medicare program and related matters including anti-kickback and anti-fraud requirements . if we were unable to remain compliant with these regulations , our financial position , results of operations , and cash flows could be materially , adversely impacted . see also item 1 , business , “ sources of revenue ” and “ regulation. ” healthcare reform .

results of operations during 2010 , 2009 , and 2008 , we derived consolidated net operating revenues from the following payor sources : replace_table_token_8_th our payor mix is weighted heavily towards medicare . our hospitals receive medicare reimbursements under irf-pps . under irf-pps , our hospitals receive fixed payment amounts per discharge based on certain rehabilitation impairment categories established by hhs . with irf-pps , our hospitals retain the difference , if any , between the fixed payment from medicare and their operating costs . thus , our hospitals benefit from being high-quality , low-cost providers . for additional information regarding medicare reimbursement , see the “ sources of revenues ” section of item 1 , business . 34 under irf-pps , hospitals are reimbursed on a “ per discharge ” basis . thus , the number of patient discharges is a key metric utilized by management to monitor and evaluate our performance . the number of outpatient visits is also tracked in order to measure the volume of outpatient activity each period . from 2008 through 2010 , our consolidated results of operations were as follows : replace_table_token_9_th operating expenses as a % of net operating revenues replace_table_token_10_th 35 additional information regarding our operating results for the years ended december 31 , 2010 , 2009 , and 2008 is as follows : replace_table_token_11_th * excludes 396 , 393 , and 410 full-time equivalents for the years ended december 31 , 2010 , 2009 , and 2008 , respectively , who are considered part of corporate overhead with their salaries and benefits included in general and administrative expenses in our consolidated statements of operations . full-time equivalents included in the above table represent healthsouth employees who participate in or support the operations of our hospitals and exclude an estimate of full-time equivalents related to contract labor .

in addition to 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 . our goal is to help students transition from high school to college to career , with a view to improving student outcomes . we help students study more effectively for college admission exams , find the right college to accomplish their goals , get better grades and test scores while in school , and find internships that allow them to gain valuable skills to help them enter the workforce after college . we strive to improve the overall return on investment in education by helping students learn more in less time and at a lower cost . students subscribe to our digital products and services , which we collectively refer to as chegg services . these include chegg study , chegg tutors , writing tools ( newly acquired in may 2016 ) , enrollment marketing , brand partnership , internships , and test prep . our chegg study service provides step-by-step textbook solutions and expert answers , helping students with their course work . when students need additional help on a subject , they can reach a live tutor online , anytime , anywhere through chegg tutors . when students need help creating citations for their papers , they can use one of our writing tools properties , including easybib , citation machine , bibme , citethisforme , and normasapa . through our strategic partnership with nrccua , announced in january 2017 , we match domestic and international students with colleges , in the united states , to help them find the best fit school for them . we provide access to internships to help students gain skills and experiences that are critical to securing their first job . we provide high school students with an online adaptive test preparation service currently covering the act and sat exams . through our strategic partnership with ingram content group ( ingram ) , we offer required materials , which includes an extensive print textbook and etextbook library for rent and sale , helping students save money compared to the cost of buying new . to deliver services to students , we partner with a variety of third parties . we work with colleges to help shape their incoming classes . we 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 have a large network of students and professionals who leverage our platform to tutor in their spare time and employers who leverage our platform to post their internships and jobs . in addition , because we have a large student user base , local and national brands partner with us to reach the college and high school demographics . during the years ended december 31 , 2016 , 2015 and 2014 , we generated net revenues of $ 254.1 million , $ 301.4 million and $ 304.8 million , respectively , and in the same periods had net losses of $ 42.2 million , $ 59.2 million and $ 64.8 million , respectively . we plan to continue to invest in our long-term growth , particularly further investment in the technology that powers our connected learning platform and the development of additional products and services that serve students . our strategy for achieving and maintaining profitability is centered upon our ability to utilize chegg services to increase student engagement with our connected learning platform . we plan to continue to invest in the expansion of our chegg services to provide a more compelling and personalized solution and deepen engagement with students . in may 2016 , we acquired imagine easy solutions , llc , a privately held online learning company based in new york that provides a portfolio of online writing tools . we anticipate this acquisition to enhance our ability to acquire new students , increase the value to our existing students , and have a meaningful and positive impact on their outcomes . further , we believe this expanded and deeper penetration of the student demographic will allow us to drive further growth in our existing chegg services . in addition , we believe that these 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 chegg services products , will enable us to accomplish profitability and become cash-flow positive for the long-term . our ability to achieve these long-term objectives is subject to numerous risks and uncertainties , including our ability to attract , retain , and increasingly engage the student population , intense competition in our markets , the ability to achieve sufficient contributions to revenue from chegg services and other factors described in greater detail in part i , item 1a , “ risk factors. ” 40 we have presented revenues for our two product lines , chegg services and required materials , based on how students view us and the utilization of our products by them . chegg services includes our products and services we provide to supplement the requirements and help students with their coursework . chegg services also includes our marketing services which help to complete our offering of services to students . required materials includes all products that are essential for students to meet the requirements of their coursework . more detail on our two product lines is discussed in the next two sections titled `` chegg services '' and `` required materials . story_separator_special_tag we will continue to buy used books on ingram 's behalf including books through our buyback program and invoice ingram at cost . we provided ingram with extended payment terms throughout 2016 as we procured print textbooks on their behalf and we moved to normal payment terms commencing in january 2017. seasonality of our business historically , a substantial majority of our revenues were recognized ratably over the term a student rents our print textbooks and etextbooks or has access to our chegg services . this has generally resulted in our highest revenues in the fourth quarter as it reflects more days of the academic year and our lowest revenues in the second quarter as colleges conclude their academic year for summer and there are fewer days of rentals . the recognition of revenues from our etextbooks and chegg services will continue to follow these trends . as a result of our strategic partnership with ingram , however , revenues from all print textbook transactions will now be higher in the first and third quarters as we recognize a commission on the transaction immediately rather than recognizing the revenues ratably over the term the student rents the print textbooks . the variable expenses associated with our shipments of print textbooks and marketing activities historically were 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 . however , these variable expenses related to the shipments of print textbooks have decreased during 2016 as we have completely transitioned the shipping and fulfillment activities related to print textbooks to ingram . as a result of these factors , the most concentrated periods for our revenues and expenses did not necessarily coincide , and comparisons of our historical quarterly operating results on a sequential basis may not provide meaningful insight into our overall financial performance . our strategic partnership with ingram has shifted peak revenues in the periods that a student rents a textbook as a result of the immediate revenue recognition as well as our revenue sharing agreement such we believe our revenues will provide more meaningful insight on a sequential basis going forward . further , while our expenses associated with the print textbook rental business have decreased , our variable expenses related to marketing activities continue to remain highest in the first and third quarter such that our profitability may not provide meaningful insight on a sequential basis . components of results of operations net revenues we derive our revenues from the rental or sale of print textbooks and etextbooks , commissions earned from ingram from the rental of their textbooks , and chegg services , net of allowances for refunds or charge backs from our payment processors who process payments from credit cards , debit cards and paypal . as of november 2016 , we no longer rent our print textbooks and therefore all revenues from print textbook rentals from this date forward are commission-based . we historically generated revenues from the rental of print textbooks and to a lesser extent , through the sales of print textbooks through our website on a just-in-time basis . rental revenues for textbooks that we own were recognized ratably over the term of the rental period , generally two to five months . commissions earned on rental textbooks owned by ingram are recognized immediately when a book ships to the student . revenues from selling textbooks on a just-in-time basis were historically recognized upon shipment and has comprised approximately 12 % of our consolidated net revenues on average over the three years ended december 31 , 2016 . as of december 2016 , revenues from selling textbooks on a just-in-time basis are commission based as a result of the transition to ingram . 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 27 % , 54 % and 70 % of our net revenues in the years ended december 31 , 2016 , 2015 and 2014 , respectively , reflecting increasing growth in our chegg services . similar to the revenue recognition from print textbooks rentals , revenues 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 . 42 as a result of our strategic partnership with ingram , we recognize less revenues from the rental of print textbooks and our required materials product line . instead , our services revenues includes a commission on the total revenues that we earn from ingram upon their fulfillment of a rental transaction using books for which ingram has title and risk of loss . we also generate revenues from chegg services that include our chegg study service , our chegg tutors service , our online writing tools , enrollment marketing services to colleges , brand partnership services that we offer to brands , internship services and our test preparation service currently covering the act and sat exams . chegg services are offered to students through weekly , monthly or annual subscriptions , and we recognize revenues ratably over the respective subscription period . when deciding the most appropriate basis for presenting revenues or costs of revenues , both the legal form and substance of the agreement between us and our business partners are reviewed to determine each party 's respective role in the transaction . where our role in a transaction is that of principal , revenues are recognized on a gross basis . this requires revenue to comprise the gross value of the transaction billed to the customer , after trade discounts , with any related expenditure charged as a cost of revenues .

results of operations the following table summarizes our historical consolidated statements of operations ( in thousands , except percentage of total net revenues ) : replace_table_token_4_th 46 year ended december 31 , 2016 , 2015 and 2014 net revenues net revenues in the year ended december 31 , 2016 decreased $ 47.3 million , or 16 % , compared to the same period in 2015 . rental revenues decreased $ 80.5 million or 67 % , while services revenues increased $ 49.3 million , or 37 % , and sales revenues decreased $ 16.0 million , or 33 % . net revenues in the year ended december 31 , 2015 decreased $ 3.5 million , or 1 % , compared to the same period in 2014. rental revenues decreased $ 61.2 million or 34 % , while services revenues increased $ 44.5 million , or 51 % , and sales revenues increased $ 13.2 million , or 37 % . the decrease in rental revenues during the years ended december 31 , 2016 and 2015 was due to our strategic partnership with ingram . as a result of our strategic partnership , our rental revenues are increasingly classified as services revenues to represent the commission on the total revenues that we earn from ingram upon their fulfillment of a rental transaction using books for which ingram has title and risk of loss rather than recognizing rental revenues from transactions using our print textbooks . the increase in services revenues during the years ended december 31 , 2016 and 2015 was driven primarily from growth across our other offerings for students which included increased revenues from chegg study and our various acquisitions in 2014 and 2016 as well as an increase in the commissions earned from ingram .

we report the gains and losses resulting from such translation as a component of other comprehensive income in equity . at december 31 , 2011 and 2010 , the cumulative foreign currency translation adjustment losses were $ 3.3 million and $ 1.9 million , respectively . transaction gains or losses foreign currency transactions may produce receivables or payables that are fixed in terms of the amount of foreign currency that will be received or paid . a change in the exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of that transaction . that increase or decrease in the expected functional currency cash flows is an unrealized foreign currency transaction gain or loss that generally will be included in the determination of net income for the period in which the exchange rate changes . likewise , a transaction gain or loss ( measured from the transaction date or the most recent intervening balance sheet date , whichever is later ) , realized upon settlement of a foreign currency story_separator_special_tag management 's discussion and analysis of financial condition and results of operations ( “md & a” ) is intended to provide the reader with information that will assist in understanding our financial statements and the reasons for changes in certain key components of our financial statements from period to period . md & a also provides the reader with our perspective on our financial position and liquidity , as well as certain other factors that may affect our future results . the discussion also provides information about the financial results of the segments of our business to provide a better understanding of how these segments and their results affect our financial condition and results of operations . business overview as described in more detail in item 1 of this report , we operate in two operating segments , investment management and real estate ownership . within our investment management segment , we are currently the advisor to the following affiliated publicly-owned , non-actively traded real estate investment trusts : cpa ® :15 , cpa ® :16 – global , cpa ® :17 – global , and cwi . effective january 1 , 2011 , we include our equity investments in the reits in our real estate ownership segment . the equity income or loss from the reits that is now included in our real estate ownership segment represents our proportionate share of the revenue less expenses of the net-leased properties held by the reits . this treatment is consistent with that of our directly-owned properties . results for the years ended december 31 , 2010 and 2009 have been reclassified to conform to the current year presentation . financial highlights ( in thousands ) replace_table_token_9_th we consider the performance metrics listed above , including certain supplemental metrics that are not defined by gaap ( “non-gaap” ) , such as funds from operations — as adjusted ( “affo” ) and adjusted cash flow from operating activities , to be important measures in the evaluation of our results of operations , liquidity and capital resources . we evaluate our results of operations with a primary focus on increasing and enhancing the value , quality and amount of assets under management by our investment management segment and the ability to generate the cash flow necessary to meet our objectives in our real estate ownership segment . results of operations by reportable segment are described below in results of operations . see supplemental financial measures below for our definition of these non-gaap measures and reconciliations to their most directly comparable gaap measure . total revenue increased in 2011 as compared to 2010. the incentive , termination and subordinated disposition revenue recognized in connection with providing a liquidity event for cpa ® :14 shareholders in may 2011 and a higher volume of investments structured on behalf of the reits contributed to increases in revenues from our investment management segment . new investments that we entered into during 2010 and 2011 , including the properties we purchased in may 2011 from cpa ® :14 in connection with the cpa ® :14 asset sales ( note 4 ) , contributed to the increases in revenues in our real estate ownership segment . net income increased in 2011 as compared to 2010. results from operations in our investment management segment were significantly higher during the current year as a result of the incentive , termination and subordinated disposition revenue recognized in may 2011 in connection with providing a liquidity event for cpa ® :14 shareholders and higher volume of investments structured on behalf of the reits . results from operations in our real estate ownership segment benefited from income generated from and gains recognized on the properties we purchased from cpa ® :14 in connection with the cpa ® :14 asset sales as well as income generated from our equity interests in the reits as a result of our $ 121.0 million incremental investment in cpa ® :16 – global in connection with the cpa ® :14/16 merger . w. p. carey 2011 10-k — 24 cash flow from operating activities decreased in 2011 as compared to 2010 , primarily due to a decrease in cash received from providing asset-based management services to the reits as we no longer receive cash asset management fees from cpa ® :14 and cpa ® :16 – global subsequent to the cpa ® :14/16 merger , partially offset by the disposition revenues received , net of income taxes paid , in connection with providing a liquidity event to cpa ® :14 shareholders through the cpa ® :14/16 merger . story_separator_special_tag due to the volatility of the euro/u.s . dollar exchange rate during 2011 , which ranged between a low of $ 1.3188 and a high of $ 1.4439 , the average rate we utilized to measure these operations increased by 5 % versus 2010. this increase had a favorable impact on 2011 results of operations of the cpa ® reits as compared to the prior year period . as a result , our equity in earnings was modestly impacted ; however , as a result of hedging , distributions from cpa ® :16 – global or cpa ® :17 – global were not significantly impacted . while we actively manage our foreign exchange risk , a significant unhedged decline in the value of the euro could have a material negative impact on our navs , future results , financial position and cash flows . such a decline would particularly impact the cpa ® reits , which have higher levels of international investments than we have in our owned portfolio . capital markets during 2011 , capital markets conditions in the u.s. exhibited some signs of post-crisis improvement , including new issuances of cmbs debt and increasing capital inflows to both commercial real estate debt and equity markets , which helped increase the availability of mortgage financing and sustained transaction volume . despite increased volatility in the cmbs market as key market participants began to withdraw , and a credit downgrade of u.s. treasury debt obligations , we have seen the cost for domestic debt stabilize while the federal reserve has kept interest rates low and new lenders , including insurers , have introduced capital . events in the euro-zone have impacted the price and availability of financing and have affected global commercial real estate capitalization rates , which vary depending on a variety of factors including asset quality , tenant credit quality , geography and lease term . investment opportunities through our investment management segment , we earn structuring revenue on the investments we structure on behalf of the reits . our ability to complete these investments on behalf of the reits , and thereby earn structuring revenue , fluctuates based on the pricing and availability of transactions and financing , among other factors . times of economic uncertainty may also present opportunities in the sale-leaseback market . we continue to see investment opportunities that we believe will allow us to structure transactions on behalf of the reits on favorable terms . although capitalization rates have begun to vary widely , we believe that the investment environment remains attractive and that we will be able to achieve the targeted returns of our managed funds . we have benefited from commercial de-leveraging and recent new construction activity that has provided attractive investment opportunities for net lease investors such as w. p. carey and the cpa ® reits . to the extent that these trends continue and we are able to achieve sufficient levels of fundraising , we believe that our investment volume will benefit . while the investment community continues to remain risk averse , we expect to experience increased competition for investments , both domestically and internationally , because we believe that net lease financing market is perceived as a relatively more conservative investment vehicle , and further capital inflows into the marketplace could put additional pressure on the returns that we can generate from our investments and our willingness and ability to execute transactions . in addition , we expect to continue to expand our ability to source deals in other markets . we structured investments on behalf of the reits totaling approximately $ 1.2 billion during 2011 , and based on current conditions , we expect that we will be able to continue to take advantage of the investment opportunities we are seeing in the u.s. and internationally through the near term . international investments comprised 54 % ( on a pro rata basis ) of total investments structured during 2011. while international activity fluctuates from quarter to quarter , we currently expect that such transactions will continue to form a significant portion of the investments we structure , although the relative portion of international investments in any given period will vary . we calculate net operating income for each investment we make as the rent that we receive from a tenant , less debt service for any financing obtained for our investment in such property . the capitalization rate for an investment is a function of the purchase price that we are willing to pay for an investment , the rent that the tenant is willing to pay and the risk we are willing to assume . in our w. p. carey 2011 10-k — 26 target markets for the cpa ® reits , we have recently seen capitalization rates in the u.s. ranging from 6.25 % to 11.0 % and ranging from 6.5 % to 12.0 % internationally . the variability is due largely to the quality of the underlying assets , tenant credit quality , and the terms of the leases . financing conditions through our investment management segment , we earn structuring revenue related in part to the debt we obtain for the cpa ® reits . in addition , through our real estate ownership segment , we are impacted by the cost and availability of financing for our owned properties and , through our equity interests , for properties owned by the reits . during 2011 , we saw continued improvement in the u.s. credit and real estate financing markets despite the u.s. sovereign credit downgrade as new lenders entered the marketplace and the u.s. treasury kept interest rates low . however , the sovereign debt issues in europe that began in the second quarter of 2011 had the impact of increasing the cost of debt in certain international markets and made it more challenging for us to obtain debt for certain international deals . during 2011 , we obtained non-recourse and limited-recourse mortgage financing totaling $ 576.0 million on behalf of the cpa ® reits , including $ 126.9

summary of financing the table below summarizes our non-recourse and limited-recourse debt and credit facility ( dollars in thousands ) : replace_table_token_17_th ( a ) variable-rate debt at december 31 , 2011 included ( i ) $ 233.2 million outstanding under our new unsecured line of credit , ( ii ) $ 47.0 million that has been effectively converted to fixed rates through interest rate swap derivative instruments and ( iii ) $ 42.6 million in mortgage loan obligations that bore interest at fixed rates but have interest rate reset features that may change the interest rates to then-prevailing market fixed rates ( subject to specified caps ) at certain points during their term . ( b ) the increase was primarily due to a higher interest rate on our new unsecured line of credit , which was 4.0 % at december 31 , 2011 , compared to a rate of 1.2 % at december 31 , 2010 under our then-existing unsecured line of credit . as discussed in “line of credit” below , pursuant to its terms , we converted the interest rate on our new line of credit to a eurocurrency rate on january 3 , 2012 , at which time the interest rate was 2.0 % . cash resources at december 31 , 2011 , our cash resources consisted of the following : cash and cash equivalents totaling $ 29.3 million . of this amount , $ 7.4 million , at then-current exchange rates , was held by foreign subsidiaries . we could be subject to restrictions or significant costs should we decide to repatriate these amounts ; a line of credit with unused capacity of $ 210.0 million , excluding amounts reserved for outstanding letters of credit .

item 12. security ownership of certain beneficial owners and management and related stockholder matters the information required by this item will be set forth in the proxy statement of the company relating to the 2015 annual meeting of stockholders to be held on april 29 , 2015 and is incorporated herein by reference . item 13. certain relationships and related transactions and director independence the information required by this item will be set forth in the proxy statement of the company relating to the 2015 annual meeting of stockholders to be held on april 29 , 2015 and is incorporated herein by reference . item 14. principal accounting fees and services the information required by this item will be set forth in the proxy statement of the company relating to the 2015 annual meeting of stockholders to be held on april 29 , 2015 and is incorporated herein by reference . part iv item 15. exhibits , financial statement schedules ( a ) ( 1 ) financial statements required by item 15 are included and indexed in part ii , item 8 ( a ) ( 2 ) financial statement schedules included in part iv of this report . schedule ii is omitted because information is included in notes to financial statements . all other schedules under the accounting regulations of the sec are not required under the related instructions and are inapplicable and , thus have been omitted . ( a ) ( 3 ) see “ exhibit index ” included elsewhere in this report . 33 signatures pursuant to the requirements of section 13 or 15 ( d ) of the securities exchange act of 1934 , the registrant has duly caused this report to be signed on its behalf by the undersigned , thereunto duly authorized . psychemedics corporation date : february 27 , 2015 by : raymond c. kubacki raymond c. kubacki chairman , president and chief executive officer pursuant to the requirements of the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated . raymond c. kubacki chairman , president and chief executive officer , director february 27 , 2015 raymond c. kubacki ( principal executive officer ) neil lerner vice president , finance february 27 , 2015 neil lerner ( principal financial and accounting officer ) harry connick * director harry connick walter s. tomenson , jr * director walter s. tomenson , jr. fred j. weinert * director fred j. weinert * by : raymond c. kubacki attorney-in-fact february 27 , 2015 raymond c. kubacki 34 exhibit index exhibit number description 3.1 amended and restated certificate of incorporation filed on august 1 , 2002 — ( incorporated by reference from the registrant 's quarterly report on form 10-q for the quarter ended september 30 , 2002 ) . 3.2 by-laws of the company — ( incorporated by reference from the registrant 's annual report on form 10-k for the fiscal year ended december 31 , 2001 ) . 4.1 specimen stock certificate — ( incorporated by reference from the registrant 's registration statement on form 8-a filed on july 31 , 2002 ) . 10.2.1 lease dated october 6 , 1992 with mitchell h. hersch , et . al with respect to premises in culver city , california — ( incorporated by reference from the registrant 's annual report on form 10-ksb for the fiscal year ended december 31 , 1992 ) . 10.2.2 security agreement dated october 6 , 1992 with mitchell h. hersch et . al — ( incorporated by reference from the registrant 's annual report on form 10-ksb for the fiscal year ended december 31 , 1992 ) . 10.2.3 first amendment to lease dated with mitchell h. hersch , et.al california — ( incorporated by reference from the registrant 's annual report on form 10-k for the fiscal year ended december 31 , 1997 ) . 10.2.4 second amendment to lease dated with mitchell h. hersch , et.al . california — ( incorporated by reference from the registrant 's annual report on form 10-k for the fiscal year ended december 31 , 1997 ) . 10.2.5 third amendment to lease dated december 31 , 1997 with mitchell h. hersch 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. ” story_separator_special_tag 10pt/normal times new roman , times , serif ; margin : 0 ; text-indent : 15pt '' > during the year ended december 31 , 2013 , the company recorded a tax provision of $ 2.0 million , representing an effective tax rate of 34.4 % . during the year ended december 31 , 2012 , the company recorded a tax provision of $ 2.0 million , representing an effective tax rate of 39.7 % . the change in tax rate was driven by a new allocation method for calculating income tax in california . this new calculation requires income tax to be paid only on the sales made within california . story_separator_special_tag the company 's current intention is to continue to declare dividends to the extent funds are available and not required for operating purposes or capital requirements , and only then , upon approval by the board of directors . there can be no assurance that in the future the company will declare dividends . contractual obligations as of december 31 , 2014 were as follows : replace_table_token_5_th purchase commitment operating leases consist of rent obligations for the company 's facilities . the company has no significant contractual obligation for supply agreements as of december 31 , 2014. significant customers the company did not have any individual customers that exceeded 10 % of revenue for the years ended december 31 , 2014 , 2013 and 2012 , or accounts receivable as of december 31 , 2014 , 2013 and 2012. critical accounting policies the company 's significant accounting policies are described in note 2 to the financial statements included in item 8 of this form 10-k. management believes the most critical accounting policies are as follows : revenue recognition the company is in the business of performing drug testing and reporting the results thereof . the company 's drug testing services include training for collection of samples and storage of positive samples for its customers for an agreed-upon fee per unit tested of samples . the revenues are recognized when the predominant deliverable , drug testing , is provided and reported to the customer . the company recognizes revenue in accordance with accounting standards codification “ asc ” 605 , “ revenue recognition . ” in accordance with asc 605 , the company considers testing , training and storage elements as one unit of accounting for revenue recognition purposes , as the training and storage costs are de minimis and do not have stand-alone value to the customer . the company recognizes revenue as the service is performed and reported to the customer , since the predominant deliverable in each arrangement is the testing of the units . the company also provides expert testimony , when and if necessary , to support the results of the tests , which is generally billed separately and recognized as the services are provided . 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 , long-lived asset lives , 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 . 14 capitalized development costs we capitalize costs related to significant software projects developed or obtained for internal use in accordance with u.s. generally accepted accounting standards . costs incurred during the preliminary project work stage or conceptual stage , such as determining the performance requirements , system requirements and data conversion , are expensed as incurred . costs incurred in the application development phase , such as coding , testing for new software and upgrades that result in additional functionality , are capitalized and are amortized using the straight-line method over the useful life of the software for 5 years . costs incurred during the post-implementation/operation stage , including training costs and maintenance costs , are expensed as incurred . we capitalized internally developed software costs of approximately $ 403,000 , $ 715,000 and $ 794,000 during the years ended december 31 , 2014 , 2013 and 2012 , respectively . the software development is for primarily for two projects . determining whether particular costs incurred are more properly attributable to the preliminary or conceptual stage , and thus expensed , or to the application development phase , and thus capitalized and amortized , depends on subjective judgments about the nature of the development work , and our judgments in this regard may differ from those made by other companies . general and administrative costs related to developing or obtaining such software are expensed as incurred . 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 . the company had net deferred tax liabilities in the amount of $ 2.4 million at december 31 , 2014 , which primarily relate to timing differences . there was an increase of $ 1.4 million from 2013 which was primarily driven by bonus depreciation as part of the tax extender bill passed in december

overview psychemedics corporation is the world 's largest provider of hair testing for drugs of abuse , utilizing a patented hair analysis method involving digestion of hair , enzyme immunoassay 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 in the united states and internationally . during the year ended december 31 , 2014 , the company generated $ 29.2 million in revenue , while maintaining a gross margin of 52 % and pre-tax margins of 16 % . at december 31 , 2014 , the company had $ 3.6 million of cash . during 2014 , the company had operating cash flow of $ 4.5 million and it distributed approximately $ 3.2 million or $ 0.60 per share of cash dividends to its shareholders . in addition , the company spent approximately $ 7.6 million on equipment , leasehold improvements and software development which was primarily financed with a loan of $ 7.0 million . the additional equipment purchased , as well as additional lease space , more than doubled the company 's capacity for anticipated growth , including an opportunity in brazil . to date , the company has paid seventy-three consecutive quarterly cash dividends . 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 , 2014 compared to results for the year ended december 31 , 2013 revenue increased $ 2.3 million or 9 % to $ 29.2 million in 2014 compared to $ 26.9 million in 2013. this increase was due to an increase in volume from new and existing clients . the increase in volume was primarily driven by new customers which is a result of our recently expanded sales force and several sales initiatives .

during the year ended september 30 , 2018 , we utilized a discounted cash flow model that incorporated estimated future cash flows for the next five years and an associated terminal value to determine the fair story_separator_special_tag you should read the following discussion together with the `` selected financial data '' and the consolidated financial statements and the related notes included elsewhere in this report on form 10-k. this discussion contains forward-looking statements that are based on our current expectations , estimates and projections about our business and operations . our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors , including those we discuss under “ risk factors ” and elsewhere in this report on form 10-k. general overview we are the leading provider of postsecondary education for students seeking careers as professional automotive , diesel , collision repair , motorcycle and marine technicians as well as welders and cnc machining technicians as measured by total average full-time enrollment and graduates . we offer certificate , diploma or degree programs at 13 campuses across the united states . additionally , we offer msat programs , including student-paid electives , at our campuses and manufacturer or dealer sponsored training at certain campuses and dedicated training centers . we have provided technical education for 53 years . our revenues consist primarily of student tuition and fees derived from the programs we provide after reductions are made for discounts and scholarships that we sponsor and for refunds for students who wi t hdraw from our programs prior to specified dates . tuition and fee revenue is recognized ratably over the term of the course or program offered . approximately 98 % of our revenues for each of the years ended september 30 , 2018 , 2017 and 2016 consisted of tuition . we supplement our tuition revenues with additional revenues from sales of textbooks and program supplies and other revenues , which are recognized as the transfer of goods or services occurs . through our proprietary loan program , we , in substance , provide the students who participate in this program with extended payment terms for a portion of their tuition . under asc 606 , the portion of tuition revenue related to the proprietary loan program is considered a form of variable consideration . we estimate the amount we ultimately expect to collect from the portion of tuition that is funded by the proprietary loan program , resulting in a note receivable . estimating the collection rate requires significant management judgment . the estimated amount is determined at the inception of the contract and we recognize the related revenue as the student progresses through school . each reporting period , we update our assessment of the variable consideration associated with the proprietary loan program . accordingly , we recognize tuition and loan origination fees financed by the loan and any related interest revenue under the effective interest method required under the loan based on this collection rate . we also provide dealer technician training or instructor staffing services to manufacturers , and we recognize revenue as the transfer of services occurs . tuition revenue and fees generally vary based on the average number of students enrolled and average tuition charged per program . average full-time enrollments vary depending on , among other factors , the number of continuing students at the beginning of a period , new student enrollments during the period , students who have previously withdrawn but decide to re-enroll during the period , graduations and withdrawals during the period . our average full-time enrollments are influenced by : the attractiveness of our program offerings to high school graduates and potential adult students ; the effectiveness of our marketing efforts ; the depth of our industry relationships ; the strength of employment markets and long term career prospects ; the quality of our instructors and student services professionals ; the persistence of our students ; the length of our education programs ; the availability of federal and alternative funding for our programs ; the number of graduates of our programs who elect to attend the advanced training programs we offer and general economic conditions . our introduction of additional program offerings at existing campuses and opening additional campuses is expected to influence our average full-time enrollment . we currently offer start dates at our campuses that range from every three to six weeks throughout the year in our core programs . the number of start dates of advanced training programs varies by the duration of those programs and the needs of the manufacturers which sponsor them . 70 our tuition charges vary by type and length of our programs and the program level , such as core or advanced training . we implemented tuition rate increases of up to 2.5 % , 3.0 % and 3.0 % for each of the years ended september 30 , 2018 , 2017 and 2016 , respectively . we regularly evaluate our tuition pricing based on individual campus markets , the competitive environment and ed regulations . most students at our campuses rely on funds received under various government-sponsored student financial aid programs , predominantly title iv programs and various veterans ' benefits programs , to pay a substantial portion of their tuition and other education-related expenses . approximately 65 % of our revenues , on a cash basis , were collected from funds distributed under title iv programs for the year ended september 30 , 2018 . this percentage differs from our title iv percentage as calculated under the 90/10 rule due to the prescribed treatment of certain title iv stipends under the rule . additionally , approximately 17 % of our revenues , on a cash basis , were collected from funds distributed under various veterans ' benefits programs for the year ended september 30 , 2018 . we extend credit for tuition and fees , for a limited period of time , to the majority of our students . story_separator_special_tag please see further discussion in “ business - regulatory environment - regulation of federal student financial aid programs - incentive compensation ” included elsewhere in this report on form 10-k. we have made adjustments to the compensation practices for our admissions representatives which we believe will be compliant with ed 's november 2015 guidance . the transition period for the new compensation structure will 72 continue through calendar year 2018. we will continue to evaluate other compensation options under these regulations and guidance . our revenues for the year ended september 30 , 2018 were $ 317.0 million , a decline of $ 7.3 million , or 2.3 % , from the prior year . we had an operating loss of $ 35.3 million compared to $ 1.8 million for the same period in the prior year . the decrease in our operating results were due in part to the decline in revenues , and the decline in our average full-time enrollment . the decrease in revenue was partially offset by tuition rate increases . operating results were also impacted by an increase in contract services , advertising , compensation and related costs , student expenses , professional services expense and goodwill and intangible asset impairment expense . we incurred a net loss of $ 32.7 million compared to $ 8.1 million in the prior year . during the year ended september 30 , 2018 , we had an income tax benefit of $ 3.0 million compared to $ 5.4 million in income tax expense for the same period in the prior year . the income tax benefit for the year was due primarily to the release of certain valuation allowance , as impacted by the provisions of the tax cuts and jobs act . veterans ' benefits the percentage of our revenues , on a cash basis , which were collected from funds distributed under various veterans ' benefits programs was approximately 17 % , 19 % and 19 % for the years ended september 30 , 2018 , 2017 and 2016 , respectively . there continues to be congressional activity around the requirements of the 90/10 rule , such as reducing the 90 % maximum under the rule to 85 % or including military and veteran funding in the 90 % portion of the calculation . potential changes to the 90/10 rule could negatively impact our eligibility to participate in title iv programs . a loss of eligibility would adversely affect our students ' access to title iv program funds they need to pay their educational expenses . as described in “ business - regulatory environment - other federal and state programs - veterans ' benefits ” included elsewhere in this report on form 10-k , we are subject to limitations on the percentage of students per program receiving benefits under certain veterans ' benefits programs , unless the program qualifies for certain exemptions . if the va determines that an institution is out of compliance with the applicable limit , the va will continue to provide benefits to current students but will not provide benefits to newly enrolled students until the institution demonstrates compliance . our access to military installations for student recruitment has become more limited due to changes in the transition assistance program ( transition goals , plans , success ) and increased enforcement of the requirement to possess an mou with certain individual military installations . each of our institutions has an mou with the u.s. dod . we have mous with certain key individual installations and are pursuing mous at additional locations . we continue to strengthen and develop relationships with our existing contacts and with new contacts in order to maintain and rebuild our access to military installations . graduate employment identifying employment opportunities and preparing our graduates for these careers is critical to our ability to help our graduates benefit from their education . accordingly , we dedicate significant resources to maintaining an effective employment team , as described in `` business - graduate employment '' included in part i , item 1 of this report on form 10-k. we believe that our graduate employment services provide our students with a compelling value proposition and enhance the employment opportunities for our graduates . the rate has increased for our marine and motorcycle programs , and has remained consistent for our collision repair program . the rate has slightly declined for our automotive and diesel technology and this program continues to face challenges , including graduates who receive higher compensating jobs outside their field of study , changing regulatory standards and guidance on employment classification and availability for employment and fewer internal resources dedicated to employment verification following our reductions in force during 2016 . 73 our employment rate for 2017 graduates was 84 % , compared to 86 % for 2016 graduates . the employment calculation is based on all graduates , including those that completed msat programs , from october 1 , 2016 to september 30 , 2017 and october 1 , 2015 to september 30 , 2016 , respectively , excluding graduates not available for employment because of continuing education , military service , health , incarceration , death or international student status . graduates are counted as employed based on a verified understanding of the graduate 's job duties to assess and confirm that the graduate 's primary job responsibilities are in his or her field of study . see business - graduate employment '' in this report on form 10-k for further discussion of our graduate employment activities . for 2017 , we had 8,539 total graduates , of which 8,086 were available for employment . of those graduates available for employment , 6,818 were employed within one year of their graduation date , for a total of 84 % . for 2016 , we had 9,150 total graduates , of which 8,621 were available for employment . of those graduates available for employment , 7,387 were employed within one year of their graduation date , for a total of 86 % .

results of operations the following table sets forth selected statements of operations data as a percentage of revenues for each of the periods indicated . replace_table_token_6_th year ended september 30 , 2018 compared to year ended september 30 , 2017 revenues . our revenues for the year ended september 30 , 2018 were $ 317.0 million , a decrease of $ 7.3 million , or 2.3 % , as compared to revenues of $ 324.3 million for the year ended september 30 , 2017 . the 4.3 % decrease in our average full-time enrollment resulted in a decrease in revenues of approximately $ 13.7 million . our revenues were impacted by an increase in tuition discounts of $ 2.7 million , primarily attributable to our institutional grant program . we recognized $ 5.7 million on an accrual basis related to revenues and interest under our proprietary loan program for the year ended september 30 , 2018 , as compared to $ 8.0 million recognized on a cash basis for the year ended september 30 , 2017. the decrease in revenue was partially offset by an increase of $ 0.7 million in industry training revenue and tuition rate increases of up to 2.5 % , depending on the program . educational services and facilities expenses . our educational services and facilities expenses for the year ended september 30 , 2018 were $ 182.6 million , representing an increase of $ 1.6 million , or 0.9 % , as compared to $ 181.0 million for the year ended september 30 , 2017 .

forward looking statements some of the statements and information contained in this annual report on form 10-k may constitute forward-looking statements within the meaning of the private securities litigation reform act of 1995. statements regarding the company 's financial position , business strategy and plans and objectives of the company 's management for future operations and other statements that are not historical facts , are forward-looking statements . forward-looking statements are often characterized by the use of words such as `` outlook , '' `` may , '' `` will , '' `` should , '' `` could , '' `` expects , '' `` plans , '' `` anticipates , '' `` contemplates , '' `` proposes , '' `` believes , '' `` estimates , '' `` predicts , '' `` projects , '' `` potential , '' `` continue , '' `` intend , '' or the negative of such terms and other comparable terminology , or by discussions of strategy , plans or intentions , including but not limited to : expectations regarding future market trends ; expectations regarding our future strategic focuses and 2020 financial performance , including our new growth initiative plan ; and expectations regarding the consummation of the sale of our stake in amak and the use of proceeds therefrom , including the realization of expected benefits to the company from the application of such proceeds . forward-looking statements are subject to risks , uncertainties and other factors that could cause actual results to differ materially from those expressed or implied by such statements . such risks , uncertainties and factors include , but are not limited to : not completing , or not completely realizing the anticipated benefits from , the sale of our stake in amak ( including the satisfaction of remaining closing conditions ) ; general economic and financial conditions domestically and internationally ; insufficient cash flows from operating activities ; our ability to attract and retain key employees ; feedstock , product and mineral prices ; feedstock availability and our ability to access third party transportation ; competition ; industry cycles ; natural disasters or other severe weather events , health epidemics and pandemics ( including covid-19 ) and terrorist attacks ; our ability to consummate extraordinary transactions , including acquisitions and dispositions , and realize the financial and strategic goals of such transactions ; technological developments and our ability to maintain , expand and upgrade our facilities ; regulatory changes ; environmental matters ; lawsuits ; outstanding debt and other financial and legal obligations ; difficulties in obtaining additional financing on favorable conditions , or at all ; local business risks in foreign countries , including civil unrest and military or political conflict , local regulatory and legal environments and foreign currency fluctuations ; and other risks detailed in our latest annual report on form 10-k , including but not limited to : `` part i , item 1a . risk factors '' and `` part ii , item 7 . 23 management 's discussion and analysis of financial condition and results of operations '' therein , and in our other filings with the securities and exchange commission ( the `` sec '' ) . there may be other factors of which we are currently unaware or deem immaterial that may cause our actual results to differ materially from the forward-looking statements . in addition , to the extent any inconsistency or conflict exists between the information included in this press release and the information included in our prior releases , reports and other filings with the sec , the information contained in this press release updates and supersedes such information . forward-looking statements are based on current plans , estimates , assumptions and projections , and , therefore , you should not place undue reliance on them . forward-looking statements speak only as of the date they are made , and we undertake no obligation to update them in light of new information or future events . overview the following discussion and analysis of our financial results , as well as the accompanying unaudited consolidated financial statements and related notes to consolidated financial statements to which they refer , are the responsibility of our management . our accounting and financial reporting fairly reflect our business model which is based on the manufacturing and marketing of specialty petrochemicals products and waxes and providing custom manufacturing services . our preferred supplier position in the specialty petrochemicals market is derived from the combination of our reputation as a reliable supplier established over many years , the very high purity of our products , and a focused approach to customer service . in specialty waxes , we are able to deliver to our customers a performance and price point that is unique to our market ; while the diversity of our custom processing assets and capabilities offers solutions to our customers that we believe are uncommon along the u.s. gulf coast . enabling our success in these businesses is a commitment to operational excellence which establishes a culture that prioritizes the safety of our employees and communities in which we operate , the integrity of our assets and regulatory compliance . this commitment drives a change to an emphasis on forward-looking , leading-indicators of our results and proactive steps to continuously improve our performance . we bring the same commitment to excellence to our commercial activities where we focus on the value proposition to our customers while understanding opportunities to maximize our value capture through service and product differentiation , supply chain and operating cost efficiencies and diversified supply options . we believe over time our focus on execution , meeting the needs of our customers and the prudent control of our costs will create value for our stockholders . business environment and risk assessment we believe we are well-positioned to participate in the us chemical industry growth driven by new investments and overall economic growth . story_separator_special_tag as compared to a decrease of $ 5.4 million in 2018 ( primarily due to collection of federal and state research and development credits , carryback claims , and refunds of tax payments on deposit ) ; and net loss for 2019 included non-cash deferred income tax liability of $ 3.0 million as compared to non-cash deferred income tax liability of $ 1.4 million in 2018. operating activities generated cash of $ 19.9 million during fiscal 2018 as compared with $ 30.8 million of cash provided during fiscal 2017. net income decreased by $ 20.3 million and cash provided by operations decreased by $ 10.9 million from 2017 to 2018 due primarily to the following factors : net loss for 2018 included a non-cash depreciation and amortization charge of $ 14.4 million as compared to 2017 which included a non-cash depreciation and amortization charge of $ 11.0 million ; net loss for 2018 included non-cash deferred income tax liability of $ 1.6 million as compared to non-cash deferred income tax liability of $ 5.8 million in 2017 ; trade receivables decreased $ 1.5 million in 2018 as compared to an decrease of $ 3.6 million in 2017 ; income taxes receivable decreased $ 5.4 million in 2018 ( primarily due to collection of federal and state research and development credits , carryback claims , and refunds of tax payments on deposit ) as compared to an increase of $ 1.6 million in 2017 ( primarily due to federal and state research and development credits and carryback claims ) ; and inventory decreased $ 1.9 million in 2018 as compared to an increase of $ 0.6 million in 2017. these significant sources of cash were partially offset by the following decreases in cash provided by operations : net income for 2018 included a non-cash equity in loss from amak of $ 0.9 million as compared to a non-cash equity in loss from amak of $ 4.3 million in 2017 ; and accounts payable and accrued liabilities decreased $ 2.2 million in 2018 as compared to a decrease of $ 7.0 million in 2017 due to the release of post-retirement obligations to a former director as well as the completion of certain capital projects . investing activities cash used by investing activities during fiscal 2019 was approximately $ 6.0 million , representing a decrease of approximately $ 13.8 million compared to fiscal 2018. the majority of the decrease was due to the completion of construction projects for the advanced reformer unit . during 2019 , major capital expenditures included improvements to plant safety and maintenance projects at shr and tc and feedstock pipeline maintenance and upgrade work at shr . cash used by investing activities during fiscal 2018 was approximately $ 19.9 million , representing a decrease of approximately $ 31.8 million compared to fiscal 2017. the majority of the decrease was due to the completion of construction projects for the advanced reformer unit . during 2018 , major capital expenditures included $ 14.9 million to complete the advanced reformer unit , which includes $ 1 million insurance deductible related to the february 2018 fire and $ 3 million for the catalyst replacement in december 2018 , $ 1.3 million for a rail spur addition at shr and $ 0.5 million for a loading rack at shr . financing activities cash used in financing activities during fiscal 2019 was approximately $ 19.7 million versus cash provided of $ 3.7 million during fiscal 2018. during 2019 , we made principal payments on our outstanding credit facilities of $ 21.4 million . we drew $ 2.0 million on revolving facility for working capital purposes . see note 13 for additional discussion on long-term debt . 26 cash provided by financing activities during fiscal 2018 was approximately $ 3.7 million versus cash provided of $ 15.5 million during fiscal 2017. during 2018 , we increased our line of credit and consolidated our acquisition and term loans . we made principal payments of $ 15.4 million on our term debt . we drew $ 18.2 million on our revolving line of credit , primarily to fund our capital projects . see note 13 for additional discussion on long-term debt . credit agreement in october 2014 , tocco , shr , gspl and tc ( shr , gspl and tc collectively the “ guarantors ” ) entered into an amended and restated credit agreement ( as amended to the date hereof , the “ arc agreement ” ) , which originally provided ( i ) a revolving credit facility ( which we refer to herein as the “ revolving facility ” ) with revolving commitments of $ 40.0 million and ( ii ) term loan borrowings consisting of ( a ) a $ 70.0 million single advance term loan incurred to partially finance the acquisition of tc ( which we refer to as the “ acquisition loan ” ) and ( b ) a $ 25.0 multiple advance term loan facility for which borrowing availability ended on december 31 , 2015 ( which we collectively refer to herein as the “ term loan facility ” and , together with the revolving facility , the “ credit facilities ” ) . on july 31 , 2018 , tocco and the guarantors entered into a fourth amendment to the arc agreement ( the “ fourth amendment ” ) pursuant to which the revolving commitments under the revolving facility were increased to $ 75.0 million . pursuant to the fourth amendment , total borrowings under the term loan facility were increased to $ 87.5 million under a single combined term loan , which comprised new term loan borrowings together with approximately $ 60.4 million of previously outstanding term loans under the term loan facility . the $ 60.4 million of previously outstanding term loans included the remaining outstanding balances on the acquisition loan and the multiple advance term loan facility described above .

results of operations our annual report on form 10-k for the year ended december 31 , 2018 includes a discussion and analysis of our financial condition and results of operations for the year ended december 31 , 2017 in item 7 of part ii , “ management 's discussion and analysis of financial condition and results of operations. ” comparison of years 2019 and 2018 the tables containing financial and operating information set forth below are presented to facilitate the discussion of the results of operations , and should not be considered a substitute for , and should be read in conjunction with , the audited consolidated financial statements . specialty petrochemicals segment replace_table_token_11_th * included in cost of sales * * includes $ 9,865 and $ 8,333 for 2019 and 2018 which is included in cost of sales and operating expenses gross revenue gross revenue for the specialty petrochemicals segment decreased from 2018 to 2019 by approximately 10.2 % due to a decrease in specialty petrochemicals sales volume and a decrease in average selling prices . decline in selling price was primarily attributable to lower feedstock costs in 2019 which impacts pricing for our formula customers . specialty petrochemicals product sales specialty petrochemicals product sales revenue decreased 9.9 % from 2018 to 2019 due to a decrease in total sales volume of 5.4 % and a decrease in average selling price of 4.8 % . much of the decline in sales volume was due to lower by-product sales in 2019 compared to 2018. in 2019 , as result of more reliable operation of the advanced reformer unit , we processed more by products through the unit resulting in much higher margin upgraded product . the operation of the advanced reformer unit results in some volumetric yield loss leading to lower volumes . our average selling price decreased primarily because of lower feedstock costs .

these statements represent projections , beliefs and expectations based on current circumstances and conditions and in light of recent events and trends , and you should not construe these statements either as assurances of performances or as promises of a given course of action . instead , various known and unknown factors are likely to cause our actual performance and management 's actions to vary , and the results of these variances may be both material and adverse . a list of the known material factors that may cause our results to vary , or may cause management to deviate from its current plans and expectations , is included in item 1a “ risk factors. ” the following discussion should also be read in conjunction with the consolidated financial statements and notes included herein . business overview nephros is a commercial stage medical device and commercial products company that develops and sells high performance liquid purification filters and hemodiafiltration ( “ hdf ” ) systems . our filters , which are generally classified as ultrafilters , are primarily used in dialysis centers for the removal of biological contaminants from water and bicarbonate concentrate , and used in hospitals for the prevention of infection from water borne pathogens , such as legionella and pseudomonas . because our ultrafilters capture contaminants as small as 0.005 microns in size , they minimize exposure to a wide variety of bacteria , viruses , fungi , parasites and endotoxins . our ultrafilters olpūr h2h hemodiafiltration system , used in conjunction with a standard hemodialysis machine , is the only fda 510 ( k ) cleared medical device that enables nephrologists to provide hemodiafiltration treatment to patient with end stage renal disease ( “ esrd ” ) . additionally , we sell hemodiafilters , which serve the same purpose as dialyzers in an hd treatment , and other disposables used in the hemodiafiltration treatment process . we were founded in 1997 by healthcare professionals affiliated with columbia university medical center/new york-presbyterian hospital to develop and commercialize an alternative method to hemodialysis ( “ hd ” ) . we have extended our filtration technologies to meet the demand for liquid purification in other areas , in particular water purification . the following trends , events and uncertainties may have a material impact on our potential sales , revenue and income from operations : ● the market acceptance of our products in the united states and of our technologies and products in each of our target markets ; ● our ability to effectively and efficiently manufacture , market and distribute our products ; ● our ability to sell our products at competitive prices which exceed our per unit costs ; ● the consolidation of dialysis clinics into larger clinical groups ; and ● the current u.s. healthcare plan is to bundle reimbursement for dialysis treatment which may force dialysis clinics to change therapies due to financial reasons . to the extent we are unable to succeed in accomplishing the foregoing , our sales could be lower than expected and dramatically impair our ability to generate income from operations . recent accounting pronouncements in may 2014 , the financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) 2014-09 , “ revenue from contracts with customers , ” related to revenue recognition . the underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to be entitled to in exchange for the goods or services . the standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in prior accounting guidance . asu 2014-09 provides alternative methods of initial adoption , and was effective for fiscal years beginning after december 15 , 2016 , and interim periods within those annual periods . early adoption was not permitted . in august , 2015 , the fasb issued asu no . 2015-14 , “ revenue from contracts with customers : deferral of the effective date ” . the amendment in this asu defers the effective date of asu no . 2014-09 for all entities for one year . public business entities , certain not-for-profit entities , and certain employee benefit plans should apply the guidance in asu 2014-09 to fiscal years beginning after december 15 , 2017 , including interim reporting periods within that fiscal year . earlier application is permitted only as of fiscal years beginning after december 31 , 2016 , including interim reporting periods with that fiscal year . we are currently reviewing the revised guidance and assessing the potential impact on our consolidated financial statements . 25 in july 2015 , the fasb issued asu no . 2015-11 , “ simplifying the measurement of inventory , ” that requires inventory be measured at the lower of cost and net realizable value and options that currently exist for market value be eliminated . the standard defines net realizable value as estimated selling prices in the ordinary course of business , less reasonably predictable costs of completion , disposal , and transportation and is effective for fiscal years beginning after december 15 , 2016 and interim periods within those fiscal years with early adoption permitted . the guidance should be applied prospectively . we do not believe that the adoption of asu 2015-11 will have a significant impact on our consolidated financial statements . in november 2015 , the fasb issued asu no . 2015-17 , “ balance sheet classification of deferred taxes , ” that requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position . the current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this amendment . story_separator_special_tag we are evaluating the impact of adopting this guidance on our consolidated financial statements . in january 2017 , the fasb issued asu 2017-04 , “ simplifying the test for goodwill impairment , ” which simplifies the test for goodwill impairment . the guidance is effective for us beginning in the first quarter of fiscal year 2020. early adoption is permitted for interim or annual goodwill impairments tests after january 1 , 2017. we are evaluating the impact of adopting this guidance on our consolidated financial statements . going concern our independent registered public accounting firm has included an explanatory paragraph in their report on our consolidated financial statements included in this annual report on form 10-k which expressed doubt as to our ability to continue as a going concern . the accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern . however , there can be no assurance that we will be able to do so . our recurring operating losses and difficulty in generating sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern , and our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty . 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 . the preparation of financial statements in accordance with generally accepted accounting principles in the united states requires application of management 's subjective judgments , often requiring the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods . our actual results may differ substantially from these estimates under different assumptions or conditions . while our significant accounting policies are described in more detail in the notes to consolidated financial statements included in this annual report on form 10-k for the year ended december 31 , 2016 , we believe that the following accounting policies require the application of significant judgments and estimates . revenue recognition revenue is recognized in accordance with accounting standards codification ( “ asc ” ) topic 605. four basic criteria must be met before revenue can be recognized : ( i ) persuasive evidence that an arrangement exists ; ( ii ) delivery has occurred or services have been rendered ; ( iii ) the fee is fixed or determinable ; and ( iv ) collectability is reasonably assured . we recognize revenue related to product sales when delivery is confirmed by our external logistics provider and the other criteria of asc topic 605 are met . product revenue is recorded net of returns and allowances . all costs and duties relating to delivery are absorbed by us . shipments for all products are currently received directly by our customers . we are recognizing the remaining deferred revenue under the bellco license agreement on a straight line basis over the remaining eighty-four month expected obligation period which ends on december 31 , 2021. any difference between payments received and recognized revenue is reported as deferred revenue . deferred revenue on the accompanying december 31 , 2016 consolidated balance sheet is approximately $ 348,000 and is related to the bellco license agreement . we have recognized approximately $ 2,728,000 of revenue related to this license agreement to date and approximately $ 69,000 for the year ended december 31 , 2016 , resulting in $ 348,000 being deferred over the remainder of the expected obligation period . we amortize the deferred revenue monthly over the expected obligation period which ends on december 31 , 2021. as a result , expected revenue to be recognized will be approximately $ 70,000 in each of the next five years . 27 stock-based compensation the fair value of stock options is recognized as stock-based compensation expense in net income . we calculate employee stock-based compensation expense in accordance with asc 718. we account for stock option grants to consultants under the provisions of asc 505-50 , and as such , these stock options are revalued at each reporting period through the vesting period . the fair value of our stock option awards are estimated using a black-scholes option valuation model . this model requires the input of highly subjective assumptions including expected stock price volatility and the estimated life of each award . in addition , the calculation of compensation costs requires that we estimate the number of awards that will be forfeited during the vesting period . the fair value of stock-based awards is amortized over the vesting period of the award . for stock awards that vest based on performance conditions ( e.g . achievement of certain milestones ) , expense is recognized when it is probable that the condition will be met . warrants we account for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement . stock warrants that allow for cash settlement or provide for modification of the warrant exercise price under certain conditions are accounted for as derivative liabilities . we classify derivative warrant liabilities on the balance sheet as a liability , which is revalued using a binomial options pricing model at each balance sheet date subsequent to the initial issuance . a binomial options pricing model requires the input of highly subjective assumptions including expected stock price volatility and the estimated life of each award . the changes in fair value of the derivative warrant liabilities resulting from their remeasurement at each balance sheet date are recorded in current period earnings . accounts receivable we provide credit terms to our customers in connection with purchases of our products . we periodically review customer account activity in order to assess the adequacy of the allowances provided for potential collection issues and returns . factors considered include economic conditions , each customer 's payment and return history and credit worthiness .

fluctuations in operating results our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future . we anticipate that our annual results of operations will be impacted for the foreseeable future by several factors including the progress and timing of expenditures related to our research and development efforts , marketing expenses related to product launches , timing of regulatory approval of our various products and market acceptance of our products . due to these fluctuations , we believe that the period to period comparisons of our operating results are not a good indication of our future performance . 28 the fiscal year ended december 31 , 2016 compared to the fiscal year ended december 31 , 2015 revenues total revenues for the year ended december 31 , 2016 were approximately $ 2,320,000 compared to approximately $ 1,944,000 for the year ended december 31 , 2015. the increase of approximately $ 376,000 , or 19 % , was primarily driven by an increase in the number of filters sold in 2016 versus in 2015. cost of goods sold cost of goods sold was approximately $ 1,026,000 for the year ended december 31 , 2016 compared to approximately $ 884,000 for the year ended december 31 , 2015. the increase of approximately $ 142,000 , or 16 % , in cost of goods sold was primarily related to an increase in the number of filters sold . research and development research and development expenses were approximately $ 1,079,000 and $ 826,000 for the years ended december 31 , 2016 and december 31 , 2015 , respectively . this increase of approximately $ 253,000 , or 31 % , is primarily due to an increase in full-time research and development employees .

we believed the vast movement of information from analog to digital mediums combined with increasing information dependence would change both the global economy and the risk profiles of corporations and government . since then our focus has been on using innovation to address the cyber-implications of this movement , creating software that provides new ways to track and protect data wherever it is stored . our software allows enterprises to protect data stored on premises and in the cloud : sensitive files and emails ; confidential customer , patient and employee data ; financial records ; strategic and product plans ; and other intellectual property . recognizing the complexities of securing data , we have built a single integrated platform for security and analytics to simplify and streamline security and data management . 28 the varonis data security platform , built on patented technology , allows enterprises to protect data against insider threats and cyberattacks . our products enable enterprises to analyze data , account activity and user behavior to detect attacks . our data security platform prevents or limits unauthorized use of sensitive information , prevents potential cyberattacks and limits others by locking down sensitive and stale data . our product efficiently sustains a secure state with automation and addresses additional important use cases including governance , compliance , classification and threat analytics . our data security platform is driven by a proprietary technology , our metadata framework , that extracts critical metadata , or data about data , from an enterprise 's it infrastructure . our data security platform uses this contextual information to map functional relationships among employees , data objects , content and usage . we started operations in 2005 with a vision to make enterprise data more accessible , manageable , secure and actionable . we began offering our flagship product , datadvantage , which provides centralized visibility for enterprise data , in 2006. since then we have continued to invest in innovation and have consistently introduced new products to our customers . in 2006 , we introduced dataprivilege as our self-service web portal for business users . in 2008 , we enhanced our datadvantage offering with datadvantage for unix/linux . in 2009 , we introduced the idu classification framework ( later renamed the data classification engine ) for sensitive data classification and datadvantage for sharepoint . we further enhanced our datadvantage offering by releasing datadvantage for exchange in 2010 , enabling our customers to exercise control over the information transferred through corporate e-mails . in 2011 , we introduced datadvantage for directory services for increased visibility into active directory . in 2012 , we released the data transport engine for intelligent data migration and archiving and datanywhere for secure hybrid cloud collaboration . in 2013 , we introduced datalert to monitor and alert on sensitive data and file activity . in 2014 , we introduced datanswers , a secure enterprise search solution for enterprise data that delivers highly relevant and secure search results to enterprise employees , greatly improving their productivity . in 2015 , we enhanced our datadvantage , dataprivilege and data classification engine offerings ; with datadvantage support for the following microsoft office 365 data stores : exchange online , sharepoint online , onedrive and active directory hosted in azure ; with dataprivilege for sharepoint ; and with data classification engine for unix , sharepoint online and onedrive . in 2016 , we enhanced our datadvantage offerings with additional office 365 support ; datanswers support for sharepoint online and onedrive ; and introduced a new web ui for datalert for comprehensive security management and threat detection . in that year we also added additional user behavior analytics driven threat models to datalert to significantly enhance our detection of insider threats , including potential disgruntled employees , rogue administrators , hijacked accounts and malware , such as ransomware . we also established a behavioral research laboratory where a dedicated team of security experts and data scientists from varonis continually research the latest threats and emerging security vulnerabilities and introduce new behavior-based threat models to datalert . in 2017 , we introduced the automation engine to allow customers to automatically repair and maintain file systems so that organizations are less vulnerable to attacks and security breaches , more compliant and consistently meeting a least privilege model . we enhanced datalert with datalert analytics rewind to allow customers to analyze past user and data activity to identify security breaches that may have occurred in the past and pre-emptively tune out false positives . we have continued to update our web ui for datalert and added new threat models to detect suspicious mailbox , exchange and exchange online behaviors , password resets , unusual activity from personal devices and more . we introduced a new security dashboard in datalert , along with enhanced behavioral analytics , geolocation and more to make it easier than ever to perform security investigations and forensics . in 2017 , we also released gdpr patterns , part of the data classification engine family , to help enterprises identify data that falls under the gdpr and expanded our offerings that can help enterprises meet compliance and regulation requirements . finally , in early 2018 , we introduced varonis edge to extend our proactive security approach to the perimeter enabling customers to spot signs of attack at the perimeter with telemetry from dns , vpn and web proxies . at the core of our technology is our ability to intelligently extract and analyze metadata from an enterprise 's vast , distributed data stores . the broad applicability of our technology has resulted in our customers deploying our platform for numerous use cases for security , it , operations and business personnel . we currently have six product families , and , as of december 31 , 2017 , approximately 52 % of our customers had purchased products in two or more families , one of which was datadvantage for all of these customers . story_separator_special_tag for the years ended december 31 , 2017 , 2016 and 2015 , we had operating losses of $ 13.6 million , $ 15.7 million and $ 19.1 million and net losses of $ 13.7 million , $ 17.7 million and $ 21.3 million , respectively . components of operating results revenues our revenues consist of licenses and maintenance and services revenues . license revenues . license revenues reflect the revenues recognized from sales of software licenses to new customers and sales of additional licenses to existing customers who can purchase additional users for existing licenses or purchase new licenses . substantially all of our license revenues consist of revenues from perpetual licenses , under which we generally recognize the license fee portion of the arrangement upon delivery , assuming all revenue recognition criteria are satisfied . customers may also purchase term license agreements , under which we recognize the license fee ratably , on a straight-line basis , over the term of the underlying maintenance contract , which is typically up to one year . we are focused on acquiring new customers and increasing revenues from our existing customers . 30 maintenance and services revenues . maintenance and services revenues consist of revenues from maintenance agreements and , to a lesser extent , professional services . typically , when purchasing a perpetual license , a customer also purchases a one year maintenance contract for which we charge a percentage of the license fee . customers may renew , and generally have renewed , their maintenance agreements for a fee that is based upon a percentage of the initial license fee paid . customers with maintenance agreements are entitled to receive support and unspecified upgrades and enhancements when and if they become available during the maintenance period . we have experienced growth in maintenance revenues primarily due to increased license sales to new and existing customers and high annual retention of existing customers . we recognize the revenues associated with maintenance ratably , on a straight-line basis , over the associated maintenance period . we measure the perpetual license maintenance renewal rate for our customers over a 12-month period , based on a dollar renewal rate for contracts expiring during that time period . our maintenance renewal rate for each of the years ended december 31 , 2017 , 2016 and 2015 has been over 90 % . we also offer professional services focused on both deployment and training our customers to fully leverage the use of our products . we recognize the revenues associated with these professional services , which are generally provided on a time and materials basis , as we deliver the services , provide the training or when the service term has expired . the following table sets forth the percentage of our revenues that have been derived from licenses and maintenance and services revenues for the periods presented . replace_table_token_6_th our products are used by a wide range of enterprises , including fortune 500 corporations and small and medium-sized businesses . as of december 31 , 2017 , we had approximately 6,250 customers across a broad array of company sizes and industries located in over 75 countries . cost of revenues , gross profit and gross margin our cost of revenues consists of cost of maintenance and services revenues . cost of maintenance and services revenues consist primarily of salaries ( including payroll tax expense related to stock-based compensation ) , employee benefits ( including commissions and bonuses ) and stock-based compensation for our maintenance and services employees ; travel expenses ; and allocated overhead costs for facilities , it and depreciation of equipment . we recognize expenses related to maintenance and services as they are incurred . we expect that our cost of maintenance and services revenues will increase in absolute dollars as we increase our headcount to support revenue growth . gross profit is total revenues less total cost of revenues . gross margin is gross profit expressed as a percentage of total revenues . our gross margin has historically fluctuated slightly from period to period as a result of changes in the mix of license and maintenance and services revenues . due to the seasonality of our business , the first quarter typically results in the lowest gross margin as our first quarter revenues have historically been the lowest for the year and the majority of our expenses are relatively fixed quarter over quarter . conversely , the fourth quarter typically results in the highest gross margin as our fourth quarter revenues have historically been the highest for the year . operating costs and expenses our operating costs and expenses are classified into three categories : research and development , sales and marketing and general and administrative . for each category , the largest component is personnel costs , which consists of salaries ( including payroll tax expense related to stock-based compensation ) , employee benefits ( including commissions and bonuses ) and stock-based compensation . operating costs and expenses also include allocated overhead costs for depreciation of equipment . allocated costs for facilities primarily consist of rent and office maintenance . operating costs and expenses are generally recognized as incurred . we expect personnel costs to continue to increase in absolute dollars as we hire new employees to continue to grow our business . 31 research and development . research and development expenses primarily consist of personnel costs attributable to our research and development personnel , as well as allocated overhead costs . we expense research and development costs as incurred . we expect that our research and development expenses will continue to increase in absolute dollars as we increase our research and development headcount to further strengthen our technology platform and invest in the development of both existing and new products . sales and marketing . sales and marketing expenses are the largest component of our operating costs and expenses and consist primarily of personnel costs , as well as marketing and business development costs , travel expenses , training and education and allocated overhead costs .

results of operations the following tables are a summary of our consolidated statements of operations in dollars and as a percentage of our total revenues . replace_table_token_7_th replace_table_token_8_th 34 comparison of years ended december 31 , 2017 and 2016 revenues replace_table_token_9_th replace_table_token_10_th total revenue growth was achieved due to increased demand for our products and services from existing and new customers , mostly in the domestic market , as well as in international markets . the increase in license revenues was driven by sales to existing customers , larger aggregate sales to 987 new customers in 2017 compared to the aggregate sales to 1,098 new customers in 2016 and sales of new products . as of december 31 , 2017 and 2016 , we had approximately 6,250 and approximately 5,350 customers , respectively . almost all of our license revenues was attributable to sales of perpetual licenses . the increase in maintenance and services revenues was primarily due to an increase in the sale of maintenance agreements resulting from the growth of our installed customer base . in each of 2017 and 2016 , our maintenance renewal rate was over 90 % . of the license and first year maintenance and services revenues recognized in the year ended december 31 , 2017 , 54 % was attributable to revenues from new customers , and 46 % was attributable to revenues from existing customers . of the license and first year maintenance and services revenues recognized in the year ended december 31 , 2016 , 58 % was attributable to revenues from new customers , and 42 % was attributable to revenues from existing customers . as of december 31 , 2017 and 2016 , 52 % and 48 % of our customers , respectively , had purchased two or more product families . cost of revenues and gross margin year ended december 31 , 2017 2016 % change ( in thousands ) cost of revenues $ 20,873 $ 15,843 31.7

overview we began operations in 1997 and have grown to be one of the largest operators of long term acute care hospitals ( “ ltchs ” ) , inpatient rehabilitation facilities ( “ irfs ” ) , outpatient rehabilitation clinics and occupational health centers in the united states based on the number of facilities . as of december 31 , 2017 , we operated 100 ltchs in 27 states , 24 irfs in 10 states , and 1,616 outpatient rehabilitation clinics in 37 states and the district of columbia . concentra , which is operated through a joint venture subsidiary , operated 312 occupational health centers in 38 states as of december 31 , 2017 . concentra also provides contract services at employer worksites and department of veterans affairs community-based outpatient clinics , or “ cbocs. ” as of december 31 , 2017 , we had operations in 47 states and the district of columbia . in 2017 , we changed our internal segment reporting structure to reflect how we now manage our business operations , review operating performance , and allocate resources . for the year ended december 31 , 2017 , our reportable segments include long term acute care , inpatient rehabilitation , outpatient rehabilitation , and concentra . prior year results for the year ended december 31 , 2016 presented herein have been recast to conform to the current presentation . prior to 2017 , we disclosed our financial information in three reportable segments : specialty hospitals , outpatient rehabilitation , and concentra . we had net operating revenues of $ 4,443.6 million for the year ended december 31 , 2017 . of this total , we earned approximately 40 % of our net operating revenues from our long term acute care segment , approximately 14 % from our inpatient rehabilitation segment , approximately 23 % from our outpatient rehabilitation segment , and approximately 23 % from our concentra segment . patients are typically admitted to the company 's ltchs and irfs from general acute care hospitals . these patients have specialized needs , with serious and often complex medical conditions . our outpatient rehabilitation segment consists of clinics that provide physical , occupational , and speech rehabilitation services . our concentra segment consists of occupational health centers and contract services provided at employer worksites and department of veterans affairs cbocs that deliver occupational medicine , physical therapy , veteran 's healthcare , and consumer health services . non-gaap measure we believe that the presentation of adjusted ebitda , as defined below , is important to investors because adjusted ebitda is commonly used as an analytical indicator of performance by investors within the healthcare industry . adjusted ebitda is used by management to evaluate financial performance and determine resource allocation for each of our operating segments . adjusted ebitda is not a measure of financial performance under accounting principles generally accepted in the united states of america ( “ gaap ” ) . items excluded from adjusted ebitda are significant components in understanding and assessing financial performance . adjusted ebitda should not be considered in isolation or as an alternative to , or substitute for , net income , income from operations , cash flows generated by operations , investing or financing activities , or other financial statement data presented in the consolidated financial statements as indicators of financial performance or liquidity . because adjusted ebitda is not a measurement determined in accordance with gaap and is thus susceptible to varying calculations , adjusted ebitda as presented may not be comparable to other similarly titled measures of other companies . we define adjusted ebitda as earnings excluding interest , income taxes , depreciation and amortization , gain ( loss ) on early retirement of debt , stock compensation expense , acquisition costs associated with concentra , physiotherapy , and u.s. healthworks , non-operating gain ( loss ) , and equity in earnings ( losses ) of unconsolidated subsidiaries . we will refer to adjusted ebitda throughout the remainder of management 's discussion and analysis of financial condition and results of operations . the table in “ selected financial data ” reconciles net income and income from operations to adjusted ebitda and should be referenced when we discuss adjusted ebitda . 49 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > december 31 , 2016 . replace_table_token_13_th _ n/m — not meaningful . the following table provides the change in segment performance measures for the year ended december 31 , 2016 , compared to the year ended december 31 , 2015. replace_table_token_14_th _ n/m—not meaningful . long term acute care segment . we operated 103 ltchs at december 31 , 2016 , compared to 109 ltchs at december 31 , 2015. our bed counts , admissions , patient days , and occupancy rate decreased during the year ended december 31 , 2016 due to a decline in the number of hospitals we operated and as a result of transitioning to operating under the new medicare patient criteria regulations . the decline in patient days , which was offset in part by an increase in net revenue per day , resulted in a decrease in net operating revenues of $ 117.6 million , income from operations of $ 32.2 million , and adjusted ebitda of $ 33.6 million for the year ended december 31 , 2016 , compared to the year ended december 31 , 2015. our adjusted ebitda margin declined to 12.6 % for the year ended december 31 , 2016 , compared to 13.6 % for the year ended december 31 , 2015 . 52 inpatient rehabilitation segment . we operated 20 irfs at december 31 , 2016 , compared to 18 irfs at december 31 , 2015. our admissions , patient days , and net revenue per patient day increased during the year ended december 31 , 2016 , principally as a result of two new facilities which commenced operations during the year ended december 31 , 2016. our occupancy rate declined during the year ended december 31 , 2016 , which is principally attributable to our start-up facilities . story_separator_special_tag significant events refinancing on march 6 , 2017 , select entered into a new senior secured credit agreement ( the “ select credit agreement ” ) that provides for $ 1.6 billion in senior secured credit facilities comprising a $ 1.15 billion , seven-year term loan ( the “ select term loan ” ) and a $ 450.0 million , five-year revolving credit facility ( the “ select revolving facility ” and together with the select term loan , the “ select credit facilities ” ) , including a $ 75.0 million sublimit for the issuance of standby letters of credit . select used borrowings under the new select credit facilities to : ( i ) repay the series e tranche b term loans due june 1 , 2018 , the series f tranche b term loans due march 31 , 2021 , and the revolving facility maturing march 1 , 2018 under select 's 2011 senior secured credit facility ; and ( ii ) pay fees and expenses in connection with the refinancing . acquisition of u.s. healthworks and financing on october 23 , 2017 , select announced that concentra group holdings , llc ( “ concentra group holdings ” ) entered into an equity purchase and contribution agreement ( the “ purchase agreement ” ) dated october 22 , 2017 with concentra , concentra group holdings parent , u.s. healthworks , inc. ( “ u.s . healthworks ” ) , and dignity health holding company ( “ dhhc ” ) . on february 1 , 2018 , pursuant to the terms of the purchase agreement , concentra acquired all of the issued and outstanding shares of stock of u.s. healthworks , an occupational medicine and urgent care service provider . in connection with the closing of the transaction , concentra group holdings redeemed certain of its outstanding equity interests from existing minority equity holders and subsequently , concentra group holdings and a wholly owned subsidiary of concentra group holdings parent merged , with concentra group holdings surviving the merger and becoming a wholly owned subsidiary of concentra group holdings parent . as a result of the merger , the equity interests of concentra group holdings outstanding after the redemption described above were exchanged for membership interests in concentra group holdings parent . concentra acquired u.s. healthworks for $ 753.0 million . dhhc , a subsidiary of dignity health , was issued a 20 % equity interest in concentra group holdings parent , which was valued at $ 238.0 million . select retained a majority voting interest in concentra group holdings parent following the closing of the transaction . 54 on february 1 , 2018 , in connection with the transactions contemplated under the purchase agreement , concentra amended its first lien credit agreement ( the “ concentra first lien credit agreement ” ) to , among other things , provide for ( i ) an additional $ 555.0 million in tranche b term loans that , along with the existing tranche b term loans under the concentra first lien credit agreement , have a maturity date of june 1 , 2022 and ( ii ) an additional $ 25.0 million to the $ 50.0 million , five-year revolving credit facility under the terms of the existing concentra first lien credit agreement . the tranche b term loans bear interest at a rate equal to the adjusted libo rate ( as defined in the concentra first lien credit agreement ) plus 2.75 % ( subject to an adjusted libo rate floor of 1.00 % ) for eurodollar borrowings ( as defined in the concentra first lien credit agreement ) , or alternate base rate ( as defined in the concentra first lien credit agreement ) plus 1.75 % ( subject to an alternate base rate floor of 2.00 % ) for abr borrowings ( as defined in the concentra first lien credit agreement ) . all other material terms and conditions applicable to the original tranche b term loan commitments are applicable to the additional tranche b term loans created under this amendment . in addition , concentra entered into a second lien credit agreement ( the “ concentra 2018 second lien credit agreement ” ) that provides for $ 240.0 million in term loans with an initial maturity date of june 1 , 2023. borrowings under the concentra 2018 second lien credit agreement will bear interest at a rate equal to the adjusted libo rate ( as defined in the concentra 2018 second lien credit agreement ) plus 6.50 % ( subject to an adjusted libo rate floor of 1.00 % ) , or alternate base rate ( as defined in the concentra 2018 second lien credit agreement ) plus 5.50 % ( subject to an alternate base rate floor of 2.00 % ) . concentra used borrowings under the concentra first lien credit agreement and the concentra 2018 second lien credit agreement , together with cash on hand , to pay the purchase price for all of the issued and outstanding stock of u.s. healthworks to dhhc and to finance the redemption and reorganization transactions contemplated by the purchase agreement ( as described above ) . 55 regulatory changes the medicare program reimburses us for services furnished to medicare beneficiaries , which are generally persons age 65 and older , those who are chronically disabled , and those suffering from end stage renal disease . net operating revenues generated directly from the medicare program represented approximately 37 % , 30 % , and 30 % of the company 's net operating revenues for the years ended december 31 , 2015 , 2016 , and 2017 , respectively . the principal causes of the decrease in medicare net operating revenues as a percentage of our total net operating revenues are the acquisitions of concentra on june 1 , 2015 and physiotherapy on march 4 , 2016 , which both have a significantly lower relative percentage of medicare net operating revenues as compared to our historical business prior to the acquisitions .

summary financial results year ended december 31 , 2017 for the year ended december 31 , 2017 , our net operating revenues increased 3.7 % to $ 4,443.6 million , compared to $ 4,286.0 million for the year ended december 31 , 2016 . income from operations increased 18.7 % to $ 355.9 million for the year ended december 31 , 2017 , compared to $ 299.8 million for the year ended december 31 , 2016 . our adjusted ebitda increased $ 72.2 million , or 15.5 % , to $ 538.0 million for the year ended december 31 , 2017 , compared to $ 465.8 million for the year ended december 31 , 2016 . our adjusted ebitda margin improved to 12.1 % for the year ended december 31 , 2017 , compared to 10.9 % for the year ended december 31 , 2016 . the following table provides a reconciliation of our segment performance measures to our consolidated operating results for the year ended december 31 , 2017 . replace_table_token_11_th _ n/m — not meaningful . the following table provides the change in segment performance measures for the year ended december 31 , 2017 , compared to the year ended december 31 , 2016 . replace_table_token_12_th _ n/m—not meaningful . long term acute care segment . we operated 100 ltchs at december 31 , 2017 , compared to 103 ltchs at december 31 , 2016 . while our bed counts , admissions , and patient days decreased during the year ended december 31 , 2017 due to a decline in the number of hospitals we operated , our revenue per patient day and occupancy rate improved . since fully transitioning to operating under the new medicare patient criteria regulations , our ltchs have experienced improvements in income from operations and adjusted ebitda as a result of increases in net revenue per patient day and lower relative operating expenses .

cumulatively , from inception through november 15 , 2011 , the date of the termination agreement , $ 242,481 had been recorded as the amortized license fee story_separator_special_tag the discussion and analysis below includes certain forward-looking statements that are subject to risks , uncertainties and other factors , as described in “ risk factors ” and elsewhere in this annual report on form 10-k , that could cause our actual growth , results of operations , performance , financial position and business prospects and opportunities for this fiscal year and the periods that follow to differ materially from those expressed in , or implied by , those forward-looking statements . story_separator_special_tag `` > cost of sales for the year ended december 31 , 2011 totaled $ 16,000 , which is a $ 342,000 or 95 % decrease as compared to the 2010 period . as a percentage of sales , 2011 gross profit was 93 % as compared to 3 % in 2010. the improvement in the gross profit percentage resulted from $ 153,000 in inventory write downs recorded in 2010 compared to $ 1,000 in write downs in 2011 , combined with no fixed production cost incurred in the 2011 period . year 2010 compared to year 2009 sales of the company 's antigen products for the year ended december 31 , 2010 totaled $ 370,000 , which is a $ 79,000 or 27 % increase from the 2009 period . four customers accounted for $ 215,000 of the total 2010 sales and individually represented 10 % , 11 % , 18 % and 19 % of such sales . this increase in sales is primarily attributable to the timing of customer orders as they purchased on-hand stock of inventory . in late 2009 , the company made a strategic decision to suspend antigen production and focus available scientific resources on the acute appendicitis project and single-chain animal product development . in april 2008 , the company entered into a long term exclusive license and commercialization agreement with novartis to develop and launch the company 's novel recombinant single-chain products for bovine species . the total payments received under this agreement were recorded as deferred revenue and was being recognized over future periods through 2020 , with $ 68,000 and $ 64,000 of such license fee recognized in each of years ended december 31 , 2010 and 2009 , respectively . in december 2009 , the company entered into a termination agreement for a prior distribution agreement covering a bovine diagnostic blood test . upon execution of the original agreement , the company received $ 200,000 , which had been recorded as deferred revenue . under the termination agreement a refund of 25 % ( $ 50,000 ) of the development payment previously received was paid and the remaining $ 150,000 , which was no longer subject to any conditions was recorded as license fee income in 2009. cost of sales for the year ended december 31 , 2010 totaled $ 358,000 , which is a $ 352,000 or 50 % decrease as compared to the 2009 period . as a percentage of sales , 2010 gross profit was 3 % as compared to a gross loss of 144 % in 2009. the net decrease in cost of sales is the result of inventory write-downs in 2009 totaling $ 400,000 compared to write-downs in 2010 totaling $ 153,000 as well as the allocation of certain fixed overhead production costs to cost of sales in 2009 which were not allocated in the 2010 period as no production runs of antigen products were made in 2010. selling , general and administrative expenses year 2011 compared to year 2010 selling , general and administrative expenses in the year ended december 31 , 2011 , totaled $ 5,575,000 , which is a $ 1,842,000 or 25 % decrease as compared to the 2010 period . total stock-based compensation and non-qualified option expenses decreased $ 1,044,000 in 2011 primarily due to fewer options being granted combined with lower computed black-scholes values attributable to the options granted . compensation expenses also decreased $ 359,000 in 2011 due to lower employee costs including a reduced amount accrued for incentive pay in the 2011 period compared to the 2010 period . expenses associated with public company costs decreased $ 379,000 in 2011 and legal fees decreased $ 104,000 compared to 2010. year 2010 compared to year 2009 selling , general and administrative expenses in the year ended december 31 , 2010 , totaled $ 7,418,000 , which is a $ 1,365,000 or 23 % increase as compared to the 2009 period . hiring of additional management personnel to advance the appyscore product resulted in approximately $ 329,000 of additional expenses in the 2010 period . approximately $ 611,000 in additional stock-based compensation expense was recorded in 2010 over 2009 amounts which included $ 106,000 related to options granted to animal health advisory board members . selling , general and administrative expenses also increased by $ 213,000 in insurance related costs primarily due to increased medical benefits costs and increases in the company 's insurance limits and public company expense increased by $ 167,000 in 2010 . 27 research and development year 2011 compared to year 2010 research and development expenses in the 2011 period totaled $ 5,666,000 , which is a $ 446,000 or 7 % decrease as compared to the 2010 period . the completion of the enzyme linked immunosorbant assay ( elisa ) based appendicitis clinical trial in mid-2010 resulted in a $ 1,269,000 decrease which was offset by $ 1,030,000 in expenses in 2011 for the appyscore pilot trial . discovery efforts related to the identifying additional markers for the appendicitis test increased expenses by approximately $ 488,000 compared to the 2010 period and general appendicitis research decreased $ 131,000 in the 2011 period . expenses incurred for the single-chain animal product development decreased by approximately $ 963,000 in the 2011 period due to lower expenses associated with the shared development costs under the novartis agreement . story_separator_special_tag we anticipate that expenditures for research and development for the fiscal year ending december 31 , 2012 will decrease compared to the amounts expended in 2011. development and testing costs in support of the current appyscore product as well as costs to file patents and revise and update previous filings on our technologies will continue to be substantial . as we continue towards commercialization of these products , including evaluation of alternatives for possible product management and distribution alternatives and implications of product manufacturing and associated carrying costs such evaluation and related decisions will impact our future capital needs . certain costs such as manufacturing and license / royalty agreements have different financial , logistical and operational implications depending upon the ultimate strategic commercialization path determined . we expect that our primary development expenditures will be to continue to advance product development and testing of the cassette and instrument version of appyscore . during the years ended december 31 , 2011 , 2010 , and 2009 , we expended approximately $ 3,388,000 , $ 3,371,000 and $ 6,290,000 , respectively , in direct costs for appyscore development and related efforts . steps to achieve commercialization of the acute appendicitis product will be an ongoing and evolving process with subsequent generations and expected improvements being made in the test . should we be unable to achieve fda clearance of the appyscore appendicitis test and generate revenues from the product , we would need to rely on other product opportunities to generate revenues and costs that we have incurred for the acute appendicitis patent may be deemed impaired . the exclusive license agreement ( wu license agreement ) between aspenbio and wu was entered into effective may 1 , 2004 , and grants aspenbio exclusive license and right to sublicense wu 's technology ( as defined under the wu license agreement ) for veterinary products worldwide , except where such products are prohibited under u.s. laws for export . the term of the wu license agreement continues until the expiration of the last of wu 's patents ( as defined in the wu license agreement ) to expire . aspenbio has agreed to pay minimum annual royalties of $ 20,000 annually during the term of the wu license agreement and such amounts are creditable against future royalties . royalties payable to wu under the wu license agreement for covered product sales by aspenbio carry a mid-single digit royalty rate and for sublicense fees received by aspenbio carry a low double-digit royalty rate . the wu license agreement contains customary terms for confidentiality , prosecution and infringement provisions for licensed patents , publication rights , indemnification and insurance coverage . the wu license agreement is cancelable by aspenbio with ninety days advance notice at any time and by wu with sixty days advance notice if aspenbio materially breaches the wu license agreement and fails to cure such breach . 29 our animal health technology , licensed from washington university in st. louis ( wu ) in 2004 and further developed at aspenbio , has been used to develop reproduction drugs , initially in the bovine , to be followed by other livestock species of economic importance . the bovine drugs were sub-licensed in 2008 to novartis animal health ( “ nah ” or “ novartis ” ) under a long-term world-wide development and marketing agreement . between 2008 and 2011 , substantial investment and progress in product , regulatory and clinical activities were made on the bovine drug products . a pilot study was completed during late 2010 using the bovine lh drug and subsequently nah informed us that preliminary pilot study results revealed that the pilot study did not demonstrate the outcomes as defined in the success criteria , and nah had requested a refund of the contingent $ 900,000 milestone payment that was tied to the pilot study outcome and notified us that they wished to terminate the agreement . on november 15 , 2011 , aspenbio and novartis executed a termination and settlement agreement ( “ agreement ” ) that provided for the termination of the existing agreements between the company and nah . under the terms of the agreement , the company will pay to nah the refundable $ 900,000 milestone payment and a negotiated amount totaling $ 475,000 of the company 's portion of net shared development expenses . the settlement amount is payable in quarterly installments commencing upon execution of the agreement and for the following six fiscal quarters . upon execution of the agreement , the company gained access to and use of all development and research materials and protocols developed under the prior nah agreements . all of nah 's rights under the prior agreements will be terminated in full once the company pays the settlement amount in full . we have entered and expect to continue to enter into additional agreements with contract manufacturers for the development / manufacture of certain of our products for which we are seeking fda approval . the goal of this development process is to establish current good manufacturing practices ( cgmp ) required for those products for which we are seeking fda approval . these development and manufacturing agreements generally contain transfer fees and possible penalty and /or royalty provisions should we transfer our products to another contract manufacturer . we expect to continue to evaluate , negotiate and execute additional and expanded development and manufacturing agreements , some of which may be significant commitments during 2012. we may also consider acquisitions of development technologies or products , should opportunities arise that we believe fit our business strategy and would be appropriate from a capital standpoint . the company periodically enters into generally short-term consulting and development agreements primarily for product development , testing services and in connection with clinical trials conducted as part of the company 's fda clearance process . such commitments at any point in time may be significant but the agreements typically contain cancellation provisions .

results of operations aspenbio pharma 's independent public accounting firm 's report on its financial statements as of december 31 , 2011 includes a “ going concern ” explanatory paragraph that describes factors that raise substantial doubt about aspenbio pharma 's ability to continue as a going concern . the company 's financial statements for the year ended december 31 , 2011 have been prepared on a going concern basis , which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business . the company has experienced significant recurring losses from operations and negative cash flows from operations , and at december 31 , 2011 had cash and liquid investments of $ 3,971,000 , working capital of $ 2,249,000 , total stockholders ' equity of $ 3,826,000 and an accumulated deficit of $ 65,021,000. to date , the company has in a large part relied on equity financing to fund its operations . we expect to continue to incur losses from operations for the near-term and these losses could be significant as we incur product development , contract consulting and other product development related expenses . we believe that our current working capital position will not be sufficient to meet our estimated cash needs for the remainder of 2012. these factors raise substantial doubt about the company 's ability to continue as a going concern . if the company does not obtain additional capital or financing , then the company would potentially be required to reduce the scope of its research and development and general and administrative expenses and may not be able to continue in business . 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 classification of liabilities that might result in the possible inability of the company to continue as a going concern .

there were no adjustments to prices obtained from third party pricing services during the years ended december 31 , 2011 , 2010 and 2009 that were material to the consolidated financial statements . 61 if quoted story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the accompanying notes thereto included in item 8 and item 15 of this report . in addition to historical information , the following discussion contains forward-looking statements that are subject to risks and uncertainties and other factors described in item 1a of this report . our actual results in future periods may differ from those referred to herein due to a number of factors , including the risks described in the sections entitled “ risk factors ” and “ forward-looking statements ” elsewhere in this report . overview we are a nevada holding company . through our insurance subsidiaries , we provide workers ' compensation insurance coverage to select , small businesses in low to medium hazard industries . workers ' compensation insurance is provided under a statutory system wherein most employers are required to provide coverage for their employees ' medical , disability , vocational rehabilitation , and or death benefit costs for work-related injuries or illnesses . we provide workers ' compensation insurance in 31 states and the district of columbia , with a concentration in california . our revenues are primarily comprised of net premiums earned , net investment income , and net realized gains on investments . we target small businesses , as we believe that this market is traditionally characterized by fewer competitors , more attractive pricing , and stronger persistency when compared to the u.s. workers ' compensation insurance industry in general . we believe we are able to price our policies at levels which are competitive and profitable over the long-term . our underwriting approach is to consistently underwrite small business accounts at an appropriate and competitive price without sacrificing long-term profitability and stability for short-term top-line revenue growth . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; font-style : italic ; font-weight : bold ; '' > net investment income and realized gains ( losses ) on investments we invest our holding company assets , statutory surplus , and the funds supporting our insurance liabilities , including unearned premiums and unpaid losses and lae . we invest in fixed maturity securities , equity securities , short-term investments , and cash equivalents . net investment income includes interest and dividends earned on our invested assets and amortization of premiums and discounts on our fixed maturity securities , less bank service charges and custodial and portfolio management fees . we have established a high quality/short duration bias in our investment portfolio . net investment income was $ 80.1 million , $ 83.0 million , and $ 90.5 million for the years ended december 31 , 2011 , 2010 , and 2009 , respectively . the decrease in net investment income over the past three years was primarily related to a decrease in the average pre-tax book yield on invested assets and a decrease in average invested assets over this period . the decrease in average invested assets was primarily due to repayment of debt and the return of capital to stockholders through share repurchases and stockholder dividends . the average pre-tax book yield on invested assets was 4.1 % , 4.2 % , and 4.5 % at december 31 , 2011 , 2010 , and 2009 , respectively , while the tax-equivalent yield on invested assets was 5.0 % , 5.3 % , and 5.6 % as of the same dates , respectively . realized gains and losses on our investments are reported separately from our net investment income . realized gains and losses on investments include the gain or loss on a security at the time of sale compared to its original or adjusted cost ( equity securities ) or amortized cost ( fixed maturity securities ) . realized losses are also recognized when securities are written down as a result of an other-than-temporary impairment . realized gains on investments were $ 20.2 million , $ 10.1 million , and $ 0.8 million for the years ended december 31 , 2011 , 2010 , and 2009 , respectively . the increase in realized gains on investments for the year ended december 31 , 2011 compared to 2010 resulted from a strategic rebalancing of our investment portfolio in an effort to increase portfolio allocations to taxable fixed income sectors , shorten portfolio duration following the decline in interest rates in the second half of 2011 , and an increase the allocation to high dividend equity securities . we also evaluated our portfolio allocation during the fourth quarter of 2010 and elected to shift $ 20.0 million of our equity securities into a high dividend yield portfolio , which resulted in a $ 9.2 million gain . additional information regarding our investments is set forth under “ –liquidity and capital resources–investments. ” 31 combined ratio the combined ratio , expressed as a percentage , is a key measurement of underwriting profitability . the combined ratio is the sum of the losses and lae ratio , the commission expense ratio , policyholder dividends ratio , and underwriting and other operating expenses ratio . when the combined ratio is below 100 % , we have recorded underwriting income , and conversely , when the combined ratio is greater than 100 % , we can not be profitable without investment income . because we only have one operating segment , holding company expenses are included in our calculation of the combined ratio . the following table provides the calculation of our calendar year combined ratios . replace_table_token_20_th loss and lae ratio . expressed as a percentage , this is the ratio of losses and lae to net premiums earned . we analyze our loss and lae ratios on both a calendar year and accident year basis . story_separator_special_tag the underwriting and other operating expenses ratio is the ratio ( expressed as a percentage ) of underwriting and other operating expenses to net premiums earned and measures an insurance company 's operational efficiency in producing , underwriting , and administering its insurance business . underwriting and other operating expenses are those costs that we incur to underwrite and maintain the insurance policies we issue , excluding commission . these expenses include premium taxes and certain other general expenses that vary with , and are primarily related to , producing new or renewal business . other underwriting expenses include changes in estimates of future write-offs of premiums receivable , general administrative expenses such as salaries and benefits , rent , office supplies , depreciation , and all other operating expenses not otherwise classified separately . policy acquisition costs are variable based on premiums earned ; however , other operating costs are more fixed in nature and become a smaller percentage of net premiums earned as premiums increase . in january 2009 , we restructured our operations as a result of the acquisition of amcomp incorporated in 2008 ( the acquisition ) and incurred one-time pre-tax integration and restructuring charges of approximately $ 5.7 million , including $ 2.8 million of severance benefits , for the year ended december 31 , 2009. in the first quarter of 2010 , we incurred charges of $ 0.9 million related to staffing reductions to adjust our insurance operations to reflect activity levels at that time . in july 2010 , we announced the reorganization of our operations to eliminate duplicative services and better align resources with business activity and growth opportunities at that time . in connection with those efforts and with general cost control efforts , we eliminated approximately 160 positions . in conjunction with that reorganization , we recorded restructuring charges of $ 5.2 million in 2010 , including $ 3.0 million related to workforce reductions and $ 2.2 million related to leases for facilities that were vacated during the year . underwriting and other operating expenses were $ 100.7 million , $ 106.0 million , and $ 138.7 million for the years ended december 31 , 2011 , 2010 , and 2009 , respectively , reflecting efforts to manage our expenses . during the year ended december 31 , 2011 , compensation and facilities related expenses declined $ 8.9 million and $ 3.3 million , respectively , partially offset by a $ 5.2 million increase in premium taxes and assessments , compared to the same period of 2010. underwriting and other operating expenses also included one-time charges totaling $ 1.2 million during 2011 for professional service fees related to acquisition due diligence activity . excluding total restructuring items incurred in 2010 and the one-time professional services fees incurred in 2011 , underwriting and other operating expenses decreased $ 0.4 million for the year ended december 31 , 2011 compared to 2010. the $ 32.7 million decrease in underwriting and other operating expense for the year ended december 31 , 2010 , compared to the same period of 2009 , includes restructuring items for both years . excluding these restructuring charges , underwriting and other operating expenses decreased $ 33.1 million for the year ended december 31 , 2010 , compared to 2009. the decrease reflects efforts to manage our expenses during a period of declining premiums . during the year ended december 31 , 2010 , information technology expenses declined $ 3.5 million and compensation expenses declined $ 16.5 million , compared to the same period of 2009. additionally , there was a $ 5.8 million decrease in premium taxes and a $ 3.6 million decrease in bad debt expense . commission expense ratio . the commission expense ratio is the ratio ( expressed as a percentage ) of commission expense to net premiums earned and measures the cost of compensating agents and brokers for the business we have underwritten . commission expense includes direct commissions to our agents and brokers for the premiums that they produce for us , as well as incentive payments , other marketing costs , and fees . commission expense is net of contingent profit commission income related to the lpt agreement . the contingent profit is an amount based on the favorable difference between actual paid losses and lae and expected paid losses and lae under the lpt agreement . loss expenses are deemed to be 7 % of total losses paid and are paid 33 to us as compensation for management of the lpt claims . the calculation of actual amounts paid versus expected amounts is determined every five years beginning june 30 , 2004 for the first twenty-five years of the agreement . the reinsurers pay us 30 % of any favorable difference between the actual and expected amounts paid at each calculation point . conversely , we could be required to return any previously paid contingent profit commission , plus interest , in the event of unfavorable differences . we accrue the estimated ultimate contingent profit commission through june 30 , 2024. increases or decreases in the estimated contingent profit commission are reflected in commission expense in the period that the estimate is revised . we increased the estimated contingent profit commission by $ 1.8 million and $ 0.8 million in 2011 and 2010 , respectively , resulting in a decrease in the commission expense for those years . for the year ended december 31 , 2009 , we decreased commission expenses by $ 15.0 million as a result of an increase in contingent profit commissions and received cash payment of $ 10.3 million from the reinsurers . at december 31 , 2011 , expected amounts to be paid for losses under the lpt agreement for the period july 1 , 1999 through june 30 , 2014 , were $ 673.4 million , compared to contractually expected losses and lae of approximately $ 775.0 million .

results of operations overall , net income was $ 48.3 million , $ 62.8 million , and $ 83.0 million in 2011 , 2010 , and 2009 , respectively and we recognized underwriting ( losses ) income of $ ( 50.9 ) million , $ ( 21.8 ) million , and $ 8.0 million for the same periods , respectively . underwriting ( loss ) income is determined by deducting losses and lae , commission expense , policyholder dividends , and underwriting and other operating expenses from net premiums earned . key factors that affected our financial performance over the last three years , include : gross premiums written declined 15 % from 2009 to 2010 and increased 30 % from 2010 to 2011 ; net premiums earned declined 20 % from 2009 to 2010 and increased 13 % from 2010 to 2011 ; losses and lae decreased 9 % in 2010 compared to 2009 and increased 36 % in 2011 compared to 2010 ; current accident year loss estimate increased to 77.2 % in 2011 , from 70.9 % in 2010 and 70.2 % in 2009 ; underwriting and other operating expenses declined 24 % from 2009 to 2010 and 5 % from 2010 to 2011 ; and income tax expenses declined from $ 9.3 million in 2009 to $ 3.5 million in 2010 , while we had an income tax benefit of $ 2.1 million in 2011. we measure our performance by our ability to increase stockholders ' equity , including the impact of the deferred reinsurance gain–lpt agreement ( deferred gain ) , over the long-term .

the initial story_separator_special_tag you should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this annual report . some of the information contained in this discussion and analysis or set forth elsewhere in this annual report , including information with respect to our plans and strategy for our business , includes forward-looking statements that involve risks and uncertainties . you should review item 1a . “ risk factors ” and `` special note regarding forward-looking statements '' in this annual report 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 . overview we are a leading provider of software-as-a-service , or saas , solutions that enable our retailer and manufacturer customers to integrate , manage and optimize their merchandise sales across hundreds of online channels . through our platform , we enable our customers to connect with new and existing sources of demand for their products , including e-commerce marketplaces , such as ebay , amazon and newegg , search engines and comparison shopping websites , such as google , bing , nextag and sears , and emerging channels , such as facebook and pinterest . our suite of solutions , accessed through a standard web browser , provides our customers with a single , integrated user interface to manage their product listings , inventory availability , pricing optimization , search terms , data analytics and other critical functions across these channels . we also offer a where to buy solution that allows branded manufacturers to send visitors to their website directly to authorized resellers and to gain insight into consumer behavior . our proprietary cloud-based technology platform delivers significant breadth , scalability and flexibility to our customers . in 2014 , our customers processed approximately $ 5.7 billion in gross merchandise value , or gmv , through our platform . we sell subscriptions to our saas solutions primarily through our direct sales force . our customers include the online businesses of traditional retailers , online retailers and branded manufacturers , as well as advertising agencies that use our solutions on behalf of their retailer clients . as of december 31 , 2014 , we had over 2,800 core customers worldwide , including 32 % of the top 500 u.s. internet retailers , as identified by internet retailer magazine based on their 2013 online sales . we operate in one segment and derive a majority of our revenue from our customers ' access to and usage of our saas solutions , which are organized into modules . each module integrates with a particular type of channel , such as third-party marketplaces , digital marketing websites and authorized reseller websites , or supports a specific online functionality , such as creating webstores or employing rich media solutions on their websites . the majority of our revenue is derived from subscription fees paid to us by our customers for access to and usage of our saas solutions for a specified contract term , which is usually one year . a portion of the subscription fee is typically fixed and is based on a specified minimum amount of gmv that a customer expects to process through our platform . the remaining portion of the subscription fee is variable and is based on a specified percentage of gmv processed through our platform in excess of the customer 's specified minimum gmv amount . we also receive implementation fees , which may include fees for providing launch assistance and training . we have grown our total revenue from $ 53.6 million for the year ended december 31 , 2012 to $ 84.9 million for the year ended december 31 , 2014 , a compound annual growth rate of 25.9 % . our revenue growth has been driven primarily by an increase in the number of core customers utilizing our solutions and an increase in the average revenue per core customer , as well as by an increase in the amount of our customers ' gmv processed through our platform . during 2014 , 22.0 % of our core revenue and 22.5 % of our total revenue was derived from customers located outside of the united states . we currently offer the same solutions internationally as we do in the united states , and we intend to continue expanding our international operations . we do not take title to any of the merchandise processed through our platform and we generally do not collect payments on behalf of our customers . we do not hold any inventory of merchandise and we are not involved in the physical logistics of shipping merchandise to buyers , which is handled by our customers . we plan to grow our revenue by adding new customers , helping our existing customers increase their gmv processed through our platform by taking full advantage of its functionality and selling additional module subscriptions to existing customers to allow them to sell merchandise through new channels . we face a variety of challenges and risks , which we will need to address and manage as we pursue our growth strategy . in particular , we will need to continue to innovate in the face of a rapidly changing e-commerce landscape if we are to remain competitive , and we will need to effectively manage our growth , especially related to our international expansion . in addition , as consumer preferences potentially shift from smaller retailers , we need to continue to add large retailers and branded manufacturers as profitable customers . these customers generally pay a lower percentage of gmv as fees based on the high 33 volume of their gmv processed through the platform . we continue to focus our efforts on increasing value for our customers to support higher rates . story_separator_special_tag although some customers in any given period elect not to renew their contracts with us , our customers that do renew their subscriptions often increase their fixed subscription pricing levels to align with their increasing gmv volumes processed through our platform and may subscribe to additional modules as well . if our subscription dollar retention rate for a period is over 100 % , this means that the increased subscription revenue we recognized from customers that renewed their contracts during the period , or whose contracts did not come up for renewal during the period , more than offset the subscription revenue we lost from customers that did not renew their contracts . for each of the twelve months ended december 31 , 2014 , 2013 and 2012 , our subscription dollar retention rate exceeded 100 % . adjusted ebitda adjusted ebitda represents our earnings before interest expense , income tax expense ( benefit ) and depreciation and amortization , adjusted to eliminate stock-based compensation expense , acquisition-related costs and loss on extinguishment of debt . we believe that excluding these expenses in calculating adjusted ebitda provides our management with a useful measure for period-to-period comparisons of our business . however , adjusted ebitda is not a measure calculated in accordance with gaap . please refer to item 6 . `` selected financial data—adjusted ebitda ” in this annual report for a discussion of the limitations of adjusted ebitda and a reconciliation of adjusted ebitda to net loss , the most comparable gaap measurement , for the years ended december 31 , 2014 , 2013 , 2012 , 2011 and 2010. adjusted ebitda should not be considered as an alternative to any measure of financial performance calculated and presented in accordance with gaap . in addition , adjusted ebitda may not be comparable to similarly titled measures of other companies because other companies may not calculate adjusted ebitda in the same manner that we do . we prepare adjusted ebitda to eliminate the impact of stock-based compensation expense , acquisition-related costs and loss on extinguishment of debt , which we do not consider indicative of our operating performance . we encourage you to evaluate these adjustments , the reasons we consider them appropriate and the material limitations of using non-gaap measures as described in item 6 . `` selected financial data—adjusted ebitda. ” components of operating results revenue we derive the majority of our revenue from subscription fees paid to us by our customers for access to and usage of our saas solutions for a specified contract term , which is usually one year . a portion of the subscription fee is typically fixed and based on a specified minimum amount of gmv that a customer expects to process through our platform . the remaining portion of the subscription fee is variable and is based on a specified percentage of gmv processed through our platform in excess of the customer 's specified minimum gmv . in most cases , the specified percentage of excess gmv on which the variable portion of the subscription is based is fixed and does not vary depending on the amount of the excess . we also receive implementation fees , which may include fees for providing launch assistance and training . because our customer contracts generally contain both fixed and variable pricing components , changes in gmv between periods do not translate directly or linearly into changes in our revenue . we use customized pricing structures for each of our customers depending upon the individual situation of the customer . for example , some customers may commit to a higher specified minimum gmv amount per month in exchange for a lower fixed percentage fee on that committed gmv . in addition , the percentage fee assessed on the variable gmv in excess of the committed minimum for each customer is typically higher than the fee on the fixed , committed portion . as a result , our overall revenue could increase or decrease even without any change in overall gmv between periods , depending on which customers generated the gmv . in addition , changes in gmv from month to month for any individual customer that are below the specified minimum amount would have no effect on our revenue from that customer , and each customer may alternate between being over the committed amount or under it from 35 month to month . for these reasons , while gmv is an important qualitative and long-term directional indicator , we do not regard it as a useful quantitative measurement of our historic revenues or as a predictor of future revenues . the following table shows the percentage of our total revenue attributable to fixed subscription fees plus implementation fees , as compared to the percentage attributable to variable subscription fees , for each of the periods indicated . replace_table_token_5_th we recognize fixed subscription fees and implementation fees ratably over the contract period once four conditions have been satisfied : the contract has been signed by both parties ; the customer has access to our platform and transactions can be processed ; the fees are fixed or determinable ; and collection is reasonably assured . we generally invoice our customers for the fixed portion of the subscription fee in advance , in monthly , quarterly , semi-annual or annual installments . we invoice our customers for the implementation fee at the inception of the arrangement . fixed subscription and implementation fees that have been invoiced are initially recorded as deferred revenue and are generally recognized ratably over the contract term . we invoice and recognize revenue from the variable portion of subscription fees in the period in which the related gmv is processed , assuming that the four conditions specified above have been met . cost of revenue cost of revenue primarily consists of salaries and personnel-related costs for employees providing services to our customers and supporting our platform infrastructure , including benefits , bonuses and stock-based compensation .

results of operations comparison of years ended december 31 , 2014 and 2013 replace_table_token_6_th * = not meaningful revenue year ended december 31 , period-to-period change 2014 2013 amount percentage ( dollars in thousands ) revenue $ 84,901 $ 68,004 $ 16,897 24.8 % the increase in revenue for the year ended december 31 , 2014 was mainly driven by an increase in our core revenue , which is discussed below , and the expansion of our international operations . this growth in core revenue was partially offset by a $ 0.5 million , or 30.0 % , decrease in our non-core revenue over the same period , as the products associated with our non-core , legacy acquisitions became a less significant part of our overall business focus . our revenue from international operations of $ 19.1 million , or 22.5 % of total revenue , for the year ended december 31 , 2014 increased from $ 14.2 million , or 20.8 % of total revenue , for the year ended december 31 , 2013 . the increase in revenue from our international operations was primarily attributable to an increase in the number of international customers . during 2014 , we continued our expansion in the asia-pacific and latin america regions . 38 core revenue replace_table_token_7_th the growth in core revenue was primarily attributable to a 17.0 % increase in the number of core customers using our platform at december 31 , 2014 as compared to december 31 , 2013 . the increase in core customers accounted for 88.8 % of the increase in core revenue during the year ended december 31 , 2014 . in addition , we experienced a 2.4 % increase in the average revenue per core customer during the year ended december 31 , 2014 as compared to the year ended december 31 , 2013 , which accounted for 11.2 % of the increase in core revenue during the period .

we provide our customers with highly differentiated services across their development portfolios using either our therapeutic expertise as a full service provider or utilizing our global scale and systems as a functional service provider . we consistently and predictably deliver clinical development services , consulting , and real world evidence support in a complex environment and offer a proprietary , operational approach to the delivery of our projects through our trusted process ® methodology . our service offerings focus on optimizing the development of and , therefore , the commercial potential for , our customers ' new biopharmaceutical compounds , enhancing returns on their r & d investments , and reducing their overhead costs by offering an attractive variable cost alternative to fixed cost , in-house resources . our extensive range of services supports the entire drug development process from phase i to phase iv and allows us to offer our customers an integrated suite of investigative site support and clinical development services . we offer these services across a wide variety of therapeutic areas , bringing deep clinical expertise with a primary focus on phase i to phase iv clinical trials delivered in both a turnkey full service clinical model , as well as large scale functional service models . we provide total biopharmaceutical program development while also providing discrete services for any part of a clinical trial . our combination of service area experts and depth of clinical capability allows for enhanced protocol design and actionable trial data . we have two reportable segments : clinical development services and phase i services . clinical development services offers a variety of clinical development services , including full-service global studies , as well as ancillary services such as clinical monitoring , investigator recruitment , patient recruitment , data management , study reports to assist customers with their drug development process , and specialized consulting services . phase i services focuses on clinical development services for phase i trials that include scientific exploratory medicine , first-in-human studies through proof-of-concept stages and support for phase i studies in established compounds . for financial information regarding revenue and long-lived assets by geographic areas , please see `` note 14 - operations by geographic location '' to our consolidated financial statements included in part ii , item 8 , in this annual report on form 10-k. the discussion and analysis of our financial condition and results of operations herein is presented on a consolidated basis . because our clinical development services segment accounts for substantially all of our business operations and approximately 99 % of our net service revenue for the year ended december 31 , 2016 , we believe that a discussion of our reportable segments ' operations would not be meaningful disclosure for investors . see further discussion in `` note 13 - segment information '' to our consolidated financial statements included in part ii , item 8 , in this annual report on form 10-k. we earn net service revenue primarily for services performed under contracts for global clinical drug trials , based upon a combination of milestones and output measures that are specific to the services performed and defined by the contract . engagements for phase ii to phase iv clinical trials , which represent the majority of our revenue , are typically long duration contracts ranging from several months to several years . the contracts for these engagements typically cover the detailed scope of work , phases , milestones , billing schedules and processes for review of work and clinical results . contracts are individually priced and negotiated based on the anticipated level of effort required to complete the project , the complexity and performance risks , and the level of competition in the market . 50 direct costs associated with these contracts consist principally of compensation expense and benefits associated with our employees and other employee-related costs . while we can manage the majority of these costs relative to the amount of contracted services we have during any given period , direct costs as a percentage of net service revenue can vary from period to period . such fluctuations are due to a variety of factors , including , among others : ( i ) the level of staff utilization created by our ability to effectively manage our workforce , ( ii ) adjustments to the timing of work on specific customer contracts , ( iii ) the experience mix of personnel assigned to projects , and ( iv ) the service mix and pricing of our contracts . in addition , as global projects wind down or as delays and cancellations occur , staffing levels in certain countries or functional areas can become misaligned with the current business volume . new business awards and backlog we add new business awards to backlog when we enter into a contract or when we receive a written commitment from the customer selecting us as its service provider , provided that ( i ) the customer has received appropriate internal funding approval , ( ii ) the project or projects are not contingent upon completion of another trial or event , ( iii ) the project or projects are expected to commence within the next 12 months and ( iv ) the customer has entered or intends to enter into a comprehensive contract as soon as practicable . contracts generally have terms ranging from several months to several years . we recognize revenue on these awards as services are performed , provided we have entered into a contractual commitment with the customer . our new business awards , net of cancellations of prior awards , for the years ended december 31 , 2016 , 2015 and 2014 were $ 1.22 billion , $ 1.18 billion and $ 0.95 billion , respectively , representing a 4.0 % increase from 2015 to 2016 and a 23.9 % increase from 2014 to 2015. net new business awards were higher for the year ended december 31 , 2016 , due to a lower cancellation rate across our therapeutic service offerings . story_separator_special_tag other direct costs increased by $ 20.2 million for the year ended december 31 , 2016 , compared to the prior year primarily due to ( i ) increases in travel , information technology and facilities costs from increased headcount , ( ii ) an increase in non-labor project related costs and ( iii ) the one-time benefits included in 2015 , as discussed below . direct costs increased by $ 27.3 million , or 5.3 % , to $ 542.4 million for the year ended december 31 , 2015 from $ 515.1 million for the year ended december 31 , 2014 , primarily due to increased salaries , benefits and incentive compensation . this increase in employee-related expenses was partially offset by a reduction in direct costs of $ 37.8 million related to fluctuations in foreign currency exchange rates during the year ended 54 december 31 , 2015 compared to the prior year . other direct costs decreased by $ 5.7 million for the year ended december 31 , 2015 , compared to the prior year primarily due to ( i ) 2014 including a provision for non-recoverable value added tax ( `` vat '' ) expenses , as compared to 2015 , including a release of a portion of these liabilities , ( ii ) certain other one-time benefits primarily due to the favorable resolution of disputed pass-through costs realized in the first and third quarters of 2015 , ( iii ) decreases in subcontract services , ( iv ) a reduction in certain non-labor project related costs , and ( v ) an increase in vendor contract rebates . partially offsetting these decreases was an increase in expenses related to contract labor , travel , facilities , and information technology costs to support revenue growth . as discussed above , direct costs for the year ended december 31 , 2015 included certain one-time benefits that we do not believe are representative of ongoing operations , which we estimate to be approximately $ 6.6 million . specifically , in the first quarter of 2015 we realized benefits of $ 5.1 million related to ( i ) a favorable resolution of several vat and other tax items , ( ii ) a change in estimate related to 2014 employee incentive compensation , and ( iii ) a favorable settlement of disputed pass-through costs . during the third quarter of 2015 , we realized a benefit of $ 4.9 million from the favorable resolution of additional disputed pass-through costs ; however , we had initially recorded approximately $ 3.4 million of these obligations in the first half of 2015 , resulting in the net favorable impact on the full year ended december 31 , 2015 of approximately $ 1.5 million . as we continue to expand our business , initiate new studies and invest in resources to support new customer proposals , the increase in headcount-related expenses will outpace our revenue growth , resulting in gross margins remaining flat or declining slightly in the short term . partially offsetting this anticipated decrease in gross margin , we expect to continue to see the benefits from a number of our cost-saving initiatives including ( i ) leveraging our therapeutic management overhead infrastructure over the expanded revenue base , ( ii ) improving the utilization of our facilities , and ( iii ) the consolidation of our clinical trial management systems resulting in our achieving better efficiencies due to standardization . as noted above , reimbursable out-of-pocket expenses increased by 19.8 % , or $ 95.8 million , to $ 580.3 million for the year ended december 31 , 2016 from $ 484.5 million for the year ended december 31 , 2015 . reimbursable out-of-pocket expenses increased by 31.3 % , or $ 115.4 million , to $ 484.5 million for the year ended december 31 , 2015 from $ 369.1 million for the year ended december 31 , 2014. reimbursable out-of-pocket expenses fluctuate significantly from period to period based on the timing of program initiation or closeout and the mix of program complexity and do not necessarily change in direct correlation to net service revenues . selling , general and administrative expenses for the years ended december 31 , 2016 , 2015 and 2014 , selling , general and administrative expenses were as follows ( dollars in thousands ) : replace_table_token_10_th 55 the following is a summary of the year-over-year fluctuation in components of our selling , general and administrative expenses during the year ended december 31 , 2016 as compared to the year ended december 31 , 2015 and the year ended december 31 , 2015 as compared to the year ended december 31 , 2014 ( in thousands ) : replace_table_token_11_th selling , general and administrative expenses increased by $ 15.8 million , or 10.1 % , to $ 172.4 million for the year ended december 31 , 2016 from $ 156.6 million for the year ended december 31 , 2015 , including a $ 4.0 million benefit from favorable fluctuations in foreign currency exchange rates compared to the prior year . the increase was primarily driven by ( i ) an increase in salaries , benefits and incentive compensation , principally as a result of the additions in personnel to support the growth of our business and the one-time benefit from settlement of certain employee related liabilities in 2015 , ( ii ) an increase in bad debt expense resulting from an increase in billed and unbilled receivables exposure , and ( iii ) an increase in travel costs primarily driven by increased headcount . these cost increases were offset by reductions in ( i ) professional fees for legal and accounting fees associated with implementing sarbanes-oxley and tax planning that occurred in 2015 , and ( ii ) facilities and it related costs through improved utilization of our existing infrastructure .

results of operations year ended december 31 , 2016 compared to the years ended december 31 , 2015 and 2014 the following table sets forth amounts from our consolidated financial statements along with the percentage change for years ended december 31 , 2016 , 2015 and 2014 ( dollars in thousands ) : replace_table_token_6_th 52 net service revenue and reimbursable out-of-pocket expenses for the years ended december 31 , 2016 , 2015 and 2014 , total revenue was comprised of the following ( dollars in thousands ) : replace_table_token_7_th net service revenue increased $ 115.6 million , or 12.6 % , to $ 1,030.3 million for the year ended december 31 , 2016 from $ 914.7 million for the year ended december 31 , 2015 . in 2016 , our revenue grew across all therapeutic areas and has been particularly strong in the central nervous system , oncology and other complex therapeutic areas . the growth in revenue during 2016 was primarily due to our strong backlog at the beginning of the year , the acceleration of a group of projects with one of our sponsors , revenue mix , and the growth of our functional service provider business . our net service revenue for the year ended december 31 , 2016 was negatively impacted by fluctuations in foreign exchange rates and contractual currency adjustment provisions of $ 11.7 million , as the u.s. dollar has strengthened compared to the prior year . net service revenue increased $ 105.0 million , or 13.0 % , to $ 914.7 million for the year ended december 31 , 2015 from $ 809.7 million for the year ended december 31 , 2014. the increase in 2015 is primarily driven by the growth in awards , a lower cancellation rate of previously awarded business and a positive revenue mix . the growth in our revenue in 2015 was across all therapeutic areas and was particularly strong in the complex therapeutic areas .

if the fair value of a reporting unit is less than the reporting unit 's carrying value , the company performs the second step of the test for impairment of goodwill in which the company compares the implied fair value of the reporting unit 's goodwill story_separator_special_tag the following discussion of our financial condition and results of operations should be read together with the financial statements and the related notes set forth in item 8 . “ financial statements and supplementary data. ” the following discussion also contains forward-looking statements that involve a number of risks and uncertainties . see part i , “ special note regarding forward-looking statements ” for a discussion of the forward-looking statements contained below and part i , item 1a . “ risk factors ” for a discussion of certain risks that could cause our actual results to differ materially from the results anticipated in such forward-looking statements . overview we provide talent management solutions delivered as software-as-a-service , or saas . our solutions support the management of the entire employee lifecycle , with a focus on learning and development that is fundamental to the growth of employees and organizations . our enterprise and mid-market solution is a unified cloud-based platform that addresses critical talent needs throughout the entire employee lifecycle , from recruitment , onboarding , training and collaboration , to performance management , compensation , succession planning and analytics . the platform is composed of several products , focused on recruiting , learning management , performance management and analytics . the platform also helps improve business execution through integrating with an organization 's extended enterprise of clients , vendors and distributors by delivering training , certification programs and other content . we introduced cornerstone edge and cornerstone insights in may 2015 to add flexibility and extensibility to our suite of applications while enabling clients , collaborators and developers to derive more value out of their talent investments . we also provide consulting services for configuration and training , as well as third-party e-learning content for use with our solution . after the initial purchase of our solution , we continue to market and sell to our existing clients , who may renew their subscriptions , add additional products , broaden the deployment of the solution across their organizations and increase usage of the solution over time . we also offer cornerstone for salesforce and cornerstone growth edition . cornerstone for salesforce is a cloud-based learning solution developed natively on the salesforce.com platform . cornerstone for salesforce allows organizations to provide seamless access to sales enablement and just-in-time training embedded within salesforce . cornerstone growth edition is a cloud-based talent management solution with learning and performance product offerings targeted to organizations with 250 or fewer employees . we currently do not include the number of clients and users of our cornerstone for salesforce and cornerstone growth edition solutions in our client and user count metrics as we believe the client and user count metrics for our enterprise and mid-market solution give a better indication of our overall performance . we currently have approximately 2,600 clients who use our enterprise and mid-market solution to empower more than 23.8 million users across 191 countries in 42 different languages . for 2015 and 2014 , no single client or distributor accounted for more than 10 % of our revenue . the number of clients using our enterprise and mid-market solution has grown from 105 at december 31 , 2007 to 1,631 at december 31 , 2013 , 2,153 at december 31 , 2014 and 2,595 at december 31 , 2015 . 41 we generate most of our revenue from the sale of our solutions pursuant to multi-year client agreements . client agreements for our enterprise and mid-market solution typically have terms of three years . our sales processes are typically competitive , and sales cycles generally vary in duration from two to nine months depending on the size of the potential client . we generally price our enterprise and mid-market solution based on the number of products purchased and the permitted number of users with access to each product . we expect to price cornerstone edge based on usage and to generate platform fees from independent software vendors that build or integrate applications on our platform . we also generate revenue from consulting services for configuration , training , and consulting , as well as from the resale or hosting of third-party e-learning content . we sell our solutions through our direct sales teams and , to a lesser extent , indirectly through our distributors . we intend to continue to invest in our direct sales and distribution activities to address our market opportunity . we generally recognize revenue from subscriptions ratably over the term of the client agreement and revenue from consulting services as the services are performed . in certain instances , our clients request enhancements to the underlying features and functionality of our enterprise and mid-market solution , and in these instances , revenue from subscriptions is recognized over the remaining term of the agreement once the additional features are delivered to the client . we generally invoice our clients a portion of the annual subscription fees upfront for multi-year subscriptions and upfront for consulting services . for amounts not invoiced in advance for multi-year subscriptions or consulting services , we invoice under various terms over the subscription and service periods . we record amounts invoiced for annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our balance sheet . with the growth in the number of clients , our revenue has grown to $ 339.7 million for the year ended december 31 , 2015 from $ 263.6 million for the same period in 2014 . we have historically experienced seasonality in terms of when we enter into client agreements . we usually sign a significantly higher percentage of agreements with new clients , as well as renewal agreements with existing clients , in the fourth quarter of each year . story_separator_special_tag we generally recognize subscription revenue over the contract period , and as a result of our revenue recognition policy and the seasonality of when we enter into new client agreements , revenue from client agreements signed in the current period may not be fully reflected in the current period . as a result , revenue increases period over period are primarily from contracts that existed prior to the beginning of that period . bookings . under our revenue recognition policy , we generally recognize subscription revenue from our client agreements ratably over the terms of those agreements . for this reason , the major portion of our revenue for a period will be from client agreements signed in prior periods rather than from new business activity during the current period . in order to assess our business performance with a metric that more fully reflects current period business activity , we track bookings , which is a non-gaap financial measure we define as the sum of revenue and the change in the deferred revenue balance for the period . we include changes in the deferred revenue balance to calculate bookings so it better reflects new business activity in the period as evidenced by prepayments or billings under our billing policies arising from acquisition of new clients , sales of additional products to existing clients , the addition of incremental users by existing clients and client renewals . bookings are affected by our billing terms , and any changes in those billing terms may shift bookings between periods . due to the seasonality of our sales , bookings growth is inconsistent from quarter to quarter throughout a calendar year . for a reconciliation of bookings to revenue , please see “ results of operations – revenue and metrics . ” 43 annual dollar retention rate . we define annual dollar retention rate as the implied monthly recurring revenue under client agreements at the end of a fiscal year , divided by the implied monthly recurring revenue , for that same client base , at the end of the prior fiscal year and excluding implied monthly recurring revenue from clients of our cornerstone for salesforce and cornerstone growth edition solutions . this ratio does not reflect implied monthly recurring revenue for new clients added between the end of the prior fiscal year and the end of the current fiscal year . beginning in 2013 , incremental sales up to and not exceeding the original renewal amount to the existing client base are included in this ratio . we define implied monthly recurring revenue as the total amount of minimum recurring revenue to which we have a contractual right under each of our client agreements over the entire term of the agreement , but excluding non-recurring support , consulting and maintenance fees , divided by the number of months in the term of the agreement . implied monthly recurring revenue is substantially comprised of subscriptions to our enterprise and mid-market solution . we believe that our annual dollar retention rate is an important metric to measure the long-term value of client agreements and our ability to retain our clients . number of clients . we believe that our ability to expand our client base is an indicator of our market penetration and the growth of our business as we continue to invest in our direct sales teams and distributors . our client count includes contracted clients for our enterprise and mid-market solution as of the end of the period and excludes clients of our cornerstone for salesforce and cornerstone growth edition solutions . number of users . since our clients generally pay fees based on the number of users of our solutions within their organizations , we believe the total number of users is an indicator of the growth of our business . our user count includes active users for our enterprise and mid-market solution and excludes users of our cornerstone for salesforce and cornerstone growth edition solutions . key components of our results of operations sources of revenue and revenue recognition our solutions are designed to enable organizations to meet the challenges they face in maximizing the productivity of their human capital . we generate revenue from the following sources : subscriptions to our solutions . clients pay subscription fees for access to our solutions for a specified period of time , typically three years for our enterprise and mid-market solution and annual or three-year periods for our cornerstone for salesforce and cornerstone growth edition solutions . fees are based on a number of factors , including the number of products purchased and the number of users having access to a solution . we generally recognize revenue from subscriptions ratably over the term of the agreements . consulting services . we offer our clients assistance in implementing our solutions and optimizing their use . consulting services include application configuration , system integration , business process re-engineering , change management and training services . services are billed either on a time-and-material or a fixed-fee basis . these services are generally purchased as part of a subscription arrangement and are typically performed within the first several months of the arrangement . clients may also purchase consulting services at any other time . our consulting services are performed by us directly or by third-party service providers we engage . clients may also choose to perform these services themselves or engage their own third-party service providers . we generally recognize revenue from fixed fee consulting services using the proportional performance method over the period the services are performed and as time is incurred for time-and-material arrangements . e-learning content . we resell third-party on-line training content , which we refer to as e-learning content , to our clients . we also host other e-learning content provided by our clients . we generally recognize revenue from the resale of e-learning content as it is delivered and recognize revenue from hosting as the hosting services are provided .

results of operations the following table sets forth our results of operations for each of the periods indicated ( in thousands ) . the period-to-period comparison of financial results is not necessarily indicative of future results . replace_table_token_6_th 52 the following table sets forth our revenue and key metrics that we use to evaluate our business , measure our performance , identify trends affecting our business , formulate financial projections and make strategic decisions : metrics replace_table_token_7_th revenue increased $ 76.1 million , or 29 % , for the year ended december 31 , 2015 as compared to the same period in 2014 . the increase was the result of a $ 51.5 million increase in revenue from existing clients , specifically , revenue from client agreements that were entered into prior to january 1 , 2015. in addition , revenue increased by $ 24.6 million from client agreements that were entered into during the year ended december 31 , 2015 . revenue increased by $ 78.4 million , or 42 % , for the year ended december 31 , 2014 as compared to the same period in 2013. the increase was primarily the result of a $ 64.8 million increase in revenue from existing clients , specifically , revenue from client agreements that were entered into prior to january 1 , 2014. in addition , revenue increased by $ 13.6 million from the client agreements that were entered into during the year ended december 31 , 2014. the rate at which revenue increased year over year declined in the current period , from a 42 % revenue increase from the year ended december 31 , 2013 to the year ended december 31 , 2014 to a 29 % revenue increase from the year ended december 31 , 2014 to the year ended december 31 , 2015. our growth rate can depend on a variety of factors , such as the size , volume and complexity of our agreements with our

during the year ended march 31 , 2018 , our financing activities consisted of the following : in the year ended march 31 , 2018 , the company raised approximately $ 5.8 million in net proceeds after sales commissions and expenses of the offering through the atm financing facility via sale of 1,543,364 shares of our common stock . in march 2018 , we raised approximately $ 21.7 million in net proceeds after underwriting commissions and discounts and expenses of the offering through a public offering of 10,350,000 shares of our common stock . in april 2017 , we raised $ 2.6 million in net proceeds through a private placement of 1,069,603 shares of our common stock and 1,069,603 warrants . each warrant entitles its holder to purchase one warrant share at an exercise price of $ 3.00 per warrant share , subject to adjustment . subsequent events on april 2 , 2019 , the company closed on an underwritten registered offering of 8,000,000 shares of its common stock , par value $ 0.0001 per share , and warrants to purchase up to 8,000,000 shares of its common stock with an exercise price of $ 2.00 per share at a combined purchase price of $ 1.50 per share of common stock and accompanying warrant . the net proceeds to the company , after deducting underwriting discounts and commissions and estimated offering expenses payable by the company , was approximately $ 11 million . 73 seasonality the company does not believe that its operations are seasonal in nature . contractual obligations and commitments at our current stage of development and at a stage where we have yet to secure material and recurring amounts of financial funding , we do not have any significant contractual obligations with the exception of certain purchase commitments discussed below . purchase commitments the company has entered into three contracts with manufacturers to supply certain components used in sm-88 in order to achieve favorable pricing on supplied products . these contracts have non-cancellable elements related to the scheduled deliveries of these products in future periods . payments are made by us to the manufacturer when the products are delivered and of acceptable quality . the contracts are structured to match clinical supply needs for our ongoing trials and we expect the timing of associated payments to predominately occur during fiscal year 2019. total outstanding future obligations associated with the contracts were $ 2.0 million at march 31 , 2019. in may 2019 , the company increased the work scope of one of the contracts resulting in a commitment increase of $ 495,000. leases the company has a two-year lease for office space in new jersey with a monthly rent of $ 2,289 for the first six months and $ 4,292 for the remaining term expiring february 2021. future rent payments are $ 40,000 and $ 47,000 for fiscal years 2020 and 2021 , respectively . the company has a two-year lease for office furniture in new jersey with future rent payments of $ 19,000 and $ 17,000 for fiscal years 2020 and 2021 , respectively . the company subleases office space in new york , the rent obligation has been prepaid through august 30 , 2020. rent expense , primarily for the new york office , including short term rentals was approximately $ 243,000 and $ 93,000 for the years ended march 31 , 2019 and 2018 respectively . off-balance sheet arrangements we do not have during the periods presented , and we do not currently have , any off-balance sheet arrangements , as defined by applicable sec regulations . item 7a . qualitative and quantitative disclosures about market risk we are a smaller reporting company as defined by rule 12b-2 of the securities exchange act of 1934 , as amended , and are not required to provide the information under this item . item 8. financial statements and supplementary data 74 report of independent regist ered public accounting firm board of directors and stockholders tyme technologies , inc. opinion on the financial statements we have audited the accompanying consolidated balance sheets of tyme technologies , inc. ( a delaware corporation ) and subsidiaries ( the “ company ” ) as of march 31 , 2019 and 2018 , the related consolidated statements of operations , stockholders ' equity , and cash flows for each of the two years in the period ended march 31 , 2019 , and the related notes ( collectively referred to as the “ financial statements ” ) . in our opinion , the financial statements present fairly , in all material respects , the financial position of the company as of march 31 , 2019 and 2018 , and the results of its operations and its cash flows for each of the two years in the period ended march 31 , 2019 , in conformity with accounting principles generally accepted in the united states of america . we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) ( “ pcaob ” ) , the company 's internal control over financial reporting as of march 31 , 2019 based on criteria established in the 2013 internal control—integrated framework issued by the committee of sponsoring organizations of the treadway commission ( “ coso ” ) , and our report dated june 12 , 2019 expressed an unqualified opinion . basis for opinion these financial statements are the responsibility of the company 's management . our responsibility is to express an opinion on the company 's financial statements based on our audits . we are a public accounting firm registered with the pcaob and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob . we conducted our audits in accordance with the standards of the pcaob . those standards story_separator_special_tag during the year ended march 31 , 2018 , our financing activities consisted of the following : in the year ended march 31 , 2018 , the company raised approximately $ 5.8 million in net proceeds after sales commissions and expenses of the offering through the atm financing facility via sale of 1,543,364 shares of our common stock . in march 2018 , we raised approximately $ 21.7 million in net proceeds after underwriting commissions and discounts and expenses of the offering through a public offering of 10,350,000 shares of our common stock . in april 2017 , we raised $ 2.6 million in net proceeds through a private placement of 1,069,603 shares of our common stock and 1,069,603 warrants . each warrant entitles its holder to purchase one warrant share at an exercise price of $ 3.00 per warrant share , subject to adjustment . subsequent events on april 2 , 2019 , the company closed on an underwritten registered offering of 8,000,000 shares of its common stock , par value $ 0.0001 per share , and warrants to purchase up to 8,000,000 shares of its common stock with an exercise price of $ 2.00 per share at a combined purchase price of $ 1.50 per share of common stock and accompanying warrant . the net proceeds to the company , after deducting underwriting discounts and commissions and estimated offering expenses payable by the company , was approximately $ 11 million . 73 seasonality the company does not believe that its operations are seasonal in nature . contractual obligations and commitments at our current stage of development and at a stage where we have yet to secure material and recurring amounts of financial funding , we do not have any significant contractual obligations with the exception of certain purchase commitments discussed below . purchase commitments the company has entered into three contracts with manufacturers to supply certain components used in sm-88 in order to achieve favorable pricing on supplied products . these contracts have non-cancellable elements related to the scheduled deliveries of these products in future periods . payments are made by us to the manufacturer when the products are delivered and of acceptable quality . the contracts are structured to match clinical supply needs for our ongoing trials and we expect the timing of associated payments to predominately occur during fiscal year 2019. total outstanding future obligations associated with the contracts were $ 2.0 million at march 31 , 2019. in may 2019 , the company increased the work scope of one of the contracts resulting in a commitment increase of $ 495,000. leases the company has a two-year lease for office space in new jersey with a monthly rent of $ 2,289 for the first six months and $ 4,292 for the remaining term expiring february 2021. future rent payments are $ 40,000 and $ 47,000 for fiscal years 2020 and 2021 , respectively . the company has a two-year lease for office furniture in new jersey with future rent payments of $ 19,000 and $ 17,000 for fiscal years 2020 and 2021 , respectively . the company subleases office space in new york , the rent obligation has been prepaid through august 30 , 2020. rent expense , primarily for the new york office , including short term rentals was approximately $ 243,000 and $ 93,000 for the years ended march 31 , 2019 and 2018 respectively . off-balance sheet arrangements we do not have during the periods presented , and we do not currently have , any off-balance sheet arrangements , as defined by applicable sec regulations . item 7a . qualitative and quantitative disclosures about market risk we are a smaller reporting company as defined by rule 12b-2 of the securities exchange act of 1934 , as amended , and are not required to provide the information under this item . item 8. financial statements and supplementary data 74 report of independent regist ered public accounting firm board of directors and stockholders tyme technologies , inc. opinion on the financial statements we have audited the accompanying consolidated balance sheets of tyme technologies , inc. ( a delaware corporation ) and subsidiaries ( the “ company ” ) as of march 31 , 2019 and 2018 , the related consolidated statements of operations , stockholders ' equity , and cash flows for each of the two years in the period ended march 31 , 2019 , and the related notes ( collectively referred to as the “ financial statements ” ) . in our opinion , the financial statements present fairly , in all material respects , the financial position of the company as of march 31 , 2019 and 2018 , and the results of its operations and its cash flows for each of the two years in the period ended march 31 , 2019 , in conformity with accounting principles generally accepted in the united states of america . we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) ( “ pcaob ” ) , the company 's internal control over financial reporting as of march 31 , 2019 based on criteria established in the 2013 internal control—integrated framework issued by the committee of sponsoring organizations of the treadway commission ( “ coso ” ) , and our report dated june 12 , 2019 expressed an unqualified opinion . basis for opinion these financial statements are the responsibility of the company 's management . our responsibility is to express an opinion on the company 's financial statements based on our audits . we are a public accounting firm registered with the pcaob and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob . we conducted our audits in accordance with the standards of the pcaob . those standards

results of operations year ended march 31 , 2019 compared to year ended march 31 , 2018 net loss for the year ended march 31 , 2019 was $ 32,983,000 compared to $ 18,969,000 for the year ended march 31 , 2018. the increase in the net loss for the year ended march 31 , 2019 , as compared to the net loss for the year ended march 31 , 2018 is due to increased operating costs and expenses in 2019 , as highlighted below . cash used in operating activities for the year ended march 31 , 2019 was $ 20,116,000 compared to $ 11,879,000 for the year ended march 31 , 2018. see cash flows section below for further details . revenue during the years ended march 31 , 2019 and march 31 , 2018 , we did not realize any revenues from operations . we do not anticipate recognizing any revenues until such time as one of our products has been approved for marketing by appropriate regulatory authorities or we enter into collaboration or licensing arrangements , none of which is anticipated to occur in the near future . 69 operating expenses for the year ended march 31 , 2019 , operating costs and expenses totaled $ 31,777,000 , compared to $ 19,360,000 for the year ended march 31 , 2018 , representing an increase of $ 12,417,000 , of which $ 6,037,000 relates to increased r & d study and consulting expenses , $ 2,471,000 to severance expense $ 1,810,000 to salaries and related employee costs , $ 873,000 to stock based compensation and $ 1,226,000 to professional fees and other general and administrative expenses .

in addition , our audited consolidated financial statements and the financial data included in this form 10-k reflect our reorganization and have been prepared as if our current corporate structure had been in place throughout the relevant periods . the following discussion and analysis contains 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 , including , without limitation , statements regarding our expectations , beliefs , intentions or future strategies that are signified by the words “ expect , ” “ anticipate , ” “ intend , ” “ believe , ” or similar language . all forward-looking statements included in this document are based on information available to us on the date hereof , and we assume no obligation to update any such forward-looking statements . our business and financial performance are subject to substantial risks and uncertainties . actual results could differ materially from those projected in the forward-looking statements . in evaluating our business , you should carefully consider the information set forth under the heading “ risk factors ” and elsewhere in this form 10-k. readers are cautioned not to place undue reliance on these forward-looking statements . story_separator_special_tag into share transfer agreements ( slow-walk agreement ) with mr. yang li , the sole shareholder of rise king bvi , which beneficially owns an aggregate of 7,434,940 shares of the company 's common stock , ( the “ subject shares ” ) . on march 30 , 2011 , pursuant to the terms of the share transfer agreement , ms. li sun transferred her right to acquire 18 % of the shares of rise king bvi under the share transfer agreement to mr. zhige zhang , the chief financial officer of the company . on march 30 , 2011 , each of mssrs . handong cheng , xuanfu liu and zhige zhang ( the “ prc persons ” ) exercised their right to purchase the outstanding stock of rise king bvi . on the same date , the entrustment agreement originally entered into among rise king bvi and the control group was terminated . as a result of these transactions , the ownership of rise king bvi was transferred from mr. yang li to the prc persons . rise king bvi has sole voting and dispositive power over the subject shares . the prc persons may be deemed to share voting power over the shares as a result of their collective ownership of all of the outstanding stock of rise king bvi and are now the controlling shareholders of rise king bvi . pursuant to the above contractual agreements , all of the equity owners ' rights and obligations of the vies were assigned to rise king wfoe , which resulted in the equity owners lacking the ability to make decisions that have a significant effect on the vies , and rise king wfoe 's ability to extract the profits from the operation of the vies , 43 and assume the residual benefits of the vies . because rise king wfoe and its indirect parent are the sole interest holders of the vies , we included the assets , liabilities , revenues and expenses of the vies in our consolidated financial statements , which is consistent with the provisions of fasb accounting standards codification ( “ asc ” ) topic 810 , “ consolidation ” subtopic 10. as a result of the share exchange on june 26 , 2009 , the former china net bvi shareholders owned a majority of our common stock . the transaction was regarded as a reverse acquisition whereby china net bvi was considered to be the accounting acquirer as its shareholders retained control of our company after the share exchange , although we are the legal parent company . the share exchange was treated as a recapitalization of our company . as such , china net bvi ( and its historical financial statements ) is the continuing entity for financial reporting purposes . following the share exchange , we changed our name from emazing interactive , inc. to chinanet online holdings , inc. the financial statements have been prepared as if china net bvi had always been the reporting company and then on the share exchange date , had changed its name and reorganized its capital stock . as of the date of the share exchange , through a series of contractual agreements , we operate our business in china primarily through business opportunity online and beijing cnet online . beijing cnet online owns 51 % of shanghai borongdingsi computer technology co. , ltd. ( “ shanghai borongdingsi ” ) . business opportunity online , beijing cnet online and shanghai borongdingsi , were incorporated on december 8 , 2004 , january 27 , 2003 and august 3 , 2005 , respectively . on june 24 , 2010 , one of our vies , business opportunity online , together with three other individuals , who were not affiliated with the company , formed a new company , shenzhen city mingshan network technology co. , ltd. ( “ shenzhen mingshan ” ) . shenzhen mingshan is 51 % owned by business opportunity online and 49 % owned collectively by the other three individuals . shenzhen mingshan is located in shenzhen city , guangdong province of the prc and is primarily engaged in developing and designing internet based software , online games and the related operating websites and providing related internet and information technology services necessary to operate such games and websites . on january 6 , 2011 , as approved by the shareholders of shenzhen mingshan , an independent third party investor , who was not affiliated with us or any of our affiliates , invested rmb15,000,000 ( approximately us $ 2,356,749 ) into shenzhen mingshan in exchange for a 60 % equity interest in shenzhen mingshan . story_separator_special_tag as a result of this transaction , our share of the equity interests in zhao shang ke hubei decreased from 51 % to 25.5 % and we ceased to have a controlling financial interest in zhao shang ke hubei , but still retained an investment in , and significant influence over , zhao shang ke hubei . therefore , as of december 31 , 2011 , zhao shang ke hubei was an equity investment affiliate of ours . on july 1 , 2011 , quanzhou zhi yuan formed a new wholly owned company , xin qi yuan advertisement planning ( hubei ) co. , ltd. ( “ xin qi yuan hubei ” ) . xin qi yuan hubei is primarily engaged in advertisement design , production , promulgation and providing the related adverting and marketing consultancy services . on july 1 , 2011 , quanzhou tian xi shun he formed a new wholly owned company , mu lin sen advertisement ( hubei ) co. , ltd. ( “ mu lin sen hubei ” ) . mu lin sen hubei is primarily engaged in advertisement design , production , promulgation and providing the related adverting and marketing consultancy services . on july 1 , 2011 , business opportunity online hubei , together with an individual who is not affiliated with us , formed a new company , sheng tian network technology ( hubei ) co. , ltd. ( “ sheng tian hubei ” ) . business opportunity online hubei and the co-founding individual owned 51 % and 49 % of the equity interests of sheng tian hubei , respectively . sheng tian hubei is primarily engaged in computer system design , development and promotion , software development and promotion , and providing the related technical consultancy services . 45 on september 5 , 2011 , business opportunity online hubei formed a new wholly owned company , chongqing business opportunity online technology co. , ltd. ( “ business opportunity online chongqing ” ) . business opportunity online chongqing is primarily engaged in internet advertisement design , production and promulgation . on december 15 , 2011 , business opportunity online hubei entered into an equity transfer agreement with sou yi lian mei network technology ( beijing ) co. ltd. , ( “ sou yi lian mei ” ) and its shareholders , to acquire a 51 % equity interest in sou yi lian mei for a cash consideration of rmb51,600,000 ( approximately us $ 8,107,216 ) . sou yi lian mei is based in beijing , china , and is primary engaged in providing online advertising and marketing services . sou yi lian mei operates its business primarily through its wholly-owned subsidiary , jin du ya he ( beijing ) network technology co. , ltd ( “ jin du ya he ” ) . on december 20 , 2011 , the transaction was approved by , and registered with , the relevant local prc government authorities of beijing , the prc . sou yi lian mei became a majority-owned subsidiary of business opportunity online hubei . through our prc operating subsidiary and vies , we are one of china 's leading b2b fully integrated internet service providers for expanding smes ' sales networks in china and our services primarily include proprietary internet and advertising technologies which prepare and publish rich media enabled advertising and marketing campaigns for clients on the internet , television and other valued added communication channels , host mini-sites with online messaging and consulting functionalities , generate effective sales leads and provide online management tools to help smes manage the expansion of their sales networks . our goal is to strengthen our position as the leading diversified one-stop internet service provider to smes for their sales network expansion in china . our multi-channel advertising and promotion platform consists of the websites www.28.com ( “ 28.com ” ) , www.liansuo.com ( “ liansuo.com ” ) , www.chuangye.com ( “ chuangye.com ” ) and www.sooe.cn ( “ sooe.cn ” ) , our internet advertising portals , chinanet tv , our tv production and advertising unit , our bank kiosk advertising unit , which is primarily used as an advertising platform for clients in the financial services industry and will be further utilized as an additional value-added communication channel for sme clients and our brand management and sales channel building services unit . basis of presentation , critical accounting policies and management estimates our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states of america ( “ u.s.gaap ” ) and include the accounts of our company , and all of our subsidiaries and vies . we prepare financial statements in conformity with u.s.gaap , which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenues and expenses during the financial reporting period . we continually evaluate these estimates and assumptions based on the most recently available information , our own historical experience and various other assumptions that we believe to be reasonable under the circumstances . since the use of estimates is an integral component of the financial reporting process , actual results could differ from those estimates . some of our accounting policies require higher degrees of judgment than others in their application . we consider the policies discussed below to be critical to an understanding of our financial statements . foreign currency translation our functional currency is united states dollars ( “ us $ ” ) , and the functional currency of china net hk is hong kong dollars ( “ hk $ ” ) . the functional currency of our prc operating subsidiary and vies is renminbi ( “ rmb ' ) , and prc is the primary economic environment in which we operate . for financial reporting purposes , the financial statements of our prc operating subsidiary and vies , which are prepared using the rmb , are translated into our reporting currency , the united states dollar ( “ u.s . dollar ” ) .

overview our company ( formerly known as emazing interactive , inc. ) was incorporated in the state of texas in april 2006 and re-domiciled to become a nevada corporation in october 2006. from the date of our company 's incorporation until june 26 , 2009 , when our company consummated the share exchange ( as defined below ) , our company 's activities were primarily concentrated in web server access and company branding in hosting web based e-games . on june 26 , 2009 , our company entered into a share exchange agreement ( the “ exchange agreement ” ) , with ( i ) china net online media group limited , a company organized under the laws of british virgin islands ( “ china net bvi ” ) , ( ii ) china net bvi 's shareholders , allglad limited , a british virgin islands company ( “ allglad ” ) , growgain limited , a british virgin islands company ( “ growgain ” ) , rise king investments limited , a british virgin islands company ( “ rise king bvi ” ) , star ( china ) holdings limited , a british virgin islands company ( “ star ” ) , surplus elegant investment limited , a british virgin islands company ( “ surplus ” ) , clear jolly holdings limited , a british virgin islands company ( “ clear ” and together with allglad , growgain , rise king bvi , star and surplus , the “ china net bvi shareholders ” ) , who together owned shares constituting 100 % of the issued and outstanding ordinary shares of china net bvi ( the “ china net bvi shares ” ) and ( iii ) g. edward hancock , our principal stockholder at such time . pursuant to the terms of the exchange agreement , the china net bvi shareholders transferred to us all of the china net bvi shares in exchange for the issuance of 13,790,800 shares ( the “ exchange shares ” ) in the aggregate of our common stock ( the “ share exchange ” ) .

when the company determines that an other-than-temporary decline in fair value has occurred , the amount of the decline that is related to a credit loss is recognized in earnings . gains and losses are determined using the specific identification method . the company story_separator_special_tag this management 's discussion and analysis of financial condition and results of operations ( “md & a” ) should be read in conjunction with our annual consolidated financial statements and notes thereto which appear elsewhere in this annual report on form 10-k. these discussions contain “forward-looking statements” that involve risks and uncertainties , as well as assumptions that , if they never materialize or prove incorrect , could cause our results to differ materially from those expressed or implied by such forward-looking statements . these forward-looking statements include , but are not limited to , statements related to changes in market conditions that impact our ability to generate service revenue on our customers ' behalf ; errors in estimates as to the service revenue we can generate for our customers ; risks associated with material defects or errors in our software or the effect of data security breaches ; our ability to adapt our solution to changes in the market or new competition ; our ability to improve our customers ' renewal rates , margins and profitability ; our ability to increase our revenue and contribution margin over time from new and existing customers ; the potential effect of mergers and acquisitions on our customer base ; business strategies ; technology development ; protection of our intellectual property ; investment and financing plans ; liquidity ; competitive position ; the effects of competition ; industry environment ; and potential growth opportunities . forward-looking statements are also often identified by the use of words such as , but not limited to , “anticipate , ” “believe , ” “can , ” “continue , ” “could , ” “estimate , ” “expect , ” “intend , ” “may , ” “plan , ” “project , ” “seek , ” “should , ” “target , ” “will , ” “would , ” and similar expressions or variations intended to identify forward-looking statements . these statements are based on the beliefs and assumptions of our management based on information currently available to management . such forward-looking statements are subject to risks , uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements . factors that could cause or contribute to such differences include , but are not limited to , those identified below , and those discussed in the section of this annual report on form 10-k titled “risk factors” . furthermore , such forward-looking statements speak only as of the date of this report . except as required by law , we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements . all dollar amounts expressed as numbers in this md & a ( except per share amounts ) are in millions . overview we manage the service contract renewals process for renewals of maintenance , support and subscription agreements on behalf of our customers . our integrated solution consists of a suite of cloud applications , dedicated service sales teams working under our customers ' brands and a proprietary service revenue intelligence platform . by integrating software , managed services and data , we address the critical steps of the renewals process including data management , quoting , selling and service revenue business intelligence . our business is built on our pay-for-performance model , whereby our revenues are based on the service renewals customers achieve with our solution . as of december 31 , 2011 , we managed over 120 engagements across approximately 70 customers , representing over $ 7 billion in service revenue opportunity under management . we were formed in november 2002 as a limited liability company , and shortly thereafter we purchased certain assets of a business originally started by service sales representatives from a major technology company . since then we have refined our business model , developed and expanded our service sales teams , our suite of cloud based applications and our service revenue intelligence platform , and opened additional sales centers in the united states , europe and asia and a global sales operations center in kuala lumpur , malaysia . we broadened our customer focus from technology companies to also include technology-enabled healthcare and life sciences and industrial systems companies . we have experienced rapid growth in our operations in recent periods , as indicated by the following : our revenue has increased from $ 152.9 million in 2010 to $ 205.5 million in 2011 , representing an increase of 34 % . 34 our engagements have grown from approximately 100 as of december 31 , 2010 to over 120 as of december 31 , 2011. we are currently in the midst of a significant investment cycle in which we have taken steps designed to drive our future growth and profitability . we plan to offer additional cloud based applications , hire additional sales , service sales and other personnel and further build out our infrastructure to develop our technology . these steps impacted our expenses in recent periods and are expected to continue to impact our profitability in future periods . on march 24 , 2011 , our registration statement on form s-1 relating to our initial public offering ( “ipo” ) was declared effective by the securities and exchange commission ( “sec” ) . the ipo closed on march 30 , 2011 , at which time we sold 9,791,020 shares of our common stock ( inclusive of 1791,020 shares of common stock from the full exercise of the over-allotment option granted to the underwriters ) and the selling stockholders sold 3,940,133 of our common stock . the price of the shares sold in the offering was $ 10.00 per share . story_separator_special_tag other factors impacting our close rate include : the manner in which our customers price their service contracts for sale to their end customers ; the stage of life-cycle associated with the products and underlying technologies covered by the service contracts offered to the end customer ; the extent to which our customers or their competitors introduce new products or underlying technologies ; the nature , size and age of the service contracts ; and the extent to which we have managed the renewals process for similar products and underlying technologies in the past . in determining commission rates for an individual engagement , various factors , including our close rates , as described above , are evaluated . these factors include : historical , industry-specific and customer-specific renewal rates for similar service contracts ; the magnitude of the opportunity under management in a particular engagement ; the number of end customers associated with these opportunities ; and the opportunity to receive additional performance commissions when we exceed certain renewal levels . we endeavor to set our commission rates at levels commensurate with these factors and other factors that may be relevant to a particular engagement . accordingly , our commission rates vary , often significantly , from engagement to engagement . in addition , we sometimes agree to lower commission rates for engagements with significant opportunity under management . number of engagements . we track the number of engagements we have with our customers . we often have multiple engagements with a single customer , particularly where we manage the sales of service renewals relating to different product lines , technologies , types of contracts or geographies for the customer . when the set 36 of renewals we manage on behalf of a customer is associated with a separate customer contract or a distinct product set , type of end customer contract or geography and therefore requires us to assign a dedicated service sales team to manage the renewals , we designate the set of renewals , and associated revenues and costs to us as a unique engagement . for example , we may have one engagement consisting of a dedicated service sales team selling maintenance contract renewals of a particular product for a customer in the united states and another engagement consisting of a dedicated sales team selling warranty contract renewals of a different product for the same customer in europe . these would count as two engagements . we had approximately 120 , 100 and 80 engagements as of december 31 , 2011 , 2010 and 2009 , respectively . factors affecting our performance sales cycle . we sell our integrated solution through our sales organization . at the beginning of the sales process , our quota-carrying sales representatives contact prospective customers and educate them about our offerings . educating prospective customers about the benefits of our solution can take time , as many of these prospects have not historically relied upon integrated solutions like ours for service revenue management , nor have they typically put out a formal request for proposal or otherwise made a decision to focus on this area . as part of the education process , we utilize our solutions design team to perform the spa of our prospect 's service revenue . the spa includes an analysis of best practices and benchmarks the prospect 's service revenue against industry peers . through the spa process , which typically takes several weeks , we are able to assess the characteristics and size of the prospect 's service revenue , identify potential areas of performance improvement , and formulate our proposal for managing the prospect 's service revenue . the length of our sales cycle for a new customer , inclusive of the spa process and measured from our first formal discussion with the customer until execution of a new customer contract , is typically longer than six months . we generally contract with new customers to manage a specified portion of their service revenue opportunity , such as the opportunity associated with a particular product line or technology , contract type or geography . we negotiate the customized terms of our customer contracts , including commission rates , based on the output of the spa , including the areas identified for improvement . once we demonstrate success to a customer with respect to the opportunity under contract , we seek to expand the scope of our engagement to include other opportunities with the customer . for some customers , we manage all or substantially all of their service contract renewals . implementation cycle . after entering into an engagement with a new customer , and to a lesser extent after adding an engagement with an existing customer , we incur sales and marketing expenses related to the commissions owed to our sales personnel . the commissions are based on the estimated total contract value , a material portion of which is expensed upfront and the remaining portion of which is expensed over a period of eight to fourteen months , including commissions paid on multi-year contracts . we also make upfront investments in technology and personnel to support the engagement . these expenses are typically incurred one to three months before we begin generating sales and recognizing revenue . accordingly , in a given quarter , an increase in new customers , and , to a lesser extent , an increase in engagements with existing customers , or a significant increase in the contract value associated with such new customers and engagements , will negatively impact our gross margin and operating margins until we begin to achieve anticipated sales levels associated with the new engagements . although we expect new customer engagements to contribute to our operating profitability over time , in the initial periods of a customer relationship , the near term impact on our profitability can be negative due to upfront costs we incur , the lower initial level of associated service sales team productivity and lack of mature data and technology integration with the customer .

summary cash flows the following table sets forth a summary of our cash flows for the periods indicated : replace_table_token_16_th 47 operating activities in 2011 , net cash used in operating activities were $ 11.2 million . our net income during the period was $ 15.1 million which reflected a one-time non-cash tax benefit of $ 20.7 million as a result of recognition of deferred tax assets resulting from our election to be subject to taxation as a corporation . the net income was adjusted by non-cash charges of $ 9.4 million for depreciation and amortization and $ 11.6 million for stock-based compensation . cash used for operations during 2011 principally resulted from $ 18.1 million in payments to oracle/sun and the related settlement of accrued payables owed to oracle/sun and amounts owed to us by oracle/sun . additional uses of cash were related to a $ 1.4 million increase in prepaid expenses and other assets and a $ 5.0 million increase in accounts receivable . sources of cash resulted from changes in our working capital , including a $ 6.9 million increase in accrued compensation and benefits , a $ 2.2 million increase in accounts payable , a $ 2.0 million increase in other accrued liabilities and a $ 1.8 million increase in accrued taxes . in 2010 , cash inflows from our operating activities were $ 22.6 million . our net loss during the period was $ 2.6 million , adjusted by non-cash charges of $ 6.1 million for depreciation and amortization and $ 8.1 million for stock-based compensation .

as required under its existing advisory agreement with the company , the advisor and its affiliates will continue to manage the company 's affairs on a day to day basis ( including management and leasing of the company 's properties ) and will remain responsible for managing and providing other services with respect to the company 's european investments . the advisor may engage one or more third parties to assist with these responsibilities , all subject to the terms of the advisory agreement . the company and american realty capital global trust ii , inc. ( `` global ii `` ) , an entity formerly sponsored by an affiliate of the sponsor , entered into an agreement and plan of merger on august 8 , 2016 ( `` the merger agreement `` ) . on december 22 , 2016 , pursuant to the merger agreement , global ii merged with and into story_separator_special_tag the following discussion and analysis should be read in conjunction with the accompanying financial statements . the following information contains forward-looking statements , which are subject to risks and uncertainties . should one or more of these risks or uncertainties materialize , actual results may differ materially from those expressed or implied by the forward-looking statements . please see `` forward-looking statements '' elsewhere in this report for a description of these risks and uncertainties . overview we were incorporated on july 13 , 2011 as a maryland corporation . we acquired our first property and commenced active operations in october 2012 and elected and qualified to be taxed as a reit for u.s. federal income tax purposes beginning with our taxable year ended december 31 , 2013. we completed our ipo on june 30 , 2014 and on june 2 , 2015 we listed our common stock on the nyse under the symbol `` gnl . '' we invest in commercial properties , with an emphasis on sale-leaseback transactions involving single tenant net-leased commercial properties . on august 8 , 2016 , we entered into the merger agreement with global ii . on december 22 , 2016 , pursuant to the merger agreement , global ii merged with and into the merger sub , at which time the separate existence of global ii ceased and we became the parent of the merger sub . in addition , pursuant to the merger agreement , global ii op , merged with our op , with our op being the surviving entity . see note 3 — merger transaction to our audited consolidated financial statements in this annual report on form 10-k. as of december 31 , 2017 , we owned 321 properties consisting of 22.9 million rentable square feet , which were 99.5 % leased with a weighted-average remaining lease term of 8.8 years . based on original purchase price or acquisition value with respect to properties acquired in the merger , 50.6 % of our properties are located in the u.s and puerto rico and 49.4 % are located in europe . we may also originate or acquire first mortgage loans , mezzanine loans , preferred equity or securitized loans secured by real estate . as of december 31 , 2017 , we did not own any first mortgage loans , mezzanine loans , preferred equity or securitized loans . pursuant to the advisory agreement , we retained the advisor to manage our affairs on a day-to-day basis . substantially all of our business is conducted through the op . our properties are managed and leased by property manager . the advisor , property manager , and the special limited partner are under common control with ar global , the parent of our sponsor , and as a result are related parties . these related parties receive compensation and fees for various services provided to us . on august 8 , 2015 , we entered into the service provider agreement with the advisor and the service provider , pursuant to which the service provider agreed to provide , subject to the advisor 's oversight , certain real estate-related services , as well as sourcing and structuring of investment opportunities , performance of due diligence , and arranging debt financing and equity investment syndicates , solely with respect to investments in europe . on january 16 , 2018 , we notified the service provider that it was being terminated effective as of march 17 , 2018. additionally , as a result of our termination of the service provider , the property management and leasing agreement among an affiliate of the advisor and the service provider will terminate by its own terms . as required under the advisory agreement , the advisor and its affiliates will continue to manage our affairs on a day to day basis ( including management and leasing of our properties ) and will remain responsible for managing and providing other services with respect to our european investments . the advisor may engage one or more third parties to assist with these responsibilities , all subject to the terms of the advisory agreement . see item 3 . legal proceedings . during the year ended december 31 , 2017 , we sold 1 property and acquired 12 properties ( see note 4 — real estate investments , net to our audited consolidated financial statements in this annual report on form 10-k for further discussion ) . significant accounting estimates and accounting policies set forth below is a summary of the significant accounting estimates and accounting policies that management believes are important to the preparation of our financial statements . certain of our accounting estimates are particularly important for an understanding of our financial position and results of operations , and require the application of significant judgment by our management . as a result , these estimates are subject to a degree of uncertainty . story_separator_special_tag identifiable intangible assets include amounts allocated to acquire leases for above- and below-market lease rates , the value of in-place leases , and the value of customer relationships , as applicable . factors considered in the analysis of the in-place lease intangibles include an estimate of carrying costs during the expected lease-up period for each property , taking into account current market conditions and costs to execute similar leases . in estimating carrying costs , we include real estate taxes , insurance and other operating expenses and estimates of lost rentals at contract rates during the expected lease-up period , which typically ranges from 12 to 18 months . we also estimate costs to execute similar leases including leasing commissions , legal and other related expenses . above-market and below-market lease values for acquired properties are initially recorded based on the present value ( using a discount rate which reflects the risks associated with the leases acquired ) of the difference between ( i ) the contractual amounts 48 to be paid pursuant to each in-place lease , and ( ii ) management 's estimate of fair market lease rates for each corresponding in-place lease , measured over a period equal to the remaining term of the lease for above-market leases and the remaining initial term plus the term of any below-market fixed rate renewal options for below-market leases . the capitalized above-market lease values are amortized as a reduction of base rental revenue over the remaining terms of the respective leases , and the capitalized below-market lease values are amortized as an increase to base rental revenue over the remaining initial terms plus the terms of any below-market fixed rate renewal options of the respective leases . if a tenant with a below market rent renewal does not renew , any remaining unamortized amount will be taken into income at that time . the aggregate value of intangible assets related to customer relationship , as applicable , is measured based on our evaluation of the specific characteristics of each tenant 's lease and our overall relationship with the tenant . characteristics considered by us in determining these values include the nature and extent of its existing business relationships with the tenant , growth prospects for developing new business with the tenant , the tenant 's credit quality and expectations of lease renewals , among other factors . the value of customer relationship intangibles is amortized to expense over the initial term and any renewal periods in the respective leases , but in no event does the amortization period for intangible assets exceed the remaining depreciable life of the building . if a tenant terminates its lease , the unamortized portion of the in-place lease value and customer relationship intangibles is charged to expense . in making estimates of fair values for purposes of allocating purchase price , we utilize a number of sources , including independent appraisals that may be obtained in connection with the acquisition or financing of the respective property and other market data . we also consider information obtained about each property as a result of our pre-acquisition due diligence in estimating the fair value of the tangible and intangible assets acquired and intangible liabilities assumed . as more fully discussed in note 3 — merger transaction to our audited consolidated financial statements , the merger was accounted for under the acquisition method for business combinations with us as the accounting acquirer . depreciation and amortization depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings , 15 years for land improvements , five years for fixtures and improvements and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests . capitalized above-market lease values are amortized as a reduction of rental income over the remaining terms of the respective leases . capitalized below-market lease values are amortized as an increase to rental income over the remaining terms of the respective leases and expected below-market renewal option periods . capitalized above-market ground lease values are amortized as a reduction of property operating expense over the remaining terms of the respective leases . capitalized below-market ground lease values are amortized as an increase to property operating expense over the remaining terms of the respective leases and expected below-market renewal option periods . the value of in-place leases , exclusive of the value of above-market and below-market in-place leases , is amortized to expense over the remaining periods of the respective leases . assumed mortgage premiums or discounts are amortized as an increase or reduction to interest expense over the remaining terms of the respective mortgages . impairment of long lived assets when circumstances indicate the carrying value of a property may not be recoverable , we review the asset for impairment . this review is based on an estimate of the future undiscounted cash flows , excluding interest charges , expected to result from the property 's use and eventual disposition . these estimates consider factors such as expected future operating income , market and other applicable trends and residual value , as well as the effects of leasing demand , competition and other factors . if impairment exists due to the inability to recover the carrying value of a property , an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property for properties to be held and used . for properties held for sale , the impairment loss is the adjustment to fair value less estimated cost to dispose of the asset . these assessments have a direct impact on net income because recording an impairment loss results in an immediate negative adjustment to net earnings . goodwill we evaluate goodwill for possible impairment at least annually or upon the occurrence of a triggering event . a triggering event is an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount .

results of operations comparison of the year ended december 31 , 2017 to the year ended december 31 , 2016 during 2017 , we acquired 12 properties by purchase ( net 11 after one disposition ) , bringing our total portfolio of properties to 321 as of december 31 , 2017 . late in the fourth quarter of 2016 , we acquired 15 properties for $ 565.8 million through merger , bringing our total portfolio to 310 properties as of december 31 , 2016. our operating results generally reflect our ownership of 318 properties through the end of the fourth quarter of 2017 ( three properties acquired late during the fourth quarter of 2017 had little to no impact on 2017 operating results given the timing of the acquisitions ) . as a result thereof , the results of operations for the year ended december 31 , 2017 reflect significant changes in most categories when comparing to the year ended december 31 , 2016. rental income rental income was $ 242.5 million and $ 204.0 million for the years ended december 31 , 2017 and 2016 , respectively . our rental income increased $ 38.5 million compared to 2016 , as a result of a full year of rental income for the 15 properties acquired in the merger , and a partial year of rental income on the 12 properties acquired by purchase during 2017 , which , together , resulted in an incremental $ 48.1 million increase in rental income for the year ended december 31 , 2017 , and was partially aided by a rise in the value of the gbp and euro throughout 2017 compared to the usd .

we believe shippers value our services because we are able to objectively arrange the most efficient and cost-effective means , type and provider of transportation service without undue influence caused by the ownership of transportation assets . in addition , our minimal investment in physical assets affords us the opportunity for a higher return on invested capital and net cash flows than our asset-based competitors . through our operating locations across north america , we offer domestic and international air and ocean freight forwarding services and freight brokerage services including truckload services , ltl services , and intermodal services , which is the movement of freight in trailers or containers by combination of truck and rail . our primary business operations involve arranging the shipment , on behalf of our customers , of materials , products , equipment and other goods that are generally larger than shipments handled by integrated carriers of primarily small parcels , such as fedex , dhl and ups . our services include arranging and monitoring all aspects of material flow activity utilizing advanced information technology systems . we also provide other value-added logistics services , including customs brokerage and materials management and distribution solutions to complement our core transportation service offering . 28 we expect to grow our business organically and by completing acquisitions of other companies with compl ementary geographic and logistics service offerings . our organic growth strategy will continue to focus on strengthening existing and expanding new customer relationships leveraging the benefit of our truck brokerage and intermodal service offerings , while continuing our efforts on the organic build-out of our network of strategic operating partner locations . in addition to our focus on organic growth , we continue to search for acquisition candidates that bring to our current platform a critical mass from a geographic and or purchasing power standpoint along with complementary service offerings . as we continue to grow and scale our business , we believe that we are creating density in our trade lanes which creates opportunities for us to more efficiently sour ce and manage our transportation capacity . in addition , we remain focused on leveraging our back-office infrastructure to drive productivity improvement across the organization . performance metrics our principal source of income is derived from freight forwarding and freight brokerage services we provide to our customers . as a third-party logistics provider , we arrange for the shipment of our customers ' freight from point of origin to point of destination . generally , we quote our customers a turnkey cost for the movement of their freight . our price quote will often depend upon the customer 's time-definite needs ( first day through fifth day delivery ) , special handling needs ( heavy equipment , delicate items , environmentally sensitive goods , electronic components , etc . ) , and the means of transport ( motor carrier , air , ocean or rail ) . in turn , we assume the responsibility for arranging and paying for the underlying means of transportation . our transportation revenue represents the total dollar value of services we sell to our customers . our cost of transportation includes direct costs of transportation , including motor carrier , air , ocean and rail services . our net transportation revenue ( gross transportation revenue less the direct cost of transportation ) is the primary indicator of our ability to source , add value and resell services provided by third-parties , and is considered by management to be a key performance measure . in addition , management believes measuring its operating costs as a function of net transportation revenue provides a useful metric , as our ability to control costs as a function of net transportation revenue directly impacts operating earnings . our operating results will be affected as acquisitions occur . since all acquisitions are made using the purchase method of accounting for business combinations , our financial statements will only include the results of operations and cash flows of acquired companies for periods subsequent to the date of acquisition . our gaap-based net income will be affected by non-cash charges relating to the amortization of customer related intangible assets and other intangible assets attributable to completed acquisitions . under applicable accounting standards , purchasers are required to allocate the total consideration in a business combination to the identified assets acquired and liabilities assumed based on their fair values at the time of acquisition . the excess of the consideration paid over the fair value of the identifiable net assets acquired is to be allocated to goodwill , which is tested at least annually for impairment . applicable accounting standards require that we separately account for and value certain identifiable intangible assets based on the unique facts and circumstances of each acquisition . as a result of our acquisition strategy , our net income will include material non-cash charges relating to the amortization of customer related intangible assets and other intangible assets acquired in our acquisitions . although these charges may increase as we complete more acquisitions , we believe we will be growing the value of our intangible assets ( e.g. , customer relationships ) . thus , we believe that earnings before interest , taxes , depreciation and amortization , or ebitda , is a useful financial measure for investors because it eliminates the effect of these non-cash costs and provides an important metric for our business . ebitda is a non-gaap measure of income and does not include the effects of preferred stock dividends , interest and taxes , and excludes the “ non-cash ” effects of depreciation and amortization on long-term assets . companies have some discretion as to which elements of depreciation and amortization are excluded in the ebitda calculation . we exclude all depreciation charges related to technology and equipment , all amortization charges ( including amortization of leasehold improvements ) , and other intangible assets . story_separator_special_tag 30 story_separator_special_tag style= '' text-align : justify ; margin-bottom:0pt ; margin-top:18pt ; text-indent:0 % ; font-weight : bold ; font-style : italic ; font-size:10pt ; font-family : times new roman ; text-transform : none ; font-variant : normal ; '' > the following table provides a reconciliation for the fiscal years ended june 30 , 2017 and 2016 of normalized adjusted ebitda to net income ( loss ) , the most directly comparable gaap measure in accordance with sec regulation g ( in thousands ) : replace_table_token_7_th 33 fiscal year ended june 30 , 2016 , compared to fiscal year ended june 30 , 2015 the following table summarizes transportation revenue , cost of transportation and net transportation revenue by geographic operating segments for the fiscal years ended june 30 , 2016 and 2015 ( in thousands ) : replace_table_token_8_th forwarding revenue was $ 547.0 million and $ 438.4 million for the years ended june 30 , 2016 and 2015 , respectively . the increase of $ 108.6 million , or 24.8 % , is primarily attributable to the acquisition of wheels and sba , a full year of revenues for dca and the addition of several new strategic operating partner locations . forwarding net transportation revenue was $ 151.3 million and $ 114.6 million for the years ended june 30 , 2016 and 2015 , respectively . net forwarding transportation margins increased from 26.1 % to 27.7 % , primarily due to changes in product mix . brokerage revenue was $ 227.4 million and $ 62.5 million for the years ended june 30 , 2016 and 2015 , respectively . the increase of $ 164.9 million , or 263.8 % , is primarily attributable a full year of revenues for wheels . brokerage net transportation revenue was $ 27.2 million and $ 7.4 million for the years ended june 30 , 2016 and 2015 , respectively . net brokerage transportation margins increased from 11.8 % to 11.9 % . other value-added services were $ 8.2 million and $ 1.7 million for the years ended june 30 , 2016 and 2015 , respectively . 34 the following table compares condensed consolidated statements of operation s data by geographic operating segments for the fiscal years ended june 30 , 2016 and 2015 ( in thousands ) : replace_table_token_9_th replace_table_token_10_th operating partner commissions increased $ 24.1 million , or 40.0 % , to $ 84.5 million for the year ended june 30 , 2016 primarily due to a full year of operations of sba which added approximately 40 strategic operating partner locations whom are paid commissions , changes in sales mix with a higher percentage of domestic revenues , which tend to create higher commissions , compared to international revenues , and new strategic operating partners who joined the radiant network . personnel costs increased $ 19.9 million , or 58.2 % , to $ 54.1 million for the year ended june 30 , 2016 primarily due to a full year of operations associated with the acquisitions of wheels , sba , dca and highways , as well as increased investment in the management structure of the organization . sg & a expenses increased $ 10.3 million , or 67.3 % , to $ 25.7 million for the year ended june 30 , 2016 primarily due to normal expenses associated with the acquisitions of wheels , sba , dca and highways which included increased costs for facilities , it , communication and travel . additionally , increased professional fees , insurance and claims were incurred due to an overall larger organization after recent acquisitions , offset partially by lower legal fees . depreciation and amortization costs increased $ 5.6 million , or 89.2 % , to $ 12.0 million for the year ended june 30 , 2016 primarily due to increased amortization associated with a full year of the wheels , sba , dca and highways acquisitions from fiscal year 2015. transition and lease termination costs increased $ 5.1 million , or 672.1 % , to $ 5.9 million for the year ended june 30 , 2016. transition and lease termination costs for the year ended june 30 , 2016 were due to consolidation at the wheels toronto location and non-recurring personnel costs in connection with the winding-down of sba 's historical back-office operations . 35 transition and lease termination costs for the year ended june 30 , 2015 were due to the exit and downsizing of the former dba warehouse and corporate headquarters in new jersey to a smaller location , similar costs associated with a consolidation effort at the wheels toronto location , and non-recurring personnel costs in connection with the winding-down of sba 's historical back-office operations . impairment of acquired intangible assets is attributable to the customer related intangibles associated with on time . change in contingent consideration represents the change in the fair value of contingent consideration due to former shareholders of acquired operations . change in contingent consideration increased $ 4.9 million , or 125.6 % , to $ 1.0 million for the year ended june 30 , 2016. the change is primarily attributable to an increase in management 's estimates of future payouts with respect to dca , pca , and highways , offset by a decrease in management 's estimated future payouts for on time , as it did not achieve its specified operating objectives . other expenses increased $ 2.4 million , or 94.0 % , to $ 5.0 million for the year ended june 30 , 2016 primarily due to higher interest expense on indebtedness used to acquire wheels and a loss on write off of loan fees , partially offset by foreign exchange gains . our net loss is principally due to increased depreciation , amortization , and interest expenses compared to the prior year , partially offset by an income tax benefit .

results of operations fiscal year ended june 30 , 2017 , compared to fiscal year ended june 30 , 2016 the following table summarizes transportation revenue , cost of transportation and net transportation revenue by geographic operating segments for the fiscal years ended june 30 , 2017 and 2016 ( in thousands ) : replace_table_token_4_th forwarding revenue was $ 562.0 million and $ 547.0 million for the years ended june 30 , 2017 and 2016 , respectively . the increase of $ 15.0 million , or 2.7 % , is primarily attributable to increased revenues by certain strategic operating partners . forwarding net transportation revenue was $ 160.3 million and $ 151.3 million for the years ended june 30 , 2017 and 2016 , respectively . net forwarding transportation margins increased from 27.7 % to 28.5 % , primarily due to lower costs of purchased transportation . brokerage revenue was $ 207.3 million and $ 227.4 for the years ended june 30 , 2017 and 2016 , respectively . the decrease of $ 20.1 million , or 8.8 % , is primarily attributable to general softness in the brokerage markets . brokerage net transportation revenue was $ 26.1 million and $ 27.2 million for the years ended june 30 , 2017 and 2016 , respectively . net brokerage transportation margins increased from 11.9 % to 12.6 % , primarily as a result of slightly lower costs of purchased transportation . other value-added services were $ 8.3 million and $ 8.2 million for the years ended june 30 , 2017 and 2016 , respectively . 31 the following table compares condensed consolidated stateme nts of operations data by geographic operating segments for the fiscal years ended june 30 , 2017 and 2016 ( in thousands ) : replace_table_token_5_th replace_table_token_6_th operating partner commissions increased $ 5.7 million , or 6.8 % , to $ 90.2 million for the year ended june 30 , 2017 primarily due to increased commissions resulting from increases in net revenues from strategic operating partners .

62 nephros , inc. notes to consolidated financial statements note 8 — stock plans , share-based payments and warrants ( continued ) 2011 shareholders ' rights offering on march 10 , 2011 , nephros announced the completion of its rights offering and private placement that together story_separator_special_tag the following discussion includes forward-looking statements about our business , financial condition , and results of operations , including discussions about management 's expectations for our business . these statements represent projections , beliefs and expectations based on current circumstances and conditions and in light of recent events and trends , and you should not construe these statements either as assurances of performances or as promises of a given course of action . instead , various known and unknown factors are likely to cause our actual performance and management 's actions to vary , and the results of these variances may be both material and adverse . a list of the known material factors that may cause our results to vary , or may cause management to deviate from its current plans and expectations , is included in item 1a “ risk factors. ” the following discussion should also be read in conjunction with the consolidated financial statements and notes included herein . 37 going concern our independent registered public accounting firm has included an explanatory paragraph in their report on our financial statements included in this form 10-k which expressed doubt as to our ability to continue as a going concern . the accompanying financial statements have been prepared assuming that we will continue as a going concern , however , there can be no assurance that we will be able to do so . our recurring losses and difficulty in generating sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern , and our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty . business overview we are a medical device company developing and marketing filtration products for therapeutic applications , infection control , and water purification . our hemodiafiltration , or hdf , system is designed to improve the quality of life for the end-stage renal disease , or esrd , patient while addressing the critical financial and clinical needs of the care provider . esrd is a disease state characterized by the irreversible loss of kidney function . the nephros hdf system removes a range of harmful substances more effectively , and with greater capacity , than existing esrd treatment methods , particularly with respect to substances known collectively as “ middle molecules. ” these molecules have been found to contribute to such conditions as dialysis-related amyloidosis , carpal tunnel syndrome , degenerative bone disease and , ultimately , mortality in the esrd patient . nephros esrd products are sold and distributed throughout europe . we currently have three products in various stages of development in the hdf modality to deliver improved therapy to esrd patients : olpur mdhdf filter series ( which we sell in various countries in europe and currently consists of our md190 and md220 diafilters ) ; to our knowledge , it is the only filter designed expressly for hdf therapy and employs our proprietary mid-dilution diafiltration technology ; olpur h 2 h , our add-on module designed to allow the most common types of hemodialysis machines to be used for hdf therapy ; and olpur ns2000 system , our stand-alone hdf machine and associated filter technology . we have also developed our olpur hd 190 high-flux dialyzer cartridge , which incorporates the same materials as our olpur md series but does not employ our proprietary mid-dilution diafiltration technology . our olpur hd190 was designed for use with either hemodialysis or hemodiafiltration machines , and received its approval from the u.s. food and drug administration , or fda , under section 510 ( k ) of the food , drug and cosmetic act , or the fdc act , in june 2005. in january 2006 , we introduced our new dual stage ultrafilter , or dsu , water filtration system . our dsu represents a new and complementary product line to our existing esrd therapy business . the dsu incorporates our unique and proprietary dual stage filter architecture and is , to our knowledge , the only water filter that allows the user to sight-verify that the filter is properly performing its cleansing function . our research and development work on the olpur h 2 h and md mid-dilution filter technologies for esrd therapy provided the foundations for a proprietary multi-stage water filter that we believe is cost effective , extremely reliable , and long-lasting . the dsu is designed to remove a broad range of bacteria , viral agents and toxic substances , including salmonella , hepatitis , cholera , hiv , ebola virus , ricin toxin , legionella , fungi and e-coli . with over 5,800 registered hospitals in the united states alone ( as reported by the american hospital association in fast facts of january 3 , 2012 ) , we believe the hospital shower and faucet market can offer us a valuable opportunity as a first step in water filtration . the following trends , events and uncertainties may have a material impact on our potential sales , revenue and income from operations : 1 ) receiving regulatory approval for each of our esrd therapy products and our dsu product in our target territories ; 2 ) the completion and success of additional clinical trials ; 3 ) the market acceptance of hdf therapy in the united states and of our technologies and products in each of our target markets ; 4 ) our ability to effectively and efficiently manufacture , market and distribute our products ; 5 ) our ability to sell our products at competitive prices which exceed our per unit costs ; 6 ) the consolidation of dialysis clinics into larger clinical groups ; and 38 7 ) the current u.s. healthcare plan is to bundle reimbursement for dialysis treatment which may force dialysis story_separator_special_tag 39 revenue recognition revenue is recognized in accordance with asc topic 605. four basic criteria must be met before revenue can be recognized : ( i ) persuasive evidence of an arrangement exists ; ( ii ) delivery has occurred or services have been rendered ; ( iii ) the fee is fixed and determinable ; and ( iv ) collectibility is reasonably assured . we recognize revenue related to product sales when delivery is confirmed by our external logistics provider and the other criteria of asc topic 605 are met . product revenue is recorded net of returns and allowances . all costs and duties relating to delivery are absorbed by us . all shipments are currently received directly by our customers . stock-based compensation we account for stock-based compensation in accordance with asc 718 by recognizing the fair value of stock-based compensation in net income . the fair value of our stock option awards are estimated using a black-scholes option valuation model . this model requires the input of highly subjective assumptions and elections including expected stock price volatility and the estimated life of each award . in addition , the calculation of compensation costs requires that we estimate the number of awards that will be forfeited during the vesting period . the fair value of stock-based awards is amortized over the vesting period of the award . for stock awards that vest based on performance conditions ( e.g . achievement of certain milestones ) , expense is recognized when it is probable that the condition will be met . accounts receivable we provide credit terms to our customers in connection with purchases of our products . we periodically review customer account activity in order to assess the adequacy of the allowances provided for potential collection issues and returns . factors considered include economic conditions , each customer 's payment and return history and credit worthiness . adjustments , if any , are made to reserve balances following the completion of these reviews to reflect our best estimate of potential losses . inventory reserves our inventory reserve requirements are based on factors including the products ' expiration date and estimates for the future sales of the product . if estimated sales levels do not materialize , we will make adjustments to our assumptions for inventory reserve requirements . accrued expenses we are required to estimate accrued expenses as part of our process of preparing financial statements . this process involves identifying services which have been performed on our behalf , and the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements . examples of areas in which subjective judgments may be required include costs associated with services provided by contract organizations for the preclinical development of our products , the manufacturing of clinical materials , and clinical trials , as well as legal and accounting services provided by professional organizations . in connection with such service fees , our estimates are most affected by our understanding of the status and timing of services provided relative to the actual levels of services incurred by such service providers . the majority of our service providers invoice us monthly in arrears for services performed . in the event that we do not identify certain costs , which have begun to be incurred , or we under- or over-estimate the level of services performed or the costs of such services , our reported expenses for such period would be too low or too high . the date on which certain services commence , the level of services performed on or before a given date and the cost of such services are often determined based on subjective judgments . we make these judgments based upon the facts and circumstances known to us in accordance with generally accepted accounting principles . results of operations story_separator_special_tag style= '' width : 100 % ; font : 10pt times new roman , times , serif '' > amortization of debt issuance costs we account for debt issuance costs in accordance with asc 835 , which requires that these costs be reported in the balance sheet as deferred charges and amortized over the term of the associated debt . amortization of debt issuance costs of $ 40,000 and $ 50,000 for the years ended december 31 , 2011 and 2010 , respectively , were associated with the senior secured note issued to lambda investors llc . the note was paid in march 2011 and these capitalized costs were fully amortized by the first quarter of 2011. other income/expense other expense in the amount of approximately $ 2,000 for the year ended december 31 , 2011 was due to foreign currency loss on invoices paid to an international supplier . other income in the amount of approximately $ 20,000 for the year ended december 31 , 2010 primarily resulted from the reversal of a prior year 's accrual determined to no longer be necessary . off-balance sheet arrangements we did not engage in any off-balance sheet arrangements during the periods ended december 31 , 2011 and december 31 , 2010. liquidity and capital resources our future liquidity sources and requirements will depend on many factors , including : · the cost , timing and results of our efforts to obtain regulatory approval of our products , including specifically our 510 ( k ) application for our hdf system ; · the availability of additional financing , through the sale of equity securities or otherwise , on commercially reasonable terms or at all ; · the market acceptance of our products , and our ability to effectively and efficiently produce and market our products ; · the timing and costs associated with obtaining united states regulatory approval or the conformité européene , or ce , mark , which demonstrates compliance with the relevant european union requirements and is a regulatory prerequisite for selling our esrd therapy products in the european union and certain other countries that recognize ce marking ( for products other than our olpur mdhdf filter series , for which the ce

fluctuations in operating results our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future . we anticipate that our annual results of operations will be impacted for the foreseeable future by several factors including the progress and timing of expenditures related to our research and development efforts , marketing expenses related to product launches , timing of regulatory approval of our various products and market acceptance of our products . due to these fluctuations , we believe that the period to period comparisons of our operating results are not a good indication of our future performance . 40 the fiscal year ended december 31 , 2011 compared to the fiscal year ended december 31 , 2010 revenues total revenues for the year ended december 31 , 2011 were approximately $ 2,214,000 compared to approximately $ 2,938,000 for the year ended december 31 , 2010. total revenues decreased approximately $ 724,000. the decrease of approximately 25 % is due to decreased revenue of approximately $ 384,000 , or 45 % , during the year ended december 31 , 2011 over the same period in 2010 , related to our contract with the office of u.s. naval research , a $ 749,000 reduction in direct sales of our md filters in our target european market , and a $ 73,000 reduction in steris project sales .

the company is currently evaluating the impact this guidance may have on its consolidated financial statements story_separator_special_tag management 's discussion and analysis of financial condition and results of operations ( “ md & a ” ) is a supplement to the accompanying consolidated financial statements and is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses , current developments , financial condition , results of operations and liquidity . significant sections of the md & a are as follows : overview . this section , beginning below , provides a description of recent developments we believe are important in understanding our results of operations and financial condition as well as understanding anticipated future trends . it also provides a brief description of significant transactions and events that affect the comparability of financial results and a discussion of the progress being made on our strategic initiatives . consolidated results of operations . this section , beginning on page 38 , provides an analysis of our consolidated results of operations for the three years ended december 31 , 2018 . segment results of operations . this section , beginning on page 44 , provides an analysis of each business segment for the three years ended december 31 , 2018 as well as other businesses , corporate and eliminations . in addition , we discuss significant transactions , events and trends that may affect the comparability of the results being analyzed . liquidity and capital resources . this section , beginning on page 53 , provides an analysis of our cash flows for the three years ended december 31 , 2018 . we also discuss restrictions on cash movements , future commitments and capital resources . critical accounting policies , estimates and recent accounting pronouncements . this section , beginning on page 56 , identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application . we provide all of our significant accounting policies in note 2 to the accompanying consolidated financial statements . other matters . this section , beginning on page 59 , provides a discussion of off-balance sheet arrangements to the extent they exist . in addition , we provide a tabular discussion of contractual obligations , discuss any significant commitments or contingencies and customer concentration . overview our business we are an integrated service provider and marketplace for the real estate and mortgage industries . combining operational excellence with a suite of innovative services and technologies , altisource helps solve the demands of the ever-changing markets we serve . we report our operations through two reportable segments : mortgage market and real estate market . in addition , we report other businesses , corporate and eliminations separately . the mortgage market segment provides loan servicers and originators with marketplaces , services and technologies that span the mortgage lifecycle . the real estate market segment provides real estate consumers and rental property investors with marketplaces and services that span the real estate lifecycle . in addition , the other businesses , corporate and eliminations segment includes businesses that provide post-charge-off consumer debt collection services primarily to debt originators ( e.g. , credit card , auto lending and retail credit ) , customer relationship management services primarily to the utility , insurance and hotel industries and it infrastructure management services . other businesses , corporate and eliminations also includes interest expense and costs related to corporate support functions including executive , finance , law , compliance , human resources , vendor management , facilities , risk management , and sales and marketing costs not allocated to the business units as well as eliminations between the reportable segments . we classify revenue in three categories : service revenue , revenue from reimbursable expenses and non-controlling interests . service revenue consists of amounts attributable to our fee-based services and sales of short-term investments in real estate . reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee-based services that we pass directly on to our customers without a markup . non-controlling interests represent the earnings of lenders one , a consolidated entity that is a mortgage cooperative managed , but not owned , by altisource . lenders one is included in revenue and reduced from net income to arrive at net income attributable to altisource . strategy and growth businesses we are focused on becoming one of the premier providers of mortgage and real estate marketplaces and related services to a broad and diversified customer base . within the mortgage and real estate market segments , we facilitate transactions and provide products , 33 solutions and services related to home sales , home purchases , home rentals , home maintenance , mortgage originations and mortgage servicing . each of our strategic businesses provides altisource the potential to grow and diversify our customer and revenue base . we believe these businesses operate in very large markets and directly leverage our core competencies and distinct competitive advantages . a further description of our four strategic businesses follows . servicer solutions : through this business , we provide a suite of services and technologies to meet the evolving and growing needs of loan servicers . we are focused on growing referrals from our existing customer base , expanding the service and proprietary technology offerings to our customer base , and attracting new customers to our offerings . we have a customer base that includes ocwen , a gse , nrz , several large bank and non-bank servicers and asset managers . we believe we are one of only a few providers with a broad suite of servicer solutions , nationwide coverage and demonstrated scalability . further , we believe we are well positioned to gain market share as delinquency rates rise and as existing customers and prospects consolidate to larger , full-service providers and outsource services that have historically been performed in-house . story_separator_special_tag previous regulatory actions against ocwen resulted in subjecting ocwen to independent oversight of its operations and placing certain restrictions on its ability to acquire servicing rights . in addition to the above , ocwen may become subject to future federal and state regulatory investigations , cease and desist orders , consent orders , inquiries , subpoenas , civil investigative demands , requests for information , other matters or legal proceedings , any of which could also result in adverse regulatory or other actions against ocwen . ocwen has disclosed that nrz is its largest client . as of september 30 , 2018 , nrz owned msrs or rights to msrs relating to approximately 57 % of loans serviced and subserviced by ocwen ( measured in upb ) . in july 2017 and january 2018 , ocwen and nrz entered into a series of agreements pursuant to which the parties agreed , among other things , to undertake certain actions to facilitate the transfer from ocwen to nrz of ocwen 's legal title to the subject msrs and under which ocwen will subservice mortgage loans underlying the subject msrs for an initial term of five years . nrz can terminate its sub-servicing agreement with ocwen in exchange for the payment of a termination fee . the foregoing may have significant adverse effects on ocwen 's business and or our continuing relationship with ocwen . for example , ocwen may be required to alter the way it conducts business , including the parties it contracts with for services ( including it and software services ) , it may be required to seek changes to its existing pricing structure with us , it may lose its non-gse servicing rights or subservicing arrangements or may lose one or more of its state servicing or origination licenses . additional regulatory actions or adverse financial developments may impose additional restrictions on or require changes in ocwen 's business that could require it to sell assets or change its business operations . any or all of these effects could result in our eventual loss of ocwen as a customer or a reduction in the number and or volume of services they purchase from us or the loss of other customers . if any of the following events occurred , altisource 's revenue could be significantly lower and our results of operations could be materially adversely affected , including from the possible impairment or write-off of goodwill , intangible assets , property and equipment , other assets and accounts receivable : altisource loses ocwen as a customer or there is a significant reduction in the volume of services they purchase from us ocwen loses , sells or transfers a significant portion or all of its remaining non-gse servicing rights or subservicing arrangements and altisource fails to be retained as a service provider ocwen loses state servicing licenses in states with a significant number of loans in ocwen 's servicing portfolio the contractual relationship between ocwen and altisource changes significantly or there are significant changes to our pricing to ocwen for services from which we generate material revenue altisource otherwise fails to be retained as a service provider management can not predict whether any of these events will occur or the amount of any impact they may have on altisource . however , in the event one or more of these events materially negatively impact altisource , we believe the variable nature of our cost structure would allow us to realign our cost structure in line with remaining revenue . furthermore , in the event of a significant reduction in the volume of services purchased or loan portfolios serviced by ocwen ( such as a transfer of ocwen 's remaining servicing rights to a successor servicer ) , we believe the impact to altisource could occur over an extended period of time . during this period , we believe that we will continue to generate revenue from all or a portion of ocwen 's loan portfolios . our servicer solutions , origination solutions and consumer real estate solutions businesses are focused on diversifying and growing our revenue and customer base and we have a sales and marketing strategy to support these businesses . management 35 believes our plans , together with current liquidity and cash flows from operations , would be sufficient to meet our working capital , capital expenditures , debt service and other cash needs . however , there can be no assurance that our plans will be successful or our operations will be profitable . factors affecting comparability the following items may impact the comparability of our results : the average number of loans serviced by ocwen on realservicing ( including those msrs owned by nrz and subserviced by ocwen ) was approximately 1.1 million , 1.3 million and 1.5 million for the years ended december 31 , 2018 , 2017 and 2016 , respectively . the average number of delinquent non-gse loans serviced by ocwen on realservicing ( including those msrs owned by nrz and subserviced by ocwen ) was approximately 152 thousand , 182 thousand and 219 thousand for the years ended december 31 , 2018 , 2017 and 2016 , respectively . in august 2018 , we sold our rental property management business to resi for total transaction proceeds of $ 18.0 million , $ 15.0 million of which was received on the closing date of august 8 , 2018 and $ 3.0 million of which will be received on the earlier of a resi change of control or on august 8 , 2023. we recognized a $ 13.7 million pretax gain on the sale of this business during the year ended december 31 , 2018 in the accompanying consolidated statements of operations and comprehensive income ( loss ) .

segment results of operations the following section provides a discussion of pretax results of operations of our business segments . transactions between segments are accounted for as third party arrangements for purposes of presenting segment results of operations . financial information for our segments was as follows : replace_table_token_17_th replace_table_token_18_th 44 replace_table_token_19_th 45 mortgage market revenue revenue by business unit was as follows for the years ended december 31 : replace_table_token_20_th we recognized service revenue of $ 655.8 million for the year ended december 31 , 2018 , a 13 % decrease compared to the year ended december 31 , 2017 . the decrease was primarily a result of the reduction in the size of ocwen 's portfolio and number of delinquent loans in its portfolio resulting from loan repayments , loan modifications , short sales , reo sales and other forms of resolution in the servicer solutions business . in addition , origination solutions service revenue decreased , primarily from lower origination volumes in 2018. we recognized service revenue of $ 754.1 million for the year ended december 31 , 2017 , a 3 % decrease compared to the year ended december 31 , 2016 . the decrease was primarily a result of the reduction in the size of ocwen 's portfolio and number of delinquent loans in its portfolio resulting from loan repayments , loan modifications , short sales , reo sales and other forms of resolution in the servicer solutions business .

the boehringer ingelheim manufacturing facility where empagliflozin is being produced is subject to an fda warning letter ; however , it is not clear if this will impact the timing of fda action for empagliflozin . in the fourth quarter of 2013 , boehringer ingelheim filed for regulatory review in japan . enzastaurin —in may 2013 , we announced the decision to stop development of enzastaurin as a result of negative clinical trial results from the phase iii prelude study , which explored the molecule as a monotherapy in the prevention of relapse for patients with diffuse large b-cell lymphoma . ixekizumab —in january 2013 , we initiated phase iii clinical trial testing for ixekizumab as a potential treatment for psoriatic arthritis . liprotamase —in december 2013 , we made the decision to discontinue further development of liprotamase . necitumumab —in august 2013 , we announced that the phase iii study , squire , met its primary endpoint , finding that patients with stage iv metastatic squamous nsclc experienced increased overall survival when administered necitumumab in combination with gemcitabine and cisplatin as a first-line treatment , as compared to chemotherapy alone . we anticipate filing for regulatory review before the end of 2014. new insulin glargine product —in july 2013 , we and boehringer ingelheim announced that the marketing authorization application for our new insulin glargine product , filed in june 2013 through the biosimilar pathway , was accepted for review by the european medicines agency . in the fourth quarter of 2013 , we filed for regulatory review in the u.s. and japan . in january 2014 , sanofi-aventis u.s. llc ( sanofi ) filed a lawsuit against us in the u.s. district court for the district of delaware alleging patent infringement with respect to our insulin glargine product for which we are seeking approval from the fda . sanofi asserts infringement of two patents relating to pen injector devices and two patents relating to insulin glargine formulations . under the hatch-waxman act , the initiation of the lawsuit automatically invokes a stay of fda approval of the product for a period of 30 months , which may be shortened in the event of an earlier decision in our favor . we believe the lawsuit is without merit , and we are prepared to vigorously defend against the allegations . ramucirumab —our rolling submission to the fda for ramucirumab as a single-agent biologic therapy in patients with advanced gastric cancer following progression on prior chemotherapy was completed in the third quarter of 2013 , and received priority review status by the fda in october 2013. our regulatory submission in europe for the same indication was also completed in the third quarter of 2013. in september 2013 , we announced that the rainbow trial , a global phase iii study of ramucirumab in combination with paclitaxel in patients with advanced gastric cancer , met its primary endpoint of improved overall survival and a secondary endpoint of improved progression-free survival . we intend to submit an application for this indication to regulatory authorities in 2014. in september 2013 , we also announced that a separate global phase iii study of ramucirumab in women with locally recurrent or metastatic breast cancer , rose , did not meet its primary endpoint of 29 progression-free survival . we do not plan to submit an application to regulatory authorities for ramucirumab in the first-line treatment of locally recurrent or metastatic her2-negative breast cancer based on the results from the rose study . in february 2014 , we announced that the revel trial , a global phase iii study of ramucirumab in combination with chemotherapy ( docetaxel ) in patients with second-line nsclc , met its primary endpoint of improved overall survival and a secondary endpoint of improved progression-free survival . we intend to submit the first application for this indication to regulatory authorities in 2014. tabalumab —in february 2013 , we announced our decision to discontinue the phase iii rheumatoid arthritis program for tabalumab due to lack of efficacy . the decision was not based on safety concerns . the tabalumab phase iii program for lupus is continuing as planned . tanezumab —in october 2013 , we entered into a collaboration agreement with pfizer to jointly develop and globally commercialize tanezumab for the potential treatment of osteoarthritis pain , chronic low back pain , and cancer pain . tanezumab is currently in phase iii clinical development and is subject to a partial clinical hold by the fda pending submission of nonclinical data to the fda . pfizer anticipates submitting that data in 2014. see note 4 to the consolidated financial statements for additional details . there are many difficulties and uncertainties inherent in pharmaceutical research and development ( r & d ) and the introduction of new products . a high rate of failure is inherent in new drug discovery and development . the process to bring a drug from the discovery phase to regulatory approval can take 12 to 15 years or longer and cost more than $ 1 billion . failure can occur at any point in the process , including late in the process after substantial investment . as a result , most research programs will not generate financial returns . new product candidates that appear promising in development may fail to reach the market or may have only limited commercial success . delays and uncertainties in the regulatory approval processes in the u.s. and other countries can result in delays in product launches and lost market opportunities . consequently , it is very difficult to predict which products will ultimately be approved and the sales growth of those products . we manage r & d spending across our portfolio of molecules , and a delay in , or termination of , any one project will not necessarily cause a significant change in our total r & d spending . story_separator_special_tag sales of cymbalta , a product for the treatment of major depressive disorder , diabetic peripheral neuropathic pain , generalized anxiety disorder , and in the u.s. for the treatment of chronic musculoskeletal pain and the management of fibromyalgia , increased 1 percent in the u.s. , driven by higher prices , largely offset by lower demand due to the loss of u.s. patent exclusivity in december 2013 , which is causing rapid and severe declines in our cymbalta sales . sales outside the u.s. increased 4 percent , driven primarily by increased volume , partially offset by lower prices and the unfavorable impact of foreign exchange rates . we will lose effective exclusivity for cymbalta in major european countries upon expiration of our data package protection in 2014 ; however , because generic manufacturers can not file for regulatory approval until after our data package protection expires , we do not anticipate the entry of generic competition in most of these countries until 2015. while it is difficult to predict the precise impact on cymbalta sales , we expect the introduction of generics in these markets to result in a rapid and severe decline in our cymbalta sales , which will have a material adverse effect on our consolidated results of operations and cash flows . sales of alimta , a treatment for various cancers , increased 8 percent in the u.s. , due to higher prices and increased demand . sales outside the u.s. increased 1 percent , driven by increased volume , partially offset by the unfavorable impact of foreign exchange rates and lower prices . sales of humalog , our injectable human insulin analog for the treatment of diabetes , increased 11 percent in the u.s. , driven by higher prices , wholesaler buying patterns , and increased demand . sales outside the u.s. increased 6 percent , driven by increased volume , partially offset by the unfavorable impact of foreign exchange rates . sales of cialis , a treatment for erectile dysfunction and benign prostatic hyperplasia ( bph ) , increased 21 percent in the u.s. , driven by higher prices . sales outside the u.s. increased 6 percent , driven by higher prices and increased volume , partially offset by the unfavorable impact of foreign exchange rates . sales of humulin , an injectable human insulin for the treatment of diabetes , increased 14 percent in the u.s. , driven by higher prices , partially offset by decreased demand . sales outside the u.s. decreased 1 percent , driven by the unfavorable impact of foreign exchange rates , partially offset by increased volume . 32 sales of forteo , an injectable treatment for osteoporosis in postmenopausal women and men at high risk for fracture and for glucocorticoid-induced osteoporosis in men and postmenopausal women , increased 5 percent in the u.s. , driven primarily by higher prices . sales outside the u.s. increased 11 percent , due to increased volume , primarily in japan , partially offset by the unfavorable impact of foreign exchange rates . sales of zyprexa , a treatment for schizophrenia , acute mixed or manic episodes associated with bipolar i disorder , and bipolar maintenance , decreased 66 percent in the u.s. due to the continued erosion following patent expiration in 2011. sales outside the u.s. decreased 20 percent , driven by the unfavorable effect of foreign exchange rates , lower volume in markets outside of japan , and lower prices . zyprexa sales in japan were approximately $ 510 million in 2013 , compared to approximately $ 585 million in 2012 , and were negatively impacted by the continued weakness of the japanese yen . sales of evista , a product for the prevention and treatment of osteoporosis in postmenopausal women and for reduction of risk of invasive breast cancer in postmenopausal women with osteoporosis and postmenopausal women at high risk for invasive breast cancer , increased 10 percent in the u.s. , driven by higher prices , partially offset by decreased demand . sales outside the u.s. decreased 10 percent , driven by the unfavorable impact of foreign exchange rates and lower prices , partially offset by increased volume in japan . we will lose effective patent exclusivity for evista in the u.s. on march 2 , 2014. we expect generic competition immediately following the loss of exclusivity . while it is difficult to predict the precise impact on evista sales , we expect the introduction of generics to result in a rapid and severe decline in our u.s. evista sales , which will have a material adverse effect on our consolidated results of operations and cash flows . sales of strattera , a treatment for attention-deficit hyperactivity disorder , increased 16 percent in the u.s. , driven primarily by higher prices . sales outside the u.s. increased 11 percent , driven primarily by increased volume in japan , partially offset by lower prices and the unfavorable impact of foreign exchange rates . sales of effient , a product for the reduction of thrombotic cardiovascular events ( including stent thrombosis ) in patients with acute coronary syndrome who are managed with an artery-opening procedure known as percutaneous coronary intervention , including patients undergoing angioplasty , atherectomy , or stent placement , increased 11 percent in the u.s. , driven primarily by higher prices . sales outside the u.s. increased 12 percent , driven primarily by increased volume . animal health product sales in the u.s. increased 6 percent driven primarily by increased volume for trifexis ® and , to a lesser extent , higher prices . sales outside the u.s. increased 6 percent , driven by increased volume and , to a lesser extent , higher prices , partially offset by the unfavorable impact of foreign exchange rates .

financial results worldwide total revenue increased 2 percent to $ 23.11 billion in 2013 , driven by growth in several products , including cialis ® , humalog ® , trajenta ® , alimta ® , forteo ® , and animal health products , partially offset by the continued erosion of zyprexa ® sales following the loss of patent exclusivity in the u.s. and most major markets outside japan . in 2013 , net income increased 15 percent to $ 4.68 billion and eps increased 18 percent to $ 4.32 , compared to 2012 net income and eps of $ 4.09 billion and $ 3.66 , respectively . the increases were due to higher gross margin , lower marketing , selling , and administrative expenses , and , to a lesser extent , a lower effective tax rate , partially offset by higher research and development expenses and lower other income . eps in 2013 also benefited from a lower number of shares outstanding compared to 2012 as a result of our share repurchase programs . the following highlighted items affect comparisons of our 2013 and 2012 financial results : 2013 collaborations ( note 4 to the consolidated financial statements ) we recognized income of $ 495.4 million ( pretax ) , or $ 0.29 per share , related to the transfer to amylin pharmaceuticals , inc. ( amylin ) of exenatide commercial rights in all markets outside the united states . acquired in-process research & development ( ipr & d ) ( note 3 to the consolidated financial statements ) we recognized acquired ipr & d charges of $ 57.1 million ( pretax ) , or $ 0.03 per share , resulting from our acquisition of all development and commercial rights for a calcitonin gene-related peptide ( cgrp ) antibody currently being studied as a potential treatment for the prevention of frequent , recurrent migraine headaches , following a successful phase ii proof-of-concept study .

the estimated useful life for each asset category is as follows : estimated useful lives laboratory and manufacturing equipment 1.5 to 10 years furniture and fixtures 3 to story_separator_special_tag this annual report on form 10-k contains “forward-looking statements” that involve risks and uncertainties , as well as assumptions that , if they never materialize or prove incorrect , could cause our results to differ materially from those expressed or implied by such forward-looking statements . such forward-looking statements include any expectation of earnings , revenues , gross margins , expenses or other financial items ; any statements of the plans , strategies and objectives of management for future operations and personnel ; factors that may affect our operating results ; statements concerning new products or services , including future pic capacity and new product delivery and revenue dates ; statements related to capital expenditures ; statements related to future economic conditions , performance , market growth or our sales cycle ; statements related to the liquidity of our auction rate securities ; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing . these statements are often identified by the use of words such as “anticipate , ” “believe , ” “continue , ” “could , ” “estimate , ” “expect , ” “intend , ” “may , ” or “will , ” and similar expressions or variations . these statements are based on the beliefs and assumptions of our management based on information currently available to management . such forward-looking statements are subject to risks , uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements . factors that could cause or contribute to such differences include , but are not limited to , those identified below , and those discussed in the section titled “risk factors” included in item 1a of this annual report on form 10-k. you should review these risk factors for a more complete understanding of the risks associated with an investment in our securities . such forward-looking statements speak only as of the date of this report . we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements . the following discussion and analysis should be read in conjunction with our “selected consolidated financial data” and consolidated financial statements and notes thereto included elsewhere in this annual report on form 10-k. background infinera was founded in december 2000 with a unique vision for optical networking . prior to infinera , communications service provider optical networks were built from fairly commoditized products , broadly known as wavelength division multiplexing ( “wdm” ) systems . recent growth in bandwidth demand has increased the need for the delivery of high-capacity low-cost bandwidth throughout the network . we believe that traditional point-to-point network architectures do not provide the required flexibility to meet this demand . it takes large amounts of low-cost bandwidth , pervasive optical transport network ( “otn” ) switching , and the intelligence of bandwidth management to manage these larger networks and deliver high-capacity services quickly and cost-effectively . infinera believes this can best be achieved with photonic integrated circuits ( “pics” ) and that only through photonic integration can network operators efficiently scale their network bandwidth without significant increases in space , power or operational workload . we first introduced our digital optical network architecture to the market in 2004. this architecture is based on our unique pics and enables high-capacity , low-cost bandwidth in the cloud and distributed switching throughout the network . since 2004 , our strategy has been to extend the benefits of our digital optical network throughout the optical networking market . we have made significant enhancements to our digital transport node system ( “dtn platform” ) during this time by increasing reach and fiber capacity for the long-haul market , adding the infinera mtc , a 19-inch chassis option tailored for the metro core market , and adding a submarine version of the dtn platform for the submarine line terminating equipment market . in addition , we introduced our atn metro access platform ( “atn platform” ) , extending infinera 's digital bandwidth management and intelligent network benefits to the network edge . traffic patterns in the optical network continue to grow to accommodate increased bandwidth from video , mobility and cloud computing with high-capacity networks migrating from 10 gigabits per second ( “gbps” ) and 40 gbps wavelength solutions to newly available 100 gbps solutions . in order to meet the growing bandwidth demands of our customers , we introduced our 40 gbps non-pic based solution in the third quarter of 2011 and we launched our dtn-x platform , a 100 gbps platform based on our 500 gbps pics with a 5 terabit otn switch in september 2011 and completed our first shipments for customer deployment in the second quarter of 2012. the dtn , dtn-x and atn platforms are designed to operate as a tightly-integrated network with a single management system providing an end-to-end digital optical network experience . 35 2012 financial and business performance 2012 was an important year for infinera . we commenced shipment of our next-generation dtn-x platform in the second quarter with first revenues recognized from the platform in the third quarter . the dtn-x platform has been well received by customers across many markets with purchase commitments received from 22 customers by the end of the year . story_separator_special_tag operating expenses the following table summarizes our operating expenses for the periods presented ( in thousands , except % ) : replace_table_token_5_th 39 the following table summarizes the stock-based compensation expense included in our operating expenses ( in thousands ) : replace_table_token_6_th research and development expenses 2012 compared to 2011. research and development expenses decreased $ 9.9 million in 2012 from 2011. this reduction was primarily due to $ 8.6 million of research and development resources redeployed to manufacturing in support of initial dtn-x production builds . in addition , prototype and other equipment spending decreased by $ 5.7 million in 2012 , following the release of the dtn-x platform . these decreases were partially offset by $ 2.6 million of increased depreciation , $ 0.6 million increase in professional and outside services and $ 0.6 million increase in facilities and other costs , as compared to 2011. total other personnel-related costs increased by $ 0.6 million . this increase was comprised of $ 2.3 million increase of cash compensation offset by $ 1.7 million decrease of stock-based compensation expense . 2011 compared to 2010. research and development expenses increased $ 8.6 million in 2011 from 2010 primarily due to increased headcount and personnel-related costs of $ 2.6 million primarily associated with next-generation product development . this was comprised of $ 1.9 million of cash compensation and $ 0.7 million of stock-based compensation expense . in addition , during 2011 , we incurred $ 1.6 million of increased depreciation , $ 1.4 million increase in professional and outside services , $ 1.1 million in travel and entertainment expenses , $ 1.2 million increase in spending on equipment and software , and $ 0.7 million increase in facilities and other costs , as compared to 2010. sales and marketing expenses 2012 compared to 2011. sales and marketing expenses increased $ 11.1 million in 2012 from 2011 primarily due to $ 4.7 million related to increased expenses for customer lab trials , $ 3.7 million in compensation and personnel-related expenses due to increased headcount , $ 1.6 million of increased stock-based compensation expense , $ 0.7 million of increased travel and related expenses and $ 0.4 million of increased facilities and other costs . this increase in spending primarily reflects the ongoing impact of incremental sales resources to support the expansion of our addressable markets with the introduction of the dtn-x platform . 2011 compared to 2010. sales and marketing expenses increased $ 6.7 million in 2011 from 2010 primarily due to $ 2.7 million in compensation and personnel-related expenses due to increased headcount , $ 1.7 million of increased travel and related expenses , $ 1.2 million of increased marketing program expenses and trade show costs , $ 0.9 million of increased stock-based compensation expense , a $ 0.4 million increase related to outside professional services , $ 0.6 million of increased facilities and other costs , and $ 0.2 million related to increased expenses for customer lab trials . these increases were offset by $ 1.0 million in decreased sales commission expense . general and administrative expenses 2012 compared to 2011. general and administrative expenses decreased $ 6.9 million in 2012 from 2011 primarily due to $ 9.0 million of decreased stock-based compensation expense , which included the impact of reduced management bonuses and other changes in equity grant activity , and $ 0.2 million decrease in facilities and other costs . these decreases were partially offset by increased professional services costs of $ 1.6 million primarily related to implementation of our new enterprise resource planning system and related increased depreciation costs of $ 0.7 million . 40 2011 compared to 2010 . general and administrative expenses decreased $ 3.7 million in 2011 from 2010 primarily due to a $ 2.1 million decrease in cash compensation which included the impact of reduced management bonuses , $ 1.4 million of decreased stock-based compensation expense , and a $ 0.7 million decrease in facilities and other costs . these decreases were partially offset by increased depreciation costs of $ 0.4 million and increased professional services costs of $ 0.1 million . restructuring and other costs in 2011 , we recorded a credit of $ 0.1 million due to a change in estimates associated with facility-related costs . in 2010 , we incurred $ 0.2 million of restructuring and other costs associated with the closure of our maryland fab . we completed our restructuring actions in 2010. for more information , see note 7 , “restructuring and other related costs , ” to the notes to consolidated financial statements . other income ( expense ) , net replace_table_token_7_th 2012 compared to 2011 . interest income decreased $ 0.1 million in 2012 from 2011 mainly due to lower average investment balances . other gain ( loss ) , net for 2012 includes $ 1.5 million of unrealized and realized losses due to foreign currency exchange , partially offset by a gain of $ 0.5 million from ars called at par value . 2011 compared to 2010 . interest income decreased $ 0.4 million in 2011 from 2010 due to lower interest rates on investments and lower average investment balances . other gain ( loss ) , net for 2011 includes $ 1.0 million of unrealized and realized losses due to foreign currency exchange , a gain of $ 0.3 million from the sale of assets and a gain of $ 0.2 million related to an insurance claim settlement . income tax provision we recognized income tax expense of approximately $ 2.2 million , $ 1.7 million and $ 0.3 million in each of fiscal years 2012 , 2011 , and 2010 , on pre-tax book losses of $ 83.1 million , $ 80.1 million , and $ 27.6 million , respectively .

results of operations revenue the following table sets forth , for periods presented , certain consolidated statements of operations information ( in thousands , except % ) : replace_table_token_3_th the following table summarizes our revenue by geography and sales channel for the periods presented ( in thousands , except % ) : replace_table_token_4_th 37 2012 compared to 2011. total revenue increased to $ 438.4 million in 2012 from $ 404.9 million in 2011. revenues were positively impacted by the recognition of revenues from sales of our new dtn-x platform during the second half of 2012. these revenues included sales to existing customers transitioning their higher-capacity network deployments to the dtn-x and new customers purchasing our digital optical network solutions for the first time . while this increase in dtn-x revenues was somewhat offset by a reduction in sales of our dtn platform , we continued to deploy the dtn platform in lower capacity applications with nine new customers in 2012. revenues for 2011 were negatively impacted when customers who required higher-capacity network solutions in advance of the availability of our 40 gbps and 100 gbps systems purchased competitor products for portions of their networks . international revenue increased to 32 % of total revenue in 2012 from 30 % of total revenue in 2011. the increases were primarily due to an increased proportion of our sales occurring in europe . while we expect international revenues to continue to grow in absolute dollars on a long-term basis as we increase our sales activities in europe , asia pacific and other regions , this metric may fluctuate as a percentage of total revenue depending on the size and timing of deployments both internationally and in the united states .

“ selected financial data ” and our consolidated financial statements and related notes included in part iv , item 15 ( a ) of this annual report on form 10-k. as a result of our deemed controlling financial interests in the consolidated vies in accordance with u.s. gaap , we consolidate the financial position , results of operations and cash flows of these vies as if they were wholly-owned entities . we believe this presentation is meaningful for understanding our financial performance . refer to note 2 to our consolidated financial statements for a discussion of our determinations of vie consolidation under the related authoritative guidance . the following discussion of our financial position and results of operations includes the consolidated vies ' financial position and results of operations . executive summary 2019 highlights net revenue during 2019 increased by $ 272.6 million , or 9.9 % compared to the same period in 2018. the increase in net revenue was primarily due to the incremental revenue from acquisitions of $ 483.8 million and an increase in distribution revenue of $ 96.5 million from our legacy stations . these increases were partially offset by a decrease in our legacy stations ' revenue from television advertising of $ 221.9 million primarily due to 2019 not being an election year , a net decrease of $ 37.5 million in digital revenue of our entities and legacy stations primarily due to the combined effect of a decline in revenue from our social media advertising platform , marketplace changes which decreased select demand-side platform customer buying and organic growth in our local customer buying trends ( increase in local revenue from our stations ' web and mobile sites and from other internet-based revenue ) , and decrease in revenue resulting from station divestitures of $ 40.4 million . during 2019 , our board of directors declared quarterly dividends of $ 0.45 per share of our outstanding common stock , or total dividend payments of $ 82.8 million . during 2019 , we repurchased a total of 439,743 shares of our class a common stock for $ 45.1 million , funded by cash on hand . as of december 31 , 2019 , the remaining available amount under the share repurchase authorization was $ 156.8 million . 2019 acquisitions and dispositions on september 19 , 2019 , we completed our previously announced merger with tribune , a diversified media and entertainment company registered and incorporated in the state of delaware . as a result of the merger , we acquired tribune 's 31 full power television stations , net of tribune station divestitures , and one am radio station in 23 markets . we also acquired wgn america , a national general entertainment cable network , a 31.3 % ownership stake in tv food network , inc. and a portfolio of real estate assets . the total purchase price of the merger was $ 7.187 billion , including $ 4.2 billion in cash payments to stockholders of tribune , $ 2.99 billion in repayment of certain debt of tribune , including premium and accrued interest , and $ 1.0 million in replacement awards of warrants . substantially concurrently with the closing of the merger , we sold the assets of 21 full power television stations in 16 markets to tegna , inc. , e.w . scripps company and circle city broadcasting i , inc. the total consideration of these divestitures was approximately $ 1.36 billion ( inclusive of working capital adjustments ) . we sold the 13 stations previously owned or operated by tribune for $ 1.008 billion in cash , including working capital adjustments . we sold the eight stations that we previously owned for $ 358.6 million in cash , including working capital adjustments . these divestitures resulted in a net gain on disposal of $ 96.1 million . the cash consideration , the repayment of tribune debt , including premium and accrued interest , and the related fees and expenses were funded through a combination of cash on hand of nexstar and tribune , proceeds from the station divestitures , new term loan borrowings and the issuance of new notes ( see “ debt transactions ” below ) . see also note 3—acquisitions and dispositions and note 9—debt to our consolidated financial statements in part iv , item 15 ( a ) of this annual report on form 10-k for additional information about the merger and recently issued debt . 46 future acquisitions and dispositions on november 5 , 2019 , we entered into purchase and sale agreements with fox whereby we will purchase the fox affiliate wjzy and the mynetworktv affiliate wmyt in the charlotte , nc market from fox for approximately $ 45 million in cash , and will sell to fox the fox affiliate kcpq and the mynetworktv affiliate kzjo in the seattle , wa market , as well as the fox affiliate witi in the milwaukee , wi market , for approximately $ 350 million in cash , subject to customary adjustments . the transaction , which has received fcc approval , closed on march 2 , 2020. on january 14 , 2020 , we sold our sports betting information website business to star enterprises ltd. , a subsidiary of alto holdings , ltd. , for total cash consideration of $ 14.4 million . on january 27 , 2020 , we and sinclair agreed to settle the outstanding lawsuit between tribune and sinclair in connection with their terminated merger agreement . tribune is an entity acquired by nexstar in september 2019. as part of the resolution , sinclair has agreed to sell to us television station wdky-tv in the lexington , ky dma , subject to fcc approval and other customary conditions . sinclair has also sold to us certain non-license assets associated with television station kgbt-tv in the harlingen-weslaco-brownsville-mcallen , texas dma . we and sinclair have also modified an existing agreement regarding carriage of certain of sinclair 's digital networks by stations we acquired in connection with the tribune acquisition . story_separator_special_tag currently , broadcasters deliver more than 30 % of all television viewing audiences in a pay television household but are paid approximately 12-14 % of the total cable programming fees . nexstar anticipates retransmission fees will continue to increase until there is a more balanced relationship between viewers delivered and fees paid for delivery of such viewers . most of our stations have a network affiliation agreement pursuant to which the network provides programming to the station during specified time periods , including prime time , in exchange for affiliation fees paid to the networks , in most cases , and the right to sell a substantial majority of the advertising time during these broadcasts . network affiliation fees have been increasing industry wide and we expect they will continue to increase over the next several years . each station acquires licenses to broadcast programming in non-news and non-network time periods . the licenses are either purchased from a program distributor for cash and or the program distributor is allowed to sell some of the advertising inventory as compensation to eliminate or reduce the cash cost for the license . the latter practice is referred to as barter broadcast rights . beginning on january 1 , 2018 , we no longer recognize assets and expense resulting from these barter transactions . refer to note 2 — revenue recognition to our consolidated financial statements in part iv , item 15 ( a ) of this annual report on form 10-k for additional information . our primary operating expenses include employee salaries , commissions and benefits , newsgathering and programming costs . a large percentage of the costs involved in the operation of our stations and the stations we provide services to remains relatively fixed . we guarantee full payment of all obligations incurred under mission 's and shield 's senior secured credit facilities in the event of their default . mission is a guarantor of our senior secured credit facility , our 5.625 % notes due 2024 and our 5.625 % notes due 2027. shield does not guarantee any debt within the group . in consideration of our guarantee of mission 's senior secured credit facility , mission has granted us purchase options to acquire the assets and assume the liabilities of each mission station , subject to fcc consent . these option agreements ( which expire on various dates between 2021 and 2028 ) are freely exercisable or assignable by us without consent or approval by mission or its shareholders . we expect these option agreements to be renewed upon expiration . 48 we do not own the consolidated vies or their television stations . however , we are deemed under u.s. gaap to have controlling financial interests in these entities because of ( 1 ) the local service agreements nexstar has with their stations , ( 2 ) our guarantees of the obligations incurred under mission 's and shield 's senior secured credit facilities , ( 3 ) our power over significant activities affecting the vies ' economic performance , including budgeting for advertising revenue , advertising sales and , in some cases , hiring and firing of sales force personnel and ( 4 ) purchase options granted by each consolidated vie which permit nexstar to acquire the assets and assume the liabilities of each of the se vies ' stations at any time , subject to fcc consent . in compliance with fcc regulations for all the parties , each of the consolidated vies maintain s complete responsibility for and control over programming , finances and personnel for its stations . in december 2019 , marshall , a vie previously consolidated by nexstar and the owner of three television stations , filed a voluntary petition for chapter 11 protection in the u.s. bankruptcy court for the southern district of texas . effective on december 6 , 2019 , the bankruptcy court ordered the cancellation of certain contracts between nexstar and marshall , including the jsas . as a result of these developments , we evaluated our business arrangements with marshall and determined that we no longer have the power to direct the most significant economic activities of the entity and thus no longer meet the accounting criteria for a controlling financial interest in the entity . thus , we deconsolidated marshall 's assets , liabilities and equity effective in december 2019. the ssas between us and marshall are currently active . refer to note 2 — variable interest entities to our consolidated financial statements in part iv , item 15 ( a ) of this annual report on form 10-k for additional information with respect to consolidated vies . regulatory developments as a television broadcaster , the company is highly regulated , and its operations require that it retain or renew a variety of government approvals and comply with changing federal regulations . in 2016 , the fcc reinstated a previously adopted rule providing that a television station licensee which sells more than 15 percent of the weekly advertising inventory of another television station in the same dma is deemed to have an attributable ownership interest in that station . parties to existing jsas that were deemed attributable interests and did not comply with the fcc 's local television ownership rule were given until september 30 , 2025 to come into compliance . in november 2017 , the fcc adopted an order on reconsideration that eliminated the rule . that elimination became effective on february 7 , 2018. on september 23 , 2019 , a federal court of appeals vacated the fcc 's november 2017 order on reconsideration . the court later denied petitions for en banc rehearing ; on november 29 , 2019 its decision became effective ; and on december 20 , 2019 the fcc issued an order that formally reinstated the rule . further litigation is possible .

results of operations the following table sets forth a summary of the company 's operations for the years ended december 31 ( dollars in thousands ) , and each component of operating expense as a percentage of net revenue : replace_table_token_7_th 50 year ended december 31 , 2019 compared to year ended december 31 , 2018 the period-to-period comparability of our consolidated operating results is affected by acquisitions . for each quarter we present , our legacy stations include those stations that we owned or provided services to for the complete quarter in the current and prior years . for our annual and year to date presentations , we combine the legacy stations ' amounts presented in each quarter . revenue core advertising revenue was $ 1.335 billion for the year ended december 31 , 2019 as compared to $ 1.090 billion for the same period in 2018 , an increase of $ 245.2 million , or 22.5 % . the increase is primarily due to our incremental revenue from acquisitions , primarily resulting from our merger with tribune of $ 275.0 million , partially offset by a decrease in revenue as a result of station divestitures of $ 14.6 million . our legacy stations ' core advertising revenue decreased by $ 15.1 million . our largest advertiser category , automobile , represented approximately 22 % and 23 % of our local and national advertising revenue for each of the years ended december 31 , 2019 and 2018 , respectively . overall , including past results of our newly acquired stations , automobile revenues decreased by approximately 3 % during the year . the other categories representing our top five were attorneys and home repair/manufacturing , which increased in 2019 , and furniture and medical/healthcare , which decreased in 2019. political advertising revenue was $ 51.9 million for the year ended december 31 , 2019 , compared to $ 251.2 million for the same period in 2018 , a decrease of $ 199.3 million , or 79.3 % .

the implied fair value of goodwill is story_separator_special_tag the following discussion and analysis of financial condition and results of operations is provided to enhance the understanding of , and should be read in conjunction with , part i , item 1 , `` business '' and item 8 , `` financial statements and supplementary data . '' for information on risks and uncertainties related to our business that may make past performance not indicative of future results , or cause actual results to differ materially from any forward-looking statements , see `` special note regarding forward-looking statements , '' and part i , item 1a , `` risk factors . '' financial overview we have incurred significant losses since our inception . we anticipate that we may continue to incur significant losses for the foreseeable future , and we may never achieve or maintain profitability . we have never generated any royalty revenues from sales of products by our collaborators and may never be profitable . certain of our consolidated subsidiaries require regulatory approval and or commercial scale-up before they may commence significant product sales and operating profits . we expect our future capital requirements will be substantial , particularly as we continue to develop our business and expand our synthetic biology technology platform . we believe that our existing cash and cash equivalents , short-term and long-term investments , and cash expected to be received from our current collaborators and for sales of products and services provided by our consolidated subsidiaries will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months . sources of revenue we derive our collaboration and licensing revenues through the execution of agreements with counterparties for the development and commercialization of products enabled by our technologies . generally , the terms of these collaborations provide that we receive some or all of the following : ( i ) technology access fees upon signing ; ( ii ) reimbursements of costs incurred by us for our research and development and or manufacturing efforts related to specific applications provided for in the collaboration ; ( iii ) milestone payments upon the achievement of specified development , regulatory and commercial activities ; and ( iv ) royalties on sales of products arising from the collaboration . our technology access fees and milestone payments may be in the form of cash or securities of the collaborator . our collaborations contain multiple arrangements and we typically defer revenues from the technology access fees and milestone payments received and recognize such revenues in the future over the anticipated performance period . we are also entitled to sublicensing revenues in those situations where our collaborators choose to license our technologies to other parties . from time to time , we and certain collaborators may cancel the agreements , relieving us of any further performance obligations under the agreement . when no further performance obligations are required of us under an agreement , we recognize any remaining deferred revenue . we generate product and service revenues primarily through sales of products or services which are created from technologies developed or owned by us . our current offerings include sales of advanced reproductive technologies , including our bovine embryo transfer and in vitro fertilization processes and from genetic preservation and sexed semen processes and applications of such processes to other livestock , as well as sales of livestock and embryos produced using these processes and used in production . revenue is recognized when ( i ) persuasive evidence of an arrangement exists , ( ii ) services have been rendered or delivery has occurred such that risk of loss has passed to the customer , ( iii ) the price is fixed or determinable , and ( iv ) collection from the customer is reasonably assured . in future periods , our revenues will depend on the number of collaborations to which we are party , the advancement and creation of programs within our collaborations and the extent to which our collaborators bring products enabled by our 47 technologies to market . our revenues will also depend upon our ability to maintain or improve the volume and pricing of our current product and service offerings and to develop new offerings from the various technologies of our subsidiaries . our future revenues may also include additional revenue streams we may acquire through mergers and acquisitions . in light of our limited operating history and experience , there can be no assurance as to the timing , magnitude and predictability of revenues to which we might be entitled . cost of products and services cost of products and services includes primarily labor and related costs , drugs and supplies used primarily in the embryo transfer and in vitro fertilization processes , livestock and feed used in production , and facility charges , including rent and depreciation . fluctuations in the price of livestock and feed have not had a significant impact on our operating margins and no derivative financial instruments are used to mitigate the price risk . research and development expenses we recognize research and development expenses as they are incurred . our research and development expenses consist primarily of : salaries and benefits , including stock-based compensation expense , for personnel in research and development functions ; fees paid to consultants and contract research organizations who perform research on our behalf and under our direction ; costs related to laboratory supplies used in our research and development efforts ; costs related to certain in-licensed technology rights ; depreciation of leasehold improvements and laboratory equipment ; amortization of patents and related technologies acquired in mergers and acquisitions ; and rent and utility costs for our research and development facilities . story_separator_special_tag 52 comparison of the year ended december 31 , 2015 to the year ended december 31 , 2014 the following table summarizes our results of operations for the years ended december 31 , 2015 and 2014 , together with the changes in those items in dollars and as a percentage : replace_table_token_10_th 53 collaboration and licensing revenues the following table shows the collaboration and licensing revenue recognized for the years ended december 31 , 2015 and 2014 , together with the changes in those items . see note 5 to our consolidated financial statements appearing elsewhere in this annual report on form 10-k for further discussion of our collaboration and licensing revenues . replace_table_token_11_th collaboration and licensing revenues increased $ 42.6 million over the year ended december 31 , 2014 due to ( i ) the recognition of deferred revenue for upfront payments received from our license and collaboration agreement with ares trading , which became effective in may 2015 , and from other collaborations signed by us in 2015 ; ( ii ) increased research and development services performed for both new collaborations and for the expansion or addition of new programs with previously existing collaborators , including primarily ziopharm , fibrocell science , inc. , genopaver , and intrexon energy partners ; and ( iii ) the recognition of $ 16.0 million of previously deferred revenue related to collaboration agreements for which we satisfied all of our obligations or which were terminated in 2015. product revenues and gross margin product revenues increased $ 30.4 million , or 265 percent , over the year ended december 31 , 2014. this increase relates primarily to the inclusion of a full year of results for trans ova in 2015 versus approximately four and a half months of results in 2014 since the acquisition occurred in august 2014. service revenues and gross margin service revenues increased $ 28.1 million , or 191 percent , over the year ended december 31 , 2014. this increase relates primarily to the inclusion of a full year of results for trans ova in 2015 versus approximately four and a half months of results in 2014 since the acquisition occurred in august 2014. research and development expenses research and development expenses increased $ 88.5 million , or 150 percent , over the year ended december 31 , 2014. in january 2015 , we issued 2,100,085 shares of our common stock valued at $ 59.6 million to md anderson , in exchange for an exclusive license to certain technologies owned by md anderson . salaries , benefits and other personnel costs increased $ 12.5 million due to ( i ) an increase in research and development headcount to support new and expanded collaborations , as well as additional compensation expenses related to stock options and performance-based bonus awards for all research and development employees ; and ( ii ) increased headcount from our 2015 acquisitions . lab supplies and contract research organizations expenses increased $ 8.2 million as a result of ( i ) the progression into the preclinical phase with certain of our collaborators ; ( ii ) the increased level of research and development services provided to our collaborators ; and ( iii ) costs 54 incurred by our 2015 acquisitions . depreciation and amortization increased $ 4.0 million primarily as a result of acquiring property and equipment and intangible assets in connection with our 2015 acquisitions . selling , general and administrative expenses sg & a expenses increased $ 45.5 million , or 72 percent , over the year ended december 31 , 2014. salaries , benefits and other personnel costs increased $ 28.0 million due to ( i ) the inclusion of sg & a employees of trans ova for a full year in 2015 compared to approximately four and a half months in 2014 ; ( ii ) increased headcount to support our expanding operations , as well as additional compensation expenses related to stock options and performance-based bonus awards , including those paid under our 2015 annual executive bonus plan , for all sg & a employees ; and ( iii ) salaries , benefits and other personnel costs from our 2015 acquisitions . legal and professional expenses increased $ 7.0 million primarily due to costs associated with our 2015 acquisitions , the license agreement with md anderson , a full year of legal and professional costs for trans ova , our 2015 public offerings , and other business development activity . other sg & a expenses , including rent and utilities , and depreciation and amortization , have increased in 2015 as a result of our expanding operations , a full year of trans ova expenses , and expenses from our 2015 acquisitions . total other income ( expense ) , net total other income ( expense ) , net , increased $ 79.3 million , or 756 percent , over the year ended december 31 , 2014. this increase was primarily related to the $ 81.4 million realized gain recognized upon the special stock dividend of all of our shares of ziopharm to our shareholders in june 2015 which was partially offset by unrealized depreciation in fair value of our other publicly traded equity securities for the year ended december 31 , 2015. equity in net loss of affiliates equity in net loss of affiliates increased $ 3.7 million , or 70 percent , over the year ended december 31 , 2014. the increase was primarily due to higher net losses incurred by intrexon energy partners in 2015. intrexon energy partners incurred a full year of losses in 2015 at a higher spend rate due to the program progression compared to only nine months in 2014 when the program was scaling up . liquidity and capital resources sources of liquidity we have incurred losses from operations since our inception and as of december 31 , 2016 , we had an accumulated deficit of $ 729.3 million .

results of operations comparison of the year ended december 31 , 2016 to the year ended december 31 , 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_8_th 50 collaboration and licensing revenues the following table shows the collaboration and licensing revenue recognized for the years ended december 31 , 2016 and 2015 , together with the changes in those items . see note 5 to our consolidated financial statements appearing elsewhere in this annual report on form 10-k for further discussion of our collaboration and licensing revenues . replace_table_token_9_th collaboration and licensing revenues increased $ 22.1 million over the year ended december 31 , 2015 due to ( i ) the recognition of deferred revenue for upfront payments received from collaborations signed by us in 2016 , including the consideration received in june 2016 from ziopharm to amend the collaborations between us ; and ( ii ) increased research and development services for these collaborations and for the expansion of programs or the addition of new programs with previously existing collaborators , including ziopharm , genopaver , llc , or genopaver , ares trading , and our jvs with s & i ophthalmic and intrexon energy partners . this increase is partially offset by the recognition in 2015 of previously deferred revenue related to collaboration agreements for which we satisfied all of our obligations or which were terminated during 2015. product revenues and gross margin product revenues decreased $ 4.9 million , or 12 percent , from the year ended december 31 , 2015. the decrease in product revenues and gross margin primarily relates to a decrease in the quantities of pregnant cows , livestock previously used in production and live calves sold due to lower customer demand for these products and also due to a decline in average sales price of livestock previously used in production .

when determining the probability of exercising such options , the company considers contract-based , asset-based , entity-based , and market-based factors . the company 's lease agreements may contain variable costs such as common area maintenance , insurance , real estate taxes or other costs . variable lease costs are expensed as incurred on the consolidated statements of earnings . the company 's lease agreements generally do not contain any material residual value guarantees or material restrictive covenants . leases with an initial term of 12 months or less are not recorded on the balance sheet . operating leases are included in lease assets , accrued expenses and other current liabilities , and lease liabilities , long term on the consolidated balance sheets . lease expense for operating leases is recognized as an operating cost . 84 supernus pharmaceuticals , inc. notes to consolidated financial statements ( continued ) 2. summary of significant accounting policies ( continued ) advertising expense advertising expense includes costs of promotional materials and activities , such as marketing materials , marketing programs and speaker programs . the costs of the company 's advertising efforts are expensed as incurred . the company incurred approximately $ 40.8 million , $ 43.3 million and $ 33.8 million in advertising costs for the years ended december 31 , 2019 , 2018 and 2017 , respectively . these expenses are recorded in selling , general and administrative expenses in the consolidated statement of earnings . income taxes the company utilizes the asset and liability method of accounting for income taxes . under this method , deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities story_separator_special_tag in our annual report on form 10-k for the year ended december 31 , 2018 , which discussion is incorporated by reference herein . the following table displays our revenues , costs and expenses , other ( expense ) income and income tax expense for the years ended december 31 , 2019 , 2018 and 2017 ( dollars in thousands ) : replace_table_token_4_th net product sales net product sales are computed as gross revenue generated from our product shipments to our customers , which are primarily pharmaceutical wholesalers and distributors , less various forms of variable consideration , including : estimated liability for rebates ; estimated liability for future product returns ; and estimated allowance for discounts . these are collectively considered `` sales deductions . '' the table below lists our net product sales by products ( dollars in thousands ) : replace_table_token_5_th overall 2019 compared to 2018. in the fourth quarter of 2018 , wholesalers , distributors and pharmacies increased their inventory holdings when compared to the prevailing inventory levels in the third quarter of 2018. we estimated that this caused net product sales to be approximately $ 10 million higher in the fourth quarter of 2018 than it would otherwise have been , had channel inventory levels remained consistent from the third to the fourth quarter of 2018. the channel inventory build-up in the fourth quarter of 2018 was effectively reversed in the first quarter of 2019. specifically , based on analysis of sales and inventory data , inventory levels at wholesalers , distributors and pharmacies returned to the prevailing levels in the third quarter of 2018. as a result of this channel inventory reduction , both gross sales and net product sales decreased in 2019 as compared to the prior year . the adverse impact on net product sales in 2019 due to the reduction in channel inventory is estimated to be approximately $ 10 million . in addition to the aforementioned inventory reduction , unfavorable changes in sales deductions more than offset the favorable unit prescription growth of 6 % , and the impact of an 8 % price increase in 2019. specifically , as regards sales deductions , patient reimbursement challenges and increased contracting pressure from managed care providers resulted in both increased per patient costs for our co-pay programs , higher per patient rebate payments to managed care providers , and higher medicaid reimbursement payments . as a result , net product sales decreased by $ 16.5 million year over year . 59 trokendi xr 2019 compared to 2018. trokendi xr net product sales decreased by 6 % in 2019 as compared to 2018. compared to 2018 , favorable unit prescription volume growth of 5 % coupled with the impact of an 8 % price increase were offset by higher levels of net sales deductions . increased sales deductions were driven primarily by increased per patient costs for our co-pay programs , higher per patient rebate payments to managed care providers , and higher medicaid reimbursement payments . in addition , the majority of the impact of the $ 10 million channel inventory reduction , as described above , was reflected in lower net product sales for trokendi xr in 2019. oxtellar xr 2019 compared to 2018. oxtellar xr net product sales grew 4 % in 2019 as compared to 2018 . compared to 2018 , favorable unit prescription volume growth of 11 % and the impact of an 8 % price increase were offset by higher levels of sales deductions . increased sales deductions were due primarily by higher per patient payments under both medicaid and managed care programs , as well as higher co-pay program expenditures . sales deductions and related accruals the company records accrued product rebates and accrued product returns as current liabilities on our consolidated balance sheets under accrued product returns and rebates . we record sales discounts as a valuation allowance against accounts receivable on the consolidated balance sheets . the outstanding amounts are affected by changes in level of gross sales , the provision for net product sales deductions and the timing of payments/credits . story_separator_special_tag the increase in income tax expense was primarily due to a low effective tax rate in 2018 as the effective tax rate was favorably impacted by employee stock option exercises . the 2019 effective tax rate is favorably impacted by a decrease in our uncertain tax position reserve due to expiring statute of limitations and partially offset by an increase in our state effective tax rates due to an increase in the number of states in which we owe taxes . net earnings the following table provides information regarding our income tax expense during the periods indicated ( dollar in thousands ) : replace_table_token_13_th 2019 compared to 2018 . the increase in net earnings was primarily due to revenue generated from the sale of our two commercial products . trokendi xr and oxtellar xr , partially offset by decreased r & d and sg & a spending and increased income tax expense . liquidity and capital resources we have financed our operations primarily with cash generated from product sales , supplemented by revenues from royalty and licensing arrangements as well as proceeds from the sale of equity and debt securities . continued cash generation is highly dependent on the commercial success of our two commercial products , trokendi xr and oxtellar xr . we were cash flow positive and profitable from operations in 2019 . while we expect continued profitability for future years , we anticipate there may be significant variability from year to year in our profitability , and particularly as we move forward with the anticipated commercial launch of spn-812 in 2020 , assuming fda approval . we believe our existing cash and cash equivalents , marketable securities and cash received from product sales will be sufficient to finance ongoing operations , development of our new products , and label expansions for existing products . to continue to grow our business over the long-term , we plan to commit substantial resources to : product development and clinical trials of product candidates ; product acquisition ; product in-licensing ; and supportive functions such as compliance , finance , management of our intellectual property portfolio , information technology systems and personnel . in each case , spending would be commensurate with the growth of the business . we may , from time to time , consider raising additional capital through : new collaborative arrangements ; strategic alliances ; additional equity and or debt financings ; or financing from other sources , especially in conjunction with opportunistic business development initiatives . we will continue to actively manage our capital structure and to consider all financing opportunities that could strengthen our long-term financial profile . any such capital structure may or may not be similar to transactions in which we have engaged in the past . there can be no assurance that any such financing opportunities will be available on acceptable terms , if at all . 63 financial condition cash and cash equivalents , marketable securities , long term marketable securities , working capital , convertible notes and total stockholder 's equity as of the periods presented below are as follows ( dollars in thousands ) : replace_table_token_14_th 2019 compared to 2018 total cash and cash equivalents , marketable securities and long term marketable securities increased in 2019 as compared to 2018 by $ 164.0 million , primarily due to cash generated from operations in 2019 . working capital decreased in 2019 as compared to 2018 by $ 20.1 million , primarily due to increased investment in long term marketable securities in 2019 . as of december 31 , 2019 , the outstanding principal on the 2023 notes was $ 402.5 million . no 2023 notes were converted as of december 31 , 2019 . contemporaneous with the issuance of the 2023 notes , the company also entered into separate convertible note hedge transactions ( collectively , the convertible note hedge transactions ) , issuing 402,500 convertible note hedge options . the convertible note hedge transactions are expected to reduce the potential dilution of the company 's common stock upon conversion of the 2023 notes . concurrently with entering into the convertible note hedge transactions , the company also entered into separate warrant transactions , issuing a total of 6,783,939 warrants ( the warrant transactions ) . see note 9 , convertible senior notes due 2023 in the notes to the consolidated financial statements for further discussion of the 2023 notes and our other indebtedness . stockholders ' equity increased in 2019 as compared to 2018 by $ 142.4 million , as a result of net earnings of $ 113.1 million , unrealized gains on marketable securities of $ 10.6 million , issuance of common stock of $ 3.9 million and share-based compensation of $ 14.8 million . 64 story_separator_special_tag style= '' vertical-align : top ; '' > this table does not include ( i ) any milestone payments which may become payable to third parties under license agreements or contractual agreements regarding our clinical trials or those which may become payable upon achieving sales and developmental milestones per contractual agreements , as the timing and likelihood of such payments are not known , ( ii ) any royalty payments to third parties as the amounts , timing and likelihood of such payments are not known , and ( iii ) contracts that are entered into in the ordinary course of business which are not material in the aggregate in any period presented above . ( 5 ) as of december 31 , 2019 , we had liabilities related to uncertain tax positions . due to uncertainties in the timing of potential tax audits , the timing and the amounts associated with the resolution of these positions is uncertain . as such , we are unable to make a reasonably reliable estimate regarding the timing of payments beyond 12 months . liabilities related to uncertain tax positions are not included in the above table . in addition to the table above

summary of cash flows the following table summarizes the major sources and uses of cash for the periods set forth below ( dollars in thousands ) : replace_table_token_15_th operating activities net cash provided by operating activities is comprised of two components : cash provided by operating earnings ; and cash provided by ( used in ) changes in working capital . the net cash provided by operating activities , $ 143.1 million , was primarily driven by increased operating earnings , reduced by incremental cash absorbed by increased working capital . cash utilized in working capital reflects the timing impacts of cash collections on receivables and settlement of payables , as described below . the changes in certain operating assets and liabilities are as follows ( dollars in thousands ) : replace_table_token_16_th 65 investing activities 2019 compared to 2018. net cash used in investing activities decreased by $ 255.6 million , from $ 413.5 million in 2018 to $ 157.9 million in 2019 , for the year ended december 31 , 2019 . this year over year change was driven by changes in the net purchase of marketable securities . in 2018 , proceeds from the issuance of the 2023notes in march 2018 were used to purchase marketable securities and long term marketable securities .

deferred tax assets and liabilities are established using statutory tax rates and are adjusted for tax rate changes in the period of enactment . we assess whether our deferred tax assets should be reduced by a valuation allowance if it is more likely than not that some portion or all of story_separator_special_tag the following discussion and analysis provides information that management believes is relevant to an assessment and understanding of our consolidated financial condition as of december 27 , 2020 , and results of operations for the three years ended december 27 , 2020. please read this item together with our consolidated financial statements and the related notes included in this annual report . due to the change in expense captions in 2020 and resulting expense reclassification in prior periods , as discussed below , we included discussions of 2018 results that were impacted by the reclassification . otherwise , we have omitted discussion of 2018 results where it would be redundant to the discussion previously included in part ii , item 7 , of our 2019 annual report on form 10-k , filed with the sec on february 27 , 2020. significant components of the management 's discussion and analysis of results of operations and financial condition section include : page executive overview : the executive overview section provides a summary of the new york times company and our business . 29 results of operations : the results of operations section provides an analysis of our results on a consolidated basis for the three years ended december 27 , 2020 . 34 non-operating items : the non-operating items section provides an analysis of our non-gaap financial measures to the most directly comparable gaap measures for the two years ended december 27 , 2020 . 43 liquidity and capital resources : the liquidity and capital resources section provides a discussion of our cash flows for the two years ended december 27 , 2020 , and restricted cash , capital expenditures , and outstanding debt , commitments and contingencies existing as of december 27 , 2020 . 47 critical accounting policies : the critical accounting policies and estimates section provides detail with respect to accounting policies that are considered by management to require significant judgment and use of estimates and that could have a significant impact on our financial statements . 50 pensions and other postretirement benefits : the pensions and other postretirement benefits section provides a discussion of our benefit plans . 52 executive overview we are a global media organization that includes our digital and print products and related businesses . we have one reportable segment with businesses that include our core news product and other interest-specific products , and related content and services . we generate revenues principally from subscriptions and advertising . other revenues primarily consist of revenues from licensing , wirecutter affiliate referrals , the leasing of floors in the company headquarters , commercial printing , television and film , retail commerce and our live events business . our main operating costs are employee-related costs . in the accompanying analysis of financial information , we present certain information derived from consolidated financial information but not presented in our financial statements prepared in accordance with generally accepted accounting principles in the united states of america ( “ gaap ” ) . we are presenting in this report supplemental non-gaap financial performance measures that exclude depreciation , amortization , severance , non-operating retirement costs and certain identified special items , as applicable . these non-gaap financial measures should not be considered in isolation from or as a substitute for the related gaap measures and should be read in conjunction with financial information presented on a gaap basis . for further information and reconciliations of these non-gaap measures to the most directly comparable gaap measures , see “ — results of operations — non-gaap financial measures. ” the new york times company – p. 29 the company changed the expense captions on its consolidated statement of operations effective for the quarter ended march 29 , 2020. these changes were made in order to reflect how the company manages its business and to communicate where the company is investing resources and how this aligns with the company 's strategy . the company reclassified expenses for the prior periods in order to present comparable financial results . there was no change to consolidated operating income , total operating costs , net income or cash flows as a result of this change in classification . see note 19 of the notes to the consolidated financial statements for more detail . we believe that a number of factors and industry trends have , and will continue to , present risks and challenges to our business . for a detailed discussion of certain factors that could affect our business , results of operations and financial condition , see “ item 1a — risk factors. ” 2020 financial highlights in 2020 , diluted earnings per share from continuing operations were $ 0.60 , compared with $ 0.83 for 2019. diluted earnings per share from continuing operations excluding severance , non-operating retirement costs and special items discussed below ( or “ adjusted diluted earnings per share , ” a non-gaap measure ) were $ 0.97 for 2020 , compared with $ 0.92 for 2019. operating profit in 2020 was $ 176.3 million , compared with $ 175.6 million for 2019 , as the decrease in operating costs was largely offset by lower revenues . operating profit before depreciation , amortization , severance , multiemployer pension plan withdrawal costs and special items discussed below ( or “ adjusted operating profit , ” a non-gaap measure ) was $ 250.6 million and $ 248.4 million for 2020 and 2019 , respectively . total revenues decreased 1.6 % to $ 1.78 billion in 2020 from $ 1.81 billion in 2019 , primarily driven by a decrease in advertising revenue and other revenue , partially offset by an increase in digital-only subscription revenues . story_separator_special_tag in 2021 , we expect to make significant further investments in our journalism and remain committed to providing trustworthy , interesting and relevant content that sets the times apart . growing engagement with our products we saw extraordinary growth in our audience this past year , driven by an unprecedented news environment and our improved ability to draw and engage readers . we have focused on , and will continue focusing on , maintaining our audience reach , creating habitual engagement with more users and demonstrating why independent , high-quality journalism is worth paying for . we further enhanced our core digital news product to optimize user experience and deepen engagement , including by improving our users ' experience in up-to-the-minute coverage , expanding our use of visual and data journalism , creating new story formats , enhancing email newsletters like the morning , and personalizing aspects of our customer experience , all of which are beginning to drive increased engagement . this year was also the first full year of our new access model , which generally offers users who have registered free access to a limited number of articles before requiring users to subscribe for access to additional content . we believe these changes have strengthened our direct relationships with readers and supported our digital subscription growth efforts . the new york times company – p. 31 in addition , we continued to raise our ambitions for our other digital products and services . we expect to invest more in content , product development and marketing for games and cooking , to explore new opportunities for wirecutter as a subscription product , to experiment in audio and to test the concept of an app for children . we see all of these products as a way for the times to mean even more in people 's lives , and also to make a relationship with our brand more valuable . effectively monetizing our products we added 2.3 million net digital subscriptions in 2020 , by far the most annual net subscription additions in our history . we believe that this significant growth demonstrates the continued success of our “ subscription-first ” strategy . as of december 27 , 2020 , we had approximately 7.5 million total subscriptions to our products . in addition to our strong subscription growth , in 2020 , we introduced our first-ever digital price increase on tenured subscribers , from which we saw strong results , and we continued to focus on retaining as many subscribers as possible as they transition to higher prices . we will continue to look for opportunities to deepen our economic relationships with subscribers , including introducing subscribers to more of the products currently in our portfolio . we will also continue to invest in brand marketing initiatives to reinforce the importance of deeply reported independent journalism and the value of the times brand . in addition to digital subscription revenue , high-margin digital advertising revenue remains an important part of our business . we believe our journalism attracts valuable audiences , and that we provide a safe and trusted platform for advertisers ' brands . by developing innovative and compelling advertising offerings that integrate well with the user experience , we believe we can provide significant value to advertisers . during a challenging year , we continued to adapt our advertising business by focusing on our first-party data products , which allow the company to leverage its large and coveted audiences in privacy-forward ways , and by focusing on our growing audio advertising business . we expect each will continue to play critical roles in our digital advertising business . looking ahead , we will continue exploring additional opportunities to grow and engage our audience , further innovate our products and invest in brand marketing initiatives , while remaining committed to creating high-quality journalism that sets the times apart . at the same time , we will continue to apply disciplined cost-management to fund continued investment in our business and support long-term profitable growth . this includes maximizing the efficiency and profitability of our print products and services , which remain a significant part of our business . making technology and data a bigger propellant of our growth achieving our ambition will require products and technology that match the quality of our journalism . in addition to having our consumer-facing products enable our journalism to be even more accessible , engaging and impactful , this also includes improving the underlying systems that allow users to seamlessly move among various devices and products . in recent years , we have realigned our organizational structure to improve the speed and effectiveness of our product development process and optimize our data and technology platforms . looking ahead , we believe this will enable us to build platforms that power our multi-product portfolio and products that engage users . we are focused on building strength in specialized engineering disciplines and continuing to improve the quality and security of our data and systems . as we invest in our array of products and our digital business grows in size , scope and complexity , we will continue to invest in maintaining , integrating , improving and scaling our technical infrastructure . fostering a culture that enables our mission and people to thrive we believe our ability to attract , develop and maximize the contributions of world-class talent , and to create the conditions for our people to do their best work , is vital to the continued success of our mission and business and central to our long-term strategy . as we continue to transform the company and foster a culture that enables our mission and people to thrive , we are focused on building a diverse , equitable and inclusive workplace and workforce that help to make our news report deeper and richer , and better able to address the needs and experiences of our growing , global audience ; incentivizing , developing and promoting our talent ; and supporting the health , safety and well-being of our employees .

results of operations overview fiscal years 2020 , 2019 and 2018 each comprised 52 weeks . the following table presents our consolidated financial results : replace_table_token_5_th * represents a change equal to or in excess of 100 % or one that is not meaningful . p. 34 – the new york times company revenues subscription , advertising and other revenues were as follows : replace_table_token_6_th subscription revenues subscription revenues consist of revenues from subscriptions to our digital and print products ( which include our news product , as well as our games ( previously crossword ) , cooking and audm products ) , and single-copy and bulk sales of our print products ( which represent less than 10 % of these revenues ) . subscription revenues are based on both the number of copies of the printed newspaper sold and digital-only subscriptions , and the rates charged to the respective customers . the following table summarizes digital and print subscription revenues for the years ended december 27 , 2020 , december 29 , 2019 , and december 30 , 2018 : replace_table_token_7_th ( 1 ) includes revenues from subscriptions to the company 's news product . news product subscription packages that include access to the company 's games , cooking and audm products are also included in this category . ( 2 ) includes revenues from standalone subscriptions to the company 's games , cooking and audm products . ( 3 ) includes free access to some or all of the company 's digital products ( 4 ) nyt international is the international edition of our print newspaper . the new york times company – p. 35 the following table summarizes digital and print subscriptions as of december 27 , 2020 , december 29 , 2019 , and december 30 , 2018 : replace_table_token_8_th ( 1 ) includes subscriptions to the company 's news product . news product subscription packages that include access to the company 's games and cooking products are also included in this category .

2016-01 , `` financial instruments ( subtopic 825-10 ) : recognition and measurement of financial assets and financial liabilities , `` which amends certain measurement , presentation , and disclosure requirements for financial instruments . the new guidance must be adopted by means of a cumulative-effect adjustment to the 73 balance story_separator_special_tag overview the following discussion should be read in conjunction with the selected financial data , the consolidated financial statements and the notes thereto contained in this form 10-k. effective january 1 , 2018 , we adopted fasb accounting standards codification 606 , revenue from contracts with customers ( `` asc 606 '' ) , which affected our recognition of revenue from both our fixed-fee and per-unit license agreements beginning in first quarter 2018. all periods prior to january 1 , 2018 are presented in accordance with asc topic 605 , revenue recognition ( “ asc 605 ” ) . refer to note 3 , `` revenue recognition , '' in the consolidated financial statements for further information regarding this adoption , as well as additional required disclosures under the new guidance . 38 throughout the following discussion and elsewhere in this form 10-k , we refer to “ recurring revenues ” and “ non-current patent royalties. ” for all periods presented , recurring revenues are comprised of “ current patent royalties ” and “ current technology solutions revenue. ” for 2018 , non-current patent royalties are comprised of “ past patent royalties ” and “ static fixed-fee '' agreement royalties . for periods prior to 2018 , non-current patent royalties are comprised of just past patent royalties , whereas static fixed-fee agreement royalties are included as part of recurring revenues . business interdigital designs and develops advanced technologies that enable and enhance wireless communications and capabilities . since our founding in 1972 , our engineers have designed and developed a wide range of innovations that are used in digital cellular and wireless products and networks , including 2g , 3g , 4g and ieee 802-related products and networks , as well as video processing , encoding and display technology . we are a leading contributor of innovation to the wireless communications industry , as well as a leading holder of patents in the video industry . given our long history and focus on advanced research and development , interdigital has one of the most significant patent portfolios in the wireless and video industries . as of december 31 , 2018 , interdigital 's wholly owned subsidiaries held a portfolio of approximately 34,000 patents and patent applications related to a range of technologies , including the fundamental technologies that enable wireless communications , video encoding , display technology , and other areas relevant to the wireless and consumer electronics industries . in that portfolio are a number of patents and patent applications that we believe are or may be essential or may become essential to standards in cellular and other wireless communications as well as video encoding . those wireless standards include 3g , 4g and the ieee 802 suite of standards , as well as patents and patent applications that we believe are or may become essential to 5g standards that currently exist and are under continued development . in terms of video technology , our portfolio includes patents and applications relating to standards established by the iso/iec moving picture expert group ( mpeg ) , the itu-t video coding expert group ( vceg ) , the joint collaborative team on video coding ( jct-vc ) and the joint video expert team ( jvet ) , among others . the wireless portfolio has largely been built through internal development , supplemented by joint development projects with other companies as well as select acquisitions of patents and companies . products incorporating our patented inventions in wireless include : mobile devices , such as cellular phones , tablets , notebook computers and wireless personal digital assistants ; wireless infrastructure equipment , such as base stations ; components , dongles and modules for wireless devices ; and iot devices and software platforms . the video technology portfolio largely represents patents and applications that interdigital acquired through our purchase of technicolor sa 's patent licensing business ( the `` technicolor acquisition '' ) , completed in july 2018 , supplemented by internal development in the area of video technology . products incorporating our patented inventions in video include cellular phones , tablets , notebook computers , computers , televisions , gaming consoles , set-top boxes , streaming devices and other consumer electronics . interdigital derives revenues primarily from patent licensing , with smaller contributions from patent sales , product sales , technology solutions licensing and sales and engineering services . on january 1 , 2018 , we adopted the requirements of asu no . 2014-09 , `` revenue from contracts with customers ( topic 606 ) `` ( `` asc 606 '' ) using the modified retrospective method . refer to the `` revenue `` section below as well as note 3 , `` revenue recognition , '' within the consolidated financial statements for further information regarding our adoption of asc 606. acquisition of technicolor 's patent licensing business on july 30 , 2018 , we completed the technicolor acquisition . the final transaction includes the acquisition by interdigital of approximately 18,000 patents and applications , across a broad range of technologies , including approximately 3,000 worldwide video coding patents and applications . refer to note 5 , “ business combinations , ” within the consolidated financial statements for more information on this transaction . acquisition of technicolor 's research & innovation unit on february 11 , 2019 , we announced that we had made a binding offer to acquire the research & innovation ( `` r & i '' ) unit of technicolor sa . r & i is a premier research lab that conducts fundamental research into video coding , iot and smart home , imaging sciences , ar and vr and artificial intelligence and machine learning technologies . story_separator_special_tag the signal trust holds a patent portfolio related to cellular infrastructure , and it is a variable interest entity . based on the terms of the trust agreement , we previously determined that we are the primary beneficiary of the signal trust for accounting purposes and , therefore , must consolidate the signal trust . during second quarter 2018 , we entered into a multi-year , worldwide , non-exclusive , royalty-bearing patent license agreement with fujitsu connected technologies limited , or fcnt . the agreement covers the sale of fcnt 's 2g , 3g and 4g terminal unit products , including lte and lte-advanced products . 40 also during second quarter 2018 , we entered into a multi-year , world-wide , non-exclusive , royalty-bearing patent license agreement with a us-headquartered company . the agreement covers sales by the us company of 802.11 functionality within certain of its products . during fourth quarter 2018 , we entered into a multi-year , worldwide , non-exclusive patent license agreement with sony ( the `` sony pla '' ) , a global leader and technology innovator in consumer electronics , mobile communications and home appliances . in addition , we renewed our joint venture with sony , convida wireless , and sharpened its focus on 5g , including iot and infrastructure research . the sony pla covers the sale by sony of covered products for the three-year period that commenced on december 1 , 2018. a portion of the consideration for the agreement was in the form of patents from sony , all of which will be contributed to the convida wireless joint venture . all of the agreements above , with the exception of the signal trust agreement , were agreements with multiple performance obligations for accounting purposes . refer to the `` critical accounting policies and estimates — revenue recognition '' section below for details of our revenue recognition accounting policies and additional information on agreements with multiple performance obligations , as well as the estimates and methods used to determine the fair value of patents acquired . expiration of license agreements our patent license agreements with three licensees expired in whole or in part during 2018. collectively , these agreements accounted for $ 3.0 million , or approximately 1 % , of our recurring revenue in 2018. two of these patent license agreements were static fixed-fee agreements , including our patent license agreement with huawei . under asc 606 , the new revenue recognition rule that became effective for the company on january 1 , 2018 , we did not recognize any revenues under static fixed-fee agreements in 2018. prior to the adoption of asc 606 , we recognized $ 86.6 million of recurring revenue in 2017 related to the static fixed-fee agreements discussed above . refer to note 3 , “ revenue recognition , ” within the consolidated financial statements for further information regarding our adoption of asc 606. our patent license agreement with one licensee is scheduled to expire during 2019. this agreement accounted for $ 0.6 million , or less than 1 % , of our revenue in 2018. income tax reform on december 22 , 2017 , the tax cuts and jobs act , or tcja , was signed into law . the tcja significantly revised the u.s. corporate income tax regime by , among other things : lowering the u.s. corporate tax rate from 35 % to 21 % effective january 1 , 2018 ; imposing a 13.1 % tax rate on income that qualifies as foreign derived intangible income , or fdii ; repealing the deduction for domestic production activities ; implementing a territorial tax system ; and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries . the company is continually monitoring irs regulations and guidance on tax reform , specifically as it relates to income that qualifies for the favorable fdii rate . gaap requires that the impact of tax legislation be recognized in the period in which the law was enacted . as a result of the tcja , we recorded a tax benefit of $ 18.0 million in 2018 due to our income qualifying for the favorable fdii rate . during 2017 , we recorded a tax charge of $ 42.6 million due to a re-measurement of deferred tax assets and liabilities . on a go-forward basis , we expect a significant portion of our income to qualify as fdii and thus be subject to the 13.1 % tax rate . cash and short-term investments as of december 31 , 2018 , we had $ 1.0 billion of cash , restricted cash and short-term investments and up to an additional $ 642.2 million of payments due under signed agreements , including $ 35.0 million recorded in accounts receivable which includes estimates related to our fourth quarter 2018 variable patent royalty revenue . a portion of our cash and short-term investments include fixed royalty payments we have received related to revenue we will record in the future . as a result , our future cash receipts from existing licenses subject to fixed patent royalties will be lower than if the royalty payments were structured to coincide with the underlying sales . during 2018 , we recorded $ 325.4 million of cash receipts related to patent licensing and technology solutions agreements as follows ( in thousands ) : cash in patent royalties $ 322,835 technology solutions 2,537 $ 325,372 as of december 31 , 2018 , approximately $ 267.0 million of our $ 269.3 million deferred revenue balance as of december 31 , 2018 related to dynamic fixed-fee royalty payments that were scheduled to amortize as follows ( in thousands ) : 41 replace_table_token_4_th refer to `` new accounting guidance `` below for a discussion regarding our adoption of asc 606 effective january 1 , 2018. repurchase of common stock in june 2014 , our board of directors authorized a $ 300 million share repurchase program ( the “ 2014 repurchase program ” ) .

results of operations 2018 compared with 2017 revenues the following table compares 2018 revenues to 2017 revenues ( in thousands ) . amounts below for the year ended december 31 , 2018 are presented in accordance with asc 606 and amounts below for the year ended december 31 , 2017 are presented in accordance with asc 605 . 51 replace_table_token_13_th ( a ) recurring revenues consist of current patent royalties , inclusive of dynamic fixed-fee agreement royalties , and current technology solutions revenue . ( b ) non-current patent royalties for the year ended december 31 , 2018 consist of past patent royalties and royalties from static agreements . for the year ended december 31 , 2017 , non-current royalties consist of past patent royalties . as discussed above , we adopted new revenue guidance , asc 606 , effective january 1 , 2018. consistent with the modified retrospective adoption method , our results of operations for periods prior to our adoption of asc 606 remain unchanged . as a result , the difference in accounting principles attributable to the adoption of asc 606 accounted for $ 74.7 million of the decrease in net revenue . this decrease was primarily related to pre-existing static fixed-fee license agreements . the $ 150.8 million `` operational '' decrease in total revenue was primarily driven by a decrease in non-current patent royalties . in 2017 , non-current patent royalties were primarily attributable to the lg agreement , the recognition of a prepayment balance remaining under a patent license agreement that expired in fourth quarter 2017 and our second quarter 2017 settlement agreement with microsoft corporation . the decreases in current technology solutions revenue and variable patent royalties primarily related to the expiration at the end of 2017 of certain royalty obligations under a technology solutions agreement and decreased shipments by certain of our variable licensees , respectively .

we base these estimates on historical experiences 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 available from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe that the following critical accounting policies affect management 's more significant judgments and estimates used in the preparation of its consolidated financial statements . for a detailed discussion on the application of these and other accounting policies , see note a to the consolidated financial statements included in this annual report . certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates . these judgments are based on our historical experience , terms of existing contracts , current economic trends in the industry , information provided by our customers , and information available from outside sources , as appropriate . our critical accounting policies include : 10 income taxes : the company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements . these temporary differences may result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled . the deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset will not be realized . the company established an initial valuation allowance of $ 300,000 on its deferred tax assets during the year ended march 31 , 2013 to recognize that certain foreign tax credits expiring in future periods will likely not be realized . upon further review of updated projected taxable income and the components of the deferred tax asset in accordance with applicable accounting guidance at september 30 , 2013 , it was determined that it is more likely than not that the tax benefits associated with the remaining components of the deferred tax assets will not be realized . this determination was made based on continued taxable losses during fiscal 2014 , which were not in line with projections , as well as product offering delays which cause uncertainty as to whether the company will generate sufficient taxable income to use the deferred tax assets prior to their expiration . accordingly , a valuation allowance was established to fully offset the value of the deferred tax assets . our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable income and the expiration dates of the components of the deferred tax assets . if sufficient future taxable income is generated , we may be able to offset a portion of future tax expenses . the company follows asc 740-10 that gives guidance to tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our financial statements the impact of a tax position , if that position is more likely than not to be sustained upon an examination , based on the technical merits of the position . interest and penalties related to income tax matters are recorded as income tax expenses . the company has recorded a long-term liability of $ 25,000 for an uncertain income tax position , tax penalties and any imputed interest thereon . see note f , income taxes . revenue recognition : revenue is recognized at the time product is shipped and title passes pursuant to the terms of the agreement with the customer , the amount due from the customer is fixed and collectability of the related receivable is reasonably assured . we establish allowances to cover anticipated doubtful accounts and sales returns based upon historical experience . the company nets the factored accounts receivable with the corresponding advance from the factor , with the net amount reflected in the consolidated balance sheet . the company assigns trade receivables on a pre-approved non-recourse basis to the factor under the factoring agreement on an ongoing basis . inventories : inventories are valued at the lower of market or cost . cost is determined on the first in/first out method . we evaluate inventories on a quarterly basis and write down inventory that is deemed obsolete or unmarketable in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions . 11 recently issued accounting pronouncements changes to accounting principles generally accepted in the united states of america ( u.s. gaap ) are established by the financial accounting standards board ( fasb ) in the form of accounting standards updates ( asu 's ) to the fasb 's accounting standards codification . the company considers the applicability and impact of all asu 's . recently issued asu 's were evaluated and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements . revision of prior period financial statements certain amounts appearing in the condensed consolidated balance sheet as of march 31 , 2013 have been revised to correct for an immaterial error and to conform to the current year 's presentation . the company had not previously recorded its proportionate share of the hong kong joint ventures other comprehensive income amounts . these consisted of the impact of foreign currency exchange rates on the translation of certain subsidiaries of the hong kong joint venture and changes in the fair value of investments held by the hong story_separator_special_tag we base these estimates on historical experiences 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 available from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe that the following critical accounting policies affect management 's more significant judgments and estimates used in the preparation of its consolidated financial statements . for a detailed discussion on the application of these and other accounting policies , see note a to the consolidated financial statements included in this annual report . certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty and actual results could differ from these estimates . these judgments are based on our historical experience , terms of existing contracts , current economic trends in the industry , information provided by our customers , and information available from outside sources , as appropriate . our critical accounting policies include : 10 income taxes : the company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements . these temporary differences may result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled . the deferred tax assets are reviewed periodically for recoverability and a valuation allowance is provided whenever it is more likely than not that a deferred tax asset will not be realized . the company established an initial valuation allowance of $ 300,000 on its deferred tax assets during the year ended march 31 , 2013 to recognize that certain foreign tax credits expiring in future periods will likely not be realized . upon further review of updated projected taxable income and the components of the deferred tax asset in accordance with applicable accounting guidance at september 30 , 2013 , it was determined that it is more likely than not that the tax benefits associated with the remaining components of the deferred tax assets will not be realized . this determination was made based on continued taxable losses during fiscal 2014 , which were not in line with projections , as well as product offering delays which cause uncertainty as to whether the company will generate sufficient taxable income to use the deferred tax assets prior to their expiration . accordingly , a valuation allowance was established to fully offset the value of the deferred tax assets . our ability to realize the tax benefits associated with the deferred tax assets depends primarily upon the timing of future taxable income and the expiration dates of the components of the deferred tax assets . if sufficient future taxable income is generated , we may be able to offset a portion of future tax expenses . the company follows asc 740-10 that gives guidance to tax positions related to the recognition and measurement of a tax position taken or expected to be taken in a tax return and requires that we recognize in our financial statements the impact of a tax position , if that position is more likely than not to be sustained upon an examination , based on the technical merits of the position . interest and penalties related to income tax matters are recorded as income tax expenses . the company has recorded a long-term liability of $ 25,000 for an uncertain income tax position , tax penalties and any imputed interest thereon . see note f , income taxes . revenue recognition : revenue is recognized at the time product is shipped and title passes pursuant to the terms of the agreement with the customer , the amount due from the customer is fixed and collectability of the related receivable is reasonably assured . we establish allowances to cover anticipated doubtful accounts and sales returns based upon historical experience . the company nets the factored accounts receivable with the corresponding advance from the factor , with the net amount reflected in the consolidated balance sheet . the company assigns trade receivables on a pre-approved non-recourse basis to the factor under the factoring agreement on an ongoing basis . inventories : inventories are valued at the lower of market or cost . cost is determined on the first in/first out method . we evaluate inventories on a quarterly basis and write down inventory that is deemed obsolete or unmarketable in an amount equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions . 11 recently issued accounting pronouncements changes to accounting principles generally accepted in the united states of america ( u.s. gaap ) are established by the financial accounting standards board ( fasb ) in the form of accounting standards updates ( asu 's ) to the fasb 's accounting standards codification . the company considers the applicability and impact of all asu 's . recently issued asu 's were evaluated and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements . revision of prior period financial statements certain amounts appearing in the condensed consolidated balance sheet as of march 31 , 2013 have been revised to correct for an immaterial error and to conform to the current year 's presentation . the company had not previously recorded its proportionate share of the hong kong joint ventures other comprehensive income amounts . these consisted of the impact of foreign currency exchange rates on the translation of certain subsidiaries of the hong kong joint venture and changes in the fair value of investments held by the hong

general we are in the business of marketing and distributing safety and security products which are primarily manufactured through our 50 % owned hong kong joint venture . our financial statements detail our sales and other operational results , and report the financial results of the hong kong joint venture using the equity method . accordingly , the following discussion and analysis of the fiscal years ended march 31 , 2014 and 2013 relate to the operational results of the company and its consolidated subsidiaries only and includes the company 's equity share of earnings in the hong kong joint venture . a discussion and analysis of the hong kong joint venture 's operational results for these periods is presented below under the heading “ hong kong joint venture. ” while we believe that our overall sales are likely affected by the current global economic situation , we believe that we are specifically negatively impacted by the severe downturn in the u.s. housing market . as stated elsewhere in this report , our usi electric subsidiary markets our products to the electrical distribution trade ( primarily electrical and lighting distributors and manufactured housing companies ) ; every downturn in new home construction and new home sales negatively impacts sales by our usi electric subsidiary . our operating results for the current fiscal years ended march 31 , 2014 and 2013 continue to be significantly impacted by the economic downturn of the u.s. housing market . we anticipate that when and as the housing market recovers , sales by our usi electric subsidiary will improve , as well . we further believe that our fiscal 2014 retail sales were impacted by the movement of the smoke and carbon monoxide alarm retail markets toward ten-year sealed alarms to comply with new laws passed in several states , including california and new york .

during the first quarter of 2015 , the company recognized $ 0.4 million as license fee revenue for the upfront payment received from sandoz for the expanded apac territory . the company recorded $ 2.0 million of deferred revenue for the upfront payment received from sandoz for the expanded territory because sandoz was entitled to a $ 2.0 million refund if certain regulatory and manufacturing conditions were not met . in december 2014 , the company met the manufacturing requirement and recognized $ 1.0 million of the upfront payment as license fee revenue . in september 2015 , the company met the regulatory 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 . vitaros ® is a registered trademark in certain countries and is pending registration in certain other countries , including the united states . solely for convenience , we have used the ® symbol throughout this report , even when discussing territories where the trademark registration is pending . story_separator_special_tag from biotox of $ 0.7 million in 2014. we recorded a gain of approximately $ 0.7 million as discontinued operations within our statement of operations in 2014. historically , we reflected the operations and subsequent cash collections associated with the sale of the business as a component of continuing operations , on the line recovery on sale of subsidiary within our consolidated statements of operations . however , we have elected not to correct these prior period amounts which are deemed immaterial . in 2013 , we received $ 0.3 million in payments from the buyer of bio-quant , which were recognized as a recovery on the sale of subsidiary in the respective periods ( see note 5 to our consolidated financial statements for further details ) . deconsolidation of former french subsidiaries we deconsolidated our former french subsidiaries in the second quarter of 2013 as a result of our former french subsidiaries entering into judicial liquidation procedures in april 2013. this deconsolidation resulted in a non-cash gain of $ 0.6 million in 2013. at that time , we also recorded a liability of $ 2.8 million , equal to the net deconsolidated liabilities ( see note 5 to our consolidated financial statements for further details ) . during the second quarter of 2014 , we released the $ 2.8 million liability previously reflected in our consolidated balance sheet and recognized approximately $ 0.8 million as a gain on deconsolidation in our statement of operations during that period . 38 other income and expense other income and expense was as follows ( in thousands , except percentages ) : replace_table_token_6_th interest expense , net interest expense increased $ 0.5 million during the year ended december 31 , 2015 as compared to the prior year due to interest charges in connection with the loan and security agreement ( the “ credit facility ” ) entered into with oxford finance llc ( “ oxford ” ) and silicon valley bank ( “ svb ” ) ( oxford and svb are referred to together as the “ lenders ” ) in october 2014. additionally , the principal balance of the loan increased due to the second term loan funding of $ 5.0 million during the third quarter of 2015 ( see note 7 to our consolidated financial statements for further details ) . interest expense decreased $ 0.4 million during 2014 as compared to 2013 primarily due to the repayment of $ 1.5 million in principal on the 7 % convertible notes ( the “ 2012 convertible notes ” ) in april 2014 , resulting in a reduction of interest expense . the terms of the 2012 convertible notes were amended during the fourth quarter of 2014 and the remainder of the balance was satisfied at that time . gain on sale of investment we previously held an 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 . change in fair value of warrant liability in connection with our february 2015 equity financing , the company issued warrants to purchase up to 3,021,977 shares of its common stock at an exercise price of $ 1.82 per share . story_separator_special_tag our stock price must be $ 1.00 per share or above in order for us to access the remaining reserve under our committed equity financing facility with aspire capital . assuming a stock price of $ 1.00 per share or greater , the agreement specifies a maximum number of shares of common stock to be sold , of which approximately 5.0 million shares is currently available . we may sell additional shares under the agreement above the maximum if the total weighted average of all shares issued to date is $ 1.97 per share or greater . shares issued to date have a total weighted average sales price of $ 1.46 per share . as of march 3 , 2016 , approximately $ 5.3 million was available under the committed equity financing facility . based upon our current operating plan and the access to additional capital under our committed equity financing facility as of march 3 , 2016 , we believe we have sufficient cash to fund our base operations through the third quarter of 2016. the accompanying consolidated financial statements have been prepared assuming we will continue to operate as a going concern , which contemplates the realization of assets and settlement of liabilities in the normal course of business , and 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 uncertainty related to our ability to continue as a going concern . our future liquidity and capital funding requirements will depend on numerous factors , including : our ability to raise additional funds to finance our operations and service our debt ; 40 the revenue generated by product sales and royalty revenue from our vitaros ® commercialization partners the outcome , costs and timing of clinical trial results for our product candidates ; the emergence and effect of competing or complementary products ; our ability to maintain , expand and defend the scope of our intellectual property portfolio , including the amount and timing of any payments we may be required to make , or that we may receive , in connection with the licensing , filing , prosecution , defense and enforcement of any patents or other intellectual property rights ; our ability to retain our current employees and the need and ability to hire additional management and scientific and medical personnel ; the terms and timing of any collaborative , licensing or other arrangements that we have or may establish ; the trading price of our common stock being above the $ 1.00 closing floor price that is required for us to use the committed equity financing facility with aspire capital ; the trading price of our common stock ; and our ability to maintain compliance with the listing requirements of the nasdaq capital market . in order to fund our operations during the next twelve months , we will need to raise substantial additional funds through one or more of the following : issuance of additional debt or equity , accessing additional capital under our committed equity financing facility with aspire capital , as described above and or the completion of a licensing transaction for one or more of our pipeline assets . if we are unable to maintain sufficient financial resources , our business , financial condition and results of operations will be materially and adversely affected . this could affect future development activities , such as the resubmission of a vitaros ® united states nda , continued development of room temperature vitaros ® , as well as future clinical studies for fispemifene and rayva . there can be no assurance that we will be able to obtain the needed financing on acceptable terms or at all . additionally , equity or debt financings may have a dilutive effect on the holdings of our existing stockholders . cash flow summary the following table summarizes selected items in our consolidated statements of cash flows ( in thousands ) : replace_table_token_7_th operating activities from continuing operations cash used in operating activities from continuing operations of $ 22.6 million in 2015 was primarily due to a net loss of $ 19.0 million net of adjustments to net loss for non-cash items such as the warrant liability revaluation of $ 3.2 million , stock based compensation expense of $ 1.2 million , and a $ 1.0 million decrease in deferred revenue primarily due to the recognition of license fee revenue related to sandoz of $ 1.0 million that had been previously deferred awaiting the satisfaction of a contractual condition in the sandoz license agreement that was met in the third quarter of 2015. changes in operating assets and liabilities also contributed to the cash used in operating activities , such as a decrease to accrued expenses primarily due to the decrease in accrued outside r & d services . cash used in operating activities from continuing operations of $ 18.0 million in 2014 was primarily due to net loss from continuing operations of $ 22.5 million , adjusted for non-cash items including $ 5.9 million of r & d expense paid to forendo in shares of common stock , stock based compensation expense of $ 1.7 million , a gain of $ 0.8 million related to the deconsolidation of our former french subsidiaries , and a $ 0.9 million gain on contract settlement . changes in net operating assets resulted mainly from the payment of liabilities associated with our former french subsidiaries , release of deferred revenue largely related to the recognition of the majorelle upfront payment which were offset by an increase in accrued expenses related to future consideration due to forendo ( see note 4 to our consolidated financial statements for further details ) .

results of operations revenues and gross profit were as follows ( in thousands , except percentages ) : replace_table_token_4_th revenue license fee revenue the $ 4.9 million decrease in license fee revenue during the year ended december 31 , 2015 as compared to the prior year was due to the recognition in 2014 of $ 4.0 million from majorelle for the fair value of the license , consisting of an upfront payment of $ 1.8 million , $ 0.2 million received for national phase approval in france , and $ 2.0 million in connection with certain severance payments made by majorelle on our behalf ; an upfront license payment of approximately $ 2.5 million from recordati ; and $ 2.0 million from sandoz , consisting of $ 0.5 million for each of the launches of vitaros ® in sweden and belgium and $ 1.0 million that had been previously deferred awaiting the satisfaction of a contractual condition that was met in the fourth quarter of 2014. the decrease was partially offset by $ 2.3 million in license fee revenue recognized in 2015 for the upfront payment related to the ferring license agreement and $ 1.4 million from sandoz , consisting of $ 0.4 million for the expansion of its existing territory into certain asian and pacific countries during the first quarter of 2015 and $ 1.0 million that had been previously deferred awaiting the satisfaction of a contractual condition in the sandoz license agreement that was met in the third quarter of 2015 . 36 comparatively , in 2013 , we received $ 0.6 million and $ 0.3 million in license fee revenue from bracco and sandoz , respectively , as a result of substantive milestones received upon regulatory approvals in italy and germany , respectively .

in the event story_separator_special_tag the following review of our results of operations and financial condition should be read in conjunction with items 1. , 1a . and 2 . “ business , risk factors and properties , ” and item 8 . “ financial statements and supplementary data , ” included in this report . cautionary statement regarding forward-looking information this form 10-k contains certain estimates , predictions , projections , assumptions and other forward-looking statements that involve various risks and uncertainties . while these forward-looking statements , and any assumptions upon which they are based , are made in good faith and reflect our current judgment regarding the direction of our business , actual results will almost always vary , sometimes materially , from any estimates , predictions , projections , assumptions or other future performance suggested in this report . these forward-looking statements can generally be identified by the words “ anticipates , ” “ believes , ” “ expects , ” “ plans , ” “ intends , ” “ estimates , ” “ forecasts , ” “ budgets , ” “ projects , ” “ will , ” “ could , ” “ should , ” “ may ” and similar expressions . these statements reflect our current views with regard to future events and are subject to various risks , uncertainties and assumptions . please read item 1a . “ risk factors ” for a discussion of certain of those risks . if one or more of these risks or uncertainties materialize , or if the underlying assumptions prove incorrect , our actual results may vary materially from those described in any forward-looking statement . other unknown or unpredictable factors could also have material adverse effects on our future results . readers are cautioned not to place undue reliance on this forward-looking information , which is as of the date of the form 10-k. we do not intend to update these statements unless it is required by the securities laws to do so , and we undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events . overview nustar gp holdings , llc ( nustar gp holdings ) is a delaware limited liability company . our units are traded on the new york stock exchange ( nyse ) under the symbol “ nsh. ” unless otherwise indicated , the terms “ nustar gp holdings , ” “ we , ” “ our ” and “ us ” are used in this report to refer to nustar gp holdings , llc , to one or more of our consolidated subsidiaries or to all of them taken as a whole . our only cash generating assets are our ownership interests in nustar energy l.p. ( nustar energy ) , a publicly traded delaware limited partnership ( nyse : ns ) . as of december 31 , 2012 , our aggregate ownership interests in nustar energy consisted of the following : the 2 % general partner interest ; 100 % of the incentive distribution rights ( idr ) issued by nustar energy , which entitle us to receive increasing percentages of the cash distributed by nustar energy , currently at the maximum percentage of 23 % ; and 10,351,461 common units of nustar energy representing a 13.0 % limited partner interest . we account for our ownership interest in nustar energy using the equity method . therefore , our financial results reflect a portion of nustar energy 's net income based on our ownership interest . we have no separate operating activities apart from those conducted by nustar energy and therefore generate no revenues from operations . nustar energy is required by its partnership agreement to distribute all of its available cash at the end of each quarter , less reserves established by its general partner , in its sole discretion , to provide for the proper conduct of nustar energy 's business . similarly , we are required by our limited liability company agreement to distribute all of our available cash at the end of each quarter , less reserves established by our board of directors . nustar energy is engaged in the terminalling and storage of petroleum products , the transportation of petroleum products and anhydrous ammonia , and petroleum refining and marketing . nustar energy has terminal and storage facilities in the united states , canada , mexico , the netherlands , including st. eustatius in the caribbean , the united kingdom and turkey . on january 1 , 2013 , nustar energy sold the san antonio refinery and related assets , which included inventory , a terminal in elmendorf , texas and a pipeline connecting the terminal and refinery for approximately $ 115.0 million . nustar energy presented the results of operations for the san antonio refinery and related assets as discontinued operations for the years ended december 31 , 2012 and 2011. on december 13 , 2012 , nustar energy completed its acquisition of the texstar crude oil assets ( as defined below ) , including 100 % of the partnership interest in texstar crude oil pipeline , lp , from texstar midstream services , lp and certain of its affiliates ( collectively , texstar ) for $ 325.4 million ( the texstar asset acquisition ) . the texstar crude oil assets consist of 27 approximately 140 miles of crude oil pipelines and gathering lines , as well as five terminals and storage facilities providing 0.6 million barrels of storage capacity . on september 28 , 2012 , nustar energy sold a 50 % ownership interest ( the asphalt sale ) in nustar asphalt llc ( asphalt jv ) , previously a wholly-owned subsidiary of nustar energy , to an affiliate of lindsay goldberg llc ( lindsay goldberg ) , a private investment firm . story_separator_special_tag we borrowed $ 6.0 million from our revolving credit facility for the year ended december 31 , 2011 , mainly to fund our $ 6.7 million in contributions to nustar energy in order to maintain our 2 % general partner interest following its issuances of common units during 2011. additionally , we repaid $ 5.5 million under the revolving credit facility . cash distributions received from nustar energy were $ 82.4 million for the year ended december 31 , 2010 , which we used primarily to fund distributions to our unitholders totaling $ 77.6 million . we borrowed $ 5.2 million from our revolving credit facility for the year ended december 31 , 2010 , mainly to fund our contribution to nustar energy in order to maintain our 2 % general partner interest following its issuance of common units in may 2010. credit facility borrowings under our revolving credit facility are used to fund capital contributions to nustar energy to maintain our 2 % general partner interest as nustar energy issues additional units and to meet other liquidity and capital resource requirements . our 364-day revolving credit agreement dated june 29 , 2012 , matures on june 28 , 2013 and has a borrowing capacity of up to $ 40.0 million , of which , up to $ 10.0 million may be available for letters of credit ( the 2012 credit facility ) . as of december 31 , 2012 , we had outstanding borrowings of $ 20.0 million , and availability of $ 20.0 million and $ 10.0 million for borrowings and letters of credit , respectively , under the 2012 credit facility . interest on the 2012 credit facility is based upon , 34 at our option , either an alternative base rate plus 0.75 % or a libor-based rate plus 1.75 % , which was 2.0 % as of december 31 , 2012 . our obligations under the 2012 credit facility are unsecured . the 2012 credit facility contains customary covenants and provisions including limitations on indebtedness , liens , dispositions of property , mergers and asset transfers . the terms of the 2012 credit facility require nustar energy to maintain , as of the end of each rolling period , consisting of any period of four consecutive quarters , a consolidated debt coverage ratio not to exceed 5.0-to-1.0 . if nustar energy consummates an acquisition for an aggregate net consideration of at least $ 50.0 million , the maximum consolidated debt coverage ratio will increase to 5.5-to-1.0 for two rolling periods . as of december 31 , 2012 , nustar energy 's consolidated debt coverage ratio could not exceed 5.5-to-1.0 , as a result of the texstar asset acquisition . nustar energy 's consolidated debt coverage ratio was 5.0 x as of december 31 , 2012. we are also required to receive cash distributions of at least $ 50.0 million in respect of our ownership interests in nustar energy for the preceding four fiscal quarters ending on the last day of each fiscal quarter . our management believes that we are in compliance with the covenants of the 2012 credit facility as of december 31 , 2012 . on july 15 , 2010 , we entered into a 364-day revolving credit facility that we amended on july 14 , 2011 to extend the maturity date to july 12 , 2012 ( 2010 credit facility ) . the 2010 credit facility has a borrowing capacity of up to $ 30.0 million , of which up to $ 10.0 million may be available for letters of credit . interest on the 2010 credit facility , as amended , is based upon , at our option , either an alternative base rate plus 0.75 % or a libor-based rate plus 1.75 % . the weighted average interest rate related to borrowings under the 2010 credit facility for the year ended december 31 , 2011 was 2.6 % . we borrowed $ 21.0 million under the 2012 credit facility during the year ended december 31 , 2012 , mainly to fund our $ 7.1 million in contributions to nustar energy to maintain our 2 % general partner interest following its issuances of common units in 2012. during the year ended december 31 , 2012 , we repaid $ 17.5 million under the 2012 credit facility . the weighted-average interest rate related to borrowings under the 2012 credit facility for the year ended december 31 , 2012 was 2.1 % . we are in discussions with the lenders to renew or replace our 2012 credit facility . investment in nustar energy on september 10 , 2012 , nustar energy issued 7,130,000 common units representing limited partner interests at a price of $ 48.94 per unit . nustar energy received proceeds of $ 336.8 million , net of issuance costs . in conjunction with nustar energy 's issuance of common units , we contributed $ 7.1 million to nustar energy in order to maintain our 2 % general partner interest . on december 9 , 2011 , nustar energy issued 6,037,500 common units representing limited partner interests at a price of $ 53.45 per unit . nustar energy received proceeds of $ 311.4 million , net of issuance cost . in september and october 2011 , nustar energy issued 108,029 common units for proceeds of $ 5.9 million , net of issuance cost . in conjunction with nustar energy 's issuances of common units , we contributed $ 6.7 million to nustar energy in order to maintain our 2 % general partner interest . cash distributions to unitholders our limited liability company agreement requires that , within 50 days after the end of each quarter , we distribute all of our available cash to the holders of record of our units on the applicable record date .

results of operations as discussed above , we account for our investment in nustar energy using the equity method . as a result , our equity in earnings of nustar energy , our only source of income , directly fluctuates with the amount of nustar energy 's distributions and results of operations . nustar energy 's distributions determine the amount of our incentive distribution earnings , while nustar energy 's results of operations determine the amounts of earnings attributable to our general partner and limited partner interests . year ended december 31 , 2012 compared to year ended december 31 , 2011 financial highlights ( thousands of dollars , except unit and per unit data ) replace_table_token_5_th the following table summarizes nustar energy 's statement of income data : replace_table_token_6_th 29 for the year ended december 31 , 2012 , nustar energy reported a net loss of $ 227.2 million , compared to net income of $ 221.6 million for the year ended december 31 , 2011 , primarily due to an operating loss of $ 296.8 million in its asphalt and fuels marketing segment . the operating loss of nustar energy 's asphalt and fuels marketing segment mainly resulted from an asset impairment charge of $ 266.4 million in the second quarter of 2012 related to the goodwill and long-lived assets of its asphalt operations . in addition , nustar energy 's equity in loss of joint ventures of $ 9.4 million and other expense of $ 26.5 million for the year ended december 31 , 2012 were primarily related to asphalt jv and the associated loss upon deconsolidation . the loss from nustar energy 's discontinued operations of $ 49.1 million also contributed to the decrease in its net income , all of which is attributable to the san antonio refinery .

the establishment of an aro has no initial impact on earnings . environmental liabilities 45 we estimate environmental liabilities using both internal and external resources . activities include feasibility studies and other evaluations management considers appropriate . environmental liabilities are recorded in the period in which the obligation can be reasonably estimated . estimating environmental liabilities requires significant management judgment as well as possible use of third party specialists knowledgeable in such matters . environmental liabilities have not adversely affected our results of operations or financial condition in the past , and we do not anticipate that they will in the future . our relationship with martin resource management martin resource management directs our business operations through its ownership and control of our general partner and under the omnibus agreement . in addition to the direct expenses , under the omnibus agreement , we are required to reimburse martin resource management for indirect general and administrative and corporate overhead expenses . for the years ended december 31 , 2014 , 2013 and 2012 , the conflicts committee of our general partner ( “ conflicts committee ” ) approved reimbursement amounts of $ 12.5 million , $ 10.6 million and $ 7.6 million , respectively , reflecting our allocable share of such expenses . the conflicts committee will review and approve future adjustments in the reimbursement amount for indirect expenses , if any , annually . we are required to reimburse martin resource management for all direct expenses it incurs or payments it makes on our behalf or in connection with the operation of our business . martin resource management also licenses certain of its trademarks and trade names to us under the omnibus agreement . we are both an important supplier to and customer of martin resource management . among other things , we sell sulfuric acid and provide marine transportation and terminalling and storage services to martin resource management . we purchase land transportation services and marine fuel from martin resource management . all of these services and goods are purchased and sold pursuant to the terms of a number of agreements between us and martin resource management . for a more comprehensive discussion concerning the omnibus agreement and the other agreements that we have entered into with martin resource management , please see “ item 13. certain relationships and related transactions , and director independence. ” how we evaluate our operations our management uses a variety of financial and operational measurements other than our financial statements prepared in accordance with u.s. gaap to analyze our performance . these include : ( 1 ) net income before interest expense , income tax expense , and depreciation and amortization ( “ ebitda ” ) , ( 2 ) adjusted ebitda and ( 3 ) distributable cash flow . our management views these measures as important performance measures of core profitability for our operations and the ability to generate and distribute cash flow , and as key components of our internal financial reporting . we believe investors benefit from having access to the same financial measures that our management uses . ebitda and adjusted ebitda . certain items excluded from ebitda and adjusted ebitda are significant components in understanding and assessing an entity 's financial performance , such as cost of capital and historic costs of depreciable assets . we have included information concerning ebitda and adjusted ebitda because they provide investors and management with additional information to better understand the following : financial performance of our assets without regard to financing methods , capital structure or historical cost basis ; our operating performance and return on capital as compared to those of other similarly situated entities ; and the viability of acquisitions and capital expenditure projects . our method of computing adjusted ebitda may not be the same method used to compute similar measures reported by other entities . the economic substance behind our use of adjusted ebitda is to measure the ability of our assets to generate cash sufficient to pay interest costs , support our indebtedness and make distributions to our unit holders . distributable cash flow . distributable cash flow is a significant performance measure used by our management and by external users of our financial statements , such as investors , commercial banks and research analysts , to compare basic cash flows generated by us to the cash distributions we expect to pay our unitholders . distributable cash flow is also an important financial measure for our unitholders since it serves as an indicator of our success in providing a cash return on investment . specifically , this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates . distributable cash flow is also a quantitative standard used throughout the investment community with respect to publicly-traded partnerships because the value of a unit 46 of such an entity is generally determined by the unit 's yield , which in turn is based on the amount of cash distributions the entity pays to a unitholder . ebitda , adjusted ebitda and distributable cash flow should not be considered alternatives to , or more meaningful than , net income , cash flows from operating activities , or any other measure presented in accordance with u.s. gaap . our method of computing these measures may not be the same method used to compute similar measures reported by other entities . non-gaap financial measures the following table reconciles the non-gaap financial measurements used by management to our most directly comparable gaap measures for the years ended december 31 , 2014 , 2013 , and 2012 , which represents ebitda , adjusted ebitda and distributable cash flow from continuing operations . reconciliation of ebitda , adjusted ebitda , and distributable cash flow replace_table_token_8_th story_separator_special_tag growth in volumes increased our costs $ 307.7 million . operating expenses . operating expenses increased $ 5.3 million story_separator_special_tag the establishment of an aro has no initial impact on earnings . environmental liabilities 45 we estimate environmental liabilities using both internal and external resources . activities include feasibility studies and other evaluations management considers appropriate . environmental liabilities are recorded in the period in which the obligation can be reasonably estimated . estimating environmental liabilities requires significant management judgment as well as possible use of third party specialists knowledgeable in such matters . environmental liabilities have not adversely affected our results of operations or financial condition in the past , and we do not anticipate that they will in the future . our relationship with martin resource management martin resource management directs our business operations through its ownership and control of our general partner and under the omnibus agreement . in addition to the direct expenses , under the omnibus agreement , we are required to reimburse martin resource management for indirect general and administrative and corporate overhead expenses . for the years ended december 31 , 2014 , 2013 and 2012 , the conflicts committee of our general partner ( “ conflicts committee ” ) approved reimbursement amounts of $ 12.5 million , $ 10.6 million and $ 7.6 million , respectively , reflecting our allocable share of such expenses . the conflicts committee will review and approve future adjustments in the reimbursement amount for indirect expenses , if any , annually . we are required to reimburse martin resource management for all direct expenses it incurs or payments it makes on our behalf or in connection with the operation of our business . martin resource management also licenses certain of its trademarks and trade names to us under the omnibus agreement . we are both an important supplier to and customer of martin resource management . among other things , we sell sulfuric acid and provide marine transportation and terminalling and storage services to martin resource management . we purchase land transportation services and marine fuel from martin resource management . all of these services and goods are purchased and sold pursuant to the terms of a number of agreements between us and martin resource management . for a more comprehensive discussion concerning the omnibus agreement and the other agreements that we have entered into with martin resource management , please see “ item 13. certain relationships and related transactions , and director independence. ” how we evaluate our operations our management uses a variety of financial and operational measurements other than our financial statements prepared in accordance with u.s. gaap to analyze our performance . these include : ( 1 ) net income before interest expense , income tax expense , and depreciation and amortization ( “ ebitda ” ) , ( 2 ) adjusted ebitda and ( 3 ) distributable cash flow . our management views these measures as important performance measures of core profitability for our operations and the ability to generate and distribute cash flow , and as key components of our internal financial reporting . we believe investors benefit from having access to the same financial measures that our management uses . ebitda and adjusted ebitda . certain items excluded from ebitda and adjusted ebitda are significant components in understanding and assessing an entity 's financial performance , such as cost of capital and historic costs of depreciable assets . we have included information concerning ebitda and adjusted ebitda because they provide investors and management with additional information to better understand the following : financial performance of our assets without regard to financing methods , capital structure or historical cost basis ; our operating performance and return on capital as compared to those of other similarly situated entities ; and the viability of acquisitions and capital expenditure projects . our method of computing adjusted ebitda may not be the same method used to compute similar measures reported by other entities . the economic substance behind our use of adjusted ebitda is to measure the ability of our assets to generate cash sufficient to pay interest costs , support our indebtedness and make distributions to our unit holders . distributable cash flow . distributable cash flow is a significant performance measure used by our management and by external users of our financial statements , such as investors , commercial banks and research analysts , to compare basic cash flows generated by us to the cash distributions we expect to pay our unitholders . distributable cash flow is also an important financial measure for our unitholders since it serves as an indicator of our success in providing a cash return on investment . specifically , this financial measure indicates to investors whether or not we are generating cash flow at a level that can sustain or support an increase in our quarterly distribution rates . distributable cash flow is also a quantitative standard used throughout the investment community with respect to publicly-traded partnerships because the value of a unit 46 of such an entity is generally determined by the unit 's yield , which in turn is based on the amount of cash distributions the entity pays to a unitholder . ebitda , adjusted ebitda and distributable cash flow should not be considered alternatives to , or more meaningful than , net income , cash flows from operating activities , or any other measure presented in accordance with u.s. gaap . our method of computing these measures may not be the same method used to compute similar measures reported by other entities . non-gaap financial measures the following table reconciles the non-gaap financial measurements used by management to our most directly comparable gaap measures for the years ended december 31 , 2014 , 2013 , and 2012 , which represents ebitda , adjusted ebitda and distributable cash flow from continuing operations . reconciliation of ebitda , adjusted ebitda , and distributable cash flow replace_table_token_8_th story_separator_special_tag growth in volumes increased our costs $ 307.7 million . operating expenses . operating expenses increased $ 5.3 million

results of operations 47 the results of operations for the years ended december 31 , 2014 , 2013 , and 2012 have been derived from our consolidated financial statements . we evaluate segment performance on the basis of operating income , which is derived by subtracting cost of products sold , operating expenses , selling , general and administrative expenses , and depreciation and amortization expense from revenues . the following table sets forth our operating revenues and operating income by segment for the years ended december 31 , 2014 , 2013 , and 2012 . our consolidated results of operations are presented on a comparative basis below . there are certain items of income and expense which we do not allocate on a segment basis . these items , including equity in earnings ( loss ) of unconsolidated entities , interest expense , and indirect selling , general and administrative expenses , are discussed after the comparative discussion of our results within each segment . the natural gas services segment information below excludes the discontinued operations of the floating storage assets disposed of on february 12 , 2015 for the years ended december 31 , 2014 and 2013 and the natural gas gathering and processing assets for the year ended december 31 , 2012. see item 8 , note 5. replace_table_token_9_th 48 terminalling and storage segment comparative results of operations for the twelve months ended december 31 , 2014 and 2013 replace_table_token_10_th services revenues . services revenue increased $ 7.7 million attributable to increased throughput volumes at our crude terminal in corpus christi , texas . in addition , $ 4.7 million of the increase is due to revenues generated by our smackover refinery related to increased tolling fees resulting from a new contract effective july 1 , 2013. our new dunphy terminal in elko , nevada , which was placed in service in may 2014 , also contributed to $ 1.2 million of the increase . products revenues .

net of divestiture , increased sales by 1.0 % . regionally , fiscal 2011 sales in the americas , europe , and asia-pacific increased 4.8 % , 6.5 % , and 9.0 % , respectively , as compared to fiscal 2010 . 18 net income for fiscal 2011 increased 32.6 % to $ 108.7 million or $ 2.04 per diluted share of class a common stock , compared to $ 82.0 million , or $ 1.55 per diluted share of class a common stock in fiscal 2010. fiscal 2011 net income before restructuring related expenses was $ 115.2 million , or $ 2.16 per diluted share of class a common stock compared to 2010 net income before restructuring related expenses of $ 93.4 million , or $ 1.76 per diluted share of class a common stock . the improvement in earnings was driven by organic sales growth , the positive impacts of the company 's ongoing process improvement initiatives and restructuring activities as well as benefits from foreign currency translation . in fiscal 2011 , the company generated $ 167.4 million of cash from operations , an increase of $ 2.2 million from the prior fiscal year . the increase in fiscal 2011 net income was mainly offset by improvements in working capital in the prior year . story_separator_special_tag width= '' 11 % '' > acquisitions : segment date completed welconstruct group limited ( “welco” ) europe october 2009 stickolor industria e comerciao de auto adesivos ltd ( “stickolor” ) americas december 2009 securimed sas ( “securimed” ) europe march 2010 fiscal 2010 sales increased $ 50.4 million , or 4.2 % from fiscal 2009. the 4.2 % increase consisted of 0.2 % growth in organic sales , 1.3 % growth due to acquisitions , and 2.7 % growth resulting from the effects of foreign currency translation . organic sales , defined as sales in the company 's existing core businesses and regions ( exclusive of acquisitions owned less than one year and foreign currency translation effects ) , were up 0.2 % compared to fiscal 2009. the annual organic sales growth of 0.2 % varied significantly by quarter . in the first quarter of the year the company experienced a 15.9 % decline in organic sales as the prior year quarter had not yet been impacted by the economic recession . subsequent to the first quarter the company experienced sequential growth over the prior period each quarter . the acquisitions listed above increased sales by $ 16.2 million or 1.3 % in fiscal 2010. the currency growth reflects fluctuations in the exchange rates used to translate financial results into the united states dollar which increased sales by $ 32.3 million or 2.7 % for the year . the gross margin as a percentage of sales increased to 49.5 % in fiscal 2010 from 47.8 % in fiscal 2009. the increase in gross margin as a percentage of sales was primarily due to the cost savings generated from restructuring activities as well as lean and continuous improvement activities in fiscal 2010 and 2009 . 20 research and development expenses increased to $ 42.6 million in fiscal 2010 from $ 34.2 million in fiscal 2009 , and increased as a percentage of sales in fiscal 2010 to 3.4 % compared to 2.8 % in fiscal 2009. the increase was due to the company 's continued commitment to investing in new product development as well as the increased incentive compensation expenses during fiscal 2010. selling , general , and administrative ( “sg & a” ) expenses increased to $ 435.9 million in fiscal 2010 as compared to $ 397.2 million in fiscal 2009. the increase in sg & a expenses was primarily due to the resumption of payment of certain incentive compensation expenses during fiscal 2010 , as well as the effects of the fluctuations in the exchange rates used to translate financial results into the united states dollar . in fiscal 2009 , the company experienced a reduction in sg & a due to the elimination of certain incentive compensation plans during the year . as a percentage of sales , sg & a increased to 34.6 % in fiscal 2010 from 32.9 % in fiscal 2009. restructuring charges were $ 15.3 and $ 25.8 million during fiscal 2010 and 2009 , respectively . in fiscal 2009 , $ 1.6 million of income tax expense was also incurred related to the anticipated repayment of certain tax holidays due to site consolidation actions . in response to the global economic downturn , the company implemented a plan to reduce its cost structure . during fiscal 2009 and 2010 , the company incurred costs related to the reduction of its workforce and facility consolidations . restructuring costs related primarily to employee separation costs , consisting of severance pay , outplacement services , medical , and other related benefits for the company 's work force . interest expense decreased to $ 21.2 million from $ 24.9 million for fiscal 2010 compared to fiscal 2009. in fiscal 2010 , the company repaid approximately $ 44.9 million of debt . interest expense decreased due to the company 's lower principal balance under the previously outstanding debt agreements . the decrease was partially offset by additional interest on the may 2010 private placement , as compared to the prior year . other income and expense decreased $ 0.6 million in fiscal 2010 to $ 1.2 million from $ 1.8 million in the prior year . the decrease was primarily due to a decrease in foreign exchange gains , offset by gains on securities held in executive deferred compensation plans . the company 's effective tax rate was 25.1 % for fiscal 2010 compared to 27.9 % for fiscal 2009. the decrease in the company 's effective tax rate during fiscal 2010 was primarily due to the mix of profits in low and high tax countries as well as positive impacts from foreign and u.s. income tax audits . story_separator_special_tag sales were also positively affected by fluctuations in the exchange rates used to translate financial results into the united states dollar , which increased sales within the segment by 0.6 % in fiscal 2011. the annual organic sales decline , in fiscal 2010 , of 0.3 % varied significantly during the year . in the first quarter europe experienced a 12.3 % decline in organic sales as the prior year quarter had not yet been impacted by the economic recession . in the second quarter europe experienced a 1.6 % decline in organic sales as the economic recession began in the prior year quarter . subsequent to the first half of the year , europe experienced sequential growth over the prior period each quarter . the segment 's organic sales volumes in direct marketing businesses and electronic industries improved modestly . the increase was offset by the decline in sales to governmental and public utilities . the acquisitions of welco and securimed in fiscal 2010 increased sales by 2.4 % . sales were positively affected by fluctuations in the exchange rates used to translate financial results into the united states dollar , which increased sales within the segment by 1.4 % in fiscal 2010. in the europe region , segment profit increased 8.5 % to $ 112.0 million in fiscal 2011 from $ 103.3 million in fiscal 2010. segment profit as a percentage of sales increased to 27.7 % in fiscal 2011 from 27.2 % in fiscal 2010 and 2009. the increase in the segment 's profit was mainly due to the increased sales volumes in addition to the continued efforts to streamline selling expenses through the company 's strategic initiatives . the segment maintained its segment profit as a percentage of sales in fiscal 2010 and was able to offset the increased expenses with cost savings initiatives put in place in fiscal 2009 and 2010 . 23 asia-pacific asia-pacific sales increased 9.0 % from fiscal 2010 to fiscal 2011 , and sales increased 6.7 % from fiscal 2009 to fiscal 2010. organic sales increased 0.4 % and 0.8 % in fiscal 2011 and 2010 , respectively as compared to prior years . foreign currency translation positively impacted the segment 's sales by 6.9 % and 5.9 % in fiscal 2011 and 2010 , respectively , as compared to prior years . overall , asia-pacific organic sales were relatively flat in fiscal 2011. increased sales from the segment 's on-going customer base diversification in the mobile handset and other adjacent markets offset the reduced demand from one of our largest mobile handset customers . the fiscal 2010 annual organic sales growth of 0.8 % varied significantly during the year . in the first quarter asia experienced a 20.4 % decline in organic sales as the prior year quarter had not yet been impacted by the economic recession . in the second quarter asia experienced a 25.7 % growth in organic sales as the impact of the economic recession in the prior quarter was offset by a heightened focus on high end mobile electronics and strong growth in the data storage market . in the third and fourth quarters asia experienced growth of 9.4 % and 5.2 % , respectively . the increase in organic sales in fiscal 2010 was primarily due to the success in higher-end solutions in both the mobile electronics and computer and storage markets . in the asia-pacific region , segment profit declined 3.8 % to $ 50.1 million in fiscal 2011 from $ 52.1 million in fiscal 2010. segment profit as a percentage of sales declined to 14.0 % in fiscal 2011 from 15.9 % in fiscal 2010. the decline in the profit in fiscal 2011 was the result of relatively flat organic sales , continued price pressure , and inflation on raw materials and wages . the segment continues to focus on driving operational improvements through lean as well as strategic sourcing initiatives . comparing fiscal 2010 to 2009 , segment profit as a percentage of sales increased to 15.9 % in 2010 from 13.9 % in 2009. the increase in the segment 's profit was primarily due to the commitment to lean manufacturing at all of the segment 's facilities . liquidity and capital resources cash and cash equivalents were $ 390.0 million at july 31 , 2011 , compared to $ 314.8 million at july 31 , 2010. the increase in cash and cash equivalents of $ 75.2 million was the result of cash provided by operations of $ 167.4 million , and the $ 22.0 million positive effects of foreign currency translation , offset by cash used for acquisitions , capital expenditures , dividends and debt repayments during fiscal 2011. the company 's working capital excluding cash as a percentage of sales remained flat at 5 % in fiscal 2011 and 2010. accounts receivable balances increased $ 6.9 million from july 31 , 2010 to july 31 , 2011. the increase in accounts receivable was due primarily to the impact of foreign currency translation as well as the increase in sales volumes . inventories increased $ 9.5 million from july 31 , 2010 to july 31 , 2011 due to increased business activity and the impact of foreign currency translation , partially offset by focused inventory reduction initiatives . current liabilities increased $ 8.1 million over the same period mainly due to the company 's forward foreign exchange currency contracts designated as net investment hedges . cash flow from operating activities totaled $ 167.4 million and $ 165.2 million in fiscal 2011 and 2010 , respectively . the increase was primarily due to the $ 26.7 million increase in net income partially offset by the change in working capital components outlined above .

results of operations year ended july 31 , 2011 , compared to year ended july 31 , 2010 the comparability of the operating results for the fiscal years ended july 31 , 2011 to july 31 , 2010 , has been impacted by the following acquisitions and divestitures completed in fiscal 2011. acquisition : segment date completed id warehouse asia pacific november 2010 divestiture : segment date completed teklynx americas europe december 2010 fiscal 2011 sales increased $ 80.5 million , or 6.4 % from fiscal 2010. the 6.4 % increase in sales consisted of 2.9 % growth in organic sales , 2.5 % growth due to the effects of the foreign currency translation , and 1.0 % growth due to an acquisition net of divesture . organic sales , defined as sales in the company 's existing core businesses and regions ( exclusive of acquisitions owned less than one year , divestitures , and foreign currency translation effects ) , were up 2.9 % compared to fiscal 2010. regionally , fiscal 2011 organic sales in the americas , europe , and asia-pacific increased 3.2 % , 4.7 % , and 0.4 % , respectively , as compared to fiscal 2010. the organic sales increase experienced in the americas was due primarily to the strong brady brand sales growth and new products positively received by end—users and distributors . the increase in europe 's organic sales was broad-based with growth in both the brady business and direct marketing business . geographically , sales were weak in the united kingdom , offsetting strength in other european markets . organic sales in the asia-pacific segment remained relatively flat . the segment 's on-going customer base diversification in the mobile handset and other adjacent markets offset the reduced demand from one of our largest mobile handset customers .

to the extent that the partnership estimates that the corporate taxpayers will not realize the full benefit represented by the deferred tax asset , based on an analysis that will consider , among other things , its expectation of story_separator_special_tag the carlyle group l.p. ( the “ partnership ” ) is a delaware limited partnership formed on july 18 , 2011. the partnership is a holding partnership and its sole material assets are equity interests through wholly owned subsidiary entities representing partnership units in carlyle holdings i l.p. , carlyle holdings ii l.p. and carlyle holdings iii l.p. ( collectively , ” carlyle holdings ” ) . through wholly owned subsidiary entities , the partnership is the sole general partner of carlyle holdings and operates and controls all of the business and affairs of carlyle holdings and , through carlyle holdings and its subsidiaries , continues to conduct the business now conducted by these subsidiaries . carlyle group management l.l.c . is the general partner of the partnership . as the sole general partner of carlyle holdings , the partnership consolidates the financial position and results of operations of carlyle holdings into its financial statements , and the ownership interests of the limited partners of the carlyle holdings partnerships are reflected as a non-controlling interest in the partnership 's financial statements . the following discussion should be read in conjunction with the consolidated financial statements and the related notes included in this annual report on form 10-k. overview we conduct our operations through four reportable segments : corporate private equity , real assets , global credit ( formerly known as global market strategies ) , and investment solutions . corporate private equity — our corporate private equity segment advises our 23 buyout and 10 growth capital funds , which seek a wide variety of investments of different sizes and growth potentials . as of december 31 , 2017 , our corporate private equity segment had approximately $ 73 billion in aum and approximately $ 36 billion in fee-earning aum ( fee-earning aum excludes $ 18 billion * in pending aum for which we have not yet activated fees , although this capital is included in total aum ) . real assets — our real assets segment advises our 11 u.s. and internationally focused real estate funds , our two infrastructure funds , our two power funds , our international energy fund , as well as our four legacy energy funds ( funds that we jointly advise with riverstone ) . the segment also includes five ngp management fee funds and four carry funds advised by ngp . as of december 31 , 2017 , our real assets segment had approximately $ 43 billion in aum and approximately $ 32 billion in fee-earning aum . global credit — our global credit segment advises a group of 58 funds that pursue investment opportunities across structured credit , direct lending , distressed credit , energy credit and opportunistic credit . as of december 31 , 2017 , our global credit segment had approximately $ 33 billion in aum and approximately $ 27 billion in fee-earning aum . investment solutions — our investment solutions segment advises global private equity and real estate fund of funds programs and related co-investment and secondary activities across 197 fund vehicles . as of december 31 , 2017 , our investment solutions segment had approximately $ 46 billion in aum and approximately $ 30 billion in fee-earning aum . * for the partnership , fee-earning aum excludes $ 22 billion in pending aum for which we have not yet activated fees , although this capital is included in total aum . we earn management fees pursuant to contractual arrangements with the investment funds that we manage and fees for transaction advisory and oversight services provided to portfolio companies of these funds . we also typically receive a performance fee from an investment fund , which may be either an incentive fee or a special residual allocation of income , which we refer to as a carried interest , in the event that specified investment returns are achieved by the fund . under u.s. generally accepted accounting principles ( “ u.s . gaap ” ) , we are required to consolidate some of the investment funds that we advise . however , for segment reporting purposes , we present revenues and expenses on a basis that deconsolidates these investment funds . accordingly , our segment revenues primarily consist of fund management and related advisory fees , performance fees ( consisting of incentive fees and carried interest allocations ) , investment income , including realized and unrealized gains on our investments in our funds and other trading securities , as well as interest and other income . our segment expenses primarily consist of compensation and benefits expenses , including salaries , bonuses , performance payment arrangements , and equity-based compensation excluding awards granted in our initial public offering or in connection with 94 acquisitions and strategic investments , and general and administrative expenses . while our segment expenses include depreciation and interest expense , our segment expenses exclude acquisition-related charges and amortization of intangibles and impairment . refer to note 16 to the consolidated financial statements included in this annual report on form 10-k for more information on the differences between our financial results reported pursuant to u.s. gaap and our financial results for segment reporting purposes . trends affecting our business expectations for global economic growth remained strong through the fourth quarter of 2017 and into early 2018 , with particular optimism surrounding the outlook for growth in the eurozone . our proprietary portfolio of industrial and manufacturing related indicators remained steady at or near six-year highs during the fourth quarter and into early 2018. as 2017 drew to a close , inflation continued to fall short of central bank targets . story_separator_special_tag we expect that our strong pace of fundraising will continue into 2018 and anticipate that we will raise approximately $ 25 billion during the year . higher fundraising activity generates incremental expenses , generally in the quarter that the capital is raised . as the majority of new capital commitments will not generate fees until management fees are activated , we generally incur costs ahead of revenues . we expect management fees on several of our new large buyout funds will activate fees in the second half of 2018 , at which time we expect fee-earning aum and fee related earnings to increase . pending fee-earning aum , which is capital that we have raised , but on which we have not yet activated fees , was $ 22 billion at december 31 , 2017 up from $ 5 billion at september 30 , 2017 , primarily due to large closings on our asia and u.s. buyout funds . we remain confident in our ability to find investment opportunities that meet the criteria and strategic focus of our investment funds despite higher asset valuations and competition that may put downward pressure on rates of return for new investments across all asset classes . during the fourth quarter , our carry funds invested $ 7 billion in new or follow-on transactions , and invested $ 22 billion in 2017. our diverse fund mandates , geographical footprint and experienced investment teams combine to generate a high level of investment lead generation . with $ 70 billion in available capital ready to deploy , our global investment teams continue to pursue transactions across our platform . we generated $ 8 billion in realized proceeds in our carry funds in the fourth quarter and $ 26 billion in 2017 , the sixth consecutive year we realized more than $ 25 billion in realized proceeds for our fund investors . we are at a point in the cycle for our carry funds where the prior generation of funds have exited substantial parts of their portfolios and newer funds , while in accrued carry , are not yet producing realized performance fees . we expect to remain in this position through 2018 , and therefore expect net realized performance fees will likely be lower in 2018 than 2017. in january 2018 , we re-branded our “ global market strategies ” segment to “ global credit ” to better reflect the underlying business strategy . during 2018 , we plan to invest our resources in further expanding and supporting our global credit business . we are building a scalable foundation in global credit capable of supporting our existing operations and managing a higher-level of assets in their current strategies , while also enabling us to extend into adjacent strategies to meet the evolving needs of our investors . if we successfully execute on our business plans , we expect to grow aum in the global credit segment and improve financial results over the next few years . recent transactions distributions in february 2018 , the board of directors of our general partner declared a quarterly distribution of $ 0.33 per common unit to common unitholders of record at the close of business on february 20 , 2018 , payable on february 27 , 2018. the board of directors of our general partner declared a quarterly distribution of $ 0.367188 per preferred unit to holders of record at the close of business on march 1 , 2018 , payable on march 15 , 2018. distributions on the preferred units are discretionary and non-cumulative . see note 14 to the consolidated financial statements for more information on these units . key financial measures our key financial measures are discussed in the following pages . additional information regarding these key financial measures and our other significant accounting policies can be found in note 2 to the consolidated financial statements included in this annual report on form 10-k. revenues revenues primarily consist of fund management fees , performance fees , investment income , including realized and unrealized gains of our investments in our funds and other investments , as well as interest and other income . fund management fees . fund management fees include management fees and transaction and portfolio advisory fees . we earn management fees for advisory services we provide to funds in which we hold a general partner interest or with which we have an investment advisory or investment management agreement . additionally , management fees include catch-up management fees , which are episodic in nature and represent management fees charged to fund investors in subsequent closings of a fund which apply to the time period between the fee initiation date and the subsequent closing date . 96 management fees attributable to carlyle partners vi , l.p. ( “ cp vi ” ) , our sixth u.s. buyout fund with approximately $ 12.0 billion of fee-earning aum as of december 31 , 2017 , were approximately 16 % , 15 % , and 15 % of total management fees recognized during the years ended december 31 , 2017 , 2016 , and 2015 , respectively . no other fund generated over 10 % of total management fees in the periods presented . fund management fees exclude the reimbursement of any partnership expenses paid by the partnership on behalf of the carlyle funds pursuant to the limited partnership agreements , including amounts related to the pursuit of actual , proposed , or unconsummated investments , professional fees , expenses associated with the acquisition , holding and disposition of investments , and other fund administrative expenses . transaction and portfolio advisory fees . transaction and portfolio advisory fees are fees we receive for the transaction and portfolio advisory services we provide to our portfolio companies . when covered by separate contractual agreements , we recognize transaction and portfolio advisory fees for these services when the service has been provided and collection is reasonably assured . we are required to offset our fund management fees earned by a percentage of the transaction and advisory fees earned , which we refer to as the “ rebate offsets.

consolidated results of operations the following table and discussion sets forth information regarding our consolidated results of operations for the years ended december 31 , 2017 , 2016 and 2015. our consolidated financial statements have been prepared on substantially the same basis for all historical periods presented ; however , the consolidated funds are not the same entities in all periods shown due to changes in u.s. gaap , changes in fund terms and the creation and termination of funds . as further described below , the consolidation of these funds primarily had the impact of increasing interest and other income of consolidated funds , interest and other expenses of consolidated funds , and net investment gains of consolidated funds in the year that the fund is initially consolidated . the consolidation of these funds had no effect on net income attributable to the partnership for the periods presented . 107 replace_table_token_12_th 108 year ended december 31 , 2017 compared to year ended december 31 , 2016 and year ended december 31 , 2016 compared to year ended december 31 , 2015 . revenues total revenues increased $ 1,401.9 million , or 62 % , for the year ended december 31 , 2017 as compared to 2016 and decreased $ 731.9 million , or 24 % , for the year ended december 31 , 2016 as compared to 2015 . the following table provides the components of the changes in total revenues for the years ended december 31 , 2017 and 2016 : replace_table_token_13_th fund management fees .

we also formally assess ( both at the hedge 's inception and on an ongoing basis ) whether the derivative instruments that we use in hedging transactions have been highly effective in offsetting changes in the fair value or cash flows of the underlying hedged items and whether those derivatives are expected to remain highly effective in future periods . when we determine that a derivative instrument is not highly story_separator_special_tag results of operations the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto included in this annual report on form 10-k. unless expressly stated or the context otherwise requires , the terms “ we , ” “ our , ” “ us , ” and “ first solar ” refer to first solar , inc. and its subsidiaries . in addition to historical consolidated financial information , the following discussion and analysis contains forward-looking statements that involve risks , uncertainties , and assumptions as described under the “ note regarding forward-looking statements , ” that appears earlier in this annual report on form 10-k. our actual results could differ materially from those anticipated by these forward-looking statements as a result of many factors , including those discussed under item 1a : “ risk factors , ” and elsewhere in this annual report on form 10-k. executive overview we are a leading global provider of comprehensive pv solar energy solutions . we design , manufacture , and sell pv solar modules with an advanced thin-film semiconductor technology and also develop , design , construct , and sell pv solar power systems that primarily use the modules we manufacture . additionally , we provide o & m services to system owners that use solar modules manufactured by us or by other third-party manufacturers . we have substantial , ongoing research and development efforts focused on module and system level innovations . we are the world 's largest thin-film pv solar module manufacturer and one of the world 's largest pv solar module manufacturers . our mission is to create enduring value by enabling a world powered by clean , affordable solar energy . certain highlights of our financial results and other key developments include the following : net sales for 2015 increased by 6 % to $ 3.6 billion compared to $ 3.4 billion in 2014 . the increase in net sales was primarily attributable to higher revenue from module plus transactions . our net sales for 2015 also included the sale of majority interests in the partially constructed desert stateline project and north star project and higher revenue from our silver state south , mccoy , and imperial solar energy center west projects , which commenced construction in late 2014. these 2015 net sales were offset by lower revenue from the completion , or substantial completion , of our desert sunlight , solar gen 2 , topaz , and campo verde projects in 2014. gross profit increased 1.4 percentage points to 25.7 % during 2015 from 24.3 % during 2014 , primarily due to a reduction in our module collection and recycling obligation and improved utilization of our manufacturing facilities . as of december 31 , 2015 , we had 30 installed production lines with an annual global manufacturing capacity of approximately 2.8 gw at our manufacturing facilities in perrysburg , ohio and kulim , malaysia . we produced 2.5 gw of solar modules during 2015 , which represented a 39 % increase from 2014 . the increase in production was primarily driven by the restart of various production lines at our manufacturing facility in malaysia , increased throughput , and higher module conversion efficiencies . we expect to produce approximately 3.0 gw of solar modules during 2016 . during 2015 , we ran our manufacturing facilities at approximately 92 % capacity utilization , which represented an 11.0 percentage point increase from 2014 . the average conversion efficiency of our modules produced in 2015 was 15.6 % , which represented an improvement of 1.6 percentage points from our average conversion efficiency of 14.0 % in 2014 . 46 market overview the solar industry continues to be characterized by intense pricing competition , both at the module and system levels . in the aggregate , we believe manufacturers of solar modules and cells have , relative to global demand , significant installed production capacity and the ability for additional capacity expansion . we believe the solar industry may from time to time experience periods of structural imbalance between supply and demand ( i.e. , where production capacity exceeds global demand ) , and that such periods will put pressure on pricing . additionally , intense competition at the system level can result in an environment in which pricing falls rapidly , thereby further increasing demand for solar energy solutions but constraining the ability for project developers , epc companies , and vertically-integrated solar companies such as first solar to sustain meaningful and consistent profitability . in light of such market realities , we are executing our long term strategic plan , vision 2020 described below , under which we are focusing on our competitive strengths . such strengths include our advanced module and system technologies as well as our differentiated , vertically-integrated business model that enables us to provide utility-scale pv solar energy solutions to key geographic markets with immediate electricity needs . worldwide solar markets continue to develop , in part aided by demand elasticity resulting from declining industry average selling prices , both at the module and system level , which make solar power more affordable to new markets , and we have continued to develop our localized presence and expertise in such markets . we are developing , constructing , or operating multiple solar projects around the world , many of which are the largest or among the largest in their regions . story_separator_special_tag as we continue to expand our systems business into key geographic markets , we can offer value beyond solar modules , reduce our exposure to module-only competition , provide differentiated product offerings to minimize the impact of solar module commoditization , and provide comprehensive utility-scale pv solar power system solutions that reduce solar electricity costs . thus , our systems business allows us to play a more active role than many of our competitors in managing the demand for our solar modules . finally , we continue to form and develop strong relationships with our customers and strategic partners around the world and continue to refine our product offerings , including epc capabilities and o & m services , in order to enhance the competitiveness of systems using our modules . for example , we have formed , and expect in the future to form , joint ventures or other business arrangements with project developers in certain strategic markets in order to provide our modules and utility-scale pv solar energy solutions to the projects developed by such ventures . certain trends and uncertainties we believe that our operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations . see item 1a : “ risk factors ” and elsewhere in this annual report on form 10-k for a discussion of other risks that may affect our financial condition and results of operations . long term strategic plan , vision 2020 our long term strategic plan , vision 2020 is a long-term roadmap to achieve our growth objectives and our technology and cost leadership goals . in executing our long term strategic plan , we are focusing on providing utility-scale pv solar energy solutions using our modules to key geographic markets that we believe have a compelling need for mass-scale pv electricity , including markets throughout the americas , asia , the middle east , and africa . as part of our long term strategic plan , we are focusing on opportunities in which our pv solar energy solutions can compete directly with fossil fuel offerings on an lcoe or similar basis , or complement such fossil fuel electricity offerings . execution of the long term strategic plan entails a prioritization of market opportunities worldwide relative to our core strengths and a corresponding allocation of resources around the globe . this prioritization involves a focus on our core utility-scale offerings and exists within a current market environment that includes rooftop and distributed generation solar , particularly in the u.s. while it is unclear how rooftop and distributed generation solar might impact our core utility-scale offerings in the next several years , we believe that utility-scale solar will continue to be a compelling solar offering for companies with technology and cost leadership and will continue to represent an increasing portion of the overall electricity generation mix . we are closely evaluating and managing the appropriate level of resources required as we pursue the most advantageous and cost effective projects and partnerships in our target markets . we have dedicated , and intend to continue to dedicate , significant capital and human resources to reduce the total installed cost of pv solar energy , to optimize the design and logistics around our pv solar energy solutions , and to ensure that our solutions integrate well into the overall electricity ecosystem of each specific market . we expect that , over time , an increasing portion of our consolidated net sales , operating income , and cash flows may come from solar offerings in the key geographic markets described above as we execute on our long term strategic plan . the timing , execution , and financial impacts of our long term strategic plan are subject to risks and uncertainties , as described in item 1a : “ risk factors , ” and elsewhere in this annual report on form 10-k. we are focusing our resources in those markets and energy applications in which solar power can be a least-cost , best-fit energy solution , particularly in regions with high solar resources , significant current or projected electricity demand , and or relatively high existing electricity prices . as part of these efforts , we 48 continue to expand or reallocate resources globally , including business development , sales personnel , and other supporting professional staff in target markets . accordingly , we may shift current costs or incur additional costs over time as we establish a localized business presence in these target markets . joint ventures or other strategic arrangements with partners are a key part of our long term strategic plan , and we generally use such arrangements to expedite our penetration of various key markets and establish relationships with potential customers . we also enter into joint ventures or strategic arrangements with customers or other entities to maximize the value of particular projects . some of these arrangements involve and are expected in the future to involve significant investments or other allocations of capital . we continue to develop relationships with policymakers , regulators , and end customers in these strategic markets with a view to creating opportunities for utility-scale pv solar power systems . we sell such systems directly to end customers , including utilities , independent power producers , commercial and industrial companies , and other system owners . depending on the market opportunity , our sales offerings may range from module-only sales , to module sales with a range of development , epc services , and other solutions , to full turn-key pv solar power system sales . we expect these offerings to continue to evolve over time as we work with our customers to optimize how our pv solar energy solutions can best meet our customers ' energy and economic needs . in order to create or maintain a market position in certain strategically targeted markets , our offerings from time to time may need to be competitively priced at levels associated with minimal gross profit margins , which may adversely affect our results of operations .

resulted primarily from $ 65.6 million of proceeds from borrowings under our project construction credit facilities in chile , partially offset by $ 60.1 million of payments on long-term debt . cash provided by financing activities during 2013 was primarily driven by proceeds from our june 2013 equity offering of $ 428.2 million , partially offset by net payments on our revolving credit facility of $ 270.0 million and $ 65.0 million of payments on long-term debt . contractual obligations the following table presents our contractual obligations as of december 31 , 2015 ( in thousands ) , which consists of legal commitments requiring us to make fixed or determinable cash payments . we purchase raw materials for inventory , construction materials , various services , and manufacturing equipment from a variety of vendors . during the normal course of business , in order to manage manufacturing and construction lead times and help assure an adequate supply of certain items , we enter into agreements with suppliers that either allow us to procure goods and services when we choose or that establish purchase requirements over the term of the agreement . replace_table_token_23_th ( 1 ) includes estimated cash interest to be paid over the remaining terms of the underlying debt . interest payments are based on fixed and floating rates in effect at december 31 , 2015 and include the effect of interest rate and cross currency swap agreements . ( 2 ) sale-leaseback payments represent the fixed rent payments associated with our leaseback of the maryland solar project from a subsidiary of 8point3 energy partners lp . see note 12 “ investments in unconsolidated affiliates and joint ventures ” to our consolidated financial statements for further information .

as exchange rates are an important factor in understanding period to period comparisons , we believe the presentation of revenue growth rates on a constant currency basis enhances the understanding of our revenue results and evaluation of our performance in comparison to prior periods . the constant currency information presented is calculated by translating current period results using prior period weighted average foreign currency exchange rates . these results should be considered in addition to , not as a substitute for , results reported in accordance with accounting principles generally accepted in the united states of america ( gaap ) . overview progress offers the leading platform for developing and deploying mission-critical business applications . progress empowers enterprises and independent software vendors ( isvs ) to build and deliver cognitive-first applications that harness big data to derive business insights and competitive advantage . progress offers leading technologies for easily building powerful user interfaces across any type of device , a reliable , scalable and secure backend platform to deploy modern applications , leading 19 data connectivity to all sources , and award-winning predictive analytics that brings the power of machine learning to any organization . over 1,700 isvs , 100,000 enterprise customers , and 2 million developers rely on progress to power their applications . we operate as three distinct segments : openedge , data connectivity and integration , and application development and deployment . beginning in late october 2016 , with the appointment of yogesh gupta as our new chief executive officer , our board of directors and executive management team undertook a comprehensive review of our strategy and operations , including our expectations for fiscal year 2017 results . on january 16 , 2017 , we announced a new strategic plan highlighted by a new product strategy and a streamlined operating approach with a tighter focus on areas of strength to more efficiently drive revenue . the key tenets of the new strategic plan are as follows : streamlined operating approach . in fiscal year 2017 , we adapted our organization and operating principles to focus primarily on customer and partner retention and success for many of our core products . for selected products that have new customer acquisition potential , we also strengthened our demand generation and high volume , low touch e-commerce capabilities . new product strategy . as part of the new strategic plan , we undertook a new product strategy to provide the platform and tools enterprises need to build next generation applications that drive their businesses , known as “ cognitive applications. ” we offer this platform to both new customers and partners as well as our existing openedge partner and customer ecosystems . our platform for cognitive applications makes it easy for developers to build machine learning into their applications , and includes : ◦ our leading ui development tools , which enable organizations to easily build engaging user interfaces for any device or front end ; ◦ our nativescript offering , which allows developers to use javascript to build native applications across multiple mobile platforms ; ◦ a mission-critical back-end-as-a-service platform that runs on any cloud , is secure , high-performing , and highly-scalable while supporting all modern user interfaces ; ◦ automated and intuitive machine learning capabilities for accelerating the creation and delivery of cognitive applications ; ◦ our data connectivity and integration capabilities ; and ◦ our business logic and rules capabilities . restructuring . with the adoption of our new product strategy , we discontinued our investment in our digital factory strategy and re-aligned our resources consistent with our core operating approach . to that end , during fiscal year 2017 , we implemented restructuring efforts including the consolidation of facilities , implementation of a simplified organizational structure and a reduction of marketing and other external expenses . in addition , we reduced headcount by over 400 employees , totaling over 20 % of our workforce . we reduced our full year expenses by over $ 30 million by the end of fiscal year 2017. on march 1 , 2017 , we acquired datarpm for an aggregate sum of $ 30.0 million . datarpm is a leader in cognitive predictive maintenance for the industrial iot ( iiot ) market . this acquisition is a key part of the company 's strategy to provide the best platform to build and deliver cognitive-first applications . on june 1 , 2017 , we acquired kinvey for an aggregate sum of $ 49.2 million . kinvey is the leading backend-as-a-service ( baas ) provider and allows developers to set up , use , and operate a cloud backend for any native , hybrid , web , or iot app built using any development tools . this acquisition , in combination with our existing technologies , enables us to offer the premier platform for building and delivering cognitive business applications . we derive a significant portion of our revenue from international operations , which are primarily conducted in foreign currencies . as a result , changes in the value of these foreign currencies relative to the u.s. dollar have significantly impacted our results of operations and may impact our future results of operations . for example , in fiscal years 2015 and 2016 , the value of the u.s. dollar strengthened in comparison to certain foreign currencies , including in europe , brazil and australia . since approximately one-third of our revenue is denominated in foreign currency , our revenue results during those periods were negatively impacted . the impact of foreign exchange did not result in a material impact on revenue during fiscal year 2017. we expect that future fluctuations in foreign currency exchange rates will impact our results . 20 in september 2017 , we announced a new capital allocation strategy pursuant to which we are targeting to return approximately 50 % of our annual cash flows from operations to stockholders in the form of share repurchases and 25-30 % through dividends . to that end , our board of directors increased our total share repurchase authorization to $ 250.0 million . story_separator_special_tag 24 sales and marketing fiscal year ended ( in thousands ) november 30 , 2017 november 30 , 2016 percentage change sales and marketing $ 96,345 $ 121,501 ( 21 ) % as a percentage of total revenue 24 % 30 % sales and marketing expenses decreased $ 25.2 million , or 21 % , in fiscal year 2017 as compared to fiscal year 2016 , and decreased as a percentage of total revenue from 30 % to 24 % . the decrease in sales expenses was primarily due to lower compensation-related and travel costs as a result of the headcount reduction actions which occurred in the first quarter of fiscal year 2017 , as well as a decrease in spending on marketing programs . product development fiscal year ended ( in thousands ) november 30 , 2017 november 30 , 2016 percentage change product development $ 76,988 $ 88,587 ( 13 ) % as a percentage of total revenue 19 % 22 % product development expenses decreased $ 11.6 million , or 13 % , in fiscal year 2017 as compared to fiscal year 2016 , and decreased as a percentage of revenue from 22 % to 19 % . the decrease in product development expense is primarily due to lower compensation-related costs as a result of the headcount reduction actions which occurred in the first quarter of fiscal year 2017. general and administrative fiscal year ended ( in thousands ) november 30 , 2017 november 30 , 2016 percentage change general and administrative $ 45,739 $ 46,532 ( 2 ) % as a percentage of total revenue 12 % 11 % general and administrative expenses include the costs of our finance , human resources , legal , information systems and administrative departments . general and administrative expenses decreased $ 0.8 million , or 2 % , in fiscal year 2017 as compared to fiscal year 2016 , and increased as a percentage of revenue from 11 % to 12 % . the dollar decrease was primarily due to lower compensation-related costs as a result of the headcount reduction actions which occurred in the first quarter of fiscal year 2017. impairment of goodwill fiscal year ended ( in thousands ) november 30 , 2017 november 30 , 2016 percentage change impairment of goodwill $ — $ 92,000 ( 100 ) % as a percentage of total revenue — % 23 % during fiscal year 2017 , we tested goodwill for impairment for each of our reporting units as of october 31 , 2017. our reporting units each had fair values which significantly exceeded their carrying values as of the annual impairment date . as a result , we did not recognize any goodwill impairment charges during fiscal year 2017. during fiscal year 2016 , we tested goodwill for impairment for each of our reporting units as of october 31 , 2016. our openedge and data connectivity and integration reporting units had fair values which significantly exceeded their carrying 25 values as of the annual impairment date . our application development and deployment reporting unit did not pass the first step of the impairment test . as a result , we recorded a $ 92.0 million goodwill impairment charge related to the application development and deployment reporting unit ( see note 6 to the consolidated financial statements in item 8 of this form 10-k for further information on the impairment charge ) . amortization of acquired intangibles fiscal year ended ( in thousands ) november 30 , 2017 november 30 , 2016 percentage change amortization of acquired intangibles $ 13,039 $ 12,735 2 % as a percentage of total revenue 3 % 3 % amortization of acquired intangibles included in operating expenses primarily represents the amortization of value assigned to intangible assets obtained in business combinations other than assets identified as purchased technology . amortization of acquired intangibles increased slightly in fiscal year 2017 due to the addition of intangible assets obtained in connection with the acquisitions of datarpm and kinvey , which occurred in the second and third quarters of fiscal year 2017 , respectively . impairment of intangible assets fiscal year ended ( in thousands ) november 30 , 2017 november 30 , 2016 percentage change impairment of intangible assets $ — $ 5,051 ( 100 ) % as a percentage of total revenue — % 1 % during fiscal year 2017 , we did not impair the value of any intangible assets . during fiscal year 2016 , we evaluated the ongoing value of the intangible assets associated with the technology obtained in connection with the acquisition of modulus . as a result of our decision to abandon the related assets due to a change in our expected ability to use the technology internally , we determined that the intangible assets were fully impaired . as a result , we incurred an impairment charge of $ 5.1 million during fiscal year 2016. see note 6 to the consolidated financial statements in item 8 of this form 10-k for additional details . fees related to shareholder activist fiscal year ended ( in thousands ) november 30 , 2017 november 30 , 2016 percentage change fees related to shareholder activist $ 2,020 $ — 100 % as a percentage of total revenue 1 % — % in september 2017 , praesidium investment management , one of our largest shareholders , publicly announced its disagreement with our strategy in a schedule 13d filed with the securities and exchange commission and stated that it was seeking changes in the composition of our board of directors . in fiscal year 2017 , we incurred professional and other fees relating to praesidium 's actions .

results of operations fiscal year 2017 compared to fiscal year 2016 revenue fiscal year ended percentage change ( in thousands ) november 30 , 2017 november 30 , 2016 as reported constant currency revenue $ 397,572 $ 405,341 ( 2 ) % ( 2 ) % total revenue decreased $ 7.8 million , or 2 % , in fiscal year 2017 as compared to fiscal year 2016. revenue would have decreased by the same percentage if exchange rates had been constant in fiscal year 2017 as compared to exchange rates in fiscal year 2016. changes in prices from fiscal year 2016 to 2017 did not have a significant impact on our revenue . license revenue replace_table_token_4_th software license revenue decreased $ 10.5 million , or 8 % , in fiscal year 2017 as compared to fiscal year 2016. software license revenue would have decreased by the same percentage if exchange rates had been constant in fiscal year 2017 as compared to exchange rates in effect in fiscal year 2016. the decrease in license revenue is primarily due to decreases in license revenue in north america from products included in our data connectivity and integration segment , due to the timing of certain oem renewal agreements . maintenance and services revenue replace_table_token_5_th maintenance and services revenue increased $ 2.7 million in fiscal year 2017 as compared to fiscal year 2016. maintenance revenue increased 1 % and professional services revenue decreased 1 % compared to the prior year . the increase in maintenance revenue is primarily due to higher maintenance revenue from our devtools and sitefinity products included in our application development and deployment segment . the decrease in services revenue is primarily due to lower revenue from our openedge segment partially offset by higher professional services revenue generated by our application development and deployment segment .

ao sat & company is an affiliate of kenges rakishev . as of december 31 , 2012 , the company had restricted cash pursuant the credit agreement of $ 1.8 million . the company paid off this credit facility on february 14 , 2013 in order to eliminate interest expense under the credit line and free up the restricted cash story_separator_special_tag the following discussion should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements contained in this report and the discussion under “ forward-looking statements ” on page i at the beginning of this report and the risk factors set forth in part i , item 1a of this report . overview ; recent developments as of december 31 , 2013 , we operate in a single operating segment , that being a provider of transactional services and mobile payment solutions in the united states and emerging countries , including the cis . during the year ended december 31 , 2012 , we had two operating segments , consisting of ( i ) mobile commerce and payment processing , and ( ii ) entertainment and culture internet destinations , in the united states and emerging countries , including the commonwealth of independent states ( cis ) . however , during the quarter ended september 30 , 2013 , we divested all of our interests in online media businesses and operations ( which comprised our entertainment and culture internet destinations business segment ) , which are presented as discontinued operations for the years ended december 31 , 2013 and december 31 , 2012 ( restated ) . the company previously owned several popular content monetization verticals ( i.e. , interests in online media businesses and operations ) that were divested during the quarter ended september 30 , 2013 ( see note 5 for additional information regarding this divestiture ) . as a result of this divestiture , the company operates in a single operating segment , that being a provider of mobile commerce and payment processing services in two geographical locations , the united states and international . operations of the divested businesses are presented as discontinued operations . 31 merger with net element on october 2 , 2012 , the company completed a merger with net element , inc. , which was a company with businesses in the online media and mobile commerce payment processing markets . immediately prior to the effectiveness of the merger , the company changed its jurisdiction of incorporation by discontinuing as an exempted company in the cayman islands and continuing and domesticating as a corporation incorporated under the laws of the state of delaware . effective upon consummation of the merger , ( i ) net element was merged with and into the company , resulting in net element ceasing to exist and the company continuing as the surviving company in the merger , and ( ii ) the company changed its name to net element international , inc. pursuant to the merger , the company issued 24,543,826 shares of its common stock to the former stockholders of net element , which shares amount to approximately 86.7 % of the 28,303,659 post-merger issued and outstanding shares of common stock of the company . following the merger , the company 's business consists of the former business of net element . for financial reporting purposes , the merger was accounted for as a recapitalization of net element . since the merger was consummated during the company 's fourth fiscal quarter , the company 's financial statements reflect the historical financial information of net element beginning with the company 's fiscal year ended december 31 , 2012. payment and transaction processing business the company 's subsidiary tot group , inc. ( “ tot group ” ) is a multinational , mobile payments and transaction processing holding company , which provides a range of flexible online and offline payment solutions . clients include wireless carriers , content providers and merchants . tot group delivers comprehensive , end-to-end payment solutions to enable merchants to reliably accept cashless transactions at the point of sale ( “ pos ” ) . from processing electronic payments at the pos to processing mobile commerce transactions to managing merchant terminals and providing information management services , tot group through its proprietary technology offers innovative solutions which allow its merchants to streamline their payments resources . through tot group , the company generates revenues from transaction fees , service fees , percentage of the dollar amount of each transaction and other fees associated with processing of cashless transactions at the points of sale . the company serves merchants primarily in the retail , restaurant , supermarket , petroleum and hospitality sectors . in addition , tot group ( through its subsidiary ooo tot money ( “ tot money ” ) ) operates the company 's provider of carrier-integrated mobile payments solutions . tot money 's relationships with mobile operators give the company substantial geographic coverage , a strong capacity for innovation in mobile payments and messaging , and the ability to offer customers in-app , p-sms and online and carrier billing solutions in over 49 countries . during the third quarter of 2012 , our subsidiary , tot money , launched operations as a provider of carrier-integrated mobile payments solutions in russia . since then , tot money has continued seeking to expand its carrier-integrated mobile payments business primarily in the commonwealth of independent states ( cis ) countries ( comprised of participating states of the former soviet union ) and other emerging markets . during the second half of 2012 , tot money entered into contracts with the three largest mobile phone operators in russia , mobile telesystems ojsc , megafon ojsc and ojsc vimpelcom , to facilitate payments using sms and mms for their mobile phone subscribers in russia . on april 16 , 2013 , certain subsidiaries of tot group acquired substantially all of the business assets of unified payments , llc , a delaware limited liability company . story_separator_special_tag other expenses were $ 3,281,137 for the year ended december 31 , 2013 as compared to $ 693,020 in other expenses for the year ended december 31 , 2012 , representing an increase of $ 2,588,117. other expenses for the year ended december 31 , 2013 was primarily attributed to acquisition of tot payments in 2013. we recorded a provision for bad debts and unrecoverable advances of $ 7,640,008 for the year ended december 31 , 2013 , which is primarily comprised of $ 4,528,759 in loss provision for advances to aggregators , $ 1,834,302 in loss provision for notes receivable and $ 703,768 from reserving revenue and costs related to the first data lawsuit ( see note 14 of the accompanying notes to consolidated financial statements and liquidity and capital resources below ) and $ 423,179 from net ach rejects in the normal course of operations . we had $ 1,638,032 for bad debts and unrecoverable advances for the year ended december 31 , 2012. during the year ended december 31 , 2013 the company recognized $ 11,200,000 of non-cash , goodwill impairment losses relating to the goodwill from the unified payments acquisition . in connection with that acquisition , the company recorded goodwill of approximately $ 17 million . as part of its financial statement closing processes , as well as the company 's review of its valuation of the unified payments business combination , the company determined that the reported goodwill of its tot payments reporting unit was impaired at december 31 , 2013. depreciation and amortization expense consists of depreciation expense on fixed assets used by the company and the amortization of merchant portfolios , client acquisition costs , ip software , intellectual property and employee non-compete agreements . depreciation and amortization expense was $ 2,242,504 for the year ended december 31 , 2013 as compared with $ 266,006 for the year ended december 31 , 2012. the $ 1,976,498 increase in depreciation and amortization expense was primarily due to $ 1,799,225 of merchant portfolio amortization and $ 85,769 of amortization of client acquisition costs . total interest expense , net for the year ended december 31 , 2013 amounted to $ 2,979,102 versus $ 370,568 of interest income , net for the year ended december 31 , 2012. the increase in interest expense , net was primarily due to tot group 's assumption of $ 20.6 million of indebtedness in connection with its acquisition of the business operations of unified payments , which resulted in interest expense of $ 2,137,852 the year ended december 31 , 2013. this includes $ 942,961 of interest expense on notes payables that had a total balance of $ 9,865,889 at december 31 , 2013 and $ 1,194,891 of interest for the loan payable to georgia notes , llc of $ 11,098,066 at december 31 , 2013 ( see note 12 of the accompanying notes to consolidated financial statements ) . interest expense for the year ended december 31 , 2013 also includes $ 819,214 of interest on a factoring line that tot money has with alfa bank . 36 interest income , net for the year ended december 31 , 2012 was $ 370,568 , which primarily was composed of interest income from tot money loan to rm invest . the company recognized the intangible assets impairment in the amount of $ 872,354. this is due to the write off of the first data portfolio . the first data portfolio was written off entirely at december 31 , 2013 since the lawsuit to regain the portfolio was dismissed in early 2014 the net loss attributable to noncontrolling interests amounted to $ 1,129,319 for the year ending december 31 , 2013 as compared to $ 133,360 year ending december 31 , 2012. the $ 1,204,059 was primarily attributed to tot group . the noncontrolling interest reflects the results of operations of subsidiaries that are allocable to equity owners other than the company . since our inception , we have incurred significant operating losses . we incurred net losses totaling $ 48.3 million and $ 16.4 million for the years ended december 31 , 2013 and 2012 , respectively . we had negative cash flows from operating activities of $ 10.8 million for the year ended december 31 , 2013 and an accumulated deficit of $ 119 million at december 31 , 2013. we had negative working capital of $ 8.0 million at december 31 , 2013 , and our current assets at december 31 , 2013 included $ 10.6 million of accounts receivable , and $ 1.1 million of advances to aggregators . these conditions raise substantial doubt about our ability to continue as a going concern . the independent auditors ' report on our consolidated financial statements for the year ended december 31 , 2013 contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern . the accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern . see also “ liquidity and capital resources ” below . liquidity and capital resources the company 's total assets at december 31 , 2013 were $ 22,508,725 compared to $ 28,378,634 at december 31 , 2012. the year over year change in total assets is primarily attributable to the significant decreases in the company 's cash used to support operations and reductions in notes receivable and advances to aggregators as of december 31 , 2013 compared to december 31 , 2012. at december 31 , 2013 , we had total current assets of $ 12,689,171 including $ 126,319 of cash , $ 10,619,289 of accounts receivable , $ 1,109,538 of advances to aggregators and $ 834,025 of prepaid expenses and other assets .

revenue . the company recognizes revenue when the following four basic criteria have been met : ( 1 ) persuasive evidence of a sales arrangement exists ; ( 2 ) performance of services has occurred , ( 3 ) the sales price is fixed or determinable , and ( 4 ) collectability is reasonably assured . the company considers persuasive evidence of a sales arrangement to be the receipt of a billable transaction from aggregators , signed contract or website advertising insertion order . collectability is assessed based on a number of factors , including transaction history with the customer and the credit worthiness of the customer . if it is determined that the collection is not reasonably assured , revenue is not recognized until collection becomes reasonably assured , which is generally upon receipt of cash . the company records cash received in advance of revenue recognition as deferred revenue . reserve for loan losses . the company monitors all accounts receivable , notes receivable and transactions with mobile operators and aggregators on a quarterly basis to ensure collectability and the adequacy of loss provisions . considerations include payment history , business volume history , financial statements of borrower , projections of borrower and other standard credit review documentation . management uses its best judgment to adequately reserve for future losses after all available information is reviewed . due to the lawsuit filed by first data ( see note 14 of the accompanying notes to consolidated financial statements ) , the company has reserved the $ 2.1million that it is due from first data . the effect , net of interchange and visa/master card costs , was a charge to bad debt in the amount of $ 703,768 in december 2013. in addition , there were additional charges to bad debts for $ 423,179 for net ach rejects that occurred in the normal course of operations .

these carryforwards expire between fiscal 2012 and 2030. because the realization of the tax benefit from state loss carryforwards is dependent on certain subsidiaries generating sufficient state taxable income in future periods , as well as annual limitations on future utilization , the company has provided a valuation allowance against the computed benefit in order to reflect the tax benefit expected to be realized . the increase in the valuation allowance of approximately $ 5.4 million from september 30 , 2010 to september 30 , 2011 related to additional net operating losses generated at the separate subsidiaries , for which the related tax story_separator_special_tag this discussion contains forward-looking statements within the meaning of the u.s. private securities litigation reform act of 1995. statements that are not historical facts , including statements about our beliefs and expectations , are forward-looking statements . forward-looking statements include statements preceded by , 23 followed by or that include the words “may , ” “could , ” “would , ” “should , ” “believe , ” “expect , ” “anticipate , ” “plan , ” “estimate , ” “target , ” “project , ” “intend” and similar words or expressions . in particular , forward-looking statements contained in this discussion include our expectations regarding : the effect of client trading activity on our results of operations ; the effect of changes in interest rates on our net interest spread ; average commissions and transaction fees per trade ; amounts of commissions and transaction fees , asset-based revenues and other revenues ; the effect of our migration of client cash balances into the insured deposit account offering ; amounts of total operating expenses and other expenses ; our effective income tax rate ; our capital and liquidity needs and our plans to finance such needs ; and the impact of recently issued accounting pronouncements . the company 's actual results could differ materially from those anticipated in such forward-looking statements . important factors that may cause such differences include , but are not limited to : general economic and political conditions and other securities industry risks ; fluctuations in interest rates ; stock market fluctuations and changes in client trading activity ; credit risk with clients and counterparties ; increased competition ; systems failures , delays and capacity constraints ; network security risks ; liquidity risk ; new laws and regulations affecting our business ; regulatory and legal matters and uncertainties and the other risks and uncertainties set forth under item 1a . — risk factors of this form 10-k. the forward-looking statements contained in this report speak only as of the date on which the statements were made . we undertake no obligation to publicly update or revise these statements , whether as a result of new information , future events or otherwise , except to the extent required by the federal securities laws . glossary of terms in discussing and analyzing our business , we utilize several metrics and other terms that are defined in the following glossary of terms . italics indicate other defined terms that appear elsewhere in the glossary . the term “gaap” refers to u.s. generally accepted accounting principles . activity rate — funded accounts — average client trades per day during the period divided by the average number of funded accounts during the period . asset-based revenues — revenues consisting of ( 1 ) net interest revenue , ( 2 ) insured deposit account fees and ( 3 ) investment product fees . the primary factors driving our asset-based revenues are average balances and average rates . average balances consist primarily of average client margin balances , average segregated cash balances , average client credit balances , average client insured deposit account balances , average fee-based investment balances and average securities borrowing and securities lending balances . average rates consist of the average interest rates and fees earned and paid on such balances . average client trades per funded account ( annualized ) — total trades divided by the average number of funded accounts during the period , annualized based on the number of trading days in the fiscal year . average client trades per day — total trades divided by the number of trading days in the period . this metric is also known as daily average revenue trades ( “darts” ) . average commissions and transaction fees per trade — total commissions and transaction fee revenues as reported on the company 's consolidated statements of income ( excluding revenues from the active trader business acquired from thinkorswim group inc. ( “thinkorswim” ) and clearing revenues from td waterhouse uk ) divided by total trades for the period . commissions and transaction fee revenues primarily consist of trading commissions , revenue-sharing arrangements with market destinations ( also referred to as “payment for order flow” ) and markups on riskless principal transactions in fixed-income securities . basis point — when referring to interest rates , one basis point represents one one-hundredth of one percent . beneficiary accounts — brokerage accounts managed by a custodian , guardian , conservator or trustee on behalf of one or more beneficiaries . examples include accounts maintained under the uniform gift to minors act ( ugma ) or uniform transfer to minors act ( utma ) , guardianship , conservatorship and trust arrangements and pension or profit plan for small business accounts . 24 brokerage accounts — accounts maintained by the company on behalf of clients for securities brokerage activities . the primary types of brokerage accounts are cash accounts , margin accounts , ira accounts and beneficiary accounts . cash accounts — brokerage accounts that do not have margin account approval . client assets — the total value of cash and securities in brokerage accounts . client cash and money market assets — the sum of all client cash balances , including client credit balances and client cash balances swept into insured deposit accounts or money market mutual funds . client credit balances — client cash held in brokerage accounts , excluding balances generated by client short sales on which no interest is paid . story_separator_special_tag we define liquid assets — management target as the sum of ( a ) corporate cash and cash equivalents , ( b ) corporate short-term investments and ( c ) regulatory net capital of ( i ) our clearing broker-dealer subsidiary in excess of 10 % of aggregate debit items and ( ii ) our introducing broker-dealer subsidiaries in excess of a minimum operational target established by management ( $ 50 million in the case of our primary introducing broker-dealer , td ameritrade , inc. ) . we include the excess capital of our broker-dealer subsidiaries in liquid assets — management target , rather than simply including broker-dealer cash and cash equivalents , because capital requirements may limit the amount of cash available for dividend from the broker-dealer subsidiaries to the parent company . excess capital , as defined under clause ( c ) above , is generally available for dividend from the broker-dealer subsidiaries to the parent company . we consider liquid assets — management target to be a measure that reflects our liquidity that would be readily available for corporate investing and financing activities under normal operating circumstances . liquid assets — regulatory threshold is a related metric that reflects our liquidity that would be available for corporate investing and financing activities under unusual operating circumstances . our liquid assets metrics should be considered as supplemental measures of liquidity , rather than as substitutes for cash and cash equivalents . liquid assets — regulatory threshold — liquid assets — regulatory threshold is a non-gaap financial measure . we define liquid assets — regulatory threshold as the sum of ( a ) corporate cash and cash equivalents , ( b ) corporate short-term investments , ( c ) regulatory net capital of ( i ) our clearing broker-dealer subsidiary in excess of 5 % of aggregate debit items and ( ii ) our introducing broker-dealer subsidiaries in excess of 120 % of the minimum dollar net capital requirement or in excess of 8 1 / 3 % of aggregate indebtedness and ( d ) tier 1 capital of our trust company in excess of the minimum dollar requirement . we include the excess capital of our broker-dealer and trust company subsidiaries in liquid assets — regulatory threshold , rather than simply including broker-dealer and trust company cash and cash equivalents , because capital requirements may limit the amount of cash available for dividend from the broker-dealer and trust company subsidiaries to the parent company . excess capital , as defined under clauses ( c ) and ( d ) above , is generally available for dividend from the broker-dealer and trust company subsidiaries to the parent company . we consider liquid assets — regulatory threshold to be a measure that reflects our liquidity that would be available for corporate investing and financing activities under unusual operating circumstances . liquid assets — management target is a related metric that reflects our liquidity that would be readily available for corporate investing and financing activities under normal operating circumstances . our liquid assets metrics should be considered as supplemental measures of liquidity , rather than as substitutes for cash and cash equivalents . 26 liquidation value — the net value of a client 's account holdings as of the close of a regular trading session . liquidation value includes client cash and the value of long security positions , less margin balances and the cost to buy back short security positions . margin accounts — brokerage accounts in which clients may borrow from the company to buy securities or for any other purpose , subject to regulatory and company-imposed limitations . net interest margin ( “nim” ) — a measure of the net yield on our average spread-based assets . net interest margin is calculated for a given period by dividing the annualized sum of net interest revenue ( excluding net interest revenue from conduit-based assets ) and insured deposit account fees by average spread-based assets . net interest revenue — net interest revenue is interest revenues less brokerage interest expense . interest revenues are generated by charges to clients on margin balances maintained in margin accounts , the investment of cash from operations and segregated cash in short-term marketable securities and interest earned on securities borrowing . brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in brokerage accounts and interest incurred on securities lending . brokerage interest expense does not include interest on company non-brokerage borrowings . net new assets — consists of total client asset inflows , less total client asset outflows , excluding activity from business combinations . client asset inflows include interest and dividend payments and exclude changes in client assets due to market fluctuations . net new assets are measured based on the market value of the assets as of the date of the inflows and outflows . net new asset growth rate ( annualized ) — annualized net new assets as a percentage of client assets as of the beginning of the period . new accounts — the number of new client accounts ( funded and unfunded ) opened in a specified period . operating expenses excluding advertising — operating expenses excluding advertising is a non-gaap financial measure . operating expenses excluding advertising consists of total operating expenses , adjusted to remove advertising expense . we consider operating expenses excluding advertising an important measure of the financial performance of our ongoing business . advertising spending is excluded because it is largely at the discretion of the company , can vary significantly from period to period based on market conditions and generally relates to the acquisition of future revenues through new accounts rather than current revenues from existing accounts . operating expenses excluding advertising should be considered in addition to , rather than as a substitute for , total operating expenses . return on client assets ( roca ) — annualized pre-tax income divided by average client assets during the period . securities borrowing — we borrow securities temporarily from other broker-dealers in connection with our broker-dealer business .

results of operations conditions in the u.s. equity markets significantly impact the volume of our clients ' trading activity . there is a direct correlation between the volume of our clients ' trading activity and our results of operations . we can not predict future trading volumes in the u.s. equity markets . if client trading activity increases , we expect that it would have a positive impact on our results of operations . if client trading activity declines , we expect that it would have a negative impact on our results of operations . changes in average balances , especially client margin , credit , insured deposit account and mutual fund balances , may significantly impact our results of operations . changes in interest rates also significantly impact our results of operations . we seek to mitigate interest rate risk by aligning the average duration of our interest-earning assets with that of our interest-bearing liabilities . we can not predict the direction of interest rates or the levels of client balances . if interest rates rise , we generally expect to earn a larger net interest spread . conversely , a falling interest rate environment generally would result in our earning a smaller net interest spread . financial performance metrics pre-tax income , net income , earnings per share and ebitda are key metrics we use in evaluating our financial performance . ebitda is a non-gaap financial measure . we consider ebitda to be an important measure of our financial performance and of our ability to generate cash flows to service debt , fund capital expenditures and fund other corporate investing and financing activities . ebitda is used as the denominator in the consolidated leverage ratio calculation for covenant purposes under our holding company 's senior revolving credit facility . ebitda eliminates the non-cash effect of tangible asset depreciation and amortization and intangible asset amortization .

you generally can identify these forward-looking statements by the use of words or phrases such as “ believe , ” “ may , ” “ could , ” “ will , ” “ would , ” “ possible , ” “ can , ” “ estimate , ” “ continue , ” “ ongoing , ” “ consider , ” “ anticipate , ” “ intend , ” “ seek , ” “ plan , ” “ project , ” “ expect , ” “ should , ” “ would , ” or “ assume ” or the negative of these terms , or other comparable terminology , although not all forward-looking statements contain these words . because the risk factors discussed in this annual report , and other risk factors of which we are not aware or currently deem immaterial , could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements , you should not place undue reliance on any such forward-looking statements . these statements are subject to risks and uncertainties , known and unknown , which could cause actual results and developments to differ materially from those expressed or implied in such statements . we have included important factors in the cautionary statements included in this annual report , particularly those identified in part i , item 1a , “ risk factors ” of this annual report , that we believe could cause actual results or events to differ materially from the forward-looking statements that we make . these and other risks may also be detailed and modified or updated in our reports and other documents filed with the securities and exchange commission ( “ sec ” ) from time to time . you are encouraged to read these filings as they are made . we can not guarantee future results , events , levels of activity , performance or achievement . further , any forward-looking statement speaks only as of the date on which it is made , and we undertake no obligation to update or revise any forward-looking statements , whether as a result of new information , future events or otherwise , unless required by law . new factors emerge from time to time , and it is not possible for us to predict which factors will arise . in addition , we can not assess the impact of each factor on our business or the extent to which any factor , or combination of factors , may cause actual results to differ materially from those contained in any forward-looking statements . recent events in february 2016 , novavax completed the issuance of $ 325 million of 3.75 % convertible senior notes due in 2023 , resulting in net proceeds of approximately $ 315 million , after deducting initial purchasers ' discounts and commissions , and approximately $ 314 million after deducting offering expenses . we used approximately $ 38 million of the net proceeds to pay the costs of a capped call transaction , which will function to reduce dilution from issuance of additional shares upon conversion of the notes between the note conversion price of $ 6.81 and the cap price of $ 9.73 per share . the resulting final net proceeds to the company were approximately $ 276 million . our cash , cash equivalents and marketable securities on december 31 , 2015 of approximately $ 231 million , as adjusted to give effect to the final net proceeds of the convertible senior note offering of approximately $ 276 million , before giving effect to the anticipated use of the final net proceeds , would result in an as adjusted cash , cash equivalents and marketable securities balance of approximately $ 507 million . 40 story_separator_special_tag disease rsv is the most common cause of lower respiratory tract infections and the leading viral cause of severe lower respiratory tract disease in infants and young children worldwide . 24 in the u.s. , rsv is the leading cause of hospitalization of infants , and globally , is second only to malaria as a cause of death in children under one year of age . 25 ,26 despite the induction of post-infection immunity , repeat infection and lifelong susceptibility to rsv is common . 27,28 clinical trial update in september 2015 , we announced positive top-line data from a phase 2 clinical trial of our rsv f vaccine in 50 healthy pregnant women and their infants . this clinical trial evaluated the safety and immunogenicity of our rsv f vaccine in pregnant women in their third trimester , and assessed the transplacental transfer of maternal antibodies induced by the vaccine . the trial also examined the impact of maternal immunization on infant safety during the first year of life and rsv-specific antibody levels through the infants ' first six months of life . immunized women demonstrated a geometric mean 14-fold rise in anti-f igg , 29-fold rise in palivizumab-competing antibodies and a 2.7 and 2.1-fold rise in microneutralization titers against rsv/a and rsv/b , respectively . in contrast , women who received placebo demonstrated no significant change in antibody levels . the infants ' antibody levels at delivery averaged 90-100 % of the mothers ' levels , indicating efficient transplacental transfer of antibodies from mother to infant . the estimated half-lives of infant pca , anti-f igg , rsv/a and rsv/b microneutralizing antibodies , based on data through day 60 , were 41 , 30 , 36 and 34 days , respectively . we announced the initiation of a global pivotal phase 3 clinical trial , known as prepare , of the rsv f vaccine in 5,000 to 8,255 healthy pregnant women in december 2015. the primary objective of the prepare trial is to determine the efficacy of maternal immunization with the rsv f vaccine against symptomatic rsv lower respiratory tract infection with hypoxemia in infants through the first 90 days of life . this phase 3 trial utilizes a group sequential design and is expected to take between two and four years to complete . story_separator_special_tag clinical trial update in july 2015 , we reported positive data from our phase 2 clinical trial of our quadrivalent seasonal influenza virus-like-particle ( “ vlp ” ) vaccine candidate in 400 healthy adults that we initiated in november 2014. these data show that our quadrivalent seasonal influenza vlp vaccine candidate is well-tolerated , and can induce influenza antibody responses that met the immunogenicity targets . these results demonstrate the potential for our quadrivalent seasonal influenza vlp vaccine candidate to meet the fda criteria for accelerated approval . 35 influenza vaccines forecasts . datamonitor ( 2013 ) 36 resolution of the world health assembly . ( 2003 ) wha56.19 . 28 37 who position paper ( 2012 ) weekly epidemiol record ; 87 ( 47 ) :461–76 44 we were awarded a contract by hhs barda in 2011 to fund the development of both our quadrivalent seasonal influenza and pandemic influenza vlp vaccine candidates . this is a cost-plus-fixed-fee contract , which reimburses us for allowable direct contract costs incurred plus allowable indirect costs and a fixed-fee earned in the ongoing clinical development and product scale-up of our vaccine candidates . we announced that hhs barda had exercised and initiated a two-year option to our contract in september 2014 , which not only extended the expected term of the contract until september 2016 , but also added scope to support our development activities leading up to planned phase 3 clinical trials and $ 70 million of funding on top of the remainder of the $ 97 million base period funding . in june 2015 , the contract was amended to increase the funding by $ 7.7 million to allow for the recovery of additional costs under the contract relating to the settlement of indirect rates for fiscal years 2011 and 2012. this additional amount was received and recorded as revenue in the second quarter of 2015. during 2015 , we recognized revenue of $ 33.3 million and have recognized approximately $ 112 million in revenue since the inception of the contract . in recent meetings with hhs barda , we have been discussing the next steps in both our seasonal influenza vlp vaccine program and our pandemic influenza vlp vaccine program , as well as some of the delays associated with our development of both vaccine candidates . we expect to continue discussions with hhs barda during 2016 and to present plans for continued clinical and product development , although there can be no guarantee that the hhs barda contract will not be terminated early or will be extended beyond september 2016. pandemic h7n9 influenza vaccine burden of disease prevention of the potential devastation of a human influenza pandemic remains a key priority with both governmental health authorities and influenza vaccine manufacturers . in the u.s. alone , the 2009 h1n1 influenza pandemic led to the production of approximately 126 million doses of monovalent ( single strain ) vaccine . public health awareness and government preparedness for the next potential influenza pandemic are driving development of vaccines that can be manufactured quickly against a potentially threatening influenza strain . industry and health experts have focused attention on developing a monovalent influenza vaccine against either the h5n1 strain or the h7n9 strain as potential key defenses against future pandemic disease threats . clinical trial update we have developed and delivered compelling safety and immunogenicity data on two pandemic vaccine candidates , h5n1 and h7n9 . in september 2014 , we announced positive results from a phase 1/2 clinical trial of our h7n9 influenza vlp vaccine candidate adjuvanted with matrix-m in 610 healthy adults . the phase 1/2 clinical trial was designed as a dose-ranging , randomized , observer-blinded , placebo-controlled clinical trial , to determine the contribution of matrix-m to potential antigen dose sparing regimens . our h7n9 influenza vaccine candidate , with and without matrix-m , was highly immunogenic and well-tolerated . matrix-m adjuvanted formulations demonstrated immunogenicity and dose-sparing benefits relative to unadjuvanted antigen . hemagglutination-inhibiting antibody titers were comparable to those reported in prior clinical trials , and the vaccine elicited significant anti-neuraminidase antibodies . in october 2014 , the fda granted fast track designation to our h7n9 influenza vaccine candidate with matrix-m. our pandemic influenza vaccine program is supported by our hhs barda contract . like our seasonal influenza vaccine program , we expect to continue discussions with hhs barda during 2016 and to present plans for continued clinical and product development of our pandemic influenza vaccine candidate , although there can be no guarantee that the hhs barda contract will not be terminated early or will be extended beyond september 2016. combination respiratory ( influenza and rsv ) given the ongoing development of our seasonal influenza vaccine candidate and our rsv f vaccine , we see an important opportunity to develop a combination respiratory vaccine candidate . early preclinical development efforts have given us confidence that such a combination vaccine is viable , and in animal models , provides acceptable immunogenicity . we expect to initiate a phase 1 clinical trial of a combination respiratory vaccine in the first half of 2017 . 45 ebola virus ( ebov ) ebov , formerly known as ebola hemorrhagic fever , is a severe , often fatal illness in humans . multiple strains of ebov have been identified , the most recent of which , the makona ebov strain , is associated with a case fatality rate of 50 % to 90 % . 38 there are currently no licensed treatments proven to neutralize the virus , but a range of blood , immunological and drug therapies are under development . despite the development of such therapies , current vaccine approaches target either a previous strain of the virus or were initially developed to be delivered by genetic vectors . in contrast , our ebov glycoprotein vaccine candidate ( “ ebola gp vaccine ” ) was developed using the makona ebov strain . in july 2015 , we announced data from our phase 1 clinical trial of our ebola gp vaccine in ascending doses , with and without our matrix-m adjuvant , in 230 healthy adults .

overview we are a clinical-stage vaccine company focused on the discovery , development and commercialization of recombinant nanoparticle vaccines and adjuvants . using innovative proprietary recombinant nanoparticle vaccine platform technology , we produce vaccine candidates to efficiently and effectively respond to both known and emerging disease threats . our vaccine candidates are genetically engineered three-dimensional nanostructures that incorporate recombinant proteins critical to disease pathogenesis . our product pipeline targets a variety of infectious diseases with vaccine candidates currently in clinical development for respiratory syncytial virus ( “ rsv ” ) , seasonal influenza , pandemic influenza and ebola virus ( “ ebov ” ) . we have additional preclinical stage programs for a variety of infectious diseases . we are also developing proprietary technology for the production of immune stimulating saponin-based adjuvants through our wholly owned swedish subsidiary , novavax ab . our lead adjuvant , matrix-m , has been successfully tested in a phase 1/2 clinical trial for our pandemic h7n9 influenza virus-like particle vaccine candidate , and in a phase 1 clinical trial for our ebov vaccine candidate . genocea biosciences , inc. ( “ genocea ” ) has licensed rights to our matrix technology and is now conducting phase 2 clinical trials with its herpes simplex 2 vaccine candidate using matrix-m. clinical product pipeline our clinical product pipeline includes vaccine candidates engineered to elicit differentiated immune responses with potential to provide increased protection . our nanoparticle technology platform targets antigens with conserved epitopes essential for viral function . unlike traditional vaccines that ‘ mimic ' viruses and elicit naturally occurring immune responses to them , our nanoparticles are engineered to elicit differentiated immune responses , which may be more efficacious than naturally-occurring immunity . our vaccine technology has the potential to be applied broadly to a wide variety of human infectious diseases .

special note regarding forward-looking statements some of the statements in this management 's discussion and analysis of financial condition and results of operations , and elsewhere in this annual report on form 10-k , are “forward-looking statements , ” as that term is defined in the private securities litigation reform act of 1995. these forward-looking statements include statements regarding our business , financial condition , results of operations , cash flows , strategies and prospects . you can identify forward-looking statements by the fact that these statements do not relate strictly to historical or current matters . rather , forward-looking statements relate to anticipated or expected events , activities , trends or results . because forward-looking statements relate to matters that have not yet occurred , these statements are inherently subject to risks and uncertainties . many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements . these factors include those described under the caption “ risk factors ” in item 1a of this report . we do not undertake any obligation to update forward-looking statements , except as required by federal securities laws . outlook as we closed out fiscal 2011 and commenced operations in 2012 , we have seen fundamental shifts and resulting trends that indicate the housing market has started to stabilize . this stabilization has been driven by a combination of low home prices and low interest rates , making the decision for qualified homebuyers to buy a home more attractive than the escalating cost of renting . in many markets , the all-inclusive cost of homeownership including principal , interest , taxes , mortgage and property insurance and community association costs is lower than the rising rental rates for comparable space . also , buying with a fixed-rate mortgage provides greater living cost stability than renting . overall , we are experiencing more traffic in our communities , and have seen a more consistent sales pace at stabilized prices during the fourth quarter of fiscal 2011 and into fiscal 2012 as reflected in our fiscal 2011 fourth quarter new orders and sales backlog , which increased 20 % and 35 % , respectively , from the prior year . in fiscal 2012 , our principal focus in our homebuilding operations will continue to be on maintaining and improving our operating margin on the homes we sell . we have taken steps over the past several years to reduce costs and right-size our overhead structure . we have also repositioned our product offering to target first-time and value-focused homebuyers . in addition , we continue to invest in carefully underwritten strategic land acquisitions in well-positioned markets that will continue to support our homebuilding operations going forward . our financial services segment will continue to transition for recovery while remaining profitable , as it did in fiscal 2011 , and our rialto investments segment also produced profitability during fiscal 2011 as it continued to grow its business . in addition , the rialto investment segment completed raising money for its first fund during the fourth quarter of fiscal 2011 , and ended fiscal 2011 with a $ 700 million pool of capital that is being invested in strategic assets and is expected to drive future profitability . as we enter fiscal 2012 , we believe that all the segments of our company are well positioned . our homebuilding operations are on track to achieve profitability in 2012 as the housing market stabilizes and ultimately recovers and our financial services and rialto investments segments will continue to enhance our earnings . 22 story_separator_special_tag interest expense was $ 163.0 million in the year ended november 30 , 2011 ( $ 70.7 million was included in cost of homes sold , $ 1.6 million in cost of land sold and $ 90.7 million in other interest expense ) , compared to $ 143.9 million in the year ended november 30 , 2010 ( $ 71.5 million was included in cost of homes sold , $ 2.0 million in cost of land sold and $ 70.4 million in other interest expense ) . interest expense increased primarily due to an increase in our outstanding debt compared to the same period last year . 24 operating earnings for our lennar financial services segment were $ 20.7 million in the year ended november 30 , 2011 , compared to operating earnings of $ 31.3 million in the same period last year . the decrease in profitability was due primarily to decreased volume in the segment 's mortgage operations . in addition , in the year ended november 30 , 2010 , our lennar financial services segment received $ 5.1 million of proceeds from the previous sale of a cable system . in the year ended november 30 , 2011 , operating earnings in our rialto investments segment were $ 63.5 million ( which included $ 28.9 million of net earnings attributable to noncontrolling interests ) , compared to operating earnings of $ 57.3 million ( which included $ 33.2 million of net earnings attributable to noncontrolling interests ) in the same period last year . in the year ended november 30 , 2011 , revenues in this segment were $ 164.7 million , which consisted primarily of accretable interest income associated with the segment 's portfolio of real estate loans and fees for managing and servicing assets , compared to revenues of $ 92.6 million in the same period last year . in the year ended november 30 , 2011 , rialto investments other income , net , was $ 39.2 million , which consisted primarily of gains from acquisition of real estate owned ( “reo” ) through foreclosure , as well as gains from real estate sales , partially offset by expenses related to owning and maintaining those assets , and a $ 4.7 million gain on the sale of investment securities . story_separator_special_tag as a percentage of revenues from home sales , selling , general and administrative expenses improved to 14.3 % in the year ended november 30 , 2010 , from 16.2 % in 2009. gross profits on land sales totaled $ 21.4 million in the year ended november 30 , 2010 , primarily due to the reduction of an obligation related to a profit participation agreement . gross profits on land sales were net of $ 3.4 million of valuation adjustments and $ 3.1 million in write-offs of deposits and pre-acquisitions costs . losses on land sales totaled $ 178.8 million in the year ended november 30 , 2009 , which included $ 108.9 million of valuation adjustments and $ 84.4 million in write-offs of deposits and pre-acquisition costs . lennar homebuilding equity in loss from unconsolidated entities was $ 11.0 million in the year ended november 30 , 2010 , which included $ 10.5 million of valuation adjustments related to assets of unconsolidated entities in which we have investments . in the year ended november 30 , 2009 , lennar homebuilding equity in loss from unconsolidated entities was $ 130.9 million , which included $ 101.9 million of valuation adjustments related to assets of unconsolidated entities in which we have investments . lennar homebuilding other income ( expense ) , net , totaled $ 19.1 million in the year ended november 30 , 2010 , which included a $ 19.4 million pre-tax gain on the extinguishment of other debt and other income , partially offset by a $ 10.8 million pre-tax loss related to the repurchase of senior notes through a tender offer and $ 1.7 million of valuation adjustments to our investments in unconsolidated entities . lennar homebuilding other income ( expense ) , net , totaled ( $ 98.4 ) million in the year ended november 30 , 2009 , which included $ 89.0 million of valuation adjustments to our investments in unconsolidated entities and $ 9.7 million of write-offs of notes and other receivables . homebuilding interest expense was $ 143.9 million in the year ended november 30 , 2010 ( $ 71.5 million was included in cost of homes sold , $ 2.0 million in cost of land sold and $ 70.4 million in other interest expense ) , compared to $ 147.4 million in the year ended november 30 , 2009 ( $ 67.4 million was included in cost of homes sold , $ 9.2 million in cost of land sold and $ 70.9 million in other interest expense ) . despite an increase in debt , interest expense decreased primarily due to an increase in qualifying assets eligible for interest capitalization and savings resulting from the termination of our senior unsecured revolving credit facility during the first quarter of 2010. operating earnings for the lennar financial services segment were $ 31.3 million in the year ended november 30 , 2010 , compared to $ 36.0 million in 2009. the decrease in operating earnings was primarily due to decreased volume in the segment 's mortgage and title operations . in the year ended november 30 , 2010 , operating earnings in our rialto investments segment were $ 57.3 million ( which included $ 33.2 million of net earnings attributable to noncontrolling interests ) , compared to an operating loss of $ 2.5 million in 2009. in the year ended november 30 , 2010 , revenues in this segment were $ 92.6 million , which consisted primarily of accretable interest income associated with the portfolios of real estate loans acquired in partnership with the fdic . in the year ended november 30 , 2010 , other income , net was $ 17.3 million , which consisted primarily of gains from acquisition of reo through foreclosure , as well as gains from real estate sales . the segment also had equity in earnings from unconsolidated entities of $ 15.4 million during the year ended november 30 , 2010 , consisting primarily of $ 9.3 million of unrealized gains related to our share of the mark-to-market adjustments of ab ppip investments . in the year ended november 30 , 2010 , expenses in this segment were $ 67.9 million , which consisted primarily of costs related to its portfolio operations , management of investments for others , due diligence expenses related to both completed and abandoned transactions , and other general and administrative expenses . 26 corporate general and administrative expenses were reduced by $ 23.6 million , or 20 % , in the year ended november 30 , 2010 , compared to 2009 primarily due to our cost reduction initiatives implemented during the downturn . as a percentage of total revenues , corporate general and administrative expenses decreased to 3.1 % in the year ended november 30 , 2010 , from 3.8 % in 2009. net earnings ( loss ) attributable to noncontrolling interests were $ 25.2 million and ( $ 28.9 ) million , respectively , in the years ended november 30 , 2010 and 2009. net earnings attributable to noncontrolling interests during the year ended november 30 , 2010 were primarily related to the fdic 's interest in the portfolio of real estate loans that we acquired in partnership with the fdic . a reduction of the carrying amounts of deferred tax assets by a valuation allowance is required , if based on available evidence , it is more likely than not that such assets will not be realized . based upon an evaluation of all available evidence , during the year ended november 30 , 2010 , we recorded a reversal of the deferred tax asset valuation allowance of $ 37.9 million , primarily due to the recording of a deferred tax liability from the issuance of 2.75 % convertible senior notes due 2020 and the net earnings generated during the year . the reversal of the deferred tax asset valuation allowance related to the issuance of the 2.75 % convertible senior notes due 2020 was recorded as an adjustment to additional paid-in capital .

results of operations overview our net earnings attributable to lennar in 2011 were $ 92.2 million , or $ 0.48 per basic and diluted share , compared to $ 95.3 million , or $ 0.51 per basic and diluted share , in 2010. the following table sets forth financial and operational information for the years indicated related to our operations . replace_table_token_8_th ( 1 ) gross margin as a percentage of revenues from home sales excluding valuation adjustments and operating margin as a percentage of revenues from home sales excluding valuation adjustments are non-gaap financial measures disclosed by certain of our competitors and have been presented because we find it useful in evaluating our performance and believe that it helps readers of our financial statements compare our operations with those of our competitors . see the non-gaap financial measures section . 2011 versus 2010 for both the years ended november 30 , 2011 and 2010 , revenues from home sales were $ 2.6 billion . there was a 1 % increase in the average sales price of homes delivered , offset by a 1 % decrease in the number of home deliveries , excluding unconsolidated entities . new home deliveries , excluding unconsolidated entities , decreased to 10,746 homes in the year ended november 30 , 2011 from 10,859 homes last year . the decrease in home deliveries was primarily in our homebuilding houston and homebuilding west segments and homebuilding other as a result of the absence of the federal homebuyer tax credit , partially offset by an increase in home deliveries in our homebuilding southeast florida segment .

we have provided these products and services mainly through our wholly-owned subsidiary , radian guaranty inc. , and its wholly-owned subsidiaries radian mortgage assurance inc. ( formerly amerin guaranty corporation ) , and radian insurance inc. ( which we refer to as `` radian guaranty , '' `` radian mortgage assurance , '' and `` radian insurance , '' respectively ) . private mortgage insurance protects the holders of our insurance from all or a portion of default-related losses on residential mortgage loans made generally to home buyers who make down payments of less than 20 % of the home 's purchase price . private mortgage insurance also facilitates the sale of these mortgage loans in the secondary mortgage market , most of which are sold to freddie mac and federal national mortgage association ( `` fannie mae '' ) . we refer to freddie mac and fannie mae together as `` government sponsored enterprises '' or `` gses . '' traditional mortgage insurance . our mortgage insurance segment offers primary mortgage insurance coverage on residential first-lien mortgages ( `` first-lien '' ) . at december 31 , 2011 , primary insurance on first-liens made up approximately 93.7 % of our total first-lien insurance risk in force ( `` rif '' ) . prior to 2009 , we also wrote pool insurance , which comprised approximately 6.3 % of our total first-lien insurance rif at december 31 , 2011 . non-traditional mortgage credit enhancement . in addition to traditional mortgage insurance , in the past , we provided other forms of credit enhancement on residential mortgage assets . these products included mortgage insurance on second-lien mortgages ( `` second-lien '' ) , credit enhancement on net interest margin securities ( `` nims '' ) , credit default swaps ( `` cdss '' ) on domestic and international mortgages and primary mortgage insurance on international mortgages ( collectively , we refer to the risk associated with these transactions as `` non-traditional '' ) . we stopped writing non-traditional business in 2007 , other than a small amount of international mortgage insurance , which we discontinued writing in 2008. as of december 31 , 2011 , the aggregate remaining rif on such non-traditional mortgage credit enhancement was approximately $ 214 million , which accounted for less than 1 % of our total risk in force . financial guaranty our financial guaranty segment has provided direct insurance and reinsurance on credit-based risks through radian asset assurance inc. ( `` radian asset assurance '' ) , a wholly-owned subsidiary of radian guaranty . financial guaranty insurance typically provides an unconditional and irrevocable guaranty to the holder of a financial obligation of full and timely payment of principal and interest when due . financial guaranty insurance may be issued at the inception of an insured obligation or may be issued for the benefit of a holder of an obligation in the secondary market . we have provided financial guaranty credit protection through the issuance of a financial guaranty insurance policy , by insuring the obligations under a cds or through the reinsurance of such obligations . both a financial guaranty insurance policy and a cds provide the purchaser of such credit protection with a guaranty of the timely payment of interest and scheduled principal when due on a covered financial obligation , and in the case of most of our financial guaranty cdss , credit protection for amounts in excess of specified levels of losses . these forms of credit enhancement each require similar underwriting and surveillance . 91 in 2008 , in light of difficult market conditions and the downgrade of the financial strength ratings of our financial guaranty insurance subsidiaries , we discontinued writing any new financial guaranty business , other than as necessary to commute , restructure , hedge or otherwise mitigate losses or reduce exposure in our existing portfolio . since 2008 , we have significantly reduced our financial guaranty operations and have reduced our financial guaranty exposures through commutations in order to mitigate uncertainty , maximize the ultimate capital available for our mortgage insurance business and accelerate our access to that capital . in january 2012 , radian asset assurance entered into a three-part transaction ( the `` assured transaction '' ) with subsidiaries of assured guaranty ltd. ( collectively `` assured '' ) that included the following : the commutation of $ 13.8 billion of financial guaranty net par outstanding that was reinsured by radian asset assurance ( the `` assured commutation '' ) ; the ceding of $ 1.8 billion of direct public finance business to assured ( the `` assured cession '' ) ; and an agreement to sell to assured municipal and infrastructure assurance corporation ( the `` fg insurance shell '' ) , a new york domiciled financial guaranty insurance company with licenses to conduct business in 37 states and the district of columbia . radian asset assurance acquired the fg insurance shell in june 2011 in order to pursue potential strategic alternatives in the public finance market . we expect to complete the sale of the fg insurance shell in the first quarter of 2012 , subject to regulatory approval . this three-part transaction with assured reduced our financial guaranty net par outstanding by approximately 22.5 % and is expected to provide a statutory capital benefit to radian asset assurance of approximately $ 100 million in the first quarter of 2012. because radian asset assurance is a wholly-owned subsidiary of radian guaranty , this transaction will also provide a statutory capital benefit of $ 100 million to radian guaranty . this transaction is consistent with our strategic objectives of accelerating the reduction of our financial guaranty net par outstanding and strengthening the statutory capital positions of radian asset assurance and radian guaranty . story_separator_special_tag see `` risk factors — because most of the mortgage loans that we insure are sold to freddie mac and fannie mae , changes in their charters or business practices could significantly impact our mortgage insurance business '' , `` the dodd-frank wall street reform and consumer protection act may have a material effect on our mortgage insurance and financial guaranty businesses '' and `` a decrease in the volume of home mortgage originations could result in fewer opportunities for us to write new insurance business '' in part i , item 1a of this annual report on form 10-k. 93 mortgage insurance defaults . our first-lien primary default rate at december 31 , 2011 , was 15.2 % , compared to 16.5 % at december 31 , 2010 . our primary default inventory comprised 110,861 loans at december 31 , 2011 , compared to 125,470 loans at december 31 , 2010 , representing an 11.6 % decrease . our primary default inventory declined slightly in january 2012. the reduction in our defaulted inventory has been the result of the total number of defaulted loans that have cured ( `` cures '' ) , claim payments on defaulted loans , and insurance rescissions and claim denials collectively exceeding the total number of new defaults on insured loans . despite this positive trend , our overall primary default rates continue to remain elevated compared to historical levels due to continued high unemployment and weakness in the u.s. housing and mortgage credit markets . in addition , this positive trend slowed in the second half of 2011 as the number of new defaults has remained elevated , while cures on existing defaults have been consistently low . we believe that a return to sustained profitability in our mortgage insurance business is dependent upon both a further reduction in the number of new defaults and an increase in the number of cures , particularly coming from our older delinquent loans . based on our projections , which are subject to significant risks and uncertainties , we expect continued improvement in the operating results of our mortgage insurance business in 2012 and to achieve marginal operating profitability in our mortgage insurance business in 2013. for 2012 , we are projecting a 15 % decrease in new defaults compared to 2011 , which compares to an 18 % decrease in 2011 and a 30 % decrease in 2010. defaults have remained at elevated levels across all of our mortgage insurance product lines , including our insured portfolio of prime , first-lien mortgages . overall , the underlying trend of high defaults continues to be driven primarily by the poor performance of our 2005 through 2008 books of business . in addition , a slowdown in mortgage foreclosures , driven by foreclosure moratoriums , servicing delays and the effect of prolonged modification programs for delinquent loans , has contributed to the sustained high level of our default inventory . this slowdown has resulted in more defaults remaining unresolved for a longer period of time than has historically been the case . provision for losses . our mortgage insurance provision for losses for 2011 was $ 1,293.9 million , and was primarily related to reserves established on new defaults . our results for 2011 were also negatively impacted by increases in our incurred but not recorded ( `` ibnr '' ) reserve estimate , which includes our estimate for the amount of reserves we will need to reinstate on loans that were previously rescinded and claims that were previously denied . in addition , our provision for losses has been affected by an increase in the weighted average rate at which defaulted loans are expected to move to claim ( the `` default to claim rate '' ) , due to a greater than anticipated impact from the aging of underlying defaulted loans . with continuing declines in home values , persistently high unemployment and delays by servicers in either modifying loans or foreclosing on properties , the time it has taken to cure or otherwise resolve a delinquent loan has been prolonged . consequently , in recent years , our default inventory has experienced an increase in its weighted average age , and because we apply higher estimated default to claim rates on our older delinquent loans , this has resulted in higher reserves . although the weighted average age of our defaulted portfolio continued to increase throughout 2011 , the pace of this increase slowed in the second half of 2011. our assumed aggregate weighted average default to claim rate ( which incorporates the expected impact of rescissions and denials ) was approximately 43 % and 40 % for the years ending december 31 , 2011 and 2010 , respectively . for 2012 , we anticipate that the aggregate weighted average default to claim rate will be similar to that assumed in 2011. our mortgage insurance reserve for losses continues to be favorably affected by our loss management efforts . our loss reserve estimate incorporates our recent experience with respect to the number of claims that we are denying and the number of insurance certificates that we are rescinding due to fraud , underwriter negligence or other factors , including the impact of our recent experience regarding reinstatements of previously rescinded policies and denied claims . our current level of rescissions and denials remains elevated compared to historical levels , which we believe reflects the larger concentration of poorly underwritten loans ( primarily originated during 2005 through 2008 ) that are in our default inventory , as well as our extensive efforts to examine all claims for potential rescissions or denials . we expect the level of rescissions and denials to continue to remain elevated compared to historical levels as long as our 2005 through 2008 insurance policies comprise the majority of our default inventory . claims paid . total mortgage insurance claims paid in 2011 were $ 1.5 billion and include $ 90.5 million related to the termination of certain structured mortgage insurance transactions .

results of operations our results for 2011 were positively impacted by the change in fair value of derivative and other financial instruments , which occurred primarily due to the widening of radian group 's cds spreads . this widening , in turn , resulted in a corresponding decline in the fair value liability of our insured obligations , primarily non-corporate cdos and trups cdos . because we have the ability to hold our financial guaranty contracts to maturity , changes in market spreads are not necessarily indicative of our ultimate net credit loss payments with respect to these obligations . our estimated credit loss payments presented in the table below represent our current estimate of the present value ( net of estimated recoveries ) that we expect to pay in claims with respect to our insured credit derivatives and net variable interest entity ( `` vie '' ) liabilities . the estimated fair value of these obligations is measured as of a specific point in time and may be influenced by changes in interest rates , credit spreads , credit ratings and other market , asset-class and transaction-specific conditions and factors that may be unrelated to our obligation to pay future claims . other factors that may cause a difference between the fair value of these obligations and our estimated credit loss payments include the effects of our non-performance risk and differing assumptions regarding discount rate and future performance , as well as the expected impact of our loss mitigation activities , including commutations . in the absence of credit losses , unrealized losses related to changes in fair value will reverse before or at the maturity of these obligations . however , we may agree to settle some or all of these obligations prior to maturity at amounts that are greater or less than their fair values at the time of settlement , which could result in the realization of additional gains or losses .

our principal business is to acquire , own , and operate class a and creative office assets in vibrant and improving metropolitan communities throughout the united states ( including improving and developing such assets ) . these communities are located in areas that include traditional downtown areas and suburban main streets , which have high barriers to entry , high population density , positive population trends and a propensity for growth . we believe that the critical mass of redevelopment in such areas creates positive externalities , which enhance the value of real estate assets in the area . we believe that these assets will provide greater returns than similar assets in other markets , as a result of the population growth , public commitment , and significant private investment that characterize these areas . we are operated by affiliates of cim group . cim group is a vertically-integrated owner and operator of real assets with multi-disciplinary expertise and in-house research , acquisition , credit analysis , development , finance , leasing , and onsite property management capabilities . cim group is headquartered in los angeles , california and has offices in chicago , illinois ; dallas , texas ; new york , new york ; orlando , florida ; phoenix , arizona ; the san francisco bay area ; the washington d.c. metro area ; and tokyo , japan . properties as of december 31 , 2019 , our real estate portfolio consisted of 11 assets , all of which were fee-simple properties . as of december 31 , 2019 , our 9 office properties ( including one development site , which is being used as a parking lot ) , totaling approximately 1.3 million rentable square feet , were 86.7 % occupied and our one hotel with an ancillary parking garage , which has a total of 503 rooms , had revpar of $ 127.09 for the year ended december 31 , 2019 . 70 strategy our strategy is principally focused on the acquisition of class a and creative office assets in vibrant and improving metropolitan communities throughout the united states ( including improving and developing such assets ) in a manner that will prudently grow our nav and cash flow per share of common stock . our strategy is centered around cim group 's community qualification process . we believe this strategy provides us with a significant competitive advantage when making real estate acquisitions . the qualification process generally takes between six months and five years and is a critical component of cim group 's evaluation . as part of the community qualification process , cim group examines the characteristics of a market to determine whether the district possesses certain characteristics prior to the extensive efforts cim group 's investment professionals undertake when reviewing potential acquisitions in its qualified communities . qualified communities generally fall into one of two categories : ( i ) transitional metropolitan districts that have dedicated resources to become vibrant metropolitan communities and ( ii ) well-established , thriving metropolitan areas ( typically major central business districts ) . qualified communities are distinct districts which have dedicated resources to become or are currently vibrant communities where people can live , work , shop and be entertained , all within walking distance or close proximity to public transportation . these areas also generally have high barriers to entry , high population density , positive population trends and support for investment . cim group believes that a vast majority of the risks associated with acquiring real estate are mitigated by accumulating local market knowledge of the community where the asset is located . cim group typically spends significant time and resources qualifying targeted communities prior to making any acquisitions . since 1994 , cim group has identified 135 qualified communities and has deployed capital in 75 of them . although we may not deploy capital exclusively in qualified communities , it is expected that most of our assets will be identified through this systematic process . cim group seeks to maximize the value of its holdings through active onsite property management and leasing . cim group has extensive in-house research , acquisition , credit analysis , development , finance , leasing and onsite property management capabilities , which leverage its deep understanding of metropolitan communities to position properties for multiple uses and to maximize operating income . as a vertically-integrated owner and operator , cim group has in-house onsite property management and leasing capabilities . property managers prepare annual capital and operating budgets and monthly operating reports , monitor results , and oversee vendor services , maintenance and capital improvement schedules . in addition , they ensure that revenue objectives are met , lease terms are followed , receivables are collected , preventative maintenance programs are implemented , vendors are evaluated and expenses are controlled . in addition , cim group 's real assets management committee reviews and approves strategic plans for each asset , including financial , leasing , marketing , property positioning and disposition plans . the real assets management committee reviews and approves the annual business plan for each property , including its capital and operating budget . cim group 's organizational structure provides for continuity through multi-disciplinary teams responsible for an asset from the time of the original investment recommendation , through the implementation of the asset 's business plan , and any disposition activities . cim group 's investments and development teams are separate groups that work very closely together on transactions requiring development expertise . while the investments team is responsible for acquisition analysis , both the investments and development teams perform due diligence , evaluate and determine underwriting assumptions and participate in the development management and ongoing asset management of cim group 's opportunistic assets . the development team is also responsible for the oversight and or execution of securing entitlements and the development/repositioning process . story_separator_special_tag the shares of series l preferred stock accepted for payment by the company were restored to the status of authorized but unissued shares of preferred stock without designation as to class or series . 72 rental rate trends office statistics : the following table sets forth occupancy rates and annualized rent per occupied square foot across our office portfolio as of the specified periods : replace_table_token_30_th ( 1 ) the information presented in this table represents historical information as of the date indicated without giving effect to any property sales occurring thereafter . we sold eight office properties , one development site and one parking garage during the year ended december 31 , 2019 , we acquired one office property during the year ended december 31 , 2018 , and we sold six office properties and one parking garage during the year ended december 31 , 2017 . excluding these properties , the occupancy and annualized rent per occupied square foot were 86.7 % and $ 43.83 as of december 31 , 2019 , 94.7 % and $ 39.90 as of december 31 , 2018 and 94.9 % and $ 37.89 as of december 31 , 2017 . ( 2 ) other than as set forth in ( 3 ) below , represents gross monthly base rent under leases commenced as of the specified periods , multiplied by twelve . this amount reflects total cash rent before abatements . total abatements for the years ended december 31 , 2019 , 2018 and 2017 were $ 1,816,000 , $ 5,146,000 and $ 3,128,000 , respectively . where applicable , annualized rent has been grossed up by adding annualized expense reimbursements to base rent . annualized rent for certain office properties includes rent attributable to retail . ( 3 ) 1130 howard street was acquired on december 29 , 2017. the annualized rent as of december 31 , 2017 for 12,944 rentable square feet of the building is presented using the actual rental income under a signed lease with a different tenant who took possession in march 2018 , as the space was occupied by the prior owner and annualized rent under the short-term lease was de minimis . over the next four quarters , we expect to see expiring cash rents as set forth in the table below : replace_table_token_31_th ( 1 ) month-to-month tenants occupying a total of 22,416 square feet are included in the expiring leases in the first quarter listed . ( 2 ) represents gross monthly base rent , as of december 31 , 2019 , under leases expiring during the periods above , multiplied by twelve . this amount reflects total cash rent before abatements . where applicable , annualized rent has been grossed up by adding annualized expense reimbursements to base rent . 73 during the year ended december 31 , 2019 , we executed leases with terms longer than 12 months totaling 128,687 square feet . the table below sets forth information on certain of our executed leases during the year ended december 31 , 2019 , excluding space that was vacant for more than one year , month-to-month leases , leases with an original term of less than 12 months , related party leases , and space where the previous tenant was a related party : replace_table_token_32_th ( 1 ) based on the number of tenants that signed leases . ( 2 ) cash rents represent gross monthly base rent , multiplied by twelve . this amount reflects total cash rent before abatements . where applicable , annualized rent has been grossed up by adding annualized expense reimbursements to base rent . fluctuations in submarkets , buildings and terms of leases cause large variations in these numbers and make predicting the changes in rent in any specific period difficult . our rental and occupancy rates are impacted by general economic conditions , including the pace of regional and economic growth , and access to capital . therefore , we can not give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates . additionally , decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re lease space could have a material adverse effect on our business , financial condition , results of operations , cash flow or our ability to satisfy our debt service obligations or to maintain our level of distributions on our common stock or preferred stock . hotel statistics : the following table sets forth the occupancy , adr and revpar for our hotel in sacramento , california for the specified periods : replace_table_token_33_th lending segment through our sba 7 ( a ) lending platform , we are a national lender that primarily originates loans to small businesses . we identify loan origination opportunities through personal contacts , internet referrals , attendance at trade shows and meetings , direct mailings , advertisements in trade publications and other marketing methods . we also generate loans through referrals from real estate and loan brokers , franchise representatives , existing borrowers , lawyers and accountants . 74 results of operations comparison of the year ended december 31 , 2019 to the year ended december 31 , 2018 net income replace_table_token_34_th net income increased to $ 345,521,000 , or by $ 344,379,000 , for the year ended december 31 , 2019 , compared to $ 1,142,000 for the year ended december 31 , 2018 , primarily due to the asset sale .

summary segment results during the years ended december 31 , 2019 and 2018 , cim commercial operated in three segments : office and hotel properties and lending . set forth and described below are summary segment results for our operating segments . replace_table_token_36_th revenues office revenue : office revenue includes rental revenue , expense reimbursements and lease termination income from office properties . office revenue decreased to $ 86,948,000 , or by 41.2 % , for the year ended december 31 , 2019 compared to $ 147,811,000 for the year ended december 31 , 2018 . the decrease is primarily due to the sale of three office properties and a parking garage in oakland , california , the sale of an office property in washington , d.c. , and the sale of an office property in san francisco , california , all of which were consummated in march 2019 , the sale of an office property in oakland , california , which was consummated in may 2019 , the sale of two office properties in washington , d.c. , which was consummated in july 2019 , and lower revenues at an office property in los angeles , california , partially offset by increases in rental revenue at certain of our properties due to increases in rental rates as a result of leasing activity and an increase in expense reimbursements at one of our properties .

total interest costs story_separator_special_tag this section and other parts of this annual report on form 10-k ( “ form 10-k ” ) contain forward-looking statements , within the meaning of the private securities litigation reform act of 1995 , which are subject to risks and uncertainties . forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact . forward-looking statements can also be identified by words such as `` aim , '' `` anticipate , '' `` believe , '' `` estimate , '' `` expect , '' `` forecast , '' `` future , '' `` intend , '' `` outlook , '' `` plan , '' `` potential , '' `` predict , '' `` project , '' `` seek , '' `` may , '' `` can , '' `` will , '' `` would , '' `` could , '' `` should , '' the negatives thereof and other similar expressions . forward-looking statements are not guarantees of future performance and actual results may differ significantly from the results discussed in the forward-looking statements . factors that might cause such differences include , but are not limited to , those discussed in part i , item 1a of this form 10-k under the heading “ risk factors , ” which are incorporated herein by reference . the following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in part ii , item 8 of this form 10-k. all information presented herein is based on our fiscal calendar . unless otherwise stated , references to particular years , quarters , months or periods refer to our fiscal years and the associated quarters , months and periods of those fiscal years . we undertake no obligation to revise or update any forward-looking statements for any reason , except as required by law . overview shake shack is a modern day `` roadside '' burger stand serving a classic american menu of premium burgers , hot dogs , crispy chicken , crinkle-cut fries , shakes , frozen custard , beer and wine . our fine dining heritage and commitment to community building , hospitality and the sourcing of premium ingredients have helped us pioneer what we believe is a new `` fine casual '' restaurant category . fine casual couples the ease , value and convenience of fast casual concepts with the high standards of excellence grounded in fine dining—thoughtful ingredient sourcing and preparation , hospitality and quality . our mission is to stand for something good ® in all aspects of our business , including the exceptional team we hire and train , the premium ingredients making up our menu , our community engagement and the design of our shacks . stand for something good is a call to action for all of our stakeholders—our team , guests , communities , suppliers and investors—and we actively invite them all to share in this philosophy with us . this commitment drives our integration into the local communities in which we operate and fosters a deep and lasting connection with our guests . fiscal 2015 highlights fiscal 2015 was a remarkable year for shake shack in many ways . we completed an initial public offering of 5,750,000 shares of our class a common stock and received $ 112.3 million in net proceeds , which will provide the capital we need to continue growing our business for years to come . in fiscal 2015 , we opened 13 domestic company-operated shacks , successfully executing on our targeted growth plan for the year . we entered two new markets this year—baltimore , maryland , in the heart of inner harbor , and austin , texas at the domain . we also deepened our roots in our current markets , opening shacks in new york , new jersey , massachusetts , illinois , florida and nevada . internationally , we expanded our footprint by opening eight international licensed shacks in six countries , including russia , kuwait , qatar , the united kingdom , and saudi arabia , as well as our first shack in japan , in tokyo 's renowned meiji-jingu park . in december 2015 , we also announced plans to enter south korea with a new licensed partner with a development agreement that spans 25 shacks in korea over the next 10 years . fiscal 2015 marked a year of great achievements in menu innovation for us as well . we began a new limited time offering ( `` lto '' ) program where we plan to feature a new premium burger every six months . the shackmeister burger launched in january 2015 , the first major burger to debut at shake shack since the smokeshack in april 2012 , and was a huge success , driving positive shifts in mix at a premium price point . we retired the shackmeister burger in july 2015 and introduced the roadside shack , which was 49 | shake shack inc. form 10-k met with similar success . in january 2015 , we also launched the shake of the week , an extension of our custard calendar where guests can enjoy seasonally changing flavors in creamy and deliciously dense shakes . we also made great strides this past year in our mission to stand for something good . in march 2015 , we announced that all burger and hot dog buns served at shacks around the world will be non-gmo and , in december 2015 , we announced our commitment to transition to the use of cage-free eggs in our entire menu by the end of 2016. our fiscal 2015 results demonstrate the success of our various growth strategies . our brand power and thoughtful approach to growth have resulted in strong shack performance across a variety of geographic areas and formats . some financial highlights for fiscal 2015 include : ▪ total revenue increased 60.8 % to $ 190.6 million . story_separator_special_tag fiscal 2016 outlook for the fiscal year ending december 28 , 2016 , we currently expect the following : ▪ total revenue to be between $ 237 million and $ 242 million . ▪ same-shack sales growth between 2.5 % and 3.0 % , with higher growth expected in the first half of fiscal 2016 due to the significant growth we experienced in the second half of fiscal 2015 . ▪ at least 13 new domestic company-operated shacks to be opened in 2016 ( of the previously stated guidance of 14 new domestic company-operated shacks , one was opened on the last day of fiscal 2015 ) , with these new shacks expected to have average annual sales volumes of at least $ 3.3 million and shack-level operating profit margins of at least 22 % . ▪ seven licensed shacks to be opened under the company 's current license agreements in the u.k. , middle east and japan , as well as a new licensed shack in las vegas ' t-mobile arena ( of the previously stated guidance of eight international licensed shacks , two opened ahead of schedule in december 2015 ) . ▪ as a percentage of shack sales , approximately 100 to 150 basis points of deleverage in labor and related expenses on a year-over-year basis . ▪ adjusted pro forma effective tax rate between 43 % and 44 % 51 | shake shack inc. form 10-k story_separator_special_tag costs . food and paper costs were $ 34.9 million for fiscal 2014 compared to $ 23.9 million for fiscal 2013 , an increase of $ 11.0 million or 46.3 % , primarily due to the opening of 10 new domestic company-operated shacks during fiscal 2014 . as a percentage of shack 53 | shake shack inc. form 10-k sales , food and paper costs increase d to 31.2 % for fiscal 2014 compared to 30.4 % for fiscal 2013 . this increase was due to an increase in the cost of certain food items , primarily beef , which was partially offset by menu price increases and purchasing efficiencies of other items . labor and related expenses labor and related expenses include domestic company-operated shack-level hourly and management wages , bonuses , payroll taxes , workers ' compensation expense and medical benefits . as we expect with other variable expense items , we expect labor costs to grow as our shack sales grow . factors that influence labor costs include minimum wage and payroll tax legislation , health care costs and the performance of our domestic company-operated shacks . labor and related expenses were $ 44.8 million for fiscal 2015 compared to $ 29.3 million for fiscal 2014 , an increase of $ 15.5 million or 52.7 % . this increase was primarily due to the opening of 13 new domestic company-operated shacks during fiscal 2015 . as a percentage of shack sales , labor and related expenses decrease d to 24.4 % in fiscal 2015 compared to 26.2 % in fiscal 2014 . this decrease was due to the benefit from higher shack sales and the reduced labor requirements from the return of crinkle-cut fries , offset by the increase in the starting wage for shack team members at the start of fiscal 2015 . labor and related expenses were $ 29.3 million for fiscal 2014 compared to $ 20.1 million for fiscal 2013 , an increase of $ 9.2 million or 45.9 % . this increase was primarily due to the opening of 10 new domestic company-operated shacks during fiscal 2014 . as a percentage of shack sales , labor and related expenses increase d to 26.2 % in fiscal 2014 compared to 25.6 % in fiscal 2013 . this increase was due to a decision by the company to increase the starting wage for shack team members at the start of fiscal 2014 , as well as the impact of target-volume shacks opening and the impact of fixed management labor at these shacks . other operating expenses other operating expenses consist of marketing expenses , utilities and other operating expenses incidental to operating our domestic company-operated shacks , such as non-perishable supplies , credit card fees , property insurance and repairs and maintenance . other operating expenses were $ 16.3 million for fiscal 2015 compared to $ 11.2 million for fiscal 2014 , an increase of $ 5.1 million or 45.7 % , primarily due to the opening of 13 new domestic company-operated shacks in fiscal 2015 . as a percentage of shack sales , other operating expenses decrease d to 8.9 % in fiscal 2015 compared to 10.0 % in fiscal 2014 . this decrease was due to the benefit from higher shack sales and the impact of fixed operating expenses on the higher sales levels . other operating expenses were $ 11.2 million for fiscal 2014 compared to $ 7.3 million for fiscal 2013 , an increase of $ 3.9 million or 53.0 % , primarily due to the opening of 10 new domestic company-operated shacks in fiscal 2014 . as a percentage of shack sales , other operating expenses increase d to 10.0 % in fiscal 2014 compared to 9.3 % in fiscal 2013 . this increase was due to the opening of more target-volume shacks and the impact of fixed operating expenses at these shacks . occupancy and related expenses occupancy and related expenses consist of shack-level occupancy expenses ( including rent , common area expenses and certain local taxes ) , excluding pre-opening costs , which are recorded separately . occupancy and related expenses were $ 15.2 million for fiscal 2015 compared to $ 9.8 million for fiscal 2014 , an increase of $ 5.4 million or 55.9 % , primarily due to the opening of 13 new domestic company-operated shacks in fiscal 2015 . as a percentage of shack sales , occupancy and related expenses decrease d to 8.3 % in fiscal 2015 compared to 8.7 % in fiscal 2014 , primarily due to increased amortization of tenant improvements .

results of operations the following table summarizes our results of operations for fiscal 2015 , 2014 and 2013 : replace_table_token_5_th ( 1 ) we operate on a 52/53 week fiscal year that ends on the last wednesday of the calendar year . fiscal year 2014 was a 53-week year . fiscal 2015 and 2013 each contained 52 weeks . ( 2 ) as a percentage of shack sales . shake shack inc. form 10-k | 52 shack sales shack sales represent the aggregate sales of food and beverages in domestic company-operated shacks . shack sales in any period are directly influenced by the number of operating weeks in such period , the number of open shacks and same-shack sales . shack sales were $ 183.2 million for fiscal 2015 compared to $ 112.0 million for fiscal 2014 , an increase of $ 71.2 million or 63.5 % . the growth in shack sales was primarily driven by the opening of 13 new domestic company-operated shacks during fiscal 2015 , robust sales at our mature shacks , and same-shack sales growth . shacks in the comparable shack base contributed $ 10.1 million of this increase while new domestic company-operated shacks contributed $ 63.9 million , offset by the impact of 53rd week in fiscal 2014 , which contributed $ 2.8 million in shack sales in the prior year . same-shack sales increased 13.3 % during fiscal 2015 , on a calendar year basis , primarily driven by increased menu prices and traffic . for purposes of calculating same-shack sales growth , shack sales for 21 shacks were included in the comparable shack base , which includes madison square park .

the company also originates commercial business and consumer loans in an effort to maintain strong customer relationships . despite the challenging current market and economic conditions , the company continues to maintain capital substantially in excess of regulatory requirements . this management 's discussion and analysis section is intended to assist in understanding the financial condition and results of operations of prudential bancorp . the results of operations of prudential bancorp are primarily dependent on the results of the bank . the information contained in this section should be read in conjunction with our consolidated financial statements and the accompanying notes to the consolidated financial statements contained in item 8 of this annual report on form 10-k. critical accounting policies in reviewing and understanding financial information for prudential bancorp , you are encouraged to read and understand the significant accounting policies used in preparing our financial statements . these policies are described in note 2 of the notes to our consolidated financial statements included in item 8 hereof . the accounting and financial reporting policies of prudential bancorp conform to accounting principles generally accepted in the united states of america ( “ u.s . gaap ” ) and to general practices within the banking industry . accordingly , the financial statements require certain estimates , judgments and assumptions , which are believed to be reasonable , based upon the information available . these estimates and assumptions affect the reported amounts of assets and liabilities as well as contingent assets and contingent liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented . the following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results . these policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods . allowance for loan losses . the allowance for loan losses is established through a provision for loan losses charged to expense . losses are charged against the allowance for loan losses when management believes that the collectability in full of the principal of a loan is unlikely . subsequent recoveries are added to the allowance . the allowance for loan losses is maintained at a level that management considers adequate to provide for estimated losses and impairments based upon an evaluation of known and inherent losses in the loan portfolio that are both probable and reasonable to estimate . loan impairment is evaluated based on the fair value of collateral or estimated net realizable value . it is the policy of management to provide for losses on unidentified loans in its portfolio in addition to criticized and classified loans . 60 management monitors its allowance for loan losses at least quarterly and makes adjustments to the allowance through the provision for loan losses as economic conditions and other pertinent factors indicate . the quarterly review and adjustment of the qualitative factors employed in the allowance methodology and the updating of historic loss experience allow for timely reaction to emerging conditions and trends . in this context , a series of qualitative factors are used in a methodology as a measurement of how current circumstances are affecting the loan portfolio . included in these qualitative factors are : levels of past due , classified , criticized and non-accrual loans , tdrs and loan modifications ; nature and volume of loans ; changes in lending policies and procedures , underwriting standards , collections , charge-offs and recoveries and for commercial loans , the level of loans being approved with exceptions to lending policy ; experience , ability and depth of management and staff ; national and local economic and business conditions , including various market segments ; quality of the company 's loan review system and degree of board oversight ; concentrations of credit and changes in levels of such concentrations ; and effect of external factors on the level of estimated credit losses in the current portfolio . in determining the allowance for loan losses , management has established both specific and general pooled allowances . values assigned to the qualitative factors and those developed from historic loss experience provide a dynamic basis for the calculation of reserve factors for both pass-rated loans ( general pooled allowance ) and for criticized and classified loans . the amount of the specific allowance is determined through a loan-by-loan analysis of certain large dollar commercial real estate loans . loans not individually reviewed are evaluated as a group using reserve factor percentages based on historical loss experience and the qualitative factors described above . in determining the appropriate level of the general pooled allowance , management makes estimates based on internal risk ratings , which take into account such factors as debt service coverage , loan-to-value ratios and external factors . estimates are periodically measured against actual loss experience . this evaluation is inherently subjective as it requires material estimates including , among others , exposure at default , the amount and timing of expected future cash flows on impaired loans , value of collateral , estimated losses on our commercial , construction and residential loan portfolios and historical loss experience . all of these estimates may be susceptible to significant change . while management uses the best information available to make loan loss allowance evaluations , adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance . in addition , the department and the fdic , as an integral part of their examination processes , periodically review our allowance for loan losses . the department and the fdic may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations . story_separator_special_tag commitments to extend credit generally have fixed expiration dates and may require additional collateral from the borrower if deemed necessary . commitments to extend credit are not recorded as an asset or liability by us until the instrument is exercised . commitments the following table summarizes our outstanding commitments to originate loans and to advance additional amounts pursuant to outstanding letters of credit , lines of credit and undisbursed construction loans at september 30 , 2019. replace_table_token_27_th 63 contractual cash obligations the following table summarizes our contractual cash obligations at september 30 , 2019. replace_table_token_28_th 64 average balances , net interest income , and yields earned and rates paid . the following table shows for the periods indicated the total dollar amount of interest from average interest-earning assets and the resulting yields , as well as the interest expense on average interest-bearing liabilities , expressed both in dollars and rates , and the net interest margin . all average balances are based on monthly balances . management does not believe that the monthly averages differ significantly from what the daily averages would be . replace_table_token_29_th ( 1 ) tax-exempt yields have been adjusted to a tax-equivalent basis . ( 2 ) includes nonaccrual loans during the respective periods . calculated net of deferred fees and discounts , loans in process and the allowance for loan losses . ( 3 ) equals net interest income divided by average interest-earning assets . 65 rate/volume analysis . the following table shows the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities affected our interest income and expense during the periods indicated . for each category of interest-earning assets and interest-bearing liabilities , information is provided on changes attributable to ( 1 ) changes in rate , which is the change in rate multiplied by prior year volume , and ( 2 ) changes in volume , which is the change in volume multiplied by prior year rate . the combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume . replace_table_token_30_th comparison of financial condition at september 30 , 2019 and september 30 , 2018 at september 30 , 2019 , the company had total assets of $ 1.3 billion , as compared to $ 1.1 billion at september 30 , 2018 , an increase of $ 208.0 million or 19.2 % . at september 30 , 2019 , the investment portfolio had increased by $ 215.5 million to $ 581.5 million as compared to $ 366.0 million at september 30 , 2018 primarily as a result of the purchase of u.s. government agency issued mortgage-backed securities . net loans receivable decreased slightly by $ 17.4 million to $ 585.5 million at september 30 , 2019 from $ 602.9 million at september 30 , 2018 as competition for quality loans remained intense . commercial real estate and construction and land development loan balances increased in the aggregate $ 102.2 million , or 36.5 % , during the year from an aggregate of $ 279.7 million at september 30 , 2018 to an aggregate of $ 381.9 million at september 30 , 2019. concurrently , the balance of one-to-four family residential loans decreased by $ 56.1 million , or 17.3 % , from $ 324.9 million at the end of fiscal year 2018 to $ 268.8 million at the end of fiscal year 2019 due to the intentional run-off of the portfolio . 66 total liabilities increased by $ 196.7 million to $ 1.1 billion at september 30 , 2019 from $ 952.8 million at september 30 , 2018. at september 30 , 2019 , the company had fhlb advances outstanding of $ 376.9 million as compared to $ 154.7 million at september 30 , 2018. the increase in the level of borrowings was primarily due to the match funding of purchases of investment securities in order to lock in the yield with minimal interest rate risk as part of the company 's asset/liability management . all of the borrowings had maturities of less than six years . total deposits decreased $ 38.8 million , as the company sought to decrease its holdings in higher costing wholesale certificates of deposit in favor of lower costing fhlb advances . other liabilities increased by $ 12.3 million primarily due to the change in value of our interest rate swaps due to decreases in the market rates of interest . total stockholders ' equity increased by $ 11.2 million to $ 139.6 million at september 30 , 2019 from $ 128.4 million at september 30 , 2018. the increase was primarily due to net income of $ 9.5 million for fiscal 2019 , combined with a $ 9.3 million increase in the unrealized appreciation in the fair market value of available-for-sale securities and interest rate swaps due to decreased market rates of interest . these increases were partially offset by dividend payments of $ 5.8 million , including $ 4.0 million related to the $ 0.45 per share special dividend paid in june 2019 , and net treasury stock repurchases , net of equity benefit plan activity , of $ 2.0 million . results of operations for the years ended september 30 , 2019 , 2018 and 2017 story_separator_special_tag margin-bottom : 0pt ; text-align : center ; font-size : 10pt '' > 68 the allowance for loan losses totaled $ 5.2 million , or 0.9 % of total loans and 38.6 % of total non-performing loans ( which included loans acquired from polonia bank at their fair value ) at september 30 , 2018 as compared to $ 4.5 million , or 0.8 % of total loans and 29.0 % of total non-performing loans at september 30 , 2017. non-interest income .

general . 2019 vs. 2018. for the fiscal year ended september 30 , 2019 , the company recognized net income of $ 9.5 million , or $ 1.07 per diluted share , as compared to net income of $ 7.1 million , or $ 0.78 per diluted share for the fiscal year ended september 30 , 2018. fiscal year 2018 results reflected the effect of a $ 1.8 million non-cash charge in the first quarter of the fiscal year related to the revaluation of the company 's deferred tax assets due to the enactment of the tax cuts and jobs act in december 2017 which significantly reduced the corporate income tax rate applicable to the company . 2018 vs. 2017. for the fiscal year ended september 30 , 2018 , the company recognized net income of $ 7.1 million , or $ 0.78 per diluted share , as compared to net income of $ 2.8 million , or $ 0.32 per diluted share for the fiscal year ended september 30 , 2017. both fiscal year periods included significant one-time charges . fiscal year 2017 results included a one-time $ 2.5 million pre-tax expense related to the acquisition of polonia bancorp which was completed as of january 1 , 2017 as well as a $ 1.9 million non-cash pre-tax charge-off associated with a large lending relationship . fiscal year 2018 results reflected the effect of a $ 1.8 million non-cash charge in the first quarter of the fiscal year discussed above . net interest income . 2019 vs. 2018. for the fiscal year ended september 30 , 2019 , net interest income increased by $ 37,000 to $ 24.8 million as compared to $ 24.7 million for the same period in fiscal 2018. the $ 9.2 million , or 26.4 % , increase in interest income , was offset by a $ 9.2 million , or 90.3 % , increase in interest paid on deposits and borrowings .

in 2019 and 2018 , one customer accounted for more than 10 % of our consolidated revenue in each year . in 2017 , there were two such customers . the carrying amount reported in the consolidated balance sheet for accounts receivable approximates fair value based on the fact that the receivables collection averaged approximately 33 days and 32 days in 2019 and 2018 , respectively . included in accounts receivable is $ 86.6 million and $ 53.6 million of factoring receivables at december 31 , 2019 and 2018 , respectively , net of allowances for bad debts of $ 0.5 million and $ 0.4 million in those years . we advance approximately 85 % to 95 % of each receivable factored and retain the story_separator_special_tag this management 's discussion and analysis of financial condition and results of operations should be read together with “ business ” in part i , item 1 of this annual report on form 10-k , as well as the consolidated financial statements and notes thereto in part ii , item 8 of this annual report on form 10-k. this discussion contains forward-looking statements as a result of many factors , including those set forth under part i , item 1a . “ risk factors ” and part i “ cautionary note regarding forward-looking statements ” of this annual report on form 10-k , and elsewhere in this report . these statements are based on current expectations and assumptions that are subject to risks and uncertainties . actual results could differ materially from those discussed . executive overview we are a leading provider of high-service truckload transportation services . our strategy is to focus on value-added , less commoditized portions of our customers ' supply chains and thereby become embedded in their business processes . we believe disciplined planning and execution of our strategy will reduce the cyclicality and seasonality of our financial results through growth in higher margin , less volatile services , which in turn will enhance sustainable long-term earnings power and return on invested capital for our stockholders . our four business segments are highway services , dedicated , managed freight , and factoring , each as described under “ reportable operating segments and service offering ” above . consistent with our strategic plan , we have been allocating capital toward dedicated , managed freight , and factoring , and away from highway services ( particularly non-dedicated , solo-driver refrigerated services ) over the past several years . the table below reflects the revenue trends in each of these segments : replace_table_token_6_th in 2019 , we battled a difficult operating environment , marked by excess industry capacity , lackluster freight volumes , intense competition from freight brokerage competitors , and higher operating costs . this challenging environment reinforced our commitment to continuing to reduce exposure to more cyclical customers and markets . our managed freight and factoring segments were solidly profitable , our dedicated segment was moderately profitable , and our highway services segment was unprofitable . within highway services , our irregular route expedited business was moderately profitable but performed below our normal expectations . however , otr operations deteriorated materially , primarily as a result of our solo-driver refrigerated operations , and generated a significant negative margin . ongoing priorities within our strategic plan include increasing capital allocation to our dedicated and managed freight segments , upgrading the legacy dedicated contracts in the covenant side of the business to the terms and level of execution of the landair dedicated business , decreasing capital allocated to highway services , and improving our operating and overhead efficiency . our consolidated financial results are summarized as follows : ● total revenue was $ 894.5 million , compared with $ 885.5 million for 2018 , and freight revenue ( which excludes revenue from fuel surcharges ) was $ 800.4 million , compared with $ 779.7 million for 2018 ; ● operating income was $ 16.0 million , compared with operating income of $ 59.0 million for 2018 ; ● net income was $ 8.5 million , or $ 0.45 per diluted share , compared with net income of $ 42.5 million , or $ 2.30 per diluted share , for 2018 ; ● with available borrowing capacity of $ 59.8 million under our credit facility as of december 31 , 2019 , we do not expect to be required to test our fixed charge covenant in the foreseeable future ; ● our equity investment in tel provided $ 7.0 million of pre-tax earnings in 2019 , compared to $ 7.7 million for 2018 ; ● since december 31 , 2018 , total indebtedness , net of cash , increased by $ 112.3 million to $ 304.6 million however , $ 60.3 million of this increase related to recording right of use operating lease liabilities under asu 842 in 2019 , which was not required in 2018 ; and ● stockholders ' equity and tangible book value at december 31 , 2019 were $ 350.1 million and $ 278.0 million , respectively . 37 outlook from a financial perspective , we expect operating cash flows and our ratio of debt to total capitalization to improve for fiscal 2020 compared with fiscal 2019. we expect these improvements to be weighted toward the second half of the year , as year-over-year comparisons in consolidated average freight revenue per total mile and margin performance in certain operations are expected to be negative for at least two quarters . from a balance sheet perspective , we expect to reduce total indebtedness , including operating lease right to use liabilities , net of cash , through a combination of net capital expenditures scheduled below normal replacement cycle , and improving operating cash flows . story_separator_special_tag operations and maintenance replace_table_token_11_th operations and maintenance increased $ 4.0 million , or 7.2 % , for the year ended december 31 , 2019 , compared with 2018. as a percentage of total revenue , operations and maintenance increased to 6.7 % of total revenue in 2019 , compared with 6.3 % in 2018. as a percentage of freight revenue , operations and maintenance increased to 7.4 % of freight revenue for 2019 , from 7.1 % in 2018. the increase in dollar amount was primarily due to the addition of the landair business and its comparatively older tractor fleet . going forward , we believe this category will fluctuate based on several factors , including expected upgrades to landair 's fleet , our continued ability to maintain a relatively young fleet in our other operating companies , accident severity and frequency , weather , and the reliability of new and untested revenue equipment models . 40 revenue equipment rentals and purchased transportation replace_table_token_12_th revenue equipment rentals and purchased transportation increased approximately $ 21.0 million , or 11.4 % , for the year ended december 31 , 2019 , compared with 2018. as a percentage of total revenue , revenue equipment rentals and purchased transportation increased to 22.9 % of total revenue for the year ended december 31 , 2019 , from 20.7 % in 2018. as a percentage of freight revenue , revenue equipment rentals and purchased transportation increased to 25.6 % of freight revenue for the year ended december 31 , 2019 , from 23.6 % in 2018. these increases were primarily the result of the acquisition of landair 's freight brokerage and tms within the managed freight segment , which added to overall purchased transportation cost but is less reliant on purchased transportation to generate revenue , compared to our legacy brokerage and logistics services . additionally , rent under operating leases increased in 2019 due to a full year of landair 's operations , which relied to a greater extent on operating leases . additionally , the percentage of the total miles run by independent contractors increased from 11.9 % for 2018 to 12.5 % for 2019. we expect revenue equipment rentals to decrease going forward as a result of our increase in acquisition of revenue equipment through financed purchases or finance leases rather than operating leases , particularly as we transition landair from operating leases to owned equipment . we expect purchased transportation to increase as we seek to grow the freight brokerage and tms within the managed freight segment . in addition , if fuel prices increase , it would result in a further increase in what we pay third party carriers and independent contractors . however , this expense category will fluctuate with the number and percentage of loads hauled by independent contractors , loads handled by managed freight , and tractors , trailers , and other assets financed with operating leases . in addition , factors such as the cost to obtain third party transportation services and the amount of fuel surcharge revenue passed through to the third party carriers and independent contractors will affect this expense category . if industry-wide trucking capacity were to tighten in relation to freight demand , we may need to increase the amounts we pay to third-party transportation providers and independent contractors , which could increase this expense category on an absolute basis and as a percentage of freight revenue absent an offsetting increase in revenue . we continue to actively recruit independent contractors and , if we are successful , we would expect this line item to increase as a percentage of revenue . operating taxes and licenses replace_table_token_13_th operating taxes and licenses increased approximately $ 1.2 million , or 10.1 % , for the year ended december 31 , 2019 , compared with 2018. as a percentage of total revenue , operating taxes and licenses increased slightly to 1.5 % of total revenue for the year ended december 31 , 2019 , from 1.3 % in 2018. as a percentage of freight revenue , operating taxes and licenses increased slightly to 1.6 % of freight revenue for the year ended december 31 , 2019 , from 1.5 % in 2018. the increase in operating taxes and licenses was not significant as either a percentage of total revenue or freight revenue for the year ended december 31 , 2019. insurance and claims replace_table_token_14_th insurance and claims , consisting primarily of premiums and deductible amounts for liability , physical damage , and cargo damage insurance and claims , increased approximately $ 4.4 million , or 10.1 % , for the year ended december 31 , 2019 , compared to 2018. as a percentage of total revenue , insurance and claims increased to 5.3 % of total revenue for the year ended december 31 , 2019 , from 4.9 % in 2018. as a percentage of freight revenue , insurance and claims increased to 6.0 % of freight revenue for the years ended december 31 , 2019 , compared to 5.6 % in 2018. insurance and claims per mile cost increased to 14.3 cents per mile for 2019 from 13.3 cents per mile in 2018. the per mile increase is primarily the result of the inflation in overall expected cost per claim , development on prior period claims during the twelve months ended december 31 , 2019 , and increased frequency of higher severity incidents compared to 2018 . 41 our auto liability ( personal injury and property damage ) , cargo , and general liability insurance programs include significant self-insured retention amounts . we are also self-insured for physical damage to our equipment . because of these significant self-insured exposures , insurance and claims expense may fluctuate significantly from period-to-period . any increase in frequency or severity of claims , or any increases to then-existing reserves , could adversely affect our financial condition and results of operations . we periodically evaluate strategies to efficiently reduce our insurance and claims expense .

results of consolidated operations our management 's discussion and analysis of financial condition and results of operations included in this document 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 document 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 december 31 , 2018. the following table sets forth total revenue and freight revenue ( total revenue less fuel surcharge revenue ) for the periods indicated : revenue replace_table_token_7_th for 2019 , total revenue increased $ 9.1 million , or 1.0 % , to $ 894.5 million from $ 885.5 million in 2018. freight revenue increased $ 20.7 million or 2.7 % , to $ 800.4 million for 2019 , from $ 779.7 million in 2018 , while fuel surcharge revenue decreased $ 11.6 million year-over-year . the increase in freight revenue resulted from a $ 77.5 million , $ 32.5 , and $ 4.1 million increase in freight revenues from our dedicated , managed freight , and factoring segments , respectively , partially offset by a $ 93.4 million decrease in freight revenues from our highway services segment . the increase in 2019 dedicated revenue relates to a 511 ( or 40.9 % ) average tractor increase partially offset by a decrease in average freight revenue per tractor per week of 3.3 % compared to 2018. landair contributed $ 68.2 million of freight revenue to dedicated operations for the full year in 2019 , compared to $ 28.9 million in approximately six months of post-acquisition operations in 2018. the increase in average tractors was attributable to the full year of landair 's operations plus a re-allocation of tractors from highway services to dedicated .

” you should read the following discussion and analysis together with our consolidated financial statements and the notes to those statements included elsewhere in this annual report on form 10-k. due to the spin-off on may 30 , 2014 of our accommodations business into a stand-alone , publicly traded corporation ( civeo corporation , or civeo ) through a tax-free distribution of the accommodations business to the company 's shareholders ( the spin-off ) , and the sale of our tubular services business on september 6 , 2013 , both of which are reported as discontinued operations , our management believes that income from continuing operations is more representative of the company 's current business environment and focus . the terms “ earnings ” and “ loss ” as used in this “ management 's discussion and analysis of financial condition and results of operations ” refer to income ( loss ) from continuing operations . macroeconomic environment with the completion of the spin-off , we are now a technology-focused , pure-play energy services company . we provide a broad range of products and services to the oil and gas industry through our offshore products and well site services business segments . demand for our products and services is cyclical and substantially dependent upon activity levels in the oil and gas industry , particularly our customers ' willingness to invest capital in the exploration for and development of oil and natural gas . our customers ' capital spending programs are generally based on their cash flows and their outlook for near-term and long-term commodity prices , economic growth , commodity demand and estimates of resource production . as a result , demand for our products and services is largely sensitive to expected commodity prices , principally related to crude oil and natural gas . in the past few years , crude oil prices have been volatile due to global economic uncertainties as well as inadequate regional well site transportation infrastructure . although this price volatility moderated in 2013 and for the first several months of 2014 , significant downward crude oil price volatility began early in the fourth quarter of 2014 and has continued into 2016. prices dropped precipitously in the fourth quarter of 2014 and into 2015 , with a partial recovery during the second quarter of 2015 only to be offset by a decline in prices again in the second half of 2015 which continued into the first quarter of 2016. the material decrease in crude oil prices over this period can primarily be attributed to high levels of global crude oil inventories due to significant production growth in the u.s. shale plays , strengthening of the u.s. dollar relative to other foreign currencies , and the organization of petroleum exporting companies ( opec ) increasing its production . opec has demonstrated an unwillingness to cut its production as it has done in previous years , in an effort to protect market share . these production increases have been offset somewhat by moderate increases in global oil demand . the combination of these factors caused a global supply and demand imbalance for oil and natural gas which , along with concerns regarding the growth outlook in china and the anticipation of potential supply increases related to the lifting of sanctions against iran , resulted in materially lower crude oil prices in 2015 and to date in 2016. the average price of west texas intermediate ( wti ) crude oil decreased from an average price of $ 73 per barrel in the fourth quarter of 2014 to an average of $ 49 per barrel in 2015. these data points compare to an average price of $ 93 per barrel in 2014. the average price of intercontinental exchange brent ( brent ) crude decreased from an average price of $ 76 per barrel in the fourth quarter of 2014 to an average of $ 52 per barrel in 2015. these data points compare to an average price of $ 99 per barrel in 2014. as of february 18 , 2016 , wti crude traded at approximately $ 31 per barrel while brent crude traded at approximately $ 34 per barrel . the magnitude of the supply/demand imbalance has created a market concern that crude oil prices could decline further or remain at their currently low level for the foreseeable future , with the current twelve-month forward strip price for wti and brent crude each averaging $ 37 per barrel . the current and expected price for wti crude will continue to influence our customers ' spending in u.s. shale play developments , such as the permian , bakken , niobrara , and eagle ford basins . spending in these regions will influence the overall drilling and completion activity in the area and , therefore , the activity of our well site services segment . the price for brent crude will influence our customers ' spending related to global offshore drilling and development and , thus , the activity of our offshore products segment . -40- given the historical volatility of crude prices , there remains a high degree of risk that prices could deteriorate further due to high levels of domestic and opec crude oil production , slowing growth rates in various global regions and or the potential for ongoing supply/demand imbalances . conversely , if the global supply of oil were to decrease due to reduced capital investment by our customers or government instability in a major oil-producing nation and energy demand were to continue to increase in the u.s. and countries such as china and india , a recovery in wti and brent crude prices could occur . in any event , crude oil price improvements will depend upon a rebalancing of global supply and demand , the timing of which is difficult to predict . if commodity prices do not improve or decline further , demand for our products and services could further decline . story_separator_special_tag related to non-deductible items . excluding these significant charges in 2015 , net income from continuing operations would have been $ 43.1 million , or $ 0.84 per diluted share . these results compare to net income from continuing operations attributable to the company of $ 127.2 million , or $ 2.35 per diluted share , reported for the year ended december 31 , 2014 , including a loss on extinguishment of debt of $ 100.4 million , or $ 1.21 per diluted share after-tax , and $ 11.2 million , or $ 0.14 per diluted share after-tax , of transaction costs included in “ other operating expense ” and sg & a expenses primarily related to the spin-off . excluding these significant charges in 2014 , net income from continuing operations would have been $ 199.6 million , or $ 3.69 per diluted share . revenues . consolidated revenues decreased $ 719.6 million , or 40 % , in 2015 compared to 2014. our well site services segment revenues decreased $ 482.1 million , or 56 % , in 2015 compared to 2014 due to decreases in both completion services and drilling services revenues . our completion services revenues decreased $ 348.8 million , or 53 % , in 2015 compared to 2014 , primarily due to a 38 % decrease in the number of service tickets completed as a result of decreased activity in the u.s. shale basins and a 25 % decrease in our revenue per completion services job due to pricing pressure from our customers and competitors . our drilling services revenues decreased $ 133.3 million , or 66 % , in 2015 compared to 2014 primarily as a result of significantly decreased utilization of our drilling rigs from an average of 87 % during 2014 to an average of 33 % in 2015 primarily due to the weak commodity price environment . -44- our offshore products segment revenues decreased $ 237.5 million , or 25 % , in 2015 compared to 2014. this decrease was primarily the result of lower contributions from essentially all product and service lines , especially drilling products and shorter cycle businesses such as elastomer products and valves , coupled with reduced service activities and a backlog that has trended lower during 2015. cost of sales and service . our consolidated cost of sales decreased $ 420.2 million , or 35 % , in 2015 compared to 2014 as a result of decreased cost of sales at our well site services and offshore products segments of $ 250.6 million , or 46 % , and $ 169.6 million , or 26 % , respectively . with cost of sales and service decreasing at a slower rate than our revenues , consolidated gross margin as a percentage of revenues decreased from 34 % in 2014 to 29 % in 2015 primarily due to lower margins realized in our well site services segment in 2015. our well site services segment cost of sales decreased $ 250.6 million , or 46 % , in 2015 compared to 2014 as a result of a $ 165.5 million , or 41 % , decrease in completion services cost of sales and a $ 85.1 million , or 60 % , decrease in drilling services cost of sales . these decreases in cost of sales , which are strongly correlated to the revenue decreases in these businesses , reflect cost reduction measures implemented in response to the material decrease in revenues caused by industry activity declines . our well site services segment gross margin as a percentage of revenues decreased from 37 % in 2014 to 22 % in 2015. our completion services gross margin as a percentage of revenues decreased from 39 % in 2014 to 23 % in 2015 primarily due to the decline in revenues . our drilling services gross margin as a percentage of revenues decreased from 30 % in 2014 to 17 % in 2015 primarily due to decreased rig utilization and cost absorption . our offshore products segment cost of sales decreased $ 169.6 million , or 26 % , in 2015 compared to 2014 in correlation with the decrease in revenues . gross margin as a percentage of revenues remained generally constant ( 31 % in 2014 compared to 32 % in 2015 ) . the improvement in gross margin year-over-year is due to strong project execution on several jobs combined with favorable cost adjustments ( including favorable percentage-of-completion adjustments ) as we have been able to lower our overall cost structure . selling , general and administrative expenses . selling , general and administrative ( sg & a ) expense decreased $ 36.8 million , or 22 % , in 2015 compared to 2014 largely due to decreased compensation including short-term incentive compensation , wages and benefits and stock compensation expense coupled with a decrease in commissions and bad debt expense . depreciation and amortization . depreciation and amortization expense increased $ 6.5 million , or 5 % , in 2015 compared to 2014 due to capital expenditures made during the previous twelve months across all segments of our company , the $ 3.4 million leasehold restoration provision for one of our offshore products u.k. facilities , along with increased depreciation and amortization expense related to the mmc acquisition which closed at the beginning of the first quarter of 2015. other operating ( income ) expense . other operating ( income ) expense moved from other operating expense of $ 9.3 million in 2014 to other operating income of $ 4.6 million in 2015 primarily due to transaction costs incurred in 2014 in connection with the spin-off totaling $ 11.0 million and $ 3.7 million of foreign exchange gains in 2015. operating income . consolidated operating income decreased $ 255.2 million , or 82 % , in 2015 compared to 2014 primarily as a result of decreases in operating income from our well site services segment of $ 222.5 million resulting from decreased revenues caused by industry activity declines , and a $ 52.4 million decrease in offshore products operating income .

overview demand for the products and services of our offshore products segment is tied primarily to the long-term outlook for commodity prices . demand for our well site services segment responds to shorter-term movements in oil and natural gas prices and , specifically , changes in north american drilling and completion activity given the spot contract nature of our operations coupled with shorter cycles between drilling a well and bringing it on production . other factors that can affect our business and financial results include the general global economic environment and regulatory changes in the u.s. and international markets . our offshore products segment provides highly engineered products and services for offshore oil and natural gas production systems and facilities , as well as certain products and services to the offshore drilling market . sales of our offshore products and services depend primarily upon capital spending for offshore production systems and subsea pipelines , repairs and , to a lesser extent , upgrades of existing offshore drilling rigs and construction of new offshore drilling rigs and vessels . in this segment , we are particularly influenced by global deepwater drilling and production spending , which are driven largely by our customers ' longer-term outlook for crude oil and natural gas prices . deepwater oil and gas development projects typically involve significant capital investments and multi-year development plans . such projects are generally undertaken by larger exploration , field development and production companies using relatively conservative crude oil and natural gas pricing assumptions . we believe some of these deepwater projects are , therefore , less susceptible to short-term fluctuations in the price of crude oil and natural gas given longer lead times associated with field development .

additionally , on october 8 , 2015 , our board of directors amended , effective as of the acquisition of logentries , the 2015 plan to reserve an additional 1,500,000 shares of our story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere 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 and beliefs . our actual results could differ materially from those contained in or implied by any forward-looking statements . factors that could cause or contribute to these differences include those under “risk factors” included in part i , item 1a or in other parts of this annual report on form 10-k. overview rapid7 is a leading provider of analytics for security and it operations that enable organizations to implement an active , analytics-driven approach to cyber security and it operations . our data and analytics platform was purpose-built for today 's increasingly complex and chaotic it environment . we make it simple to collect and unify operational data from across the entire it infrastructure , and our advanced analytics unlock the information required to securely operate , manage and develop today 's sophisticated applications and services . we combine our extensive experience in collecting disparate data , deep insight into attacker behaviors and techniques and our purpose-driven analytics to make sense of the wealth of data available to organizations about their it environments and users . our powerful and proprietary analytics enable organizations to contextualize and prioritize the threats facing their physical , virtual and cloud assets , including those posed by the behaviors of their users . leveraging our it data and analytics platform , our solutions enable organizations to strategically and dynamically manage their cyber security exposure and manage it operations . our solutions empower organizations to prevent attacks by providing visibility into vulnerabilities , and allow them to rapidly detect compromises , respond to breaches and correct the underlying causes of attacks . by providing a unified it and security platform , with automated workflow , we enable it and security to work together more effectively to develop , operate and secure their environment . for example , our platform and proprietary technologies were developed to help customers identify the weaknesses and exposures in their environment and are designed to enable them to detect and respond to breaches immediately . we help them troubleshoot performance issues across their infrastructure , applications and endpoints . our platform approach enables organizations to collect data once and use it for ongoing unlimited use and access to solve the specific problems their organization faces , reducing the costs and overhead associated with relying on point solutions , and enabling workflow between organizations that must work together to resolve issues , reduce risk and increase resiliency . we market and sell our products and professional services to global organizations of all sizes , including mid-market businesses , enterprises , non-profits , educational institutions and government agencies . our customers span a wide variety of industries such as technology , energy , financial services , healthcare and life sciences , manufacturing , media and entertainment , retail , education , real estate , transportation , government and professional services . as of december 31 , 2016 , we had over 6,200 customers in 117 countries , including 38 % of the fortune 1000. our revenue was not concentrated with any individual customer or group of customers , and no customer represented more than 2 % of our revenue in 2016 , 2015 or 2014. we sell our products and services through direct inside and field sales team and indirect channel partner relationships . our global sales teams focus on both new customer acquisition and up-selling and cross-selling additional offerings to our existing customers . our sales teams are organized by geography , consisting of the americas ; europe , the middle east and africa , or emea ; and asia pacific , or apac , as well as by target organization size . our inside sales team focuses on small and middle-market transactions , while larger or more complex transactions are generally handled by our globally distributed direct field sales teams . our highly technical sales engineers help define customer use cases , manage solution evaluations and train channel partners . recent developments in november 2016 , we announced the beta launch of insightops , a new it operations solution designed to centralize machine data across organizations ' infrastructures . this solution is designed to provide it teams with 49 comprehensive operational awareness by pairing endpoint visibility and log analytics . with insightops , we believe that it professionals will have the ability to easily search and ask questions of their data to gain insights regarding core issues related to their it environments faster , which , we believe , will ultimately improve uptime and business productivity . insightops is currently being tested in a beta program , and we anticipate it will be ready for sale during the first half of 2017. in november 2016 , we announced the appointment of jeff kalowski as our new chief financial officer , effective january 9 , 2017. he replaced steven gatoff , who joined us at the beginning of 2013 , announced his planned departure in august 2016 and formally transitioned from our company in january 2017. in october 2016 , we announced that andrew burton , who was formerly our senior vice president of logentries , was promoted to the position of chief operating officer . our business model we have three offerings : ( 1 ) threat exposure management , which includes our nexpose , metasploit and appspider products , ( 2 ) incident detection and response , which includes our insightidr , managed detection and response ( formerly known as “analytic response” ) and logentries products as well as our incident response services and ( 3 ) security advisory services . story_separator_special_tag we define a customer as any entity that has ( 1 ) an active rapid7 contract or a contract that expired within 90 days or less of the applicable measurement date ; and for logentries products , those customers with a contract value equal to or greater than $ 2,400 per year , and ( 2 ) purchased rapid7 professional services within the 12 months preceding the applicable measurement date . non-gaap financial results to supplement our consolidated financial statements , which are prepared and presented in accordance with generally accepted accounting principles in the united states , or gaap , we provide investors with certain non-gaap financial measures , including non-gaap gross profit , non-gaap operating loss , non-gaap net loss , and non-gaap net loss per share , which we collectively refer to as non-gaap financial measures . these non-gaap financial measures exclude all or a combination of the following ( as reflected in the following reconciliation tables ) : stock-based compensation expense , amortization of acquired intangible assets , acquisition-related expenses and impairment of long-lived assets . 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 , and use certain non-gaap financial measures as performance measures under our executive bonus plan . 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 metrics used by our management in its financial and operational decision making . while our non-gaap financial measures are an important tool for financial and operational decision making and for evaluating our own operating results over different periods of time , you should review the reconciliation of our non-gaap financial measures to the comparable gaap financial measures included below , and not rely on any single financial measure to evaluate our business . we exclude stock-based compensation expense because of varying available valuation methodologies , subjective assumptions and the variety of equity instruments that can impact our non-cash expense . we believe that providing non-gaap financial measures that exclude stock-based compensation expense allow for more meaningful comparisons between our operating results from period to period . we believe that excluding the impact of amortization of intangible assets allows for more meaningful comparisons between operating results from period to period as the intangibles are valued at the time of acquisition and are amortized over several years after the acquisition . we also exclude the impact of costs directly related to acquisitions and asset impairments as these costs are unrelated to the current operations and neither comparable to the prior period nor predictive of future results , which we believe allows for a more meaningful comparison between the operating results from period to period . accordingly , we believe that excluding these expenses provides investors and management with greater visibility into the underlying performance of our business operations , facilitates comparison of our results with other periods and may also facilitate comparison with the results of other companies in our industry . our non-gaap financial measures may not provide information that is directly comparable to that provided by other companies in our industry , as other companies in our industry may calculate non-gaap financial results differently , particularly related to non-recurring , unusual items . in addition , 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 other companies 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 . 52 the following tables reconcile gaap gross profit to non-gaap gross profit for the years ended 2016 , 2015 and 2014 : replace_table_token_8_th replace_table_token_9_th replace_table_token_10_th the following table reconciles gaap loss from operations to non-gaap loss from operations for the years ended 2016 , 2015 and 2014 : replace_table_token_11_th 53 the following table reconciles gaap net loss attributable to common stockholders to non-gaap net loss for the years ended 2016 , 2015 and 2014 : replace_table_token_12_th components of results of operations revenue we generate revenue primarily from selling products , maintenance and support and professional services through a variety of delivery models to meet the needs of our diverse customer base . we generally bill customers and collect payment for both our products and services up front . products we generate products revenue from the sale of ( 1 ) perpetual or term software licenses for our nexpose , metasploit and appspider products , as well as associated content subscriptions for our nexpose and metasploit products , ( 2 ) managed services for our nexpose , appspider and insightidr products and ( 3 ) cloud-based subscriptions for our insightidr , appspider and logentries products . we also generate an immaterial amount of appliance revenue that is included in our products revenue and is associated with hardware sold as part of our nexpose product to certain customers . revenue for perpetual software licenses and related services that are sold along with the software license is deferred on our balance sheet and recognized as revenue on our consolidated statements of operations ratably over the contractual period of the maintenance and support , which is typically one to three years . maintenance and support we generate maintenance and support revenue when customers purchase or renew agreements for maintenance and support of their nexpose , metasploit and appspider software licenses . substantially all of our customers purchase an agreement for maintenance and support in connection with their purchase of a nexpose , metasploit or appspider software license .

results of operations replace_table_token_13_th ( 1 ) cost of revenue and operating expenses include stock-based compensation expense and depreciation and amortization expense as follows : replace_table_token_14_th 57 replace_table_token_15_th the following table sets forth our consolidated statements of operations data expressed as a percentage of revenue : replace_table_token_16_th 58 year ended december 31 , 2016 compared to the year ended december 31 , 2015 revenue replace_table_token_17_th the majority of our products and maintenance and support revenue and revenue associated with professional services in a multiple-element arrangement are recognized ratably over the related contractual period of maintenance and support ( typically one to three years ) and accordingly $ 87.3 million , or 55 % , of our 2016 revenue was recorded as deferred revenue on the balance sheet as of december 31 , 2015 , as compared to $ 58.2 million , or 53 % , of our 2015 revenue recorded on the balance sheet as of december 31 , 2014. the remaining $ 70.1 million of 2016 revenue was recognized from 2016 billings as compared to $ 52.3 million of 2015 revenue recognized from 2015 billings . total revenue increased by $ 46.9 million in 2016 compared to 2015 primarily due to the $ 29.1 million increase in revenue recognized from our deferred revenue balance , while the remaining increase of $ 17.8 million was recognized in same year in which it was billed . the $ 17.8 million increase is due to increased purchases of additional products and services in the amount of $ 12.3 million by our existing customers and $ 5.5 million in sales to customers that were new in 2016. the increase in total revenue in 2016 was comprised of $ 38.6 million generated from sales in north america and $ 8.3 million generated from sales from the rest of the world .

the three reportable segments are power and electromechanical , energy and story_separator_special_tag important note about forward-looking statements the following discussion and analysis should be read in conjunction with our audited consolidated financial statements as of december 31 , 2016 and notes thereto included in this document and our unaudited 10-q filings for the first three quarters of 2016 and the notes thereto . in addition to historical information , the following discussion and other parts of this form 10-k contain forward-looking information that involves risks and uncertainties . our actual results could differ materially from those anticipated by such forward-looking information due to factors discussed elsewhere in this form 10-k. the statements that are not historical constitute ‘ ‘ forward-looking statements . '' said forward-looking statements involve risks and uncertainties that may cause the actual results , performance or achievements of the company to be materially different from any future results , performance or achievements , expressed or implied by such forward-looking statements . these forward-looking statements are identified by the use of such terms and phrases as ‘ ‘ expects , '' ‘ ‘ intends , '' ‘ ‘ goals , '' ‘ ‘ estimates , '' ‘ ‘ projects , '' ‘ ‘ plans , '' ‘ ‘ anticipates , '' ‘ ‘ should , '' ‘ ‘ future , '' ‘ ‘ believes , '' and ‘ ‘ scheduled . '' the variables , which may cause differences include , but are not limited to , the following : general economic and business conditions ; competition ; success of operating initiatives ; operating costs ; advertising and promotional efforts ; the existence or absence of adverse publicity ; changes in business strategy or development plans ; the ability to retain management ; availability , terms and deployment of capital ; business abilities and judgment of personnel ; availability of qualified personnel ; labor and employment benefit costs ; availability and costs of raw materials and supplies ; and changes in , or failure to comply with various government regulations . although the company believes that the assumptions underlying the forward-looking statements contained herein are reasonable , any of the assumptions could be inaccurate ; therefore , there can be no assurance that the forward-looking statements included in this form 10-k will prove to be accurate . in light of the significant uncertainties inherent in the forward-looking statements included herein , the inclusion of such information should not be regarded as a representation by the company or any person that the objectives and expectations of the company will be achieved . 29 overview cui global , inc. is a colorado corporation organized on april 21 , 1998. the company 's principal place of business is located at 20050 sw 112th avenue , tualatin , oregon 97062 , phone ( 503 ) 612-2300. cui global is a platform company dedicated to maximizing shareholder value through the acquisition , development and commercialization of new , innovative technologies . through its subsidiaries , cui global has built a diversified portfolio of industry leading technologies that touch many markets . critical accounting policies our financial statements and related public financial information are based on the application of accounting principles generally accepted in the united states ( ‘ ‘ gaap '' ) . gaap requires the use of estimates , assumptions , judgments and subjective interpretations of accounting principles that have an impact on the assets , liabilities , revenue , and expense amounts reported . these estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies , risk and financial condition . we believe our use of estimates and underlying accounting assumptions adhere to gaap and are consistently and conservatively applied . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances . actual results may differ materially from these estimates under different assumptions or conditions . we continue to monitor significant estimates made during the preparation of our financial statements . while all of our significant accounting policies impact the company 's financial condition and results of operations , we view certain of these policies as critical . policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates . actual results may differ from those estimates . our management believes that given current facts and circumstances , it is unlikely that applying any other reasonable judgments or estimate methodologies would have caused a material change in our results of operations , financial position or liquidity for the periods presented in this report . asset impairment the company reviews its long-lived assets including finite-lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable . in performing the review for recoverability , the company estimates the future cash flows expected to result from the use of the asset and its eventual disposition . if the sum of the expected future cash flows ( undiscounted and without interest charges ) is less than the carrying amount of the asset , an impairment loss is recognized as the excess of the carrying amount over the fair value . otherwise , an impairment loss is not recognized . management estimates the fair value and the estimated future cash flows expected . any changes in these estimates could impact whether there was impairment and the amount of the impairment . there were no impairments during the year ended december 31 , 2016. during the year ended december 31 , 2015 , management recorded a $ 2 thousand impairment for a patent within the power and electromechanical segment as the company chose not to continue pursuit of the related patent grants and a $ 2 thousand impairment of its capitalized website costs for its japan site after choosing to translate its u.s.-based website into japanese . story_separator_special_tag the company may use the fair value of the consideration received , the quoted market price of the stock or a contemporaneous cash sale of the common or preferred stock . each of these methods may produce a different result . management uses the method it determines most appropriately reflects the stock transaction . if a different method was used it could impact the expense and equity stock accounts . 31 revenue recognition power and electromechanical segment product revenue is recognized in the period when persuasive evidence of an arrangement with a customer exists , the products are shipped and title has transferred to the customer , the price is fixed or determinable , and collection is reasonably assured . the company sells to distributors pursuant to distribution agreements that have certain terms and conditions such as the right of return and price protection , which inhibit revenue recognition unless they can be reasonably estimated as we can not assert the price is fixed and determinable and estimate returns . for one distributor that comprises 19 % of revenue , we have such history and ability to estimate and therefore recognized revenue upon sale to the distributor and record a corresponding reserve for the estimated returns . for three other distributor arrangements that represents a combined 10 % of revenue , we do not have sufficient history to reasonably estimate price protection reserve and the right of return and accordingly defer revenue and the related costs until such time as the distributor resells the product . energy segment for production-type contracts meeting the company 's minimum threshold , revenues and related costs on the contracts , are recognized using the ‘ ‘ percentage of completion method '' of accounting in accordance with asc 605-35 , accounting for performance of construction-type and certain production type contracts ( ‘ ‘ asc 605-35 '' ) . under this method , contract revenues and related expenses are recognized over the performance period of the contract in direct proportion to the costs incurred as a percentage of total estimated costs for the entirety of the contract . costs include direct material , direct labor , subcontract labor and any allocable indirect costs . the company captures certain job costs as work progresses , including labor , material and costs not invoiced . margin adjustments are made as information pertaining to contracts changes . all un-allocable indirect costs and corporate general and administrative costs are charged to the periods as incurred . the amount of costs not invoiced is captured to ensure an estimated margin consistent with that expected at the completion of the project . in the event a loss on a contract is foreseen , the company recognizes the loss when it is determined . contract costs plus recognized profits are accumulated as deferred assets , and billings and or cash received are recorded to a deferred revenue liability account . the net of these two accounts for any individual project is presented as ‘ ‘ costs in excess of billings , '' an asset account , or ‘ ‘ billings in excess of costs , '' a liability account . production type contracts that do not qualify for use of the percentage of completion method are accounted for using the ‘ ‘ completed contract method '' of accounting in accordance with asc 605-35-25-57. under this method , contract costs are accumulated as deferred assets , and billings and or cash received is recorded to a deferred revenue liability account , during the periods of construction , but no revenues , costs , or profits are recognized in operations until the period within which completion of the contract occurs . a contract is considered complete when all costs except insignificant items have been incurred ; the equipment is operating according to specifications and has been accepted by the customer . for product sales in the energy segment , revenue is recognized in the period when persuasive evidence of an arrangement with a customer exists , the products are shipped and title has transferred to the customer , the price is fixed or determinable , and collection is reasonably assured . revenues from warranty and maintenance activities are recognized ratably over the term of the warranty and maintenance period and the unrecognized portion is recorded as deferred revenue . liquidity and capital resources general as of december 31 , 2016 , cui global held cash and cash equivalents of $ 4.6 million . operations , other intangible assets , and equipment have been funded through cash on hand during the year ended december 31 , 2016. cash used in operations there was a use of cash from operations of approximately $ 0.8 million during the year ended december 31 , 2016. this was a decrease from the use of cash from operations of approximately $ 6.4 million during the year ended december 31 , 2015 , and use of cash from operations of approximately $ 3.1 million for the year ended december 31 , 2014 . 32 the use of cash from operations in 2016 was benefited by lower accounts receivable balances in both segments at december 31 , 2016 compared to december 31 , 2015 as a result of improved collections in both segments and the transition of tectrol customers to cui-canada that delayed some payments at the end of 2015. cui-canada 's cash from operations improved significantly from 2015 while orbital gas systems north america continued to use more cash than it produces due to the cost of establishing the orbital brand in the u.s. as the business matures , this operation is expected to contribute cash but not in the short term . orbital u.k. 's cash from operations improved significantly in 2016 compared to its use of cash in operations in 2015. overall , the change in cash used in operations is primarily the result of the net loss in 2016 before non-cash expenses affected by changes in assets and liabilities .

results of operations the following tables set forth , for the periods indicated , certain financial information regarding revenue and costs by segment . replace_table_token_6_th replace_table_token_7_th 37 replace_table_token_8_th revenue replace_table_token_9_th 2016 compared to 2015 revenues in 2016 are attributable to continued sales and marketing efforts , sales through the distribution channel customers , the cui-canada related product line , and the revenues generated since the january 2015 opening of orbital gas systems , north america , inc. net revenues in 2016 were generally consistent compared to 2015 but would have been more significantly improved except for lower translated orbital u.k. operations as a result of falling foreign currency rates in the u.k. following the brexit vote . however , the lower rates did not have a significant effect on operating or net income . the power and electromechanical segment held a backlog of customer orders of approximately $ 18.1 million as of december 31 , 2016 compared to a backlog of customer orders of approximately $ 19.7 million as of december 31 , 2015. at december 31 , 2016 , the energy segment held a backlog of customer orders of approximately $ 12.1 million compared to approximately $ 12.5 million as of december 31 , 2015. in 2016 , the energy segment 's orbital gas systems , north america , inc. subsidiary completed its first full year of operations and made progress on its goals of self-sustainability with four consecutive quarters of revenue growth . the company intends to grow this product line to become a major portion of orbital 's revenue going forward .

currently , we own one commercial bank , community trust bank , inc. ( “ ctb ” ) and one trust company , community trust and investment company . through our subsidiaries , we have seventy-nine banking locations in eastern , northeastern , central , and south central kentucky , southern west virginia , and northeastern tennessee , four trust offices across kentucky , and one trust office in northeastern tennessee . at december 31 , 2018 , we had total consolidated assets of $ 4.2 billion and total consolidated deposits , including repurchase agreements , of $ 3.5 billion . total shareholders ' equity at december 31 , 2018 was $ 564.2 million . trust assets under management , which are excluded from ctbi 's total consolidated assets , at december 31 , 2018 , were $ 2.0 billion . trust assets under management include ctb 's investment portfolio totaling $ 0.6 billion . through its subsidiaries , ctbi engages in a wide range of commercial and personal banking and trust and wealth management activities , which include accepting time and demand deposits ; making secured and unsecured loans to corporations , individuals and others ; providing cash management services to corporate and individual customers ; issuing letters of credit ; renting safe deposit boxes ; and providing funds transfer services . the lending activities of ctb include making commercial , construction , mortgage , and personal loans . lease-financing , lines of credit , revolving lines of credit , term loans , and other specialized loans , including asset-based financing , are also available . our corporate subsidiaries act as trustees of personal trusts , as executors of estates , as trustees for employee benefit trusts , as paying agents for bond and stock issues , as investment agent , as depositories for securities , and as providers of full service brokerage and insurance services . for further information , see item 1 of this annual report . financial goals and performance the following table shows the primary measurements used by management to assess annual performance . the goals in the table below should not be viewed as a forecast of our performance for 2019. rather , the goals represent a range of target performance for 2019. there is no assurance that any or all of these goals will be achieved . see “ cautionary statement regarding forward looking statements . replace_table_token_18_th story_separator_special_tag 11pt ; '' > impaired loans , loans not expected to meet contractual principal and interest payments , at december 31 , 2018 totaled $ 46.4 million compared to $ 47.4 million at december 31 , 2017. included in certain loan categories of impaired loans are troubled debt restructurings that were classified as impaired . at december 31 , 2018 , ctbi had $ 31.5 million in commercial loans secured by real estate , $ 4.2 million in commercial real estate construction loans , $ 8.8 million in commercial other loans , and $ 1.9 million in real estate mortgage loans that were modified in troubled debt restructurings and or impaired . management evaluates all impaired loans for impairment and records a direct charge-off or provides specific reserves when necessary . for further information regarding nonperforming and impaired loans , see note 4 to the consolidated financial statements . ctbi generally does not offer high risk loans such as option arm products , high loan to value ratio mortgages , interest-only loans , loans with initial teaser rates , or loans with negative amortizations , and therefore , ctbi would have no significant exposure to these products . our level of foreclosed properties at $ 27.3 million at december 31 , 2018 was a decrease of $ 4.7 million from the $ 32.0 million at december 31 , 2017. sales of foreclosed properties for the year ended december 31 , 2018 totaled $ 7.7 million while new foreclosed properties totaled $ 5.5 million . at december 31 , 2018 , the book value of properties under contracts to sell was $ 3.3 million ; however , the closings had not occurred at year-end . when foreclosed properties are acquired , appraisals are obtained and the properties are booked at the current market value less expected sales costs . additionally , periodic updated appraisals are obtained on unsold foreclosed properties . when an updated appraisal reflects a market value below the current book value , a charge is booked to current earnings to reduce the property to its new market value less expected sales costs . charges to earnings in 2018 to reflect the decrease in current market values of foreclosed properties totaled $ 2.5 million . there were 63 properties reappraised during 2018. of these , 40 were written down by a total of $ 0.9 million . charges during the year ended december 31 , 2017 were $ 3.0 million . our policy for determining the frequency of periodic reviews is based upon consideration of the specific properties and the known or perceived market fluctuations in a particular market and is typically between 12 and 18 months but generally not more than 24 months . approximately ninety-three percent of our oreo properties have appraisals dated within the past 18 months . management anticipates that our foreclosed properties will remain elevated as we work through current market conditions . the appraisal aging analysis of foreclosed properties , as well as the holding period , at december 31 , 2018 is shown below : replace_table_token_21_th * regulatory approval is required and has been obtained to hold these properties beyond the initial period of 5 years . additional approval may be required to continue to hold these properties should they not be liquidated during the extension period , which is typically one year . to the extent we are not able to sell a foreclosed property in 10 years , we will be required to relinquish ownership of that property . story_separator_special_tag at the end of 2018 , available-for-sale ( “ afs ” ) securities comprised substantially all of the total investment portfolio , and the afs portfolio was approximately 105 % of equity capital . ninety-three percent of the pledge eligible portfolio was pledged . interest rate risk we consider interest rate risk one of our most significant market risks . interest rate risk is the exposure to adverse changes in net interest income due to changes in interest rates . consistency of our net interest revenue is largely dependent upon the effective management of interest rate risk . we employ a variety of measurement techniques to identify and manage our interest rate risk including the use of an earnings simulation model to analyze net interest income sensitivity to changing interest rates . the model is based on actual cash flows and repricing characteristics for on and off-balance sheet instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities . assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model . these assumptions are inherently uncertain , and as a result , the model can not precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income . actual results will differ from simulated results due to timing , magnitude , and frequency of interest rate changes as well as changes in market conditions and management strategies . ctbi 's asset/liability management committee ( alco ) , which includes executive and senior management representatives and reports to the board of directors , monitors and manages interest rate risk within board-approved policy limits . our current exposure to interest rate risks is determined by measuring the anticipated change in net interest income spread evenly over the twelve-month period . the following table shows our estimated earnings sensitivity profile as of december 31 , 2018 : change in interest rates ( basis points ) percentage change in net interest income ( 12 months ) +400 10.26 % +300 7.89 % +200 5.43 % +100 2.80 % -100 ( 2.73 ) % -200 ( 4.90 ) % the following table shows our estimated earnings sensitivity profile as of december 31 , 2017 : change in interest rates ( basis points ) percentage change in net interest income ( 12 months ) +400 7.49 % +300 5.70 % +200 3.86 % +100 1.92 % -25 ( 0.29 ) % the simulation model used the yield curve spread evenly over a twelve-month period . the measurement at december 31 , 2018 estimates that our net interest income in an up-rate environment would increase by 10.26 % at a 400 basis point change , 7.89 % increase at a 300 basis point change , 5.43 % increase at a 200 basis point change , and a 2.80 % increase at a 100 basis point change . in a down-rate environment , net interest income would decrease 2.73 % at a 100 basis point change and decrease 4.90 % at a 200 basis point change over one year . in order to reduce the exposure to interest rate fluctuations and to manage liquidity , we have developed sale procedures for several types of interest-sensitive assets . primarily all long-term , fixed rate single family residential mortgage loans underwritten according to federal home loan mortgage corporation guidelines are sold for cash upon origination or originated under terms where they could be sold . periodically , additional assets such as commercial loans are also sold . in 2018 and 2017 , $ 56.7 million and $ 59.4 million , respectively , were realized on the sale of fixed rate residential mortgages . we focus our efforts on consistent net interest revenue and net interest margin growth through each of the retail and wholesale business lines . we do not currently engage in trading activities . the preceding analysis was prepared using a rate ramp analysis which attempts to spread changes evenly over a specified time period as opposed to a rate shock which measures the impact of an immediate change . had these measurements been prepared using the rate shock method , the results would vary . our static repricing gap as of december 31 , 2018 is presented below . in the 12 month cumulative repricing gap , rate sensitive liabilities ( “ rsl ” ) exceeded rate sensitive assets ( “ rsa ” ) by $ 421.9 million . replace_table_token_24_th capital resources we continue to grow our shareholders ' equity while also providing an annual dividend yield for the year 2018 of 3.48 % to shareholders . shareholders ' equity increased 6.3 % from december 31 , 2017 to $ 564.2 million at december 31 , 2018. our primary source of capital growth is the retention of earnings . cash dividends were $ 1.38 per share for 2018 and $ 1.30 per share for 2017. we retained 58.8 % of our earnings in 2018 compared to 55.5 % in 2017. basel iii on july 2 , 2013 , the federal reserve approved final rules that substantially amended the regulatory risk-based capital rules applicable to ctbi and ctb . the fdic subsequently approved these rules . the final rules implemented the “ basel iii ” regulatory capital reforms and changes required by the dodd-frank act . the rules included new risk-based capital and leverage ratios , which were phased in from 2015 to january 2019 , and refined the definition of what constitutes “ capital ” for purposes of calculating those ratios . the minimum capital level requirements applicable to ctbi and ctb under the final rules are : ( i ) a common equity tier 1 capital ratio of 4.5 % ; ( ii ) a tier 1 capital ratio of 6 % ; ( iii ) a total capital ratio of 8 % ; and ( iv ) a tier 1 leverage ratio of 4 % for all institutions .

results of operations and financial condition we reported record earnings of $ 59.2 million , or $ 3.35 per basic share , for the year ended december 31 , 2018 compared to $ 51.5 million , or $ 2.92 per basic share , for the year ended december 31 , 2017 and $ 47.3 million , or $ 2.70 per basic share , for the year ended december 31 , 2016 . 2018 highlights ● net interest income for the year ended december 31 , 2018 increased $ 4.8 million , or 3.5 % , from december 31 , 2017 with a 1 basis point decrease in our net interest margin and a $ 114.5 million increase in average earning assets . ● provision for loan losses for the year ended december 31 , 2018 decreased $ 1.4 million , or 18.0 % , from december 31 , 2017 . ● our loan portfolio increased $ 85.7 million , or 2.7 % , from december 31 , 2017 . ● net loan charge-offs for the year ended december 31 , 2018 were $ 6.4 million , or 0.20 % of average loans annualized , compared to $ 7.3 million , or 0.24 % , experienced for the year 2017 . ● nonperforming loans at $ 22.1 million decreased $ 6.2 million , or 22.0 % , from december 31 , 2017. nonperforming assets at $ 49.4 million decreased $ 11.1 million , or 18.3 % , from december 31 , 2017 . ● deposits , including repurchase agreements , increased $ 31.0 million , or 0.9 % , from december 31 , 2017 . ● noninterest income for the year ended december 31 , 2018 was a $ 3.4 million , or 7.1 % , increase from prior year . year over year noninterest income was positively impacted by increases in deposit service charges , trust revenue , and bank owned life insurance income .

57 future minimum rental commitments of non-cancelable operating leases are approximately as follows : replace_table_token_30_th rental expense was approximately $ 170,000 and $ 174,000 during 2015 and story_separator_special_tag this management 's discussion and analysis of financial condition and results of operations , and other parts of this report contain forward-looking statements that involve risks and uncertainties . all forward-looking statements included in this report are based on information available to us on the date hereof , and we assume no obligation to update any such forward-looking statements . our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors , including those set forth in the section captioned “ risk factors ” in item 1a and elsewhere in this report . the following should be read in conjunction with our audited financial statements included elsewhere herein . the following management 's discussion and analysis of financial condition and results of operations ( “ md & a ” ) is intended to help you understand the company . the md & a is provided as a supplement to and should be read in conjunction with our financial statements and the accompanying notes . effective february 3 , 2015 , we implemented a reverse stock split of our outstanding common stock at a ratio of 1-for-2 shares . all share figures are reflected on a post-split basis . overview we develop and market advanced fingerprint biometric identification and identity verification technologies , cryptographic authentication-transaction security technologies , as well as related identity management and credentialing software solutions . we were pioneers in developing automated , finger identification technology that supplements or compliments other methods of identification and verification , such as personal inspection identification , passwords , tokens , smart cards , id cards , pki , credit card , passports , driver 's licenses , otp or other form of possession or knowledge-based credentialing . advanced bio-key® technology has been and is used to improve both the accuracy and speed of competing finger-based biometrics . in partnerships with oems , integrators , and solution providers , we provide biometric software solutions to private and public sector customers . we provide the ability to positively identify and authenticate individuals before granting access to valuable corporate resources , web portals or applications in seconds . powered by our patented vector segment technology or vst , web-key® and bsp development kits are fingerprint biometric solutions that provide interoperability with all major reader manufacturers , enabling application developers and integrators to integrate fingerprint biometrics into their applications . more recently , we have begun to distribute directly to consumers and commercial users our sideswipe and ecoid products . sideswipe and ecoid are stand-alone fingerprint readers that can be used on any laptop , tablet or other device with a usb port . we have developed what we believe is the most discriminating and effective commercially available finger-based biometric technology . our primary focus is in marketing and selling this technology into commercial logical and physical privilege entitlement & access control markets . our primary market focus includes , among others , mobile payments & credentialing , online payments and credentialing , and healthcare record and payment data security . our secondary focus includes government and educational markets . strategic outlook and recent developments historically , our largest market has been access control within highly regulated industries such as healthcare . however , we believe the mass adoption of advanced smart-phone and hand-held wireless devices have caused commercial demand for advanced user authentication to emerge as viable . the introduction of smart-phone capabilities , like mobile payments and credentialing , could effectively require biometric user authentication on mobile devices to reduce risks of identity theft , payment fraud and other forms of fraud in the mobile or cellular based world wide web . as more services and payment functionalities , such as mobile wallets and near field communication ( nfc ) , migrate to smart-phones , the value and potential risk associated with such systems should grow and drive demand and adoption of advanced user authentication technologies , including fingerprint biometrics and bio-key solutions . 16 as devices with onboard fingerprint sensors continue to deploy to consumers , we expect that third party application developers will demand the ability to authenticate users of their respective applications ( app 's ) with the onboard fingerprint biometric . we further believe that authentication will occur on the device itself for potentially low-value , and therefore low-risk , use-transactions and that user authentication for high-value transactions will migrate to the application provider 's authentication server , typically located within their supporting technology infrastructure , or cloud . we have developed our technology to enable , on-device authentication as well as network or cloud-based authentication and believe we may be the only technology vendor capable of providing this flexibility and capability . our core technology works on over 40 commercially available fingerprint readers , across both windows and linux platforms , and apple ios and android mobile operating systems . this interoperability , coupled with the ability to authentic users via the device or cloud , is unique in the industry , provides a key differentiator for us , and in our opinion , makes our technology more viable than competing technologies and expands the size of the overall market for our products . we believe there is potential for significant market growth in five key areas : ● corporate network access control , including corporate campuses , computer networks and applications ; ● consumer mobile credentialing , including mobile payments , credit and payment card programs , data and application access , and commercial loyalty programs ; ● government services and highly regulated industries including , medicare , medicaid , social security , drivers licenses , campus and school id , passports/visas ; ● direct sales of fingerprint readers to consumers and commercial customers ; and ● growth in the asia pacific region . story_separator_special_tag on november 11 , 2015 , we issued 105,000 shares ( the “ series b-1 shares ” ) of series b-1 convertible preferred stock at a purchase price of $ 100.00 per share , for gross proceeds of $ 10,500,000 , and 5,500 additional shares of series a-1 convertible preferred stock at a purchase price of $ 100.00 per share , for gross cash proceeds of $ 550,000. the series b-1 shares are convertible at any time at the option of the holder into shares of common stock at an initial conversion price of $ 0.30 per share , subject to adjustment for stock dividends , stock splits , combinations , and reclassifications of our capital stock , and subject to a “ blocker provision ” which prohibits conversion if such conversion would result in the holder being the beneficial owner of in excess of 9.99 % of our common stock . the series b-1 shares accrue dividends at the rate of 2.5 % per annum payable quarterly on april 1 , july , 1 , october 1 , and january 1 of each year payable in cash . liquidity outlook at december 31 , 2015 , our total cash and cash equivalents were approximately $ 4,321,000 , as compared to approximately $ 844,000 at december 31 , 2014. as discussed above , we have historically financed our operations through access to the capital markets by issuing secured and convertible debt securities , convertible preferred stock , common stock , and through factoring receivables . we currently require approximately $ 512,000 per month to conduct our operations , a monthly amount that we have been unable to consistently achieve through revenue generation . during 2015 , we generated approximately $ 5,261,000 of revenue , which is below our average monthly requirements . with the addition of the dividend obligations for the series a-1 and b-1 shares , our monthly amount will increase by approximately $ 67,000. with our recent fourth quarter capital raise , we believe our current cash resources are sufficient to fund our operations for at least the next twelve months . 21 if we are unable to generate sufficient revenue to fund current operations or meet our goals , we will need to obtain additional third-party financing to ( i ) conduct the sales , marketing and technical support necessary to execute our plan to substantially grow operations , increase revenue and serve a significant customer base ; and ( ii ) provide working capital . we may , therefore , need to obtain additional financing through the issuance of debt or equity securities . due to several factors , including our history of losses and limited revenue , our independent auditors have included an explanatory paragraph in their opinion related to our annual financial statements as to the substantial doubt about our ability to continue as a going concern . our long-term viability and growth will depend upon the successful commercialization of our technologies and our ability to obtain adequate financing . to the extent that we require such additional financing , no assurance can be given that any form of additional financing will be available on terms acceptable to us , that adequate financing will be obtained to meet our needs , or that such financing would not be dilutive to existing stockholders . if available financing is insufficient or unavailable or we fail to continue to generate sufficient revenue , we may be required to further reduce operating expenses , delay the expansion of operations , be unable to pursue merger or acquisition candidates , or continue as a going concern . off-balance sheet arrangements we do not have any off-balance sheet arrangements that have , or are in the opinion of management reasonably likely to have , a current or future effect on our financial condition or results of operations . critical accounting policies our financial statements are prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements requires that we 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 financial statements and the reported amounts of revenue and expenses during the reporting periods . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances . we evaluate our estimates and assumptions on an ongoing basis . our actual results may differ significantly from these estimates under different assumptions or conditions . there have been no material changes to these estimates for the periods presented in this annual report on form 10-k. we believe that of our significant accounting policies , which are described in note a of the notes to our consolidated financial statements included in this annual report on form 10-k , the following accounting policies involve a greater degree of judgment and complexity . accordingly , these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of operations . 1. revenue recognition revenues from software licensing are recognized in accordance with asc 985-605 , “ software revenue recognition . '' accordingly , revenue from software licensing is recognized when all of the following criteria are met : persuasive evidence of an arrangement exists , delivery has occurred , the fee is fixed or determinable , and collectability is probable . the company intends to enter into arrangements with end users for items which may include software license fees , and services or various combinations thereof . for each arrangement , revenues will be recognized when evidence of an agreement has been documented , the fees are fixed or determinable , collection of fees is probable , delivery of the product has occurred and no other significant obligations remain .

results of operations consolidated results of operations two year % trend replace_table_token_3_th revenues and costs of goods sold replace_table_token_4_th revenues revenue increased $ 1,255,369 or 31 % to $ 5,261,225 in 2015 as compared to $ 4,005,856 in 2014. as described more fully below , the increase was primarily due to material growth in our core business of licensing our software and new revenue stream from sales of our fingerprint readers . for the years ended december 31 , 2015 and 2014 , service revenues included approximately $ 679,000 and $ 627,000 , respectively , of recurring maintenance and support revenue , and approximately $ 252,000 and $ 863,000 , respectively , of non-recurring custom services revenue . recurring service revenue increased 8 % from 2014 to 2015 , due to the increase in bundled maintenance agreements to our expanding customer license base . non-recurring custom services decreased 71 % due to a completion of a customer project at the end of 2014 . 18 for the years ended december 31 , 2015 and 2014 , license and other revenue ( comprised of third party and bio-key hardware , and royalty ) increased approximately 72 % as a result of several contributing factors . software license revenue increased by approximately $ 957,000 or 49 % during the year ended december 31 , 2015 compared to the year ended december 31 , 2014. we continued to expand our relationship with ncr , developed new partnerships , continued to ship orders to aesynt for their continued deployment of our identification technology in their accudose® product line , and for ongoing expansion of biometric id deployments with commercial partners lexisnexis , educational biometric technology , identimetrics , and a large supplemental order from single international customer . hardware sales increased by approximately $ 841,000 ( 181 % ) , as a result of the introduction of our new low cost fingerprint readers , the establishment of our hong kong subsidiary , and expanding healthcare industry deployments .

the lease commenced on july 1 , 2015 and has an initial term of 129 months thereafter , with an option for the company to extend the lease for two additional five -year periods . the company will be responsible for payment of taxes and operating expenses for its portion of the building , in addition to an annual base rent in the initial amount of approximately $ 1.6 million , with 2.5 % annual increases . as a result of the foregoing transaction , the deferred rent balance of approximately $ 470,000 was reversed during the year ended january 31 , 2016. lease expense for office space for the years ended january 31 , 2016 , 2015 and 2014 totaled story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this annual report on form 10-k. this discussion contains forward-looking statements that reflect our plans , estimates and beliefs , and involve risks and uncertainties . our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of several factors , including those discussed in the section titled “ risk factors ” included under part i , item 1a and elsewhere in this report . see “ special note regarding forward-looking statements. ” overview we are a leader and an innovator in the high-growth category of technology-enabled services platforms that empower consumers to make healthcare saving and spending decisions . our platform provides an ecosystem where consumers can access their tax-advantaged healthcare savings , compare treatment options and pricing , evaluate and pay healthcare bills , receive personalized benefit and clinical information , earn wellness incentives , and make educated investment choices to grow their tax-advantaged healthcare savings . the core of our ecosystem is the hsa , a financial account through which consumers spend and save long-term for healthcare on a tax-advantaged basis . we are the integrated hsa platform for 25 of the 50 largest health plans in the country , a number of which are among 31 blue cross and blue shield health plans in 29 states , and over 33,000 employer clients . through our network partners , we have the potential to reach over 72 million consumers , representing approximately 39 % of the under-age 65 privately insured population in the united states . since our inception in 2002 , we have been committed to developing technology solutions that empower healthcare consumers . in 2003 , we began offering live 24/7/365 consumer support from health saving and spending experts . in 2005 , we integrated hsas with our first health plan partner , and in 2006 , we were authorized to act as an hsa custodian by the u.s. department of the treasury . in 2009 , we integrated hsas with multiple health plans of a single large employer , began delivering integrated wellness incentives through an hsa , and partnered with a private health insurance exchange as its preferred hsa partner . in 2011 , we integrated hsas , ras , and investment accounts on one website , and in 2013 , our registered investment advisor subsidiary began delivering hsa-specific investment advice online . we generate revenue primarily from three sources : service revenue ( previously referred to as account fees ) , custodial revenue ( previously referred to as custodial fees ) and interchange revenue ( previously referred to card fees ) . we generate service revenue by providing monthly account services on our platform , primarily through multi-year contracts with our network partners that are typically three to five years in duration . we generate custodial revenue from interest we earn on cash aum deposited with our fdic-insured custodial depository bank partners and with our insurance company partner , and recordkeeping fees we earn from mutual funds in which our members invest on a self-directed basis . we also generate interchange revenue from interchange fees that we earn on payments that our members make using our physical and virtual payment cards . key factors affecting our performance we believe that our performance and future success are driven by a number of factors , including those identified below . each of these factors presents both significant opportunities and significant risks to our future performance . see the section entitled “ risk factors ” included in part 1 , item 1a of this annual report on form 10-k. structural change in u.s. private health insurance substantially all of our revenue is derived from healthcare-related saving and spending by consumers in the united states , which is impacted by changes affecting the broader healthcare industry in the u.s. the healthcare industry has changed significantly in recent years , and we expect that significant changes will continue to occur that will result in increased participation in hsa plans and other consumer-centric health plans . in particular , we believe that the implementation of the affordable care act over the remainder of this decade , continued growth in healthcare costs , and related factors will spur hsa plan and hsa growth ; however , the timing and impact of these and other developments in the healthcare industry are difficult to predict . - 32 - attracting and penetrating network partners we created our business model to take advantage of the changing dynamics of the u.s. private health insurance market . our model is based on a b2b2c distribution strategy , meaning that we rely on our employer partners and health plan partners to reach potential members to increase the number of our hsa members . our success depends in large part on our ability to further penetrate our existing network partners by adding new hsa members from these partners and adding new network partners . our innovative technology platform we believe that innovations incorporated in our technology that enable consumers to make healthcare saving and spending decisions differentiate us from our competitors and drive our growth in revenue , hsa members , network partners and aum . story_separator_special_tag measuring our aum is important because our custodial revenue is determined by the applicable account yields and average daily cash aum balances . our total aum increased by $ 1.3 billion , or 56 % , from january 31 , 2015 to january 31 , 2016. our total aum increased by $ 737.3 million , or 45 % , from january 31 , 2014 to january 31 , 2015. the increase in total aum in these periods was driven by additional aum from our existing hsa members and new aum from new hsa members added during the fiscal year . in addition , during the year ended january 31 , 2016 , we acquired the rights to be the custodian of the bancorp and m & t hsa portfolios consisting of approximately $ 390.0 million and $ 63.0 million of aum , respectively , the latter of which transitioned to our platform subsequent to january 31 , 2016 . - 34 - adjusted ebitda the following table sets forth our adjusted ebitda : replace_table_token_6_th we define adjusted ebitda , which is a non-gaap financial metric , as adjusted earnings before interest , taxes , depreciation and amortization , stock-based compensation expense , and certain other non-cash statement of operations items . we believe that adjusted ebitda provides useful information to investors and analysts in understanding and evaluating our operating results in the same manner as our management and our board of directors because it reflects operating profitability before consideration of non-operating expenses and non-cash expenses , and serves as a basis for comparison against other companies in our industry . our adjusted ebitda increased by $ 15.4 million , or 61 % , from $ 25.2 million for the year ended january 31 , 2015 to $ 40.6 million for the year ended january 31 , 2016. the increase in adjusted ebitda was driven by the overall growth of our business , including a $ 9.3 million , or 55 % , increase in income from operations . our adjusted ebitda increased by $ 9.5 million , or 60 % , from $ 15.8 million for the year ended january 31 , 2014 to $ 25.2 million for the year ended january 31 , 2015. the increase in adjusted ebitda was driven by the overall growth of our business , including a $ 5.3 million , or 46 % , increase in income from operations . our use of adjusted ebitda has limitations as an analytical tool , and it should not be considered in isolation or as a substitute for analysis of our results as reported under gaap . the following table presents a reconciliation of net income , the most comparable gaap financial measure , to adjusted ebitda for each of the periods indicated : replace_table_token_7_th ( 1 ) for the years ended january 31 , 2016 , 2015 and 2014 , other consisted of interest income of $ ( 414 ) , $ ( 38 ) and $ ( 49 ) , miscellaneous taxes of $ 334 , $ 366 and $ 96 , acquisition-related costs of $ 471 , $ 0 and $ 0 , and sec registration costs of $ 105 , $ 0 and $ 0 , respectively . key components of our results of operations revenue the following table sets forth our revenue for the periods indicated : replace_table_token_8_th - 35 - we generate revenue from three primary sources : service revenue ( previously referred to as account fee revenue ) , custodial revenue ( previously referred to as custodial fee revenue ) and interchange revenue ( previously referred to as card fee revenue ) . service revenue . we earn service revenue from the fees we charge our network partners , employer clients and individual members for the administration services we provide in connection with the hsas and ras we offer . our fees are generally based on a fixed tiered structure for the duration of our agreement with the relevant customer , which is typically three to five years , and are paid to us on a monthly basis . we recognize revenue on a monthly basis as services are rendered under our written service agreements . custodial revenue . we earn custodial revenue from our aum held in trust with our fdic-insured custodial depository bank partners , our insurance company partner and our custodial investment partner . as a non-bank custodian , we deposit our cash aum with our various bank partners pursuant to contracts that ( i ) have terms up to five years , ( ii ) provide for a fixed or variable interest rate payable on the average daily cash balances deposited with the relevant bank partner , and ( iii ) have minimum and maximum required deposit balances . we earn custodial revenue on our cash aum that is based on the interest rates offered to us by these bank partners . in addition , once a member 's hsa cash balance reaches a certain threshold , the member is able to invest his or her hsa assets in mutual funds through our custodial investment partner . we receive a recordkeeping fee related to such investment aum . interchange revenue . we earn interchange revenue each time one of our members uses one of our payment cards to make a qualified purchase . this revenue is collected each time a member “ swipes ” our payment card to pay a healthcare-related expense . we recognize interchange revenue monthly based on reports received from third parties , namely , the card-issuing bank and the card processor . cost of revenue cost of revenue includes costs related to servicing member accounts , managing customer and partner relationships and processing reimbursement claims . expenditures include personnel-related costs , depreciation , amortization , stock-based compensation , common expense allocations ( such as office rent , supplies , and other overhead expenses ) , new member and participant supplies , and other operating costs related to servicing our members .

results of operations the following table sets forth our results of operations for the specified periods . the period-to-period comparisons of results are not necessarily indicative of results for future periods . replace_table_token_9_th - 38 - the following table presents the components of our results of operations for the periods indicated as a percentage of our total revenue : replace_table_token_10_th comparison of the years ended january 31 , 2016 , 2015 and 2014 service revenue the $ 15.9 million increase in service revenue from the year ended january 31 , 2015 to the year ended january 31 , 2016 was primarily due to an increase in the number of our hsa members . the $ 14.6 million increase in service revenue from the year ended january 31 , 2014 to the year ended january 31 , 2015 was also primarily due to an increase in the number of our hsa members . the number of our hsa members increased by approximately 714,000 , or 50 % , from january 31 , 2015 to january 31 , 2016 , and by approximately 459,000 , or 47 % , from january 31 , 2014 to january 31 , 2015. the growth in the number of our hsa members over the past two years was due to a combination of growth from our new and existing network partners and the acquisition of the right to be the custodian of the bancorp and m & t hsa portfolios during the year ended january 31 , 2016. service revenue per hsa member decreased by approximately 8 % from the year ended january 31 , 2015 to the year ended january 31 , 2016. our service revenue tier structure incentivizes network partners to add hsa members by charging a lower rate as additional hsa members are added . accordingly , as network partners add more hsa members , the service revenue per hsa member will continue to decrease .

our “ forward-looking ” information is based on various factors and was derived using numerous assumptions . in some cases , you can identify these “ forward-looking statements ” by words like “ may , ” “ will , ” “ should , ” “ expects , ” “ plans , ” “ anticipates , ” “ believes , ” “ estimates , ” “ predicts , ” “ intends , ” “ potential ” or “ continue ” or the negative of those words and other comparable words . you should be aware that these statements only reflect our current predictions and beliefs . these statements are subject to known and unknown risks , uncertainties and other factors , and actual events or results may differ materially . important factors that could cause our actual results to be materially different from the forward-looking statements are disclosed throughout this report , particularly under the heading “ risk factors ” in item 1a of part i of this annual report . you should review these risk factors for a more complete understanding of the risks associated with an investment in our securities . we undertake no obligation to revise or update any forward-looking statements . the following discussion and analysis should be read in conjunction with our “ selected consolidated financial data ” and consolidated financial statements and notes thereto included elsewhere in this annual report . overview 32 we are a provider of equipment , software and service solutions that support the transport , switching , aggregation and management of voice , video and data traffic on communications networks . our packet-optical transport , packet-optical switching and carrier ethernet solutions products are deployed and used , individually or as part of an integrated solution , in communications networks operated by service providers , cable operators , governments , enterprises and other network operators around the globe . we are a network specialist focused on the modernization and transition of disparate , legacy network infrastructures to converged , next-generation architectures , optimized to handle a broader mix of high-bandwidth communications services . our product portfolio consists of our packet-optical transport , packet-optical switching and carrier ethernet solutions products that enable network operators to scale capacity and increase transmission speeds , transport and efficiently allocate network traffic , and deliver services to business and consumer end users . our network solutions also include our ciena one software suite for unified network management and network planning and design , as well as a broad offering of advanced network consulting , design , implementation and support services . our customers face a challenging and rapidly changing environment that requires their networks to be robust enough to address increasing capacity needs and flexible enough to quickly adapt to emerging applications and evolving consumer and business use of communications services . our solutions seek to enable software-defined , automated , next-generation networks that better address the business challenges , infrastructure requirements and service delivery needs of our customers . by improving network productivity and automation , reducing network costs and enabling rapid deployment of differentiated service offerings , our communications networking solutions create business and operational value for our customers . our quarterly reports on form 10-q , annual reports on form 10-k and current reports on form 8-k filed with the sec are available through the sec 's website at www.sec.gov or free of charge on our website as soon as reasonably practicable after we file these documents . we routinely post the reports above , recent news and announcements , financial results and other important information about ciena on the `` investors '' page of our website at www.ciena.com . global market conditions and competitive landscape the sustained period of macroeconomic weakness and volatility in the global economy and in capital markets has resulted in heightened uncertainty and cautious customer behavior in our industry and markets . these dynamics have caused increased customer scrutiny with respect to network investment , which has resulted in protracted sales cycles , lengthier network deployments , revenue recognition delays and extended collection cycles , particularly for international network projects . broad macroeconomic weakness has previously resulted in periods of decreased demand for our products and services that have adversely affected our results of operations . we remain uncertain as to how long current macroeconomic and industry conditions will persist , the pace of any recovery , and the magnitude of the effect of these conditions on the growth of our markets and business , as well as our results of operations . we continue to encounter a highly competitive marketplace for sales of our networking solutions offering , particularly within our packet-optical transport segment . competition has intensified as we and our competitors have introduced new , high-capacity , high-speed network solutions and more aggressively sought to capture market share and displace incumbent vendors at large carrier customers . we have also encountered increased competition as we have expanded our business in emerging geographies and new markets or applications for our communications networking products . for example , we have made early progress in the sale of our products for application in submarine networks and with sales to customers in the middle east . in this competitive environment , securing new opportunities , particularly in international markets , often requires that we agree to less favorable commercial terms or pricing , financial commitments requiring collateralized performance bonds or similar instruments that place cash resources at risk , and other contractual commitments that place a disproportionate allocation of risk upon the vendor . these terms can adversely affect our result of operations . we expect the level of competition , particularly in north america , to continue and potentially increase , as chinese equipment vendors seek to gain entry into the u.s. market , and other multinational competitors seek to retain incumbent positions with large customers in the region . potential supply chain disruption in recent months , several regions of thailand have experienced severe flooding , causing significant damage to infrastructure and factories . story_separator_special_tag increased use of cash from operations primarily driven by greater working capital requirements in fiscal 2010 and 2011. in reviewing our financial results , investors should consider these and other factors included to highlight challenges to period to period comparisons . story_separator_special_tag switching - includes optical switching platforms that enable automated optical infrastructures for the delivery of a wide variety of enterprise and consumer-oriented network services . our principal products in this segment include our family of coredirector® multiservice optical switches , our 5430 reconfigurable switching system and our otn configuration for the 5410 reconfigurable switching system . these products include multiservice , multi-protocol switching systems that consolidate the functionality of an add/drop multiplexer , digital cross-connect and packet switch into a single , high-capacity intelligent switching system . these products address both the core and metro segments of communications networks and support key managed service services , ethernet/tdm private line , triple play and ip services . this segment also includes sales of operating system software and enhanced software features embedded in each of these products . revenue from this segment is included in product revenue on the consolidated statement of operations . carrier-ethernet solutions - includes our 3000 family of service delivery switches and service aggregation switches , the 5000 series of service aggregation switches , and our carrier ethernet packet configuration for the 5410 service aggregation switch . these products support the access and aggregation tiers of communications networks and have principally been deployed to support wireless backhaul infrastructures and business data services . employing sophisticated carrier ethernet switching technology , these products deliver quality of service capabilities , virtual local area networking and switching functions , and carrier-grade operations , administration , and maintenance features . this segment includes the legacy metro ethernet routing switch ( mers ) product line from the men business , and our legacy broadband products , including our cnx-5 broadband dsl system ( cnx-5 ) , that transitions legacy voice networks to support internet-based ( ip ) telephony , video services and dsl . this segment also includes sales of operating system software and enhanced software features embedded in each of these products . revenue from this segment is included in product revenue on the consolidated statement of operations . software and services - includes the ciena one software suite , including onecontrol , our integrated network and service management software designed to automate and simplify network management , operation and service delivery . these software solutions can track individual services across multiple product suites , facilitating planned network maintenance , outage detection and identification of customers or services affected by network troubles . in addition to ciena one , this segment includes our on-center® network & service management suite , and the omea and preside platforms from the men business . this segment also includes a broad range of consulting and support services , including installation and deployment , maintenance support , consulting , network design and training activities . except for revenue from the software portion of this segment , which is included in product revenue , revenue from this segment is included in services revenue on the consolidated statement of operations . 36 fiscal 2010 compared to fiscal 2011 revenue the table below ( in thousands , except percentage data ) sets forth the changes in our operating segment revenue for the periods indicated : replace_table_token_3_th _ * denotes % of total revenue * * denotes % change from 2010 to 2011 packet-optical transport revenue increased reflecting a $ 377.8 million increase in sales of our 6500 packet-optical platform , largely driven by service provider demand for high-capacity , optical transport , including coherent 40g and 100g network infrastructures . packet-optical transport revenue also benefited from sales increases of $ 23.4 million in 4200 advanced services platform , $ 19.9 million in 6100 multiservice optical platform , $ 15.9 million in 5100/5200 advanced services platform , and $ 10.2 million in cpl . these increases were partially offset by decreases of $ 25.6 million in corestream® agility optical transport system and $ 5.1 million in legacy transport products . packet-optical switching revenue increased reflecting a $ 21.3 million increase in sales of our 5430 reconfigurable switching system and a $ 14.1 million increase in sales of our coredirector® multiservice optical switches . packet-optical switching revenue has historically reflected sales of our coredirector platform , which has a concentrated customer base . our packet-optical switching segment is in the midst of a platform transition to our next-generation 5430 reconfigurable switching system . as a result of these factors , revenue for this segment can fluctuate considerably depending upon individual customer purchasing decisions and the level of initial deployments with customers . carrier-ethernet solutions revenue decreased reflecting a $ 51.6 million decrease in sales of our 3000 and 5000 families of service delivery switches and service aggregation switches and an $ 8.7 million decrease in sales of our legacy metro ethernet and broadband products . carrier ethernet service delivery revenue benefited from $ 9.1 million in initial revenue from the introduction of the 5410 service aggregation switch to support wireless backhaul , ethernet business services and residential broadband applications . revenue for this segment remains subject to fluctuation due to customer concentration and the timing of customer purchasing and deployment cycles . we expect segment results to be dependent upon further adoption of these products to support business ethernet service applications and the level of customer adoption of our high-capacity , carrier ethernet configuration for our 5410 service aggregation switch to support wireless backhaul , ethernet business services and residential broadband applications . software and services revenue increased reflecting a $ 66.1 million increase in maintenance support revenue and a $ 42.0 million increase in installation , deployment and consulting services . revenue from sales to customers outside of the united states is reflected as international in the geographic distribution of revenue below .

financial results revenue for the fourth quarter of fiscal 2011 was $ 455.5 million , representing a sequential increase of 4.6 % from $ 435.3 million in the third quarter of fiscal 2011 . revenue-related details reflecting sequential changes from the third quarter of fiscal 2011 include : product revenue for the fourth quarter of fiscal 2011 increased by $ 18.0 million , primarily reflecting an increase of $ 29.6 million in packet-optical transport and a decrease of $ 11.6 million in sales of carrier-ethernet solutions . service revenue for the fourth quarter of fiscal 2011 increased by $ 2.1 million . revenue from the united states for the fourth quarter of fiscal 2011 was $ 252.2 million , an increase from $ 227.5 million in the third quarter of fiscal 2011 . international revenue for the fourth quarter of fiscal 2011 was $ 203.3 million , a decrease from $ 207.8 million in the third quarter of fiscal 2011 . as a percentage of revenue , international revenue was 44.6 % during the fourth quarter of fiscal 2011 , a decrease from 47.7 % during the third quarter of fiscal 2011 . for the fourth quarter of fiscal 2011 , one customer accounted for greater than 10 % of revenue , representing 14.9 % of total revenue . this compares to one customer that accounted for 17.2 % of total revenue in the third quarter of fiscal 2011 . gross margin for the fourth quarter of fiscal 2011 was 41.7 % , a decrease from 42.5 % in the third quarter of fiscal 2011 . gross margin for the fourth quarter of fiscal 2011 was adversely affected by lower services margin .

reported net income for the year ended december 31 , 2017 includes a charge of $ 13.6 million to income tax expense attributable to the remeasurement of the company 's deferred tax assets and deferred tax liabilities due to the recently enacted federal tax legislation that reduces the company 's future federal corporate tax rate . highlights of the company 's performance in 2017 include the following : total assets were $ 7.86 billion at december 31 , 2017 , an increase of $ 964.2 million , or 14.0 % , from december 31 , 2016. organic growth in loans amounted to $ 941.0 million for 2017 , or 20.3 % of december 31 , 2016 loans excluding purchased loan pools and covered loans . total deposits were $ 6.63 billion at december 31 , 2017 , an increase of $ 1.05 billion , or 18.8 % , from december 31 , 2016. non-interest bearing demand deposits grew $ 203.8 million , or 12.9 % , during 2017 to end the year at 26.8 % of total deposits . total revenue increased 12.1 % to $ 364.6 million . the company 's net interest margin decreased 4 basis point to 3.95 % in 2017 , from 3.99 % in 2016. this decrease was primarily attributable to higher funding costs even though yields on substantially all earning asset classes increased . deposit costs , the company 's largest funding expense , increased from 0.24 % in 2016 to 0.34 % in 2017. non-deposit funding yields decreased from 2.26 % in 2016 to 2.11 % in 2017. net income from retail mortgage , warehouse lending , sba and premium finance lines of business increased 44.0 % to $ 26.4 million , compared with $ 18.3 million in 2016. total non-accrual loans , decreased approximately $ 11.5 million , or 27.9 % , to $ 29.6 million during 2017. non-accrual loans , excluding purchased loans , decreased approximately $ 3.9 million , or 21.6 % , to $ 14.2 million during 2017. legacy oreo ( excluding purchased oreo and oreo sourced from purchased loans ) decreased from $ 10.9 million at december 31 , 2016 to $ 8.5 million at december 31 , 2017. non-performing assets to total assets continued to improve during 2017 , decreasing from 0.94 % at december 31 , 2016 to 0.68 % at december 31 , 2016. net charge-offs for 2017 remained low at 0.13 % of average total legacy loans , compared with 0.11 % for 2016. net charge-offs for 2017 remained low at 0.12 % of average total loans , compared with 0.03 % for 2016. tangible common equity to tangible assets increased from 7.46 % at december 31 , 2016 to 8.62 % at december 31 , 2017. tangible common book value per share increased 23.9 % from $ 14.42 at december 31 , 2016 to $ 17.86 at december 31 , 2017 . 36 critical accounting policies and estimates ameris has established certain accounting and financial reporting policies to govern the application of accounting principles generally accepted in the united states of america ( “ gaap ” ) in the preparation of its financial statements . our significant accounting policies are described in note 1 to the consolidated financial statements . certain accounting policies involve significant judgments and assumptions by management which have a material impact on the carrying value of certain assets and liabilities ; management considers these accounting policies to be critical accounting policies . the judgments and assumptions used by management are based on historical experience and other factors which are believed to be reasonable under the circumstances . because of the nature of the judgments and assumptions made by management , actual results could differ from the judgments and estimates adopted by management which could have a material impact on the carrying values of assets and liabilities and the results of our operations . we believe the following accounting policies applied by ameris represent critical accounting policies . allowance for loan losses we believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of our consolidated financial statements . the allowance for loan losses represents management 's estimate of probable incurred losses in the company 's loan portfolio . calculation of the allowance for loan losses represents a critical accounting estimate due to the significant judgment , assumptions and estimates related to the amount and timing of estimated losses , consideration of subjective environmental factors and the amount and timing of cash flows related to impaired loans . management believes that the allowance for loan losses is adequate . while management uses available information to recognize losses on loans , future additions to the allowance for loan losses may be necessary based on changes in economic conditions . in addition , various regulatory agencies , as an integral part of their examination processes , periodically review the company 's allowance for loan losses . such agencies may require the company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination . considering current information and events regarding a borrower 's ability to repay its obligations , management considers a loan to be impaired when the ultimate collectability of all amounts due , according to the contractual terms of the loan agreement , is in doubt . when a loan is considered to be impaired , the amount of impairment is measured based on the present value of expected future cash flows discounted at the loan 's effective interest rate or if the loan is collateral-dependent , the fair value of the collateral is used to determine the amount of impairment . impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses . subsequent recoveries are credited to the allowance for loan losses . cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement . story_separator_special_tag income taxes as required by gaap , we use the asset and liability method of accounting for deferred income taxes and provide deferred income taxes for all significant income tax temporary differences . see note 16 , “ income taxes , ” in the notes to consolidated financial statements for additional details . as part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate . this process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items , such as the provision for loan losses and gains on fdic-assisted transactions , for tax and financial reporting purposes . these differences result in deferred tax assets and liabilities that are included in our consolidated balance sheet . we must also assess the likelihood that our deferred tax assets will be recovered from future taxable income , and to the extent we believe that recovery is not likely , we must establish a valuation allowance . significant management judgment is required in determining our provision for income taxes , our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets . to the extent we establish a valuation allowance or adjust this allowance in a period , we must include an expense within the tax provisions in the statement of income . long-lived assets , including intangibles intangible assets consist of goodwill and core deposit intangibles . goodwill represents the excess purchase price over the fair value of net assets acquired in business acquisitions . core deposit intangibles represent premiums paid for deposits acquired via 38 acquisition and are being amortized over their estimated useful lives , typically five to ten years . net income/ ( loss ) and earnings per share the company 's net income during 2017 was $ 73.5 million , or $ 1.98 per diluted share , compared with $ 72.1 million , or $ 2.08 per diluted share , in 2016 , and $ 40.8 million , or $ 1.27 per diluted share , in 2015. for the fourth quarter of 2017 , the company recorded net income of $ 9.2 million , or $ 0.24 per diluted share , compared with $ 18.2 million , or $ 0.52 per diluted share , for the quarter ended december 31 , 2016 , and $ 14.1 million , or $ 0.43 per diluted share , for the quarter ended december 31 , 2015. earning assets and liabilities average earning assets were approximately $ 6.76 billion in 2017 , compared with approximately $ 5.60 billion in 2015. the earning asset and interest-bearing liability mix is regularly monitored to maximize the net interest margin and , therefore , increase return on assets and shareholders ' equity . the following statistical information should be read in conjunction with the remainder of “ management 's discussion and analysis of financial condition and results of operation ” and the consolidated financial statements and related notes included elsewhere in this annual report and in the documents incorporated herein by reference . 39 the following tables set forth the amount of average balance , interest income or interest expense , and average interest rate for each category of interest-earning assets and interest-bearing liabilities , net interest spread and net interest margin on average interest-earning assets . federally tax-exempt income is presented on a taxable-equivalent basis assuming a 35 % federal tax rate . replace_table_token_6_th 40 story_separator_special_tag were 0.13 % of average legacy loans , compared with 0.11 % in 2016 and 0.22 % in 2015. at december 31 , 2017 , non-performing assets amounted to $ 53.1 million , or 0.68 % of total assets , compared with $ 64.5 million , or 0.94 % of total assets , at december 31 , 2016. legacy non-performing assets totaled $ 28.7 million and $ 29.0 million at december 31 , 2017 and 2016 , respectively . legacy other real estate was approximately $ 8.5 million as of december 31 , 2017 , reflecting a 22.2 % decrease from the $ 10.9 million reported at december 31 , 2016. purchased other real estate was $ 9.0 million at december 31 , 2017 , reflecting a 28.1 % decrease from the $ 12.5 million at december 31 , 2016. the company 's allowance for loan losses at december 31 , 2017 was $ 25.8 million , or 0.43 % of loans compared with $ 23.9 million , or 0.45 % , and $ 21.1 million , or 0.54 % , at december 31 , 2016 and 2015 , respectively . excluding purchased loans and purchased loan pools , the company 's allowance for loan losses at december 31 , 2017 was $ 21.5 million , or 0.44 % of loans excluding purchased loans and purchased loan pools , compared with $ 20.5 million , or 0.56 % , and $ 20.5 million , or 0.85 % , at december 31 , 2016 and 2015 , respectively . a significant portion of the company 's loan growth during 2017 consisted of municipal loans , residential mortgages and commercial insurance premium loans , each of which presents a lower risk of default than other loan types , such as acquisition , construction and development or investor commercial real estate loans . the growth in lower-risk loans during 2017 , combined with the improved historical loss rates and qualitative factors , are the primary reasons the allowance for loan losses as a percentage of loans , excluding purchased loans and purchased loan pools , decreased during the year . 42 noninterest income following is a comparison of noninterest income for 2017 , 2016 and 2015 . replace_table_token_8_th 2017 compared with 2016 . total noninterest income in 2017 was $ 104.5 million , compared with $ 105.8 million in 2016 , reflecting a decrease of 1.3 % , or $ 1.3 million .

results of operations net interest income net interest income represents the amount by which interest income on interest-earning assets exceeds interest expense incurred on interest-bearing liabilities . net interest income is the largest component of our income and is affected by the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities . our interest-earning assets include loans , investment securities , other investments , interest-bearing deposits in banks and federal funds sold . our interest-bearing liabilities include deposits , securities sold under agreements to repurchase , other borrowings and subordinated deferrable interest debentures . 2017 compared with 2016. for the year ended december 31 , 2017 , interest income was $ 294.3 million , an increase of $ 55.3 million , or 23.1 % , compared with the same period in 2016. average earning assets increased $ 1.16 billion , or 20.7 % , to $ 6.76 billion for the year ended december 31 , 2017 , compared with $ 5.60 billion as of december 31 , 2016. yield on average earning assets on a taxable equivalent basis increased during 2017 to 4.46 % , compared with 4.35 % for the year ended december 31 , 2016.average yields on all interest-earning asset categories increased from 2016 to 2017 with the exception of purchased loans , which experienced a decrease in accretion income .

you can identify forward-looking statements by their use of forward-looking words , such as `` may '' , `` will '' , `` anticipate '' , `` expect '' , `` believe '' , `` estimate '' , `` intend '' , `` plan '' , `` should '' , `` seek '' , or comparable terms . readers of this report should understand that these forward-looking statements are not guarantees of performance or results . forward-looking statements provide our current expectations and beliefs concerning future events and are subject to risks , uncertainties , and factors relating to our business and operations , all of which are difficult to predict and could cause our actual results to differ materially the expectations expressed in or implied by such forward-looking statements . such risks , uncertainties , and factors include , among other things : our ability to achieve the intended benefits of acquisitions and divestitures , including the recent spinoff of our lamb weston business and the announced divestiture of the wesson ® oil business ; general economic and industry conditions ; our ability to successfully execute our long-term value creation strategy ; our ability to access capital ; our ability to execute our operating and restructuring plans and achieve our targeted operating efficiencies from cost-saving initiatives and to benefit from trade optimization programs ; the effectiveness of our hedging activities and our ability to respond to volatility in commodities ; the competitive environment and related market conditions ; our ability to respond to changing consumer preferences and the success of our innovation and marketing investments ; the ultimate impact of any product recalls and litigation , including litigation related to the lead paint and pigment matters ; actions of governments and regulatory factors affecting our businesses ; the availability and prices of raw materials , including any negative effects caused by inflation or weather conditions ; risks and uncertainties associated with intangible assets , including any future goodwill or intangible assets impairment charges ; the costs , disruption , and diversion of management 's attention associated with campaigns commenced by activist investors ; and other risks described in this this and other reports we file with the securities and exchange commission ( the `` sec '' ) . we caution readers not to place undue reliance on these forward-looking statements , which speak only as of the date of this report . we undertake no responsibility to update these statements . the discussion that follows should be read together with the consolidated financial statements and related notes contained in this report . results for fiscal 2017 are not necessarily indicative of results that may be attained in the future . executive overview conagra brands , inc. ( the `` company '' , `` we '' , `` us '' , or `` our '' ) , headquartered in chicago , is one of north america 's leading branded food companies . guided by an entrepreneurial spirit , the company combines a rich heritage of making great food with a sharpened focus on innovation . the company 's portfolio is evolving to satisfy people 's changing food preferences . its iconic brands such as marie callender 's ® , reddi-wip ® , hunt 's ® , healthy choice ® , slim jim ® , orville redenbacher 's ® , as well as emerging brands , including alexia ® , blake 's ® , duke 's ® , and frontera ® , offer choices for every occasion . with an ongoing commitment to corporate citizenship , the company has been named to the dow jones sustainability north america index for six consecutive years . fiscal 2017 performance reflected a higher gross profit in the grocery & snacks segment , offset by lower gross profits in the refrigerated & frozen , foodservice , and international segments . fiscal 2017 results were also impacted by lower sales volumes and the reduction of profits due to the divestitures of spicetec and jm swank in the first quarter of fiscal 2017. the improved operating performance reflected significantly lower selling , general and administrative ( `` sg & a '' ) expenses and lower interest expense , in each case compared to fiscal 2016. diluted earnings per share in fiscal 2017 was $ 1.46 , including earnings of $ 1.25 per diluted share from continuing operations and $ 0.21 per diluted share from discontinued operations . diluted loss per share in fiscal 2016 was $ 1.56 , including earnings of $ 0.29 per diluted share from continuing operations and a loss of $ 1.85 per diluted share from discontinued 18 operations . several significant items affect the comparability of year-over-year results of continuing operations ( see `` items impacting comparability '' below ) . in fiscal 2017 , we completed the spinoff of lamb weston holdings , inc. ( `` lamb weston '' ) through a distribution of 100 % of our interest in lamb weston to holders of outstanding shares of our common stock ( the `` spinoff '' ) . the transaction effecting this change was structured as a tax-free spinoff . we also completed several other acquisitions and divestitures during the year . see `` acquisitions '' below and `` divestitures and formation of ardent mills joint venture '' below . finally , we completed the relocation of our corporate headquarters to chicago , illinois in the first quarter of fiscal 2017. in the first quarter of fiscal 2017 , in anticipation of the spinoff , we reorganized our reporting segments . we now reflect our results of operations in five reporting segments : grocery & snacks , refrigerated & frozen , international , foodservice , and commercial . the results of operations for the lamb weston business have been reclassified to results of discontinued operations for all periods presented , and the assets and liabilities of the lamb weston business have been reclassified to assets and liabilities of discontinued operations for all periods prior to the spinoff . story_separator_special_tag in connection with the formation , we contributed all of the assets of conagra mills , our milling operations . we reflected the results of the conagra mills operations as discontinued operations for all periods presented . our equity in the earnings of ardent mills is reflected in our continuing operations . restructuring plans in may 2013 , we announced the supply chain and administrative efficiency plan ( the `` scae plan '' ) , our plan to integrate and restructure the operations of our private brands business , improve sg & a effectiveness and efficiencies , and optimize our supply chain network , manufacturing assets , dry distribution centers , and mixing centers . in the second quarter of fiscal 2016 , we announced plans to realize efficiency benefits by reducing sg & a expenses and enhancing trade spend processes and tools , which plans were included as part of the scae plan . although we divested the private brands business , we have continued to implement the scae plan , including by working to optimize our supply chain network , pursue cost reductions through our sg & a functions , enhance trade spend processes and tools , and improve productivity . 20 although we remain unable to make good faith estimates relating to the entire scae plan , we are reporting on actions initiated through the end of fiscal 2017 , including the estimated amounts or range of amounts for each major type of costs expected to be incurred , and the charges that have resulted or will result in cash outflows . as of may 28 , 2017 , our board of directors has approved the incurrence of up to $ 880.5 million of expenses in connection with the scae plan . we have incurred or expect to incur approximately $ 446.2 million of charges ( $ 299.2 million of cash charges and $ 147.0 million of non-cash charges ) for actions identified to date under the scae plan . we recognized charges of $ 63.6 million , $ 281.8 million , and $ 47.7 million in relation to the scae plan related to our continuing operations in fiscal 2017 , 2016 , and 2015 , respectively . we expect to incur costs related to the scae plan over a multi-year period . segment review during fiscal 2017 , we reorganized our reporting segments . we now reflect our results of operations in five reporting segments : grocery & snacks , refrigerated & frozen , international , foodservice , and commercial . prior periods have been reclassified to conform to the revised segment presentation . in the second quarter of fiscal 2017 , we completed the spinoff of the lamb weston business , which was previously included in the commercial foods segment . the results of operations of the lamb weston business have been classified as discontinued operations for all periods presented . grocery & snacks the grocery & snacks reporting segment principally includes branded , shelf stable food products sold in various retail channels in the united states . refrigerated & frozen the refrigerated & frozen reporting segment principally includes branded , temperature controlled food products sold in various retail channels in the united states . international the international reporting segment principally includes branded , food products , in various temperature states , sold in various retail and foodservice channels outside of the united states . foodservice the foodservice reporting segment includes branded and customized food products , including meals , entrees , sauces , and a variety of custom-manufactured culinary products that are packaged for sale to restaurants and other foodservice establishments in the united states . commercial the commercial reporting segment included commercially branded and private label food and ingredients that were sold primarily to commercial , restaurant , foodservice , food manufacturing , and industrial customers . the segment 's primary food items included a variety of vegetable , spice , and frozen bakery goods sold under brands such as spicetec flavors & seasonings ® . the spicetec and jm swank businesses were sold in the first quarter of fiscal 2017. presentation of derivative gains ( losses ) from economic hedges of forecasted cash flows in segment results derivatives used to manage commodity price risk and foreign currency risk are not designated for hedge accounting treatment . we believe these derivatives provide economic hedges of certain forecasted transactions . as such , these derivatives are generally recognized at fair market value with realized and unrealized gains and losses recognized in general corporate expenses . the gains and losses are subsequently recognized in the operating results of the reporting segments in the period in which the underlying transaction being economically hedged is included in earnings . in the event that management determines a particular derivative entered into as an economic hedge of a forecasted commodity purchase has ceased to function as an economic hedge , we cease recognizing further gains and losses on such derivatives in corporate expense and begin recognizing such gains and losses within segment operating results , immediately . 21 the following table presents the net derivative gains ( losses ) from economic hedges of forecasted commodity consumption and the foreign currency risk of certain forecasted transactions associated with continuing operations , under this methodology : replace_table_token_3_th as of may 28 , 2017 , the cumulative amount of net derivative losses from economic hedges that had been recognized in general corporate expenses and not yet allocated to reporting segments was $ 3.0 million . this amount reflected net losses of $ 3.3 million incurred during the fiscal year ended may 28 , 2017 , as well as net gains of $ 0.3 million incurred prior to fiscal 2017 . based on our forecasts of the timing of recognition of the underlying hedged items , we expect to reclassify to segment operating results losses of $ 1.2 million in fiscal 2018 and losses of $ 1.8 million in fiscal 2019 and thereafter .

results of discontinued operations our discontinued operations generated after-tax income of $ 102.0 million in fiscal 2017 and an after-tax loss of $ 794.4 million in fiscal 2016. results reflected the operations of lamb weston through the date of its spinoff in november 2016 , as well as the results of the private brands business prior to its divestiture in the second half of fiscal 2016. we incurred significant costs associated with effecting the spinoff . these costs are included in results of discontinued operations . we recognized a pre-tax charge of $ 1.92 billion ( $ 1.44 billion after-tax ) in fiscal 2016 , to write-down the goodwill and long-lived assets of the private brands business to the final sales price , less costs to sell , and to recognize the final loss . earnings ( loss ) per share diluted earnings per share in fiscal 2017 was $ 1.46 , including earnings of $ 1.25 per diluted share from continuing operations and $ 0.21 per diluted share from discontinued operations . diluted loss per share in fiscal 2016 was $ 1.56 , including earnings of $ 0.29 per diluted share from continuing operations and a loss of $ 1.85 per diluted share from discontinued operations . see `` items impacting comparability '' above as several significant items affected the comparability of year-over-year results of operations . fiscal 2016 compared to fiscal 2015 our fiscal year end falls on the last sunday of may each year . as a result , fiscal 2016 included 52 weeks of results , while fiscal 2015 included 53 weeks of results . the exclusion in fiscal 2016 of one additional week of results than what was included in fiscal 2015 impacted our fiscal 2016 results of operations relative to our fiscal 2015 results of operations . such impacts are noted below .

this discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto , appearing elsewhere in this report . caution about forward looking statements . this report contains forward looking statements within the meaning of section 27a of the securities act of 1933 , as amended , or the securities act , and section 21e of the securities exchange act of 1934 , as amended , or the exchange act . these forward looking statements represent plans , estimates , objectives , goals , guidelines , expectations , intentions , projections and statements of our beliefs concerning future events , business plans , objectives , expected operating results and the assumptions upon which those statements are based . forward looking statements include without limitation , any statement that may predict , forecast , indicate or imply future results , performance or achievements , and are typically identified with words such as `` may , '' `` could , '' `` should , '' `` will , '' `` would , '' `` believe , '' `` anticipate , '' `` estimate , '' `` expect , '' `` intend , '' `` plan , '' or words or phases of similar meaning . these forward looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are , in many instances , beyond our control . actual results , performance or achievements could differ materially from those contemplated , expressed , or implied by the forward looking statements . the following factors , among others , could cause our financial performance to differ materially from that expressed in such forward looking statements : the strength of the united states economy in general and the strength of the local economies in which we conduct operations ; geopolitical conditions , including acts or threats of terrorism , actions taken by the united states or other governments in response to acts or threats of terrorism and or military conflicts , which could impact business and economic conditions in the united states and abroad ; the effects of , and changes in , trade , monetary and fiscal policies and laws , including interest rate policies of the federal reserve board , inflation , interest rate , market and monetary fluctuations ; the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers ; the willingness of users to substitute competitors ' products and services for our products and services ; the impact of changes in financial services policies , laws and regulations , including laws , regulations and policies concerning taxes , banking , securities and insurance , and the application thereof by regulatory bodies ; the effect of changes in accounting policies and practices , as may be adopted from time-to-time by bank regulatory agencies , the securities and exchange commission ( the `` sec '' ) , the public company accounting oversight board or the financial accounting standards board ; technological changes ; the effect of acquisitions we may make , including , without limitation , the failure to achieve the expected revenue growth and or expense savings from such acquisitions ; the growth and profitability of noninterest or fee income being less than expected ; changes in the level of our nonperforming assets and charge-offs ; 37 changes in consumer spending and savings habits ; and unanticipated regulatory or judicial proceedings . if one or more of the factors affecting our forward looking information and statements proves incorrect , then our actual results , performance or achievements could differ materially from those expressed in , or implied by , forward looking information and statements contained in this report . you should not place undue reliance on our forward looking information and statements . we will not update the forward looking statements to reflect actual results or changes in the factors affecting the forward looking statements . general the company is a growth oriented , one-bank holding company headquartered in bethesda , maryland . the company provides general commercial and consumer banking services through the bank , its wholly owned banking subsidiary , a maryland chartered bank , which is a member of the federal reserve system . the company was organized in october 1997 , to be the holding company for the bank . the bank was organized as an independent , community oriented , full service banking alternative to the super regional financial institutions , which dominate the primary market area . the company 's philosophy is to provide superior , personalized service to its customers . the company focuses on relationship banking , providing each customer with a number of services , becoming familiar with and addressing customer needs in a proactive , personalized fashion . the bank currently has a total of seventeen branch offices , including seven offices serving montgomery county , maryland , five offices in the district of columbia and five offices in arlington and fairfax counties in virginia . the company has announced plans to open an additional office in alexandria , virginia , which is expected to open in march 2013. the company offers a broad range of commercial banking services to its business and professional clients as well as full service consumer banking services to individuals living and or working primarily in the bank 's market area . the company emphasizes providing commercial banking services to sole proprietors , small and medium-sized businesses , partnerships , corporations , non-profit organizations and associations , and investors living and working in and near the primary service area . these services include the usual deposit functions of commercial banks , including business and personal checking accounts , `` now '' accounts and money market and savings accounts , business , construction , and commercial loans , residential mortgages and consumer loans , and cash management services . story_separator_special_tag the loss , if any , 39 can be determined by the difference between the loan balance and the value of collateral , the present value of expected future cash flows , or values observable in the secondary markets . three components comprise our allowance for credit losses : a specific allowance , a formula allowance and a nonspecific or environmental factors allowance . each component is determined based on estimates that can and do change when actual events occur . the specific allowance allocates a reserve to identified impaired loans . impaired loans are assigned specific reserves based on an impairment analysis . under asc topic 310 , `` receivables , '' a loan for which reserves are individually allocated may show deficiencies in the borrower 's overall financial condition , payment record , support available from financial guarantors and for the fair market value of collateral . when a loan is identified as impaired , a specific reserve is established based on the company 's assessment of the loss that may be associated with the individual loan . the formula allowance is used to estimate the loss on internally risk rated loans , exclusive of those identified as requiring specific reserves . the portfolio of unimpaired loans is stratified by loan type and risk assessment . allowance factors relate to the type of loan and level of the internal risk rating , with loans exhibiting higher risk and loss experience receiving a higher allowance factor . the environmental allowance is also used to estimate the loss associated with pools of non-classified loans . these non-classified loans are also stratified by loan type , and environmental allowance factors are assigned by management based upon a number of conditions , including delinquencies , loss history , changes in lending policy and procedures , changes in business and economic conditions , changes in the nature and volume of the portfolio , management expertise , concentrations within the portfolio , quality of internal and external loan review systems , competition , and legal and regulatory requirements . the allowance captures losses inherent in the loan portfolio , which have not yet been recognized . allowance factors and the overall size of the allowance may change from period to period based upon management 's assessment of the above described factors , the relative weights given to each factor , and portfolio composition . management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses , including in connection with the valuation of collateral , a borrower 's prospects of repayment , and in establishing allowance factors on the formula and environmental components of the allowance . the establishment of allowance factors involves a continuing evaluation , based on management 's ongoing assessment of the global factors discussed above and their impact on the portfolio . the allowance factors may change from period to period , resulting in an increase or decrease in the amount of the provision or allowance , based upon the same volume and classification of loans . changes in allowance factors can have a direct impact on the amount of the provision , and a related after tax effect on net income . errors in management 's perception and assessment of the global factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio , and may result in additional provisions or charge-offs . alternatively , errors in management 's perception and assessment of the global factors and their impact on the portfolio could result in the allowance being in excess of amounts necessary to cover losses in the portfolio , and may result in lower provisions in the future . for additional information regarding the provision for credit losses , refer to the discussion under the caption `` provision for credit losses '' below . the company follows the provisions of asc topic 718 , `` compensation , '' which requires the expense recognition for the fair value of share based compensation awards , such as stock options , restricted stock awards , and performance based shares . this standard allows management to establish modeling assumptions as to expected stock price volatility , option terms , forfeiture rates and dividend rates which directly impact estimated fair value . the accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined . the company 's practice is to utilize reasonable and supportable assumptions . 40 story_separator_special_tag company has relied primarily upon core deposit growth , together with use of increased levels of brokered and wholesale deposits . the major component of the growth in core deposits has been growth in money market accounts and noninterest deposits primarily as a result of effectively building new and enhanced client relationships . average growth of deposits was 20 % for the twelve months ended december 31 , 2012 as compared to the same period in 2011. in terms of the average balance sheet composition or mix , loans , which generally have higher yields than securities and other earning assets , increased from 76 % ( decreased from 80 % excluding the effect of the settlement deposit ) of average earning assets for the year ended december 31 , 2011 to 77 % of average earning assets for the same period in 2012. the higher growth of average funding sources as compared to average loan growth has added average liquidity to the balance sheet for year ended december 31 , 2012 compared to the same period in 2011. the slight increase in average loans as a percentage of average 42 earning assets is due primarily to a large increase in average loans held for sale . for the year ended december 31 , 2012 , as compared to the same period in 2011 , average loans held for sale , increased $ 77 million , a 122 % increase .

results of operations overview as previously reported , in mid-september 2011 , eaglebank became the escrow depository of approximately $ 618 million of noninterest bearing deposits resulting from a long term client relationship ( the `` settlement deposit '' ) . the deposit , as expected , was substantially withdrawn in the fourth quarter of 2011. while this large and unusual transaction did not impact 2012 results , these funds contributed approximately $ 140 thousand to net earnings in the fourth quarter of 2011 and $ 170 thousand to earnings for the full year 2011 and significantly impacted a number of financial ratios and metrics . to allow for appropriate comparisons , we make certain parenthetical comments in this management discussion , in order to compute the relevant non-gaap ratios on a basis , which excludes this large and unusual short-term transaction . for the year ended december 31 , 2012 , the company 's net income was $ 35.3 million , a 44 % increase over the $ 24.6 million for the year ended december 31 , 2011. the increase in net income for the twelve months ended december 31 , 2012 can be attributed primarily to an increase in net interest income of 29 % as compared to the same period in 2011. net interest income growth was due substantially to growth in average earning assets of 19 % in 2012 and to an increase in the net interest margin .

our federal and state net operating losses at december 31 , 2014 included $ 43.3 million and $ 9.0 million , respectively , of income tax deductions in excess of previously recorded tax story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with the section titled “selected financial data” and our audited financial statements and related notes which are included elsewhere in this annual report on form 10-k. our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors , including , but not limited to , those discussed in “risk factors” included elsewhere in this annual report on form 10-k. overview we are a leading provider of cloud-based supply chain management solutions , providing network-proven integrations and comprehensive retail performance analytics to thousands of customers worldwide . we provide our solutions through the sps commerce platform , a cloud-based product suite that improves the way suppliers , retailers , distributors and other customers manage and fulfill orders . we derive the majority of our revenues from thousands of monthly recurring subscriptions from businesses that utilize our solutions . we plan to continue to grow our business by further penetrating the supply chain management market , increasing revenues from our customers as their businesses grow , expanding our distribution channels , expanding our international presence and , from time to time , developing new solutions and applications . we also intend to selectively pursue acquisitions that will add customers , allow us to expand into new regions or allow us to offer new functionalities . for 2014 , 2013 and 2012 , we generated revenues of $ 127.9 million , $ 104.4 million and $ 77.1 million , respectively . our fiscal quarter ended december 31 , 2014 represented our 56th consecutive quarter of increased revenues . recurring revenues from recurring revenue customers accounted for 90 % , 89 % and 88 % of our total revenues for 2014 , 2013 and 2012 , respectively . our revenues are not concentrated with any customer , as our largest customer represented 2 % or less of total revenues in 2014 , 2013 and 2012. key financial terms and metrics sources of revenues trading partner fulfillment . our revenues primarily consist of monthly revenues from our customers for our trading partner fulfillment solution . this solution consists of a monthly subscription fee and a transaction-based fee . we also receive set-up fees for initial integration services we provide to our customers . most of our customers have contracts with us that may be terminated by the customer by providing 30 days prior notice . trading partner enablement . our trading partner enablement solution helps organizations , typically large retailers , to implement new integrations with trading partners . this solution ranges from electronic data interchange testing and certification to more complex business workflow automation and results in a one-time payment to us . trading partner analytics . our trading partner analytics solution consists of data analytics applications which allow our customers to improve their visibility across , and analysis of , their supply chains . through interactive data analysis , our retailer customers improve their visibility into supplier performance and their understanding of product sell-through . our revenues for this solution primarily consist of a monthly subscription fee . other trading partner solutions . the remainder of our revenues are derived from solutions that allow our customers to perform tasks such as barcode labeling or picking-and-packaging information tracking as well as purchases of miscellaneous supplies . these revenues are primarily transaction-based . 32 cost of revenues and operating expenses overhead allocation . we allocate overhead expenses such as rent , certain employee benefit costs , office supplies and depreciation of general office assets to cost of revenues and operating expenses categories based on headcount . cost of revenues . cost of revenues consist primarily of personnel costs for our implementation teams , customer support personnel and application support personnel . cost of revenues also includes our cost of network services , which is primarily data center costs for the locations where we keep the equipment that serves our customers , and connectivity costs that facilitate electronic data transmission between our customers and their trading partners . sales and marketing expenses . sales and marketing expenses consist primarily of personnel costs for our sales , marketing and product management teams , commissions earned by our sales personnel and marketing costs . in order to expand our business , we will continue to add resources to our sales and marketing efforts over time . research and development expenses . research and development expenses consist primarily of personnel costs for development and maintenance of existing solutions . our research and development group is also responsible for enhancing existing solutions and applications as well as internal tools and developing new information maps that integrate our customers to their trading partners in compliance with those trading partners ' requirements . general and administrative expenses . general and administrative expenses consist primarily of personnel costs for finance , human resources and internal information technology support , as well as legal , accounting and other fees , such as credit card processing fees . other metrics recurring revenue customers . as of december 31 , 2014 , we had approximately 22,000 customers with contracts to pay us monthly fees , which we refer to as recurring revenue customers . we report recurring revenue customers at the end of a period . a small portion of our recurring revenue customers consist of separate units within a larger organization . we treat each of these units , which may include divisions , departments , affiliates and franchises , as distinct customers . average recurring revenues per recurring revenue customer . story_separator_special_tag income taxes we account for income taxes using the liability method , which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements . under this method , deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse . deferred tax assets are reduced by a valuation allowance when it is not “more likely than not” that the deferred tax asset will be utilized . we assess our ability to realize our deferred tax assets at the end of each reporting period . realization of our deferred tax assets is contingent upon future taxable earnings . accordingly , this assessment requires significant estimates and judgment . if the estimates of future taxable income vary from actual results , our assessment regarding the realization of these deferred tax assets could change . future changes in the estimated amount of deferred taxes expected to be realized will be reflected in our consolidated financial statements in the period the estimate is changed , with a corresponding adjustment to our operating results . we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would “more likely than not” sustain the position following an audit . for tax positions meeting the “more likely than not” threshold , the amount recognized in the financial statements is the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement with the relevant tax authority . stock-based compensation stock-based compensation is measured at the grant date , based on the fair value of the award , and is recognized ratably as an expense over the vesting period of the award . determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of subjective assumptions , including the expected life of the stock-based payment awards and stock price volatility . we use the black-scholes option pricing model to value our award grants and determine the related compensation expense . the assumptions used in calculating the fair value of stock-based payment awards represent management 's best estimates , but the estimates involve inherent uncertainties and the application of management judgment . as a result , if factors change and we use different assumptions , our stock-based compensation expense could be materially different in the future . we expect to continue to grant stock-based awards in the future , and to the extent that we do , our actual stock-based compensation expense recognized in future periods will likely increase . prior to becoming a public entity in 2010 , historical volatility was not available for our common stock . as a result , we do not have sufficient data to rely solely on the historical volatility of our common stock . therefore , we have estimated volatility based partially on the historical volatilities of the publicly traded shares of a selected peer group , and partially on the historical volatility of our common stock , which collectively provided a reasonable basis for estimating volatility . beginning in 2015 , we anticipate that we will be able to rely solely on the historical volatility of our common stock . valuation of goodwill and purchased intangible assets goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination . assets acquired may include identifiable intangible assets , such as subscriber relationships , which are recognized separately from goodwill . we test goodwill for impairment annually at december 31 , or more frequently if events or changes in circumstances indicate that the asset might be impaired . the impairment test is conducted by comparing the fair 35 value of the net assets with the carrying value of the reporting unit . fair value is determined using the direct market observation of market price and outstanding equity of the reporting unit at december 31. if the carrying value of the goodwill were to exceed the fair value of the reporting unit , the goodwill may be impaired . if this were to occur , the fair value would then be allocated to assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the goodwill . this implied fair value would then be compared to the carrying amount of the goodwill and , if it were less , an impairment loss would be recognized . story_separator_special_tag non-gaap income per share . non-gaap income per share , which is also a non-gaap measure of financial performance , consists of net income plus stock-based compensation expense and amortization expense related to intangible assets divided by the weighted average number of shares of common stock outstanding during each period . the following table provides a reconciliation of net income to non-gaap income per share ( in thousands , except per share amounts ) : replace_table_token_11_th 38 year ended december 31 , 2013 compared to year ended december 31 , 2012 the following table presents our results of operations for the periods indicated ( dollars in thousands ) : replace_table_token_12_th due to rounding , totals may not equal the sum of the line items in the table above revenues . revenues for 2013 increased $ 27.3 million , or 35 % , to $ 104.4 million from $ 77.1 million for 2012. the increase in revenues resulted from two primary factors : the increase in recurring revenue customers and the increase in average recurring revenues per recurring revenue customer , which we also refer to as wallet share .

results of operations year ended december 31 , 2014 compared to year ended december 31 , 2013 the following table presents our results of operations for the periods indicated ( dollars in thousands ) : replace_table_token_9_th due to rounding , totals may not equal the sum of the line items in the table above revenues . revenues for 2014 increased $ 23.6 million , or 23 % , to $ 127.9 million from $ 104.4 million for 2013. the increase in revenues resulted from two primary factors : the increase in recurring revenue customers and the increase in average recurring revenues per recurring revenue customer , which we also refer to as wallet share . the number of recurring revenue customers increased 12 % to 21,983 at december 31 , 2014 from 19,690 at december 31 , 2013. average recurring revenues per recurring revenue customer , or wallet share , increased 12 % to $ 5,524 for 2014 from $ 4,920 for 2013. this increase in wallet share was primarily attributable to increased fees resulting from increased usage of our solutions by our recurring revenue customers and growth in larger customers . recurring revenues from recurring revenue customers increased 24 % in 2014 , as compared to 2013 , and accounted for 90 % of our total revenues for 2014 and 89 % for 2013. we anticipate that the number of recurring revenue customers and wallet share will continue to increase as we increase the number of solutions we offer and increase the penetration of those solutions across our customer base . 36 cost of revenues . cost of revenues for 2014 increased $ 8.2 million , or 26 % , to $ 40.0 million from $ 31.8 million for 2013. this increase was primarily due to increased headcount in 2014 which resulted in higher personnel costs .

we manage separate accounts on behalf of institutions , act as sub-investment adviser for a variety of sec-registered mutual funds and non-u.s. funds , and act as investment adviser for the pzena mutual funds , certain private placement funds and non-u.s. funds . we function as the sole managing member of our operating company , pzena investment management , llc ( the “ operating company ” ) . as a result , we : ( i ) consolidate the financial results of our operating company with our own , and reflect the membership interest in it that we do not own as a non-controlling interest in our consolidated financial statements ; and ( ii ) recognize income generated from our economic interest in our operating company 's net income . as of december 31 , 2014 , the holders of our class a common stock and the holders of class b units of our operating company held approximately 19.8 % and 80.2 % , respectively , of the economic interests in the operations of our business . non-gaap net income our results for the years ended december 31 , 2014 , 2013 , and 2012 included recurring adjustments related to our tax receivable agreement and the associated liability to its selling and converting shareholders , in addition to adjustments related to certain non-recurring charges recognized in operating expense in the fourth quarter of 2014. we believe that these accounting adjustments add a measure of non-operational complexity which partially obscures the underlying performance of our business . in evaluating our financial condition and results of operations , we also review certain non-gaap measures of net income , which exclude these items . excluding these adjustments , non-gaap diluted net income and non-gaap diluted earnings per share were $ 34.5 million and $ 0.51 , respectively , for the year ended december 31 , 2014 , $ 29.3 million and $ 0.44 , respectively , for the year ended december 31 , 2013 , and $ 20.4 million and $ 0.31 , respectively , for the year ended december 31 , 2012 . gaap and non-gaap net income for diluted earnings per share generally assumes all operating company membership units are converted into company stock at the beginning of the reporting period , and the resulting change to our net income associated with our increased interest in the operating company is taxed at our historical effective tax rate , exclusive of other adjustments , the adjustments related to our tax receivable agreement and the associated liability to selling and converting shareholders , and adjustments related to the non-recurring charges recognized in operating expense in the fourth quarter of 2014. our effective tax rate , exclusive of these adjustments , was 41.3 % for the year ended december 31 , 2014 , and approximately 41.7 % and 42.9 % for the years ended december 31 , 2013 and 2012 , respectively . see “ operating results — income tax expense ” below . we use these non-gaap measures to assess the strength of the underlying operations of the business . we believe that these adjustments , and the non-gaap measures derived from them , provide information to better analyze our operations between periods , and over time . investors should consider these non-gaap measures in addition to , and not as a substitute for , financial measures prepared in accordance with gaap . 23 a reconciliation of the non-gaap measures to the most comparable gaap measures is included below : replace_table_token_6_th revenue we generate revenue primarily from management fees and performance fees , which we collectively refer to as our advisory fees , by managing assets on behalf of institutional accounts and for retail clients , which are generally open-end mutual funds catering primarily to retail investors . our advisory fee income is recognized over the period in which investment management services are provided . following the preferred method identified in the revenue recognition topic of the financial accounting standards board accounting standards codification ( “ fasb asc ” ) , income from performance fees is recorded at the conclusion of the contractual performance period , when all contingencies are resolved . our advisory fees are primarily driven by the level of our aum . our aum increases or decreases with the net inflows or outflows of funds into our various investment strategies and with the investment performance thereof . in order to increase our aum and expand our business , we must develop and market investment strategies that suit the investment needs of our target clients , and provide attractive returns over the long-term . the value and composition of our aum , and our ability to continue to attract clients , will depend on a variety of factors including , among other things : our ability to educate our target clients about our classic value investment strategies and provide them with exceptional client service ; the relative investment performance of our investment strategies , as compared to competing products and market indices ; competitive conditions in the investment management and broader financial services sectors ; general economic conditions ; investor sentiment and confidence ; and our decision to close strategies when we deem it to be in the best interests of our clients . for our institutional accounts , we are paid fees according to a schedule , which varies by investment strategy . the substantial majority of these accounts pay us management fees pursuant to a schedule in which the rate we earn on the aum declines as the amount of aum increases . pursuant to our sub-investment advisory agreements with our retail clients and advisory agreements with pzena-branded funds , we are generally paid a management fee according to a schedule in which the rate we earn on the aum declines as the 24 amount of aum increases . certain of these funds pay us fixed-rate management fees . story_separator_special_tag this strategy reflects a portfolio composed of a portfolio of approximately 30 to 40 stocks drawn from a universe of 1,000 of the largest u.s. listed companies , based on market capitalization . this strategy was launched in january 1996. at december 31 , 2014 , the focused value strategy generated a one-year annualized gross return of 11.4 % , underperforming its benchmark . the underperformance was broad based and driven by our overweight position and stock selection in the consumer discretionary sector , our exposure in the producer durables sector , and our underweight exposure to the utilities sector . this underperformance was partially offset by our overweight position in the technology sector . global expanded value . this strategy reflects a portfolio composed of approximately 60-95 stocks drawn from a universe of 2,000 of the largest companies across the world , based on market capitalization . this strategy was launched in january 2010. at december 31 , 2014 , the global expanded value strategy generated a one-year annualized gross return of 1.7 % , underperforming its benchmark . this underperformance was primarily driven by our overweight position in europe and the energy sector , as well as our underweight position and stock selection in the healthcare sector . this underperformance was partially offset by our stock selection in the technology sector . small cap focused value . this strategy reflects a portfolio composed of approximately 40 to 50 stocks drawn from a universe of u.s. listed companies ranked from the 1,001 st to 3,000 th largest , based on market capitalization . this strategy was launched in january 1996. at december 31 , 2014 , the small cap focused value strategy generated a one-year annualized gross return of 10.9 % , outperforming its benchmark . a broad number of holdings across a diverse range of industries contributed to this outperformance , specifically certain stocks in the energy , technology , and healthcare sectors . mid cap expanded value . this strategy reflects a portfolio composed of approximately 50 to 80 stocks drawn from a universe of u.s. listed companies ranked from the 201 st to 1,200 th largest , based on market capitalization . this strategy was launched in april 2014. at december 31 , 2014 , the mid cap expanded value strategy generated a since inception gross return of 5.2 % , underperforming its benchmark . producer durables holdings were the largest contributors to this underperformance . the underperformance was also driven by our overweight position in the energy sector . emerging markets focused value . this strategy reflects a portfolio composed of approximately 40 to 80 stocks drawn from a universe of 1,500 of the largest emerging market companies , based on market capitalization . this strategy was launched in january 2008. at december 31 , 2014 , the emerging markets focused value strategy generated a one-year annualized gross return of ( 9.9 ) % , underperforming its benchmark . the main contributors to this underperformance include holdings across a diverse range of industries , specifically certain positions in the industrials and financial services sectors , our overweight position and stock selection in the energy sector , and certain korean and brazilian stocks . international ( ex-u.s. ) focused value . this strategy reflects a portfolio composed of approximately 30-50 stocks drawn from a universe of 1,500 of the largest companies across the world excluding the united states , based on market capitalization . this strategy was launched in january 2004. at december 31 , 2014 , the international ( ex-u.s. ) expanded value strategy generated a one-year annualized gross return of ( 8.8 ) % , underperforming its benchmark . the top contributors to relative underperformance were our stock selection in the consumer discretionary and industrials sectors and our overweight position in the energy sector . european focused value . this strategy reflects a portfolio composed of approximately 40-50 stocks drawn from a universe of 750 of the largest european companies , based on market capitalization . this strategy was launched in august 2008. at december 31 , 2014 , the european focused value strategy generated a one-year annualized gross return of ( 10.8 ) % , underperforming its benchmark . this underperformance was driven primarily by our stock selection and overweight position in the industrials sector , our underweight position in the healthcare sector , and our overweight position in the energy sector . mid cap focused value . this strategy reflects a portfolio composed of approximately 30 to 40 stocks drawn from a universe of u.s. listed companies ranked from the 201 st to 1,200 th largest , based on market capitalization . this strategy was launched in september 1998. at december 31 , 2014 , the mid cap focused value strategy generated a one-year annualized gross return of 10.2 % , underperforming its benchmark . producer durables holdings were the largest contributors to this underperformance . the underperformance was also driven by positioning in the financial services and utilities sectors . our earnings and cash flows are heavily dependent upon prevailing financial market conditions . significant increases or decreases in the various securities markets , particularly the equities markets , can have a material impact on our results of operations , financial condition , and cash flows . 28 the change in aum in our institutional accounts and our retail accounts for the years ended december 31 , 2014 , 2013 , and 2012 is described below . inflows are composed of the investment of new or additional assets by new or existing clients . outflows consist of redemptions of assets by existing clients . replace_table_token_9_th the following table describes the allocation of our aum among our investment strategies , as of december 31 , 2014 , 2013 , and 2012 : replace_table_token_10_th 1 during 2013 , approximately $ 0.1 billion of previously reported assets under management in u.s. value strategies has been reclassified to global value strategies . historical information has been reclassified for all periods presented .

operating results assets under management and flows as of december 31 , 2014 , our approximately $ 27.7 billion of aum was invested in a variety of value-oriented investment strategies , representing distinct capitalization segments of u.s. and non-u.s. equity markets . the performance of our largest investment strategies as of december 31 , 2014 is further described below . we follow the same investment process for each of these strategies . our investment strategies are distinguished by the market capitalization ranges from which we select securities for their portfolios , which we refer to as each strategy 's investment universe , as well as the regions in which we invest and the degree to which we concentrate on a limited number of holdings . while our investment process includes ongoing review of companies in the investment universes described below , our actual investments may include companies outside of the relevant market capitalization range at the time of our investment . in addition , the number of holdings typically found in the portfolios of each of our investment strategies may vary , as described below . the following table indicates the annualized returns , gross and net ( which represents annualized returns prior to , and after , payment of advisory fees , respectively ) , of our largest investment strategies from their inception to december 31 , 2014 , and in the five-year , three-year , and one-year periods ended december 31 , 2014 , relative to the performance of the market index which is most commonly used by our clients to compare the performance of the relevant investment strategy . replace_table_token_7_th 26 replace_table_token_8_th ( 1 ) the historical returns of these investment strategies are not necessarily indicative of their future performance , or the future performance of any of our other current or future investment strategies . ( 2 ) net of applicable withholding taxes and presented in u.s. $ . large cap focused value .

readers should carefully consider those risks and uncertainties in reading this report . factors that could cause or contribute to such differences include , but are not limited to : ( 1 ) global , national and local economic and market conditions , specifically with respect to changes in the united states economy and geopolitical uncertainty ; ( 2 ) the level and volatility of interest rates and currency values ; ( 3 ) government fiscal and monetary policies ; ( 4 ) credit risks inherent in the lending process ; ( 5 ) loan and deposit demand in the geographic regions where we conduct business ; ( 6 ) the impact of intense competition in the rapidly evolving banking and financial services business ; ( 7 ) extensive federal and state regulation of our business , including the effects of current and pending legislation and regulations ; ( 8 ) whether expected revenue enhancements and cost savings are realized within expected time frames ; ( 9 ) matters relating to the integration of our business with that of past and future merger partners , including the impact of combining these businesses on revenues , expenses , deposit attrition , customer retention and financial performance ; ( 10 ) our reliance on third parties to provide certain critical services , including data processing ; ( 11 ) the proposal or adoption of changes in accounting standards by the financial accounting standards board ( “fasb” ) , the securities and exchange commission ( “sec” ) or other standard setting bodies ; ( 12 ) technological changes ; ( 13 ) other risks and uncertainties discussed in this document or detailed from time to time in other sec filings that we make ; and ( 14 ) management 's ability to manage risks that result from these and other factors . our forward-looking statements are based on management 's current views about future events . those statements speak only as of the date on which they are made . we do not intend to update forward-looking statements , and , except as required by law , we disclaim any obligation or undertaking to update or revise any such statements to reflect any change in our expectations or any change in events , conditions , circumstances or assumptions on which forward-looking statements are based . glossary see “glossary of financial terms” on page 71 for definitions of certain terms used in this annual report . overview our net income during 2002 increased 41.8 % over 2001 to a record $ 361.3 million . these were some of the key events that occurred in 2002 : on march 15 , 2002 , we completed our acquisition of united california bank ( “ucb” ) from ufj bank ltd. of tokyo , japan . we acquired ucb for $ 2.4 billion in cash . on march 15 , 2002 , ucb had total assets of $ 10.1 billion , net loans of $ 8.5 billion , total deposits of $ 8.3 billion and 115 branches . the acquisition of ucb substantially bolstered our branch network , particularly in southern california where we maintain administrative and processing centers in addition to our branches . ucb was merged with and into bank of the west on april 1 , 2002. in the third quarter of 2002 , former ucb branches became fully integrated within bank of the west . we expect to achieve cost savings for the combined company of approximately $ 75- $ 80 million per year beginning in 2003. these anticipated cost savings primarily involve employee compensation and occupancy-related expenses . bnp paribas funded our acquisition of ucb by providing $ 1.6 billion in additional capital and by providing $ 800 million in debt financing . the contribution made by the ucb acquisition substantially impacted our financial results for 2002. in november 2002 , we obtained permanent financing for the ucb acquisition through a repurchase agreement of bank of the west stock with bnp paribas . bnp paribas purchased approximately 15 % of bank of the west stock from us subject to a shareholder 's agreement that contained put and call features . see note 4 to the consolidated financial statements for additional information . bank of the west acquired trinity capital corporation ( “trinity” ) , a privately held equipment leasing company , in the fourth quarter of 2002. trinity became a wholly-owned subsidiary of bank of the west , with a lease portfolio of approximately $ 160 million and with leases serviced for others of nearly $ 900 million . in addition to the growth that resulted from the ucb acquisition , we continued to grow loans , leases and deposits through our existing operations in the western united states . in hawaii , first hawaiian strengthened bancwest corporation and subsidiaries 13 part ii ( continued ) its dominant market position by increasing deposits . for further information regarding the company 's mergers and acquisitions , see note 2 to the consolidated financial statements on pages 49 through 51 . 2002 vs. 2001 the table below compares our 2002 financial results to 2001. the increases in net income and core earnings are primarily the result of the acquisition of ucb . the acquisition , coupled with organic growth , resulted in higher net interest income , caused mainly by increased loan and lease and deposit volume . noninterest income also contributed to the increase with increased charges and fees from our larger customer base . noninterest expense increased in 2002 compared to 2001 , primarily as a result of higher employee , occupancy , equipment and other costs resulting from the acquisition of ucb . although net income and core earnings increased in 2002 over 2001 , the return on average tangible assets dipped from 1.49 % in 2001 to 1.38 % in 2002. replace_table_token_4_th * see “gaap , core and cash earnings” on page 10 . * * see note 2 on page 12 for explanation of the method of calculation . story_separator_special_tag 2001 vs. 2000 ( in thousands ) 2001 2000 change average loans and leases $ 14,585,712 $ 13,285,586 9.8 % the increase in average loans and leases was primarily due to growth in bank of the west 's consumer loan and lease financing portfolios . in addition to growth from its existing branch network , average loans and leases in the bank of the west operating segment also increased due to the acquisition of branches in nevada and new mexico . average loans and leases in the first hawaiian operating segment decreased in 2001 as compared to 2000 , primarily due to the planned reduction in certain syndicated national credits , partially offset by loans and leases acquired in the guam and saipan branch acquisition . average interest-bearing deposits and liabilities 2002 vs. 2001 ( in thousands ) 2002 2001 change average interest-bearing deposits and liabilities $ 21,170,693 $ 13,366,544 58.4 % the increase in average interest-bearing deposits and liabilities in 2002 over 2001 was principally due to growth in our customer deposit base , primarily in bank of the west . average deposits increased due to the ucb acquisition and the guam and saipan branches acquired by first hawaiian from union bank of california . average short-term borrowings increased primarily due to higher federal home loan bank advances and the $ 800 million in short-term debt financing for the ucb acquisition . average long-term debt and capital securities increased primarily due to the inclusion of $ 1.550 billion in long-term debt entered into with bnp paribas in conjunction with the bnp paribas merger for all of 2002 , as opposed to only a portion of december 2001. in november 2002 , we recorded an additional $ 800 million in long-term debt in connection with the ucb acquisition . 2001 vs. 2000 ( in thousands ) 2001 2000 change average interest-bearing deposits and liabilities $ 13,366,544 $ 12,289,972 8.8 % the increase in average interest-bearing deposits and liabilities in 2001 over 2000 was principally caused by growth in our customer deposit base , primarily in bank of the west . our average deposits also increased due to branch acquisitions in nevada , new mexico , guam and saipan . average long-term debt and capital securities increased in 2001 over 2000 primarily due to the inclusion of the $ 150 million in bwe capital securities for all of 2001 , as opposed to only a portion of december 2000. also affecting average long-term debt was the $ 1.550 billion in long-term debt entered into with bnp paribas in conjunction with the bnp paribas merger . bancwest corporation and subsidiaries 15 part ii ( continued ) table 1 : average balances , interest income and expense , and yields and rates ( taxable-equivalent basis ) on december 20 , 2001 , bnp paribas acquired all of the outstanding common shares of bancwest corporation . as a result of the transaction , the corporation became a wholly-owned subsidiary of bnp paribas . the business combination was accounted for as a purchase with bnp paribas ' accounting basis being “pushed down” to bancwest corporation . see note 2 to the consolidated financial statements for additional information regarding this business combination . it is generally not appropriate to combine pre- and post-“push-down” periods ; however , for purposes of comparison only , the following tables combine our consolidated results of operations from december 20 , 2001 through december 31 , 2001 with those for the period january 1 , 2001 through december 19 , 2001. the combined results will generally serve as comparable amounts to the 12-month periods ended december 31 , 2002 and 2000 and will be utilized for purposes of providing discussion and analysis of consolidated results of operations . the following table sets forth the condensed consolidated average balance sheets , an analysis of interest income/expense and average yield/rate for each major category of earning assets and interest-bearing deposits and liabilities for the years indicated on a taxable-equivalent basis . the taxable-equivalent adjustment is made for items exempt from federal income taxes ( assuming a 35 % tax rate for 2002 , 2001 and 2000 ) to make them comparable with taxable items before any income taxes are applied . replace_table_token_8_th notes : ( 1 ) for the years ended december 31 , 2002 , 2001 , and 2000 , average debt investment securities were computed based on historical amortized cost , excluding the effects of sfas no . 115 adjustments . ( 2 ) nonaccruing loans and leases are included in the average loan and lease balances . ( 3 ) interest income for loans and leases include loan fees of $ 53,830 , $ 37,834 and $ 32,811 for 2002 , 2001 and 2000 , respectively . 16 bancwest corporation and subsidiaries part ii ( continued ) replace_table_token_9_th bancwest corporation and subsidiaries 17 part ii ( continued ) table 2 : analysis of changes in net interest income ( taxable-equivalent basis ) the following table analyzes the dollar amount of change ( on a taxable-equivalent basis ) in interest income and expense and the changes in dollar amounts attributable to : ( a ) changes in volume ( changes in volume times the prior year 's rate ) , ( b ) changes in rates ( changes in rates times the prior year 's volume ) , and ( c ) changes in rate/volume ( change in rate times change in volume ) . in this table , the dollar change in rate/volume is prorated to volume and rate proportionately . the taxable-equivalent adjustment is made for items exempt from federal income taxes ( assuming a 35 % tax rate for 2002 , 2001 and 2000 ) to make them comparable with taxable items before any income taxes are applied . replace_table_token_10_th note : ( 1 ) interest income for loans and leases include loan fees of $ 53,830 , $ 37,834 , and $ 32,811 for 2002 , 2001 and 2000 , respectively .

operating segments results as detailed in note 19 to the consolidated financial statements on pages 62 through 66 , our operations are managed principally through our two major bank subsidiaries , bank of the west and first hawaiian . bank of the west operates primarily in california , oregon , washington , idaho , new mexico and nevada . it also conducts business nationally through its consumer finance division as well as its essex credit corporation subsidiaries . first hawaiian 's primary base of operations is in hawaii , guam and saipan . it also has significant operations extending nationally , and to a lesser degree internationally , through its media finance , national corporate lending and leveraged leasing operations . the “other bancwest” category in the table below consists principally of bancwest corporation ( parent company ) , fhl lease holding company , inc. , bancwest capital i and first hawaiian capital i. the reconciling items are principally consolidating entries to eliminate intercompany balances and transactions . the following table summarizes significant financial information , as of or for years ended december 31 , of our reportable segments : replace_table_token_11_th 2002 vs. 2001 as detailed in note 19 to the consolidated financial statements , we manage our operations through a number of operating segments at bank of the west and first hawaiian . the results of each segment are detailed in the note previously referenced . bank of the west regional banking net interest income grew $ 235 million primarily due to an increase in average outstanding loans of approximately $ 2.9 billion and an increase of $ 4.9 billion in average deposits , both of which are largely attributable to the acquisition of ucb on march 15 , 2002. additionally , due to a declining interest rate environment during much of the period , the net margin ( yield ) widened .

our condensed statements of income ( loss ) from discontinued operations for each operating segment were as follows : replace_table_token_34_th 62 oil and gas ( 1 ) includes a $ 51.0 million impairment charge due to the deterioration of economic conditions story_separator_special_tag the following discussion and analysis of our financial condition and results of operations is based on , and should be read in conjunction with , our consolidated financial statements and the related notes thereto included under part ii , item 8.—financial statements and supplementary data . this discussion and analysis contains forward-looking statements that involve risks and uncertainties . actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors , including those set forth under part 1a.—risk factors and elsewhere in this annual report . see “forward-looking statements.” management overview we own and operate the world 's largest land-based drilling rig fleet and are a leading provider of offshore platform workover and drilling rigs in the united states and multiple international markets . our drilling & rig services business is comprised of our global land-based and offshore drilling rig operations and other rig services , consisting of equipment manufacturing , rig instrumentation , optimization software and directional drilling services . our drilling & rig services business consist of four reportable operating segments : u.s. , canada , international and rig services . on march 24 , 2015 , we completed the merger of our completion & production services business with c & j energy . in the merger and related transactions , our wholly-owned interest in our completion & production service business was exchanged for cash and an equity interest in the combined entity , cjes , and is now accounted for as an unconsolidated affiliate as of the acquisition date . see further discussion in note 9—investments in unconsolidated affiliates . prior to the merger , our completion & production services business conducted our operations involved in the completion , life-of-well maintenance and plugging and abandonment of a well in the united states and canada . these services include stimulation , coiled-tubing , cementing , wireline , workover , well-servicing and fluids management . as a result of the merger , we report our share of the earnings ( losses ) of cjes through earnings ( losses ) from unconsolidated affiliates in our consolidated statements of income ( loss ) . cjes provides well construction , well completions , well support and other complementary oilfield services to oil and gas exploration and production companies primarily in north america . as we no longer consolidate the results of operations from our historical completion & production services business , our results of operations for the years ended december 31 , 2014 and 2013 are not directly comparable to the year ended december 31 , 2015. outlook the demand for our services is a function of the level of spending by oil and gas companies for exploration , development and production activities . the primary driver of customer spending is their cash flow and earnings which are largely driven by oil and natural gas prices . the oil and natural gas markets have traditionally been volatile and tend to be highly sensitive to supply and demand cycles . during the second half of 2014 , the markets experienced a dramatic decline in oil prices which remained depressed throughout 2015 and into 2016 due , at least in part , to an increase in global crude supply coupled with stagnant demand . oil prices have declined by more than 60 % from the peak oil prices of 2014 , falling to approximately $ 35 per barrel in late 2015. subsequent to year end , oil prices have continued to decline reaching a low of $ 26.21 per barrel on february 11 , 2016. as a result of the sustained reduction in the price of oil , we have experienced a decline in the demand , primarily in north america and to a lesser extent in the international market , for drilling services as customers have reduced or curtailed their capital spending and drilling activities . the reduction in demand for drilling services , coupled with the increased supply of newly built high-specification rigs in the drilling market , among other factors , has led to a highly competitive market for all rigs . accordingly , we have also experienced downward pricing pressure for our services . due to the decline in oil prices and customers ' reduced drilling activity , we have experienced a decline in our dayrates as well as the average number of rigs operating , most notably in the lower 48 states . in our u.s. drilling operating segment , our rig years ( a measure of activity and utilization ) have decreased from 212.5 years during fiscal year 2014 to 120.0 years during fiscal year 2015. in our canada drilling operating segment , our rig years have declined by roughly 51 % from 2014. our international operating segment has not been immune from the impact of lower oil prices . although international drilling markets tend to react slower than the north american markets , we began to experience downward pressure on dayrates in the international segment beginning in the second quarter of 2015. our international rig years declined in the latter half of 2015 , primarily due to the conclusion of several drilling projects as well as reduced activity resulting from lower commodity prices . given the commodity price environment entering 2016 , we expect continued erosion at least through the first half of the year in industry rig counts , both domestic and international , as well as continued downward pressure on the utilization and pricing of 23 our rig fleets . story_separator_special_tag the canadian dollar weakened approximately 19 % against the u.s. dollar year-over-year . this also negatively impacted margins , as both revenues and expenses are denominated in canadian dollars . operating results decreased slightly from 2013 to 2014 primarily due to an unfavorable foreign exchange variance . the canadian dollar weakened approximately 7 % against the u.s. dollar . in addition , the canada operations were impacted by a decline in average drilling dayrates . these decreases were partially offset by streamlining activities and cost saving initiatives . 28 international operating results increased from 2014 to 2015 primarily as a result of an increase in rig count coupled with the incremental revenue associated with our acquisition of the remaining equity interest in nabors arabia in the second quarter of 2015 . furthermore , our international operations benefitted from the incremental margins associated with deployments of several newly constructed rigs throughout 2014. these increases were partially offset by a decrease in rig years in mexico , papua new guinea and bahrain . operating results increased from 2013 to 2014 primarily as a result of higher dayrates from existing land rigs in algeria , colombia , northern iraq , russia and saudi arabia , as well as deployments of newly built rigs in saudi arabia and argentina . these increases were partially offset by decreased land drilling activity in mexico . rig services operating results decreased from 2014 to 2015 primarily due to a broad-based decline in revenue-producing activities , including top drives and catwalk sales and the continued decline in financial results in our directional drilling businesses due to intense competition and the low price of oil . the decline in revenue was partially offset by a decrease in operating and general and administrative costs for this segment due to cost-reduction efforts . operating results increased from 2013 to 2014 primarily due to higher demand in the united states and canada drilling markets for top drives , rig instrumentation and data collection services from oil and gas exploration companies , along with higher third-party rental and rigwatch ® units , which generate higher margins . these increases were partially offset by the continued decline in financial results in our directional drilling businesses due to intense competition . other financial information replace_table_token_12_th ( 1 ) the number is so large that it is not meaningful . general and administrative expenses general and administrative expenses decreased from 2014 to 2015. over half of the decrease , approximately $ 98.5 million , was due to the fact that we no longer consolidate the expenses from our completion & production services business as a result of the merger . the remainder of the decrease was attributable to a reduction in workforce and general cost-reduction efforts across the remaining operating units and our corporate offices . as a percentage of operating revenues , general and administrative expenses are slightly higher in 2015 due to the reductions in revenues primarily across the u.s. operating units . general and administrative expenses increased slightly from 2013 to 2014 primarily as a result of increased activity across the operating units , particularly within our u.s. and international drilling segments . as a percentage of operating revenues , general and administrative expenses are comparable for each period relative to fluctuations in activity levels . 29 research and engineering research and engineering expenses decreased slightly from 2014 to 2015. the decrease was primarily attributable to a reduction in workforce and general cost-reduction efforts across the various operating units . research and engineering expenses increased slightly from 2013 to 2014. the increase was primarily attributable to the development of drilling and measurement tools resulting from our acquisition of nes , as well as an increase in personnel as a result of the acquisition of 2td during october 2014. depreciation and amortization depreciation and amortization expense decreased from 2014 to 2015 primarily due to the fact that we no longer consolidate the expenses from our completion & production services business as a result of the merger , which accounted for $ 170.7 million , or 98 % of the decrease . the remainder of the decrease was due to the impairment and retirement of rigs and rig components during the fourth quarter of 2014 , which more than offset the incremental depreciation attributed to newly constructed rigs , rig upgrades and other capital expenditures made during 2014. depreciation and amortization expense increased from 2013 to 2014 as a result of the incremental depreciation expense related to newly constructed rigs placed into service during 2014 , and to a lesser extent , rig upgrades and other capital expenditures . earnings ( losses ) from unconsolidated affiliates earnings ( losses ) from unconsolidated affiliates represents our share of the net income ( loss ) , as adjusted for our basis differences , of our equity method investments , primarily composed of our investment in cjes . we account for our investment in cjes on a one-quarter lag . accordingly , the year ended december 31 , 2015 includes our share of the net income ( loss ) of cjes from the closing of the merger until september 30 , 2015 , resulting in a loss of $ 81.3 million . the operating losses of cjes for the nine months ended september 30 , 2015 are primarily due to reduced activity levels driven by lower customer demand stemming from lower oil prices coupled with the further pricing concessions required by the highly competitive environment . further sustained declines in oil prices and activity levels in the pressure pumping business could impact cjes 's operations and the fair value of its assets , resulting in future operating losses . interest expense interest expense was relatively flat from 2014 to 2015. our average outstanding debt balances during 2015 were lower than those in the corresponding 2014 period , primarily due to the repayment of a portion of our outstanding debt using cash consideration received in connection with the merger .

financial results during 2015 , our income ( loss ) from continuing operations was adversely affected by approximately $ 369.0 million in impairments and other charges . net loss from continuing operations totaled $ 329.5 million for 2015 ( $ 1.14 per diluted share ) compared to a net loss from continuing operations of $ 669.3 million ( $ 2.28 per diluted share ) in 2014. the impairment charges stemmed from the impact of the industry downturn on our business activity and future outlook as the continuation of depressed oil prices led to considerable reductions in capital spending by some of our customers and diminished demand for our drilling services . the impairments and retirement provisions were primarily comprised of $ 140.1 million related to tangible assets and equipment and $ 180.6 million related to an other-than-temporary impairment on our equity method investment in cjes . operating revenues in 2015 totaled $ 3.9 billion , representing a decrease of $ 2.9 billion , or 43 % , over 2014. the decrease in revenues was due in part to ceasing to consolidate the revenues associated with our completion & production services business . further exacerbating the decline in revenues was the decrease in activity and reduced dayrates within our u.s. and canada drilling operating segments resulting from the overall decline in oil prices throughout 2015 as mentioned above . these decreases were partially offset by an increase in revenue in our international drilling operating segment . during 2014 , our income ( loss ) from continuing operations was adversely affected by approximately $ 1.03 billion in impairments and other charges .

risk factors ” of this annual report on form 10-k. our actual results may differ materially from those contained in any forward-looking statements . you should read the following discussion together with our audited consolidated financial statements and related notes thereto and other financial information included in this annual report on form 10-k. our historical financial information may not be indicative of our future performance . company overview we are a leading national provider of professional workforce solutions and have completed a series of acquisitions including the acquisition of bg personnel , lp and b g staff services inc. in june 2010 , substantially all of the assets of jna staffing , inc. in december 2010 , extrinsic , llc in december 2011 , american partners , inc. in december 2012 , instaff in june 2013 , d & w in march 2015 , vts in october 2015 , zycron in april 2017 , smart in september 2017 , and ljk in december 2019 , 100 % of the equity of edgerock in february 2020 , and substantially all of the assets of momentum solutionz in february 2021. we operate within three industry segments : real estate , professional , and light industrial . we provide workforce solutions to client partners primarily within the united states of america . we now operate across 46 states and d.c. , as well as 13 on-site locations . the real estate segment provides office and maintenance field talent to various apartment communities and commercial buildings in 36 states and d.c. , via property management companies responsible for the apartment communities ' and commercial buildings ' day-to-day operations . our real estate segment operates through two divisions , bg multifamily and bg talent . the professional segment provides skilled field talent on a nationwide basis for information technology ( “ it ” ) and finance , accounting , legal and human resource client partner projects on a national basis . our professional segment operates through various divisions including extrinsic , american partners , donovan & watkins , vision technology services , zycron , smart resources , l.j . kushner & associates , edgerock technology partners , and beginning in 2021 , momentum solutionz . the light industrial segment provides field talent primarily to manufacturing , distribution , logistics , and call center client partners needing a flexible workforce in 7 states . our light industrial segment operates through our instaff division . impact of covid-19 we continue to observe the impact of the covid-19 outbreak on our consolidated operating results , our candidate and field talent supply chain , and our client partners demand in all segments . we expect that the social distancing measures , the changing operational status of our client partners , production levels at client partners facilities , and general business uncertainty will continue to effect demand in all our segments . during this uncertain time , our critical priorities are the health and safety of our team members , field talent , candidates and client partners . starting in march 2020 , we took several cost containment and liquidity actions , which we do not believe have materially adversely impacted our internal controls , financial reporting systems or our operations . 29 our business , results of operations , and financial condition have been , and may continue to be , adversely impacted in material respects by covid-19 and by related government actions , non-governmental organization recommendations , and public perceptions , all of which have led and may continue to lead to disruption in global economic and labor markets . these effects have had a significant impact on our business , including reduced demand for our workforce solutions , early terminations or reductions in projects , and hiring freezes , and a shift of a majority of our workforce to remote operations , all of which have contributed to a decline in revenues and other significant adverse impacts on our financial results . other potential impacts of covid-19 may include continued or expanded closures or reductions of operations with respect to our client partners ' operations or facilities , the possibility our client partners will not be able to pay for our workforce solutions , or that they will attempt to defer payments owed to us , either of which could materially impact our liquidity , the possibility that the uncertain nature of the pandemic may not yield the increase in certain of our workforce solutions that we have historically observed during periods of economic downturn , and the possibility that various government-sponsored programs to provide economic relief may be inadequate . further , we may continue to experience adverse financial impacts , some of which may be material , if we can not offset revenue declines with cost savings through expense-related initiatives , human capital management initiatives , or otherwise . as a result of these observed and potential developments , we expect our business , results of operations , and financial condition to continue to be negatively affected . real estate was strongly affected by covid-19 when client partners immediately stopped non-emergency maintenance , which is our largest revenue source . additional , during our high volume season , many client partners were forced into a virtual leasing model verses using onsite touring options . with many government actions requiring eviction moratoriums , our client partners ' response was to tighten all expenses . we will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal , state , local authorities , or that we determine are in the best interests of our team members , field talent , client partners , and stockholders . the potential effects are not clear for any such alterations or modifications on our business , our client partners , candidates , vendors , or on our financial results . story_separator_special_tag in fiscal 2020 , we paid net $ 22.0 million in connection with the 2020 edgerock and 2019 ljk acquisitions and we made capital expenditures of $ 2.1 million mainly related to software and computer equipment purchased in the ordinary course of business and for the it roadmap . in fiscal 2019 , we paid $ 7.5 million in connection with the ljk acquisition , excluding the hold back paid in 2020 , and we made capital expenditures of $ 2.2 million mainly related to software and computer equipment purchased in the ordinary course of business and for the it roadmap project . in fiscal 2018 , we made capital expenditures of $ 0.9 million mainly related to furniture and fixtures and computer equipment purchased in the ordinary course of business . 36 financing activities cash flows from financing activities consisted principally of borrowings and payments under our credit agreement , payment of dividends , and contingent consideration paid . for fiscal 2020 , we borrowed $ 22.5 million on our term loan , as defined below , to fund the edgerock acquisition and pay down the revolving facility , we reduced $ 14.4 million on our revolving facility , paid $ 5.2 million in cash dividends on our common stock , and paid down $ 1.1 million on the term loan . for fiscal 2019 , we paid $ 12.3 million in cash dividends on our common stock , paid down $ 10.1 million on the term loan with texas capital bank , national association ( “ tcb ” ) , and we paid $ 2.7 million of contingent consideration related to the zycron acquisition . we borrowed $ 9.7 million on our revolving facility and borrowed $ 7.5 million on our term loan in connection with the ljk acquisition . for fiscal 2018 , we paid $ 13.8 million in principal payments on the term loan with tcb , paid $ 10.9 million in cash dividends on our common stock , reduced our revolving credit facility by $ 10.7 million , paid $ 3.3 million related to option cancellation agreement , and paid $ 1.0 million of contingent consideration related to the vts and zycron acquisitions . we received net proceeds from the issuance of the common stock of $ 22.2 million and used the net proceeds to reduce outstanding indebtedness under our credit agreement with tcb and cancel outstanding options pursuant to the option cancellation agreement , as noted above . credit agreements on july 16 , 2019 , we entered into a credit agreement ( the “ credit agreement ” ) , maturing july 16 , 2024 , with bmo , as administrative agent , lender , letters of credit issuer , and swing line lender . the credit agreement provides for the revolving facility permitting us to borrow funds from time to time in an aggregate amount up to $ 35 million . the credit agreement also provided for a term loan commitment ( the “ term loan ” ) permitting us to borrow funds from time to time in an aggregate amount not to exceed $ 30 million with principal payable quarterly , based on an annual percentage of the original principal amount as defined in the credit agreement all of which has been funded . we may from time to time , with a maximum of two , request an increase in the aggregate term loan commitment by $ 40 million , with minimum increases of $ 10 million . our obligations under the credit agreement are secured by a first priority security interest in substantially all our tangible and intangible property . the credit agreement bears interest either at the base rate plus the applicable margin plus the applicable margin or libor ( as such terms are defined in the credit agreement ) . we also pay an unused commitment fee on the daily average unused amount of revolving facility and term loan . the credit agreement contains customary affirmative covenants and negative covenants , including certain limitations on our ability to pay cash dividends . we are subject to a maximum leverage ratio and a minimum fixed charge coverage ratio as defined in the credit agreement . in april 2020 , we entered into a pay-fixed/receive-floating interest rate swap agreement with bmo that reduces the floating interest rate component on the term loan obligation . the $ 25.0 million notional amount was effective on june 3 , 2020 and designed as a cash flow hedge on the underlying variable rate interest payments against a fixed interest rate that terminates on june 1 , 2023. in accordance with cash flow hedge accounting treatment , we have determined that the hedge is perfectly effective using the change-in-variable-cash-flow method . on december 13 , 2019 , we borrowed $ 7.5 million on the term loan in conjunction with the closing of the ljk acquisition . on february 3 , 2020 , we borrowed $ 18.5 million on the term loan in conjunction with the closing of the edgerock acquisition . on april 6 , 2020 , the company borrowed the remaining $ 4.0 million on the term loan and the proceeds were used to pay down the revolving facility . we borrowed $ 20 million under the revolving facility to pay off our existing indebtedness with tcb and our credit agreement with tcb ( and related ancillary documentation ) was terminated on july 16 , 2019 in connection with such repayment . we recognized a loss on extinguishment of debt of approximately $ 0.5 million related to the unamortized deferred finance fees . on february 8 , 2021 , the company borrowed $ 3.8 million on the revolving facility in conjunction with the closing of the momentum solutionz acquisition , as described in note 19 in the notes to consolidated financial statements .

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 revenues , and have been derived from our consolidated financial statements . replace_table_token_7_th 30 replace_table_token_8_th fifty-two week fiscal year ended december 27 , 2020 ( fiscal 2020 ) compared with fifty-two week fiscal year ended december 29 , 2019 ( fiscal 2019 ) revenues : replace_table_token_9_th real estate revenues : real estate revenues decreased approximately $ 27.7 million ( 28.7 % ) due to the effects of the covid-19 pandemic discussed above . the decrease was due to a 31.7 % decrease in billed hours partially offset by a 4.1 % increase in average bill rate . revenue from new offices was $ 0.8 million . professional revenues : professional revenues increased approximately $ 15.1 million ( 12.2 % ) , primarily from ljk and edgerock acquisitions , which contributed $ 36.1 million of new revenues . the remaining professional group decreased $ 21.1 million . even with the overall increase , billed hours decreased 5.0 % offsets by an increase of 17.7 % in average bill rate and an increase in permanent placements of $ 1.2 million . light industrial revenues : light industrial revenues decreased approximately $ 3.8 million ( 5.1 % ) due to the effects of the covid-19 pandemic . the decrease was due to a 11.8 % decrease in billed hours partially offset by a 7.6 % increase in average bill rate . 31 gross profit : gross profit represents revenues from workforce solutions less cost of services expenses , which consist of payroll , payroll taxes , payroll-related insurance , field talent costs , and reimbursable costs . replace_table_token_10_th replace_table_token_11_th overall , our gross profit decreased approximately $ 4.5 million ( 5.5 % ) . as a percentage of revenue , gross profit has remained consistent at 27.4 % , primarily due to higher gross profits across our professional segment . we determine spread as the difference between bill rate and pay rate .

inventory inventory consists primarily of finished goods stated at the lower of cost or net realizable value , with cost determined on a first-in , first-out basis . the company reviews the composition of inventory at each reporting period in order to identify obsolete , slow-moving , quantities in excess of expected story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in 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 , includes forward-looking statements that involve risks and uncertainties . you should review the “ risk factors ” section in 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 . story_separator_special_tag agreement also released the former trx owners of their requirement to indemnify the company for the losses discussed above . as a result , the company reversed the $ 5.2 million indemnity receivable in other receivables during the second quarter of 2019. the settlement agreement resulted in a net reversal of $ 1.6 million in previously recognized expense to cost of product sales for the year ended december 31 , 2019. this reversal is partially offset by cost of product sales of approximately $ 1.0 million , which is primarily composed of royalties , cost of inventory sold and licenses . the $ 3.3 million of cost of product sales for the year ended december 31 , 2018 primarily consists of the ulesfia minimum royalty obligations described above . research and development expenses the following table summarizes our research and development expenses for the years ended december 31 , 2019 and 2018 : replace_table_token_1_th research and development expenses increased $ 6.0 million for the year ended december 31 , 2019 compared to the prior year . the overall increase was driven by an increase in research and development activities during the current year as the company continues to develop its pipeline assets . clinical expenses increased $ 2.4 million primarily due to increased development costs related to cerc-801 , cerc-802 , and cerc-803 , which were acquired as part of the ichorion acquisition in september 2018 , and increased activities related to the cerc-301 clinical study in noh during the first half of 2019. chemistry , manufacturing , and controls ( `` cmc '' ) expenses increased $ 3.3 million for the year ended december 31 , 2019 compared to the same period in 2018 due to additional spending on manufacturing to support clinical development . salaries , benefits and related costs increased by $ 0.7 million compared to the same period in 2018 due to an increase in headcount and salary-related costs needed to maintain and grow our research and development activities as we continue to invest in our pipeline assets . additionally , stock-based compensation increased by $ 0.4 million due to an increase in the amount of stock option grants in 2019 driven by an increased headcount , as well as the additional expense related to the annual stock option award that was granted on april 1 , 2019. these increases were partially offset by a $ 1.3 million reversal of research and development expense related to the company 's assignment of its license agreement with respect to cerc-611 to es therapeutics in the third quarter of 2019. pursuant to the assignment agreement , the company assigned and transferred its rights , interest and obligations related to the compound , thus releasing the company 's contingent payment of $ 1.3 million to lilly upon the first subject dosage of cerc-611 in a multiple ascending dose study , which was previously recorded as a license obligation on the balance sheet . the elimination of the license obligation resulted in an offset of research and development expense for the year ended december 31 , 2019 . 61 the company expects research and development expenses to increase in 2020 as the company advances its newly acquired pipeline assets and also continues to advance the cerc-800 assets . acquired in-process research and development expenses as part of the ichorion acquisition in september 2018 , the company acquired $ 18.7 million of in-process research and development ( `` ipr & d '' ) for three preclinical therapies ( cerc-801 , cerc-802 and cerc-803 ) for cdgs . the fair value of the ipr & d was immediately recognized as acquired ipr & d expense as the ipr & d asset has no other alternate use due to the stage of development . there was no acquired ipr & d expense for the year ended december 31 , 2019. general and administrative expenses the following table summarizes our general and administrative expenses of continuing operations for the years ended december 31 , 2019 and 2018 : replace_table_token_2_th general and administrative expenses decreased $ 0.4 million for the year ended december 31 , 2019 compared to 2018. the overall decrease was driven by a $ 0.5 million decrease in legal , consulting and other professional fees and a $ 0.6 million decrease in stock-based compensation , largely offset by a $ 0.6 million increase in salaries , benefits and related costs . legal , consulting and other professional expenses decreased $ 0.5 million , which was driven by a substantial decrease in consulting fees in the current year . the consulting fees incurred in the prior year were related to the integration of the acquisitions of trx and avadel pharmaceuticals plc 's ( `` avadel '' ) pediatric products . the company has since increased corporate headcount and therefore uses less consulting services to meet accounting and reporting requirements . story_separator_special_tag million increase in interest income , net in the current year which is the result of the company opening a money market account during 2019 and having a higher average cash balance year over year . additionally , for the year ended december 31 , 2019 , the company recognized a $ 0.1 million gain on change in the fair value of the investment related to the company 's investment in aytu . as part of the aytu divestiture , the company received 9,805,845 shares of aytu series g preferred stock . the fair value of the investment was determined on november 1 , 2019 , the closing date of the aytu divestiture . subsequent to this date , at each reporting period , the investment will be remeasured at current fair value with changes recorded in other income in the condensed consolidated statement of operations . subsequent to december 31 , 2019 , aytu 's common stock price has been volatile and therefore cerecor may recognize a significant gain or loss on the change in fair value of the investment in aytu for the three months ending march 31 , 2020 and any future reporting period based on actual movements in the underlying stock price . income tax expense ( benefit ) the income tax expense from continuing operations was $ 0.3 million for the year ended december 31 , 2019. the provision for income taxes for the year ended december 31 , 2019 is primarily composed of interest on the income tax liability . the company recognized an immaterial income tax benefit for the year ended december 31 , 2018 , which was composed of an adjustment benefit from the return to provision true up of a prior year tax liability , offset by state income tax of one subsidiary , and deferred income tax 64 expense , all of which were not significant . the annual effective tax rate was ( 1.75 ) % and 0.14 % for the years ended december 31 , 2019 and 2018 , respectively . liquidity , capital resources and expenditure requirements during the first quarter of 2019 , the company closed on an underwritten public offering of common stock for 1,818,182 shares of common stock of the company , at a price to the public of $ 5.50 per share ( `` public price '' ) . armistice capital master fund ltd. ( `` armistice '' ) , the company 's largest stockholder , participated in the offering by purchasing 363,637 shares of common stock of the company at the public price . cerecor director , steven j. boyd , is armistice 's chief investment officer . the net proceeds of the offering were approximately $ 9.0 million . during the third quarter of 2019 , the company entered into a securities purchase agreement with armistice , pursuant to which , the company sold 1,200,000 shares of its common stock for a purchase price of $ 3.132 per share . net proceeds of the private placement were approximately $ 3.7 million . during the fourth quarter of 2019 , the company entered into , and subsequently closed on , the aytu purchase agreement to sell the company 's rights , title and interest in , assets relating to its pediatric portfolio and related commercial infrastructure for a combination of cash and preferred stock ( $ 4.5 million in cash , and approximately 9.8 million shares of aytu convertible preferred stock ) and the assumption of certain of the company 's liabilities including the company 's payment obligations payable to deerfield of $ 15.1 million and certain other liabilities of approximately $ 11.0 million . during the first quarter of 2020 , the company closed on a registered direct offering with institutional investors of 1,306,282 shares of the company 's common stock at a purchase price of $ 3.98 per share . armistice participated in the offering by purchasing 1,256,282 shares of common stock from the company . the net proceeds of the offering were approximately $ 5.0 million . in order to meet its cash flow needs , the company applies a disciplined decision-making methodology as it evaluates the optimal allocation of the company 's resources between investing in the company 's existing pipeline assets and acquisitions or in-licensing of new assets . for the year ended december 31 , 2019 , cerecor generated a net loss of $ 16.1 million and negative cash flow from operations of $ 19.1 million . as of december 31 , 2019 , cerecor had an accumulated deficit of $ 114.3 million and $ 3.6 million in cash and cash equivalents . the accompanying consolidated financial statements have been prepared assuming the company will continue as a going concern ; however , the company expects to incur additional losses in the future in connection with research and development activities and will require additional financing to fund its operations and to continue to execute its strategy . the company plans to use its current cash on hand and the anticipated cash flows from the company 's profits from millipred product sales and or the potential proceeds from the out-license or sale of millipred to a third party to offset costs related to its orphan disease pipeline assets , business development , and costs associated with its organizational infrastructure ; however , cerecor expects to continue to incur significant expenses and operating losses for the immediate future as it continues to invest in the company 's pipeline assets . the company 's ability to continue as a going concern through 2020 is dependent upon the company 's ability to raise additional equity and or debt capital ; however , there can be no assurance that such capital will be available in sufficient amounts or on terms acceptable to the company .

results of operations during the fourth quarter of 2019 , the company sold its rights , titles and interest in , assets relating to its pediatric portfolio , namely aciphex ® sprinkle , cefaclor for oral suspension , karbinal er , flexichamber , poly-vi-flor ® and tri-vi-flor ( the `` pediatric portfolio '' ) , as well as the corresponding commercial infrastructure consisting of the right to offer employment to cerecor 's sales force and the assignment of supporting commercial contracts ( the `` aytu divestiture '' ) , retaining as our only commercial product , millipred , an oral prednisolone indicated across a wide variety of inflammatory conditions . as a result of the aytu divestiture , the pediatric portfolio met all conditions required in order to be classified as discontinued operations as of december 31 , 2019. accordingly , operating results from the pediatric portfolio are reported separately within income ( loss ) from discontinued operations , net of tax ( inclusive of gain on sale ) for all periods presented . unless otherwise noted , the following section focuses on results of operations from continuing operations only . comparison of the years ended december 31 , 2019 and 2018 the following table summarizes our revenue from continuing operations for the years ended december 31 , 2019 and 2018 : replace_table_token_0_th product revenue , net product revenue , net increased $ 0.1 million for the year ended december 31 , 2019 as compared to the year ended december 31 , 2018. sales force revenue as part of the acquisition of trx pharmaceuticals , llc ( `` trx '' ) in november 2017 , the company acquired a sales and marketing agreement with pharmaceutical associates , inc. ( `` pai '' ) under which the company received a monthly marketing fee to promote , market and sell certain products on behalf of pai , as well as a share of pai 's profits , which we collectively categorized as sales force revenue .

we conduct credit analyses prior to making any sales to new customers or increasing credit for existing customers and may require parent story_separator_special_tag the following discussion and analysis should be read in conjunction with our consolidated financial statements included in item 8 of this report and also with risk factors in item 1a of this report . this discussion also includes forward-looking statements . refer to cautionary information about forward-looking statements in part i of this report for important information about these types of statements . overview cimarex is an independent oil and gas exploration and production company . our operations are entirely located in the united states , mainly in oklahoma , texas , and new mexico . currently our operations are focused in two main areas : the permian basin and the mid-continent . our permian basin region encompasses west texas and southeast new mexico . our mid-continent region consists of oklahoma and the texas panhandle . our principal business objective is to increase shareholder value through the profitable long-term growth of our proved reserves and production while seeking to minimize our impact on the communities in which we operate for the long-term . our strategy centers on maximizing cash flow from producing properties so that we can reinvest in exploration and development opportunities and provide cash returns to shareholders through increasing dividends . we consider merger and acquisition opportunities that enhance our competitive position and we occasionally divest non-core assets . on august 31 , 2018 , we closed on the divestiture of oil and gas properties principally located in ward county , texas for a sales price of $ 544.5 million , as adjusted to reflect the resolution of all asserted defects . as of december 31 , 2018 , we have received $ 534.6 million in net cash proceeds as adjusted for customary closing adjustments to reflect an effective date of april 1 , 2018 and transaction costs . final settlement , which will reflect customary post-closing adjustments , is scheduled to occur by the end of first quarter 2019. this divestiture did not significantly alter the relationship between capitalized costs and proved reserves , therefore , in accordance with the full cost method of accounting , no gain or loss was recognized . this divestiture is part of our continuous portfolio optimization and high-grading of our investment opportunities . on november 18 , 2018 , we entered into an agreement and plan of merger to acquire resolute energy corporation ( “ resolute ” ) in a cash and stock transaction valued at a total purchase price of approximately $ 1.6 billion , including the assumption of resolute 's long-term debt , which was $ 710 million as of september 30 , 2018. under the terms of the agreement , resolute shareholders will have the right to receive 0.3943 shares of cimarex common stock , $ 35.00 per share in cash , or a combination of $ 14.00 per share in cash and 0.2366 shares of cimarex common stock . the amount of stock and cash is subject to proration for a total stock and cash mix of 60 % and 40 % , respectively . this pending acquisition will expand cimarex 's footprint in reeves county , texas by 21,100 net acres that are complementary to our existing reeves county position . the transaction , which is expected to be completed by the end of the first quarter 2019 , is subject to the approval of resolute shareholders , which includes voting agreements with certain 37 shareholders that collectively beneficially own approximately 26 % of the outstanding resolute voting power and the satisfaction of certain regulatory approvals and other customary closing conditions . we believe that detailed technical analysis , operational focus , and a disciplined capital investment process mitigate risk and position us to continue to achieve profitable increases in proved reserves and production . our drilling inventory and limited long-term commitments provide the flexibility to respond quickly to industry volatility . our investments are generally funded with cash flow provided by operating activities together with cash on hand , bank borrowings , sales of non-strategic assets , and , from time to time , public financing based on our monitoring of capital markets and our balance sheet . conservative use of leverage has long been a part of our financial strategy . we believe that maintaining a strong balance sheet mitigates financial risk and enables us to withstand unpredictable fluctuations in commodity prices . market conditions the oil and gas industry is cyclical and commodity prices can fluctuate significantly . we expect this volatility to persist . commodity prices are affected by many factors outside of our control , including changes in market supply and demand , inventory storage levels , weather conditions , and other factors . during 2018 , as compared to 2017 , market prices for oil have improved , while market prices for gas have declined . during 2018 , average nymex oil and gas prices were $ 64.77 per barrel and $ 3.09 per mcf , respectively , representing an increase of 27 % and a decrease of 1 % , respectively , from the average nymex oil and gas prices for 2017 . local market prices for oil and gas can be impacted by pipeline capacity constraints limiting takeaway and increasing basis differentials . gas production growth and pipeline constraints in the permian basin and mid-continent region and oil production growth and pipeline constraints in the permian basin have resulted in higher basis differentials and , therefore , lower realized prices . the average prices per barrel of oil and mcf of gas that we realized were less than the wti cushing and henry hub indices by the amounts shown in the table below for the periods indicated . replace_table_token_16_th pipeline expansion projects in the permian basin are expected to ease capacity constraints as they come online over the next few years , which is reflected in the current futures markets that show narrowing differentials . story_separator_special_tag ( 3 ) asc 606 reduced the average realized total price by $ 0.56 per boe for the year ended december 31 , 2018 . our 2018 daily production volumes were 221.9 mboe , a 17 % increase from 2017 . this increase is the result of increased drilling and completion activity during 2018 as compared to 2017 . see production volumes , prices , and costs and exploration and development overview in items 1 and 2 of this report for production information by region and a discussion of our drilling activities . 41 other revenues we transport , process , and market some third-party gas that is associated with our equity gas . we market and sell gas for other working interest owners under short term agreements and may earn a fee for such services . the table below reflects income from third-party gas gathering and processing and our net marketing margin for marketing third-party gas . replace_table_token_22_th fluctuations in revenues from gas gathering and gas marketing activities are a function of increases and decreases in volumes , commodity prices , and gathering rate charges . the decreases from 2017 are primarily due to lower rates and decreases in prices and volumes . operating costs and expenses costs associated with producing oil and gas are substantial . among other factors , some of these costs vary with commodity prices , some trend with the volume of production , others are a function of the number of wells we own , some depend on the prices charged by service companies , and some fluctuate based on a combination of the foregoing . total operating costs and expenses of $ 1.29 billion in 2018 were 11 % higher than the $ 1.17 billion incurred in 2017 . the primary drivers of the increase were depletion , taxes other than income , production expense , and other operating expense , with these being partially offset by lower transportation and processing and increased gains on derivative instruments . the following table shows our operating costs and expenses for the years indicated and a discussion of year-over-year differences follows . replace_table_token_23_th depreciation , depletion , and amortization depletion of our producing properties is computed using the units-of-production method . the economic life of each producing well depends upon the estimated proved reserves for that well , which in turn depend upon the assumed realized sales price for future production . therefore , fluctuations in oil and gas prices will impact the level of proved reserves used in the calculation . higher prices generally have the effect of increasing reserves , which reduces depletion expense . conversely , lower prices generally have the effect of decreasing reserves , which increases depletion expense . the cost of replacing production also impacts our depletion expense . in addition , changes in estimates of reserve quantities , estimates of operating and future development costs , reclassifications of properties from unproved to proved , 42 and impairments of oil and gas properties will also impact depletion expense . while the increase in oil prices has more than offset the decrease in gas prices during 2018 as compared to 2017 , thus increasing our reserves , the increase in production combined with our ongoing exploration and development capital expenditures throughout 2018 have resulted in an overall increase in depletion expense . fixed assets consist primarily of gathering and plant facilities , vehicles , airplanes , office furniture , and computer equipment and software . these items are recorded at cost and are depreciated on the straight-line method based on expected lives of the individual assets , which range from 3 to 30 years . depreciation , depletion , and amortization ( “ dd & a ” ) consisted of the following for the years indicated : replace_table_token_24_th asset retirement obligation asset retirement obligation expense is typically primarily comprised of accretion expense . in periods subsequent to the initial measurement of an asset retirement obligation liability at present value , a period-to-period increase in the carrying amount of the liability is recognized as accretion expense , which represents the effect of the passage of time on the amount of the liability . an equivalent amount is added to the carrying amount of the liability . also included in asset retirement obligation expense are gains and losses recognized on the settlement of asset retirement obligation liabilities . asset retirement obligation expense decreased 54 % , or $ 8.5 million , compared to 2017. the expense in 2017 included $ 10.5 million for the estimated liability to decommission two offshore properties in the gulf of mexico in which we were a prior lessee . in january 2018 , the bureau of safety and environmental enforcement ( “ bsee ” ) notified us and other prior lessees that the current lessee of the properties had filed a petition for relief under the bankruptcy code and , as a result , had defaulted on its obligation to decommission the properties . consequently , bsee ordered us and other prior lessees to decommission all wells , pipelines , platforms , and other facilities related to these properties . our estimate of our liability may change as we refine our understanding of the extent of our obligations under the orders from bsee and obtain additional information on decommissioning costs . production production expense generally consists of costs for labor , equipment , maintenance , saltwater disposal , compression , power , treating , and miscellaneous other costs ( lease operating expense ) . production expense also includes well workover activity necessary to maintain production from existing wells . production expense consists of lease operating expense and workover expense as follows : replace_table_token_25_th through efficiency gains and increasing daily production by 17 % during 2018 as compared to 2017 , we reduced our per unit lease operating expense by 4 % between these two periods .

results of operations above for more information regarding year-over-year changes in revenue and operating expenses . in 2018 , net cash used by investing activities was $ 1.09 billion , compared to $ 1.27 billion and $ 692.4 million in 2017 and 2016 , respectively . the majority of our cash flows used by investing activities are for e & d capital expenditures , which , as reflected in the statements of cash flows , were $ 1.57 billion , $ 1.23 billion , and $ 699.6 million in 2018 , 2017 , and 2016 , respectively . our other capital expenditures , which are primarily for our midstream assets , were $ 103.5 million , $ 45.4 million , and $ 22.2 million in 2018 , 2017 , and 2016 , respectively . in 2018 , cash outflows for capital expenditures were partially offset by proceeds from asset sales of $ 584.4 million , which includes $ 534.6 million in net cash proceeds from the august 2018 divestiture of oil and gas properties principally located in ward county , texas for which the final cash settlement , which will reflect customary post-closing adjustments , is scheduled to occur by the end of first quarter 2019. net cash proceeds from other asset sales totaled $ 49.9 million , $ 12.6 million , and $ 29.4 million in 2018 , 2017 , and 2016 , respectively . these asset sales are primarily for the divestiture of non-core oil and gas properties . net cash used by financing activities was $ 65.2 million , $ 83.0 million , and $ 59.9 million in 2018 , 2017 , and 2016 , respectively . all years include the payment of dividends , the payment of income tax withholdings made on behalf of our employees upon the net settlement of employee stock awards , and the receipt of proceeds from stock option exercises .

the following table summarizes information about director , officer , and employee options outstanding under the stock option plan at december 31 , 2018 : replace_table_token_24_th non-employee options a summary of options outstanding and held by non-employees is as follows : replace_table_token_25_th the following table summarizes information about non-employee options outstanding under the stock option plan at december 31 , 2018 : exercise price shares outstanding weighted average remaining contractual life shares exercisable $ 0.81 57,500 0.54 57,500 the company recorded $ 388 thousand of stock-based compensation expense in 2016. in 2017 , the company recognized stock-based compensation expense of $ 672 thousand . the company recorded no stock-based compensation expense in 2018. the total intrinsic value of options exercised was $ 0 ; $ 0 ; and $ 1,414,892 in 2018 , 2017 , and 2016 , respectively . there were no options outstanding and exercisable with exercise prices lower than market price at december 31 , 2018. f- 25 options pricing models — assumptions the expected life is based on the company 's historical experience with option exercise trends . the assumptions for expected volatility is based on a calculation of volatility over the five-years preceding the grant date . risk-free interest rates are set using grant-date u.s. treasury yield curves . in its calculations , the company assumed no dividends . 16 . 401 ( k ) plan the company implemented an employee savings and retirement plan ( the “401 ( k ) plan” ) in 2005 that is intended to be a tax-qualified plan covering substantially all employees . the 401 ( k ) plan is available to all employees on the first day of the month after 90 days of service . under the terms of the 401 ( k ) plan , employees may elect to contribute up to 88 % of their compensation , or the statutory prescribed limit , if less . the company may , at its discretion , match employee contributions . in the first quarter of 2016 , the company reinstituted a policy of matching . for 2016 , 2017 , and 2018 , the company matched each participant 's elective deferrals up to 2 % of the participant 's compensation for the pay period . the total match was $ 122,369 in 2016 and $ 145,474 in 2017 and $ 145,146 in 2018 . 17. business segment the following is a summary of the company 's sales and long-lived assets by geography : replace_table_token_26_th the company does not operate in separate reportable segments . the company has minimal long-lived assets in foreign countries . shipments to international customers generally require a prepayment either by wire transfer or an irrevocable confirmed letter of credit . the company does extend credit to international customers on some occasions depending upon certain criteria , including , but not limited to , the credit worthiness of the customer , the stability of the country , banking restrictions , and the size of the order . all transactions are in u.s. currency . 18. bonuses in february 2017 , mr. cowan and ms. larios were each granted cash bonuses of $ 250,000 . ms. larios received her bonus in the first quarter of 2017. mr. cowan received his bonus in the fourth quarter of 2017 . 19. storm damage and insurance proceeds on march 26 , 2017 , a hail storm passed through little elm , texas , resulting in damage to the company 's two buildings . during april 2017 , the company performed an inspection of its facilities and determined that possible roof damage had been sustained . in late april 2017 , the company 's insurance carrier inspected the two buildings and confirmed that damage occurred from the hail storm . this damage was principally to the roofs of the buildings but also many of the hvac units and a wall alongside one of the buildings were also damaged . the company 's insurance carrier has assessed damages of $ 1,009,960 and the company 's deductible is $ 5,000 . the company received these funds from its carrier in the second quarter of 2017. repairs commenced during the third quarter of 2017. all repairs were completed in the fourth quarter of 2018. f- 26 during 2017 , the company incurred and recognized $ 538,667 in repairs due to the storm damage . repair expense during 2018 was $ 203,289 . this repair expense was offset by the insurance proceeds , resulting in no impact to the statements of operations . the remaining insurance proceeds of $ 261 thousand were recognized as income in the fourth quarter of 2018 . 20. subsequent events on march 26 , 2019 , the u.s. court of appeals for the fifth circuit issued an opinion affirming the take nothing judgment of the district court in the company and an officer 's suit against bd . the company is evaluating this ruling and conferring with legal counsel regarding possible future action . selected quarterly financial data - unaudited the selected quarterly financial data for the periods ended december 31 , 2018 , and 2017 , have been derived from the company 's unaudited financial statements and include all adjustments , consisting only of normal recurring adjustments , necessary for a fair presentation of the results of the interim periods . certain quarterly amounts may differ from full year totals due to rounding . replace_table_token_27_th f- 27 replace_table_token_28_th major variances for 2018 as compared to 2017 are due to increased domestic sales , offset by a decline in international sales . costs of manufacture declined due to lower volumes and lower unit costs . story_separator_special_tag thomas j. shaw was the only officer to exercise such right prior to expiration , buying a total of three million shares in two transactions in 2017 for an aggregate purchase price of $ 2.35 million . we received approximately $ 1 million from our insurance carrier in the second quarter of 2017 and used these funds to repair our buildings from earlier storm damage . the remaining proceeds of $ 261 thousand were recognized as insurance proceeds in the fourth quarter of 2018. product purchases from our chinese manufacturers have enabled us to increase manufacturing capacity with little capital outlay and have provided a competitive manufacturing cost . in 2018 , our chinese manufacturers 11 produced approximately 85.3 % of our products . in the event that we become unable to purchase products from our chinese manufacturers , we would need to find an alternate manufacturer for the blood collection set , iv catheter , patient safe ® syringe , 0.5ml insulin syringe , 0.5ml autodisable syringe , and 2ml , 5ml , and 10ml syringes and we would increase domestic production for the 1ml and 3ml syringes . in 1995 , we entered into a license agreement with thomas j. shaw for the exclusive right to manufacture , market , and distribute products utilizing his patented automated retraction technology and other patented technology . this technology is the subject of various patents and patent applications owned by mr. shaw . the license agreement generally provides for quarterly payments of a 5 % royalty fee on gross sales . with increased volumes , our manufacturing unit costs have generally tended to decline . factors that could affect our unit costs include increases in costs by third party manufacturers , changing production volumes , costs of petroleum products , and transportation costs . increases in such costs may not be recoverable through price increases of our products . story_separator_special_tag style= '' margin:0in 0in .0001pt ; text-align : justify ; text-indent:36.3pt ; '' > we recorded $ 188 thousand in tax benefits in connection with the enactment of the tax cut and jobs act ( the “act” ) on december 22 , 2017. the act established new tax provisions that affect us including the elimination of the corporate alternative minimum tax and changing rules related to uses and limitations of net operating loss carry forwards created after december 31 , 2017. carry forward credits from alternative minimum taxes paid in prior years became refundable in tax years beginning january 1 , 2018. cash flow from operations was a negative $ 2.9 million for 2017 due to our net loss , increased accounts receivable and other current assets , mitigated by noncash expenses of depreciation and stock option expense , lower inventory levels , increased liabilities , and insurance proceeds . liquidity and capital resources at the present time , management does not intend to publicly raise equity capital . due to the funds received from prior litigation and direct purchase of stock , we have sufficient cash reserves and intend to rely on operations , cash reserves , and debt financing , when available , as the primary ongoing sources of cash . our ability to obtain additional funds through loans is uncertain . in 2018 , we transferred $ 3 million from our cash accounts into securities with maturities of one to three years . this transfer significantly affects our net decrease in cash in 2018. however , the securities may increase investment income in the future . historical sources of liquidity we have historically funded operations primarily from the proceeds from revenues , private placements , litigation settlements , and loans . 13 internal sources of liquidity margins and market access to routinely achieve positive or break even quarters , we need increased access to hospital markets which has been difficult to obtain . we will continue to attempt to gain access to the market through our sales efforts , innovative technology , the introduction of new products , and , when necessary , litigation . we continue to focus on methods of upgrading our manufacturing capability and efficiency in order to reduce costs . fluctuations in the cost and availability of raw materials and inventory and our ability to maintain favorable manufacturing arrangements and relationships could result in the need to manufacture all ( as opposed to 14.4 % ) of our products in the u.s. or find other manufacturers . this could temporarily increase unit costs as we ramp up domestic production . the mix of domestic and international sales affects the average sales price of our products . generally , the higher the ratio of domestic sales to international sales , the higher the average sales price will be . some international sales of our products are shipped directly from china to the customer . the number of units produced by us versus manufactured in china can have a significant effect on the carrying costs of inventory as well as cost of sales . we will continue to evaluate the appropriate mix of products manufactured domestically and those manufactured in china to achieve economic benefits as well as to maintain our domestic manufacturing capability . cash requirements due to funds received from prior litigation , we have sufficient cash reserves and intend to rely on operations , cash reserves , and debt financing , when available , as the primary ongoing sources of cash . we have taken steps to decrease our legal costs and we continue to evaluate these costs . we also decreased our workforce , as discussed in the overview of this item 7. in the future , if such cost cutting measures prove insufficient , we may reduce the number of units being produced , further reduce the workforce , reduce the salaries of officers and other employees , and or defer royalty payments . external sources of liquidity we have obtained several loans since our inception , which have , together

results of operations the following discussion contains trend information and other forward-looking statements that involve a number of risks and uncertainties . our actual future results could differ materially from our historical results of operations and those discussed in the forward-looking statements . all period references are to our fiscal years ended december 2018 , 2017 , or 2016. dollar amounts have been rounded for ease of reading . comparison of year ended december 31 , 2018 and year ended december 31 , 2017 domestic sales accounted for 86.1 % and 78.3 % of the revenues in 2018 and 2017 , respectively . domestic revenues increased 6.0 % principally due to increased volume mitigated by lower average price . domestic unit sales increased 12.0 % . domestic unit sales were 81.0 % of total unit sales for 2018. international revenues decreased from $ 7.5 million in 2017 to $ 4.6 million in 2018 , primarily due to lower volumes . overall unit sales decreased 3.8 % . our international orders may be subject to significant fluctuation over time . such orders may fluctuate due to health initiatives at various times as well as economic conditions . cost of manufactured product decreased $ 1.5 million principally due to lower volumes and lower unit cost of manufacture . royalty expense increased $ 80 thousand due to increased gross sales . gross profit margins increased from 28.9 % in 2017 to 30.7 % in 2018 principally due to lower cost of manufacturing . operating expenses decreased 14.2 % from the prior year due to lower legal expense , no bonuses paid in 2018 , lower travel and entertainment cost , decreased costs of engineering samples , and no stock option expense in 2018. these decreases were mitigated by severance costs . recognition of insurance proceeds of $ 261 thousand is due to actual building repairs being less than the insurance payment .