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these forward-looking statements are based on 59 index to financial statements management 's beliefs and assumptions and on information currently available to our management and involve significant elements of subjective judgment and analysis . words such as “may , ” “will , ” “should , ” “could , ” “would , ” “expect , ” “plan , ” “anticipate , ” “believe , ” “estimate , ” “project , ” “potential , ” “seek , ” “target , ” “goal , ” “intend , ” variations of such words , and similar expressions are intended to identify forward-looking statements . our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements . factors that might cause such a difference include those discussed under the caption “special note regarding forward looking statements” and in “risk factors” and elsewhere in this annual report on form 10-k. these and many other factors could affect our future financial and operating results . we undertake no obligation to update any forward-looking statement to reflect events after the date of this annual report . overview cymabay therapeutics , inc. is focused on developing therapies to treat metabolic diseases with high unmet medical need , including serious rare and orphan disorders . our two key clinical development candidates are mbx-8025 and arhalofenate . we are currently developing mbx-8025 for the treatment of various orphan lipid and liver diseases . in an earlier phase 2 clinical study conducted in patients with mixed dyslipidemia , mbx-8025 demonstrated favorable effects on cholesterol , triglycerides and markers of liver health . in march 2016 , we announced data from a second phase 2 clinical study evaluating mbx-8025 in 13 patients with homozygous familial hypercholesterolemia ( hofh ) . five patients in this study experienced what we believe was a clinically meaningful maximal decrease in low density lipoprotein ( ldl-c ) of greater than 20 % with three of them having decreases greater than 30 % . however , given the variability in responses observed in this study , including a number of patients that did not experience a decrease in ldl-c , we believe additional proof-of-concept data would be warranted before determining whether or not to advance to a registration study of mbx-8025 in patients with hofh . in november 2015 , we initiated a double-blind , placebo-controlled phase 2 study of mbx-8025 in patients with primary biliary cholangitis ( pbc ) , formerly referred to as primary biliary cirrhosis . in this study , approximately 75 patients with pbc who have had an inadequate response to ursodiol are to be enrolled and randomized to receive either placebo or mbx-8025 ( either 50 mg or 200 mg ) for 12 weeks . the primary endpoint will be the change in alkaline phosphatase , and the study is expected to include patients from the u.s. , as well as canada , germany , poland and u.k. we expect this study to be completed by the end of 2016. we also believe that mbx-8025 could have utility in the treatment of severe hypertriglyceridemia ( shtg ) and the more prevalent , but high unmet need , indication of nonalcoholic steatohepatitis ( nash ) . we have obtained orphan-drug designations for mbx-8025 in both hofh and shtg ( frederickson type i or v hyperlipoproteinemia ) . arhalofenate , is being developed for the treatment of gout . arhalofenate has been studied in five phase 2 clinical trials in patients with gout and consistently demonstrated the ability to reduce gout flares and reduce serum uric acid ( sua ) . gout flares are recurring and painful episodes of joint inflammation that are triggered by the presence of monosodium urate crystals that form as a result of elevated sua levels . we believe the potential for arhalofenate to prevent or reduce flares while also lowering sua could differentiate it from currently available treatments for gout and classify it as the first potential drug in what we believe could be a new class of gout therapy referred to as urate lowering anti-flare therapy ( ulaft ) . arhalofenate has established a favorable safety profile in clinical trials involving over 1,100 patients exposed to date . we have completed end of phase 2 discussions with the fda and intend to partner arhalofenate prior to advancing into phase 3 development . we are an emerging growth company . under the jobs act emerging growth companies can delay adopting new or revised accounting standards until such time of those standards apply to private companies . we have adopted this exemption from new or revised accounting standards , and therefore , we may not be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.” 60 index to financial statements equity financings on july 25 , 2014 , we completed a public offering of 4.6 million shares of our common stock at $ 5.50 per share which we refer to as our 2014 public offering . net proceeds to us in connection with the 2014 public offering were approximately $ 23.0 million after deducting underwriting discounts , commissions and offering expenses . on november 7 , 2014 , we filed a $ 100 million registration statement on form s-3 with the sec , which registration statement includes an at-the-market facility ( atm ) to sell up to $ 25 million of common stock under the registration statement . as of december 31 , 2015 , we have sold shares of common stock under the atm with aggregate net proceeds to us of $ 4.3 million . on july 27 , 2015 , pursuant to our shelf registration statement on form s-3 , we completed the issuance of 8.2 million shares of our common stock at $ 2.81 per share which we refer to as our 2015 public offering . net proceeds to us in connection with the 2015 public offering were approximately $ 21.1 million after deducting underwriting discounts , commissions and other offering expenses . story_separator_special_tag the fair value of all warrants is re-measured at each financial reporting date with any changes in fair value being recognized in change in fair value of warrant liabilities , a component of other income ( expense ) , in the statements of operations and comprehensive income ( loss ) . we will continue to re-measure the fair value of the warrant liabilities until exercise or expiration of the related warrant . story_separator_special_tag to offset future taxable income , if any . in addition , we had federal research and development tax credit carry forwards of $ 7.2 million and state research and development tax credit carryforwards of $ 3.5 million . if not utilized , the federal net operating loss and tax credit carryforwards will expire beginning in 2024 through 2035 and the state net operating loss carryforwards will expire beginning in 2016 through 2035. the state tax credit will carry forward indefinitely . current federal and state tax laws include substantial restrictions on the utilization of net operating losses and tax credits in the event of an ownership change . even if the carryforwards are available , they may be subject to annual limitations , lack of future taxable income , or future ownership changes that could result in the expiration of the carryforwards before they are 64 index to financial statements utilized . at december 31 , 2015 , we recorded a 100 % valuation allowance against our deferred assets of approximately $ 111.8 million as our management believes it is more likely than not that they will not be fully realized . if we determine in the future that we will be able to realize all or a portion of our net operating loss carryforwards , an adjustment to our net operating loss carryforwards would increase net income in the period in which we make such a determination . liquidity and capital resources we have financed our operations primarily through the sale of equity securities , licensing fees , issuance of debt and collaborations with third parties . at december 31 , 2015 , we had cash , cash equivalents and marketable securities of $ 41.5 million , primarily as a result of the aggregate proceeds received in our series of financings described in the next paragraph , which we refer to collectively as the “2013 financing , ” and our 2014 public offering and 2015 public offering . specifically , on september 30 , 2013 , we issued common stock and warrants to purchase our common stock and we secured a term loan facility which together enabled us to raise aggregate net proceeds of $ 28.8 million . on september 30 , 2013 , all of the shares of our outstanding redeemable convertible preferred stock converted to common stock , and we sold shares of our common stock and warrants to purchase shares of our common stock in a private placement for aggregate gross proceeds of $ 26.8 million , and raised an additional $ 5.0 million in venture debt financing pursuant to a $ 10.0 million loan agreement which we entered into simultaneously with the private placement , resulting in aggregate net proceeds to us of $ 28.8 million after deducting placement agent fees and offering expenses . at the same time we issued shares of our common stock in cancellation of approximately $ 16.9 million of debt owed to the holder of that debt and on october 31 , 2013 , we issued common stock and warrants to purchase our common stock to raise additional net proceeds of $ 2.2 million . furthermore , on november 22 , 2013 , we entered into an agreement with investors to purchase shares of our common stock and warrants to purchase our common stock as part of the private placement for net proceeds of $ 2.7 million , which sales occurred shortly after our listing of our common stock on the over-the-counter market on january 24 , 2014. on july 25 , 2014 , we completed a public offering of 4.6 million shares of our common stock at $ 5.50 per share . net proceeds to us in connection with the 2014 public offering were approximately $ 23.0 million after deducting underwriting discounts , commissions and offering expenses . on november 7 , 2014 , we filed a $ 100 million registration statement on form s-3 with the sec , which registration statement includes an at-the-market facility to sell up to $ 25 million of common stock under the registration statement . in january and february 2015 , we sold additional shares of our common stock under this facility for net proceeds to us of $ 4.3 million . on july 27 , 2015 , pursuant to our shelf registration statement on form s-3 , we completed the issuance of 8,188,000 shares of our common stock at $ 2.81 per share in an underwritten public offering . net proceeds to us in connection with this offering were approximately $ 21.1 million after deducting underwriting discounts , commissions and other offering expenses . 2013 term loan facility in the 2013 financing , we entered into a term loan facility with silicon valley bank and oxford finance llc , collectively referred to as the lenders , for an aggregate amount of $ 10 million , the first $ 5 million tranche of which was made available to us as of september 30 , 2013 bearing interest at a rate equal to 8.75 % per annum . the remaining $ 5 million , referred to as the second tranche , became available to us for draw down upon our february 24 , 2015 , announcement of the achievement of positive phase 2b study data in arhalofenate and remained available to us until june 30 , 2015. we did not draw down on the $ 5 million second tranche before that portion of the loan facility expired on june 30 , 2015 .

results of operations general to date , we have not generated any net income from operations . as of december 31 , 2015 , we have an accumulated deficit of $ 396.3 million , primarily as a result of expenditures for research and development and general and administrative expenses . while we may in the future generate revenue from a variety of sources , including license fees and milestone payments in connection with strategic partnerships , our product candidates 62 index to financial statements are at a mid-level 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 sufficient revenue to achieve and sustain profitability . our results of operations for 2015 and 2014 are presented below : replace_table_token_3_th research & development expenses conducting research and development is central to our business model . for the years ended december 31 , 2015 and 2014 , research and development expenses were $ 17.0 million and $ 15.8 million , respectively . research and development expenses are detailed in the table below : replace_table_token_4_th our external research and development costs consist primarily of : expenses incurred under agreements with contract research organizations , investigative sites and consultants that conduct our clinical trials and a substantial portion of our preclinical activities ; the cost of acquiring and manufacturing clinical trial and other materials ; and other costs associated with development activities , including additional studies internal research and development costs consist primarily of salaries and related fringe benefits costs for our employees ( such as workers compensation and health insurance premiums ) , stock-based compensation charges , travel costs , lab supplies and overhead expenses . internal costs generally benefit multiple projects and are not separately tracked per project .

in addition , under existing operating service agreements , mplx continues story_separator_special_tag management 's discussion and analysis of financial condition and results of operations should be read in conjunction with the information included under item 1. business , item 1a . risk factors , item 6. selected financial data and item 8. financial statements and supplementary data . management 's discussion and analysis of financial condition and results of operations includes various forward-looking statements concerning trends or events potentially affecting our business . you can identify our forward-looking statements by words such as “ anticipate , ” “ believe , ” “ estimate , ” “ expect , ” “ forecast , ” “ goal , ” “ intend , ” “ plan , ” “ predict , ” “ project , ” “ seek , ” “ target , ” “ could , ” “ may , ” “ should , ” “ would , ” `` will '' or other similar expressions that convey the uncertainty of future events or outcomes . in accordance with “ safe harbor ” provisions of the private securities litigation reform act of 1995 , these statements are accompanied by cautionary language identifying important factors , though not necessarily all such factors , which could cause future outcomes to differ materially from those set forth in forward-looking statements . corporate overview we are an independent petroleum refining , marketing and transportation company . we currently own and operate seven refineries , all located in the united states , with an aggregate crude oil refining capacity of approximately 1.7 mmbpcd . our refineries supply refined products to resellers and consumers within our market areas , including the midwest , gulf coast and southeast regions of the united states . we distribute refined products to our customers through one of the largest private domestic fleets of inland petroleum product barges , one of the largest terminal operations in the united states , and a combination of mpc-owned and third-party-owned trucking and rail assets . as of december 31 , 2013 , we owned , leased or had ownership interests in approximately 8,300 miles of crude oil and refined product pipelines to deliver crude oil to our refineries and other locations and refined products to wholesale and retail market areas . we are one of the largest petroleum pipeline companies in the united states on the basis of total volumes delivered . our operations consist of three reportable operating segments : refining & marketing ; speedway ; and pipeline transportation . each of these segments is organized and managed based upon the nature of the products and services they offer . see item 1. business for additional information on our segments . refining & marketing—refines crude oil and other feedstocks at our seven refineries in the gulf coast and midwest regions of the united states , purchases ethanol and refined products for resale and distributes refined products through various means , including barges , terminals and trucks that we own or operate . we sell refined products to wholesale marketing customers domestically and internationally , buyers on the spot market , our speedway business segment and to independent entrepreneurs who operate marathon ® retail outlets ; speedway—sells transportation fuels and convenience products in the retail market in the midwest , primarily through speedway ® convenience stores ; and pipeline transportation—transports crude oil and other feedstocks to our refineries and other locations , delivers refined products to wholesale and retail market areas and includes the aggregated operations of mplx and mpc 's retained pipeline assets and investments . the spinoff and basis of presentation on may 25 , 2011 , the marathon oil board of directors approved the spinoff of its rm & t business into an independent , publicly traded company , mpc , through the distribution of mpc common stock to the stockholders of marathon oil common stock . in accordance with a separation and distribution agreement between marathon oil and mpc , the distribution of mpc common stock was made on june 30 , 2011 , with marathon oil stockholders receiving one share of mpc common stock for every two shares of marathon oil common stock held . following the spinoff , marathon oil retained no ownership interest in mpc , and each company had separate public ownership , boards of directors and management . on july 1 , 2011 , our common stock began trading “ regular-way ” on the nyse under the ticker symbol “ mpc. ” prior to the spinoff on june 30 , 2011 , our results of operations and cash flows consisted of the rm & t business , which represented a combined reporting entity . subsequent to the spinoff , our results of operations and cash flows consist of consolidated mpc activities . all significant intercompany transactions and accounts have been eliminated . the consolidated statements of income for periods prior to the spinoff include expense allocations for certain corporate functions historically performed by the marathon oil companies , including allocations of general corporate expenses related to executive oversight , accounting , treasury , tax , legal , procurement and information technology . those allocations were based primarily on specific identification , headcount or computer utilization . our management believes the assumptions underlying the consolidated financial statements , including the assumptions regarding allocating general corporate expenses from the marathon oil companies , are reasonable . however , the consolidated financial statements do not include all of the actual expenses that would have been incurred had we been a stand-alone company during those periods presented prior to the spinoff and may not reflect our consolidated results of operations and cash flows had we been a stand-alone company during the periods presented . actual 36 costs that would have been incurred if we had been a stand-alone company would depend on multiple factors , including organizational structure and strategic decisions made in various areas , including information technology and infrastructure . story_separator_special_tag see item 8. financial statements and supplementary data – note 4 for additional information on mplx . on february 27 , 2014 , we announced that an additional 13 percent of pipe line holdings will be sold to mplx effective march 1 , 2014 for $ 310 million . subsequent to this transaction , mplx will own a 69 percent general partner interest in pipe line holdings and we will own a 31 percent limited partner interest . mplx intends to finance this transaction with $ 40 million of cash on-hand and by borrowing $ 270 million on its revolving credit agreement . in 2013 , we agreed with enbridge energy partners , l.p. ( `` enbridge '' ) to serve as an anchor shipper for the sandpiper pipeline , which will run from beaver lodge , north dakota to superior , wisconsin and is targeted to be operational in early 2016. we also agreed to fund 37.5 percent of the construction of the sandpiper pipeline project , which is currently estimated to cost $ 2.6 billion , of which approximately $ 1.0 billion is our share . we made initial contributions of $ 24 million in 2013. in exchange for our commitment to be an anchor shipper and our investment in the project , we will earn an approximate 27 percent equity interest in enbridge 's north dakota system when the sandpiper pipeline is placed into service . enbridge 's north dakota system currently includes approximately 240 miles of crude oil gathering pipelines connected to a transportation pipeline that is approximately 730 miles long . we will also have the option to increase our ownership interest to approximately 30 percent through additional investments in future system improvements . in 2012 , we agreed to be the anchor shipper on enbridge inc. 's proposed southern access extension pipeline , which will run from flanagan , ill. to patoka , ill. as a result of that commitment , we obtained the option to acquire a 25 percent equity interest in the pipeline . in conjunction with our commitment to the sandpiper pipeline project , our option for equity interest in the southern access extension pipeline increased an additional 10 percent to a total of 35 percent . the southern access extension pipeline is expected to be operational in 2015 and we estimate our option for equity interest to cost approximately $ 250 million . in 2013 , we completed projects to develop infrastructure that facilitates transportation of hydrocarbon liquids production from the utica shale in eastern ohio and western pennsylvania . the project with harvest pipeline company increased our truck unloading capacity by 24,000 barrels per day and a separate project increased our barge loading capacity to up to 50,000 barrels per day at our wellsville , ohio terminal . on february 1 , 2012 , we announced that our board of directors authorized a share repurchase plan , enabling us to purchase up to $ 2.0 billion of mpc common stock over a two-year period . on january 30 , 2013 , we announced that our board of directors approved an additional $ 2.0 billion share repurchase authorization to expire in december 2014 . on september 26 , 2013 , we announced that our board of directors approved an additional $ 2.0 billion share repurchase authorization through september 2015 , resulting in $ 6.0 billion of total share repurchase authorizations since february 1 , 2012. we paid $ 2.79 billion in 2013 and $ 1.35 billion in 2012 to repurchase shares . as of december 31 , 2013 , we had total outstanding repurchase authorizations of $ 1.86 billion . as of december 31 , 2013 , we had cash and cash equivalents of $ 2.29 billion and no borrowings or letters of credit outstanding under our $ 2.5 billion revolving credit agreement or $ 1.3 billion trade receivables securitization facility or mplx 's $ 500 million revolving credit agreement . the above discussion includes forward-looking statements that relate to our expectations with respect to the anticipated sale of an additional 13 percent interest in pipe line holdings to mplx , the sandpiper pipeline project , the southern access extension pipeline project and the share repurchase authorizations . factors that could affect the sale of an additional 13 percent interest in pipe line holdings to mplx include , but are not limited to , the satisfaction of customary closing conditions . factors that could affect the sandpiper and southern access extension pipeline projects include , but are not limited to , availability of materials and labor , unforeseen hazards such as weather conditions , delays in obtaining or conditions imposed by necessary government and third-party approvals and other risks customarily associated with construction projects . factors that could affect the share repurchase authorizations and the timing of any repurchases include , but are not limited to , business conditions , availability of liquidity and the market price of our common stock . these factors , among others , could cause actual results to differ materially from those set forth in the forward-looking statements . 38 overview of segments refining & marketing refining & marketing segment income from operations depends largely on our refining & marketing gross margin and refinery throughputs . our refining & marketing gross margin is the difference between the prices of refined products sold and the costs of crude oil and other charge and blendstocks refined , including the costs to transport these inputs to our refineries and the costs of purchased products . the crack spread is a measure of the difference between market prices for refined products and crude oil , commonly used by the industry as a proxy for the refining margin . crack spreads can fluctuate significantly , particularly when prices of refined products do not move in the same relationship as the cost of crude oil .

consolidated results of operations replace_table_token_32_th net income attributable to mpc was $ 1.00 billion higher in 2012 compared to 2011 , primarily due to a higher refining & marketing gross margin , which increased to $ 17.85 per barrel in 2012 from $ 14.26 per barrel in 2011 , partially offset by higher refinery direct operating costs . sales and other operating revenues ( including consumer excise taxes ) increased $ 3.65 billion in 2012 compared to 2011 , primarily due to increases in refined product selling prices and sales volumes , crude oil and refinery feedstock sales volumes and consumer excise taxes . sales to related parties decreased $ 47 million in 2012 compared to 2011. the decrease resulted from lower refined product volumes sold to centennial and sales to marathon oil after the spinoff no longer being classified as related party sales . income from equity method investments decreased $ 24 million in 2012 compared to 2011. the decrease resulted from an $ 18 million decrease in income from our ethanol investments and an $ 8 million decrease in income from our investment in loop . our ethanol investments experienced lower product margins in 2012 , primarily due to lower demand for corn ethanol and higher corn prices , and loop experienced higher expenses in 2012 compared to 2011. other income decreased $ 13 million in 2012 compared to 2011 , primarily due to a decrease in income from transition services provided to the buyer of our minnesota assets and to marathon oil and a decrease in sales of rins . these decreases were partially offset by $ 12 million of dividend income recognized in 2012 from our preferred equity interest in the buyer of our minnesota assets , which was paid in connection with our settlement agreement with the buyer .

in addition , we provide management services , accounting and financial services , and insurance services to third party operators of healthcare properties . we also own the real estate of thirteen healthcare properties and lease these properties to third party operators . executive summary earnings to monitor our earnings , we have developed budgets and management reports to monitor labor , census , and the composition of revenues . inflationary increases in our costs may cause net earnings from patient services to decline . occupancy a primary area of management focus continues to be the rates of occupancy within our skilled nursing facilities . the overall census in owned and leased skilled nursing facilities for 2015 was 90.0 % compared to 88.9 % and 89.2 % in 2014 and 2013 , respectively . increased availability of assisted living facilities , as well as the rapid growth of home and community based services , has amplified the challenge of maintaining desirable patient census levels . management has undertaken a number of steps in order to best position our current and future health care 31 facilities . this includes working internally to examine and improve systems to be most responsive to referral sources and payors . additionally , nhc is in various stages of partnerships with hospital systems , payors , and other post-acute alliances in positioning ourselves to be an active participant in the health delivery systems as they develop . development and growth we are undertaking to expand our long-term care operations while protecting our existing operations and markets . the following table lists our recent construction and purchase activities . replace_table_token_8_th for the projects under construction at december 31 , 2015 , the 90-bed skilled nursing facility and 80-unit assisted living facility located in nashville , tennessee is expected to begin operations in the third quarter of 2016 ; the 76-unit assisted living facility in bluffton , sc is expected to begin operations in the third quarter of 2016 ; the 80-unit assisted living facility in garden city , sc is expected to begin operations in the fourth quarter of 2016 ; and the 112 bed replacement center that will combine the 92 beds of nhc hillview in columbia , tennessee with 20 beds from the existing skilled nursing unit at maury regional medical center is expected to being operations in the fourth quarter of 2016. during 2016 , we plan to apply for certificates of need for additional beds in certain of our markets . we also will evaluate the feasibility of expansion into new markets by building private pay health care centers or assisted living communities . medicare reimbursement rate changes in july 2015 , cms released its final rule outlining the fiscal year 2016 medicare payments for skilled nursing facilities , which began october 1 , 2015. the 2016 final rule provides for an approximate 1.2 % rate update . this estimated increase consists of a 2.3 % market basket increase , reduced by a 0.6 % forecast error adjustment and further reduced 0.5 % for a multifactor productivity adjustment required by the aca . cms estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2016 by $ 430 million compared to fiscal year 2015 levels . the effect of the 2016 pps rate update on our revenues will be dependent upon our census and the mix of our patients at the various pps pay rates . in august 2014 , cms released its skilled nursing facility pps update for the fiscal year 2015 , which began october 1 , 2014. the final rule provided for a 2.0 % rate update , which reflected a 2.5 % market basket increase less a 0.5 % multifactor productivity adjustment as required by the aca . cms estimated the update would increase 32 overall payments to skilled nursing facilities in fiscal year 2015 by $ 750 million compared to fiscal year 2014 levels . the 2015 final rule also included wage index updates , revisions to the change of therapy ( cot ) other medicare required assessment ( omra ) policy , and comments pertaining to cms ' observations on therapy utilization trends . for 2015 , our average medicare per diem rate for skilled nursing facilities increased 0.9 % compared to the same period in 2014. accrued risk reserves our accrued professional liability reserves , workers ' compensation reserves and health insurance reserves totaled $ 98,508,000 and $ 106,218,000 at december 31 , 2015 and 2014 , respectively , and are a primary area of management focus . we have set aside restricted cash and marketable securities to fund our professional liability and workers ' compensation reserves . as to exposure for professional liability claims , we have developed for our centers performance certification criteria to measure and bring focus to the patient care issues most likely to produce professional liability exposure , including in–house acquired pressure ulcers , significant weight loss and numbers of falls . these programs for certification , which we regularly modify and improve , have produced measurable improvements in reducing these incidents . our experience is that achieving goals in these patient care areas improves both patient and employee satisfaction . application of critical accounting policies the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates and cause our reported net income to vary significantly from period to period . story_separator_special_tag we believe we have made adequate provision for unrecognized tax benefits related to uncertain tax positions including related penalties and interest . the above listing is not intended to be a comprehensive list of all of our accounting policies . in many cases , the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles , with limited need for management 's judgment in their application . there are also areas in which management 's judgment in selecting any available alternative would not produce a materially different result . see our audited consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by generally accepted accounting principles . government program financial changes cost containment will continue to be a priority for federal and state governments for health care services , including the types of services we provide . government reimbursement programs such as medicare and medicaid prescribe , by law , the billing methods and amounts that health care providers may charge and be reimbursed to care for patients covered by these programs . congress has passed a number of laws that have effected major changes in the medicare and medicaid programs . the balanced budget act of 1997 sought to achieve a balanced federal budget by , among other things , reducing federal spending on medicare and medicaid to various providers . the balanced budget act of 1997 defined the medicare prospective payment system ( `` pps '' ) and this system has 34 subsequently been refined in 1999 , 2000 , 2005 , 2006 and 2010. federal health care reform in march 2010 , president obama signed into law the patient protection and affordable care act ( `` ppaca '' or , commonly , “aca” ) and the health care and education reconciliation act of 2010 ( `` hcera '' ) , which represents significant changes to the current u.s. health care system ( collectively the `` acts '' ) . the primary goals of the acts are to : ( 1 ) expand coverage to americans without health insurance , ( 2 ) reform the delivery system to improve quality and drive efficiency , ( 3 ) and to lower the overall costs of providing health care . the timeline of the enacted provisions span over several years – some of the provisions were effective immediately in 2010 and others will be phased in through 2020. since a significant goal of federal health care reform is to transform the delivery of health care by holding providers accountable for the cost and quality of care provided , medicare and many commercial third party payors are implementing accountable care organization ( `` aco '' ) models in which groups of providers share in the benefit and risk of providing care to an assigned group of individuals . other reimbursement methodology reforms in which we are participating or expect to participate in include value-based purchasing , in which a portion of provider reimbursement is redistributed based on relative performance on designated economic , clinical quality , and patient satisfaction metrics . also , cms is implementing demonstration programs , in which we are participating in a limited way , to bundle acute care and post-acute care reimbursement to hold providers accountable for costs across a broader continuum of care . these reimbursement methodologies and similar programs are likely to continue and expand , both in public and commercial health plans . in january 2015 , cms announced its goal by 2016 to have 30 % of medicare payments through alternative payment models such as acos or bundled payments and up to 50 % by the end of 2018. providers who respond successfully to these trends and are able to deliver quality care at lower costs are likely to benefit financially . medicare – skilled nursing facilities in july 2015 , cms released its final rule outlining the fiscal year 2016 medicare payments for skilled nursing facilities , which began october 1 , 2015. the 2016 final rule provides for an approximate 1.2 % rate update . this estimated increase consists of a 2.3 % market basket increase , reduced by a 0.6 % forecast error adjustment and further reduced 0.5 % for a multifactor productivity adjustment required by the aca . cms estimates the update will increase overall payments to skilled nursing facilities in fiscal year 2016 by $ 430 million compared to fiscal year 2015 levels . the effect of the 2016 pps rate update on our revenues will be dependent upon our census and the mix of our patients at the various pps pay rates . in august 2014 , cms released its skilled nursing facility pps update for the fiscal year 2015 , which began october 1 , 2014. the final rule provided for a 2.0 % rate update , which reflected a 2.5 % market basket increase less a 0.5 % multifactor productivity adjustment as required by the aca . cms estimated the update would increase overall payments to skilled nursing facilities in fiscal year 2015 by $ 750 million compared to fiscal year 2014 levels . the 2015 final rule also included wage index updates , revisions to the change of therapy ( cot ) other medicare required assessment ( omra ) policy , and comments pertaining to cms ' observations on therapy utilization trends . in july 2013 , cms released its skilled nursing facility pps update for the fiscal year 2014 , which began october 1 , 2013. the notice provided for a 1.3 % rate update , which reflected a 2.3 % market basket increase less a 0.5 % multifactor productivity adjustment and a 0.5 % adjustment to correct market basket forecasting errors in fiscal year 2012. cms estimated the update increased overall payments to skilled nursing facilities in fiscal year 2014 by $ 470 million compared to fiscal year 2013 levels .

results of operations the following table and discussion sets forth items from the consolidated statements of income as a percentage of net operating revenues for the years ended december 31 , 2015 , 2014 and 2013. percentage of net operating revenues replace_table_token_9_th the following table sets forth the increase or ( decrease ) in certain items from the consolidated statements of income as compared to the prior period . period to period increase ( decrease ) replace_table_token_10_th 2015 compared to 2014 results for 2015 compared to 2014 include a 4.0 % increase in net operating revenues and a 0.1 % increase in income before income taxes . excluding the operations of the two newly constructed skilled nursing facilities and one assisted living facility placed in service less than twelve months ago , net operating revenues would have increased 3.2 % and income before income taxes for the year ended december 31 , 2015 would have increased 6.2 % compared to 2014. the overall average census in owned and leased skilled nursing facilities for 2015 was 90.0 % compared to 88.9 % in 2014. the composite skilled nursing facility per diem increased 2.6 % in 2015 compared to 2014. medicare and managed care per diem rates increased 0.9 % and 1.1 % , respectively , in 2015 compared to 2014. medicaid and private pay per diem rates increased 1.6 % and 2.7 % , respectively , in 2015 compared to 2014. net patient revenues totaled $ 864,846,000 , an increase of $ 35,559,000 , or 4.3 % , compared to the prior year . the majority of the increase in net patient revenues was derived from our same-facility skilled nursing facilities ( $ 24,769,000 ) . these centers benefitted from a census increase in 2015 of 110 basis points and a higher percentage of medicare and managed care patients compared to 2014. three newly constructed healthcare properties that began operations in december 2014 and april 2015 enhanced net patient revenues by $ 7,129,000 compared to the prior year .

hyperinflationary economies story_separator_special_tag overview the following management 's discussion and analysis of financial condition and results of operations ( `` md & a '' ) is intended to help the reader understand the coca-cola company , our operations and our present business environment . md & a is provided as a supplement to — and should be read in conjunction with — our consolidated financial statements and the accompanying notes thereto contained in `` item 8. financial statements and supplementary data '' of this report . this overview summarizes the md & a , which includes the following sections : our business — a general description of our business and the nonalcoholic beverage segment of the commercial beverage industry , our objective , our strategic priorities , our core capabilities , and challenges and risks of our business . critical accounting policies and estimates — a discussion of accounting policies that require critical judgments and estimates . story_separator_special_tag partners for the manufacture of fountain syrups . the bottlers then typically sell the fountain syrups to wholesalers or directly to fountain retailers . 2 includes fountain syrups manufactured by the company , including consolidated bottling operations , and sold to fountain retailers or to authorized fountain wholesalers or bottling partners who resell the fountain syrups to fountain retailers . the following table sets forth the percentage of total worldwide unit case volume related to concentrate operations and finished product operations : replace_table_token_6_th 1 includes unit case volume related to concentrates sold by the company to authorized bottling partners for the manufacture of fountain syrups . the bottlers then typically sell the fountain syrups to wholesalers or directly to fountain retailers . 2 includes unit case volume related to fountain syrups manufactured by the company , including consolidated bottling operations , and sold to fountain retailers or to authorized fountain wholesalers or bottling partners who resell the fountain syrups to fountain retailers . the nonalcoholic beverage segment of the commercial beverage industry we operate in the highly competitive nonalcoholic beverage segment of the commercial beverage industry . we face strong competition from numerous other general and specialty beverage companies . we , along with other beverage companies , are affected by a number of factors , including , but not limited to , cost to manufacture and distribute products , consumer spending , economic conditions , availability and quality of water , consumer preferences , inflation , political climate , local and national laws and regulations , foreign currency exchange fluctuations , fuel prices and weather patterns . our objective our objective is to use our formidable assets — our brands , financial strength , unrivaled distribution system , global reach , and the talent and strong commitment of our management and associates — to achieve long-term sustainable growth . our vision for sustainable growth includes the following : people : being a great place to work where people are inspired to be the best they can be . portfolio : bringing to the world a portfolio of beverage brands that anticipates and satisfies people 's desires and needs . partners : nurturing a winning network of partners and building mutual loyalty . planet : being a responsible global citizen that makes a difference . profit : maximizing return to shareowners while being mindful of our overall responsibilities . productivity : managing our people , time and money for greatest effectiveness . 31 strategic priorities we have the following five strategic priorities designed to create long-term sustainable growth for our company and the coca-cola system and value for our shareowners : accelerate sparkling growth , led by brand coca-cola strategically expand our profitable still portfolio increase media investments by maximizing productivity win at the point of sale by unlocking the power of the coca-cola system invest in our next generation of leaders to enable the entire coca-cola system so that we can deliver on these strategic priorities , we must further enhance our core capabilities of consumer marketing ; commercial leadership ; franchise leadership ; and bottling and distribution operations . core capabilities consumer marketing marketing investments are designed to enhance consumer awareness of , and increase consumer preference for , our brands . successful marketing investments produce long-term growth in unit case volume , per capita consumption and our share of worldwide nonalcoholic beverage sales . through our relationships with our bottling partners and those who sell our products in the marketplace , we create and implement integrated marketing programs , both globally and locally , that are designed to heighten consumer awareness of and product appeal for our brands . in developing a strategy for a company brand , we conduct product and packaging research , establish brand positioning , develop precise consumer communications and solicit consumer feedback . our integrated marketing activities include , but are not limited to , advertising , point-of-sale merchandising and sales promotions . we have disciplined marketing strategies that focus on driving volume in emerging markets , increasing our brand value in developing markets and growing profit in our developed markets . in emerging markets , we are investing in infrastructure programs that drive volume through increased access to consumers . in developing markets , where consumer access has largely been established , our focus is on differentiating our brands . in our developed markets , we continue to invest in brands and infrastructure programs , but generally at a slower rate than gross profit growth . we are focused on affordability and ensuring we are communicating the appropriate message based on the current economic environment . commercial leadership the coca-cola system has millions of customers around the world who sell or serve our products directly to consumers . we focus on enhancing value for our customers and providing solutions to grow their beverage businesses . our approach includes understanding each customer 's business and needs — whether that customer is a sophisticated retailer in a developed market or a kiosk owner in an emerging market . story_separator_special_tag we are actively collaborating with other companies , governments , nongovernmental organizations and communities to advocate for needed water policy reforms and action to protect water availability and quality around the world . we are working with our global partners to develop and implement sustainability-related water projects . we are encouraging improved water efficiency and conservation efforts throughout our system . through these integrated programs , we believe that our company is in an excellent position to leverage the water-related knowledge we have developed in the communities we serve — through source water availability assessments , water resource management , water treatment , wastewater treatment systems and models for working with communities and partners 33 in addressing water and sanitation needs . as demand for water continues to increase around the world , we expect commitment and continued action on our part will be crucial to the successful long-term stewardship of this critical natural resource . evolving consumer preferences consumers want more choices . we are impacted by shifting consumer demographics and needs , on-the-go lifestyles , aging populations in developed markets and consumers who are empowered with more information than ever . we are committed to generating new avenues for growth through our core brands and throughout our portfolio with a focus on low- and no-calorie products , innovative packaging , and ingredient and packaging material education efforts . we are also committed to continuing to expand the variety of choices we provide to consumers to meet their needs , desires and lifestyles . increased competition and capabilities in the marketplace our company is facing strong competition from some well-established global companies and many local participants . we must continue to strengthen our capabilities in marketing and innovation in order to maintain our brand loyalty and market share while we strategically expand into other profitable segments of the nonalcoholic beverage segment of the commercial beverage industry . product safety and quality as the world 's largest beverage company , we strive to meet the highest of standards in both product safety and product quality . we are aware that some consumers have concerns and negative viewpoints regarding certain ingredients used in our products . our system works every day to share safe and refreshing beverages with the world . we have rigorous product and ingredient safety and quality standards designed to ensure safety and quality in each of our products and we drive innovation that provides new beverage options to meet consumers ' evolving needs and preferences . across the coca-cola system , we take great care in an effort to ensure that every one of our beverages meets the highest standards for safety and quality . we work to ensure consistent safety and quality through strong governance and compliance with applicable regulations and standards . we stay current with new regulations , industry best practices and marketplace conditions , and engage with standard-setting and industry organizations . additionally , we manufacture and distribute our products according to strict policies , requirements and specifications set forth in an integrated quality management program that continually measures all operations within the coca-cola system against the same stringent standards . our quality management system also identifies and mitigates risks and drives improvement . in our quality laboratories , we stringently measure the quality attributes of ingredients as well as samples of finished products collected from the marketplace . we perform due diligence to ensure that product and ingredient safety and quality standards are maintained in the more than 200 countries where our products are sold . we consistently reassess the relevance of our requirements and standards and continually work to improve and refine them across our entire supply chain . food security increased demand for commodities and decreased agricultural productivity in certain regions of the world as a result of changing weather patterns may limit the availability or increase the cost of key agricultural commodities , such as sugarcane , corn , beets , citrus , coffee and tea , which are important sources of ingredients for our products and could impact the food security of communities around the world . we are dedicated to implementing our sustainable sourcing commitment , which is founded on principles that protect the environment , uphold workplace rights and help build more sustainable communities . to support this commitment , our programs focus on economic opportunity , with an emphasis on female farmers , and environmental sustainability designed to help address these agricultural challenges . through joint efforts with farmers , communities , bottlers , suppliers and key partners , as well as our increased and continued investment in sustainable agriculture , we can together help make a positive strategic impact on food security . all of these challenges and risks — obesity , poor diets and inactive lifestyles ; water quality and quantity ; evolving consumer preferences ; increased competition and capabilities in the marketplace ; product safety and quality ; and food security — have the potential to have a material adverse effect on the nonalcoholic beverage segment of the commercial beverage industry and on our company ; however , we believe our company is well positioned to appropriately address these challenges and risks . see also `` item 1a . risk factors '' in part i of this report for additional information about risks and uncertainties facing our company . 34 critical accounting policies and estimates our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the united states , which require management to make estimates , judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes . we believe our most critical accounting policies and estimates relate to the following : principles of consolidation recoverability of noncurrent assets pension plan valuations revenue recognition income taxes management has discussed the development , selection and disclosure of critical accounting policies and estimates with the audit committee of the company 's board of directors .

operations review — an analysis of our company 's consolidated results of operations for the three years presented in our consolidated financial statements . except to the extent that differences among our operating segments are material to an understanding of our business as a whole , we present the discussion in the md & a on a consolidated basis . liquidity , capital resources and financial position — an analysis of cash flows ; off-balance sheet arrangements and aggregate contractual obligations ; foreign exchange ; the impact of inflation and changing prices ; and an overview of financial position . 29 our business general the coca-cola company is the world 's largest beverage company . we own or license and market more than 500 nonalcoholic beverage brands , primarily sparkling beverages but also a variety of still beverages such as waters , enhanced waters , juices and juice drinks , ready-to-drink teas and coffees , and energy and sports drinks . we own and market four of the world 's top five nonalcoholic sparkling beverage brands : coca-cola , diet coke , fanta and sprite . finished beverage products bearing our trademarks , sold in the united states since 1886 , are now sold in more than 200 countries . we make our branded beverage products available to consumers throughout the world through our network of company-owned or -controlled bottling and distribution operations as well as independent bottling partners , distributors , wholesalers and retailers — the world 's largest beverage distribution system . beverages bearing trademarks owned by or licensed to us account for 1.9 billion of the approximately 57 billion beverage servings of all types consumed worldwide every day . we believe our success depends on our ability to connect with consumers by providing them with a wide variety of choices to meet their desires , needs and lifestyle choices . our success further depends on the ability of our people to execute effectively , every day .

our comparable stores open more than three years normally achieve approximately $ 1.4 million in revenues , which we believe represents a higher unit revenue volume than the typical rent-to-own store . most of our stores are cash flow positive in the second year of operations . we also use our franchise program to help us expand our sales and lease ownership concept more quickly and into more areas than we otherwise would by opening only company-operated stores . our franchisees added a net of 36 stores in 2012. we purchased 21 franchised stores during 2012. franchise royalties and other related fees represent a growing source of high margin revenue for us , accounting for $ 66.7 million of revenues in 2012 , up from $ 59.1 million in 2010 , representing a compounded annual growth rate of 6.2 % . aaron 's office furniture closure . in november 2008 , the company completed the sale of substantially all of the assets and the transfer of certain liabilities of its legacy residential rent-to-rent business , aaron 's corporate furnishings division . when the company sold its rent-to-rent business , it decided to keep the then 13 aaron 's office furniture stores , a rent-to-rent concept aimed at the office market . however , after disappointing results in a difficult environment , in june 2010 the company announced its plans to close all of the then 12 remaining aaron 's office furniture stores and focus solely on the company 's sales and lease ownership business . as of december 31 , 2011 , the company had closed 11 of its aaron 's office furniture stores and had one remaining store open to liquidate merchandise . the company recorded $ 9.0 million in 2010 related to the write-down and cost to dispose of office furniture , estimated future lease liabilities for closed stores , write-off of leaseholds , severance pay , and other costs associated with closing the stores . the company did not incur any significant charges in 2011 or 2012 related to winding down the division . stock split . on march 23 , 2010 , we announced a 3-for-2 stock split effected in the form of a 50 % stock dividend on our common stock . new shares were distributed on april 15 , 2010 to shareholders of record as of the close of business on april 1 , 2010. all share and per share information has been restated for all periods presented to reflect this stock split . dual class unification . in december 2010 , the company 's shareholders approved the unification of our prior nonvoting common stock and voting class a common stock into a single class . effective december 10 , 2010 , the two classes were combined into a single voting class now known simply as our common stock . same store revenues . we believe the changes in same store revenues are a key performance indicator . the change in same store revenues is calculated by comparing revenues for the year to revenues for the prior year for all stores open for the entire 24-month period , excluding stores that received lease agreements from other acquired , closed or merged stores . 24 key components of net income in this management 's discussion and analysis section , we review the company 's consolidated results , including the five components of our revenues , costs of sales and expenses , of which depreciation of lease merchandise is a significant part . revenues . we separate our total revenues into five components : lease revenues and fees , retail sales , non-retail sales , franchise royalties and fees , and other . lease revenues and fees include all revenues derived from lease agreements at company-operated stores , including agreements that result in our customers acquiring ownership at the end of the term . retail sales represent sales of both new and returned lease merchandise from our stores . non-retail sales mainly represent new merchandise sales to our aaron 's sales & lease ownership division franchisees . franchise royalties and fees represent fees from the sale of franchise rights and royalty payments from franchisees , as well as other related income from our franchised stores . other revenues include , at times , income from gains on asset dispositions and other miscellaneous revenues . retail cost of sales . retail cost of sales represents the original or depreciated cost of merchandise sold through our company-operated stores . non-retail cost of sales . non-retail cost of sales primarily represents the cost of merchandise sold to our franchisees . operating expenses . operating expenses include personnel costs , selling costs , occupancy costs , and delivery , among other expenses . lawsuit ( income ) expense . lawsuit expense consists of the net cost of paying legal judgments and settlement amounts ; defense costs are included in operating expenses . lawsuit income results from reductions in previously accrued reserves . retirement/separation charges . retirement/separation charges represent costs associated with the retirement of the company 's founder and former chairman of the board in 2012 and the departure of the company 's former chief executive officer in 2011. depreciation of lease merchandise . depreciation of lease merchandise reflects the expense associated with depreciating merchandise held for lease and leased to customers by our company-operated stores . critical accounting policies revenue recognition . lease revenues are recognized in the month they are due on the accrual basis of accounting . for internal management reporting purposes , lease revenues from sales and lease ownership agreements are recognized by the reportable segments as revenue in the month the cash is collected . on a monthly basis , we record an accrual for lease revenues due but not yet received , net of allowances , and a deferral of revenue for lease payments received prior to the month due . our revenue recognition accounting policy matches the lease revenue with the corresponding costs , mainly depreciation , associated with the lease merchandise . story_separator_special_tag the calculation of our income tax expense requires significant judgment and the use of estimates . we periodically assess tax positions based on current tax developments , including enacted statutory , judicial and regulatory guidance . in analyzing our overall tax position , consideration is given to the amount and timing of recognizing income tax liabilities and benefits . in applying the tax and accounting guidance to the facts and circumstances , income tax balances are adjusted appropriately through the income tax provision . reserves for income tax uncertainties are maintained at levels we believe are adequate to absorb probable payments . actual amounts paid , if any , could differ significantly from these estimates . 26 we use the liability method of accounting for income taxes . under 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 basis . deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . valuation allowances are established , when necessary , to reduce deferred tax assets when we expect the amount of tax benefit to be realized is less than the carrying value of the deferred tax asset . fair value . for the valuation techniques used to determine the fair value of financial assets and liabilities on a recurring basis , as well as assets held for sale , which are recorded at fair value on a nonrecurring basis , refer to note 4 in the consolidated financial statements . story_separator_special_tag font size= '' 2 '' style= '' font-family : times new roman '' > non-retail cost of sales . non-retail cost of sales increased 10.1 % , to $ 389.4 million in 2012 , from $ 353.7 million for the comparable period in 2011 , and as a percentage of non-retail sales , increased to 91.4 % in 2012 from 90.9 % in 2011. operating expenses . operating expenses in 2012 increased $ 83.6 million to $ 952.3 million from $ 868.7 million in 2011 , a 9.6 % increase . as a percentage of total revenues , operating expenses decreased to 42.8 % in 2012 from 43.1 % in 2011. lawsuit ( income ) expense . litigation expense decreased $ 72.0 million due to the accrual of $ 36.5 million in the twelve months ended december 31 , 2011 , followed by a reversal of the accrual of $ 35.5 million in the year ended december 31 , 2012 related to the alford v. aaron rents , inc. et al case previously discussed . based on the judgment in the june 14 , 2011 jury verdict ( as reduced by the court ) , the company recorded a charge of $ 36.5 million in the second quarter of 2011 , which represented an accrual for the judgment and associated legal fees and expenses of $ 41.5 million , less insurance coverage of $ 5.0 million . on march 26 , 2012 , following the court 's ruling that the verdict would not be sustained , the company entered into a settlement agreement in the amount of $ 6.0 million . the company recognized $ 35.5 million of income related to the reversal of the lawsuit accrual in the first quarter of 2012. retirement/separation charges . retirement/separation charges of $ 10.4 million represent costs associated with the retirement of the company 's founder and former chairman of the board in 2012 , while in 2011 the company incurred $ 3.5 million in separation costs related to the departure of the company 's former chief executive officer . 29 depreciation of lease merchandise . depreciation of lease merchandise increased $ 53.9 million to $ 604.7 million in 2012 from $ 550.7 million during the comparable period in 2011 , a 9.8 % increase as a result of higher on-rent lease merchandise due to the growth of our sales and lease ownership and homesmart segments . levels of merchandise on lease remained consistent year over year , resulting in idle merchandise representing approximately 6 % of total depreciation expense in 2012 and 2011. as a percentage of total lease revenues and fees , depreciation of lease merchandise decreased slightly to 36.1 % from 36.3 % in the prior year . year ended december 31 , 2011 versus year ended december 31 , 2010 retail cost of sales . retail cost of sales decreased $ 275,000 , or 1.2 % , to $ 22.7 million in 2011 , from $ 23.0 million for the comparable period in 2010 , and as a percentage of retail sales , increased to 59.0 % from 56.7 % due to a change in the mix of products . non-retail cost of sales . non-retail cost of sales increased 6.9 % , to $ 353.7 million in 2011 , from $ 330.9 million for the comparable period in 2010 , and as a percentage of non-retail sales , decreased to 90.9 % in 2011 from 91.3 % in 2010. operating expenses . operating expenses in 2011 increased $ 47.3 million to $ 872.2 million from $ 824.9 million in 2010 , a 5.7 % increase . as a percentage of total revenues , operating expenses decreased to 43.1 % in 2011 from 44.0 % in 2010. we began ceasing the operations of the aaron 's office furniture division in june of 2010. we closed 14 aaron 's office furniture stores during 2010 and have one remaining store open to liquidate merchandise . as a result , in 2010 we recorded $ 3.3 million in closed store reserves and $ 4.7 million in lease merchandise write-downs and other miscellaneous expenses , totaling $ 9.0 million in operating expenses , related to the closures . no significant operating expenses related to the closure were recorded in 2011. lawsuit ( income ) expense .

results of operations results of operations – years ended december 31 , 2012 , 2011 and 2010 replace_table_token_5_th nmf—calculation is not meaningful for all years presented , the company 's sales and lease ownership , homesmart and franchise segments accounted for substantially all of the operations of the company and , therefore , unless otherwise noted only material changes within these three segments are discussed . the production of our manufacturing segment , consisting of our woodhaven furniture industries division , is primarily leased or sold through our company-operated and franchised stores , and consequently , substantially all of that segment 's revenues and earnings before income taxes are eliminated through the elimination of intersegment revenues and intersegment profit . 27 revenues information about our revenues by reportable segment is as follows : replace_table_token_6_th nmf—calculation is not meaningful 1 segment revenue consists of lease revenues and fees , retail sales and non-retail sales . 2 segment revenue consists of franchise royalties and fees . year ended december 31 , 2012 versus year ended december 31 , 2011 sales and lease ownership . sales and lease ownership segment revenues increased due to a 10.5 % increase in lease revenues and fees and 9.5 % increase in non-retail sales . lease revenues and fees within the sales and lease ownership segment increased due to a net addition of 100 company-operated stores since the beginning of 2011 and a 5.1 % increase in same store revenues .

progressive leasing consequently has no stores of its own , but rather offers lease-purchase solutions to the customers of traditional retailers . aaron 's business offers furniture , consumer electronics , home appliances and accessories to consumers primarily on a month-to-month , lease-to-own basis with no credit needed through the company 's aaron 's stores . this operating segment also supports franchisees of its aaron 's stores . we have more than 1,700 company-operated and franchised aaron 's stores in 47 states and canada . in addition , the aaron 's business segment also includes the operations of woodhaven furniture industries , which manufactures and supplies the majority of the upholstered furniture and bedding leased and sold in company-operated and franchised stores . dami , which was acquired by progressive leasing on october 15 , 2015 , partners with merchants to provide a variety of revolving credit products originated through two third-party federally insured banks to customers that may not qualify for traditional prime lending ( called `` second-look '' financing programs ) . business environment and company outlook like many industries , the lease-to-own industry has been transformed by the internet and virtual marketplace . we believe that the progressive leasing and dami acquisitions have been strategically transformational in this respect by allowing the company to diversify its presence in the market and strengthen our business , as demonstrated by progressive leasing 's significant revenue and profit growth in 2017 . the company is also leveraging franchisee acquisition opportunities to expand into new geographic markets and benefit from synergies . we believe the traditional store based lease-to-own industry has been negatively impacted in recent periods by : ( i ) increased competition from a wide range of competitors , including national , regional and local operators of lease-to-own stores ; virtual lease-to-own companies ; traditional and e-commerce retailers ; and , indirectly , from various types of consumer finance companies that enable our customers to shop at traditional or online retailers ; ( ii ) the challenges faced by many traditional `` brick-and-mortar '' retailers , with respect to a decrease in the number of consumers visiting those stores , especially younger consumers ; ( iii ) the continuing economic challenges facing many traditional lease-to-own customers ; and ( iv ) commoditization of pricing in electronics . in response to these changing market conditions , we are executing a strategic plan that focuses on the following items and that we believe position us for success over the long-term : improve aaron 's store profitability ; accelerate our omnichannel platform ; strengthen relationships of progressive leasing and dami 's current retail and merchant partners ; focus on converting existing pipeline into progressive leasing retail partners ; and champion compliance . as part of executing this strategy , we sold the 82 company-operated homesmart stores on may 13 , 2016 , which we believe has enabled us to sharpen our focus on activities that have the highest potential for return . in july 2017 , the company acquired substantially all of the assets of the store operations of sei/aaron 's , inc. ( `` sei '' ) , the company 's largest franchisee . at the time of the acquisition , the sei store operations served approximately 90,000 customers through 104 aaron's-branded stores in 11 states primarily in the northeast . the acquisition has benefited our omnichannel platform through added scale , has strengthened the company 's presence in certain geographic markets , and has enhanced the company 's ability to drive inventory supply-chain synergies between the aaron 's business and progressive leasing in markets that sei served . 30 we also took steps to further address the expense structure of our aaron 's business by completing a thorough review of our remaining store base in order to identify opportunities for rationalization . as a result of this evaluation and other cost-reduction initiatives , the company closed 56 underperforming company-operated stores during 2016 , closed 82 stores during 2017 and anticipates closing an additional eight stores in the first six months of 2018. the company also optimized its home office and field support staff in 2016 and 2017 , which resulted in a reduction in employee headcount in those areas , to more closely align with current business conditions . story_separator_special_tag other non-operating income ( expense ) , net includes the impact of foreign currency remeasurement , as well as gains resulting from changes in the cash surrender value of company-owned life insurance related to the company 's deferred compensation plan . 33 results of operations the results of dami have been included in the company 's consolidated results and presented as a reportable segment from the october 15 , 2015 acquisition date . during the year ended december 31 , 2017 , the company changed its composition of reportable segments by combining the sales and lease ownership , franchise and woodhaven components into one reportable segment , the aaron 's business , to align the reportable segments with the current organizational structure and the operating results that the chief operating decision maker regularly reviews to analyze performance and allocate resources . the company has retroactively adjusted , for all periods presented , its segment disclosures to align with the current composition of reportable segments . results of operations – years ended december 31 , 2017 , 2016 and 2015 replace_table_token_11_th nmf—calculation is not meaningful 34 revenues information about our revenues by reportable segment is as follows : change year ended december 31 , 2017 vs. 2016 2016 vs. 2015 ( in thousands ) 2017 2016 2015 $ % $ % revenues : progressive leasing 1 $ 1,566,413 $ 1,237,597 $ 1,049,681 $ 328,816 26.6 % $ 187,916 17.9 % aaron 's business 2 1,782,370 1,946,039 2,127,230 ( 163,669 ) ( 8.4 ) ( 181,191 ) ( 8.5 ) dami 3 34,925 24,080 2,845 10,845 45.0 21,235 nmf total revenues from external customers $ 3,383,708 $ 3,207,716 $ 3,179,756 $ 175,992 5.5 % $ 27,960 0.9 % 1 segment revenue consists of lease revenues and fees . story_separator_special_tag the provision for lease merchandise write-offs as a percentage of lease revenues for the aaron 's business increased slightly to 4.2 % in 2017 from 4.1 % in 2016 due to higher lease merchandise write-offs caused by the hurricanes . bad debt expense increased by $ 42.2 million during 2017 primarily due to the increases in invoice volume from progressive leasing as discussed above . progressive leasing 's bad debt expense as a percentage of progressive leasing 's revenues increased to 10.9 % in 2017 from 10.3 % in 2016 due primarily to a shift in the portfolio mix , as well as higher bad debt expense from customers impacted by hurricanes harvey and irma . the provision for loan losses increased during 2017 due to the growth of dami 's post-acquisition loan portfolio subsequent to the october 15 , 2015 acquisition of dami . other operating expenses increased primarily due to higher third-party consulting costs related to various aaron 's business strategic operating initiatives as well as transaction costs incurred related to the acquisition of sei . year ended december 31 , 2016 versus year ended december 31 , 2015 as a percentage of total revenues , operating expense decreased to 42.1 % during 2016 from 42.7 % in 2015 . personnel costs decreased primarily due to the disposition of the homesmart business , in which the company sold all of its 82 homesmart stores on may 13 , 2016 , and a reduction of corporate support staff . this was partially offset by increases in hiring to support the growth of progressive leasing and dami , the inclusion of a full year of dami personnel costs in 2016 and additional charges related to the retirement of the company 's former chief financial officer in 2016 . 36 the provision for lease merchandise write-offs decreased during 2016 . progressive leasing 's provision for lease merchandise write-offs as a percentage of progressive leasing 's lease revenues decreased to 5.7 % in 2016 compared to 7.0 % in 2015 due to continued operational improvements and enhancements to the lease decisioning process . the provision for lease merchandise write-offs as a percentage of lease revenues for the aaron 's business increased to 4.1 % in 2016 compared to 3.8 % in 2015 . bad debt expense increased due to the increase in invoice volume from progressive leasing as discussed above . progressive leasing 's bad debt expense as a percentage of progressive leasing 's revenues decreased to 10.3 % in 2016 compared to 11.6 % in 2015 due to continued operational improvements and enhancements to the lease decisioning process . shipping and handling expense decreased during 2016 due to lower delivery volumes as a result of the net reduction of 161 company-operated stores during the 24 month period ending december 31 , 2016 , including the disposition of the 82 homesmart stores on may 13 , 2016 . the provision for loan losses increased during 2016 due to the inclusion of dami 's results for a full year in 2016 compared to a partial year in 2015 from the october 15 , 2015 acquisition date . other operating expenses during 2015 included $ 3.7 million of one-time transaction costs incurred by progressive leasing in connection with the acquisition of dami . other costs and expenses year ended december 31 , 2017 versus year ended december 31 , 2016 depreciation of lease merchandise . as a percentage of total lease revenues and fees , depreciation of lease merchandise increased to 48.3 % from 46.9 % in the prior year , primarily due to a shift in product mix from the aaron 's business to progressive leasing , which is consistent with the increasing proportion of progressive leasing 's revenue to total lease revenue . progressive leasing generally experiences higher depreciation as a percentage of lease revenues because , among other factors , its merchandise has a shorter average life on lease , a higher rate of early buyouts , and the merchandise is generally purchased at retail prices compared to the aaron 's business , which procures merchandise at wholesale prices . progressive leasing 's depreciation of lease merchandise as a percentage of progressive leasing 's lease revenues and fees increased to 60.6 % in 2017 from 60.2 % in the prior year due to an increase in revenue from early buyouts , which has a lower margin , year over year . aaron 's business depreciation of lease merchandise as a percentage of aaron 's business lease revenues and fees decreased to 34.8 % in 2017 from 36.2 % in the prior year , which was primarily driven by less promotional pricing in 2017 and a favorable revenue mix shift from lower-margin early payout revenue to higher-margin lease revenue year over year . retail cost of sales . retail cost of sales as a percentage of retail sales increased to 64.0 % from 63.2 % primarily due to higher inventory purchase cost during 2017 as compared to 2016 . non-retail cost of sales . non-retail cost of sales as a percentage of non-retail sales remained consistent at approximately 89 % in both periods . restructuring expenses . in connection with the announced closure and consolidation of underperforming company-operated stores and workforce reductions in our home office and field support operations , charges of $ 18.0 million were incurred during the year ended december 31 , 2017 . the charges are comprised of $ 13.4 million related to aaron 's store contractual lease obligations for closed stores , $ 3.2 million related to workforce reductions , and $ 1.4 million primarily related to the write-down to fair value , less estimated selling costs , of land and buildings from stores closed under the restructuring program and impairment of aaron 's store property , plant and equipment .

highlights the following summarizes significant highlights from our 2017 fiscal year : the company reported record revenues of $ 3.4 billion , and its net earnings before income tax ( benefit ) expense increased to a record $ 239.6 million compared to $ 218.4 million in 2016 . the tax cuts and jobs act ( the `` tax act '' ) enacted in december 2017 , among other things , lowered the u.s. corporate income tax rate from 35 % to 21 % effective january 1 , 2018. the estimated net impact of the tax act to our income tax ( benefit ) expense for the year ended december 31 , 2017 is a non-cash provisional income tax benefit of $ 137 million , which primarily relates to the remeasurement of net deferred tax liabilities at the lower tax rate . progressive leasing achieved record revenues of $ 1.6 billion , an increase of 26.6 % over 2016 . progressive leasing 's revenue growth is due to a 23.0 % increase in active doors , which contributed to a 31.2 % increase in total invoice volume . progressive leasing increased its earnings before income taxes to $ 140.2 million compared to $ 104.7 million in 2016 , due mainly to its revenue growth . aaron 's business revenues decreased to $ 1.8 billion , an 8.4 % decrease compared to 2016 . the decline is due primarily to a 7.0 % decrease in same store sales , the net reduction of 130 company-operated stores during the 24-month period ended december 31 , 2017 , and declines in non-retail sales to our franchisees . earnings before income taxes decreased to $ 110.6 million in 2017 compared to $ 123.0 million in the prior year due primarily to the decline in same store sales and the reduction in non-retail sales to franchisees .

in 2008 , we established a full valuation allowance against our u.s. deferred tax asset , and management believes the full valuation allowance is still appropriate as of december 31 , 2015 and 2014 since the facts and circumstances necessitating the allowance have not changed . as a result , no u.s. federal or state income tax benefit story_separator_special_tag statements below regarding future events or performance are “forward-looking statements” within the meaning of the private securities litigation reform act of 1995. our actual results could be quite different from those expressed or implied by the forward-looking statements . factors that could affect results are discussed more fully under the item 1a , entitled “risk factors , ” and elsewhere in this annual report . although forward-looking statements help to provide complete information about us , readers should keep in mind that forward-looking statements may not be reliable . readers are cautioned not to place undue reliance on the forward-looking statements . we undertake no duty to update any forward-looking statements made herein after the date of this annual report . the following discussion should be read in conjunction with the consolidated financial statements contained herein and the notes thereto , along with the section entitled “critical accounting policies and estimates , ” set forth below . overview we develop , manufacture , market and sell diagnostic products and specimen collection devices using our proprietary technologies , as well as other diagnostic products , including immunoassays and other in vitro diagnostic tests that are used on other specimen types . our diagnostic products include tests that are performed on a rapid basis at the point-of-care , tests that are processed in a laboratory , and a rapid point-of-care hiv test approved for use in the domestic consumer retail or over-the-counter ( “otc” ) market . we also manufacture and sell oral fluid collection devices used to collect , stabilize and store samples of genetic material for molecular testing in the consumer genetic , clinical genetic , academic research , pharmacogenomics , personalized medicine , microbiome and animal genetics markets . lastly , we manufacture and sell medical devices used for the removal of benign skin lesions by cryosurgery , or freezing . our products are sold in the united states and internationally to various clinical laboratories , hospitals , clinics , community-based organizations , public health organizations , research and academic institutions , distributors , government agencies , physicians ' offices , commercial and industrial entities , retail pharmacies and mass merchandisers , and to consumers over the internet . current consolidated financial results during the year ended december 31 , 2015 , our consolidated net revenues were $ 119.7 million , compared to $ 106.5 million for the year ended december 31 , 2014. net product revenues during the year ended december 31 , 2015 increased 6 % to $ 104.5 million when compared to 2014 , primarily as a result of higher sales of our molecular collection systems , oraquick ® hcv and intercept ® products . these increases were partially offset by lower sales of our oraquick ® professional hiv and cryosurgical systems products . consolidated other revenues for 2015 were $ 15.3 million , of which $ 13.5 million represents the ratable recognition of payments for exclusive co-promotion rights and certain services provided under our hcv co-promotion agreement with abbvie , and $ 1.8 million represents revenue recognized in connection with ebola-related funding from the u.s. department of health and human services office of the assistant secretary for preparedness and response 's biomedical advanced research and development authority ( “barda” ) . other revenues in 2014 of $ 7.6 million represent the recognition of exclusivity payments under the abbvie co-promotion agreement . our consolidated net income for the year ended december 31 , 2015 was $ 8.2 million , or $ 0.14 per share on a fully diluted basis , compared to a net loss of $ 4.6 million , or ( $ 0.08 ) per share , for the year ended december 31 , 2014. our consolidated net income for the current period reflects the increase in product and other revenues , lower advertising and promotional expenses associated with our oraquick ® in-home hiv test , and the impact of a favorable change in the canadian to u.s. dollar exchange rate of approximately $ 2.8 million . these improvements to the bottom line were partially offset by the absence of a $ 5.5 million roche termination payment received in 2014 and which was reflected as a reduction in operating expenses . additionally , we experienced higher legal costs and increased expenses under our hcv co-promotion agreement with abbvie in 2015 than in the prior year . 59 cash provided by operating activities for the year ended december 31 , 2015 was $ 15.8 million , compared to $ 7.5 million for the year ended december 31 , 2014. as of december 31 , 2015 , we had $ 101.3 million in cash and short term investments , compared to $ 97.9 million at december 31 , 2014 . 2015 developments rapid ebola test early in 2015 , we completed the design of a rapid ebola antigen test using our oraquick ® platform . in june 2015 , we entered into a contract for up to $ 10.4 million in total funding from barda related to our oraquick ® ebola test . the three-year , multi-phased contract included an initial commitment of $ 1.8 million and options for up to an additional $ 8.6 million to fund certain clinical and regulatory activities . in september 2015 , barda exercised an option under the contract to provide $ 7.2 million in additional funding for our oraquick ® ebola test . this funding will be used primarily for clinical and regulatory activities required to request fda 510 ( k ) clearance for this product . funding received under this contract is recorded as other revenue in our consolidated statement of operations as the activities are being performed . story_separator_special_tag sales of our oraquick ® in-home hiv test increased 8 % to $ 7.0 million in 2015 from $ 6.5 million in 2014 largely due to a price increase implemented in august 2015 and an increase in sales volume in the fourth quarter of 2015 immediately following a celebrity 's announcement that he had tested positive for the hiv virus . these increases in the latter half of 2015 were partially offset by a decline in sales in the first quarter of the year which was primarily the result of our decision to transition away from broad-based consumer advertising and focus our marketing and promotional efforts at the retail outlet level in the second half of 2014. domestic oraquick ® hcv sales increased 78 % to $ 7.5 million in 2015 from $ 4.2 million in 2014 , primarily due to the addition of new hcv customers and higher sales to current customers who have expanded their hcv testing programs . international oraquick ® hcv sales increased 27 % to $ 3.9 million in 2015 from $ 3.0 million in 2014 , primarily due to the expansion of our business into asia . we believe our oraquick ® hcv product represents an opportunity for future sales growth given the recent fda approval of several new drug therapies for treating hcv . however , demand for our hcv product , particularly in the public health marketplace , may be somewhat tempered by the limited availability of government funding allocated to hcv testing efforts and the time and effort required to build awareness and demand for rapid hcv testing . sales to physicians can also be adversely affected by the level of reimbursement available from insurance providers and competition from laboratory-based hcv tests . the intensely competitive market for new hcv therapies and the decisions by insurance providers and payors to grant preferred or exclusive formulary status to one hcv therapy over another have adversely affected our initiatives under the hcv co-promotion agreement with abbvie . these and other factors could limit the future growth of our hcv business . 62 international orders for both our hiv and hcv products can be sporadic in nature and are often predicated upon the availability of governmental funding , the impact of competition and other factors . as such , there is no assurance that such sales will continue at the same levels in future periods . substance abuse testing market net substance abuse testing revenues increased 22 % to $ 10.3 million in 2015 from $ 8.4 million in 2014 , primarily as a result of higher sales of our intercept ® drug testing system . domestic intercept ® sales in 2015 increased to $ 7.8 million compared to $ 6.1 million in 2014 largely due to the recovery of customers previously lost to competition , improved domestic employment conditions , and the addition of customers who we believe recognize the advantages of oral fluid testing in identifying recent drug use . cryosurgical systems market sales of our cryosurgical systems products ( which includes both the physicians ' office and otc markets ) decreased 23 % to $ 11.9 million in 2015 from $ 15.5 million in 2014. the table below shows a breakdown of our total net cryosurgical systems revenues ( dollars in thousands ) generated in each market during 2015 and 2014. replace_table_token_8_th sales of our histofreezer ® product in the domestic professional market decreased 36 % to $ 4.3 million in 2015 , compared to $ 6.8 million in 2014 largely as a result of distributor consolidation and competition from new private-label brands . during 2015 , international sales of histofreezer ® increased to $ 916,000 , compared to $ 693,000 in the prior year primarily due to higher sales in asia . in the fourth quarter of 2014 , we re-launched our otc wart removal product in the u.s. retail market through private labeling with a large pharmacy chain . sales related to this product were $ 390,000 for the full year of 2015 compared to $ 108,000 in 2014. we expect this area of cryosurgical sales to increase due to broader retail adoption of our product . sales of our international otc cryosurgical products during 2015 decreased 21 % to $ 6.3 million , compared to $ 8.0 million in 2014 , largely due to lower sales to our latin american distributor . sales decreased to $ 1.3 million , compared to $ 3.0 million in 2014 , due to challenges in the local markets , including declining economic conditions in argentina , a restructuring of our distributor 's business operations in mexico , and overall customer ordering patterns . insurance risk assessment market sales to the insurance risk assessment market decreased 12 % to $ 3.2 million in 2015 from $ 3.7 million in 2014 , as a result of reduced demand in the domestic life insurance market , as well as the continued adoption by some underwriters of a “simplified issue” policy . where such a policy is issued , applicants are required to respond to a questionnaire about their behaviors rather than undergoing lab-based tests . we expect this trend to continue . 63 other revenues other revenues were $ 15.3 million in 2015 , of which $ 13.5 million represent the recognition of exclusivity revenues under our hcv co-promotion agreement with abbvie , and $ 1.8 million represents ebola-related funding from barda . other revenues in 2014 were $ 7.6 million and represent the recognition of exclusivity revenues from abbvie .

consolidated operating results consolidated gross margin was 63 % in 2014 compared to 59 % in 2013. this increase was largely due to the $ 7.6 million of other revenues associated with our abbvie agreement , as well as a more favorable product mix driven largely by increased dnag sales to higher margin customers . consolidated operating loss decreased by $ 7.4 million to $ 4.8 million in 2014 , compared $ 12.2 million in 2013. the lower operating loss was primarily due to the higher licensing and product development revenues and lower hiv otc sales and marketing expenses in 2014 , partially offset by a $ 2.8 million reduction in contract termination payments received from roche during 2014. operating income ( loss ) by segment osur segment osur 's gross margin was 60 % in 2014 compared to 57 % in 2013. osur 's 2014 margin was positively impacted by an increase in other revenues recorded during 2014. research and development expenses increased 13 % to $ 9.4 million in 2014 from $ 8.4 million in 2013 largely due to increased lab supply costs partially offset by lower clinical trial and staffing expenses . sales and marketing expenses decreased 16 % to $ 33.1 million in 2014 from $ 39.5 million in 2013 , primarily as a result of lower advertising and promotional costs for our oraquick ® in-home hiv test which totaled $ 8.5 million in 2014 , as compared to $ 18.8 million in 2013. this reduction in spending was the result of our decision to focus our marketing and promotional efforts at the retail outlet level and transition away from broad-based consumer advertising in june 2014. partially offsetting this decrease were higher sales and marketing costs associated with our oraquick ® hcv co-promotion agreement with abbvie .

- 55 - northrop grumman corporation the change in unrecognized tax benefits during 2016 , 2015 and 2014 , excluding interest , is as follows : replace_table_token_42_th these liabilities , along with $ 7 million of accrued interest and penalties , are included in other current and non-current liabilities in the consolidated statements of financial position . if the income tax benefits from these tax positions are ultimately realized , $ 112 million of federal and foreign tax benefits would reduce the company 's story_separator_special_tag overview global security and economic environment the u.s. and its allies face a global security environment of heightened tensions and instability , threats from state and non-state actors as well as terrorist organizations , emerging nuclear tensions and diverse regional security concerns . global threats persist across all domains , from undersea to space to cyber . the market for defense products , services and solutions globally continues to be driven by these complex and evolving security challenges , considered in the broader context of political and socioeconomic priorities . global economic growth is expected to remain in the low single digits in 2017 , reflecting the impact of and uncertainty surrounding geopolitical tensions globally and financial market volatility . the global economy may also be affected by britain 's exit from the european union , the impact of which is not known at this time . global economic conditions could impact customer purchasing decisions . u.s. political and economic environment in the u.s. , there is an uncertain political environment with a new administration and a new congress . the u.s. continues to face substantial fiscal and economic challenges , which affect funding for its discretionary and non-discretionary budgets . part i of the budget control act of 2011 ( budget control act ) provided for a reduction in planned defense budgets by at least $ 487 billion over a ten year period . part ii mandated substantial additional reductions , through a process known as “ sequestration , ” which took effect in march 2013. on november 2 , 2015 , the president signed the bipartisan budget act of 2015 ( the budget act ) . the budget act raised the debt ceiling until march 2017 and raised the sequester caps imposed by the budget control act by $ 80 billion , split equally between defense and non-defense discretionary spending in the government 's fy 2016 and fy 2017 ( $ 50 billion in fy 2016 and $ 30 billion in fy 2017 ) . sequestration spending caps under the budget control act could reduce defense spending again in fy 2018. on december 18 , 2015 , congress passed and the president signed the consolidated appropriations act of 2016 , which provided funding for the u.s. government for fy 2016 , providing $ 1.1 trillion in discretionary funding for federal agencies through september 2016. the fy 2016 dod budget was approximately $ 580 billion ( including $ 58 billion for overseas contingency operations ( oco ) ) , which represented an approximately four percent increase relative to dod funding for fy 2015. on february 9 , 2016 , the president delivered his fy 2017 budget to congress . the fy 2017 budget reflected the fy 2017 spending caps established in the budget act and requested $ 583 billion for the dod 's annual budget , including $ 59 billion for oco . the president signed a continuing resolution in september 2016 , which was extended in december 2016 and provides funding for the u.s. government at fy 2016 levels through april 28 , 2017. the federal budget and debt ceiling are expected to continue to be the subject of considerable debate , which could have a significant impact on defense spending broadly and the company 's programs in particular . additionally , both the incoming administration and the new congress have offered plans to reform the federal income tax code , along with other significant policy initiatives , some of which could have an impact on the company . for further information on the risks we face from the current political and economic environment , see “ risk factors. ” operating performance assessment and reporting we manage and assess our business based on our performance on contracts and programs ( typically large contracts or two or more closely-related contracts ) . we recognize sales from our portfolio of long-term contracts primarily using the cost-to-cost method of percentage of completion accounting , but in some cases we utilize the units-of-delivery method of percentage of completion accounting . as a result , sales tend to fluctuate in concert with costs incurred and units delivered across our large portfolio of contracts . due to federal acquisition regulation ( far ) rules that govern our u.s. government business and related cost accounting standards ( cas ) , most types of costs are allocable to u.s. government contracts . as such , we do not focus on individual cost groupings ( such as manufacturing , engineering and design labor costs , subcontractor costs , material costs , overhead costs and general and administrative ( g & a ) costs ) , as much as we do on total contract cost , which is the key driver of our sales and operating income . in evaluating our operating performance , we look primarily at changes in sales and operating income . where applicable , significant fluctuations in operating performance attributable to individual contracts or programs , or changes in a specific cost element across multiple contracts , are described in our analysis . based on this approach - 23 - northrop grumman corporation and the nature of our operations , the discussion of results of operations below first focuses on our three segments before distinguishing between products and services . changes in sales are generally described in terms of volume , deliveries or other indicators of sales activity . changes in margins are generally described in terms of performance and contract mix . story_separator_special_tag operating margin rate decreased to 11.4 percent from 12.1 percent primarily due to the lower margins on manned aircraft programs , partially offset by improved performance on space and autonomous systems programs . 2015 - aerospace systems sales for 2015 were comparable to the prior year . sales in 2014 included the $ 75 million in settlements described above . excluding the settlements , sales for 2015 increased $ 105 million , or 1 percent , as compared to 2014. the increase is primarily due to higher volume on autonomous systems and space programs , partially offset by lower volume on manned aircraft programs . autonomous systems sales reflect higher volume on a number of programs , including global hawk , partially offset by lower volume on the fire scout and nato ags programs . sales in manned aircraft declined principally due to fewer f/a-18 deliveries , as that program ramps down , and lower volume on restricted programs , partially offset by the transition to full rate production on the e-2d program and increased deliveries on the f-35 program . space sales include higher volume on restricted programs , partially offset by lower volume on the aehf program . operating income for 2015 decreased $ 80 million , or 6 percent , and operating margin rate decreased to 12.1 percent from 13.0 percent . lower operating income and margin rate in 2015 were primarily due to the benefits recognized in 2014 associated with the settlements described above . mission systems replace_table_token_15_th 2016 - mission systems sales for 2016 increased $ 254 million , or 2 percent , as compared with 2015 due to higher volume on sensors and processing and advanced capabilities programs , partially offset by lower volume on cyber and isr programs . sensors and processing sales increased primarily due to higher volume on communications programs , including the joint counter radio-controlled improvised explosive device electronic warfare program ; increased restricted volume and ramp-up on the g/ator program . these increases were partially offset by lower volume on international programs . advanced capabilities sales increased primarily due to higher volume on restricted , maritime systems and marine systems programs . cyber and isr sales reflect lower volume on space programs . operating income for 2016 increased $ 35 million , or 2 percent , due to the higher sales volume described above and a $ 21 million gain associated with the sale of a commercial cyber security product business , partially offset by a $ 49 million forward loss provision recorded on an advanced capabilities program principally due to cost growth for changes impacting fixed-price options , which may not be fully recovered through additional contract value . operating margin rate for 2016 was consistent with the same period in 2015 and reflects improved performance on sensors and processing programs , partially offset by lower margins on advanced capabilities programs . 2015 - mission systems sales for 2015 decreased $ 327 million , or 3 percent , as compared with 2014 . the decrease was due to lower volume across the sector . advanced capabilities sales decreased primarily due to the impact of in-theater force reductions , lower volume on the consolidated afloat network and enterprise services program and completion of the ground combat vehicle contract . these decreases were partially offset by higher volume on marine systems and missile defense programs . the decrease in cyber and isr sales is primarily due to lower volume on restricted programs , partially offset by higher volume on cyber solutions programs . sensors and processing sales decreased primarily due to ramp-down on an international program and lower volume on the litening program . these decreases were partially offset by ramp-up on the g/ator program and higher volume on fixed wing avionics and c4isr programs . operating income for 2015 decreased $ 147 million , or 9 percent . operating margin rate decreased to 13.2 percent from 14.2 percent . operating income and margin rate for 2015 decreased primarily due to business mix changes , which resulted in lower volume for mature fixed-price production programs and higher volume for cost-type development programs , as well as less favorable performance on sensors and processing and advanced capabilities programs . - 28 - northrop grumman corporation technology services replace_table_token_16_th 2016 - technology services sales for 2016 were slightly higher than the prior year and reflect higher volume on system modernization and services programs , partially offset by lower volume on advanced defense services and global logistics and modernization programs . system modernization and services sales increased primarily due to higher volume on u.s. government health programs . advanced defense services sales declined primarily due to the completion of several programs in 2015 , partially offset by higher volume on the saudi arabian ministry of national guard training support program ( through our interest in a joint venture for which we consolidate the financial results ) . global logistics and modernization sales decreased principally due to lower volume on the intercontinental ballistic missile ( icbm ) program , partially offset by higher volume on the kc-10 program . the increase in kc-10 volume is not indicative of a longer-term trend as we expect kc-10 sales will be winding down in 2017 as our contract nears completion . operating income and margin rate for 2016 were comparable to the prior year . 2015 - technology services sales for 2015 decreased $ 83 million , or 2 percent , as compared with 2014 . the decrease is principally due to lower volume on global logistics and modernization and system modernization and services programs . the decrease in global logistics and modernization is mainly due to ramp-down activities on the icbm program , partially offset by higher volume on intercompany restricted work . system modernization and services sales reflect lower volume across a number of programs , partially offset by higher volume on the total information processing support services and social security administration it support services programs .

consolidated operating results selected financial highlights are presented in the table below : replace_table_token_8_th sales 2016 – sales increased $ 982 million , or 4 percent , as compared with 2015 , primarily due to higher sales at aerospace systems and mission systems . 2015 – sales decreased $ 453 million , or 2 percent , as compared with 2014 , primarily due to lower sales on u.s. government contracts across the company , partially offset by an increase in international sales at aerospace systems . see “ revenue recognition ” in note 1 to the consolidated financial statements for further information on sales by customer category . see “ segment operating results ” for further information by segment and “ product and service analysis ” for product and service detail . operating costs and expenses and operating margin rate operating costs and expenses primarily include labor , material , subcontractor and overhead costs , and are generally allocated to contracts as incurred . operating margin rate is defined as operating income as a percentage of sales . in accordance with industry practice and the regulations that govern cost accounting requirements for government contracts , most general management and corporate expenses incurred at the segment and corporate locations are considered allowable and allocable costs . allowable and allocable g & a costs , including independent research and development ( ir & d ) and bid and proposal costs , are allocated on a systematic basis to contracts in progress . operating costs and expenses comprise the following : replace_table_token_9_th 2016 – operating costs and expenses as a percentage of sales increased slightly in 2016 as compared with 2015 , which reduced our operating margin rate to 13.0 percent from 13.1 percent in the prior year period .

nitin mittal & co. chartered accountants new delhi , india march 28 , 2013 f-4 spar group , inc. and subsidiaries consolidated balance sheets ( in thousands , except share and per share data ) replace_table_token_9_th see accompanying notes . f-5 spar group , inc. and subsidiaries consolidated statements of income and comprehensive income ( in thousands , except per share data ) replace_table_token_10_th see accompanying notes . f-6 spar group , inc. and subsidiaries consolidated statements of equity ( in thousands ) replace_table_token_11_th see accompanying notes . f-7 spar group , inc. and subsidiaries consolidated statements of cash flows ( in thousands ) replace_table_token_12_th see accompanying notes . f-8 spar group , inc. and subsidiaries notes to consolidated financial statements 1. business and organization the spar group , inc. , a delaware corporation ( `` sgrp `` ) , and its subsidiaries ( together with sgrp , the `` spar group `` or the `` company `` ) , is a supplier of merchandising and other marketing services throughout the united states and internationally . the company also provides in-store event staffing , product sampling , furniture and other product assembly services , technology services and marketing research services . assembly services are performed in stores , homes and offices while those other services are primarily performed in mass merchandisers , office supply , grocery , drug store , independent , convenience and electronics stores . merchandising services primarily consist of regularly scheduled , special project and other product services provided at the store level , and the company may be engaged by either the retailer or the manufacturer . those services may include restocking and adding new products , removing spoiled or outdated products , resetting categories `` on the shelf `` in accordance with client or store schematics , confirming and replacing shelf tags , setting new sale or promotional product displays and advertising , replenishing kiosks , providing in-store event staffing and providing assembly services in stores , homes and offices . other merchandising services include whole store or departmental product sets or resets , including new store openings , new product launches and in-store demonstrations , special seasonal or promotional merchandising , focused product support and product recalls . the company also provides technology services and marketing research services . today the company operates in 10 countries that encompass approximately 50 % of the total world population . although it operates in a single business segment ( merchandising and marketing services ) , the company currently divides its operations for marketing , administrative and other purposes into two geographic divisions : its domestic merchandising services division , which provides those services in the united states of america since certain of its predecessors were formed in 1979 ; and its international merchandising services division , which began operations in may of 2001 and provides similar merchandising , marketing services and in-store event staffing services in japan , canada , south africa , india , romania , china , australia , mexico and turkey . the company continues to focus on expanding its merchandising and marketing services business throughout the world . domestic merchandising services division the company 's domestic merchandising services division provides nationwide merchandising and other marketing services throughout the united states of america primarily on behalf of consumer product manufacturers and retailers at mass merchandisers , office supply , grocery , drug store , independent , convenience and electronics stores . included in its clients are home entertainment , general merchandise , health and beauty care , consumer goods and food products companies . f-9 spar group , inc. and subsidiaries notes to consolidated financial statements ( continued ) 1. business and organization ( continued ) the company 's international business in each territory outside the united states is conducted through a foreign subsidiary incorporated in its primary territory . the primary territory establishment date ( which may include predecessors ) , the percentage of the company 's equity ownership , and the principal office location for its us ( domestic ) subsidiaries and each of its foreign ( international ) subsidiaries is as follows : replace_table_token_13_th 1 in september 2012 the company , through its subsidiary in south africa ( sgrp meridian ) , entered into a joint venture agreement to expand its operations in south africa . sgrp meridian owns a 51 % ownership interest in the new company ; cmr meridian ( pty ) ltd. ( `` cmr-meridian `` ) . ( see acquisition strategies and strategic acquisitions , above , note 12 to the consolidated financial statements – geographic data , and note 13 to the consolidated financial statements - purchase of interests in subsidiaries , below ) . 2 in june 2011 , the company sold 49 % of its interest in its indian subsidiary to krognos integrated marketing services private limited . in march 2013 , the company purchased a 51 % interest in a new subsidiary in india , preceptor marketing services private limited , which began operations in march 2013 ( see acquisition strategies and strategic acquisitions , above , note 12 to the consolidated financial statements – geographic data , note 13 to the consolidated financial statements - story_separator_special_tag statements contained in this `` management 's discussion and analysis of financial condition and results of operations '' include `` forward-looking statements '' within the meaning of the securities laws and are based on the company 's best estimates and determinations . story_separator_special_tag these policies have been consistently applied in all material respects and address such matters as revenue recognition , depreciation methods , asset impairment recognition , consolidation of subsidiaries and other companies . while the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions , the company believes the estimates and judgments associated with the reported amounts are appropriate in the circumstances . four critical accounting policies are consolidation of subsidiaries , revenue recognition , allowance for doubtful accounts , and internal use software development costs . consolidation of subsidiaries the company consolidates its 100 % owned subsidiaries . the company also consolidates all of its 51 % owned subsidiaries as the company believes it is the primary beneficiary and controls the economic activities in accordance with accounting standards codification ( asc ) 810-10 , consolidation of variable interest entity . revenue recognition the company 's services are provided to its clients under contracts or agreements . the company bills its clients based upon service fee and per unit fee billing arrangements . revenues under service fee billing arrangements are recognized when the service is performed . the company 's per unit fee arrangements provide for fees to be earned based on the retail sales of a client 's products to consumers . the company recognizes per unit fees in the period such amounts become determinable and are reported to the company . allowance for doubtful accounts the company continually monitors the validity of its accounts receivable based upon current client credit information and financial condition . balances that are deemed to be uncollectible after the company has attempted reasonable collection efforts are written off through a charge to the bad debt allowance and a credit to accounts receivable . accounts receivable balances , net of any applicable reserves or allowances , are stated at the amount that management expects to collect from the outstanding balances . the company provides for probable uncollectible amounts through a charge to earnings and a credit to bad debt allowance based in part on management 's assessment of the current status of individual accounts . based on management 's assessment , the company established an allowance for doubtful accounts of $ 216,000 and $ 57,000 at december 31 , 2012 , and 2011 , respectively . bad debt expense was $ 72,000 , for the year ended december 31 , 2012. in 2011 , the company had minimal write offs of accounts receivable resulting in recovery of $ 55,000 for the year ended december 31 , 2011. internal use software development costs in accordance with asc-350-10-720 , accounting for the costs of computer software developed or obtained for internal use , the company capitalizes certain costs associated with its internally developed software . specifically , the company capitalizes the costs of materials and services incurred in developing or obtaining internal use software . these costs include ( but are not limited to ) the cost to purchase software , the cost to write program code , payroll and related benefits and travel expenses for those employees who are directly involved with and who devote time to the company 's software development projects . capitalized software development costs are amortized over three years on a straight-line basis . the company capitalized $ 824,000 and $ 722,000 of costs related to software developed for internal use in 2012 , and 2011 , respectively , and recognized approximately $ 638,000 and $ 595,000 of amortization of capitalized software for the years ended december 31 , 2012 , and 2011 , respectively . -26- results of operations the following table sets forth selected financial data and such data as a percentage of net revenues for the years indicated ( in millions ) . replace_table_token_4_th story_separator_special_tag times new roman ; font-size : 10pt '' > the company reported a net income of $ 2.9 million for the year ended december 31 , 2012 , or $ 0.14 per diluted share , compared to a net income of $ 2.2 million , or $ 0.10 per diluted share , for the corresponding period last year , based on diluted shares outstanding of 21.6 million and 21.3 million at december 31 , 2012 , and 2011 , respectively . off balance sheet arrangements none . -28- liquidity and capital resources the company had net income before non-controlling interest of $ 3.5 million and $ 2.3 million for the years ended december 31 , 2012 , and december 31 , 2011 , respectively . the company 's cash provided by operating activities for the year ended december 31 , 2012 , was $ 3.4 million , compared to net cash provided by operating activities of $ 3.5 million in 2011. the net cash provided by operating activities was primarily due to a reported net income , depreciation and an increase in accounts payable , accrued expenses and other liabilities , partially offset by an increase in accounts receivable . net cash used by the company in investing activities was $ 1.8 million for the year ended december 31 , 2012 , and $ 1.3 million for the year ended december 31 , 2011 , respectively . the net cash used in investing activities was a result of capitalization of software development costs , the purchase of computer equipment , the purchase of non-controlling interest in new subsidiaries and the final payment for the purchase of the mexican subsidiary .

results of operations for the year ended december 31 , 2012 , when compared to the same period in 2011 net revenues net revenues for the year ended december 31 , 2012 , were $ 102.8 million , compared to $ 73.5 million for the year ended december 31 , 2011 , an increase of $ 29.3 million or 39.7 % . domestic net revenues totaled $ 43.1 million in the year ended december 31 , 2012 , compared to $ 37.8 million for the same period in 2011. domestic net revenues increased by $ 5.3 million or 14 % primarily attributable to continued growth from the company 's syndicated services and assembly businesses , increased project work and the acquisition of a competitive company in the later part of the year . international net revenues totaled $ 59.7 million for the year ended december 31 , 2012 , compared to $ 35.7 million for the same period in 2011 , an increase of $ 24.0 million or 67 % . the increase in 2012 international net revenues was primarily due to additional revenue from the newly integrated acquisitions acquired in the fourth quarter of 2011 in mexico of $ 10 million and turkey of $ 3.5 , and 2012 acquisitions in romania of $ 4.1 million , and south africa of $ 2.4 million , as well as , continued organic growth in south africa of $ 3.1 and japan of $ 2 million .

the fair value for rights to purchase shares of common stock under the company 's employee stock purchase plan was estimated on the date of grant using the following assumptions : replace_table_token_28_th f-18 ceva , inc. notes to the consolidated financial statements— ( continued ) ( in thousands , except share data ) during the years ended december 31 , 2015 , 2016 and 2017 , the company recognized equity-based compensation expense related to stock options , sars , rsus and employee stock purchase plan as follows : replace_table_token_29_th as of december 31 , 2017 , there was $ 620 of unrecognized compensation expense related to unvested stock options , sars and employee stock purchase plan story_separator_special_tag you should read the following discussion together with the consolidated financial statements and related notes appearing elsewhere in this annual report . this discussion contains forward-looking statements that involve risks and uncertainties . actual results may differ materially from those included in such forward-looking statements . factors that could cause actual results to differ materially include those set forth under “risk factors , ” as well as those otherwise discussed in this section and elsewhere in this annual report . see “forward-looking statements and industry data.” business overview the following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations . the discussion should be read in conjunction with our consolidated financial statements and notes thereto for the year ended december 31 , 2017 , both appearing elsewhere in this annual report . headquartered in mountain view , california , ceva is a leading licensor of signal processing platforms and a primary player in artificial intelligence ( ai ) processors for a smarter , connected world . we partner with semiconductor companies and oems worldwide to create power-efficient , intelligent and connected devices for a range of end markets , including mobile , consumer , automotive , industrial and internet of things ( iot ) . our ultra-low-power ips address many of the most complex technologies for imaging and computer vision , neural networks , sound and long and short range wireless . our portfolio includes comprehensive platforms for 5g baseband processing in handsets and infrastructure , highly integrated cellular iot solutions , dsp and voice input algorithms and software for voice enabled devices , advanced imaging and computer vision dsp platforms for any camera-enabled device , and a family of self-contained ai processors that address a wide range of applications . for short range wireless , we offer the industry 's most widely adopted ips for bluetooth ( low energy and dual mode ) and wi-fi ( 802.11 b/g/n/ac up to 4x4 ) . our technologies are licensed to leading semiconductor and original equipment manufacturer ( oem ) companies throughout the world . these companies incorporate our ip into application-specific integrated circuits ( “asics” ) and application-specific standard products ( “assps” ) that they manufacture , market and sell to wireless , consumer , automotive and iot companies . we believe that our licensing business is progressing well with strong interest , diverse customer base and a myriad of target markets . our state-of-the-art technology has shipped in more than 9 billion chips to date for a wide range of diverse end markets . one in three handsets sold worldwide is powered by ceva . our signal processing platforms power many of the world 's leading handset oems , including a tier-one u.s. brand , asus , coolpad , htc , huawei , intex , karbonn , lava , lenovo , lg , meizu , micromax , oppo , samsung , vivo , xiaomi , zte and hundreds of local handset manufacturers in china and india . based on internal data and strategy analytics ' provisional worldwide shipment data , ceva 's worldwide market share of handset baseband chips that incorporate our technologies was approximately 36 % of the worldwide shipment volume in 2017. moreover , we believe the adoption of our signal processing platform and ai processors outside of the cellular baseband market continues to progress . as a testament to this growing trend , during 2017 , we concluded 45 licensing deals , 43 of which are for non-cellular baseband applications . these license deals demonstrate that our technologies are being integrated into a broad range of end devices , including 5g base stations , smartphones , automotive adas , drones , surveillance cameras , wearables , industrial iot and a variety of bluetooth and wi-fi connected consumer and medical products . moreover , during the 2017 , our royalty revenues derived from non-cellular baseband products approximately doubled year-over-year , contributing to more than $ 8 million of royalty revenues . 32 we believe the following key elements represent significant growth drivers for the company : ceva is firmly established in the largest space in the semiconductor industry—baseband for mobile handsets . in particular , our presence in the lte smartphone markets continue to grow as our customers targeting those markets are gaining market share at the expense of the incumbents . during 2017 , we reported 311 million lte chipsets shipped , up from 226 million in 2016. the royalty we derive from smartphones is higher on average than that of feature phones , so we may benefit if and when lte handset markets around the world transition and shift away from feature phones to smartphones , particularly in emerging economies . story_separator_special_tag in addition , our future growth is dependent not only on the continued success of our existing products but also the successful introduction of new products , which requires the dedication of resources into research and development which in turn may increase our operating expenses . furthermore , since our products are incorporated into end products of our oem and semiconductor customers , our business is very dependent on their ability to achieve market acceptance of their end products in the handset and consumer electronic markets , which are similarly very competitive . in addition , macroeconomic trends may significantly affect our operating results . for example , consolidation among our customers may negatively affect our revenue source , increase our existing customers ' negotiation leverage and make us more dependent on a limited number of customers . also , since we continue to derive a significant portion of our revenues from the handset baseband market , any negative trends in that market would adversely affect our financial results . moreover , the semiconductor and consumer electronics industries remain volatile , which makes it extremely difficult for our customers and us to accurately forecast financial results and plan for future business activities . our license arrangements have not historically provided for substantial ongoing license payments so revenue recognized from licensing arrangements vary significantly from period to period , depending on the number and size of deals closed during a quarter , and is difficult to predict . moreover , our royalty revenues are based on the sales of products incorporating the semiconductors or other products of our customers , and as a result we do not have direct access to information that will help us anticipate the timing and amount of future royalties . we have very little visibility into the timetable of product shipments incorporating our technology by our customers . as a result , our past operating results should not be relied upon as an indication of future results . critical accounting policies , estimates and assumptions our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the united states ( u.s. gaap ) . these accounting principles require us to make certain estimates , judgments and assumptions . we believe that the estimates , judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates , judgments and assumptions are made . these estimates , judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements , as well as the reported amounts of revenues and expenses during the periods presented . to the extent there are material differences between these estimates , judgments or assumptions and actual results , our financial statements will be affected . the significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following : revenue recognition ; 34 business combinations and valuation of goodwill and other acquired intangible assets ; income taxes ; equity-based compensation ; and impairment of marketable securities ; in many cases , the accounting treatment of a particular transaction is specifically dictated by u.s. gaap and does not require management 's judgment in its application . there are also areas in which management 's judgment in selecting among available alternatives would not produce a materially different result . revenue recognition significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period . material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management 's estimates change on the basis of development of business or market conditions . management 's judgments and estimates have been applied consistently and have been reliable historically . we generate our revenues from ( 1 ) licensing intellectual property , which in certain circumstances is modified for customer-specific requirements , ( 2 ) royalty revenues and ( 3 ) other revenues , which include revenues from support , training and sale of development systems . we license our ip to semiconductor companies throughout the world . these semiconductor companies then manufacture , market and sell custom-designed chipsets to oems of a variety of consumer electronics products . we also license our technology directly to oems , which are considered end users . we account for our ip license revenues and related services in accordance with financial accounting standards board ( “fasb” ) accounting standards codification ( “asc” ) no . 985-605 , “software revenue recognition.” revenues are recognized when persuasive evidence of an arrangement exists and no further obligation exists , delivery has occurred , the license fee is fixed or determinable , and collection is reasonably assured . a license may be perpetual or time limited in its application . revenue earned on licensing arrangements involving multiple elements are allocated to each element based on the “residual method” when vendor specific objective evidence ( “vsoe” ) of fair value exists for all undelivered elements and vsoe does not exist for one of the delivered elements . vsoe of fair value of the undelivered elements is determined based on the substantive renewal rate as stated in the agreement . extended payment terms in a licensing arrangement may indicate that the license fees are not deemed to be fixed or determinable . if the fee is not fixed or determinable , revenue is recognized as payments become due from the customer unless collection is not considered reasonably assured , then revenue is recognized as payments are collected from the customer , provided all other revenue recognition criteria have been met . revenues from license fees that involve significant customization of our ip to customer-specific specifications are recognized in accordance with the principles set out in fasb asc no . 605-35-25 , “construction-type and production-type contracts recognition , ” using contract accounting on a percentage of completion method .

results of operations the following table presents line items from our consolidated statements of income as percentages of our total revenues for the periods indicated : replace_table_token_8_th 41 discussion and analysis below we provide information on the significant line items in our consolidated statements of income for each of the past three fiscal years , including the percentage changes year-on-year , as well as an analysis of the principal drivers of change in these line items from year-to-year . revenues total revenues replace_table_token_9_th we derive a significant amount of revenues from a limited number of customers . sales to spreadtrum represented 23 % , 27 % and 31 % of our total revenues for 2017 , 2016 and 2015 , respectively . generally , the identity of our other customers representing 10 % or more of our total revenues varies from period to period , especially with respect to our licensing customers as we generate licensing revenues generally from new customers on a quarterly basis . with respect to our royalty revenues , two royalty paying customers each represented 10 % or more of our total royalty revenues for 2017 , and collectively represented 70 % of our total royalty revenues for 2017 ; two royalty paying customers each represented 10 % or more of our total royalty revenues for 2016 , and collectively represented 80 % of our total royalty revenues for 2016 ; and two royalty paying customers each represented 10 % or more of our total royalty revenues for 2015 , and collectively represented 72 % of our total royalty revenues for 2015. we expect that a significant portion of our future revenues will continue to be generated by a limited number of customers . the concentration of our customers is explainable in part by consolidation in the semiconductor industry . the loss of any significant customer could adversely affect our near-term future operating results .

the following discussion contains “ forward-looking statements ” that reflect our future plans , estimates , beliefs and expected performance . we caution that assumptions , expectations , projections , intentions or beliefs about future events may , and often do , vary from actual results and the differences can be material . some of the key factors which could cause actual results to vary from our expectations include changes in oil or natural gas prices , the timing of planned capital expenditures , availability under our credit agreement borrowing base , uncertainties in estimating proved reserves and forecasting production results , operational factors affecting the commencement or maintenance of producing wells , the condition of the capital markets generally , as well as our ability to access them , the proximity to and capacity of gathering , processing and transportation facilities , availability and integration of acquisitions , uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business , as well as those factors discussed below and elsewhere in this annual report , all of which are difficult to predict . in light of these risks , uncertainties and assumptions , the forward-looking events discussed may not occur . see “ cautionary note regarding forward-looking statements. ” overview we are an independent energy company founded in july 2003 and engaged in the exploration , development , production and acquisition of oil and natural gas resources in the united states , with an emphasis on oil and natural gas shale and other unconventional plays . our current operations are focused primarily on the oil and liquids-rich portion of the wolfcamp and bone spring plays in the delaware basin in southeast new mexico and west texas . we also operate in the eagle ford shale play in south texas and the haynesville shale and cotton valley plays in northwest louisiana and east texas . additionally , we conduct midstream operations primarily , as of february 17 , 2017 , through san mateo in support of our exploration , development and production operations and provide natural gas processing , natural gas , oil and salt water gathering services and salt water disposal services to third parties on a limited basis . 56 story_separator_special_tag december 31 , 2015 . our oil revenues and natural gas revenues increased 3 % and 8 % to approximately $ 209.9 million and $ 81.2 million , respectively , as a result of the increases in oil and natural gas production for the year ended december 31 , 2016 as noted above , as compared to $ 203.4 million and $ 75.0 million , respectively , for the year ended december 31 , 2015 . the increase in both oil and natural gas production in 2016 helped to mitigate the impacts of somewhat lower realized weighted average oil and natural gas prices of $ 41.19 per bbl and $ 2.66 per mcf in 2016 , respectively , as compared to $ 45.27 per bbl and $ 2.71 per mcf in 2015 , respectively . we reported a net loss of approximately $ 97.4 million , or $ 1.07 per diluted common share on a gaap basis for the year ended december 31 , 2016 , as compared to a net loss of $ 679.8 million , or $ 8.34 per diluted common share , for the year ended december 31 , 2015 . our net loss and net loss per diluted common share on a gaap basis were significantly impacted by full-cost ceiling impairments of $ 158.6 million and $ 801.2 million for the years ended december 31 , 2016 and 2015 , respectively , as a result of substantial declines in oil and natural gas prices throughout 2015 and 2016. adjusted ebitda for the year ended december 31 , 2016 was $ 157.9 million , as compared to adjusted ebitda of $ 223.2 million reported for the year ended december 31 , 2015 . this decrease in adjusted ebitda resulted , in part , from the lower weighted average oil and natural gas 57 prices realized in 2016 , but was primarily attributable to lower realized hedging revenues of $ 9.3 million in 2016 , as compared to $ 77.1 million in 2015. adjusted ebitda is a non-gaap financial measure . for a definition of adjusted ebitda and a reconciliation of adjusted ebitda to our net income ( loss ) and net cash provided by operating activities , see “ selected financial data — non-gaap financial measures. ” at december 31 , 2016 , our estimated total proved oil and natural gas reserves were 105.8 million boe , an all-time high for the company , including 57.0 million bbl of oil and 292.6 bcf of natural gas , with a standardized measure of $ 575.0 million and a pv-10 of $ 581.5 million . at december 31 , 2015 , our estimated proved oil and natural gas reserves were 85.1 million boe , including 45.6 million bbl of oil and 236.9 bcf of natural gas , with a standardized measure of $ 529.2 million and a pv-10 of $ 541.6 million . our estimated total proved reserves of 105.8 million boe at december 31 , 2016 represented a 24 % year-over-year increase , as compared to 85.1 million boe at december 31 , 2015 . our estimated proved oil reserves of 57.0 million bbl at december 31 , 2016 increased 25 % , as compared to 45.6 million bbl at december 31 , 2015 . our proved oil and natural gas reserves in the delaware basin increased 68 % to 79.4 million boe at december 31 , 2016 , as compared to 47.1 million boe at december 31 , 2015 , as a result of our ongoing delineation and development operations in the delaware basin . at december 31 , 2016 , approximately 75 % of our total proved oil and natural gas reserves were attributable to our properties in the delaware basin . story_separator_special_tag our oil and natural gas revenues increase d $ 12.8 million to $ 291.2 million , or an increase of 5 % , for the year ended december 31 , 2016 , as compared to $ 278.3 million for the year ended december 31 , 2015 . our oil revenues increase d $ 6.6 million , or an increase of 3 % , to $ 209.9 million for the year ended december 31 , 2016 , as compared to $ 203.4 million for the year ended december 31 , 2015 . the increase in oil revenues resulted from the 13 % increase in our oil production to 5.1 million bbl of oil for the year ended december 31 , 2016 , or about 13,924 bbl of oil per day , as compared to 4.5 million bbl of oil , or about 12,306 bbl of oil per day , for the year ended december 31 , 2015 . this increase d oil production was primarily a result of our ongoing delineation and development drilling in the delaware basin , which offset declining oil production in the eagle ford shale , where we have not drilled any new operated wells since the second quarter of 2015. the increase in oil revenues was partially impacted by a lower weighted average oil price realized for the year ended december 31 , 2016 of $ 41.19 per bbl , as compared to $ 45.27 per bbl realized for the year ended december 31 , 2015 . our natural gas revenues increase d $ 6.3 million , or an increase of 8 % , to $ 81.2 million for the year ended december 31 , 2016 , as compared to $ 75.0 million for the year ended december 31 , 2015 . the increase in natural gas revenues resulted from the 10 % increase in our natural gas production to 30.5 bcf for the year ended december 31 , 2016 , as compared to 27.7 bcf for the year ended december 31 , 2015 . the increased natural gas production was primarily attributable to our ongoing delineation and development drilling in the delaware basin , which offset declining natural gas production in the eagle ford and haynesville shales where we have significantly reduced our activity since late 2014 and early 2015. the increase in natural gas revenues was partially impacted by a lower weighted average natural gas price realized for the year ended december 31 , 2016 of $ 2.66 per mcf , as compared to $ 2.71 per mcf realized for the year ended december 31 , 2015 . third-party midstream services revenues . during the third quarter of 2016 , our midstream operations became a reportable business segment under gaap . our third-party midstream services revenues were previously included in other income . third-party midstream services revenues are primarily those revenues from midstream operations related to third parties , including working interest owners in our operated wells ; all midstream services revenues associated with our production are eliminated in consolidation . our third-party midstream services revenues increased to $ 5.2 million , or an increase of almost three-fold , for 60 the year ended december 31 , 2016 , as compared to $ 1.9 million for the year ended december 31 , 2015 . this increase was primarily attributable to a significant increase in third-party salt water disposal revenue to approximately $ 1.6 million for the year ended december 31 , 2016 , as compared to $ 0.2 million for the year ended december 31 , 2015 , due to increased salt water disposal at our facilities in the wolf asset area in 2016. the remaining increase was primarily attributable to third-party natural gas gathering and processing fees of $ 3.6 million for the year ended december 31 , 2016 , as compared to $ 1.7 million for the year ended december 31 , 2015 , including natural gas processing at the black river processing plant , which began operating in august 2016. realized gain on derivatives . our realized net gain on derivatives was $ 9.3 million for the year ended december 31 , 2016 , as compared to a realized net gain of $ 77.1 million for the year ended december 31 , 2015 . we realized net gain s of $ 5.9 million and $ 3.4 million from our oil and natural gas derivative contracts , respectively , for the year ended december 31 , 2016 resulting from oil and natural gas prices that were below the floor prices of certain of our oil and natural gas costless collar contracts . our realized net gain on derivatives was $ 77.1 million for the year ended december 31 , 2015 . we realized net gain s of $ 62.3 million , $ 12.7 million and $ 2.2 million from our oil , natural gas and natural gas liquid ( “ ngl ” ) derivative contracts , respectively , for the year ended december 31 , 2015 resulting from oil and natural gas prices being below the floor prices of most of our oil and natural gas costless collar contracts and ngl prices being below the fixed prices of all of our swap contracts . we realized an average gain of approximately $ 2.29 per bbl hedged on all of our open oil costless collar contracts during the year ended december 31 , 2016 , as compared to an average gain of $ 22.89 per bbl hedged for the year ended december 31 , 2015 . our oil volumes hedged for the year ended december 31 , 2016 were also 6 % lower as compared to the year ended december 31 , 2015 . we realized an average gain of approximately $ 0.26 per mmbtu hedged on all of our open natural gas costless collar contracts during the year ended december 31 , 2016 , as compared to an average gain of approximately $ 0.73 per mmbtu hedged on all of our open natural gas costless collar contracts during the year ended december 31 , 2015 .

2016 operational highlights during the year ended december 31 , 2016 , we completed and began producing oil and natural gas from 40 gross ( 35.6 net ) operated and 15 gross ( 1.4 net ) non-operated wells in the delaware basin . we did not conduct any operated drilling and completion activities on our leasehold properties in south texas or in northwest louisiana and east texas during 2016 , although we did participate in the drilling and completion of 15 gross ( 2.1 net ) non-operated haynesville shale wells and two gross ( less than 0.1 net ) non-operated eagle ford shale wells that began producing in 2016. at january 1 , 2016 , we were operating three drilling rigs in the delaware basin in southeast new mexico and west texas , and we operated these drilling rigs in certain of our various asset areas in the delaware basin throughout most of 2016. we contracted a fourth drilling rig in late august 2016 to begin drilling our first salt water disposal well in our rustler breaks asset area in eddy county , new mexico . after we finished drilling that well , we moved the rig to our wolf asset area in loving county , texas to drill a third salt water disposal well there . in late november 2016 , we elected to move this fourth drilling rig back to our rustler breaks asset area to begin drilling oil and natural gas wells there . at december 31 , 2016 and february 22 , 2017 we continued to operate four drilling rigs in the delaware basin , including two rigs in our rustler breaks asset area , one rig in our wolf asset area and one rig in our ranger and arrowhead asset areas in lea and eddy counties , new mexico .

79 bank7 corp. notes to consolidated financial statements the ( benefit ) /provision for income taxes for the years ended december 31 , 2020 , 2019 and 2018 consists of the following ( dollars in thousands ) : replace_table_token_63_th the provision for income taxes for the years ended december 31 , 2020 , 2019 and 2018 differs from the federal rate of 21 % due to the following : replace_table_token_64_th 80 bank7 corp. notes to consolidated financial statements deferred tax assets ( liabilities ) included in other assets in the accompanying consolidated balance sheet consist of the following : replace_table_token_65_th in assessing the company 's ability to realize deferred tax assets , management considers whether it is more likely than not that some 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 report . unless the context indicates otherwise , references in this management 's discussion and analysis to “ we ” , “ our ” , and “ us , ” refer to bank7 corp. and its consolidated subsidiaries . all references to “ the bank ” refer to bank7 , our wholly owned subsidiary . general we are bank7 corp. , a bank holding company headquartered in oklahoma city , oklahoma . through our wholly-owned subsidiary , bank7 , we operate nine full-service branches in oklahoma , the dallas/fort worth , texas metropolitan area and kansas . we are focused on serving business owners and entrepreneurs by delivering fast , consistent and well-designed loan and deposit products to meet their financing needs . we intend to grow organically by selectively opening additional branches in our target markets and we will also pursue strategic acquisitions . as a bank holding company , we generate most of our revenue from interest income on loans and from short-term investments . the primary source of funding for our loans and short-term investments are deposits held by our subsidiary , bank7 . we measure our performance by our return on average assets , return on average equity , earnings per share , capital ratios , and our efficiency ratio , which is calculated by dividing noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income . as of december 31 , 2020 , we had total assets of $ 1.0 billion , total loans of $ 836.6 million , total deposits of $ 905.5 million and total shareholders ' equity of $ 107.3 million . in september 2018 , in conjunction with our initial public offering , the company terminated its status as an s corporation and elected to be treated as a c corporation . as this termination occurred at the end of the third quarter , we have presented information as pre-tax and pro forma numbers in the non-gaap reconciliation below . 30 the u.s. economy experienced widespread volatility throughout 2020 as a result of the covid-19 pandemic and government responses to the pandemic . economic condition declined rapidly and significantly following the initial widespread u.s. outbreak in march and april of 2020. federal stimulus was quickly passed in the form of the cares act and the economy rebounded significantly in the second half of 2020. in an emergency measure aimed at dampening the economic impact of covid-19 , the federal reserve lowered the target for the federal funds rate to a range of between zero to 0.25 % effective on march 16 , 2020 where it remained through the end of 2020. this action by the federal reserve followed a prior reduction of the targeted federal funds rates to a range of 1.0 % to 1.25 % effective march 4 , 2020. this decline in interest rates led to new all-time low yields across the u.s. treasury maturity curve . in september 2020 , the federal reserve ( fed ) indicated that it expects to maintain the targeted federal funds rate at current levels and expects that to last through 2023. although rates are at or near historical lows , it is possible the fed could force rates even lower , which could further negatively impact the net interest margins for the banking industry . net interest income is a key driver for our earnings , and is defined as the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits . our bank has an asset sensitive balance sheet , therefore , our earnings are susceptible to lower rates because the interest income received on loans and other investments falls more quickly and to a larger degree than the interest rates paid on deposits . although we have implemented various strategies to mitigate the effects of lower interest rates , we have experienced a decrease in net interest income , and could possibly experience further degradation to our net interest margin . factors affecting comparability of financial results s corporation status since our formation in 2004 , until our initial public offering , we have elected to be taxed for u.s. federal income tax purposes as an s corporation . as a result , our net income has not been subject to , and we have not paid , u.s. federal or state income taxes , and we have not been required to make any provision or recognize any liability for u.s. federal income tax in our financial statements . the consummation of our initial public offering resulted in the termination of our status as an s corporation and in our taxation as a c corporation for u.s. federal and state income tax purposes . upon the termination of our status as an s corporation , we commenced paying u.s. federal income tax on our pre-tax net income for each year ( including the short year beginning on the date our status as an s corporation terminated ) , and our financial statements reflect a provision for u.s. federal income tax . story_separator_special_tag financial condition the following discussion of our financial condition compares december 31 , 2020 , 2019 , and 2018. total assets total assets increased $ 150.3 million , or 17.4 % , to $ 1.0 billion as of december 31 , 2020 , as compared to $ 866.4 million as of december 31 , 2019 and $ 770.5 million as of december 31 , 2018. the increasing trend in total assets is primarily attributable to strong organic loan and retail deposit growth within the oklahoma city market and expansion into the dallas/fort worth metropolitan area , as well as the addition of loans related to the paycheck protection program ( ppp ) in 2020 . 36 loan portfolio our loans represent the largest portion of our earning assets . the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition . as of december 31 , 2020 , 2019 and 2018 , our gross loans were $ 839.1 million , $ 708.7 million and $ 601.9 million , respectively . the following table presents the balance and associated percentage of each major category in our loan portfolio as of december 31 , 2020 , december 31 , 2019 and december 31 , 2018 : replace_table_token_12_th during the second quarter of 2020 , we began originating loans to qualified small businesses under the ppp administered by the sba under the provisions of the cares act . included in our commercial & industrial balance at december 31 , 2020 , are $ 44.9 million of ppp loans . we have established internal concentration limits in the loan portfolio for cre loans , hospitality loans , energy loans , and construction loans , among others . all loan types are within our established limits . we use underwriting guidelines to assess each borrower 's historical cash flow to determine debt service , and we further stress test the debt service under higher interest rate scenarios . financial and performance covenants are used in commercial lending to allow us to react to a borrower 's deteriorating financial condition , should that occur . 37 the following tables show the contractual maturities of our gross loans as of the periods below : replace_table_token_13_th replace_table_token_14_th 38 replace_table_token_15_th allowance for loan and lease losses the allowance is based on management 's estimate of probable losses inherent in the loan portfolio . in the opinion of management , the allowance is adequate to absorb estimated losses in the portfolio as of each balance sheet date . while management uses available information to analyze losses on loans , future additions to the allowance may be necessary based on changes in economic conditions . in addition , various regulatory agencies , as an integral part of their examination process , periodically review the company 's allowance . in analyzing the adequacy of the allowance , a comprehensive loan grading system to determine risk potential in loans is utilized together with the results of internal credit reviews . to determine the adequacy of the allowance , the loan portfolio is broken into segments based on loan type . historical loss experience factors by segment , adjusted for changes in trends and conditions , are used to determine an indicated allowance for each portfolio segment . these factors are evaluated and updated based on the composition of the specific loan segment . other considerations include volumes and trends of delinquencies , nonaccrual loans , levels of bankruptcies , criticized and classified loan trends , expected losses on real estate secured loans , new credit products and policies , economic conditions , concentrations of credit risk and the experience and abilities of our lending personnel . in addition to the segment evaluations , impaired loans with a balance of $ 250,000 or more are individually evaluated based on facts and circumstances of the loan to determine if a specific allowance amount may be necessary . specific allowances may also be established for loans whose outstanding balances are below the $ 250,000 threshold when it is determined that the risk associated with the loan differs significantly from the risk factor amounts established for its loan segment . the allowance was $ 9.6 million at december 31 , 2020 , $ 7.8 million at december 31 , 2019 and $ 7.8 million at december 31 , 2018. the increasing trend was related to , and in conjunction with , loan growth and uncertainty in the economy caused by the covid-19 pandemic . 39 the following table provides an analysis of the activity in our allowance for the periods indicated : replace_table_token_16_th while the entire allowance is available to absorb losses from any and all loans , the following table represents management 's allocation of the allowance by loan category , and the percentage of allowance in each category , for the periods indicated : replace_table_token_17_th nonperforming assets loans are considered delinquent when principal or interest payments are past due 30 days or more . delinquent loans may remain on accrual status between 30 days and 90 days past due . loans on which the accrual of interest has been discontinued are designated as nonaccrual loans . typically , the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when , in the opinion of management , there is a reasonable doubt as to collectability of the obligation . when loans are placed on nonaccrual status , all interest previously accrued but not collected is reversed against current period interest income . income on a nonaccrual loan is subsequently recognized only to the extent that cash is received and the loan 's principal balance is deemed collectible . loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable . 40 a loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement .

results of operations years ended december 31 , 2020 , december 31 , 2019 , and december 31 , 2018 net interest income and net interest margin the following table presents , for the periods indicated , information about : ( i ) weighted average balances , the total dollar amount of interest income from interest-earning assets , and the resultant average yields ; ( ii ) average balances , the total dollar amount of interest expense on interest-bearing liabilities , and the resultant average rates ; ( iii ) net interest income ; and ( iv ) the net interest margin . replace_table_token_8_th ( 1 ) includes income and weighted average balances for fed funds sold , interest-earning deposits in banks and other miscellaneous interest-earning assets . ( 2 ) includes income and weighted average balances for fhlb and frb stock . ( 3 ) average loan balances include monthly average nonaccrual loans of $ 11.3 million , $ 2.1 million and $ 991,000 for the years ended december 31 , 2020 , 2019 and 2018 , respectively . ( 4 ) net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities .

the acquisition of tendyne , which story_separator_special_tag story_separator_special_tag countries in latin america . operating margins increased from 17.7 percent of sales in 2015 to 19.8 percent in 2017. since the beginning of the first quarter of 2017 , the results of abbott 's cardiovascular and neuromodulation products segment includes abbott 's historical vascular products segment and 23 st. jude medical from the date of acquisition . excluding the impact of foreign exchange , sales in the cardiovascular and neuromodulation products segment increased 207.4 percent in 2017 and 4.5 percent in 2016. the sales increase in 2017 was driven by the acquisition of st. jude medical . excluding the impact of the acquisition , as well as the impact of foreign exchange , sales in the cardiovascular and neuromodulation products segment were essentially unchanged in 2017 versus the prior year . in 2017 , higher structural heart and endovascular sales were offset by lower coronary stent sales and the comparison impact from the favorable 2016 resolution of a third-party royalty agreement . in 2016 , sales growth was driven by double-digit growth in abbott 's sales of its mitraclip structural heart device for the treatment of mitral regurgitation , as well as endovascular franchise sales growth . these increases were partially offset by pricing pressures primarily related to drug-eluting stents ( des ) and lower market share for abbott 's xience des franchise in certain geographies . in 2017 , operating earnings for this segment increased over 160 percent ; the operating margin profile declined from 38.0 percent of sales in 2015 to 30.5 percent in 2017 primarily due to the mix of business resulting from the acquisition of st. jude medical and ongoing pricing pressures in the coronary business . in 2017 , abbott obtained regulatory approval for various products in addition to the approvals described above in the diagnostics business . in its cardiovascular and neuromodulation products segment , abbott received u.s. fda approvals for magnetic resonance ( mr ) conditional labeling across its full suite of pacemaker , implantable cardioverter defibrillator ( icd ) , and cardiac resynchronization therapy defibrillator ( crt-d ) devices . abbott announced ce mark and received u.s. fda clearance for its confirm rx insertable cardiac monitor ( icm ) , the first and only smartphone-compatible icm designed to help physicians remotely identify cardiac arrhythmias . abbott received u.s. fda approval for its heartmate 3 system , which helps a weak heart pump blood through the body for advanced heart failure patients in need of short-term hemodynamic support ( bridge-to-transplant or bridge to myocardial recovery ) . abbott obtained ce mark for its xience sierra product , which is the next generation of its drug-eluting coronary stent system . in its diabetes business , abbott received u.s. fda approval for its freestyle libre system , which is the only continuous glucose monitoring system that does not require any user calibration . abbott 's short- and long-term debt totaled $ 27.9 billion and $ 22.0 billion at december 31 , 2017 and 2016 , respectively . at december 31 , 2017 , abbott 's long-term debt rating was bbb by standard and poor 's corporation and baa3 by moody 's investors service ( moody 's ) . in february 2018 , moody 's raised abbott 's rating to baa2 with a positive outlook . abbott is committed to reducing its debt levels following the recent acquisitions of st. jude medical and alere . in january 2018 , abbott repaid $ 3.95 billion of debt and anticipates additional debt repayments throughout 2018. on february 16 , 2018 , the board of directors authorized the additional redemption of up to $ 5 billion of currently outstanding long-term notes . in the first quarter of 2017 , as part of the acquisition of st. jude medical , abbott assumed outstanding debt previously issued by st. jude medical . abbott exchanged certain st. jude medical debt obligations with an aggregate principal amount of approximately $ 2.9 billion for debt issued by abbott which consists of : $ 473.8 million of 2.00 % senior notes due 2018 ; $ 483.7 million of 2.80 % senior notes due 2020 ; $ 818.4 million of 3.25 % senior notes due 2023 ; $ 490.7 million of 3.875 % senior notes due 2025 ; and $ 639.1 million of 4.75 % senior notes due 2043. following this exchange , approximately $ 194.2 million of existing st. jude medical notes remain outstanding across the five series of existing notes which have the same coupons and maturities as those listed above . there were no significant costs associated with the exchange of debt . in addition , during the first quarter of 2017 , abbott assumed and subsequently repaid approximately $ 2.8 billion of various st. jude medical debt obligations . on january 4 , 2017 , as part of funding the cash portion of the st. jude medical acquisition , abbott borrowed $ 2.0 billion under a 120-day senior unsecured bridge term loan facility . this facility was repaid during the first quarter of 2017. in 2017 , abbott also issued 364-day yen-denominated debt , of which $ 195 million was outstanding at december 31 , 2017. abbott also paid off a $ 479 million yen-denominated short-term borrowing during the year . 24 on july 31 , 2017 , abbott entered into a 5-year term loan agreement that allowed abbott to borrow up to $ 2.8 billion on an unsecured basis for the acquisition of alere . on october 3 , 2017 , abbott borrowed $ 2.8 billion under this term loan agreement to finance the acquisition of alere , to repay certain indebtedness of abbott and alere , and to pay fees and expenses in connection with the acquisition . borrowings under the term loan bore interest based on a eurodollar rate , plus an applicable margin based on abbott 's credit ratings . abbott paid off this term loan on january 5 , 2018. on october 3 , 2017 , abbott borrowed $ 1.7 billion under its lines of credit . story_separator_special_tag except for a transition period before or after a change in the supplier for the wic business in a state , inventory in the distribution channel does not vary substantially . management also estimates the states ' processing lag time based on claims data . in the wic business , the state where the sale is made , which is the determining factor for the applicable price , is reliably determinable . estimates are required for the amount of wic sales within each state where abbott has the wic business . external data sources utilized for that estimate are participant data from the u.s. department of agriculture ( usda ) , which administers the wic program , participant data from some of the states , and internally administered market research . the usda has been making its data available for many years . internal data includes historical redemption rates and pricing data . at december 31 , 2017 , abbott had wic business in 29 states . historically , adjustments to prior years ' rebate accruals have not been material to net income . abbott employs various techniques to verify the accuracy of claims submitted to it , and where possible , works with the organizations submitting claims to gain insight into changes that might affect the rebate amounts . for government agency programs , the calculation of a rebate involves interpretations of relevant regulations , which are subject to challenge or change in interpretation . income taxes — abbott operates in numerous countries where its income tax returns are subject to audits and adjustments . because abbott operates globally , the nature of the audit items is often very complex , and the objectives of the government auditors can result in a tax on the same income in more than one country . abbott employs internal and external tax professionals to minimize audit adjustment amounts where possible . in accordance with the accounting rules relating to the measurement of tax contingencies , in order to recognize an uncertain tax benefit , the taxpayer must be more likely than not of sustaining the position , and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit . application of these rules requires a significant amount of judgment . in the u.s. , abbott 's federal income tax returns through 2013 are settled except for the federal income tax returns of the former alere consolidated group which are settled through 2012. no additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax related to the u.s. tax cuts and jobs act , or any additional outside basis differences that exist , as these amounts continue to be indefinitely reinvested in foreign operations . pension and post-employment benefits — abbott offers pension benefits and post-employment health care to many of its employees . abbott engages outside actuaries to assist in the determination of the 26 obligations and costs under these programs . abbott must develop long-term assumptions , the most significant of which are the health care cost trend rates , discount rates and the expected return on plan assets . the discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits . the health care cost trend rates represent abbott 's expected annual rates of change in the cost of health care benefits and are a forward projection of health care costs as of the measurement date . a difference between the assumed rates and the actual rates , which will not be known for years , can be significant in relation to the obligations and the annual cost recorded for these programs . low interest rates have significantly increased actuarial losses for these plans . at december 31 , 2017 , pretax net actuarial losses and prior service costs and ( credits ) recognized in accumulated other comprehensive income ( loss ) for abbott 's defined benefit plans and medical and dental plans were losses of $ 3.5 billion and $ 248 million , respectively . actuarial losses and gains are amortized over the remaining service attribution periods of the employees under the corridor method , in accordance with the rules for accounting for post-employment benefits . differences between the expected long-term return on plan assets and the actual annual return are amortized over a five-year period . note 13 to the consolidated financial statements describes the impact of a one-percentage point change in the health care cost trend rate ; however , there can be no certainty that a change would be limited to only one percentage point . valuation of intangible assets — abbott has acquired and continues to acquire significant intangible assets that abbott records at fair value at the acquisition date . transactions involving the purchase or sale of intangible assets occur with some frequency between companies in the health care field and valuations are usually based on a discounted cash flow analysis . the discounted cash flow model requires assumptions about the timing and amount of future net cash flows , risk , cost of capital , terminal values and market participants . each of these factors can significantly affect the value of the intangible asset . abbott engages independent valuation experts who review abbott 's critical assumptions and calculations for acquisitions of significant intangibles . abbott reviews definite-lived intangible assets for impairment each quarter using an undiscounted net cash flows approach . if the undiscounted cash flows of an intangible asset are less than the carrying value of an intangible asset , the intangible asset is written down to its fair value , which is usually the discounted cash flow amount . where cash flows can not be identified for an individual asset , the review is applied at the lowest group level for which cash flows are identifiable .

financial review abbott 's revenues are derived primarily from the sale of a broad line of health care products under short-term receivable arrangements . patent protection and licenses , technological and performance features , and inclusion of abbott 's products under a contract most impact which products are sold ; price controls , competition and rebates most impact the net selling prices of products ; and foreign currency translation impacts the measurement of net sales and costs . abbott 's primary products are nutritional products , diagnostic testing products , branded generic pharmaceuticals and cardiovascular and neuromodulation products . sales in international markets comprise approximately 65 percent of consolidated net sales . on october 3 , 2017 , abbott acquired alere inc. ( alere ) , a diagnostic device and service provider , for $ 51.00 per common share in cash , which equated to a purchase price of approximately $ 4.5 billion . as part of the acquisition , abbott tendered for alere 's preferred shares for a total value of approximately $ 0.7 billion . in addition , approximately $ 3.0 billion of alere 's debt was assumed and subsequently repaid . the acquisition establishes abbott as a leader in point of care testing , expands abbott 's global diagnostics presence and provides access to new products , channels and geographies . abbott 's diagnostic products reportable segment includes the results of alere from the date of acquisition . on january 4 , 2017 , abbott completed the acquisition of st. jude medical , inc. ( st. jude medical ) , a global medical device manufacturer , for approximately $ 23.6 billion , including approximately $ 13.6 billion in cash and approximately $ 10 billion in abbott common shares , based on abbott 's closing stock price on the acquisition date . as part of the acquisition , approximately $ 5.9 billion of st. jude medical 's debt was assumed , repaid or refinanced by abbott .

for purposes of calculating earnings ( loss ) per share ( “ eps ” ) , a company that has participating security holders ( for example , holders of unvested restricted stock that have non-forfeitable dividend rights ) is required to utilize the two -class method for calculating earnings per story_separator_special_tag the following discussion should be read in conjunction with , and is qualified in its entirety by , the consolidated financial statements and notes thereto included elsewhere in this annual report on form 10-k. this item contains forward-looking statements that involve risks and uncertainties . actual results may differ materially from those indicated in such forward-looking statements . factors that may cause such a difference include , but are not limited to , those discussed in “ item 1a , risk factors relating to our business. ” this section of this form 10-k generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this form 10-k can be found in “ management 's discussion and analysis of financial condition and results of operations ” in part ii , item 7 of the company 's annual report on form 10-k for the fiscal year ended december 31 , 201 8 . replace_table_token_4_th 16 story_separator_special_tag style= '' font-family : 'times new roman ' , times , serif ; font-size:10pt ; margin:0pt ; text-align : justify ; text-indent:36pt ; '' > replace_table_token_6_th total homebuilding assets increased 10 % from december 31 , 2018 to december 31 , 2019. increases in each of our homebuilding segments were the result of increases in our inventory balances . these increases were driven by a greater number of lots acquired during 2019 than those delivered to homebuyers during the year as well as an increase in homes completed or under construction as of year-end . the increase in our corporate segment was the result of the adoption of accounting standards update ( “ asu ” ) 2016-02 , leases on january 1 , 2019 , which requires a lessee to recognize a right-of-use asset and a corresponding lease liability , primarily related to our corporate office . 18 new home deliveries & home sale revenues : changes in home sale revenues are impacted by changes in the number of new homes delivered and the average selling price of those delivered homes . commentary for each of our segments on significant changes in these two metrics is provided below . replace_table_token_7_th replace_table_token_8_th west segment commentary for the year ended december 31 , 2019 , the increase in new home deliveries was the result of a 5 % increase in the number of homes in backlog to begin the year along with a year-over-year increase in net new orders in all of our western markets resulting in increased deliveries in the second half of 2019. the average selling price of homes delivered decreased as a result of a decline in the percentage of deliveries coming from our higher priced communities in southern california . in addition , a greater percentage of closings within all of our western markets during the current year were from our more affordable product offerings . mountain segment commentary for the year ended december 31 , 2019 , new home deliveries increased 6 % driven by improved backlog conversion rates in our colorado markets and an increase in net new orders in each of our mountain markets resulting in increased deliveries in the second half of 2019. backlog conversion rates in colorado benefited from cycle time improvements as a result of ( 1 ) an increase in the percentage of seasons tm deliveries , which have some of the shortest cycle times of all of our product offerings and ( 2 ) improved cycle times across all of our product offerings in these markets . these improvements in net new orders and backlog conversion were partially offset by a 17 % decrease in homes in backlog to begin the year . east segment commentary for the year ended december 31 , 2019 , the decrease in the average selling price of homes delivered in our east segment was due to a change in mix resulting from ( 1 ) a higher percentage of our deliveries coming from our florida markets , which have a lower average selling price than our mid-atlantic market and ( 2 ) a higher percentage of deliveries in this segment coming from communities that offer more affordable home plans . the increase in new home deliveries was driven by a year-over-year increase in net new orders in all of our east markets resulting in increased deliveries in the second half of 2019 as well as shorter cycle times as a higher percentage of our deliveries were from our more affordable product offerings . these improvements in backlog conversion and net new orders were partially offset by a 19 % decrease in homes in backlog to begin the year . 19 gross margin our gross margin from home sales for the year ended december 31 , 2019 increased 50 basis points year-over-year from 18.3 % to 18.8 % . during the years ended december 31 , 2019 and 2018 , we recorded inventory impairments of $ 0.9 million and $ 21.9 million , respectively . the impairments recorded in 2018 negatively impacted gross margin by 70 basis points , while the impairments recorded in 2019 did not have a significant impact on gross margin . see below for further discussion of the inventory impairments . inventory impairments during the year ended december 31 , 2019 , we recorded $ 0.9 million of inventory impairments , of which $ 0.4 million related to two projects in our east segment , $ 0.4 million related to one project in our mountain segment , and $ 0.1 million related to one project in our west segment . story_separator_special_tag consistent with our quarterly homebuilding operating data provided , we have also included below the cancellations as a percentage of homes in beginning backlog for each quarter during the years ended december 31 , 2019 and 2018. replace_table_token_16_th 24 backlog : replace_table_token_17_th at december 31 , 2019 , we had 3,801 homes in backlog with a total value of $ 1.75 billion , representing respective increases of 29 % and 22 % from december 31 , 2018. the increase in the number of homes in backlog is primarily a result of the year-over-year increase in net new orders in the second half of 2019 , offset slightly by an increase in backlog conversion rates due to improved cycle times . the decrease in the average selling price of homes in backlog is due to a shift in mix to lower priced communities , consistent with our ongoing strategy of offering more affordable home plans , as well as a shift in geographical mix with an increased proportion of net new orders coming from our arizona ( west segment ) and florida ( east segment ) markets , which have the lowest average selling prices in our company . homes completed o r under construction : replace_table_token_18_th both the increase in sold homes under construction or completed and the decrease in unsold started homes are due to the increased demand we have experienced as a result of our increased offering of more affordable home plans . lots owned and optioned ( including homes completed or under construction ) : replace_table_token_19_th our total owned and optioned lots at december 31 , 2019 were 27,386 , up 18 % from december 31 , 2018 , due to our land acquisition approval activity over the past year across nearly all of our markets . we believe that our total lot supply can support growth in future periods . see `` forward-looking statements '' above . 25 financial services replace_table_token_20_th for the year ended december 31 , 2019 , our financial services pretax income increased $ 14.0 million , or 30 % from the same period in the prior year . this was primarily due to increases in the market value of investments in equity securities held by our insurance entities that resulted in an $ 11.8 million net gain on equity securities in the current year as compared to a $ 3.7 million net loss in the prior year . pretax income for our mortgage segment decreased $ 2.6 million year-over-year primarily due to the settlement of outstanding claims relating to loans originated by homeamerican prior to 2009. the table below sets forth information for our mortgage operations relating to mortgage loans originated and capture rate . replace_table_token_21_th 26 income taxes we recorded income tax expense of $ 66.7 million , $ 53.1 million , and $ 87.9 million for the years ended december 31 , 2019 , 2018 and 2017 , respectively , resulting in effective income tax rates of 21.9 % , 20.1 % , and 38.3 % , respectively . the year-over-year change in our effective tax rate from 2018 to 2019 was impacted by the following items : ( 1 ) our effective tax rate in 2019 includes a $ 2.8 million benefit from share based awards vested or exercised during the year compared to a $ 0.4 million expense during the prior year . ( 2 ) our effective tax rate in 2019 includes a $ 1.6 million benefit due to a decrease in our liability for uncertain tax positions , while our effective tax rate in 2018 included a $ 4.7 million expense due to an increase in our liability for uncertain tax positions . ( 3 ) our effective tax rate in 2018 included a larger benefit from energy tax credits than 2019 . ( 4 ) our effective tax rate in 2018 included the benefit of certain tax method changes that were implemented with the filing of our 2017 federal tax return . 27 liquidity and capital resources we use our liquidity and capital resources to ( 1 ) support our operations , including the purchase of land , land development and construction of homes ; ( 2 ) provide working capital ; and ( 3 ) provide mortgage loans for our homebuyers . our liquidity includes our cash and cash equivalents , marketable securities , revolving credit facility ( as defined below ) and mortgage repurchase facility ( as defined below ) . additionally , we have an existing effective shelf registration statement that allows us to issue equity , debt or hybrid securities up to $ 2.0 billion . following the issuance of $ 300 million of 3.850 % senior notes on january 9 , 2020 ( see note 24 for further discussion ) , $ 1.70 billion remains on our effective shelf registration statement . we have marketable equity securities that consist primarily of holdings in common stocks and exchange traded funds . capital resources our capital structure is primarily a combination of ( 1 ) permanent financing , represented by stockholders ' equity ; ( 2 ) long-term financing , represented by our 5.625 % senior notes due 2020 , 5.500 % senior notes due 2024 and our 6.000 % senior notes due 2043 ; ( 3 ) our revolving credit facility and ( 4 ) our mortgage repurchase facility . on january 9 , 2020 , we completed an offering of $ 300 million of 3.850 % senior notes due january 2030 ( see note 24 , subsequent events , in the notes to the financial statements for further discussion ) . because of our current balance of cash , cash equivalents , marketable securities , ability to access the capital markets , and available capacity under both our revolving credit facility and mortgage repurchase facility , we believe that our capital resources are adequate to satisfy our short and long-term capital requirements , including meeting future payments on our senior notes as they become due . see “ forward-looking statements ” above .

executive summary overview results for the twelve months ended december 31 , 2019 for the year ended december 31 , 2019 , we reported net income of $ 238.3 million , or $ 3.72 per diluted share , a 13 % increase compared to net income of $ 210.8 million , or $ 3.39 per diluted share , for the prior year period . the increase was partly the result of a $ 27.3 million increase in pretax income from homebuilding operations due to a 7 % increase in home sale revenues and a 50 basis point improvement in gross margin from home sales . additionally , net income benefited from investments in equity securities held by our insurance entities that resulted in an $ 11.8 million net gain on equity securities in the current year as compared to a $ 3.7 million net loss in the prior year . these increases were slightly offset by a higher effective tax rate in 2019 as our 2018 effective tax rate included a larger benefit from energy tax credits than 2019. home sale revenues increased from $ 2.98 billion in 2018 to $ 3.21 billion in 2019. the $ 223.4 million increase was the result of a 13 % increase in the number of homes delivered , which was slightly offset by a 4 % decrease in the average selling price of those homes . the dollar value of our net new home orders increased 26 % from the prior year period , driven by a 31 % increase in the number of net new orders . the increase in net new orders was the result of a 17 % increase in the number of average active communities and a 13 % increase in our monthly sales absorption pace .

( 2 ) series c convertible preferred stock warrants were automatically converted to equivalent common stock warrants upon the company 's ipo on january 24 , 2012 and converted or cancelled as of april 30 , 2012. the following outstanding shares of common stock equivalents were excluded from the computation of diluted net income per share for the periods presented because including them would have been antidilutive : replace_table_token_51_th ( 1 ) see note 2 “ change in accounting policy - stock-based compensation ” of notes to consolidated financial statements 69 6. commitments and contingencies the following table presents a summary of the company 's contractual obligations and commitments as story_separator_special_tag the following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included in item 8 and the risk factors included in item 1a of part i of this annual report on form 10-k. all information presented herein is based on our fiscal calendar . unless otherwise stated , references in this report to particular years or quarters refer to our fiscal years ended in july and the associated quarters of those fiscal years . we assume no obligation to revise or update any forward-looking statements for any reason , except as required by law . overview we are a leading provider of software products that help property & casualty ( “ p & c ” ) insurers replace their legacy core systems and transform their business . designed to be flexible and scalable , guidewire insurancesuite tm enables insurers to deliver excellent service , increase market share and lower operating costs . we also sell additional products in the areas of data management , mobile and portals , and hosted analytic applications which complement guidewire insurancesuite and align with our mission to build software products that transform the p & c industry . we sell our products to a wide variety of global p & c insurance carriers ranging from some of the largest global insurance carriers or their subsidiaries to national carriers to regional carriers . we continue to expand our global reach with sales and marketing growth in europe and asia pacific , geographies in which we are building pipeline and strengthening our presence . our customer engagement is led by our direct sales model and supported by our system integrator ( “ si ” ) partners . customers can buy our software applications , policycenter , claimcenter and billingcenter , either separately or in combination as a suite . strong customer relationships are a key driver of our success given the long-term nature of our contracts and the importance of customer references for new sales . we continue to focus on developing and maintaining our customer relationships through customer service and account management . we see opportunities for orders from new customers , but our sales cycles remain long as customers are deliberate and the decision making process is long . we must also earn creditability as we expand our sales operations and enter new markets which involves extensive customer due diligence and reference checks . finally , our new products are sold as complementary or adjacent to our insurancesuite which naturally limits the quantity of potential customers . we also see upsell opportunities with our existing customers for both insurancesuite and our newer products in data management , mobile and portals and hosted analytic applications . we continue to invest in sales and marketing as well as our si partnerships and we work to align with each insurer 's strategic goals in order to address any sales cycle risk . we primarily enter into term based licenses ranging from 3 to 7 years . these contracts are renewable on an annual or multi-year basis . we generally price our licenses based on the amount of direct written premiums ( “ dwp ” ) that will be managed by our solutions . we typically invoice our customers annually in advance or , in certain cases , quarterly for both recurring term license and maintenance fees . our sales and marketing efforts are affected by seasonal variations in which our customer orders are higher in the second and fourth quarters of our fiscal year . we primarily derive our services revenues from implementation , integration and training services . guidewire implementation teams assist customers in building implementation plans , integrating our software with their existing systems , and defining business rules and specific requirements unique to each customer and installation . to extend our technology leadership position in the global market , we continue to focus on product innovation through our investment in research and development . we continue to invest in guidewire insurancesuite - policycenter , claimcenter and billingcenter . further , we are also investing in new technologies and offerings , such as data management , mobile and portals and hosted analytic applications . these investments complement guidewire insurancesuite and enable our customers to accelerate the pace and impact of their transformation initiatives . new technology and product development is central to our core strategy and our commitment to our customers . our product innovation strategy is critical to our growth and global expansion or otherwise responding to competitive pressures which could limit our ability to capture the global p & c market share . our success depends on our continued ability to develop new or enhanced versions of our existing products to meet evolving customer requirements and enabling successful transformations . we also partner with leading si consulting firms to achieve scalable , cost-effective implementations for our customers . our extensive relationships with sis and industry partners have strengthened and expanded in line with the interest in and adoption of our products . we encourage our partners to co-market , pursue joint sales initiatives and drive broader adoption of our technology , helping us grow our business more efficiently and enabling us to focus our engineering resources on continued innovation and further enhancement of our solutions . our track record of success with customers and their implementations is central to our strategy . story_separator_special_tag revenues are derived from three sources : ( i ) license fees , related to term ( or time-based ) licenses , perpetual software licenses , and other ; ( ii ) maintenance fees , related to email and phone support , bug fixes and unspecified software updates and upgrades released when , and if available during the maintenance term ; and ( iii ) services fees , related to professional services related to implementation of our software , reimbursable travel and training . revenues are recognized when all of the following criteria are met : persuasive evidence of an arrangement exists . evidence of an arrangement consists of a written contract signed by both the customer and management prior to the end of the period . delivery or performance has occurred . our software is delivered electronically to the customer . delivery is considered to have occurred when we provide the customer access to the software along with login credentials . fees are fixed or determinable . arrangements where a significant portion of the fee is due beyond 90 days from delivery are not considered to be fixed or determinable . revenues from such arrangements are recognized as payments become due , assuming all other revenue recognition criteria have been met . fees from term licenses are generally due in annual or , in certain cases , quarterly installments over the term of the agreement beginning on the effective date of the license . accordingly , fees from term licenses are not considered to be fixed or determinable until they become due . collectability is probable . collectability is assessed on a customer-by-customer basis , based primarily on creditworthiness as determined by credit checks and analysis , as well as customer payment history . payment terms generally range from 30 to 90 days from invoice date . if it is determined prior to revenue recognition that collection of an arrangement fee is not probable , revenues are deferred until collection becomes probable or cash is collected , assuming all other revenue recognition criteria are satisfied . 31 vsoe of fair value does not exist for our software licenses ; therefore , we allocate revenues to software licenses using the residual method . under the residual method , the amount recognized for license fees is the difference between the total fixed and determinable fees and the vsoe of fair value for the undelivered elements under the arrangement . the vsoe of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those elements when sold separately . vsoe of fair value for maintenance is established using the stated maintenance renewal rate in the customer 's contract . we generally enter into term licenses ranging from 3 to 7 years . for term licenses with duration of one year or less , no vsoe of fair value for maintenance exists . vsoe of fair value for services is established if a substantial majority of historical stand-alone selling prices for a service fall within a reasonably narrow price range . if the undelivered elements are all service elements and vsoe of fair value does not exist for one or more service element , the total arrangement fee is recognized ratably over the longest service period starting at software delivery , assuming all the related services have been made available to the customer . in certain offerings sold as fixed fee arrangements , we recognize services revenues on a proportional performance basis as performance obligations are completed by using the ratio of labor hours to date as an input measure compared to total estimated labor hours for the consulting services . in cases where professional services are deemed to be essential to the functionality of the software , the arrangement is accounted for using contract accounting until the essential services are complete . if reliable estimates of total project costs can be made , we apply the percentage-of-completion method whereby percentage toward completion is measured by using the ratio of service billings to date compared to total estimated service billings for the consulting services . service billings approximate labor hours as an input measure since they are generally billed monthly on a time and material basis . the fees related to the maintenance are recognized over the period the maintenance is provided . if reliable estimates of total project costs can not be made or vsoe for maintenance has not been established and it is reasonably assured that no loss will be incurred under the arrangement , revenues are recognized pursuant to the zero gross margin method . under this method , revenues recognized are limited to the costs incurred for the implementation services . when zero gross margin method is applied for lack of reliable project estimates and subsequently project estimates become reliable , we switch to the percentage-of-completion ; resulting in a cumulative effect adjustment for deferred license revenues to the extent of progress toward completion , and the related deferred professional service margin is recognized in full as revenues . such cumulative effect adjustment for license revenues was zero , $ 3.2 million and $ 0.9 million for the fiscal years ended july 31 , 2014 , 2013 and 2012 , respectively , and for service revenues was zero , $ 1.7 million and $ 0.9 million for the fiscal years ended july 31 , 2014 , 2013 and 2012 , respectively . deferred revenues deferred revenues represent license , maintenance and professional services amounts , which are billed to or collected from customers for which the related revenues have not been recognized . the revenues are deferred when one or more of the revenue recognition criteria have not been met . the current portion of deferred revenues represents the amount that is expected to be recognized as revenues within one year from the balance sheet date . we generally invoice fees for licenses and maintenance to our customers in annual or , in certain cases , quarterly installments payable in advance .

results of operations the following tables set forth our results of operations for the periods presented . the data has been derived from the consolidated financial statements contained in this annual report on form 10-k which , in the opinion of our management , reflect all adjustments , consisting only of normal recurring adjustments , necessary to present fairly the financial position and results of operations for the interim periods presented . the operating results for any period should not be considered indicative of results for any future period . 33 replace_table_token_8_th ( 1 ) see note 2 “ change in accounting policy - stock-based compensation ” of notes to consolidated financial statements . 34 comparison of the fiscal years ended july 31 , 2014 and 2013 revenues please refer to note 1 of notes to consolidated financial statements for a description of our accounting policy related to revenue recognition . replace_table_token_9_th license revenues the $ 28.4 million increase in license revenues during fiscal year 2014 was primarily driven by increased adoption of our insurancesuite software , and increased sales and marketing efforts in north america and europe . replace_table_token_10_th the $ 27.0 million increase in term license revenues during the fiscal year 2014 was primarily driven by $ 31.3 million of revenues recognized from new orders or expanded orders from existing customers , offset by a net decrease of $ 4.3 million of revenues due to contractual terms that affected license revenue recognition from customer contracts . the $ 1.3 million increase in perpetual license revenues during the fiscal year 2014 was primarily driven by revenues from existing customers for additional products in the current period . maintenance revenues the $ 4.3 million increase in maintenance revenues during the fiscal year 2014 reflects our growing customer base .

these initiatives included replacing our outdated legacy systems with a state-of-the-art erp system , optimizing our distribution network and transforming our sales organization to allow our customers to conduct business with us through multiple channels . in august 2011 , after extensive preparation , we went live with our new erp system . within hours of the system going live , we were able to pick , pack , and ship orders . however , certain configuration issues caused delays in our supply chain and fulfillment processes leading to an increase in backorders and complicated our inventory procurement process . consequently , we experienced a decline in net sales in the second half of 2011. we also experienced higher temporary labor , overtime and freight costs as we worked to reduce backorders in a timely manner . we are making progress resolving many of these issues as we begin to take advantage of the system 's capabilities . the new erp system is designed to provide us with the ability to access reliable , transparent , real-time data , allowing us to meet the technology requirements of state-of-the-art distribution and packaging centers . in november 2011 , we entered into a lease for a new , state-of-the art packaging and distribution center in mccook , illinois . this new facility will consolidate operations currently performed in our illinois locations . the new facility is designed to specifically meet our distribution needs and will incorporate upgraded technology and increased space . we anticipate the combined operations will streamline our distribution logistics and reduce our cost structure . the facility 's close proximity to a major freight hub will provide us more time to process orders and expand our next-day delivery capabilities . in conjunction with closing the des plaines facility , we plan to relocate our corporate headquarters to a location approximately three miles from our current location . we anticipate these moves will be completed in the second half of 2012. our new erp system is also allowing us to make progress on our sales channel transformation initiatives . we have been investing in the design and development of a new ecommerce website , which we expect to introduce to our customers in the first half of 2012. with the launch of our new website , our customers will have access to an integrated sales channel , allowing them to research products and prices and to place orders on a 24/7 basis . this improvement should help us capture a portion of our customers ' “unplanned” purchases . also , during 2011 , we amended our existing $ 55.0 million dollar credit facility , extending the term until october , 2016 and improving pricing . we also amended financial covenants , giving us the flexibility to better implement our strategic initiatives and further invest in our business . during 2011 , we continued to distribute a quarterly cash dividend of $ 0.12 per share , representing a dividend yield of 3.1 % based on our december 31 , 2011 stock price . we ended the year with $ 2.1 million of cash and no outstanding borrowings . we believe our existing cash-on-hand and our untapped credit facility provide us with the capital resources to make the necessary investments to continue the transformation of our business and allow us to pursue future growth opportunities . 18 story_separator_special_tag $ 0.2 million in 2010. income tax expense the effective tax rates for continuing operations for 2011 and 2010 were 27.8 % and 42.6 % , respectively . the 2011 tax rate decreased from 2010 primarily due to the effect of permanent tax differences on pre tax operating loss reported in 2011 compared to pre tax operating income reported in 2010. operating income ( loss ) operating income ( loss ) in 2011 was significantly impacted in the second half of the year by the implementation of our erp system reflected in lower sales and lower gross margins and higher operating expenses as a percent of sales . the following represents our quarterly results for 2011 : replace_table_token_11_th 22 results of operations for 2010 as compared to 2009 net sales and gross profit sales and gross profit results for the years ended december 31 , 2010 and 2009 were as follows : replace_table_token_12_th net sales for 2010 increased 5.0 % to $ 316.8 million from $ 301.8 million in 2009. mro net sales increased $ 13.4 million or 4.6 % in 2010 to $ 303.1 million from $ 289.7 million in 2009 , driven by sales increases in the strategic , government and automotive sectors of our business . a modest improvement in the economy also contributed to the net sales increase , particularly in the second half of the year . an improvement in average daily sales per sales representative and average orders per day drove average mro daily sales from $ 1.150 million in 2009 to $ 1.203 million in 2010. oem net sales increased $ 1.6 million or 13.2 % in 2010 to $ 13.6 million from $ 12.1 million in 2009 , primarily driven by growth within our existing customer base and the addition of new customers . consistent with the increase in sales , overall gross profit increased 5.0 % in 2010 to $ 194.8 million from $ 185.6 million in 2009. as a percent of sales , gross profit margin remained constant for both 2010 and 2009 at 61.5 % . mro gross profit increased $ 8.1 million in 2010 to $ 192.5 million from $ 184.4 million in 2009. as a percent of net sales , mro gross profit decreased slightly to 63.5 % in 2010 from 63.7 % in 2009 , primarily due to an increased volume of business from strategic customers that generate lower gross margins . story_separator_special_tag , subject to the bank 's consent , to increase the maximum borrowing capacity by an additional $ 20.0 million , to $ 75.0 million . the applicable interest rate for borrowings under the credit agreement are based on our debt-to-ebitda ratio ( as defined ) and range from libor plus 1.25 to 1.85 or prime minus 1.00 to 0.40 percent , and is secured by cash , accounts receivable and inventory . the credit agreement limits our annual dividend distribution to $ 10.0 million and , in addition requires us to make other customary representations , warranties and covenants , and to comply with certain financial covenants . during 2011 , the credit agreement was amended replacing the previous debt service coverage ratio ( as defined ) with a requirement to meet minimum consolidated ebitda levels ( as defined ) on a quarterly basis through the third quarter ended september 30 , 2012. the debt service coverage ratio will be reinstituted for the trailing four quarters ended december 31 , 2012 at a minimum of 1.10 to 1.00 and increases to 1.20 to 1.00 for the trailing four quarters ended march 31 , 2013 and each quarter thereafter . additionally , we must comply with a minimum cash plus accounts receivable and inventory to debt ratio and maintain a minimum tangible net worth . on december 31 , 2011 , we were in compliance with of all of the financial covenant levels as detailed below : replace_table_token_14_th at december 31 , 2011 , we had no outstanding balance under the revolving line and $ 1.8 million of outstanding letters of credit , leaving borrowing availability of $ 53.2 million . we believe that cash provided by operations and the $ 55.0 million revolving line of credit will be sufficient to fund our operating requirements , strategic initiatives and capital improvements for the upcoming fiscal year . 25 contractual obligations contractual obligations , including discontinued operations , on december 31 , 2011 that require cash payment over future periods are as follows : replace_table_token_15_th ( 1 ) payments to participants of the security bonus plan are made on a lump sum basis at time of separation from the company . payouts for known separation dates have been included in the scheduled year of payout , while payouts for unknown separation dates are reflected in the thereafter column . ( 2 ) payments related to the long term incentive plans are subject to increase or decrease based on the future operating performance of the company . off-balance sheet arrangements in 2011 , we entered into a 10-year build-to-suit lease for our new mccook packaging and distribution center which expires in june 2022 and includes total future minimum lease payments of $ 14.8 million . we also entered into an 11-year operating lease for our new headquarters which expires in march 2023 and includes total future minimum lease payments of $ 12.2 million . as of december 31 , 2011 , we had total future minimum operating and build-to-suit lease commitments of $ 27.8 million . we also had contractual commitments to purchase $ 14.6 million of product from our suppliers and contractors in 2012. critical accounting policies we have disclosed our significant accounting policies in note 2 to the consolidated financial statements . the following provides supplemental information to these accounting policies as well as information on the accounts requiring more significant estimates . allowance for doubtful accounts — we evaluate the collectability of accounts receivable based on a combination of factors . in circumstances where we are aware of a specific customer 's inability to meet its financial obligations ( e.g. , bankruptcy filings , substantial down-grading of credit ratings ) , a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount we believe will be collected . for all other customers , we recognize reserves for bad debts based on our historical experience of bad debt write-offs as a percent of accounts receivable outstanding . if circumstances change ( e.g. , higher than expected defaults or an unexpected material adverse change in a major customer 's ability to meet its financial obligations ) , the estimates of the recoverability of amounts due to us could be revised by a material amount . at december 31 , 2011 , our allowance reserve was 4.2 % of our gross accounts receivables outstanding . a hypothetical change of one percent to our reserve allowance as a percent of our gross accounts receivable would have affected our annual doubtful accounts expense by approximately $ 0.6 million . 26 inventory reserves —inventories consist principally of finished goods and are stated at the lower of cost ( first-in-first-out method ) or market . most of our products are not exposed to the risk of obsolescence due to technology changes . however , some of our products do have a limited shelf life , and from time to time we add and remove items from our catalogs , brochures or website for marketing and other purposes . in addition , we carry varying levels of customer specific inventory . to reduce our inventory to a lower of cost or market value , we record a reserve for slow-moving and obsolete inventory based on historical experience and monitoring current inventory activity . we use estimates to determine the necessity of recording these reserves based on periodic detailed analysis reviews using both qualitative and quantitative factors . as part of this analysis , we consider several factors including the inventories ' length of time on hand , historical sales , product shelf life , product life cycle , product classification , and product obsolescence . in general , depending on product classification , we reserve inventory with low turnover at higher rates than inventory with high turnover . our policy is to not re-value inventory to the original cost basis subsequent to establishing a new cost basis .

summary of financial performance replace_table_token_7_th 19 results of operations for 2011 as compared to 2010 net sales and gross profit sales and gross profit results for the years ended december 31 , 2011 and 2010 were as follows : replace_table_token_8_th net sales for 2011 decreased 0.6 % to $ 315.0 million from $ 316.8 million in 2010 on one less selling day . excluding the canadian exchange rate impact , net sales decreased 1.0 % for the year . mro net sales decreased $ 2.7 million or 0.9 % in 2011 to $ 300.4 million from $ 303.1 million in 2010. the decrease was largely due to certain challenges we encountered following the launch of our erp system which caused delays in our supply chain and fulfillment processes leading to a build-up of backorders and lost sales in the second half of the year . for the year , average mro daily sales were $ 1.197 million in 2011 compared to $ 1.203 million in 2010. in the first half of 2011 , prior to the erp launch our average mro daily sales were $ 1.259 million , up 7.5 % over 2010 levels . immediately after the launch in august , we saw average mro daily sales drop as we encountered the issues described above . as we have worked to resolve these challenges , average daily sales have begun to recover as shown in the table below .

the long-term portion of contingent earn-out liabilities was story_separator_special_tag the following discussion should be read in conjunction with information included in item 8 of this report . unless otherwise indicated , the terms “ company ” , “ chefs ' warehouse ” , “ we ” , “ us ” , and “ our ” refer to the chefs ' warehouse , inc. and its subsidiaries . overview and recent developments overview we are a premier distributor of specialty foods in nine of the leading culinary markets in the united states . we offer more than 50,000 skus , ranging from high-quality specialty foods and ingredients to basic ingredients and staples , produce and center-of-the-plate proteins . we serve more than 34,000 customer locations , primarily located in our sixteen geographic markets across the united states and canada , and the majority of our customers are independent restaurants and fine dining establishments . our allen brothers subsidiary sells certain of our center-of-the-plate products directly to consumers . we expanded our direct-to-consumer product offerings in fiscal 2020 by launching our “ shop like a chef ” online home delivery platform in several of the markets we serve . we believe several key differentiating factors of our business model have enabled us to execute our strategy consistently and profitably across our expanding customer base . these factors consist of a portfolio of distinctive and hard-to-find specialty food products , an extensive selection of center-of-the-plate proteins , a highly trained and motivated sales force , strong sourcing capabilities , a fully integrated warehouse management system , a highly sophisticated distribution and logistics platform and a focused , seasoned management team . in recent years , our sales to existing and new customers have increased through the continued growth in demand for specialty food and center-of-the-plate products in general ; increased market share driven by our large percentage of sophisticated and experienced sales professionals , our high-quality customer service and our extensive breadth and depth of product offerings , including , as a result of our acquisitions ; the expansion of our existing distribution centers ; our entry into new distribution centers , including the construction of new distribution centers in san francisco , toronto , dallas , los angeles and miami ; and the import and sale of our proprietary brands . through these efforts , we believe that we have been able to expand our customer base , enhance and diversify our product selections , broaden our geographic penetration and increase our market share . effect of the covid-19 pandemic on our business and operations the covid-19 pandemic ( “ pandemic ” ) has had a material impact on our business and operations and those of our customers . in an effort to limit the spread of the virus , federal , state and local governments began implementing various restrictions beginning in late march that resulted in the closure of non-essential businesses in many of the markets we serve , which forced our customers in those markets to either transition their establishments to take-out service , delivery service or temporarily cease operations . state and local governments began to ease these restrictions in mid-may , however , restrictions in certain of our key markets were not eased until early june . as of december 25 , 2020 , the majority of state and local governments with jurisdiction over markets in which the company operates allow the company 's customers to operate outdoor dining and indoor dining service while adhering to specified social distancing and capacity restrictions . the duration and extent of restrictions imposed on our customers by federal , state and local governments is dependent on future developments regarding the pandemic , including new information about the severity of the disease , trends in infection rates , and development of effective medical treatments for the disease , among others . the adverse impact of the pandemic on our customers during the fifty-two weeks ended december 25 , 2020 resulted in a $ 616.7 million decline in our organic sales compared to the prior year . due to the pandemic , we incurred estimated non-cash charges of $ 15.8 million related to incremental bad debt expense and approximately $ 14.6 million related to estimated inventory obsolescence during the fifty-two weeks ended december 25 , 2020. our management team is responding rapidly to the changing landscape and pursuing alternate sources of revenue to mitigate the extent of sales declines in our core customer base . our sales force is working closely with our core customers and developing solutions to help them fulfill the demand in their communities while complying with health and safety restrictions . we are actively entering into new business relationships which include retail food outlets as they have experienced increases in consumer demand and shortages in their traditional supply chains due to the pandemic . as we develop these new sales channels , we are negotiating favorable credit terms given the nature of the underlying customer base and the current market 34 environment . in addition , our purchasing teams have worked diligently to shift our product purchases to skus that are in high demand . thus far , we have not experienced difficulties in procuring products from our suppliers . in response to the pandemic , we expanded our direct-to-consumer product offerings by launching our “ shop like a chef ” online home delivery platform in several of the markets we serve . we now offer products directly to consumers through both our allen brothers and “ shop like a chef ” online platforms . we have implemented cost control measures during this time of demand volatility . our variable cost structure naturally decreases as our sales decrease , however , we are also reducing our fixed cost structure . among other actions , we have postponed planned capital expenditures , returned certain equipment on short-term rental agreements , and reduced compensation expense through salary reductions , furloughs and lay-offs as we right-size our organization to current levels of demand . story_separator_special_tag in addition , product cost inflation may negatively impact consumer discretionary spending decisions within our customers ' establishments , which could adversely impact our sales . conversely , our profit levels may be negatively impacted during periods of product cost deflation even though our gross profit as a percentage of sales may remain relatively constant . however , some of our products , particularly certain of our center-of-the-plate protein items , are priced on a “ cost plus ” markup , which helps mitigate the negative impact of deflation . given our wide selection of product categories , as well as the continuous introduction of new products , we can experience shifts in product sales mix that have an impact on net sales and gross profit margins . this mix shift is most significantly impacted by the introduction of new categories of products in markets that we have more recently entered , the shift in product mix resulting from acquisitions , as well as the continued growth in item penetration on higher velocity items such as dairy products . the foodservice distribution industry is fragmented but consolidating , and we have supplemented our internal growth through selective strategic acquisitions . we believe that the consolidation trends in the foodservice distribution industry will continue to present acquisition opportunities for us , which may allow us to grow our business at a faster pace than we would otherwise be able to grow the business organically . performance indicators in addition to evaluating our income from operations , our management team analyzes our performance based on net sales growth , gross profit and gross profit margin . net sales growth . our net sales growth is driven principally by changes in volume and , to a lesser degree , changes in price related to the impact of inflation in commodity prices and product mix . in particular , product cost inflation and deflation impacts our results of operations and , depending on the amount of inflation or deflation , such impact may be material . for example , inflation may increase the dollar value of our sales , and deflation may cause the dollar value of our sales to fall despite our unit sales remaining constant or growing . gross profit and gross profit margin . our gross profit and gross profit as a percentage of net sales , or gross profit margin , are driven principally by changes in volume and fluctuations in food and commodity prices and our ability to pass on any price increases to our customers in an inflationary environment and maintain or increase gross profit margin when our costs decline . our gross profit margin is also a function of the product mix of our net sales in any period . given our wide selection of product categories , as well as the continuous introduction of new products , we can experience 36 shifts in product sales mix that have an impact on net sales and gross profit margins . this mix shift is most significantly impacted by the introduction of new categories of products in markets that we have more recently entered , impact of product mix from acquisitions , as well as the continued growth in item penetration on higher velocity items such as dairy products . key financial definitions net sales : net sales consist primarily of sales of specialty products , center-of-the-plate proteins and other food products to independently-owned restaurants and other high-end foodservice customers , which we report net of certain group discounts and customer sales incentives . net sales also include direct-to-consumer sales on our e-commerce platforms . cost of sales : cost of sales include the net purchase price paid for products sold , plus the cost of transportation necessary to bring the product to our distribution facilities and food processing costs . food processing costs include , but are not limited , to direct labor and benefits , applicable overhead and depreciation of equipment and facilities used in food processing activities . our cost of sales may not be comparable to other similar companies within our industry . selling , general and administrative expenses : selling , general and administrative expenses include facilities costs , product shipping and handling costs , warehouse costs , and other selling , general and administrative costs . other operating expenses : other operating expenses includes expenses primarily related to changes in the fair value of the company 's earn-out liabilities , gains and losses on asset disposals , asset impairments and certain third-party deal costs incurred in connection with business acquisitions or financing arrangements . interest expense : interest and other expense consists primarily of interest on our outstanding indebtedness and , as applicable , the amortization or write-off of deferred financing fees . reclassifications in response to a comment letter from the staff of the sec 's division of corporation finance , we have reclassified our food processing costs , previously included in operating expenses , to cost of sales and have split our historical presentation of operating expenses between selling , general and administrative expenses and other operating expenses . these reclassifications have no impact on the company 's operating income , net income or cash flows . furthermore , management has reclassified gain/loss from asset disposal , which was previously presented as a non-operating expense , to other operating expenses . see note 2 “ reclassifications ” to our consolidated financial statements for a full description of these reclassifications . story_separator_special_tag style= '' width:10.716 % '' > 2019 2018 $ change % change other operating expenses 6,359 2,225 4,134 185.8 % the increase in other operating expenses relates primarily to non-cash charges of $ 5.9 million for changes in the fair value of our contingent earn-out liabilities compared to non-cash charges of $ 1.4 million in the prior year period .

results of operations replace_table_token_6_th 37 fiscal year ended december 25 , 2020 compared to fiscal year ended december 27 , 2019 net sales 2020 2019 $ change % change net sales $ 1,111,631 $ 1,591,834 $ ( 480,203 ) ( 30.2 ) % sales growth from acquisitions contributed $ 136.5 million , or 8.6 % , to sales growth . organic sales declined $ 616.7 million , or 38.8 % , versus the prior year primarily due to impacts of the pandemic . organic case count declined approximately 43.5 % in our specialty category . in addition , specialty unique customers and placements declined 30.4 % and 43.6 % , respectively , compared to the prior year . pounds sold in our center-of-the-plate category decreased 38.0 % compared to the prior year . estimated deflation was 0.3 % in our specialty category and inflation of 3.5 % in our center-of-the-plate category compared to fiscal 2019. gross profit replace_table_token_7_th gross profit decreased primarily due to decreased sales volumes . gross profit margin decreased approximately 196 basis points . gross profit margins decreased 441 basis points in the company 's specialty category and increased 117 basis points in the company 's center-of-the-plate category compared to the prior year period . our gross profit results include a charge of approximately $ 14.6 million related to estimated inventory losses from obsolescence due to the pandemic 's impact on our customers ' purchasing behavior . selling , general and administrative expenses replace_table_token_8_th the increase in selling , general and administrative expense relates primarily to our recent acquisitions and an estimated non-cash charge of approximately $ 15.8 million to bad debt expense incurred during the first quarter of fiscal 2020 at the onset of the pandemic , partially offset by cost measures implemented during the year in response to the pandemic 's adverse impact on demand for our products .

the increase in the gross carrying amount of intangible assets resulted primarily from the acquisition of approximately 175 offices to our company-owned and franchise network . the amounts and weighted-average lives of assets acquired during fiscal year 2019 , including amounts capitalized and placed in service related to internally-developed software , are as follows : replace_table_token_25_th amortization of intangible assets of continuing operations for the years ended april 30 , 2019 , 2018 and 2017 was $ 73.2 million , $ 79.9 million and $ 78.9 million , respectively . estimated amortization of intangible assets for fiscal years 2020 , 2021 , 2022 , 2023 and 2024 is $ 61.8 million , $ 45.2 million , $ 31.9 million , $ 18.3 million and $ 11.7 million , respectively . note 7 : long-term debt the components of long-term debt are as follows : replace_table_token_26_th ( 1 ) the senior notes are not redeemable by the bondholders prior to maturity , although we have the right to redeem some or all of these notes at any time , at specified redemption prices . the interest rates on our senior notes are subject to adjustment based upon our credit ratings . unsecured committed line of credit – on september 21 , 2018 , we entered into a third amended and restated credit and guarantee agreement ( 2018 cloc ) , which amended and restated our second amended and 48 2019 form 10-k | h & r block , inc. restated credit and guarantee agreement ( 2017 cloc ) , extending the scheduled maturity date from september 22 , 2022 to september 21 , 2023. other material terms remain unchanged from our 2017 cloc . the 2018 cloc provides for an unsecured senior revolving credit facility in the aggregate principal amount of $ 2.0 billion , which includes a $ 200.0 million sublimit for swingline loans and a $ 50.0 million sublimit for standby letters of credit . we may request increases in the aggregate principal amount of the revolving credit facility of up to $ 500.0 million , subject to obtaining commitments from lenders and meeting certain other conditions . the 2018 cloc will mature on september 21 , 2023 , unless extended pursuant to the terms of the 2018 cloc , at which time all outstanding amounts thereunder will be due and payable . the 2018 cloc includes an annual facility fee , which will vary depending on our then current credit ratings . the 2018 cloc is subject to various conditions , triggers , events or occurrences that could result in earlier termination and contains customary representations , warranties , covenants and events of default , including , without limitation : ( 1 ) a covenant requiring the company to maintain a debt-to-ebitda ratio calculated on a consolidated basis of no greater than ( a ) 3.50 to 1.00 as of the last day of each fiscal quarter ending on april 30 , july 31 , and october 31 of each year and ( b ) 4.50 to 1.00 as of the last day of each fiscal quarter ending on january 31 of each year ; ( 2 ) a covenant requiring us to maintain an interest coverage ratio ( ebitda-to-interest expense ) calculated on a consolidated basis of not less than 2.50 to 1.00 as of the last date of any fiscal quarter ; and ( 3 ) covenants restricting our ability to incur certain additional debt , incur liens , merge or consolidate with other companies , sell or dispose of assets ( including equity interests ) , liquidate or dissolve , engage in certain transactions with affiliates or enter into certain restrictive agreements . the 2018 cloc includes provisions for an equity cure which could potentially allow us to independently cure certain defaults . proceeds under the 2018 cloc may be used for working capital needs or for other general corporate purposes . we were in compliance with these requirements as of april 30 , 2019 . as of april 30 , 2019 , amounts available to borrow under the 2018 cloc were limited by the debt-to-ebitda covenant to approximately $ 1.2 billion ; however , our cash needs at april 30 generally do not require us to borrow on our cloc at that time , and we had no balance outstanding under the story_separator_special_tag financial overview a summary of our fiscal year 2019 results is as follows : ▪ tax returns prepared worldwide increased 1.2 % , and returns prepared in the u.s. increased 1.5 % . our paid u.s. diy returns increased by 5.9 % , while our u.s. assisted returns declined 1.7 % compared to the prior year . ▪ revenues decreased $ 65.1 million , or 2.1 % , compared to the prior year . revenues were impacted by changes in our pricing structure whereby we offered lower prices for millions of our u.s. assisted tax preparation clients , which was partially offset by a 5.9 % increase in paid u.s. diy returns . ▪ operating expenses increased $ 71.2 million , or 3.0 % , due to a combination of higher compensation , marketing , and information technology expenses , partially offset by reductions in depreciation and amortization . ▪ pretax earnings decreased $ 123.6 million , or 18.5 % , due to the revenue and expense changes mentioned above . 22 2019 form 10-k | h & r block , inc. ▪ income tax expense increased $ 58.1 million , or 138.9 % , due to tax legislation enacted in the prior fiscal year . see item 8 , note 10 to the consolidated financial statements for further discussion . story_separator_special_tag our uncertain tax positions arise from items such as apportionment of income for state purposes , transfer pricing , and the deductibility of related party transactions . we evaluate each uncertain tax position based on its technical merits . for each position , we consider all applicable information including relevant tax laws , the taxing authorities potential position , our tax return position , and the possible settlement outcomes to determine the amount of liability to record . in making this determination , we assume the tax authority has all relevant information at its disposal . sensitivity of estimate to change . our assessment of the technical merits and measurement of tax benefits associated with uncertain tax positions is subject to a high degree of judgment and estimation . actual results may differ from our current judgments due to a variety of factors , including changes in law , interpretations of law by taxing authorities that differ from our assessments , changes in the jurisdictions in which we operate and results of routine tax examinations . we believe we have adequately provided for any reasonably foreseeable outcome related to these matters . however , our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved , or when statutes of limitation on potential assessments expire . as a result , our effective tax rate may fluctuate on a quarterly basis . h & r block , inc. | 2019 form 10-k 27 see the additional discussion in item 8 , note 10 to the consolidated financial statements . new accounting pronouncements see item 8 , note 1 to the consolidated financial statements for a discussion of recently issued accounting pronouncements . financial condition these comments should be read in conjunction with the consolidated balance sheets and consolidated statements of cash flows included in item 8 . capital resources and liquidity – overview – our primary sources of capital and liquidity include cash from operations ( including changes in working capital ) , draws on our 2018 cloc , and issuances of debt . we use our sources of liquidity primarily to fund working capital , service and repay debt , pay dividends , repurchase shares of our common stock , and acquire businesses . our operations are highly seasonal and substantially all of our revenues and cash flow are generated during the period from february through april . therefore , we require the use of cash to fund losses and working capital needs from may through january , and typically rely on available cash balances from the prior tax season and borrowings to meet our off-season liquidity needs . given the likely availability of a number of liquidity options discussed herein , we believe that , in the absence of any unexpected developments , our existing sources of capital as of april 30 , 2019 are sufficient to meet our future operating and financing needs . discussion of consolidated statements of cash flows – the following table summarizes our statements of cash flows for fiscal years 2019 and 2018 . see item 8 for the complete consolidated statements of cash flows for these periods . replace_table_token_7_th operating activities . cash provided by operating activities decreased $ 243.5 million from fiscal year 2018 . the decrease from the prior year was primarily due to lower net income and higher taxes paid compared to the prior year . investing activities . cash used in investing activities totaled $ 155.1 million compared to $ 112.1 million in the prior year . this change is principally due to a $ 40.0 million investment in an available-for-sale debt security in the current fiscal year . financing activities . cash used in financing activities increased $ 213.0 million . this increase resulted primarily from higher share repurchase activity in the current year and lower stock option exercises compared to the prior year . cash requirements – dividends and share repurchase . returning capital to shareholders in the form of dividends and the repurchase of outstanding shares has historically been a significant component of our capital allocation plan . we have consistently paid quarterly dividends . dividends paid totaled $ 205.5 million and $ 200.5 million in fiscal years 2019 and 2018 , respectively . although we have historically paid dividends and plan to continue to do so , there can be no assurances that circumstances will not change in the future that could affect our ability or decisions to pay dividends . 28 2019 form 10-k | h & r block , inc. in september 2015 , our board of directors approved a $ 3.5 billion share repurchase program , effective through june 2019. as a part of the repurchase program , in the current year , we purchased $ 184.8 million of our common stock at an average price of $ 23.51 per share . see item 8 , note 8 to the consolidated financial statements for additional information . in june 2019 , our board of directors extended its previous share repurchase authorization for three years . approximately $ 1.0 billion remains under this authorization , which now expires in june 2022. these repurchases may be effectuated through open market transactions , some of which may be effectuated under sec rule 10b5-1 . the company may cancel , suspend , or extend the time period for the purchase of shares at any time . any repurchases will be funded primarily through available cash and cash from operations . although we may continue to repurchase shares , there is no assurance that we will purchase up to the full board authorization . capital investment . capital expenditures totaled $ 95.5 million and $ 98.6 million in fiscal years 2019 and 2018 , respectively .

results of operations our subsidiaries provide assisted , diy , and virtual tax preparation solutions through multiple channels ( including in-person , online and mobile applications , virtual , and desktop software ) and distribute h & r block-branded products and services , including those of our financial partners , to the general public primarily in the u.s. , canada , australia , and their respective territories . tax returns are either prepared by h & r block tax professionals ( in company-owned or franchise offices , virtually or via an internet review ) or prepared and filed by our clients through our diy tax solutions . we operate as a single segment that includes all of our continuing operations , which are designed to enable clients to obtain tax preparation services seamlessly . h & r block , inc. | 2019 form 10-k 23 replace_table_token_4_th ( 1 ) an assisted tax return is defined as a current or prior year individual tax return that has been accepted and paid for by the client . also included are tax pro go sm , tax pro review sm , and business returns . a diy return is defined as a return that has been electronically filed and accepted by the irs . also included are online returns paid and printed . ( 2 ) net average charge is calculated as tax preparation fees divided by tax returns prepared . for diy , net average charge excludes irs free file . ( 3 ) net average charge related to h & r block franchise operations represents tax preparation fees collected by h & r block franchisees divided by returns prepared in franchise offices . h & r block will recognize a portion of franchise revenues as franchise royalties based on the terms of franchise agreements .

the company issued an irrevocable standby letter of credit in the amount of $ 0.3 million in lieu of a cash security deposit . the letter of credit is fully secured by cash held at the bank in a restricted account . in may 2020 , the company entered into an operating lease agreement for its story_separator_special_tag financial condition and results of operations . the following discussion of our financial condition and results of operations should be read together with our audited financial statements and related notes and other financial information included elsewhere in this annual report . the following discussion contains forward-looking statements that reflect our current plans , estimates and beliefs . our actual results could differ materially from those discussed in the forward-looking statements as a result of various factors , including those discussed below and elsewhere in this annual report , particularly in the section titled “ risk factors. ” our historical results are not necessarily indicative of the results that may be expected for any period in the future . overview our technology is designed to elevate the dialysis experience for patients , and help providers overcome traditional care delivery challenges . requiring only an electrical outlet and tap water to operate , tablo frees patients and providers from the burdensome infrastructure required to operate traditional dialysis machines . the integration of water purification and on-demand dialysate production enables tablo to serve as a dialysis clinic on wheels and allows providers to standardize to a single technology platform from the hospital to the home . tablo is also intelligent and connected , with automated documentation and the ability to integrate with electronic medical record reporting , along with streamlined remote machine management to maximize device uptime . we have generated meaningful evidence to demonstrate that providers can realize significant operational efficiencies , including reducing the cost of their dialysis programs by up to 80 % in the intensive care unit . in addition , tablo has been shown to deliver robust clinical care . in studies we have conducted , patients have reported experiencing fewer symptoms and better quality sleep while on tablo . we believe tablo empowers patients , who have traditionally been passive recipients of care , to regain agency and ownership of their treatment . tablo is cleared by the u.s. food and drug administration ( fda ) for use in the hospital , clinic or home setting . we designed tablo from the ground up to be a single enterprise solution that can be utilized across the continuum of care , allowing dialysis to be delivered anytime , anywhere and by anyone . tablo is comprised of a compact console with integrated water purification , on-demand dialysate production and a simple-to-use touchscreen interface . with tablo , we are bringing data to dialysis . tablo is built to live in a connected setting with cloud-based system monitoring , patient analytics , remote treatment monitoring and clinical recordkeeping and the ability to activate new capabilities and enhancements through wireless software updates . tablo 's data analytics and connectivity also enable predictive preventative maintenance to maximize machine uptime . unlike existing hemodialysis machines , which have limited clinical versatility across care settings and are generally burdened by specialized and expensive infrastructure , tablo is a single enterprise solution that can be seamlessly utilized across different care settings and for multiple clinical needs . driving adoption of tablo in the acute care setting has been our primary focus to date . we have invested in growing our economic and clinical evidence , built a veteran sales and clinical support team with significant expertise , and implemented a comprehensive training and customer experience program . our experience in the acute market has demonstrated tablo 's clinical flexibility and operational versatility , while also delivering meaningful cost savings to the providers . we plan to continue leveraging our commercial infrastructure to broaden our installed base in the acute care market as well as driving utilization and fleet expansion with our existing customers . we sell our solution through our direct sales organization , which covers most major metropolitan markets in the united states . as of december 31 , 2020 , our sales organization is comprised of 32 capital sales team members , responsible for generating new customer demand for tablo , and 47 clinical sales team members responsible for driving utilization and fleet expansion of tablo consoles at existing customer sites . in addition , our field service team comprised of 69 members provides maintenance services and product support to tablo customers . the same sales organization and field service team drive tablo penetration in both the acute and home markets . we believe the ability to leverage one team to serve both markets will result in significant productivity and cost optimization as we continue to scale our business . we are executing a well-defined , three-pronged strategy designed to expand gross margins . first , we have insourced our console manufacturing to help lower console cost . second , we are adding a second-source contract manufacturer for our cartridges to gain higher efficiency and lower material cost . third , we will continue to utilize our cloud-based data system , as well as enhanced product performance , to help drive down the cost of service . we generate revenue primarily from the initial sale of tablo consoles , and recurring sales of per-treatment consumables , including the tablo cartridge , which generates significant total revenue over the life of the console . we generate additional revenue via annual service contracts and shipping and handling charged to customer . our total revenue was $ 49.9 million , $ 15.1 million and $ 2.0 million for the years ended december 31 , 2020 , 2019 and 2018 , respectively . for the years ended december 31 , 2020 , 2019 and 2018 , we incurred net losses of $ 121.5 million , $ 68.3 million and $ 49.8 million , respectively . as of december 31 , 2020 , we had an accumulated deficit of $ 494.1 story_separator_special_tag our business may also be impacted by an escalation or a continuation of the covid-19 pandemic . operations at our contract manufacturing partners ' facilities and our outsourced business administration service provider , tacna , for our new facility in tijuana , mexico , may be disrupted . additionally , the covid-19 pandemic has disrupted the operations of certain of our third-party suppliers , resulting in increased lead-times for our purchase of some components and , in certain cases , requiring us to procure materials from alternative sources or incur higher logistics expenses . we have worked closely with our manufacturing partners and suppliers to enable us to source key components and maintain appropriate inventory levels to meet customer demand and have not experienced disruptions in our supply chain to date . however , we can not predict how long the pandemic and measures intended to contain the spread of covid-19 will continue and what effect covid-19 and the associated containment measures will have on our suppliers and vendors , in particular for any of our suppliers and vendors that may not qualify as essential businesses and suffer more significant disruptions to their business operations . there is no assurance that we will not experience more significant disruptions in our supply chain in the future , particularly if the operations of our contract manufacturing partners , our critical single source component providers , or the facility we operate in tijuana , mexico in collaboration with tacna , are more severely impacted by the pandemic and associated containment measures . components of operating results revenue we generate our revenue primarily from the sale of products and services . in addition , we enter into console operating lease arrangements that contain lease and non-lease components . revenue related to lease arrangements is allocated to the lease and non-lease elements based on their relative standalone selling price , with the lease component recorded in product revenue and the non-lease component recorded in service and other revenue . product revenue we generate product revenue from the sale , and to a lesser extent , leasing of our tablo consoles and the sale of related consumables , including the tablo cartridge . revenue is recognized when control of our tablo consoles is transferred , generally upon shipment , and excludes the value of the first-year service agreement , which is recognized as service and other revenue . leases of tablo consoles are considered operating leases and recognized as revenue over their lease term . consumables , including the tablo cartridge , are recognized primarily upon shipment . our product revenue has been generated by direct sales to customers in the united states . service and other revenue we generate service revenue primarily from service agreements for our tablo consoles and other revenue from shipping and handling charged to customers . under the service agreements , we provide maintenance , repair and training services , connectivity to our cloud infrastructure , including tablo hub , as well as software updates , for tablo consoles . the service agreements are typically entered into for a one-year term . revenue from the sale of service agreements , including the revenue associated with the first-year service , is recognized ratably over the service period . cost of revenue cost of product revenue cost of product revenue primarily consists of finished goods , reserves for excess and obsolete inventories , manufacturing overhead and warranty costs . manufacturing overhead costs include the cost of quality assurance , material procurement , depreciation expense for equipment , facilities and information technology . we currently partner with contract manufacturers to produce tablo cartridges and some tablo consoles . as described above , we have also invested in insourcing tablo console manufacturing at a facility we recently established in tijuana , mexico , where we direct the manufacturing of tablo consoles , as well as the associated warehousing and product distribution . cost of product revenue in absolute dollars will increase as our sales volume increases . 87 cost of service and other revenue cost of service and other revenue primarily consists of personnel and material expenses related to our employees performing maintenance and support services , including salaries , benefits , stock-based compensation expense and related expenses such as employer taxes , materials and supplies and allocated costs including facilities and information technology . we anticipate that we will continue to invest in personnel to support the expansion of our tablo fleet while also utilizing our cloud-based data system , as well as enhanced product performance , to lower the cost of service as a percentage of revenue . cost of service and other revenue in absolute dollars will increase as our sales volume increases . gross profit and gross margin we calculate gross margin as gross profit divided by revenue . our gross profit has been and will continue to be , affected by a variety of factors , including sales volume of tablo consoles and related consumables , the success of our cost-reduction strategies , the cost of direct materials , labor and manufacturing overhead , the contribution of console leases and associated services , discounting practices , product yields and headcount . we expect our margin to increase over the long term to the extent we are successful in our ability to lower the costs associated with the production of the tablo console and consumables , which depends on our ability to drive lower costs with our suppliers , increase our sales volume , and maintain or increase our average selling price , which will enable us to leverage our fixed costs . in addition , sales of our tablo consumables carry a higher margin than sales of our tablo consoles . we intend to use our design , engineering and manufacturing capabilities to further advance and improve the efficiency of our manufacturing processes , which , if successful , we believe will lower production costs and enable us to increase our gross margin .

cash flows summary the following table summarizes the cash flows for each of the periods indicated ( in thousands ) : replace_table_token_8_th net cash flows from operating activities net cash used in operating activities of $ 99.0 million for the year ended december 30 , 2020 was due to a net loss of $ 121.5 million and a net cash outflow from the change in our operating assets and liabilities of $ 5.8 million , partially offset by non-cash adjustments for stock-based compensation expense of $ 21.4 million , depreciation and amortization of $ 3.2 million , loss on extinguishment of term loan of $ 1.6 million , non-cash interest expense of $ 0.6 million , non-cash lease expense of $ 0.6 million , provision for inventories of $ 0.5 million , loss on disposal of property and equipment of $ 0.2 million , and change in fair value of redeemable convertible preferred stock warrant liability of $ 0.1 million . the net cash outflow from operating assets and liabilities was primarily due to an increase in inventories of $ 16.3 million due to the timing of inventory purchases including advance purchases of inventory due to anticipated demand , an increase in prepaid expenses and other assets of $ 6.2 million , an increase in accounts receivable of $ 2.6 million due to timing of collections , and an increase in accrued interest of $ 0.2 million for the svb term loan .

forward-looking statements often contain words such as “ believes , ” “ expects , ” “ anticipates , ” “ foresees , ” “ forecasts , ” “ estimates , ” “ plans , ” “ intends , ” “ continues , ” “ may , ” “ will , ” “ should , ” “ projects , ” “ might , ” “ could ” or other similar words or phrases . similarly , statements that describe our business strategy , outlook , objectives , plans , intentions or goals also are forward-looking statements . we believe there is a reasonable basis for our forward-looking statements , but they are inherently subject to risks and uncertainties and actual results could differ materially from the expectations and beliefs reflected in the forward-looking statements . we presently consider the following to be among the important factors that could cause actual results to differ materially from our expectations and beliefs : ( 1 ) changes in the budgets or regulatory environments of our clients , primarily local and state governments , that could negatively impact information technology spending ; ( 2 ) our ability to protect client information from security breaches and provide uninterrupted operations of data centers ; ( 3 ) our ability to achieve growth or operational synergies through the integration of acquired businesses , while avoiding unanticipated costs and disruptions to existing operations ; ( 4 ) material portions of our business require the internet infrastructure to be adequately maintained ; ( 5 ) our ability to achieve our financial forecasts due to various factors , including project delays by our clients , reductions in transaction size , fewer transactions , delays in delivery of new products or releases or a decline in our renewal rates for service agreements ; ( 6 ) general economic , political and market conditions ; ( 7 ) technological and market risks associated with the development of new products or services or of new versions of existing or acquired products or services ; ( 8 ) competition in the industry in which we conduct business and the impact of competition on pricing , client retention and pressure for new products or services ; ( 9 ) the ability to attract and retain qualified personnel and dealing with the loss or retirement of key members of management or other key personnel ; and ( 10 ) costs of compliance and any failure to comply with government and stock exchange regulations . a detailed discussion of these factors and other risks that affect our business are described in item 1a , “ risk factors. ” we expressly disclaim any obligation to publicly update or revise our forward-looking statements . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > socrata , inc. ( `` socrata '' ) , a company that provides open data and data-as-a-service solutions including cloud-based data integration , visualization , analysis , and reporting solutions for federal , state and local government agencies . the purchase price , net of cash acquired of $ 1.7 million , was $ 147.6 million in cash . on april 30 , 2018 , we acquired all of the equity interests of sage data security , llc ( `` sage '' ) , a cybersecurity company offering a suite of services that supports an entire cybersecurity lifecycle , including program development , education and training , technical testing , advisory services , and digital forensics . the total purchase price was $ 11.6 million paid in cash . as of december 31 , 2018 , the purchase price allocations for sage , socrata , caseloadpro , and mobileeyes are complete . the operating results of all 2018 acquisitions are included with the operating results of the enterprise software segment since their date of acquisition . revenues from socrata included in tyler 's results of operations totaled approximately $ 13.9 million and the net loss was $ 11.5 million for the twelve months ended december 31 , 2018 . the impact of the sage , caseloadpro , mobileeyes and scenedoc acquisitions , individually and in the aggregate , on our operating results , assets and liabilities is not material . our balance sheet as of december 31 , 2018 , reflects the allocation of the purchase price to the assets acquired based on their fair value at the date of each acquisition . the fair value of the assets and liabilities acquired are based on valuations using level iii , unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities . we monitor and analyze several key performance indicators in order to manage our business and evaluate our financial and operating performance . these indicators include the following : revenues – we derive our revenues from five primary sources : sale of software licenses and royalties ; subscription-based arrangements ; software services ; maintenance ; and appraisal services . subscriptions and maintenance are considered recurring revenue sources and comprised approximately 65 % of our revenue in 2018 . the number of new saas clients and the number of existing clients who convert from our traditional software arrangements to our saas model are a significant driver to our business , together with new software license sales and maintenance rate increases . in addition , we also monitor our customer base and churn as we historically have experienced very low customer turnover . during 2018 , based on our number of customers , turnover was approximately 2 % . 22 cost of revenues and gross margins – our primary cost component is personnel expenses in connection with providing software implementation , subscription-based services , maintenance and support , and appraisal services to our clients . we can improve gross margins by controlling headcount and related costs and by expanding our revenue base , especially from those products and services that produce incremental revenue with minimal incremental cost , such as software licenses and royalties , subscription-based services , and maintenance and support . story_separator_special_tag we believe the following critical accounting policies require significant judgments and estimates used in the preparation of our financial statements . revenue recognition . we earn revenue from software licenses , royalties , subscription-based services , software services , post-contract customer support ( “ pcs ” or “ maintenance ” ) , hardware , and appraisal services . revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services . we determine revenue recognition through the following steps : identification of the contract , or contracts , with a customer identification of the performance obligations in the contract determination of the transaction price allocation of the transaction price to the performance obligations in the contract recognition of revenue when , or as , we satisfy a performance obligation most of our software arrangements with customers contain multiple performance obligations that range from software licenses , installation , training , and consulting to software modification and customization to meet specific customer needs ( services ) , hosting , and pcs . for these contracts , we account for individual performance obligations separately when they are distinct . we evaluate whether separate performance obligations can be distinct or should be accounted for as one performance obligation . arrangements that include software services , such as training or installation , are evaluated to determine whether those services are highly interdependent or highly interrelated to the product 's functionality . many of our software arrangements involve “ off-the-shelf ” software . we recognize the revenue allocable to `` off-the-shelf '' software licenses and specified upgrades at a point in time when control of the software license transfers to the customer , unless the software is not considered distinct . we consider off-the-shelf software to be distinct when it can be added to an arrangement with minor changes in the underlying code , it can be used by the customer for the customer 's purpose upon installation , and remaining services such as training are not considered highly interdependent or highly interrelated to the product 's functionality . for arrangements that involve significant production , modification or customization of the software , or where software services are otherwise not considered distinct , we recognize revenue over time by measuring progress-to-completion . we measure progress-to-completion primarily using labor hours incurred as it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts . these arrangements are often implemented over an extended period and occasionally require us to revise total cost estimates . amounts recognized in revenue are calculated using the progress-to-completion measurement after giving effect to any changes in our cost estimates . changes to total estimated contract costs , if any , are recorded in the period they are determined . estimated losses on uncompleted contracts are recorded in the period in which we first determine that a loss is apparent . when software services are distinct , the fee allocable to the service element is recognized over the time we perform the services and is billed on a time and material basis . 24 subscription-based services consist of revenues derived from saas arrangements , which primarily utilize the tyler private cloud , and electronic filing transactions . revenue from subscription-based services is generally recognized over time on a ratable basis over the contract term , beginning on the date that our service is made available to the customer . for saas arrangements , we evaluate whether the customer has the contractual right to take possession of our software at any time during the hosting period without significant penalty and whether the customer can feasibly maintain the software on the customer 's hardware or enter into another arrangement with a third-party to host the software . we allocate contract value to each performance obligation of the arrangement that qualifies for treatment as a distinct element based on estimated ssp . when it is determined that software is distinct and the customer has the ability to take control of the software , we recognize revenue allocable to the software license fee when access to the software license is made available to the customer . we recognize hosting services ratably over the term of the arrangement , which range from one to ten years but are typically for a period of three to five years . for software services associated with certain saas arrangements , we have concluded that the services are not distinct , and we recognize the revenue ratably over the remaining contractual period once we have provided the customer access to the software . we record amounts that have been invoiced in accounts receivable and in deferred revenue or revenues , depending on whether the revenue recognition criteria have been met . the transaction price is allocated to the separate performance obligations on a relative ssp basis . we determine the ssp based on our overall pricing objectives , taking into consideration market conditions and other factors , including the value of our contracts , the applications sold , customer demographics , and the number and types of users within our contracts . we use a range of amounts to estimate ssp when we sell each of the products and services separately and need to determine whether there is a discount to be allocated based on the relative ssp of the various products and services . in instances where ssp is not directly observable , such as when we do not sell the product or service separately , we determine ssp using the expected cost-plus margin approach . revenue is recognized net of allowances for sales adjustments and any taxes collected from customers , which are subsequently remitted to governmental authorities . typically , the structure of our arrangements does not give rise to variable consideration .

overview general we provide integrated information management solutions and services for the public sector , with a focus on local governments . we develop and market a broad line of software products and services to address the it needs of cities , counties , schools and other local government entities . in addition , we provide professional it services to our clients , including software and hardware installation , data conversion , training and for certain clients , product modifications , along with continuing maintenance and support for clients using our systems . we also provide subscription-based services such as software as a service ( “ saas ” ) , which primarily utilize the tyler private cloud , and electronic document filing solutions ( “ e-filing ” ) , which simplify the filing and management of court related documents . revenues for e-filing are derived from transaction fees and , in some cases , fixed fee arrangements . we also provide property appraisal outsourcing services for taxing jurisdictions . our products generally automate seven major functional areas : ( 1 ) financial management and education , ( 2 ) courts and justice , ( 3 ) public safety ( 4 ) property appraisal and tax , ( 5 ) planning , regulatory and maintenance ( 6 ) land and vital records management and ( 7 ) data and insights . we report our results in two segments . the enterprise software ( “ es ” ) segment provides municipal and county governments and schools with software systems and services to meet their information technology and automation needs for mission-critical “ back-office ” functions such as : financial management ; courts and justice processes ; public safety ; planning , regulatory and maintenance ; land and vital records management ; and data analytics . the appraisal and tax ( “ a & t ” ) segment provides systems and software that automate the appraisal and assessment of real and personal property as well as property appraisal outsourcing services for local governments and taxing authorities .

the continued advancement of display technology and rapid growth of video consumption on digital delivery systems and mobile applications has increased the demand for video display processing technology in recent years . our products are used in a range of devices from large flat panel displays to small low power mobile applications . our products are designed to reduce overall system power requirements and reduce costs for our customers by minimizing bandwidth . our primary target markets include digital projection systems , digital televisions , ultrabook tm devices , tablets , and smartphones . we have an intellectual property portfolio of 125 patents related to the visual display of digital image data . we focus our research and development efforts on developing video enhancement solutions for our target markets that increase performance , video quality and device functionality while reducing power consumed . we seek to expand our technology portfolio through internal development and co-development with business partners , and we continually evaluate acquisition opportunities and other ways to leverage our technology into other high-value markets . pixelworks was founded in 1997 and is incorporated under the laws of the state of oregon . historically , significant portions of our revenue have been generated by sales to a relatively small number of end customers and distributors . we sell our products worldwide through a direct sales force , distributors and manufacturers ' representatives . we sell to distributors in china , europe , japan , korea , southeast asia , taiwan and the u.s , and our manufacturers ' representatives support some of our korean and european sales . our distributors typically provide engineering support to our end customers and often have valuable and established relationships with our end customers . in certain countries in which we operate , it is customary to sell to distributors . while distributor payment to us is not dependent upon the distributor 's ability to resell the product or to collect from the end customer , the distributors may provide longer payment terms to end customers than those we would offer . significant portions of our products are sold overseas . sales outside the u.s. accounted for approximately 83 % of revenue in 2013 , 90 % of revenue in 2012 and 96 % of revenue in 2011 . our integrators , branded manufacturers and branded suppliers incorporate our products into systems that are sold worldwide . all of our revenue to date has been denominated in u.s. dollars . 35 story_separator_special_tag was due primarily to an increase in the recognition of higher margin licensing revenue during 2012 compared to 2011. the decrease was also due to a decrease in direct product costs as a percentage of revenue due to reduced material costs , partially offset by non-recurring charges related to a discontinued product . research and development research and development expense includes compensation and related costs for personnel , development-related expenses including non-recurring engineering and fees for outside services , depreciation and amortization , expensed equipment , facilities and information technology expense allocations and travel and related expenses . co-development agreement during the second quarter of 2012 , we entered into a best efforts co-development agreement ( the `` co-development agreement '' ) with a customer to defray a portion of the research and development expenses that we expect to incur in connection with our development of an ic product to be sold exclusively to the customer . we expect to begin selling units of the product developed under the co-development agreement during 2014 , however , there is no commitment or agreement from the customer for such sales at this time . additionally , we retain ownership of any modifications or improvements to our pre-existing intellectual property and may use such improvements in products sold to other customers . the initial $ 3.5 million due under the co-development agreement was received within sixty days of contract signing and a second payment of $ 1.75 million was received during the third quarter of 2013 upon completion of a development milestone . the final payment of $ 1.75 million was invoiced during the fourth quarter of 2013 upon completion of the final development milestone . we recognized offsets to research and development expense related to the co-development agreement of $ 3.5 million in each of 2012 and 2013 . 37 research and development expense was as follows ( in thousands ) : replace_table_token_6_th 2013 v. 2012 research and development expense decreased $ 0.1 million from 2012 to 2013. the decrease was primarily attributable to a $ 1.3 million decrease in non-recurring engineering expense due to the timing of development activities . this decrease was partially offset by a $ 1.1 million increase in compensation expense primarily due to annual benefit and merit salary increases and a $ 0.3 million increase in stock compensation expense primarily due to restricted stock units granted to executives during the fourth quarter of 2013. the remainder of the decrease was due to insignificant partially offsetting increases and decreases across the remaining expense categories , which resulted in an additional $ 0.2 million net decrease . 2012 v. 2011 research and development expense decreased $ 2.1 million , or 9 % from 2011 to 2012. the decrease was primarily attributable to a benefit of $ 3.5 million recognized in 2012 partially offset by an increase in non-recurring engineering expense of $ 1.3 million . the benefit recognized and the increase in non-recurring engineering expense are both related to the co-development agreement . the decrease was also attributable to a decrease of $ 0.3 million in outside services expense due to the timing of development activities and a decrease of $ 0.2 million from a reduction in direct labor costs and allocated overhead associated with the utilization of research and development engineers on license revenue agreements ; these costs were recorded in cost of revenue . these decreases were partially offset by an increase in compensation expense due to annual merit salary increases and variable compensation expense . story_separator_special_tag these increases were partially offset by $ 1.2 million used in operating activities due primarily to the net loss we recorded for the year ended december 31 , 2013 and $ 4.5 million used for purchases of property and equipment and licensed technology and payments on other asset financing . total cash and marketable securities decreased $ 1.7 million from $ 15.1 million at december 31 , 2011 to $ 13.4 million at december 31 , 2012 . the decrease resulted primarily from $ 3.9 million used for purchases of property and equipment and payments on other asset financing , partially offset by $ 1.8 million provided by operating activities due primarily to changes in working capital . as of december 31 , 2013 , our cash and cash equivalents balance of $ 20.8 million consisted of $ 0.4 million in cash and $ 20.4 million in u.s. denominated money market funds . although we did not hold short- or long-term investments as of december 31 , 2013 , our investment policy requires that our portfolio maintains a weighted average maturity of less than 12 months . additionally , no maturities can extend beyond 24 months and concentrations with individual securities are limited . investments must be rated at least a-1 / p-1 / f-1 by at least two nationally recognized statistical rating organizations , and our investment policy is reviewed at least annually by our audit committee . although cash balances held at our foreign subsidiaries would be subject to u.s. taxes if repatriated , we have sufficient u.s. net operating losses to eliminate the liability associated with any such repatriation and foreign taxes due upon repatriation would not be significant . accounts receivable , net accounts receivable , net increased to $ 4.8 million at december 31 , 2013 from $ 3.8 million at december 31 , 2012 . average number of days sales outstanding increased to 29 days at december 31 , 2013 from 25 days at december 31 , 2012 . the increase in accounts receivable and days sales outstanding was primarily due to $ 2.3 million of licensing revenue recorded during the fourth quarter of 2013 which was received subsequent to year-end . inventories inventories decreased to $ 1.7 million at december 31 , 2013 from $ 2.7 million at december 31 , 2012 . inventory turnover increased to 12.9 at december 31 , 2013 from 7.3 at december 31 , 2012 , primarily due to lower average inventory balances and decreased cost of goods sold during the fourth quarter of 2013 compared to the fourth quarter of 2012. inventory turnover is calculated based on annualized quarterly operating results and average inventory balances during the quarter . capital resources short-term line of credit on december 21 , 2010 , we entered into a loan and security agreement ( the `` revolving loan agreement '' ) with silicon valley bank ( the `` bank '' ) . on december 14 , 2012 , we and the bank entered into amendment no . 1 ( the `` amendment no . 1 '' ) to the revolving loan agreement . the revolving loan agreement , as amended , provides a secured working capital-based revolving line of credit ( the `` revolving line '' ) in an aggregate amount of up to the lesser of ( i ) $ 10.0 million , or ( ii ) $ 1.0 million plus 80 % of eligible domestic accounts receivable and certain foreign accounts receivable . on december 4 , 2013 , we and the bank entered into amendment no . 2 ( the `` amendment no . 2 '' ) to the revolving loan agreement which changes the maturity date of the revolving line of credit provided pursuant to the revolving loan agreement to january 1 , 2016. the maturity date was previously december 14 , 2014 , as provided by amendment no . 1 to the revolving loan agreement . in addition , the revolving loan agreement , as amended , provides for non-formula advances of up to $ 10.0 million which may be made solely during the last five business days of any fiscal month or quarter and which must be repaid by the company on or before the fifth business day after the applicable fiscal month or quarter end . due to their repayment terms , non-formula advances do not provide the company with usable liquidity . 40 the revolving loan agreement , as amended , contains customary affirmative and negative covenants as well as customary events of default . the occurrence of an event of default could result in the acceleration of the company 's obligations under the revolving loan agreement , as amended , and an increase to the applicable interest rate , and would permit the bank to exercise remedies with respect to its security interest . as of december 31 , 2013 , we were in compliance with all of the terms of the revolving loan agreement , as amended . as of december 31 , 2013 , short-term borrowings outstanding under the revolving line were non-formula advances in the aggregate of $ 3.0 million which were repaid within required terms . we had no outstanding borrowings under the revolving line as of december 31 , 2012. equity offering on august 21 , 2013 , we completed the sale of 3,024,500 shares of common stock , in an underwritten registered offering at a price to the public of $ 3.50 per share . net proceeds to the company , after deducting underwriting discounts and commissions and other expenses were approximately $ 9.6 million . liquidity as of december 31 , 2013 , we had no long-term debt , our short-term debt of $ 3.0 million was repaid within required terms and our cash and cash equivalents balance of $ 20.8 million was highly liquid . we anticipate that our existing working capital will be adequate to fund our operating , investing and financing needs for the next twelve months .

results of operations year ended december 31 , 2013 compared with year ended december 31 , 2012 , and year ended december 31 , 2012 compared with year ended december 31 , 2011. revenue , net net revenue was as follows ( in thousands ) : replace_table_token_4_th 2013 v. 2012 net revenue decreased $ 11.6 million , or 19 % , from 2012 to 2013. revenue related to ic product sales was $ 40.0 million and $ 54.7 million for 2013 and 2012 , respectively . revenue related to license of intellectual property ( `` ip '' ) was $ 8.1 million and $ 5.0 million for 2013 and 2012 , respectively . the decrease related to ic product sales was primarily attributable to a 32 % decrease in units sold partially offset by a 7 % increase in average selling price ( `` asp '' ) . the decrease in units sold was primarily due to decreased sales into both the digital projector and advanced television markets , primarily due the continued impact of the macro-economic environment on end market demand . the increase in asp was primarily due to increased sales of our ultra high definition advanced television product , as a percentage of our overall units sold , which has a higher asp than our other advanced television products . during the third quarter of 2013 , we entered into an agreement with a third-party to provide a non-exclusive license for a package of our technologies and to provide certain services , under which we expect to receive a total of approximately $ 10.3 million . the license revenue recorded during 2013 was primarily due to achieving milestones under this agreement .

the financial information discussed below and included in this report as of december 31 , 2013 and for the years ended december 31 , 2013 and 2014 may not necessarily reflect what veritiv 's financial condition , results of operations or cash flows would have been had veritiv been a stand-alone company during these periods or what veritiv 's financial condition , results of operations and cash flows may be in the future . references in the consolidated and combined financial statements to `` international paper '' or `` parent '' refer to international paper company . executive overview business overview veritiv corporation ( `` veritiv '' or the `` company '' ) is a leading north american business-to-business distributor of print , publishing , packaging , and facility solutions . additionally , veritiv provides logistics and supply chain management solutions to its customers . established in 2014 , following the merger of international paper 's xpedx division ( `` xpedx '' ) and uww holdings , inc. ( `` uwwh '' ) , the company operates from approximately 180 distribution centers primarily throughout the u.s. , canada and mexico . veritiv 's business is organized under four reportable segments : print , publishing , packaging and facility solutions . this segment structure is consistent with the way the chief operating decision maker makes operating decisions and manages the growth and profitability of the company 's business . the following summary describes the products and services offered in each of the segments : print – the print segment sells and distributes commercial printing , writing , copying , digital , wide format and specialty paper products , graphics consumables and graphics equipment primarily in the u.s. , canada and mexico . this segment also includes customized paper conversion services of commercial printing paper for distribution to document centers and form printers . the company 's broad geographic platform of operations coupled with the breadth of paper and graphics products , including its exclusive private brand offerings , provides a foundation to service national , regional and local customers across north america . publishing – the publishing segment sells and distributes coated and uncoated commercial printing papers to publishers , retailers , converters , printers and specialty businesses for use in magazines , catalogs , books , directories , gaming , couponing , retail inserts and direct mail . this segment also provides print management , procurement and supply chain management solutions to simplify paper and print procurement processes for its customers . packaging – the packaging segment provides standard as well as custom and comprehensive packaging solutions for customers based in north america and in key global markets . the business is strategically focused on higher growth industries including light industrial/general manufacturing , food production , fulfillment and internet retail , as well as niche verticals based on geographical and functional expertise . veritiv 's packaging professionals create customer value through supply chain solutions , structural and graphic packaging design and engineering , automation , workflow and equipment services , contract packaging , and kitting and fulfillment . facility solutions – the facility solutions segment sources and sells cleaning , break-room and other supplies such as towels , tissues , wipers and dispensers , can liners , commercial cleaning chemicals , soaps and sanitizers , sanitary maintenance supplies and equipment , safety and hazard supplies , and shampoos and amenities primarily in the u.s. , canada and mexico . veritiv is a leading distributor in the facility solutions segment . through this segment we manage a world class network of leading suppliers in most facilities solutions categories . additionally , we offer total cost of ownership solutions with re-merchandising , budgeting and compliance reporting , inventory management , and a sales-force trained to bring leading vertical expertise to the major north american geographies . 26 the company also has a corporate & other category which includes certain assets and costs not primarily attributable to any of the reportable segments , as well as its veritiv logistics solutions business which provides transportation and warehousing solutions . the spin-off and merger on july 1 , 2014 ( the `` distribution date '' ) , international paper completed the previously announced spin-off of xpedx to the international paper shareholders ( the `` spin-off '' ) , forming a new public company called veritiv . immediately following the spin-off , uwwh merged with and into veritiv ( the `` merger '' ) . prior to the distribution date , veritiv 's financial position , results of operations and cash flows consisted of only the xpedx business of international paper and were derived from international paper 's historical accounting records . the financial results of xpedx have been presented on a carve-out basis through the distribution date , while the financial results for veritiv , post spin-off , are prepared on a stand-alone basis . as such , the audited consolidated and combined financial statements as of and for the year ended december 31 , 2014 consist of the consolidated results of veritiv on a stand-alone basis for the six months ended december 31 , 2014 and the combined results of operations of xpedx for the six months ended june 30 , 2014 on a carve-out basis . the combined financial statements as of and for the year ended december 31 , 2013 consist entirely of the combined results of xpedx on a carve-out basis . for periods prior to the spin-off , the combined financial statements include expense allocations for certain functions previously provided by international paper . see note 1 of the notes to the consolidated and combined financial statements for further information . key performance measure adjusted ebitda is the primary financial performance measure veritiv uses to manage its businesses , to monitor its results of operations , to measure its performance against the abl facility and to incentivize its management . this common metric is intended to align shareholders , debt holders and management . adjusted ebitda is a non-gaap financial measure and is not an alternative to net income , operating income or any other measure prescribed by u.s. story_separator_special_tag this increase was partially offset by a 4.9 % decrease in legacy xpedx cost of products sold . the percentage decrease in cost of products sold was driven by a decline in facilities solutions , print and publishing cost of products sold . the declines in the three segments were driven primarily by declines in sales volume . distribution expenses 2015 compared to 2014 : distribution expenses increased due primarily to incremental expenses of $ 121.8 million , or 28.6 % , attributable to the merger . excluding the impact of the merger , distribution expenses decreased by $ 26.2 million , or 6.1 % . the decline was driven by ( i ) a $ 16.8 million decrease in vehicle operation expenses due primarily to reductions in fuel and third-party freight expenses , ( ii ) a $ 4.7 million decrease in facilities expenses primarily driven by warehouse consolidations , ( iii ) a $ 1.8 million decrease in personnel costs due to lower sales volumes , ( iv ) a $ 1.1 million decrease in temporary labor and ( v ) a $ 1.8 million decrease in various other expenses . 2014 compared to 2013 : distribution expenses increased due primarily to incremental expenses of $ 131.4 million , or 41.8 % , attributable to the merger . this increase was partially offset by a 6.2 % decrease in legacy xpedx distribution expenses . the decline in legacy xpedx distribution expenses was driven by ( i ) an $ 11.3 million decrease in vehicle operation expenses due primarily to a reduction in third-party freight expense , ( ii ) a $ 4.1 million decrease in personnel costs driven by a reduction in headcount and ( iii ) a $ 3.3 million one-time benefit related to a change in veritiv 's vacation policy . selling and administrative expenses 2015 compared to 2014 : selling and administrative expenses increased due primarily to incremental expenses of $ 194.7 million , or 28.3 % , from the merger . excluding the impact of the merger , selling and administrative expenses decreased by $ 29.9 million , or 4.3 % . the decrease was primarily attributed to ( i ) a $ 16.4 million decrease in personnel costs driven primarily by a restructuring of the corporate general and administrative functions , ( ii ) a $ 7.7 million decline in bad debt expense primarily driven by the print segment , ( iii ) a $ 4.6 million benefit related to the removal of international paper overhead allocations , and ( iv ) a $ 1.2 million decrease in various other expenses . the above noted change in shipping terms resulted in a reduction to selling and administrative expenses of $ 0.8 million for the year ended december 31 , 2015 . 2014 compared to 2013 : selling and administrative expenses increased due primarily to incremental expenses of $ 191.9 million , or 35.0 % , from the merger . this increase was partially offset by a $ 51.0 million decrease in legacy xpedx selling and administrative expenses . the decrease in legacy xpedx selling and administrative expenses is primarily attributed to : ( i ) a $ 29.9 million reduction in allocated expenses from international paper , ( ii ) a $ 9.6 million one-time benefit related to the change in the vacation policy previously noted , ( iii ) a $ 4.0 million decrease in personnel costs due to a reduction in headcount , ( iv ) a $ 4.0 million decrease in sales professional training , ( v ) a $ 2.4 million reduction in it project spending and ( vi ) a $ 1.1 million decline in various other expenses . 30 depreciation and amortization expenses 2015 compared to 2014 : depreciation and amortization expenses increased due primarily to the merger . 2014 compared to 2013 : depreciation and amortization expenses increased due primarily to incremental expenses of $ 19.0 million , or 111.1 % , attributable to the merger . legacy xpedx depreciation and amortization expenses increased an additional 8.8 % due primarily to an increase in capital leases for tractor-trailer power units . merger and integration expenses during the year ended december 31 , 2015 , veritiv incurred costs to integrate the combined businesses of xpedx and unisource . integration expenses include professional services and project management fees , retention compensation , information technology conversion costs , rebranding costs and other costs to integrate the combined businesses of xpedx and unisource . during the year ended december 31 , 2014 , veritiv incurred merger and integration expenses related primarily to : advisory , legal and other professional fees directly associated with the merger ; integration-related professional services and project management fees ; retention compensation ; termination benefits ( including change-in-control bonuses ) ; rebranding and other costs to integrate the combined businesses of xpedx and unisource . see note 3 of the notes to consolidated and combined financial statements for a breakdown of the major components of these costs . restructuring charges for the years ended december 31 , 2015 and 2014 , restructuring charges related primarily to veritiv 's restructuring of its north american operations intended to integrate the legacy xpedx and unisource operations , generate cost savings and capture synergies across the combined company . during the fourth quarter of 2014 , the company initiated the process of consolidating warehouse and customer service locations of the legacy organizations , as well as realigning its field and sales management function . as a result , the company incurred restructuring charges for employee termination benefits , asset impairments and other direct costs . see note 3 of the notes to the consolidated and combined financial statements for additional details . the company may continue to record restructuring charges in the future as integration activities progress . restructuring charges for the year ended december 31 , 2013 related to xpedx 's multi-year restructuring plan to ( i ) optimize the warehouse network , ( ii ) improve the efficiency of the sales team and ( iii ) reorganize the procurement function .

segment results due to the shared nature of the distribution network , distribution expenses are not a specific charge to each segment , but are instead allocated to each segment based primarily on operational metrics that correlate with changes in volume . accordingly , distribution expenses allocated to each segment are highly interdependent on the results of other segments . lower volume in any segment that is not offset by a reduction in distribution expenses can result in the other segments absorbing a larger share of distribution expenses . conversely , higher volume in any segment can result in the other segments absorbing a smaller share of distribution expenses . the impact of this at the segment level is that the changes in distribution expense trends may not correspond with volume trends within a particular segment . the company sells thousands of products . in the print , packaging and facility solutions segments , veritiv is unable to compute the impact of changes in sales volume based on changes in sales of each individual product . rather , the company assumes that the margin stays constant and estimates the volume impact based on changes in cost of products sold as a proxy for the change in sales volume . after any other significant sales variances are identified , the remaining sales variance is attributed to price/mix . the company believes that the decline in paper and related products is due to the widespread use of electronic media and permanent product substitution , more e-commerce , less print advertising , fewer catalogs and a reduced volume of direct mail , among other factors . this trend is expected to continue and will place continued pressure on the company 's revenues and profit margins and make it more difficult to maintain or grow adjusted ebitda within the print and publishing segments .

other derivatives that are non-designated consist primarily of options strategies to minimize the risk associated with the foreign exchange effects of monetary assets and liabilities denominated in nis . the company measured the fair value of the contracts in accordance with asc 820 ( classified as level 2 ) . the net gains ( losses ) recognized in “ financial income , net ” during the year ended june 30 , 2014 , 2013 and 2012 were ( $ 70 ) , $ 231 and ( $ 145 ) , respectively . t. comprehensive income : the company accounts for comprehensive income ( loss ) in accordance with asc no . 220 , “ comprehensive income ” . comprehensive income generally represents all changes in shareholders ' equity during the period except those resulting from investments by , or distributions to , shareholders . the company determined that its items of other comprehensive income relate to gains and losses on cash flow hedging derivative instruments and unrealized gains and losses on available for sale marketable securities . replace_table_token_16_th u. recent accounting pronouncement in may 2014 , the fasb issued accounting standards update no . 2014-09 ( “ asu 2014-09 ” ) , `` revenue from contracts with customers `` . asu 2014-09 supersedes the revenue recognition requirements in “ revenue recognition ( topic 605 ) ” , and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services . asu 2014-09 is effective for annual reporting periods beginning after december 15 , 2016 , including interim periods within that reporting period . early adoption is not permitted . the company is currently in the process of evaluating the impact of the adoption of asu 2014-09 on its consolidated financial statements . f - 21 pluristem therapeutics inc. and its subsidiary notes to consolidated financial statements u.s. dollars in thousands ( except share and per share amounts ) note 3 : - marketable securities as of june 30 , 2014 , all of the company 's marketable securities were classified as available-for-sale . replace_table_token_17_th the following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of june 30 , 2014 and june 30 , 2013 , and the length of time that those investments have been in a continuous loss position : replace_table_token_18_th the company typically invests in highly-rated securities . when evaluating the investments for other-than-temporary impairment , the company reviews factors such as the length of time and extent to which fair value has been below cost basis , the financial condition of the issuer and any changes thereto , and the company 's intent to sell , or whether it is more likely than story_separator_special_tag we are a bio-therapeutics company developing off-the-shelf allogeneic cell therapy products for the treatment of multiple ischemic and inflammatory conditions , with our lead indications focusing on cardiovascular , orthopedic , pulmonary , hematological , and women 's health diseases . our patented plx ( placental expanded ) cells function as a platform that releases a number of therapeutic proteins in response to various local and systemic inflammatory and ischemic signals , generated by the patient 's own body . plx cells are grown using our proprietary 3d micro-environment technology that produces a product that requires no tissue matching prior to administration . we were incorporated as a nevada corporation in 2001. we have a wholly owned subsidiary in israel called pluristem ltd. we operate in one segment and our operations are focused on the research , development , clinical trials and manufacturing of cell therapeutics and related technologies . our strategy is to develop and produce cell therapy products for the treatment of multiple disorders using several methods of administration , such as intravenous and intramuscular injections . we plan to execute this strategy independently , using our own personnel , and through relationships with research and clinical institutions or in collaboration with other companies , such as united and cha . we have built good manufacturing practices grade facility and we are planning to have in-house production capacity to grow clinical grade plx cells in commercial quantities . 26 results of operations – year ended june 30 , 2014 compared to year ended june 30 , 2013 and year ended june 30 , 2013 compared to year ended june 30 , 2012. revenues revenues decreased by 44 % from $ 679,000 for the year ended june 30 , 2013 to $ 379,000 for the year ended june 30 , 2014. all such revenues were derived from the united agreement . revenues decreased by 5 % from $ 716,000 for the year ended june 30 , 2012 to $ 679,000 for the year ended june 30 , 2013. all such revenues were derived from the united agreement . these reductions in the years ended june 30 , 2013 and 2014 are due to a re-evaluation we did for the development period under the united agreement in light of the clinical hold . in june 2013 , we received notification from the fda that our united states phase ii ic study had been placed on clinical hold due to a serious allergic reaction in a case which required hospitalization . in september 2013 , the fda lifted the clinical hold . in june 2013 , following the clinical hold , we extended the development period for which we received funds from united from 6.5 years to 11.5 years . the license fee will be recognized on a straight line basis as revenue over the estimated development period . story_separator_special_tag during the years that ended june 30 , 2014 , 2013 and 2012 we received approximately $ 3,243,000 , $ 1,452,000 and $ 3,156,000 , respectively , from the ocs towards our research and development expenses . 29 according to the ocs grant terms , we are required to pay royalties at a rate of 3 % - 4 % on sales of products and services derived from technology developed using this and other ocs grants until 100 % of the dollar-linked grants amount plus interest are repaid . in the absence of such sales , no payment is required . during the year ended june 30 , 2014 , we paid royalties to the ocs in the aggregate amount of $ 14,000. the ocs may impose certain conditions on any arrangement under which the ocs permits the company to transfer technology or development out of israel or outsource manufacturing out of israel . while the grant is given to the company over a certain period of time ( usually a year ) , the requirements and restrictions under the israeli law for the encouragement of industrial research and development , 1984 continue and do not have a set expiration period , except for the royalties , which requirement to pay them expires after payment in full . in addition , the european authorities approved a research grant under the european commission 's seventh framework program ( fp7 ) in the amount of approximately 92,955 for a period of 5 years which began on january 1 , 2011. in december 2012 , we entered into the atm agreement with mlv & co. llc ( mlv ) , which provides that , upon the terms and subject to the conditions and limitations set forth in the atm agreement , we may elect , from time to time , to issue and sell shares of common stock having an aggregate offering price of up to $ 95 million through mlv as a sales agent . we are not obligated to make any sales of common stock under the atm agreement . during the year ended june 30 , 2014 , we issued 2,596,032 shares of common stock and raised approximately $ 10,644,000 , net of issuance expenses of $ 195,000 , under the atm agreement . on september 11 , 2014 we notified mlv of the termination of the atm agreement . in february 2013 , mtm – scientific industries center haifa ltd. ( mtm ) , our landlord , participated by contributing an amount of nis 2,990,000 ( approximately $ 816,000 ) toward the cost of constructing our new facility . such participation is being made pursuant to our lease agreement with mtm , and is recognized by ratably deducting from our monthly rent payment over the rent period . we recognized participation of $ 93,000 in fiscal year 2014. in accordance with the cha agreement , in december , 2013 , we issued to cha 2,500,000 shares of our common stock in consideration for the issuance to us of 1,011,504 common shares of cha , which reflected total consideration of approximately $ 10,414,000 to each of us and cha . each of us and cha agreed not to sell the other party 's shares for at least one year . the parties also agreed to give an irrevocable proxy to the other party 's management with respect to the shares issued . our investment in cha shares is presented as “ marketable securities ” on our balance sheet and classified as available-for-sale . as of june 30 , 2014 , the fair value of our investment in cha shares amounted to approximately $ 13 million , and other comprehensive income includes unrealized gains of $ 1,562,000 related to the increase in the fair value of cha shares . if we decide to sell our investment in cha shares , we will reclassify the unrealized gains or losses in our statement of operations . we adhere to an investment policy set by our investment committee which aims to preserve our financial assets , maintain adequate liquidity and maximize return while minimizing exposure to the nis . such policy further provides that we should hold most of our current assets in bank deposits and the remainder of our current assets is to be invested in government bonds and a combination of corporate bonds and relatively low risk stocks . as of today , the currency of our financial portfolio is mainly in u.s. dollars and we use forward and options contracts in order to hedge our exposures to currencies other than the u.s. dollar . outlook we have accumulated a deficit of $ 113,834,000 since our inception in may 2001. we do not expect to generate any revenues from sales of products in the next twelve months . our products will likely not be ready for sale for at least three years , if at all . our cash needs will increase in the foreseeable future . we expect to generate revenues , which in the short and medium terms will unlikely exceed our costs of operations , from the sale of licenses to use our technology or products , as we have in the united agreement . our management believes that we may need to raise additional funds before we have cash flow from operations that can materially decrease our dependence on our existing cash and other liquidity resources . we are continually looking for sources of funding , including non-diluting sources such as the ocs grants , other sales of our common stock or sales of the marketable securities we hold . 30 the ocs has supported our activity in the past eight years . our last program , for the ninth year , was approved by the ocs in june 2014 and relates to a nis 14,601,000 ( approximately $ 4,187,000 ) grant .

general and administrative general and administrative expenses increased by 54 % from $ 5,649,000 for the year ended june 30 , 2013 to $ 8,676,000 for the year ended june 30 , 2014. this is primarily driven by an increase in stock-based compensation expenses related to our employees and directors , due to timing of grants made to directors , and an increase in our salaries due to , among other things , an increase of 6 employees as compared to the average number of employees in the year ended june 2013. general and administrative expenses decreased by 14 % from $ 6,568,000 for the year ended june 30 , 2012 to $ 5,649,000 for the year ended june 30 , 2013. this decrease is mainly due to a decrease in stock-based compensation expenses related to our employees and consultants . financial income , net financial income decreased from $ 1,068,000 for the year ended june 30 , 2013 to $ 918,000 for the year ended june 30 , 2014. the decrease is mainly due to a decrease in gains from hedging instruments and interest income on deposits over the past fiscal year , offset by an increase in our gain from marketable securities . financial income increased from $ 237,000 for the year ended june 30 , 2012 to $ 1,068,000 for the year ended june 30 , 2013. the increase is mainly due to an increase in gains from hedging instruments and changes in exchange rates over the past fiscal year .

an additional $ 4.8 million of cash proceeds that was held in escrow for 15 months , for potential indemnifications to the buyer , was paid to teradyne in february 2015 and it will be recorded as other income in the first quarter of 2015 . 59 g. debt at december 31 , 2014 and 2013 , debt consisted of the following : 2014 2013 ( in thousands ) convertible senior notes $ — $ 185,708 japan loan — 955 total debt — 186,663 current portion of long-term debt — 186,663 long-term debt $ — $ — loan agreement on march 31 , 2009 , teradyne k.k . , teradyne 's wholly-owned subsidiary in japan , entered into a loan agreement with a local bank in japan to borrow approximately $ 10.0 million ( the loan was denominated in japanese yen ) . the loan had a term of 5 years and a fixed interest rate of 0.8 % . approximately $ 6.0 million story_separator_special_tag overview we are a leading global supplier of automatic test equipment . we design , develop , manufacture and sell automatic test systems and solutions used to test semiconductors , wireless products , hard disk drives , solid state disks and circuit boards in the consumer electronics , wireless , automotive , industrial , computing , communications and aerospace and defense industries . our automatic test equipment products and services include : semiconductor test ( “semiconductor test” ) systems ; 19 wireless test ( “wireless test” ) systems ; and defense/aerospace ( “defense/aerospace” ) test instrumentation and systems , storage test ( “storage test” ) systems , and circuit-board test and inspection ( “production board test” ) systems ( collectively these products represent “system test” ) . we have a broad customer base which includes integrated device manufacturers ( “idms” ) , outsourced semiconductor assembly and test providers ( “osats” ) , wafer foundries , fabless companies that design , but contract with others for the manufacture of , integrated circuits ( “ics” ) , developers of wireless devices and consumer electronics , manufacturers of circuit boards , automotive suppliers , wireless product manufacturers , storage device manufacturers , aerospace and military contractors . in 2014 , we acquired avionics interface technologies , llc ( “ait” ) , a supplier of equipment for testing state-of-the-art data communication buses . the acquisition of ait complements our defense/aerospace line of bus test instrumentation for commercial and defense avionics systems . ait is included in our system test segment . in 2013 , we acquired ztec instruments inc. ( “ztec” ) , a supplier of modular wireless test instruments . the acquisition of ztec expands our wireless test segment into the design verification test of wireless components and chipsets . we believe our recent acquisitions have enhanced our opportunities for growth . we will continue to invest in our business , grow market share in our markets and expand further our addressable markets while tightly managing our costs . the sales of our products and services are dependent , to a large degree , on customers who are subject to cyclical trends in the demand for their products . these cyclical periods have had , and will continue to have , a significant effect on our business since our customers often delay or accelerate purchases in reaction to changes in their businesses and to demand fluctuations in the semiconductor and electronics industries . historically , these demand fluctuations have resulted in significant variations in our results of operations . the sharp swings in the semiconductor and electronics industries in recent years have generally affected the semiconductor and electronics test equipment and services industries more significantly than the overall capital equipment sector . in the fourth quarter of 2014 , we performed our annual goodwill impairment test and recorded a goodwill impairment charge of $ 98.9 million in our wireless test segment as a result of decreased projected demand attributable to an estimated smaller future wireless test market due to reuse of wireless test equipment , price competition and different testing techniques . further reductions in the size of the wireless test market may occur , which may result in additional goodwill impairment charges , increased risk of excess and obsolete inventories , asset write-offs and restructuring charges . in 2013 , revenues from our storage test business unit were significantly lower than in 2012 due to lower hard disk drive demand from lower shipments of personal computers . in response to this lower demand , during the third quarter of 2013 , we implemented a headcount reduction in the storage test business unit . it is possible that we may need to take further cost control and reduction measures including reducing the number of employees and reducing manufacturing capacity . a prolonged slowdown in storage test demand may result in increased risk of excess and obsolete inventories , asset write-offs and restructuring charges . critical accounting policies and estimates we have identified the policies discussed below as critical to understanding our business and our results of operations and financial condition . the impact and any associated risks related to these policies on our business operations is discussed throughout management 's discussion and analysis of financial condition and results of operations where such policies affect our reported and expected financial results . 20 revenue recognition we recognize revenues when there is persuasive evidence of an arrangement , title and risk of loss have passed , delivery has occurred or the services have been rendered , the sales price is fixed or determinable and collection of the related receivable is reasonably assured . title and risk of loss generally pass to our customers upon shipment or at delivery destination point . in circumstances where either title or risk of loss pass upon destination , acceptance or cash payment , we defer revenue recognition until such events occur . our equipment has non-software and embedded software components that function together to deliver the equipment 's essential functionality . story_separator_special_tag although realization is not assured , based on our assessment , we concluded that it is more likely than not that such assets , net of the existing valuation allowance , will be realized . u.s. income taxes are not provided for on the earnings of non-u.s. subsidiaries which are expected to be reinvested indefinitely in operations outside the u.s. for intra-period tax allocations , we first utilize non-equity related tax attributes , such as net operating losses and credit carryforwards , and then equity-related tax attributes . we use the with-and-without method for calculating excess stock compensation deductions and do not take into account any indirect impacts of excess stock compensation deductions on its research and development tax credits , domestic production activities deduction , and other differences between financial reporting and tax reporting . investments we account for our investments in debt and equity securities in accordance with the provisions of asc 320-10 , “ investments—debt and equity securities.” on a quarterly basis , we review our investments to identify and evaluate those that have an indication of a potential other-than-temporary impairment . factors considered in determining whether a loss is other-than-temporary include : the length of time and the extent to which the market value has been less than cost ; the financial condition and near-term prospects of the issuer ; and the intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value . 22 goodwill , intangible and long-lived assets we assess goodwill for impairment at least annually in the fourth quarter , as of december 31 , on a reporting unit basis , or more frequently , when events and circumstances occur indicating that the recorded goodwill may be impaired . if the book value of a reporting unit exceeds its fair value , the implied fair value of goodwill is compared with the carrying amount of goodwill . if the carrying amount of goodwill exceeds the implied fair value , an impairment charge is recorded in an amount equal to that excess . in the fourth quarter of 2014 , we performed our annual goodwill impairment test and recorded a goodwill impairment charge of $ 98.9 million in our wireless test segment as a result of decreased projected demand attributable to an estimated smaller future wireless test market due to reuse of wireless test equipment , price competition and different testing techniques . we assess the impairment of intangible and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable . factors we consider important in the determination of an impairment include significant underperformance relative to historical or projected future operating results , significant changes in the manner that we use the acquired asset and significant negative industry or economic trends . as a result of the wireless test segment goodwill impairment charge in the fourth quarter of 2014 described above , we performed an impairment test of the wireless test segment 's intangible and long-lived assets based on a comparison of the estimated undiscounted cash flows to the recorded value of the assets and there was no indication of impairment . when we determine that the carrying value of intangible and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment , we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the associated risks . 23 selected relationships within the consolidated statements of operations replace_table_token_7_th story_separator_special_tag width= '' 100 % '' > — a charge of $ 15.4 million due to downward revisions to previously forecasted demand levels , of which $ 8.1 million was in semiconductor test , $ 5.2 million was in wireless test and $ 2.1 million was in system test ; and — a $ 6.8 million inventory write-down as a result of product transition , of which $ 6.3 million was in semiconductor test and $ 0.5 million in wireless test . during the year ended december 31 , 2013 , we recorded an inventory provision of $ 16.6 million included in cost of revenues , due to the following factors : — a charge of $ 12.2 million due to downward revisions to previously forecasted demand levels , of which $ 5.2 million was in semiconductor test , $ 4.2 million was in system test and $ 2.8 million was in wireless test ; and — a $ 4.4 million inventory write-down as a result of product transition in wireless test . 27 during the year ended december 31 , 2012 , we recorded an inventory provision of $ 26.8 million included in cost of revenues , due to the following factors : — a charge of $ 12.0 million due to decline in demand compared to previously forecasted demand levels for prior generation magnum testers resulted in an inventory provision in semiconductor test ; — a $ 5.3 million inventory write-down as a result of product transition related to the flex test platform in semiconductor test ; — a $ 3.9 million inventory write-down as a result of product transition in wireless test ; and — the remainder of the charge of $ 5.6 million primarily reflects downward revisions to previously forecasted demand levels , of which $ 4.3 million was in system test , $ 1.1 million in semiconductor test and $ 0.2 million in wireless test . during the years ended december 31 , 2014 , 2013 and 2012 , we scrapped $ 20.8 million , $ 35.3 million and $ 9.6 million of inventory , respectively , and sold $ 12.9 million , $ 9.8 million and $ 4.3 million of previously written-down or written-off inventory , respectively . as of december 31 , 2014 , we had inventory related reserves for amounts which had been written-down or written-off totaling $ 111.3 million . we have no pre-determined timeline to scrap the remaining inventory .

results of operations book to bill ratio book to bill ratio is calculated as net bookings divided by net sales . book to bill ratio by reportable segment was as follows : replace_table_token_8_th 24 revenues revenues for our three reportable segments were as follows : replace_table_token_9_th the increase in semiconductor test revenues of $ 277.8 million or 27 % from 2013 to 2014 was primarily due to higher system-on-a-chip ( “soc” ) product volume , driven by a larger application processor test market driven by market demand . the decrease in semiconductor test revenues of $ 104.7 million or 9 % from 2012 to 2013 was primarily due to a decrease in soc test product sales because of a smaller application processor test market , partially offset by higher memory system sales . the decrease in wireless test revenues of $ 67.4 million or 27 % from 2013 to 2014 was primarily due to lower cellular and connectivity product volume . the decrease in wireless test revenues of $ 34.5 million or 12 % from 2012 to 2013 was primarily due to lower connectivity product volume , partially offset by higher cellular product volume . the increase in system test revenues of $ 9.5 million or 6 % from 2013 to 2014 was primarily due to higher product volume in storage test and production board test , partially offset by lower defense/aerospace product sales . the decrease in system test revenues of $ 89.7 million or 37 % from 2012 to 2013 was primarily due to lower product volume in storage test . the decrease in storage test sales was due to lower hard disk drive demand primarily from lower shipments of personal computers .

113 concert pharmaceuticals , inc. notes to consolidated financial statements ( continued ) realization of the future tax benefits is dependent on many factors , 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 appearing 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 report , including information with respect to our plans and strategy for our business and related financing , includes forward-looking statements that involve risks and uncertainties . you should read the “risk factors” section in part 1—item 1a . of this 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 clinical stage biopharmaceutical company applying our extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs . our approach starts with approved drugs , advanced clinical candidates or previously studied compounds that we believe can be improved with deuterium substitution to provide better pharmacokinetic or metabolic properties , thereby enhancing clinical safety , tolerability or efficacy . we believe our approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development . we have a robust pipeline of wholly owned and collaboration programs . the following summarizes our development programs . avp-786 is a combination of a deuterium-substituted dextromethorphan analog and an ultra-low dose of quinidine being investigated for treatment of neurologic and psychiatric disorders . we granted avanir pharmaceuticals , inc. , or avanir , an exclusive worldwide license to develop and commercialize deuterated dextromethorphan analogs , including the analog in avp-786 . subsequent to our agreement , avanir was acquired by otsuka pharmaceutical co. , ltd. avanir is conducting a phase 2 clinical trial of avp-786 as an adjunctive treatment for major depressive disorder and also has announced plans to advance avp-786 into phase 3 testing for alzheimer 's agitation , following agreement with the united states food and drug administration , or fda . ctp-499 is a novel , potentially first-in-class treatment for diabetic nephropathy that we are developing as an additive treatment to the current standard of care . we have completed a phase 2 clinical trial and plan to seek one or more collaborators for future development of ctp-499 in diabetic nephropathy . ctp-354 is a novel , potentially first-in-class , non-sedating treatment for spasticity that we are initially developing for use in patients with spinal cord injury and in patients with multiple sclerosis to address a significant unmet medical need in these markets . we have conducted phase 1 clinical trials and intend to conduct additional non-clinical studies prior to initiating any phase 2 clinical testing . ctp-730 is a product candidate for the treatment of inflammatory diseases that is being developed under a collaboration with celgene pharmaceuticals , inc. , celgene international sarl and celgene corporation , together referred to as celgene , to research , develop and commercialize certain deuterated compounds for the treatment of inflammation or cancer . in september 2014 , we announced the initiation of a single ascending dose phase 1 clinical trial designed to assess the safety , tolerability and pharmacokinetics of ctp-730 . the phase 1 clinical program is designed to also evaluate multiple ascending doses of ctp-730 and is expected to be completed in 2015. jzp-386 is a product candidate containing a deuterated analog of sodium oxybate for potential use in patients with narcolepsy . we have granted jazz pharmaceuticals ireland limited , or jazz pharmaceuticals , worldwide rights to develop and commercialize deuterated sodium oxybate compounds , including jzp-386 . sodium oxybate is the active ingredient in jazz pharmaceuticals ' marketed drug xyrem ® . a second phase 1 clinical trial evaluating jzp-386 was initiated in the first quarter of 2015 with data expected in the second quarter of 2015 which will inform the next steps in the development of the program . 73 deuterated ivacaftor is a potential treatment for cystic fibrosis . cystic fibrosis is a life-threatening , hereditary genetic disease that primarily affects the lungs and digestive system . the cause is a defect in the gene that encodes for cystic fibrosis transmembrane conductance regulator , a protein which regulates components of sweat , mucus and digestion . according to the cystic fibrosis foundation , an estimated 70,000 people worldwide have cystic fibrosis . many people with the disease can now live into their 30s and beyond . we intend to advance the program into clinical evaluation in 2015. we plan to continue to seek to identify compounds that can be improved through selective deuterium substitution and believe we are capable of identifying one to two novel deuterated compounds per year that we can advance into preclinical development while concurrently progressing our existing pipeline . since our inception in 2006 , we have devoted substantially all of our resources to our research and development efforts , including activities to develop our dce platform , or deuterated chemical entity platform , and our core capabilities in deuterium chemistry , identify potential product candidates , undertake non-clinical studies and clinical trials , manufacture product in compliance with current good manufacturing practices , provide general and administrative support for these operations and establish our intellectual property . we have generated an accumulated deficit of $ 145.3 million since inception through december 31 , 2014 and will require substantial additional capital to fund our research and development . we do not have any products approved for sale and have not generated any revenue from product sales . we have funded our operations primarily through the public offering and private placement of our equity , debt financing and funding from collaborations . story_separator_special_tag celgene is restricted from utilizing their research , development and commercialization rights under each of these upfront licenses , unless , within seven years after the effective date of the agreement , celgene pays us a license exercise fee . if celgene does not elect to pay the license exercise fee during the seven year period , the license will expire . with respect to the option program , once a compound is selected , celgene may exercise its option by paying us an option exercise fee within seven years of the effective date of the agreement , and upon celgene 's exercise of the option we will grant to celgene an exclusive worldwide license to develop , manufacture and commercialize deuterated products that contain deuterated analogs of the selected non-deuterated compound . 75 under the agreement , we received a non-refundable , upfront payment of $ 35.0 million . in addition , we are eligible to earn up to $ 23.0 million in development milestone payments , including $ 8.0 million related to the completion of phase 1 clinical trials , up to $ 247.5 million in regulatory milestone payments and up to $ 50.0 million in sales-based milestone payments related to products within the initial program . if celgene exercises its rights with respect to either of the two additional license programs , we will receive a license exercise fee for the applicable program of $ 30.0 million and will also be eligible to earn up to $ 23.0 million in development milestone payments and up to $ 247.5 million in regulatory milestone payments for that program . additionally , with respect to one of the additional license programs we are eligible to receive up to $ 100.0 million in sales-based milestone payments based on net sales of products , and with respect to the other additional license program we are eligible to receive up to $ 50.0 million in sales-based milestone payments based on net sales of products . if celgene exercises its option with respect to the option program in respect of a compound to be identified at a later time , we will receive an option exercise fee of $ 10.0 million and will be eligible to earn up to $ 23.0 million in development milestone payments and up to $ 247.5 million in regulatory milestone payments . in addition , with respect to each program , celgene is required to pay us royalties on worldwide net sales of each licensed product at defined percentages ranging from the mid-single digits to low double digits below 20 % . the royalty term for each licensed product in each country is the period commencing with first commercial sale of the applicable licensed product in the applicable country and ending on the latest of expiration of specified patent coverage , expiration of regulatory exclusivity or 10 years following commercial launch . the royalty rate is reduced on a country-by-country basis during any period within the royalty term when there is no patent claim or regulatory exclusivity covering the licensed product in the particular country . under the agreement , we are responsible for conducting and funding research and development activities for the initial program at our own expense pursuant to mutually agreed-upon development plans . these activities consist of the completion of single and multiple ascending dose phase 1 clinical trials and any mutually agreed upon additional phase 1 clinical trials . if celgene exercises its rights with respect to any additional program and pays us the applicable exercise fee , we are responsible for conducting research and development activities at our own expense pursuant to mutually agreed upon development plans until the completion of the first phase 1 clinical trial , which will be defined in each development plan on a program-by-program basis . in addition , if celgene exercises its rights with respect to the option program and pays us the applicable exercise fee , we are responsible for seeking to generate a deuterated compound for clinical development in the selected option program at our own expense . avanir . in february 2012 , we entered into a development and license agreement with avanir under which we granted avanir an exclusive worldwide license to develop , manufacture and commercialize deuterated dextromethorphan containing products . subsequent to our agreement , avanir was acquired by otsuka pharmaceutical co. , ltd. and it is now a wholly owned subsidiary of otsuka america , inc. avanir is developing avp-786 , which is a combination of a deuterated dextromethorphan analog and an ultra-low dose of quinidine , for the treatment of neurologic and psychiatric disorders . under the agreement , we received a non-refundable upfront payment of $ 2.0 million , a milestone payment of $ 2.0 million in 2013 , and a milestone payment of $ 2.0 million in 2014. we are also eligible to earn , with respect to licensed products comprising a combination of deuterated dextromethorphan and quinidine , a $ 2.0 million milestone payment related to dosing in a phase 3 clinical trial for avp-786 , up to $ 37.0 million in regulatory and commercial launch milestone payments and up to $ 125.0 million in sales-based milestone payments . in addition , we are eligible for higher development milestones , up to an additional $ 43.0 million , for licensed products that do not require quinidine . avanir is currently developing deuterated dextromethorphan only in combination with quinidine . avanir also is required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20 % on worldwide net sales of licensed products . the royalty term for each licensed product in each country is the period commencing with first commercial sale of the applicable licensed product in the applicable country and ending on the later of expiration of specified patent coverage or 10 years following commercial launch .

results of operations comparison of the years ended december 31 , 2014 and 2013 the following table summarizes our results of operations for the years ended december 31 , 2014 and 2013 , together with the changes in those items in dollars . replace_table_token_6_th revenue revenue was $ 8.6 million for the year ended december 31 , 2014 , compared to $ 25.4 million for the year ended december 31 , 2013 , a decrease of $ 16.8 million . the decrease in revenue was primarily due to license revenue recognized during the year ended december 31 , 2013 of $ 17.0 million in connection with the initial license deliverable under our collaboration agreement with celgene , partially offset by an increase of $ 2.4 million recognized for services performed under our celgene agreement during the year ended december 31 , 2014. the increase in services performed during the year ended december 31 , 2014 was primarily attributable to the initiation of a single ascending dose phase 1 clinical trial of ctp-730 during the year ended december 31 , 2014. additionally , revenue recognized under our jazz pharmaceuticals collaboration decreased by $ 2.2 million , primarily as a result of the $ 3.7 million recognized for the license deliverable during the year ended december 31 , 2013 , partially offset by a $ 1.5 million increase in revenue recognized during the year ended december 31 , 2014 for services performed under our jazz pharmaceuticals agreement .

also , as a result of the merger , each outstanding share of common stock , story_separator_special_tag the following discussion and analysis of financial condition and results of operations should be read in conjunction with `` item 6. selected financial data '' and the audited consolidated financial statements and notes to consolidated financial statements included elsewhere in this annual report on form 10-k and the information included in our other filings with the sec . this discussion includes forward-looking statements within the meaning of section 27a of the securities act and section 21e of the exchange act . see `` cautionary note regarding forward-looking statements '' above . overview gca is dedicated to providing integrated gaming payments solutions , video and mechanical reel gaming content and technology solutions , as well as compliance and efficiency software . the company 's payments business provides : ( a ) access to cash at gaming facilities via automated teller machine ( `` atm '' ) cash withdrawals , credit card cash access transactions , point-of-sale ( `` pos '' ) debit card transactions , and check verification and warranty services ; ( b ) fully integrated gaming industry kiosks that provide cash access and related services ; ( c ) products and services that improve credit decision making , automate cashier operations and enhance patron marketing activities for gaming establishments ; ( d ) compliance , audit and data solutions ; and , ( e ) online payment processing solutions for gaming operators in states that offer intra-state , internet-based gaming and lottery activities . the company 's games business , under the multimedia games brand , provides : ( a ) comprehensive content , electronic gaming units and systems for native american and commercial casinos , including the award-winning tournevent® slot tournament solution ; and , ( b ) the central determinant system for the video lottery terminals ( `` vlts '' ) installed at racetracks in the state of new york . significant trends and developments impacting our business merger with multimedia games on december 19 , 2014 , we completed the merger and paid the total merger consideration of approximately $ 1.1 billion in cash . the net proceeds from the sale of the notes , together with borrowings under the credit facilities and cash on hand , were used to fund the total merger consideration . the merger is accounted for using the acquisition method of accounting with holdings identified as the acquirer . under the acquisition method of accounting , holdings recorded all assets acquired and liabilities assumed at their respective acquisition date fair values . through december 31 , 2014 , we expensed approximately $ 10.7 million of costs related to the merger for financial advisory services , financing related fees , accounting and legal fees and other transaction-related expenses , all of which are included in the consolidated statements of income and comprehensive income within operating expenses . these costs do not include any costs related to additional site consolidation or rationalization that we might consider following the closing of the merger . other trends and developments our strategic planning and forecasting processes include the consideration of economic and industry-wide trends that may impact our payments and games businesses . we have identified the more material positive and negative trends affecting our business as the following : gaming industry activity in north america remained relatively flat in 2014. the north american gaming industry also reported a year-over-year decline in the purchase of egms in 2014 and visibility into casino operator capital allocation trends for replacement units continues to be limited . 45 there continues to be a migration from the use of traditional paper checks and cash to electronic payments which may impact the type of cash access used by our customers . the credit markets in the united states and around the world are volatile and unpredictable . we face increased competition from smaller competitors in the gaming cash access market and face additional competition from larger gaming equipment manufacturers and systems providers . this increased competition has resulted in pricing pressure for both our payments and games businesses . there is increasing governmental oversight related to the cost of transaction processing and related fees to the consumer . we expect the financial services and payments industry to respond to these legislative acts by changing other fees and costs , which may negatively impact the payments business in the future . casino operators continue to try to broaden their appeal by focusing on investments in the addition of non-gaming amenities to their facilities , which could impact casino operator 's capital allocation . factors affecting comparability our consolidated financial statements included in this report that present our financial condition and results of operations reflect the following transactions and events : in december 2014 , we acquired all of the outstanding capital stock of multimedia games , a gaming manufacturer and supplier to the gaming industry . the results contributed by the multimedia games business from the date of consummation on december 19 , 2014 to december 31 , 2014 are reflected in our games segment and consolidated financial statements . we incurred significant acquisition-related expenses , which are reflected in operating expenses for the year ended december 31 , 2014. in addition , amortization expense increased due to the purchase price allocation , which included definite-lived intangible assets with relatively short amortization periods . in december 2014 , to effect the merger , we entered into the credit facilities and issued the notes and we used a portion of these proceeds to repay the outstanding amounts owed under prior credit facilities of $ 210.0 million and $ 35.0 million for gca and multimedia games , respectively ( the `` prior credit facilities '' ) . story_separator_special_tag story_separator_special_tag align= '' center '' > replace_table_token_6_th * rounding may cause variances . total revenues total revenues decreased by $ 2.0 million , or less than 1 % , to $ 582.4 million for the year ended december 31 , 2013 , as compared to the prior year . this was due to lower atm and check services 50 revenues , partially offset by higher kiosk sales and an increase in cash advance revenues for the year ended december 31 , 2013 , as compared to the prior year . cash advance revenues increased by $ 3.6 million , or 2 % , to $ 231.1 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to higher international cash advance revenues for the year ended december 31 , 2013 , as compared to the prior year . atm revenues decreased by $ 17.1 million , or 6 % , to $ 286.0 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to lost business and lower transaction volume for the year ended december 31 , 2013 , as compared to the prior year . check services revenues decreased by $ 3.8 million , or 15 % , to $ 21.6 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to lost business and a decrease in the number of check services transactions processed for the year ended december 31 , 2013 , as compared to the prior year . other revenues increased by $ 15.2 million , or 54 % , to $ 43.7 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to increased kiosk sales for the year ended december 31 , 2013 , as compared to the prior year . costs and expenses cost of revenues ( exclusive of depreciation and amortization ) increased by $ 3.7 million , or 1 % , to $ 439.8 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to increased commissions paid to our customers for new and renewed cash access services as well as costs associated with the increase in kiosk sales . operating expenses increased by $ 0.8 million , or 1 % , to $ 76.6 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to higher payroll and related expenses and occupancy related expenses , partially offset by a decrease in non-cash stock compensation expense for the year ended december 31 , 2013 , as compared to the prior year . depreciation expenses increased by $ 0.5 million , or 7 % , to $ 7.4 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to higher charges as additional fixed assets were placed into service for the year ended december 31 , 2013 , as compared to the prior year . amortization expenses decreased by $ 0.2 million , or 2 % , to $ 9.6 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to certain capitalized costs that were fully amortized for the year ended december 31 , 2013 , as compared to the prior year . primarily as a result of the factors described above , operating income decreased by $ 6.8 million , or 12 % , to $ 49.2 million for the year ended december 31 , 2013 , as compared to the prior year . the operating margin decreased to 8 % for the year ended december 31 , 2013 from 10 % for the prior year . interest expense , net of interest income , decreased by $ 5.3 million , or 34 % , to $ 10.3 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to a $ 3.6 million reduction in interest charges due to the lower outstanding debt balance and an amendment to our credit facility in late may 2013 , which reduced the interest rate from 7 % to 4 % ; a $ 0.9 million reduction in interest charges related to a lower average outstanding balance on the vault cash supplied by wells fargo and a slightly lower average cash usage rate ; and a decrease in the interest charge associated with the change in fair value of the interest rate cap of approximately $ 0.8 million . income tax expense decreased by $ 0.3 million , or 2 % , to $ 14.5 million for the year ended december 31 , 2013 , as compared to the prior year . this was primarily due to the decrease in income from operations before income tax expense of $ 1.6 million . the provision for income tax reflected an effective income tax rate of 37.3 % for the year ended december 31 , 2013 , which was greater than the statutory federal rate of 51 35.0 % due in part to state taxes and the non-cash compensation expenses related to stock options . the provision for income tax reflected an effective income tax rate of 36.5 % for the prior year , which was greater than the statutory federal rate of 35.0 % due in part to state taxes and the non-cash compensation expenses related to stock options . primarily as a result of the foregoing , net income decreased by $ 1.3 million , or 5 % , to $ 24.4 million for the year ended december 31 , 2013 , as compared to the prior year .

results of operations year ended december 31 , 2014 compared to the year ended december 31 , 2013 ( amounts in thousands ) replace_table_token_5_th * rounding may cause variances . total revenues total revenues increased by $ 10.6 million , or 2 % , to $ 593.1 million for the year ended december 31 , 2014 , as compared to the prior year . this was primarily due to the revenues generated as a result of the merger and higher cash advance and other revenues , partially offset by lower atm and check services revenues . 48 cash advance revenues increased by $ 2.8 million , or 1 % , to $ 234.0 million for the year ended december 31 , 2014 , as compared to the prior year . this was primarily due to higher international revenues together with an increase in our domestic revenues ; combined with a greater dollar volume processed per transaction . atm revenues decreased by $ 4.6 million , or 2 % , to $ 281.5 million for the year ended december 31 , 2014 , as compared to the prior year . this was primarily due to lost business and lower transaction volume . check services revenues decreased by $ 0.5 million , or 2 % , to $ 21.1 million for the year ended december 31 , 2014 , as compared to the prior year . this was primarily due to lost business and a decrease in the number of check services transactions processed . games revenues were generated as a result of the merger . other revenues increased by $ 5.5 million , or 13 % , to $ 49.1 million for the year ended december 31 , 2014 , as compared to the prior year . this was primarily due to the results from our compliance , audit and data services offerings .

this third amendment was approved by the compensation committee and the board as a whole ( with mr. farkas recusing himself from the vote regarding the third amendment ) . the third amendment declared the first amendment and second amendment null and void . the story_separator_special_tag the following discussion and analysis of the results of operations and financial condition for the years ended december 31 , 2017 and 2016 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this annual report . our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties , such as our plans , objectives , expectations and intentions . actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors . see “ forward-looking statements. ” overview we are a leading owner , operator , and provider of electric vehicle ( “ ev ” ) charging equipment and networked ev charging services . we offer both residential and commercial ev charging equipment , enabling ev drivers to easily recharge at various location types . our principal line of products and services is our blink ev charging network ( the “ blink network ” ) and ev charging equipment ( also known as electric vehicle supply equipment ) and ev related services . our blink network is proprietary cloud-based software that operates , maintains , and tracks all of the blink ev charging stations and the associated charging data . the blink network provides property owners , managers , and parking companies , who we refer to as our property partners , with cloud-based services that enable the remote monitoring and management of ev charging stations , payment processing , and provide ev drivers with vital station information including station location , availability , and applicable fees . we offer our property partners a flexible range of business models for ev charging equipment and services . in our comprehensive and turnkey business model , we own and operate the ev charging equipment , manage the installation , maintenance , and related services , and share a portion of the ev charging revenue with the property owner . alternatively , property partners may share in the equipment and installation expenses , with blink operating and managing the ev charging stations and providing connectivity to the blink network . for property partners interested in purchasing and owning ev charging stations that they manage , we can also provide ev charging hardware , site recommendations , connectivity to the blink network , and service and maintenance services . we have strategic partnerships across numerous transit/destination locations , including airports , auto dealers , healthcare/medical , hotels , mixed-use , municipal locations , multifamily residential and condos , parks and recreation areas , parking lots , religious institutions , restaurants , retailers , schools and universities , stadiums , supermarkets , transportation hubs , and workplace locations . as of april 11 , 2018 , we have approximately 14,165 charging stations deployed of which 4,690 are level 2 commercial charging units , 113 dc fast charging ev chargers and 1,976 residential charging units in service on the blink network . additionally , we currently have approximately 436 level 2 commercial charging units on other networks and there are also approximately an additional 6,950 non-networked , residential blink ev charging stations . the non-networked , residential blink ev charging stations are all partner owned . as reflected in our consolidated financial statements as of december 31 , 2017 , we had had a cash balance , a working capital deficiency and an accumulated deficit of $ 185,151 , $ 34,762,130 , and $ 156,435,278 respectively . during the years ended december 31 , 2017 and 2016 , we incurred net losses of $ 75,363,496 and $ 7,699,127 , respectively . the company has not yet achieved profitability . subsequent to december 31 , 2017 , the company raised aggregate net proceeds of approximately $ 14.1 million in connection with its public offering and exchanged aggregate liabilities of approximately $ 26.0 million for equity . story_separator_special_tag style= '' font-family : times new roman , times , serif ; font-size : 10pt '' > other operating expenses consist primarily of rent and second generation product development expenses . other operating expenses decreased by $ 546,853 , or 38 % , from $ 1,451,683 for the year ended december 31 , 2016 to $ 904,830 for the year ended december 31 , 2017. the decrease was primarily attributable to a decrease in product development costs related to second generation charging stations of $ 338,979 to $ 162,190 during the year ended december 31 , 2017 from $ 501,168 during the year ended december 31 , 2016. additionally , there was a decrease in rent expense of $ 135,514 to $ 105,246 during the year ended december 31 , 2017 from $ 240,760 during the year ended december 31 , 2016. the decrease in rent was due to our move to smaller spaces . general and administrative expenses decreased by $ 112,029 , or 8 % , from $ 1,393,954 for the year ended december 31 , 2016 to $ 1,281,925 for the year ended december 31 , 2017. the decrease was primarily due to a decrease in accounting and consulting fees of $ 312,987 to $ 331,040 during the year ended december 31 , 2017 compared to $ 644,027 during the year ended december 31 , 2016. during 2016 , there was significant accounting work performed in connection with our efforts to get current in our filings with the sec . this was partially offset by an increase in legal fees of $ 303,954 to $ 699,143 during the year ended december 31 , 2017 compared to $ 395,188 during the year ended december 31 , 2016. during the year ended december 31 , 2017 , we incurred lease termination costs of $ 300,000 which represents the fair value of our remaining under our lease agreement . story_separator_special_tag thereafter , the we will need to raise further capital , through the sale of additional equity or debt securities , or other debt instruments to support our future operations . our operating needs include the planned costs to operate our business , including amounts required to fund working capital and capital expenditures . our future capital requirements and the adequacy of our available funds will depend on many factors , including our ability to successfully commercialize our products and services , competing technological and market developments , and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings . there is also no assurance that the amount of funds we might raise will enable us to complete our development initiatives or attain profitable operations . if we are unable to obtain additional financing on a timely basis , we may have to curtail our development , marketing and promotional activities , which would have a material adverse effect on our business , financial condition and results of operations , and ultimately , we could be forced to discontinue our operations and liquidate . 26 since inception , our operations have primarily been funded through proceeds from equity and debt financings . although management believes that we have access to capital resources , there are currently no commitments in place for new financing at this time , except as described below under the heading recent developments , and there is no assurance that we will be able to obtain funds on commercially acceptable terms , if at all . recent developments resignation of andy kinard as president on march 19 , 2018 , andy kinard resigned as the company 's president , effective immediately . mr. kinard remains a non-executive employee of the company . the company has not yet appointed a new president . public offering and nasdaq uplisting on february 16 , 2018 , we closed our underwritten public offering ( the “ public offering ” ) of an aggregate 4,353,000 shares of our common stock and warrants to purchase 8,706,000 shares of common stock at a combined public offering price of $ 4.25 per unit comprised of one share and two warrants . the public offering resulted in approximately $ 18.5 million of gross proceeds , less underwriting discounts and commissions and other offering expenses of approximately $ 4.4 million , a portion of which is included within deferred public offering costs on the balance sheet as of december 31 , 2017 , for aggregate net proceeds of approximately $ 14.1 million . the common stock and warrants were approved to list on the nasdaq capital market under the symbols blnk and blnkw , respectively , and began trading on february 14 , 2018. each warrant is exercisable for five years from issuance and has an exercise price equal to $ 4.25 per share . we granted the public offering 's underwriters a 45-day option to purchase up to an additional 652,950 shares of common stock and or warrants to purchase 1,305,900 shares of common stock to cover over-allotments , if any . in connection with the closing of the public offering , the underwriters partially exercised their over-allotment option and purchased an additional 406,956 warrants . the 45-day option expired on april 2 , 2018. securities purchase agreement with jmj financial on october 7 , 2016 , we executed a promissory note in favor of jmj in the amount up to $ 3,725,000 bearing interest on the unpaid balance at the rate of six percent . the initial amount borrowed under the promissory note was $ 500,000 , with the remaining amounts permitted to be borrowed under the promissory note being subject to us achieving certain milestones . we initially issued one warrant to jmj to purchase a total of 14,286 shares of our common stock at an exercise price equal to the lesser of : ( i ) 80 % of the common stock price of the public offering , ( ii ) $ 35.00 per share , ( iii ) 80 % of the unit price of the public offering ( if applicable ) , ( iv ) the exercise price of any warrants issued in the public offering , or ( v ) the lowest conversion price , exercise price , or exchange price , of any security issued by us that is outstanding on october 13 , 2016. the initial amount borrowed under the promissory note was $ 500,000 , with the remaining amounts permitted to be borrowed under the promissory note being subject to us achieving certain milestones . with the achievement of certain milestones in november 2016 ( the filing with the sec of a preliminary information statement on schedule 14c regarding the reverse stock split ) , an additional advance of $ 500,000 under the promissory note occurred on november 28 , 2016. another warrant to purchase 14,286 shares of our common stock was issued as of november 28 , 2016. with the achievement of certain milestones in february 2017 ( the filing with the sec of a revised preliminary information statement and a definitive information statement , each on schedule 14c regarding the reverse stock split ) , additional advances of $ 225,100 and $ 300,000 under the promissory note occurred on february 10 and february 27 , respectively . thus , two more warrants to purchase the company 's common stock were issued , one for 6,431 shares and the other for 8,571 shares , respectively . all advances after february 28 , 2017 were at the discretion of jmj without regard to any specific milestones occurring . additional advances of $ 250,000 and $ 30,000 under the promissory note occurred on march 14 , 2017 and march 24 , 2017 , respectively , and two more warrants to purchase the company 's common stock were issued , one for 7,143 shares and the other for 857 shares .

consolidated results of operations year ended december 31 , 2017 compared with year ended december 31 , 2016 revenues total revenue for the year ended december 31 , 2017 was $ 2,500,357 compared to $ 3,326,021 , a decline of $ 825,664 , or 25 % . the decrease is primarily attributed to a decrease in revenue from product sales of $ 631,853 , or 56 % , to $ 495,086 for the year ended december 31 , 2017 from $ 1,126,939 for the year ended december 31 , 2016. the decrease is due to a lower volume of residential and commercial units sold in 2017. additionally , the decline is attributable to a $ 211,767 decline in grants and rebates revenue that decreased to $ 120,905 , or 64 % for the year ended december 31 , 2017 compared to $ 332,672 for the year ended december 31 , 2016. grants and rebates relating to equipment and the related installation are deferred and amortized in a manner consistent with the depreciation expense of the related assets over their useful lives . the ability to secure grant revenues is typically unpredictable and , therefore , uncertain . we have not recently received any new grants and , as a result , the 2017 revenue is related to the amortization of previous grants . 24 charging service revenue company-owned charging stations was $ 1,186,710 for the year ended december 31 , 2017 compared to $ 1,144,016 for the year ended december 31 , 2016 , a slight increase of $ 42,694 , or 4 % . total revenue from warranty revenue and network fees was $ 359,216 for the year ended december 31 , 2017 , compared to $ 380,884 the year ended december 31 , 2016 a decrease of $ 21,668 , or 6 % .

to ensure securities are appropriately classified in the fair value hierarchy , we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity , either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality , duration , yield and structure that were recently traded . a variety of inputs are utilized by the independent pricing sources including benchmark yields , reported story_separator_special_tag the following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included below in item 8 of this report and the risk factors included above in item 1a of this report . in addition , investors should review the `` cautionary note regarding forward looking statements `` above . overview we provide private mi through our wholly owned insurance subsidiaries nmic and re one . nmic and re one are domiciled in wisconsin and principally regulated by the wisconsin oci . nmic is our primary insurance subsidiary , and is approved as an mi provider by the gses and is licensed to write coverage in all 50 states and d.c. re one provides reinsurance to nmic on insured loans with coverage levels in excess of 25 % after giving effect to third-party reinsurance . our subsidiary , nmis , provides outsourced loan review services to mortgage loan originators . mi protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage . mi plays a critical role in the u.s. housing market by mitigating mortgage credit risk and facilitating the secondary market sale of high-ltv ( i.e . above 80 % ) residential loans to the gses , who are otherwise restricted by their charters from purchasing or guaranteeing high-ltv mortgages that are not covered by certain credit protections . such credit protection and secondary market sales allow lenders to increase their capacity for mortgage commitments and expand financing access to existing and prospective homeowners . nmih , a delaware corporation , was incorporated in may 2011 , and we began start-up operations in 2012 and wrote our first mi policy in 2013. since formation , we have sought to establish customer relationships with a broad group of mortgage lenders and build a diversified , high-quality insured portfolio . as of december 31 , 2018 , we had master policies with 1,374 customers , including national and regional mortgage banks , money center banks , credit unions , community banks , builder-owned mortgage lenders , internet-sourced lenders and other non-bank lenders . we had total iif of $ 71.5 billion and gross rif of $ 17.2 billion as of december 31 , 2018 , compared to total iif of $ 51.7 billion and gross rif of $ 11.9 billion as of december 31 , 2017 , and total iif of $ 35.8 billion and gross rif of $ 7.9 billion as of december 31 , 2016 . included in our total iif as of december 31 , 2018 , 2017 , and 2016 was $ 68.6 billion , $ 48.5 billion and $ 32.2 billion of primary iif , respectively . as of december 31 , 2018 , our gross primary rif was $ 17.1 billion , compared to $ 11.8 billion and $ 7.8 billion as of december 31 , 2017 and 2016 , respectively . for the year ended december 31 , 2018 , we generated niw of $ 27.3 billion , compared to $ 21.6 billion and $ 21.2 billion for the years ended december 31 , 2017 and 2016 , respectively . as of december 31 , 2018 , we had 304 full-time employees . we believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-quality iif traces to our founding principles , whereby we aim to help qualified individuals achieve the dream of homeownership , ensure that we remain a strong and credible counter-party , deliver a unique customer service experience , establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure , and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders . our strategy is to continue to build on our position in the private mi market , expand our customer base and grow our insured portfolio of high-quality residential loans by focusing on long-term customer relationships , disciplined and proactive risk selection and pricing , fair and transparent claims payment practices , responsive customer service , financial strength and profitability . our common stock trades on the nasdaq under the symbol `` nmih . '' we discuss below our results of operations for the periods presented , as well as the conditions and trends that have impacted or are expected to impact our business and results , including customer development , new insurance writings , the composition of our insurance portfolio , reinsurance among other factors . 47 conditions and trends impacting our business customer development we have important relationships with customers across all categories and allocation profiles , including national accounts and regional accounts , and centralized and decentralized lenders . our sales and marketing efforts are broadly focused on expanding our presence with existing customers and activating new customer relationships . we consider an activation to be the point at which we have signed a master policy , established it connectivity and generated a first application or first niw from a customer . during the year ended december 31 , 2018 , we activated 121 lenders , compared to 127 and 173 for the years ended december 31 , 2017 and december 31 , 2016 , respectively . we also continued to expand our business with existing customers , deepening our existing relationships and capturing what we believe to be an increasing portion of their annual mi volume . story_separator_special_tag by contrast , if monthly premium loans are repaid earlier than anticipated , we do not earn any more premium with respect to those loans and , unless we replace the repaid monthly premium loan with a new loan at the same premium rate or higher , our profitability is likely to decline . effect of reinsurance on our results we utilize third-party reinsurance to actively manage our risk , ensure pmiers compliance and support the growth of our business . we currently have both quota share and excess-of-loss reinsurance agreements in place , which impact our results of operations and regulatory capital and pmiers asset positions . under a quota share reinsurance agreement , the reinsurer receives a premium in exchange for covering an agreed-upon portion of incurred losses . such a quota share arrangement reduces premiums written and earned and also reduces rif , providing capital relief to the ceding insurance company and reducing incurred claims in accordance with the terms of the reinsurance agreement . in addition , reinsurers typically pay ceding commissions as part of quota share transactions , which offset the ceding company 's acquisition and underwriting expenses . certain quota share agreements include profit commissions that are earned based on loss performance and serve to reduce ceded premiums . under an excess-of-loss agreement , the ceding insurer is typically responsible for losses up to an agreed-upon threshold and the reinsurer then provides coverage in excess of such threshold up to a maximum agreed-upon limit . in general , there are no ceding commissions under excess-of-loss reinsurance agreements . we expect to continue to evaluate reinsurance opportunities in the normal course of business . quota share reinsurance effective september 1 , 2016 , nmic entered into the 2016 qsr with a panel of third-party reinsurers . under the terms of the 2016 qsr transaction , nmic ceded premiums written related to ( 1 ) 100 % of the risk under our pool agreement with fannie mae , ( 2 ) 25 % of the existing risk on eligible policies written as of august 31 , 2016 and ( 3 ) 25 % of the risk on eligible policies written between september 1 , 2016 and december 31 , 2017 , in exchange for reimbursement of ceded claims and claims expenses on covered policies , a 20 % ceding commission , and a profit commission of up to 60 % that varies directly and inversely with ceded claims . effective january 1 , 2018 , nmic entered into the 2018 qsr transaction with a panel of third-party reinsurers . under the 2018 qsr transaction , nmic cedes premiums earned related to 25 % of risk on eligible policies written in 2018 and will cede premiums earned related to 20 % of risk on eligible policies written in 2019 , in exchange for reimbursement of ceded claims and claims expenses on covered policies , a 20 % ceding commission , and a profit commission of up to 61 % that varies directly and inversely with ceded claims . excess-of-loss reinsurance in may 2017 , nmic secured $ 211.3 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies written from 2013 through december 31 , 2016 , through a mortgage insurance-linked notes offering by oaktown re . the reinsurance coverage amount under the terms of the 2017 iln transaction decreases from $ 211.3 million at inception over a ten-year period as the underlying covered mortgages are amortized or repaid , and or the mortgage insurance coverage is canceled and was $ 131.1 million as of december 31 , 2018. for the reinsurance coverage period , nmic retains the first layer of $ 126.8 million of aggregate losses , of which $ 125.2 million remained as of december 31 , 2018 , and oaktown re then provides second layer coverage up to the outstanding reinsurance coverage amount . nmic then retains losses in excess of the outstanding reinsurance coverage amount . in july 2018 , nmic secured $ 264.5 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies written from january 1 , 2017 through may 31 , 2018 , through a mortgage insurance-linked notes offering by oaktown re ii . the reinsurance coverage amount under the terms of the 2018 iln transaction decreases from $ 264.5 million at inception over a ten-year period as the underlying covered mortgages are amortized or repaid , and or the mortgage insurance coverage 49 is canceled . the outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained and was $ 264.5 million as of december 31 , 2018. for the reinsurance coverage period , nmic retains the first layer of $ 125.3 million of aggregate losses , of which $ 125.3 million remained at december 31 , 2018 , and oaktown re ii then provides second layer coverage up to the outstanding reinsurance coverage amount . nmic then retains losses in excess of the outstanding reinsurance coverage amount . see , item 8 , `` financial statements and supplementary data - notes to consolidated financial statements - note 6 , reinsurance `` for further discussion of these third-party reinsurance arrangements . portfolio data the following table presents primary and pool niw and iif as of the dates and for the periods indicated . unless otherwise noted , the tables below do not include the effects of our third-party reinsurance arrangements described above . replace_table_token_3_th for the year ended december 31 , 2018 , primary niw increased 26 % , compared to the year ended december 31 , 2017 , due to growth in our monthly premium policy volume tied to increased penetration of existing customer accounts and new customer account activations , offset slightly by a reduction in our single premium policy production .

consolidated results of operations replace_table_token_23_th ( 1 ) loss ratio is calculated by dividing the provision for insurance claims and claims expenses by net premiums earned . ( 2 ) expense ratio is calculated by dividing other underwriting and operating expenses by net premiums earned . revenues for the year ended december 31 , 2018 , net premiums earned totaled $ 251.2 million compared to $ 165.7 million for the year ended december 31 , 2017 and $ 110.5 million for the year ended december 31 , 2016 . the increase of net premiums earned of $ 85.5 million in 2018 was primarily due to the growth of our iif and increased monthly policy production , partially offset by a decrease in earnings from cancellations and increases in cessions under the qsr transactions and iln transactions . the $ 55.2 million increase in net premiums earned in 2017 was primarily due to the growth of our iif and increased monthly policy production , partially offset by a decrease in earnings from cancellations and the impact of cessions under the 2017 iln transaction and 2016 qsr transaction . for the year ended december 31 , 2018 , net investment income was $ 23.5 million compared to $ 16.3 million for the year ended december 31 , 2017 and $ 13.8 million for the year ended december 31 , 2016 . the increase in both periods was due to an increase in the size of and improved yields on our total investment portfolio . 61 expenses we recognize insurance claims and claims expenses in connection with the loss experience of our insured portfolio and incur other underwriting and operating expenses , including employee compensation and benefits , policy acquisition costs , and technology , professional services and facilities expenses , in connection with the development and operation of our business .

note 3 : property and equipment property and equipment consist of the following for the fiscal years ended : replace_table_token_27_th in fiscal 2015 , we purchased land in florence , kentucky and little rock , arkansas for future store sites , which are expected to open in the first half of fiscal 2016. the combined purchase price of $ story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes included herein . unless otherwise specified , the meanings of all defined terms in “management 's discussion and analysis of financial condition and results of operations ( “md & a” ) are consistent with the meanings of such terms as defined in the notes to consolidated financial statements . this discussion contains statements that are , or may be deemed to be , “forward-looking statements” within the meaning of section 27a of the securities act and section 21e of the exchange act . these forward-looking statements can be identified by the use of forward-looking terminology , including the terms “believes , ” “estimates , ” “anticipates , ” “expects , ” “intends , ” “may , ” “will” or “should” or , in each case , their negative or other variations or comparable terminology . these forward-looking statements include all matters that are not historical facts . they appear in a number of places throughout this report and include statements regarding our intentions , beliefs or current expectations concerning , among other things , our results of operations , financial condition , liquidity , prospects , growth , strategies and the industry in which we operate . 36 by their nature , forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future . forward-looking statements are not guarantees of future performance and our actual results of operations , financial condition and liquidity , and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this annual report as a result of various factors , including those set forth in item 1a “risk factors” . in addition , even if our results of operations , financial condition and liquidity , and the development of the industry in which we operate are consistent with the forward-looking statements contained in this report , those results or developments may not be indicative of results or developments in subsequent periods . general we are a leading owner and operator of high-volume venues in north america that combine dining and entertainment for both adults and families . founded in 1982 , the core of our concept is to offer our customers the opportunity to “eat drink play and watch” all in one location . eat and drink are offered through a full menu of “fun-american gourmet” entrées and appetizers and a full selection of non-alcoholic and alcoholic beverages . our play and watch offerings provide an extensive assortment of entertainment attractions centered around playing games and watching live sports and other televised events . our customer mix skews moderately to males , primarily between the ages of 21 and 39 , and we believe we also serve as an attractive venue for families with children and teenagers . we believe we appeal to a diverse customer base by providing a highly customizable experience in a dynamic and fun setting . our stores average 43,000 square feet , range in size between 16,000 and 66,000 square feet and are open seven days a week , with hours of operation typically from 11:30 a.m. to midnight on sunday through thursday and 11:30 a.m. to 2:00 a.m. on friday and saturday . our growth strategies and outlook our growth is based primarily on the following strategies : pursue disciplined new store growth ; grow our comparable stores sales ; and expand the dave & buster 's brand internationally . for further information about our growth strategies and outlook , see item 1 “business – our growth strategies” . key events in october 2014 , we amended and restated our certificate of incorporation to increase our authorized share count to 450,000,000 shares of stock , including 400,000,000 shares of common stock and 50,000,000 shares of preferred stock , each with a par value $ 0.01 per share and to split our common stock 224.9835679 for 1. unless otherwise noted herein , historic share data has been adjusted to give effect to the stock split . in october 2014 , we completed our initial public offering ( “ipo” ) of 6,764,705 shares of common stock ( including the full exercise of the underwriters ' overallotment option to purchase an additional 882,352 shares ) at a price of $ 16.00 per share . 37 during fiscal 2015 , we completed three follow-on offerings of our common stock . all shares were offered by our selling shareholders and , in each case , included the full exercise of the underwriters ' overallotment option . the timing and share activity for each of these offerings is summarized below : replace_table_token_6_th ( 1 ) we utilized 248,412 treasury shares in partial satisfaction of the shares provided by option exercise in the may 2015 offering . in december 2015 , the oak hill funds sold 2,500,000 shares of common stock to the public . as of january 31 , 2016 , the oak hill funds owned approximately 18 % of our outstanding stock and certain members of our board of directors and our management owned approximately 1 % of our outstanding stock . the remaining 81 % was owned by the public . during fiscal 2015 , we entered into a new senior secured credit facility that provides a $ 150,000 term loan facility and a $ 350,000 revolving credit facility ( the “credit facility” ) . story_separator_special_tag we define “adjusted ebitda” as net income ( loss ) , plus interest expense net , loss on debt retirement , provision ( benefit ) for income taxes , depreciation and amortization expense , loss on asset disposal , share-based compensation , currency transaction ( gain ) loss , pre-opening costs , reimbursement of affiliate and other expenses , change in deferred amusement revenue and ticket liability estimations , transaction costs and other . “adjusted ebitda margin” is defined as adjusted ebitda divided by total revenues . adjusted ebitda is presented because we believe that it provides useful information to investors regarding our operating performance and our capacity to incur and service debt and fund capital expenditures . we believe that adjusted ebitda is used by many investors , analysts and rating agencies as a measure of performance . in addition , adjusted ebitda is approximately equal to “ebitda” as defined in our credit facility and our 39 presentation of adjusted ebitda is consistent with that reported to our lenders to allow for leverage-based assessments . by reporting adjusted ebitda , we provide a basis for comparison of our business operations between current , past and future periods by excluding items that we do not believe are indicative of our core operating performance . adjusted ebitda is a metric historically utilized to measure performance-based bonuses paid to our executive officers and certain managers . presentation of operating results we operate on a 52 or 53 week fiscal year that ends on the sunday after the saturday closest to january 31. each quarterly period has 13 weeks , except in a 53 week year when the fourth quarter has 14 weeks . fiscal 2015 , 2014 , and 2013 , which ended on january 31 , 2016 , february 1 , 2015 , february 2 , 2014 , respectively , each contained 52 weeks . all dollar amounts are presented in thousands , unless otherwise noted , except share and per share amounts . key line item descriptions revenues . total revenues consist of food and beverage revenues as well as amusement and other revenues . beverage revenues refer to alcoholic beverages . for the year ended january 31 , 2016 , we derived 31.6 % of our total revenue from food sales , 15.2 % from beverage sales , 52.4 % from amusement sales and 0.8 % from other sources . for the year ended february 1 , 2015 , we derived 32.5 % of our total revenue from food sales , 15.6 % from beverage sales , 51.1 % from amusement sales and 0.8 % from other sources . for the year ended february 2 , 2014 , we derived 33.6 % of our total revenue from food sales , 15.2 % from beverage sales , 50.4 % from amusement sales and 0.8 % from other sources . our revenue growth is primarily influenced by the number of new store openings and growth in comparable store revenues . comparable store revenue growth reflects the change in year-over-year revenue for the comparable store base and is an important measure of store performance . comparable store sales growth can be generated by increases in average dollars spent per customer and improvements in customer traffic . we continually monitor the success of current food and beverage items , the availability of new menu offerings , the menu price structure and our ability to adjust prices where competitively appropriate . with respect to the beverage component , we operate fully licensed facilities which offer full beverage service , including alcoholic beverages , throughout each store . our stores offer an extensive array of amusements and entertainment options , with typically over 150 redemption and simulation games . we also offer traditional pocket billiards and shuffleboard in many locations . redemption games offer our customers the opportunity to win tickets that can be redeemed for prizes in the win ! area , ranging from branded novelty items to high-end home electronics . our redemption games include basic games of skill , such as skeeball and basketball , as well as competitive racing , and individual electronic games of skill . we review the amount of game play on existing amusements in an effort to match amusements availability with customer preferences . we intend to continue to invest in new games as they become available and prove to be attractive to our customers . our unique venue allows us to provide our customers with value driven food and amusement combination offerings including our eat & play combo ( a promotion that provides a discounted power card in combination with select entrées ) , super charge power card offerings ( when purchasing or adding value to a power card , the customer is given the opportunity to add more chips to the power card at a lower cost per chip amount ) , half-price game play ( every wednesday , from open to close , we reduce the price of every game in the midway by one-half ) , and everyone 's a winner ( a limited-time offer providing a prize to every customer that purchases or adds value to a power card in the amount of $ 10 or more ) . we also offer various food and beverage discounts during key sports viewing times . in addition , from time to time we have limited time offers which allow our customers to play certain new games for free as a way to introduce those new games . 40 our d & b sports concept , currently incorporated in approximately 70 % of our store base , provides an attractive opportunity to market our broader platform to new and existing customers through a year-round calendar of programming and promotions tied to popular sporting events and sport-related activities . large television screens , comfortable seating , a full menu of food and beverages and artwork often featuring images of local sports teams and sports icons help create an exciting environment for watching sports programming .

results of operations the following table sets forth selected data in thousands of dollars and as a percentage of total revenues ( unless otherwise noted ) for the periods indicated . all information is derived from the accompanying consolidated statements of comprehensive income . replace_table_token_12_th ( 1 ) “comparable store sales” ( year-over-year comparison of stores operating at the end of the fiscal period and open at least 18 months as of the beginning of each of the fiscal years ) is a key performance indicator used within the industry and is indicative of acceptance of our initiatives as well as local economic and consumer trends . fiscal 2014 comparable stores exclude our bethesda location , which permanently closed on august 12 , 2014 . 49 ( 2 ) our fiscal 2014 store count excludes our bethesda location . our new store openings during the last two fiscal years were as follows : replace_table_token_13_th reconciliations of non-gaap financial measures—ebitda and adjusted ebitda the following table reconciles net income to ebitda and adjusted ebitda for the following years : replace_table_token_14_th ( 1 ) represents the net book value of assets ( less proceeds received ) disposed of during the period . primarily relates to assets replaced in ongoing operation of business . ( 2 ) represents the effect of foreign currency transaction losses related to our store in canada . ( 3 ) represents expenses incurred to reimburse our board of directors and certain non-recurring payments to management and compensation consultants . ( 4 ) primarily represents costs related to capital market transactions and store closure costs . ( 5 ) represents stock compensation expense under our 2010 stock incentive plan and 2014 stock incentive plan . ( 6 ) represents costs incurred prior to the opening of our new stores . ( 7 ) represents increases or ( decreases ) to accrued liabilities established for future amusement games play and the fulfillment of tickets won by customers on our redemption games .

we are actively evaluating strategic acquisitions and investment opportunities , both domestic and international , that meet our return-on-investment and other acquisition criteria . for a discussion of our investment strategy and risks involved , see `` risk factors—we are actively evaluating strategic investment and acquisition opportunities , which may affect our long-term growth prospects . '' we offer the following principal services : wireless . in the united states , we offer wholesale wireless voice and data roaming services to national , regional , local and selected international wireless carriers in rural markets located principally in the southwest and midwest . we also offer wireless voice and data services to retail customers in bermuda , guyana , the caribbean and smaller markets in the united states . wireline . our local telephone and data services include our operations in guyana and the mainland united states . we are the exclusive licensed provider of domestic wireline local and long-distance telephone services in guyana and international voice and data communications into and out of guyana . we also offer facilities-based integrated voice and data communications services to enterprise and residential customers in new england , primarily in vermont , and wholesale transport services in vermont and new york state . in addition , we offer wholesale long-distance voice services to telecommunications carriers . the following chart summarizes the operating activities of our principal subsidiaries , the segments in which we report our revenue and the markets we served as of december 31 , 2013 : services segment markets tradenames wireless u.s. wireless united states ( rural markets ) commnet , choice island wireless aruba , bermuda , turks and caicos , u.s. virgin islands mio , cellone , islandcom , choice international integrated telephony guyana cellink wireline international integrated telephony guyana gt & t , emagine u.s. wireline united states ( new england and new york state ) sovernet , ion , essextel we provide management , technical , financial , regulatory , and marketing services to our subsidiaries and typically receive a management fee equal to a percentage of their respective revenue . management fees from our subsidiaries are eliminated in consolidation . discontinued operations—sale of u.s. retail wireless business on september 20 , 2013 , the federal communications commission announced its approval of , and we completed , our previously announced proposed sale of our u.s. retail wireless business operated under the alltel name to at & t mobility llc for approximately $ 796.8 million in cash that included a sale price adjustment for the working capital of the business of $ 16.8 million ( the `` alltel sale '' ) . the operations of the alltel business , which were previously included in our u.s. wireless segment , have been classified as discontinued operations in all periods presented . the gain on the sale of the alltel business recognized during 2013 is also included in discontinued operations . unless indicated otherwise , the information in this management 's discussion and analysis relates only to our continuing operations . 32 stimulus grants we were awarded several federal stimulus grants in 2009 and 2010 by the u.s. government under provisions of the american recovery and reinvestment act of 2009 intended to stimulate the deployment of broadband infrastructure and services to rural , unserved and underserved areas . as of december 31 , 2013 , we have spent ( i ) $ 35.9 million in capital expenditures ( of which $ 27.5 million has been or will be funded by the federal stimulus grant ) in connection with our build of ten new segments of fiber-optic , middle-mile broadband infrastructure in upstate new york and parts of pennsylvania and vermont ; ( ii ) $ 7.6 million in capital expenditures ( of which $ 5.3 million has been or will be funded by the federal stimulus grant ) in connection with our last-mile broadband infrastructure buildout in the navajo nation across arizona , new mexico and utah ; and ( iii ) $ 44.1 million in capital expenditures ( of which $ 30.9 million has been or will be funded by the federal stimulus grant ) in connection with our fiber-optic middle mile network buildout to provide broadband and transport services to over 340 community anchor institutions in vermont . the results of our new york and vermont stimulus projects are included in our `` u.s. wireline '' segment and the results of our navajo stimulus project are included in our `` u.s. wireless '' segment . the new york and navajo stimulus projects were completed during 2013. the vermont stimulus project will be completed during the latter half of 2014 and we anticipate that it will incur an additional $ 3.0 million of capital expenditures of which $ 2.1 million is expected to be funded by the federal stimulus grants . mobility fund as part of the federal communications commission 's ( `` fcc '' ) reform of its universal service fund ( `` usf '' ) program , which previously provided support to carriers seeking to offer telecommunications services in high-cost areas and to low-income households , the fcc created two new funds , including the mobility fund , a one-time award meant to support wireless coverage in underserved geographic areas in the united states . in august 2013 , we received fcc final approval for approximately $ 47.0 million of mobility fund support to our alltel business ( the `` alltel mobility funds '' ) and $ 21.7 million of mobility fund support to our wholesale wireless business ( the `` wholesale mobility funds '' and collectively with the alltel mobility funds , the `` mobility funds '' ) , to expand voice and broadband networks in certain geographic areas in order to offer either 3g or 4g coverage . as part of the receipt of the mobility funds , we committed to comply with certain additional fcc construction and other requirements . story_separator_special_tag in total , our international wireless subscribers decreased from approximately 333,000 as of december 31 , 2012 to 325,000 as of december 31 , 2013. however , while lower revenue generating subscribers in our international integrated telephony segment decreased by 6.0 % from december 31 , 2012 to december 31 , 2013 , our higher revenue generating subscribers in our island wireless segment increased 16.7 % from december 31 , 2012 to december 31 , 2013 , respectively . while we have experienced subscriber growth in a number of our international markets , competition remains strong , and the high proportion of prepaid subscribers means that subscribers and revenue could shift relatively quickly in future periods . additionally , wholesale roaming revenues in these markets are subject to seasonality and can fluctuate between quarters . wireline revenue . wireline revenue is generated by our wireline operations in guyana , including international telephone calls into and out of that country , our integrated voice and data operations in new england , our wholesale transport operations in new york state and our wholesale long-distance 35 voice services to telecommunications carriers . this revenue includes basic service fees , measured service revenue , and internet access fees , as well as installation charges for new lines , monthly line rental charges , long-distance or toll charges , and maintenance and equipment sales . wireline revenue decreased by $ 1.0 million , or 1.1 % , to $ 84.5 million for the year ended december 31 , 2013 , from $ 85.5 million during the year ended december 31 , 2012. declines in local landline revenue and international calls into guyana resulted in a decrease of $ 3.5 million in wireline revenue within our international integrated telephony segment . these decreases were partially offset by a $ 2.6 million increase in revenue from our wholesale long-distance voice service business in the united states . we anticipate that wireline revenue from our international long-distance business in guyana will continue to be negatively impacted , principally through the loss of market share , should we cease to be the exclusive provider of domestic fixed and international long-distance service in guyana , whether by reason of the government of guyana enacting legislation to such effect or a modification , revocation or lack of enforcement of our exclusive rights . while the loss of our exclusive rights will likely cause an immediate reduction in our wireline revenue , over the longer term such declines may be offset by increased revenue from data services to consumers and enterprises in guyana , an increase in regulated local calling rates in guyana , and increased wholesale transport services and large enterprise and agency sales in the united states . we currently can not predict when or if the government of guyana will enact such legislation or take , or fail to take , any action that would otherwise affect our exclusive rights in guyana . see `` business—guyana regulation '' . equipment and other revenue . equipment and other revenue represent revenue from wireless equipment sales , primarily handsets to retail customers , and other miscellaneous revenue items . equipment and other revenue increased by $ 0.9 million , or 11.3 % to $ 8.9 million for the year ended december 31 , 2013 , from $ 8.0 million for the year ended december 31 , 2012. equipment revenue primarily increased as the result of an increase in subscribers in our island wireless segment . we believe that equipment and other revenue could continue to increase as a result of gross subscriber additions , more aggressive subsidies driving demand for devices and the continued growth in smartphone penetration . termination and access fee expenses . termination and access fee expenses are charges that we pay for voice and data transport circuits ( in particular , the circuits between our wireless sites and our switches ) , internet capacity and other access fees we pay to terminate our calls , as well as customer bad debt expense . termination and access fees decreased by $ 1.1 million , or 1.9 % , from $ 56.8 million for the year ended december 31 , 2012 to $ 55.7 million for the year ended december 31 , 2013. our u.s. wireless segment reported a decrease in termination and access fees of $ 0.5 million as a result of the sale of certain network assets in late 2012. while the sale of the assets reduced the u.s. wireless segment 's termination and access fees by $ 4.8 million , the segment incurred an offsetting increase of $ 5.3 million in these costs as the result of an increase in the number of base stations and data traffic volumes . the remaining $ 0.6 million reduction in our termination and access fees were incurred across all of our other segments as increased operational synergies , primarily in bermuda , offset the increase in traffic volume costs . termination and access fees are expected to increase in future periods with expected growth in volume , but remain fairly proportionate to their related revenue as our networks expand . 36 engineering and operations expenses . engineering and operations expenses include the expenses associated with developing , operating and supporting our expanding networks , including the salaries and benefits paid to employees directly involved in the development and operation of our networks . engineering and operations expenses decreased by $ 1.1 million , or 2.8 % , from $ 40.0 million for the year ended december 31 , 2012 to $ 38.9 million for the year ended december 31 , 2013 primarily as a result of the realization of operational synergies following our 2011 merger in bermuda . we expect that engineering and operations expenses will increase over time due to an expected increase in our network capacity and geographic expansion of our networks , both of which will require additional support . sales and marketing expenses .

results of operations years ended december 31 , 2011 and 2012 replace_table_token_10_th u.s. wireless revenue . our u.s. wireless revenue increased to $ 102.8 million for the year ended december 31 , 2012 from $ 98.7 million for the year ended december 31 , 2011 , an increase of $ 4.1 million or 4.2 % . the increase was a result of an increase in data traffic in our wholesale markets . 40 international wireless revenue . international wireless revenue increased by $ 8.5 million , or 11 % , to $ 81.5 million for the year ended december 31 , 2012 , from $ 73.0 million for the year ended december 31 , 2011. this increase primarily resulted from our completion of the bermuda merger in 2011 and a $ 2.4 million increase in wireless revenues in guyana as a result of increased voice and data usage . wireline revenue . wireline revenue increased by $ 0.5 million , or 1 % , to $ 85.5 million for the year ended december 31 , 2012 from $ 85.0 million for the year ended december 31 , 2011. in guyana , a $ 3.1 million decrease in international long-distance revenue was offset by data revenue growth from our newly built fiber optic submarine cable . wireline revenue in the u.s. remained relatively consistent compared with the previous year as we saw increased revenue from our upstate new york wholesale transport service business . we continued to add business customers in the u.s. for our voice and data services ; however , the overall revenue increase was offset by a decline in the residential data business in vermont and new hampshire , including dial-up internet services . equipment and other revenue .

10.1.3 letter , dated august 31 , 2017 , from regions bank to the company , regarding certain terms under the business loan agreement and the promissory note ( incorporated by reference to exhibit 10.3 to the company 's quarterly report on form 10-q for the quarter ended september 30 , 2017 ) . * 10.1.4 letter , dated december 20 , 2017 , from regions bank to the company , regarding certain terms of the business loan agreement . 10.2 ocean bio-chem , inc. 2015 equity compensation plan , as amended ( incorporated by reference to exhibit 10.1 to the company 's quarterly report on form 10-q , filed with the securities and exchange commission on august 12 , 2016 ) . 10.3.1 form of industrial development revenue bond ( kinpak inc. project ) series 2017 ( incorporated by reference to exhibit 99.1 to the company 's current report on form 8-k , filed with the securities and exchange commission on october 2 , 2017 ) . 10.3.2 second restated lease agreement , dated as of september 1 , 2017 , between the industrial development board of the city of montgomery and kinpak , inc. ( incorporated by reference to exhibit 99.2 to the company 's current report on form 8-k , filed with the securities and exchange commission on october 2 , 2017 ) . 10.3.3 mortgage , security agreement and assignment of rents and leases , dated as of september 1 , 2017 , provided by the industrial development board of the city of montgomery and kinpak , inc. ( incorporated by reference to exhibit 99.3 to the company 's current report on form 8-k , filed with the securities and exchange commission on october 2 , 2017 ) . 10.3.4 guaranty agreement , dated as of september 1 , 2017 , provided by ocean bio-chem , inc. and its consolidated subsidiaries party thereto ( incorporated by reference to exhibit 99.4 to the company 's current report on form 8-k , filed with the securities and exchange commission on october 2 , 2017 ) . 10.4 ocean bio-chem , inc. 2002 non-qualified stock option plan , as amended ( incorporated by reference to exhibit 99.2 to the company 's registration statement on form s-8 ( file no . 333-176268 ) , filed with the securities and exchange commission on august 12 , 2011 ) . 10.5 ocean bio-chem , inc. 2008 non-qualified stock option plan , as amended ( incorporated by reference to exhibit 99.5 to the company 's registration statement on form s-8 ( file no . 333-176268 ) , filed with the securities and exchange commission on august 12 , 2011 ) . 10.6.1 net lease , dated may 1 , 1998 , between star brite distributing , inc. and peje , inc. ( incorporated by reference to exhibit 10.14 to the company 's annual report on form 10-k for the year ended december 31 , 2004 ) . 10.6.2 renewal of lease , dated may 1 , 2008 , between star brite distributing , inc. and peje , inc. ( incorporated by reference to exhibit 10.24 to the company 's annual report on form 10-k for the year ended december 31 , 2008 ) . 10.6.3 amendment number two to net lease , dated may 16 , 2013 , between star brite distributing , inc. and peje , inc. ( incorporated by reference to exhibit 10.13 to the company 's annual report on form 10-k for the year ended december 31 , 2013 ) . * 21 list of subsidiaries * 23 consent of eisneramper llp * 31.1 certification of chief executive officer pursuant to rule 13a-14 ( a ) under the securities exchange act . * 31.2 certification of chief financial officer pursuant to rule 13a-14 ( a ) under the securities exchange act . * 32.1 certification of chief executive officer pursuant to rule 13a-14 ( b ) under the securities exchange act and 18 u.s.c . section 1350 . * 32.2 certification of chief financial officer pursuant to rule 13a-14 ( b ) under the securities exchange act and 18 u.s.c . section 1350 . 101 the following materials from ocean bio-chem inc. 's annual report on form 10-k for the year ended december 31 , 2017 , formatted in xblr ( extensible business reporting language ) : ( i ) consolidated balance sheets at december 31 , 2017 and december 31 , 2016 ; ( ii ) consolidated statements of operations for the years ended december 31 , 2017 and 2016 ; ( iii ) consolidated statements of comprehensive income for the years ended december 31 , 2017 and 2016 ; ( iv ) consolidated statements of changes in shareholders equity for the years ended december 31 , 2017 and 2016 , ( v ) consolidated statements of cash flows for the years ended december 31 , 2017 and 2016 and ( story_separator_special_tag the following discussion should be read in conjunction with our consolidated financial statements contained in item 8 of this report . overview : we are engaged in the manufacture , marketing and distribution of a broad line of appearance , performance , and maintenance products for the marine , automotive , power sports , recreational vehicle and outdoor power equipment markets , under the star brite® and other trademarks within the united states and canada . in addition , we produce private label formulations of many of our products for various customers and provide custom blending and packaging services for these and other products . we also manufacture , market and distribute a line of products including disinfectants , sanitizers and deodorizers . we sell our products through national retailers and to national and regional distributors . story_separator_special_tag deferred tax assets and liabilities are measured and recorded using currently enacted tax rates , which we expect will apply to taxable income in the years in which the differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases are recovered or settled . the differences are attributable to differing methods of financial statement and income tax treatment with respect to depreciation and reserves for trade accounts receivable and inventories . the likelihood of a material change in our expected realization of deferred tax assets is dependent on , among other factors , changes in tax law , future taxable income and settlements with tax authorities . in this regard , the enactment of the tax cuts and jobs act resulted in a meaningful reduction in our net deferred tax liability as of december 31 , 2017 , reflecting the tax cuts and jobs act 's reduction of the united states corporate income tax rate . while management believes that its judgments and interpretations regarding income taxes are appropriate , significant differences in actual experience may require future adjustments to our tax assets and liabilities , which could be material . in assessing the realizability of our deferred tax assets , we evaluate positive and negative evidence and use judgments regarding past and future events , including operating results and available tax planning strategies that could be implemented to realize the deferred tax assets . we record a valuation allowance when necessary to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized . we consider available evidence , both positive and negative , and use judgments regarding past and future events , including operating results and available tax planning strategies , in assessing the need for a valuation allowance . 7 significant judgment is required in determining income tax provisions and in evaluating tax positions . we establish additional provisions for income taxes when , despite the belief that tax positions are fully supportable , there remain certain positions that do not meet the minimum probability threshold , which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority . in the normal course of business , we and our subsidiaries are examined by various federal and state tax authorities . we regularly assess the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes . we adjust the income tax provision , the current tax liability and deferred taxes in any period in which we become aware of facts that necessitate such an adjustment . the ultimate outcomes of the examinations of our income tax returns could result in increases or decreases to our recorded tax liabilities , which would affect our financial results . intangible assets intangible assets are acquired assets that lack physical substance and that meet specified criteria for recognition apart from goodwill . our intangible assets include trademarks , tradenames , patents and royalty rights . we own several trademarks and trade names , including star brite® and performacide® . we have determined that these intangible assets have indefinite lives and , therefore , are not amortized . in addition , we own several patents , the most significant of which are the clo 2 patents , which relate to a device for producing chlorine dioxide that is incorporated in our deodorizer , sanitizer and disinfectant products . we amortize our patents over their remaining life on a straight line basis ; amortization expense related to the clo 2 patents was approximately $ 52,000 ( $ 51,000 for clo 2 patents and $ 1,000 for other patents ) for each of the years ended december 31 , 2017 and 2016. in 2013 , we acquired royalty rights relating to sales of products encompassing the clo 2 patents ' technology ( we purchased these rights from an unaffiliated entity that previously owned the clo 2 patents and retained the royalty rights after selling the patents ) . we are amortizing the royalty rights over their remaining life on a straight line basis ; amortization expense relating to the royalty rights was approximately $ 18,000 for each of the years ended december 31 , 2017 and 2016. see note 7 to the consolidated financial statements included in this report for additional information . we evaluate our indefinite-lived intangible assets ( trademarks and trade names ) for impairment annually and at other times if events or changes in circumstances indicate that an impairment may have occurred . in evaluating our indefinite-lived intangible assets for impairment , we assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value . if , after completing the qualitative assessment , we determine it is more likely than not that the fair value of the indefinite-lived intangible asset is greater than its carrying amount , the asset is not impaired . if we conclude it is more likely than not that the fair value of the indefinite-lived intangible assets is less than the carrying value , we would then proceed to a quantitative impairment test , which consists of a comparison of the fair value of the intangible assets to their carrying amounts . in 2017 , we performed a qualitative assessment on all of our indefinite lived assets and determined , based on the assessment , that their fair values were more likely than not higher than their carrying values .

results of operations : the following table provides a summary of our financial results for the years ended december 31 , 2017 and 2016 : replace_table_token_1_th 8 net sales for the year ended december 31 , 2017 increased by approximately $ 2,728,000 or 7.5 % , as compared to the year ended december 31 , 2016. the net sales increase principally is attributable to sales of our marine products to two of our largest customers . in addition , we experienced sales growth generally with respect to a wide range of customers , including mass merchandisers , large home improvement and marine/sports retail chains , and online retailers . cost of goods sold in creased by approximately $ 2,105,000 or 9.4 % in 2017 , as compared to 2016. the increase in cost of goods sold is principally a result of increased sales volume , higher raw material costs on our winterizing products and higher manufacturing costs . gross profit increased by approximately $ 623,000 or 4.5 % during 2017 , as compared to 2016. as a percentage of net sales , gross profit decreased to 37.2 % in 2017 from 38.3 % in 2016. the increase in gross profit in 2017 is primarily attributable to increased sales volume . the decrease in gross profit as a percentage of net sales during 2017 is principally a result of lower profit margins on sales of our winterizing products due to both lower sales prices and higher raw material costs . advertising and promotion expense increased by approximately $ 407,000 or 13.0 % during 2017 , as compared to 2016. as a percentage of net sales , advertising and promotion expense increased to 9.1 % in 2017 compared to 8.6 % in 2016. the increase in advertising and promotion expense is primarily a result of increases in customer cooperative advertising allowances provided to select customers and other marketing expenses .

warrants old catalyst previously issued ( i ) warrants to purchase shares of series a convertible preferred stock in 2005 in connection with a loan , ( ii ) warrants to purchase shares of series e convertible preferred stock in 2014 in connection with the issuance of series e convertible preferred stock , and ( iii ) warrants to purchase shares of series f convertible preferred stock in 2015 in connection with the issuance of convertible promissory notes . in connection with the merger , such warrants were assumed by the company and are now exercisable , respectively , ( i ) at any time until the 7-year anniversary of the merger for an aggregate of 1,289 shares of the company 's common stock at an exercise price of $ 26.18 per share , ( ii ) at any time until the 5-year anniversary of the original date of issuance for an aggregate of 37,554 shares of the company 's common stock at an exercise price of $ 33.27 per share , and ( story_separator_special_tag the following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. this discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties , including those set forth under the heading “risk factors” and elsewhere in this annual report on form 10-k. our actual results and the timing of selected events discussed below could differ materially from those expressed in , or implied by , these forward-looking statements . overview we are a clinical-stage biopharmaceutical company focused on creating and developing novel medicines to address serious medical conditions . to date , we have focused our product development efforts in the fields of hemostasis , including the treatment of hemophilia and surgical bleeding , and inflammation , including prevention of delayed graft function ( “dgf” ) in renal transplants and the treatment of dry age-related macular degeneration ( “dry amd” ) , a condition that can cause visual impairment or blindness for which there are no approved treatments . our most advanced program is an improved next-generation coagulation factor viia variant , cb 813d , that has successfully completed a phase 1 clinical trial in severe hemophilia a and b patients . in addition to our lead factor viia program , we have two other next-generation coagulation factors , a factor ix variant , cb 2679d/isu 304 , that is in advanced preclinical development , and several factor xa variants , that have demonstrated efficacy and safety in preclinical animal models . proteases regulate several complex biological cascades , or sequenced biochemical reactions , including the coagulation cascade that controls bleeding ( hemostasis ) in hemophilia and non-hemophilia settings and the complement cascade that causes inflammation and tissue damage in certain diseases . our most advanced program is an improved next-generation coagulation factor viia variant , cb 813d , that has completed a phase 1 clinical trial evaluating safety and tolerability as well as pharmacokinetics , pharmacodynamics and coagulation activity in severe hemophilia a and b patients . based on our research , we estimate annual worldwide sales in 2014 for fda-approved factor viia products were approximately $ 1.6 billion . in addition to our lead factor viia program , we have a factor ix variant , cb 2679d/isu 304 , that is in advanced preclinical development and several factor xa variants which we have delayed initiating further research studies on our factor xa variants so that we can focus our efforts and resources on advancing cb 813d , our next generation factor viia and cb 2679d , our next-generation fix through phase 2/3 and phase 1/2 clinical trials respectively . based on our research , we estimate annual worldwide sales in 2014 for fda-approved factor ix and factor xa-containing products were approximately $ 1.8 billion . on june 29 , 2009 , we entered into a research and license agreement with wyeth pharmaceuticals , inc. , subsequently acquired by pfizer , whereby we and pfizer collaborated on the development of novel human factor viia products , and we granted pfizer the exclusive rights to develop and commercialize the licensed products on a worldwide basis . as a result of this agreement , pfizer paid us an up-front non-refundable signing fee of $ 21.0 million , which was initially recognized as revenue ratably over the term of our continuing involvement in the research and development of products with pfizer , which was determined to be five years ( covering the initial two-year research term plus potential extensions permitted under the applicable agreement ) . during the initial two-years of the collaboration period , pfizer reimbursed us for certain costs incurred in the development of the licensed products , including fte-based research payments . following the conclusion of the initial collaboration , without extension by pfizer , we had no further substantive performance obligations to pfizer under the agreement , and we recognized the remaining $ 12.6 million of deferred revenue related to the up-front fee in june 2011. subsequently , in august 2013 , we entered into an amendment to the pfizer agreement , in accordance with which pfizer made two $ 1.5 million non-refundable annual license maintenance payments to us in august 2013 and august 2014 and we agreed to certain performance obligations to pfizer for the period 59 starting from the effective date of the amendment . pfizer was also obligated to pay to us contingent milestone-based payments upon the occurrence of certain defined development , commercialization , and sales-based milestones . story_separator_special_tag as of june , 2015 , our deferred revenue balance from the pfizer research and license agreement was fully amortized following the termination by pfizer of that agreement . for the years ended december 31 , 2015 , 2014 and 2013 , revenue from pfizer and isu abxis represented the following percentage of our total contract revenue : replace_table_token_5_th due to the nature of the milestone payments under the remaining collaboration agreement , the termination of the pfizer agreement and the nonlinearity of the earnings process associated with certain payments and milestones , we expect that our revenue will decrease in future periods , as a result of both the loss of the pfizer contract revenue and the uncertainty of timing related to achievement of milestones . research and development expenses research and development expenses represent costs incurred to conduct research , such as the discovery and development of our product candidates . we recognize all research and development costs as they are incurred . research and development expenses consist primarily of the following : employee-related expenses , which include salaries , benefits and stock-based compensation ; laboratory and vendor expenses , including payments to consultants , related to the execution of preclinical , non-clinical , and clinical studies ; and facilities and other allocated expenses , which include direct and allocated expenses for rent and maintenance of facilities , depreciation and amortization expense and other supplies . 61 the following table summarizes our research and development expenses during the years ended december 31 , 2015 , 2014 and 2013 ( in thousands ) . replace_table_token_6_th 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 . we are currently focusing substantially all of our resources and development efforts on our preclinical pipeline . our internal resources , employees and infrastructure are not directly tied to individual product candidates or development programs . as such , we do not maintain information regarding these costs incurred for these research and development programs on a project-specific basis . we expect our research and development expenses will increase during the next few years as we continue the preclinical and clinical development , and pursue regulatory approval of our product candidates in the united states . due to the termination of the research and license agreement with pfizer , we expect to incur costs in connection with the factor viia program . however , the incurrence of such costs are dependent on whether we will pursue the program on our own or enter into a new collaboration and license arrangement with another pharmaceutical or biotech company . the process of conducting clinical trials necessary to obtain regulatory approval is costly and time consuming . we may never succeed in achieving marketing approval for our product candidates . the probability of success of each product candidate may be affected by numerous factors , including clinical data , competition , manufacturing capability and commercial viability . as a result , we are unable to determine the duration of and costs to complete our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates . successful development of current and future product candidates is highly uncertain . completion dates and costs for our research programs can vary significantly for each current and future product candidate and are difficult to predict . as a result , we can not estimate with any degree of certainty the costs we will incur in connection with development of our product candidates . we anticipate we will make determinations as to which programs and product candidates to pursue and how much funding to direct to each program and product candidate on an ongoing basis in response to the scientific success of early research programs , results of ongoing and future clinical trials , our ability to enter into collaborative agreements with respect to programs or potential product candidates , as well as ongoing assessments as to each current or future product candidate 's commercial potential . general and administrative expenses general and administrative expenses consist of personnel costs , allocated expenses and other expenses for outside professional services , including legal , human resources , audit and accounting services . personnel costs consist of salaries , bonus , benefits and stock-based compensation . we expect to incur additional expenses in connection with the completion of the merger , as substantially all of our current employees , including our finance staff , were the employees of old catalyst or are new hires who have never operated our current business as a public company , including expenses related to compliance with the rules and regulations of the sec and nasdaq , additional insurance expenses , investor relations activities and other administrative expenses and professional services . 62 interest and other income interest and other income consists primarily of the changes in fair value of derivative liability and the warrant liability and sub-lease income earned in connection with the sub-lease of a portion of our leased facility . the derivative liability is associated with the redeemable convertible notes we issued immediately prior to the closing of the merger in august 2015. the accounting for the redeemable convertible notes , which are convertible into shares of our common stock , requires us to bifurcate the embedded redemption feature and account for it as a derivative liability at estimated fair value upon issuance . the derivative liability is remeasured to estimated fair value as of each balance sheet date . we will record adjustments to the fair value of the derivative liability at the end of each reporting period until the earlier of the conversion , redemption or maturity of the redeemable convertible notes .

results of operations the following tables set forth our results of operations data for the periods presented ( in thousands ) : replace_table_token_7_th replace_table_token_8_th contract revenue contract revenue decreased by $ 0.1 million , or 3 % , from $ 1.8 million during the year ended december 31 , 2014 to $ 1.7 million during the year ended december 31 , 2015. the decrease in contract revenue was due primarily to the partial-year of recognition of the contract revenue payment received under our collaboration agreements with pfizer in connection with the termination of the agreement in april 2015 and full-year recognition of contract revenues payments under our collaboration agreement with isu abxis in connection with the amortization of deferred revenue . contract revenue increased by $ 1.3 million , or 247 % , from $ 0.5 million for the year ended december 31 , 2013 to $ 1.8 million for the year ended december 31 , 2014. the increase in contract revenue during 2014 was due primarily to the amortization of deferred revenue related to up-front license and annual license maintenance fees we received under our collaboration agreements with pfizer and isu abxis . we have recognized in revenue all amounts that had been previously deferred related to the terminated pfizer collaboration and , therefore , in future periods , will not recognize any additional revenue under our previous collaboration agreement with pfizer .

factors that might cause such a difference include , but are not limited to , those discussed in “ risk factors. ” overview we are a digital consultancy serving global 2000® and other large enterprise companies with a primary focus on the united states . we help clients gain competitive advantage by designing , building and delivering digital solutions that : make their 20 businesses more responsive to market opportunities ; strengthen relationships with customers , suppliers , and partners ; improve productivity ; and reduce technology costs . our unparalleled technology , management consulting , and creative capabilities , across industries , enable these benefits by developing , integrating , automating , and extending business processes , technology infrastructure and software applications end-to-end within an organization and with key partners , suppliers , and customers . our solutions include custom applications , analytics , management consulting , commerce , portals and collaboration , content management , business integration , customer relationship management , business process management , platform implementations and artificial intelligence , among others . our solutions enable our clients to operate a real-time enterprise that delivers exceptional front-end customer experiences and dynamically adapts business processes and the systems that support them , to meet the changing demands of an increasingly global and competitive marketplace . adoption of asc topic 606 as further detailed in note 2 , summary of significant accounting policies , in the notes to consolidated financial statements , we adopted asc topic 606 on january 1 , 2018 using the modified retrospective method . the most significant impact upon adoption was to third-party software and hardware revenue , which was primarily recorded on a gross basis as the principal in the transaction through december 31 , 2017 and presented on a net basis as the agent beginning on january 1 , 2018. since the change in presentation was applied prospectively and prior period results were not restated , the adoption of the new standard resulted in significantly lower software and hardware revenues and costs for the years ended december 31 , 2019 and 2018 as compared to the year ended december 31 , 2017. the impact of adopting asc topic 606 to services revenues and costs was immaterial . services revenues services revenues are derived from professional services that include developing , implementing , integrating , automating and extending business processes , technology infrastructure , and software applications . professional services revenues are recognized over time as services are rendered . most of our projects are performed on a time and materials basis , while a portion of our revenues is derived from projects performed on a fixed fee or fixed fee percent complete basis . for time and material projects , revenues are recognized and billed by multiplying the number of hours our professionals expend in the performance of the project by the hourly rates . for fixed fee contracts , revenues are recognized and billed by multiplying the established fixed rate per time period by the number of time periods elapsed . for fixed fee percent complete projects , revenues are generally recognized using an input method based on the ratio of hours expended to total estimated hours . fixed fee percent complete engagements represented approximately 7 % of our services revenues for the year ended december 31 , 2019 compared to 8 % for each of the years ended december 31 , 2018 and 2017 . on most projects , we are reimbursed for out-of-pocket expenses including travel and other project-related expenses . these reimbursements are included as a component of the transaction price of the respective professional services contract . the aggregate amount of reimbursed expenses will fluctuate depending on the location of our clients , the total number of our projects that require travel , and whether our arrangements with our clients provide for the reimbursement of such expenses . in conjunction with services provided , we occasionally receive referral fees under partner programs . these referral fees are recognized at a point in time when earned and recorded within services revenues . software and hardware revenues software and hardware revenues are derived from sales of third-party software and hardware resales , in which we are considered the agent , and sales of internally developed software , in which we are considered the principal . revenues from sales of third-party software and hardware are recorded on a net basis , while revenues from internally developed software sales are recorded on a gross basis . software and hardware revenues are expected to fluctuate depending on our clients ' demand for these products . there are no significant cancellation or termination-type provisions for our software and hardware sales . contracts for our professional services provide for a general right , to the client or us , to cancel or terminate the contract within a given period of time ( generally 10 to 30 days ' notice is required ) . the client is responsible for any time and expenses incurred up to the date of cancellation or termination of the contract . cost of revenues cost of revenues consists of costs of services and software and hardware costs . costs of services consists primarily of cash and non-cash compensation and benefits ( including bonuses and non-cash compensation related to equity awards ) , costs associated with subcontractors , reimbursable expenses and other project-related expenses . cost of revenues does not include depreciation of 21 assets used in the production of revenues which are primarily personal computers , servers , and other information technology related equipment . upon adoption of asc topic 606 on january 1 , 2018 , sales of third-party software and hardware were presented on a net basis , and as such , third-party software and hardware costs are no longer presented within cost of revenue in the current and prior year . story_separator_special_tag ( 2 ) working capital is total current assets less total current liabilities . net cash provided by operating activities net cash provided by operating activities for the year ended december 31 , 2019 was $ 78.0 million compared to $ 68.6 million for the year ended december 31 , 2018 . for the year ended december 31 , 2019 , the components of operating cash flows were net income of $ 37.1 million plus net non-cash charges of $ 45.0 million and investments in net operating assets of $ 4.2 million . the primary components of operating cash flows for the year ended december 31 , 2018 were net income of $ 24.6 million plus net non-cash charges of $ 40.8 million and reductions in net operating assets of $ 3.2 million . net cash used in investing activities during the year ended december 31 , 2019 , we used $ 11.1 million for acquisitions and $ 9.3 million to purchase property and equipment and to develop software . during the year ended december 31 , 2018 , we used $ 26.6 million for acquisitions and $ 4.7 million to purchase property and equipment and to develop software . net cash ( used in ) provided by financing activities for the year ended december 31 , 2019 , we used $ 20.6 million to repurchase shares of our common stock through the stock repurchase program , used $ 7.3 million to remit taxes withheld as part of a net share settlement of restricted stock vesting and used $ 4.3 million to settle the contingent consideration for the purchase of southport . we also received proceeds from sales of stock through the employee stock purchase plan of $ 0.2 million . for the year ended december 31 , 2018 , we received $ 138.9 million of proceeds from the issuance of the notes , net of issuance costs , received $ 12.1 million of proceeds from the sale of the notes warrants and paid $ 20.7 million for the privately negotiated notes hedges . we drew down $ 161.0 million from our line of credit , repaid $ 216.0 million on our line of credit , used $ 64.4 million to repurchase shares of our common stock through the stock repurchase program , used $ 5.1 million to remit taxes withheld as part of a net share settlement of restricted stock vesting and used $ 4.0 million to settle the contingent consideration for the purchase of clarity . we also received proceeds from sales of stock through the employee stock purchase plan of $ 0.1 million . availability of funds from credit facility on june 9 , 2017 , we entered into a credit agreement , as amended ( the “ credit agreement ” ) , with wells fargo bank , national association , as administrative agent and the other lenders parties thereto . the credit agreement provides for revolving credit borrowings up to a maximum principal amount of $ 125.0 million , subject to a commitment increase of $ 75.0 million . all 25 outstanding amounts owed under the credit agreement become due and payable no later than the final maturity date of june 9 , 2022. the credit agreement also allows for the issuance of letters of credit in the aggregate amount of up to $ 10.0 million at any one time ; outstanding letters of credit reduce the credit available for revolving credit borrowings . as of december 31 , 2019 , the company had one outstanding letter of credit for $ 0.2 million . substantially all of the company 's assets are pledged to secure the credit facility . borrowings under the credit agreement bear interest at the company 's option of the prime rate ( 4.75 % on december 31 , 2019 ) plus a margin ranging from 0.00 % to 0.50 % or one-month libor ( 1.76 % on december 31 , 2019 ) plus a margin ranging from 1.00 % to 1.75 % . the company incurs an annual commitment fee of 0.15 % to 0.20 % on the unused portion of the line of credit . the additional margin amount and annual commitment fee are dependent on the level of outstanding borrowings . as of december 31 , 2019 , the company had $ 124.8 million of unused borrowing capacity . at december 31 , 2019 , we were in compliance with all covenants under the credit agreement . stock repurchase program prior to 2019 , the company 's board of directors authorized the repurchase of up to $ 235.0 million of company common stock . on october 29 , 2019 , the board of directors authorized the expansion of the stock repurchase program by authorizing the repurchase of up to an additional $ 30.0 million of company common stock for a total repurchase program of $ 265.0 million and extended the expiration date of the program from december 31 , 2019 to june 30 , 2021 . the program could be suspended or discontinued at any time , based on market , economic , or business conditions . the timing and amount of repurchase transactions will be determined by management based on its evaluation of market conditions , share price , and other factors . since the program 's inception on august 11 , 2008 , we have repurchased approximately $ 220.0 million ( 15.4 million shares ) of our outstanding common stock through december 31 , 2019 . from time to time , we establish a written trading plan in accordance with rule 10b5-1 of the exchange act , pursuant to which we make a portion of our stock repurchases . additional repurchases will be at times and in amounts as the company deems appropriate and will be made through open market transactions in compliance with rule 10b-18 of the exchange act , subject to market conditions , applicable legal requirements , and other factors .

summary of significant accounting policies , in the notes to consolidated financial statements , we adopted asc topic 842 on january 1 , 2019 using the modified retrospective method . asc topic 842 requires lessees to recognize lease liabilities and right of use ( “ rou ” ) assets for all leases , including operating leases , with a term greater than 12 months on its balance sheet . as the company adopted the standard using the modified retrospective method , the recognition of the rou assets and lease liabilities does not impact the comparative period consolidated balance sheet . there was no material impact on the consolidated statement of operations or the consolidated statement of cash flows for the year ended december 31 , 2019 . 22 results of operations the following table summarizes our results of operations as a percentage of total revenues : replace_table_token_4_th a discussion of changes in our financial condition and results of operations during the year ended december 31 , 2018 compared to the year ended december 31 , 2017 has been omitted from this annual report on form 10-k , but may be found in “ item 7. management 's discussion and analysis of financial condition and results of operations ” in our annual report on form 10-k for the year ended december 31 , 2018 , filed with the sec on february 26 , 2019 , which is available free of charge on the sec 's website at www.sec.gov and on our investor relations website at www.perficient.com . year ended december 31 , 2019 compared to year ended december 31 , 2018 revenues . total revenues increased 13 % to $ 565.5 million for the year ended december 31 , 2019 from $ 498.4 million for the year ended december 31 , 2018 . replace_table_token_5_th services revenues increased 14 % to $ 561.9 million for the year ended december 31 , 2019 from $ 494.0 million for the year ended december 31 , 2018 .

there was a $ 66 increase to the reserve for uncertain tax positions for penalties during the year ended july 31 , 2016 , no changes during the fiscal year ended july 31 , 2015 , and an increase of $ 25 for the year ended july 31 , 2014. these amounts are net of reversals due to reductions for tax positions of prior years , statute of limitations , and settlements . at july 31 , 2016 and 2015 , the company had $ 1,530 and $ 1,531 story_separator_special_tag overview we are a global manufacturer and supplier of identification solutions and workplace safety products that identify and protect premises , products and people . the ids segment is primarily involved in the design , manufacture , and distribution of high-performance and innovative identification and healthcare products . the wps segment provides workplace safety and compliance products , half of which are internally manufactured and half are externally sourced . approximately 45 % of our total sales are derived outside of the united states . foreign sales within the ids and wps segments are approximately 35 % and 65 % , respectively . the ability to provide customers with a broad range of proprietary , customized and diverse products for use in various applications across multiple customers and geographies , along with a commitment to quality and service , have made brady a leader in many of its markets . the long-term sales growth and profitability of our segments will depend not only on improved demand in end markets and the overall economic environment , but also on our ability to continuously improve operational excellence , focus on the customer , develop and market innovative new products , and to advance our digital capabilities . in our ids business , our strategy for growth includes an increased focus on key customers , industries and products and improving the efficiency and effectiveness of the research and development ( `` r & d '' ) function . in our wps business , our strategy for growth includes a focus on workplace safety critical industries , innovative new product offerings , and increased investment in digital capabilities . 15 story_separator_special_tag > 2015 ; excluding impairment charges of $ 46.9 million and restructuring charges of $ 16.8 million , the company generated operating income from continuing operations of $ 99.0 million in 2015 . the increase of $ 18.9 million in operating income was due to the improvement in gross profit margin primarily in the ids segment as well as reduced sg & a primarily in the wps segment . the increase was partially offset by the negative impact of currency fluctuations . operating income from continuing operations was $ 35.3 million for fiscal 2015 ; excluding impairment charges of $ 46.9 million and restructuring charges of $ 16.8 million , the company generated operating income from continuing operations of $ 99.0 million . the company incurred an operating loss from continuing operations of $ 41.2 million in fiscal 2014 ; excluding impairment charges of $ 148.6 million and restructuring charges of $ 15.0 million , the company generated operating income from continuing operations of $ 122.4 million . the decrease of $ 23.4 million was primarily due to the segment profit declines in both the ids and wps segments , 17 facility consolidation costs incurred in both segments , and the negative impact of currency fluctuations during fiscal 2015 as compared to the prior year . operating income ( loss ) to net earnings ( loss ) replace_table_token_6_th investment and other income investment and other expense was $ 0.7 million in fiscal 2016 compared to income of $ 0.8 million in fiscal 2015 and income of $ 2.4 million in fiscal 2014 . the decline since 2014 was primarily due to foreign currency losses , and a decline in market value of securities held in executive deferred compensation plans . interest expense interest expense decreased to $ 7.8 million in fiscal 2016 compared to $ 11.2 million in fiscal 2015 and $ 14.3 million in fiscal 2014 . the decline since 2014 was due to the company 's declining principal balance under its outstanding debt agreements and a reduction in the weighted average interest rate . income taxes the company 's effective income tax rate was 26.7 % in fiscal 2016. the effective income tax rate was reduced from the statutory tax rate of 35.0 % due to certain adjustments to tax accruals and reserves , utilization of foreign tax credit carryforwards , research and development tax credits and the section 199 manufacturer 's deduction . the company 's effective income tax rate was 80.4 % in fiscal 2015. the effective income tax rate was significantly impacted by impairment charges of $ 46.9 million recognized during the period , as $ 39.8 million of these charges were nondeductible for income tax purposes . the effective income tax rate was further impacted by $ 5.0 million of foreign tax credit carryforwards from the fiscal 2014 income tax return and increases in uncertain tax positions recognized in fiscal 2015. the company 's effective income tax rate was 9.3 % in fiscal 2014. the effective income tax rate was significantly impacted by impairment charges of $ 148.6 million recognized during the period , as $ 61.1 million of these charges were non-deductible for income tax purposes . story_separator_special_tag 20 organic sales in the emea region also grew in the low-single digits in fiscal 2015 as compared to fiscal 2014. this increase was primarily driven by central europe where we increased our salesforce . economic growth softened slightly in western europe , which impacted ids sales at the beginning of the third fiscal quarter and into the fourth quarter ; however , this geography had stronger sales in the first half of the year which contributed to organic sales growth for the full fiscal year as compared to the prior year . organic sales in asia grew in the high-single digits in fiscal 2015 as compared to fiscal 2014. similar to the prior year , we experienced slower growth in the fourth quarter of fiscal 2015 as compared to the preceding three quarters . segment profit decreased to $ 149.8 million in fiscal 2015 from $ 176.1 million in fiscal 2014 , a decrease of $ 26.3 million or 14.9 % . as a percent of sales , segment profit decreased to 18.6 % in fiscal 2015 , compared to 21.3 % in the prior year . the decline in segment profit as a percent of sales was primarily in the ids americas businesses and was a result of increased costs associated with facility consolidation activities such as duplicate labor and facilities expenses , as well as increased costs from operating inefficiencies in our recently consolidated facilities in north america such as additional freight costs and excess inventory and scrap charges . in addition , although a much smaller impact , the decline was also due to our geographic product mix , as asia was our region of greatest sales growth in fiscal 2015 and generally has the lowest segment profit margins . workplace safety fiscal 2016 vs. 2015 approximately 50 % of net sales in the wps segment were generated in europe , 35 % in the americas , and 15 % in australia . wps sales decreased 5.9 % to $ 343.7 million in fiscal 2016 , compared to $ 365.2 million in fiscal 2015 , which consisted of an organic sales decline of 0.8 % and a negative currency impact of 5.1 % . since half of the wps business is in europe , the strengthening of the u.s. dollar against the euro and british pound during certain periods of the fiscal year had a larger impact on the wps segment than it did on the ids segment . the wps business in europe realized low-single digit organic sales growth in fiscal 2016 compared to the prior year . the increase was primarily driven by germany , france , and belgium due to improvements in website functionality and key account management . these improvements led to a double-digit increase in digital sales in europe as compared to the prior year . organic sales in the americas declined in the low-single digits in fiscal 2016 compared to the prior year . this decrease was primarily in north america due to reduced demand in the industrial end markets and a decrease in sales through traditional catalog channels , which were partially offset by slight growth in digital sales . organic sales in australia declined in the mid-single digits in fiscal 2016 compared to fiscal 2015. the decrease in the australian business was due to its higher concentration in industries that are experiencing economic challenges , which include manufacturing and mining production . we continue to focus on enhancing our expertise in these industries to drive sales growth as well as addressing our cost structure to improve profitability . profit for the wps segment increased to $ 59.8 million in fiscal 2016 from $ 56.5 million in fiscal 2015 , an increase of $ 3.3 million , or 5.8 % . as a percentage of sales , segment profit increased to 17.4 % in fiscal 2016 compared to 15.5 % in the prior year . the increase in segment profit margin was mainly driven by a reduction in selling expenses and catalog advertising . fiscal 2015 vs. 2014 approximately 50 % of net sales in the wps segment were generated in emea , 35 % in the americas , and 15 % in apac . wps sales decreased 8.7 % to $ 365.2 million in fiscal 2015 , compared to $ 399.9 million in fiscal 2014 , which consisted of an organic sales decline of 0.4 % and a negative currency impact of 8.3 % . because approximately half of the wps business is located in western europe and another 15 % of the wps segment is in australia , the strengthening of the u.s. dollar against the euro and the australian dollar had a larger impact on the wps segment than it did on the ids segment . organic sales in europe grew in the low-single digits in fiscal 2015 compared to the prior year . the growth was driven primarily by germany , france , and the nordics region due to improvements in website functionality and key account management . we experienced growth in both traditional catalog sales and digital sales in europe over the prior year . organic sales in the americas declined in the low-single digits in fiscal 2015 compared to fiscal 2014. this decrease was primarily due to reduced demand in the industrial end markets and a decrease in sales through traditional catalog channels . 21 organic sales in australia declined in the mid-single digits in fiscal 2015 compared to fiscal 2014. our business in australia is diversified in many industries ; however , it has a higher concentration in industries that are experiencing economic challenges , including manufacturing and mining production . profit for the wps segment decreased to $ 56.5 million in fiscal 2015 from $ 66.2 million in fiscal 2014 , a decrease of $ 9.7 million , or 14.7 % . as a percentage of sales , segment profit decreased to 15.5 % in fiscal 2015 compared to 16.6 % in the prior year .

results of operations a comparison of results of operating income ( loss ) from continuing operations for the fiscal years ended july 31 , 2016 , 2015 , and 2014 is as follows : replace_table_token_5_th in fiscal 2016 , sales decreased 4.4 % to $ 1,120.6 million , compared to $ 1,171.7 million in fiscal 2015 , which consisted of an organic sales decline of 0.7 % and a negative currency impact of 3.7 % due to the strengthening of the u.s. dollar against certain other major currencies during the year . the decline in organic sales was primarily a result of reduced demand in the americas and apac regions . organic sales declined in both the ids and wps segments in fiscal 2016 compared to fiscal 2015. the ids segment experienced sales declines in the wire id and safety and facility id product lines , which were partially offset by sales growth in the product id and healthcare id product lines . traditional catalog sales in the wps segment declined , but were partially offset by sales growth in digital sales . during fiscal 2015 , net sales decreased 4.4 % from fiscal 2014 , which consisted of organic growth of 1.0 % and a negative currency impact of 5.4 % due to the strengthening of the u.s. dollar against certain other major currencies during the year . organic sales within the ids segment were up , while organic sales within the wps segment declined . references in this form 10-k to “ organic sales ” refer to sales from continuing operations calculated in accordance with u.s. gaap , excluding the impact of foreign currency translation . the company 's organic sales disclosures exclude the effects of foreign currency translation as foreign currency translation is subject to volatility that can obscure underlying business trends .

cautionary statements this annual report on form 10-k and the documents incorporated by reference in this annual report on form 10-k contain “forward-looking statements” within the meaning of the private securities litigation reform act of 1995. the information in this management 's discussion and analysis of financial condition and results of operations , except for the historical information , contains forward-looking statements . these forward-looking statements reflect the company 's current views with respect to future events and financial performance . the words “believe , ” “expect , ” “anticipate , ” “intend , ” “estimate , ” “forecast , ” “project , ” “may , ” will , ” “would , ” “could , ” “should” and similar expressions are intended to identify these “forward-looking statements.” you should read statements that contain these words carefully because they discuss future expectations , contain projections of future results of operations or of financial position or state other “forward-looking” information . all forecasts and projections in this report are “forward-looking statements , ” and are based on management 's current expectations of the company 's near-term results , based on current information available pertaining to the company . the important factors listed below , as well as any cautionary language elsewhere in this annual report on form 10-k , provide examples of risks , uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements . the risks which could cause actual results to differ from those contained in such “forward looking statements” include , without limitation , the risks described in the company 's annual report on form 10-k for the year ended december 31 , 2012 under the headings “risks relating to our business and industry , ” “manufacturing risks , ” “international risks” and “risks related to owning our securities” as well as in the company 's quarterly reports on form 10-q and current reports on form 8-k as filed with the securities and exchange commission . any forward-looking statements in this annual report on form 10-k are not guarantees of future performance , and actual results , developments and business decisions may differ from those envisaged by such forward-looking statements , possibly materially . we disclaim any duty to update any forward-looking statements . overview this overview is not a complete discussion of the company 's financial condition , changes in financial condition and results of operations ; it is intended merely to facilitate an understanding of the most salient aspects of its financial condition and operating performance and to provide a context for the detailed discussion and analysis that follows and must be read in its entirety in order to fully understand the company 's financial condition and results of operations . entegris , inc. is a leading provider of a wide range of products and services for purifying , protecting and transporting the critical materials used in processing and manufacturing in the microelectronics and other high-technology industries . entegris derives most of its revenue from the sale of products and services to the semiconductor and related industries . the company 's customers consist primarily of semiconductor manufacturers , semiconductor equipment and materials suppliers as well as thin film transistor-liquid crystal display ( tft-lcd ) and hard disk manufacturers , which are served through direct sales efforts , as well as sales and distribution relationships , in the united states , asia , europe and the middle east . 37 the company offers a diverse product portfolio which includes more than 17,000 standard and customized products that it believes provide the most comprehensive offering of contamination control solutions and microenvironment products and services to maintain the purity and integrity of critical materials used by the semiconductor and other high-technology industries . certain of these products are unit-driven and consumable products that rely on the level of semiconductor manufacturing activity to drive growth , while others are capital-expenditure driven and rely on expansion of manufacturing capacity to drive growth . the company 's unit-driven and consumable products includes membrane-based liquid filters and housings , metal-based gas filters , resin-based gas purifiers , wafer shippers , disk-shipping containers and test assembly and packaging products and consumable graphite and silicon carbide components used in plasma etch , ion implant and chemical vapor deposition processes in semiconductor manufacturing . the company 's capital expense-driven products include components , systems and subsystems that use electro-mechanical , pressure differential and related technologies to permit semiconductor and other electronics manufacturers to monitor and control the flow and condition of process liquids used in these manufacturing processes , and process carriers that protect the integrity of in-process wafers . key operating factors key factors , which management believes have the largest impact on the overall results of operations of entegris , inc. , include : level of sales since a significant portion of the company 's product costs ( except for raw materials , purchased components and direct labor ) are largely fixed in the short-to-medium term , an increase or decrease in sales affects gross profits and overall profitability significantly . also , increases or decreases in sales and operating profitability affect certain costs such as incentive compensation and commissions , which are highly variable in nature . the company 's sales are subject to the effects of industry cyclicality , technological change , substantial competition , pricing pressures and foreign currency fluctuation . variable margin on sales the company 's variable margin on sales is determined by selling prices and the costs of manufacturing and raw materials . this is affected by a number of factors , which include the company 's sales mix , purchase prices of raw material ( especially polymers , stainless steel and purchased components ) , competition , both domestic and international , direct labor costs , and the efficiency of the company 's production operations , among others . fixed cost structure . story_separator_special_tag this evaluation includes analyses of inventory levels , historical write-off trends , expected product lives , and historical and projected sales levels by product . inventories that are considered obsolete are written off or a full allowance is recorded . in addition , allowances are established for inventory quantities in excess of forecasted demand . inventory allowances were $ 5.7 million at both december 31 , 2012 and 2011. the company 's inventories include materials and products subject to technological obsolescence , which are sold in highly competitive industries . if future demand or market conditions are less favorable than current conditions or the company 's projected outlook for sales , inventory write-downs or additional allowances may be required and would be reflected in cost of sales in the period the revision is made . impairment of long-lived assets as of december 31 , 2012 , the company had $ 157.0 million of net property , plant and equipment and $ 47.2 million of net intangible assets . the company routinely considers whether indicators of impairment of the value of its long-lived assets , particularly its manufacturing equipment , and its intangible assets , are present . a long-lived asset ( asset group ) shall be tested for recoverability whenever events or changes in circumstances ( triggering events ) indicate that its carrying amount may not be recoverable . the following are examples of such events or changes in circumstances : a. a significant decrease in the market price of a long-lived asset ( asset group ) b. a significant adverse change in the extent or manner in which a long-lived asset ( asset group ) is being used or in its physical condition c. a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset ( asset group ) , including an adverse action or assessment by a regulator d. an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset ( asset group ) e. a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset ( asset group ) f. a current expectation that , more likely than not , a long-lived asset ( asset group ) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life . if such indicators are present , it is determined whether the sum of the estimated undiscounted cash flows attributable to the asset group in question is less than its carrying value . if less , an impairment loss is recognized based on the excess of the carrying amount of the asset group over its respective fair value . fair value is determined by discounting estimated future cash flows , appraisals or other methods deemed appropriate . if the asset groups determined to be impaired are to be held and used , the company recognizes an impairment charge to the extent the fair value attributable to the asset group is less than the assets ' carrying value . the fair value of the assets then becomes the assets ' new carrying value , which is depreciated or amortized over the remaining estimated useful life of the assets . the company 's long-lived assets are grouped with other assets and liabilities at the lowest level ( asset groups ) for which the identifiable cash flows are largely independent of the cash flows of other assets and liabilities . the company has four significant asset groups , identified by assessing the company 's identifiable cash flows and the interdependence of such cash flows : contamination control solutions ( ccs ) , microenvironments ( me ) , poco graphite ( poco ) and entegris specialty coatings ( esc ) . as described above , the evaluation of the recoverability of long-lived assets requires the company to make significant estimates and assumptions . these estimates and assumptions primarily include , but are not limited to , the identification of the asset group at the lowest level of independent cash flows , the primary asset of the group 40 and long-range forecasts of revenue and costs , reflecting management 's assessment of general economic and industry conditions , operating income , depreciation and amortization and working capital requirements . due to the inherent uncertainty involved in making these estimates , actual results could differ from those estimates . in addition , changes in the underlying assumptions would have a significant impact on the conclusion that an asset group 's carrying value is recoverable , or the determination of any impairment charge if it was determined that the asset values were indeed impaired . based on current general economic conditions and trends within the semiconductor industry and the absence of any other triggering events , the company has not been required to perform impairment testing for any of its asset groups since 2009. the company will continue to monitor circumstances and events to determine whether asset impairment testing is warranted . it is possible that in the future the company may no longer be able to conclude that there is no impairment of its long-lived assets , nor can the company provide assurance that material impairment charges of long-lived assets will not occur in future periods . income taxes in the preparation of the company 's financial statements , the income tax expense , deferred tax assets and liabilities , and reserves for unrecognized tax benefits reflect management 's best assessment of estimated current and future taxes to be paid . the company is subject to income taxes in both the united states and numerous foreign jurisdictions . significant judgments and estimates are required in determining consolidated income tax expense . deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements , which will result in taxable or deductible amounts in the future .

results of operations year ended december 31 , 2012 compared to year ended december 31 , 2011 the following table sets forth the results of operations and the relationship between various components of operations , stated as a percent of net sales , for the years ended december 31 , 2012 and 2011. the company 's historical financial data was derived from its consolidated financial statements and related notes included elsewhere in this annual report . replace_table_token_6_th net sales for the year ended december 31 , 2012 , net sales were $ 715.9 million , down $ 33.4 million , or 4 % , from sales for the year ended december 31 , 2011. the company 's net sales for 2012 reflected the lower capital spending levels and sluggish production rates in the semiconductor industry that began in the latter half of 2011. sales in 2012 showed modest quarterly growth from late 2011 levels before declining in the third and fourth quarters . the company 's operating segments experienced mixed sales results . see the “segment analysis” included below in this section for additional detail . the sales decrease in 2012 included unfavorable foreign currency translation effects of $ 8.5 million related to the year-over-year weakening of most international currencies versus the u.s. dollar , most notably the euro . excluding this factor , net sales fell approximately 3 % in 2012 when compared to 2011 . 42 on a geographic basis , total sales to north america were 31 % , asia pacific 38 % , europe 12 % and japan 19 % in 2012. total sales to north america were 29 % , asia pacific 38 % , europe 14 % and japan 19 % in 2011. when comparing 2012 to 2011 , all regions experienced year-over-year sales decreases except north america .

activision blizzard , inc. is a worldwide online , personal computer ( `` pc '' ) , video game console , tablet , handheld , and mobile game publisher . the terms `` activision blizzard , '' the `` company , '' `` we , '' `` us , '' and `` our '' are used to refer collectively to activision blizzard , inc. and its subsidiaries . based upon our organizational structure , we conduct our business through three operating segments as follows : activision publishing , inc. activision publishing , inc. ( `` activision '' ) is a leading international developer and publisher of interactive software products and content . activision develops games based on both internally-developed and licensed intellectual property . activision markets and sells games we develop and , through our affiliate label program , games developed by certain third-party publishers . we sell games both through retail channels and by digital download . activision currently offers games that operate on the sony computer entertainment , inc. ( `` sony '' ) playstation 3 ( `` ps3 '' ) , nintendo co. ltd. ( `` nintendo '' ) wii ( `` wii '' ) and nintendo wii u ( `` wii u '' ) , and microsoft corporation ( `` microsoft '' ) xbox 360 ( `` xbox 360 '' ) console systems ; the nintendo dual screen ( `` ds '' ) and nintendo 3ds ( `` 3ds '' ) handheld game systems ; the pc ; and other handheld and mobile devices . blizzard entertainment , inc. blizzard entertainment , inc. ( `` blizzard '' ) is a leader in the subscription-based massively multi-player online role-playing game ( `` mmorpg '' ) category in terms of both subscriber base and revenues generated through its world of warcraft ® franchise , which it develops , hosts and supports . blizzard also develops , markets , and sells role-playing action and strategy pc-based computer games , including games in the multiple-award winning diablo ® and starcraft ® franchises . in addition , blizzard maintains a proprietary online-game related service , battle.net ® . blizzard distributes its products and generates revenues worldwide through various means , including : subscriptions ( which consist of fees from individuals playing world of warcraft ® , sales of prepaid subscription cards , and revenue from value-added services such as realm transfers , faction changes and other character customizations within the world of warcraft gameplay ) ; retail sales of physical `` boxed '' products ; online download sales of pc products ; and licensing of software to third-party or related party companies that distribute world of warcraft , diablo ® iii and starcraft ® ii products . activision blizzard distribution activision blizzard distribution ( `` distribution '' ) consists of operations in europe that provide warehousing , logistical and sales distribution services to third-party publishers of interactive entertainment software , our own publishing operations , and manufacturers of interactive entertainment hardware . 41 story_separator_special_tag hardware units increased 5 % year-over-year . during the 2012 year-end holiday season , nintendo released a new `` next-generation '' high-definition version console , the wii u. on february 20 , 2013 , sony announced that it intends to launch playstation 4 , its next-generation computer entertainment system , by the 2013 year-end holiday buying season . we continually monitor console hardware sales , as well as the development of `` next-generation '' consoles . we manage our product delivery on each current and future platform in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development . conditions in the retail distribution channels conditions in the retail channels of the interactive entertainment industry remained challenging through 2012. in north america and europe , retail sales within the industry experienced a combined overall decrease of approximately 21 % in 2012 , as compared to 2011 , according to the npd group and gfk chart-track . the declines in the north america and european retail channels were impacted by fewer releases and catalog sales in 2012 as compared to 2011 , as well as price declines over the prior year . in addition , the decline in sales to the retail channels continue to be more pronounced for casual titles on the nintendo wii and handheld platforms ( down over 35 % year-over-year ) , than titles on high-definition platforms ( i.e. , xbox 360 and ps3 ) . despite the 21 % decrease in retail sales for the overall industry , according to the npd group , gfk chart-track and the company 's internal estimates , the sales of the industry 's top five titles ( including accessory packs and figures ) grew 1 % in 2012 , as compared to 2011. this has resulted in the further concentration of revenues in the top titles , particularly for high-definition platforms , which experienced year-over-year growth , while non-premier titles experienced declines . the company 's results have been less impacted by the general declining trends in retail compared to our competitors because of our greater focus on premier top titles and a more focused overall slate of titles . concentration of top titles the concentration of retail revenues among key core titles has continued as a trend in the overall interactive software industry . according to the npd group , the top 10 titles accounted for 30 % of the sales in the u.s. video game industry in 2012 as compared to 26 % in 2011. similarly , a significant portion of our revenues has historically been derived from video games based on a few popular franchises and these video games are responsible for a disproportionately high percentage of our profits . for example , our four largest franchises in 2012—call of duty , diablo , skylanders and world of warcraft—accounted for approximately 83 % of our net revenues , and a significantly higher percentage of our operating income , for the year . story_separator_special_tag amortization of intangible assets all of our intangible assets are the result of the business combination and other acquisitions . we amortize the intangible assets over their estimated useful lives based on the pattern of consumption of the underlying economic benefits . the amount presented in the table represents the effect of the amortization of intangible assets as well as other purchase price accounting adjustments , where applicable , in our consolidated statements of operations . 47 impairment of goodwill/intangible assets we recorded a non-cash charge of $ 12 million related to the impairment of goodwill of our distribution reporting unit for the year ended december 31 , 2011 , reflecting a continuing shift in the distribution of interactive entertainment software from retail distribution channels to digital distribution channels . furthermore , we recorded a non-cash impairment charge on definite-lived intangible assets of $ 326 million for the year ended december 31 , 2010 , reflecting a continuing weaker environment for the casual game and music genres . segment net revenues activision activision 's net revenues increased for 2012 as compared to 2011 , primarily due to revenues from the skylanders franchise ( both from the launch of skylanders giants in the fourth quarter of 2012 and the full-year revenues from skylanders spyro 's adventure , which was launched in the fourth quarter of 2011 ) . the increase was partially offset by lower revenues from the call of duty franchise primarily from lower catalog sales and lower revenues from downloadable content packs for call of duty : modern warfare 3 , though these decreases were partially mitigated by the strong performance from call of duty : black ops ii which launched in the fourth quarter of 2012. for 2011 , net revenues from the activision segment increased as compared to 2010 primarily due to : the strong performance of call of duty : modern warfare 3 and the strong digital revenue performance from the franchise ; revenues from skylanders spyro 's adventure which successfully launched as a new intellectual property in the fourth quarter of 2011 ; the release of lego star wars iii , which we published on behalf of lucas arts in europe and certain countries in asia pacific ; and benefits from foreign exchange as compared to the prior year . the increase was partially offset by a more focused release schedule in 2011 than in 2010 , and lower catalog sales of games in the music and casual games genre . blizzard blizzard 's net revenues increased for 2012 as compared to 2011 , primarily due to the release of diablo iii in may 2012 and world of warcraft : mists of pandaria in september 2012. the increase in net revenues was partially offset by lower subscription revenues from world of warcraft due to a lower subscriber base . at december 31 , 2012 , the worldwide subscriber * base for world of warcraft was approximately 9.6 million , down from a base of more than 10 million subscribers at september 30 , 2012 , and approximately 10.2 million subscribers at december 31 , 2011 , with the majority of the decline from the east ( where the `` east '' includes china , taiwan , and korea , and the `` west '' includes north america , europe and latin america ) . with the launch of world of warcraft : cataclysm® , in the fourth quarter of 2010 , the subscriber base reached a new peak at more than 12 million subscribers at december 31 , 2010. since that time , the subscriber base has trended downward . looking forward , blizzard entertainment expects to continue to deliver new game content in all regions that is intended to further appeal to the gaming community . * world of warcraft subscribers include individuals who have paid a subscription fee or have an active prepaid card to play world of warcraft , as well as those who have purchased the game and are within their free month of access . internet game room players who have accessed the game over the last thirty days are also counted as subscribers . the above definition excludes all players under free promotional subscriptions , expired or cancelled subscriptions , and expired prepaid cards . subscribers in licensees ' territories are defined along the same rules . 48 blizzard 's net revenues decreased for 2011 as compared to 2010 primarily as a result of no new titles released in 2011 as compared to 2010 , when starcraft ii : wings of liberty was released in the third quarter and world of warcraft : cataclysm was released in the fourth quarter ; and as a result of a decline in world of warcraft 's subscriber base during 2011. these decreases were partially offset by benefits from foreign exchange as compared to the prior year . distribution distribution 's net revenues decreased in 2012 as compared to 2011 , primarily due to a weaker u.k. market . distribution 's net revenues increased in 2011 as compared to 2010 , primarily due to additional customer sales opportunities in the u.k. and benefits from foreign exchange as compared to prior year . segment income from operations activision activision 's operating income increased in 2012 as compared to 2011 , primarily due to higher net revenues as described above , and lower sales and marketing costs . the increase was partially offset by higher cost of sales as a result of higher net revenues , higher product development costs , and higher general and administrative costs , primarily resulting from legal-related expenses ( including legal-related accruals , settlements and fees ) and additional accrued bonuses reflecting our strong 2012 financial performance . activision 's operating income increased in 2011 as compared to 2010 , primarily due to a more focused release of products that delivered higher operating margins ; increased digital sales of call of duty 's digital content , resulting in high operating margins ; and reduction of operating expenses resulting from the 2011 restructuring .

business results and highlights in 2012 , activision blizzard 's consolidated net revenues were $ 4.9 billion and consolidated net income was $ 1.1 billion , resulting in diluted earnings per common share of $ 1.01. the company grew net revenues , operating income , and earnings per share as compared to 2011. we also generated $ 1.3 billion in cash from operating activities in 2012. also , according to the npd group with respect to north america , gfk chart-track with respect to europe , and activision blizzard internal estimates , during 2012 : in north america and europe combined , including toys and accessories , activision publishing was the # 1 console and handheld publisher for the calendar year with the # 1 and # 3 best-selling franchises—call of duty® and skylanders . activision blizzard reported record digital revenues for the calendar year and was the # 1 third-party interactive entertainment western digital publisher . for the calendar year , in aggregate across all platforms in the u.s. and europe , activision publishing 's call of duty : black ops ii was the # 1 best-selling title in dollars and call of duty : modern warfare® 3 was the # 9 best-selling title in dollars . in both north america and europe , including toys and accessories , skylanders giants™ was the # 1 best-selling kids ' title in dollars for the fourth quarter . additionally , for the calendar year , in north america and europe combined , including toys and accessories , skylanders giants was the # 5 best-selling game in dollars , and skylanders spyro 's adventure® was the # 4 best-selling game in dollars . for the calendar year , blizzard entertainment had two top-10 pc games in north america and europe . diablo iii was the # 1 best-selling pc game at retail , breaking pc-game sales records with more than 12 million copies sold worldwide through december 31 , 2012 , and world of warcraft : mists of pandaria® was the # 3 best-selling pc game at retail .

in order to finance this obligation , we make monthly contributions equal to 8.33 % of mr. shore 's salary to a severance payment fund story_separator_special_tag the following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. overview we are a medical device company focusing on the development and commercialization of our proprietary micronet stent platform technology for the treatment of complex vascular and coronary disease . a stent is an expandable “ scaffold-like ” device , usually constructed of a metallic material , that is inserted into an artery to expand the inside passage and improve blood flow . our micronet , a micron mesh sleeve , is wrapped over a stent to provide embolic protection in stenting procedures . our cguard eps combines micronet and a self-expandable nitinol stent in a single device for use in carotid artery applications . our cguard eps received ce mark approval in the european union in march 2013 , and we launched its release on a limited basis in october 2014. in january 2015 , a new version of cguard , with a rapid exchange delivery system , received ce mark approval in europe and in september 2015 , we announced the full market launch of cguard eps in europe . subsequently , we launched cguard eps in russia and certain countries in latin america and asia , and , in january 2018 , received regulatory approval to commercialize cguard eps in india . if we receive sufficient proceeds from future financings , we plan to develop cguard eps with a smaller delivery catheter ( 5 french gauge ) , which we intend to submit for ce mark approval within three calendar quarters of receiving such proceeds . we can not give any assurance that we will receive sufficient ( or any ) proceeds from any such financings or the timing of such financings , if ever . in addition , such additional financings may be costly or difficult to complete . 49 our mguard prime eps is marketed for use in patients with acute coronary syndromes , notably acute myocardial infarction ( heart attack ) and saphenous vein graft coronary interventions ( bypass surgery ) . mguard prime eps combines micronet with a bare-metal cobalt-chromium based stent . we market and sell mguard prime eps for the treatment of coronary disease in the european union . mguard prime eps received ce mark approval in the european union in october 2010 for improving luminal diameter and providing embolic protection . however , as a result of a shift in industry preferences away from bare-metal stents in favor of drug-eluting ( drug-coated ) stents , in 2014 we decided to curtail further development of this product in order to focus on the development of a drug-eluting stent product , mguard des . due to limited resources , though , our efforts have been limited to testing drug-eluting stents manufactured by potential partners for compatibility with micronet and seeking to incorporate micronet onto a drug-eluting stent manufactured by a potential partner . we are also developing a neurovascular flow diverter , nguard , which is an endovascular device that directs blood flow away from cerebral aneurysms in order to ultimately seal the aneurysms . our flow diverter would utilize an open cell , highly flexible metal scaffold to which micronet would be attached . we have completed initial pre-clinical testing of this product in both simulated bench models and standard in vivo pre-clinical models . however , as we plan to focus our resources on the further expansion of our sales and marketing activities for cguard eps and mguard prime eps and , provided that we have sufficient resources , the development of cguard eps with a smaller delivery catheter ( 5 french gauge ) and its submission for ce mark approval , we do not intend to resume further development of nguard until at least the third quarter of 2018. we also intend to develop a pipeline of other products and additional applications by leveraging our micronet technology to new applications to improve peripheral vascular and neurovascular procedures , such as the treatment of the superficial femoral artery disease , vascular disease below the knee and neurovascular stenting to seal aneurysms in the brain . presently , none of our products may be sold or marketed in the united states . recent events effective as of 5:00 p.m. eastern time on february 7 , 2018 , we amended our certificate of incorporation in order to effectuate a 1-for-35 reverse stock split of our outstanding shares of common stock . critical accounting policies we prepared our consolidated financial statements in accordance with u.s. generally accepted accounting principles ( “ u.s . gaap ” ) . u.s. gaap represents a comprehensive set of accounting and disclosure rules and requirements , and applying these rules and requirements requires management judgments and estimates including , in certain circumstances , choices between acceptable u.s. gaap alternatives . the following is a discussion of our most critical accounting policies , judgments and uncertainties that are inherent in our application of u.s. gaap . use of estimates the preparation of financial statements in conformity with u.s. gaap requires management to make estimates using assumptions that affect the reported amounts of assets and liabilities , the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods . actual results could differ from those estimates . 50 as applicable to these consolidated financial statements , the most significant estimates and assumptions relate to inventory valuations , share-based compensation and legal contingencies . functional currency the currency of the primary economic environment in which our operations and the operations of our subsidiaries are conducted is the u.s. dollar ( “ $ ” or “ dollar ” ) . accordingly , our and our subsidiaries ' functional currency is the u.s. dollar . story_separator_special_tag as a result of these expected losses and negative cash flows from operations , along with our current cash position , we only have sufficient resources to fund operations for a period of up to four months from the date of filing of this annual report on form 10-k. therefore , there is substantial doubt about our ability to continue as a going concern . our plans include the continued commercialization of our products and raising capital through the sale of additional equity securities , debt or capital inflows from strategic partnerships . there are no assurances , however , that we will be successful in obtaining the level of financing needed for our operations . if we are unsuccessful in commercializing our products and raising capital , we may need to reduce activities , curtail or cease operations . on october 23 , 2013 , we entered into a loan and security agreement with hercules technology growth capital , inc. ( “ hercules ” ) , which was subsequently amended on november 19 , 2013 , july 23 , 2014 , and june 13 , 2016 , pursuant to which we received a loan of $ 10 million , before deduction of issuance costs . interest on the loan was determined on a daily basis at a variable rate equal to the greater of either ( i ) 10.5 % , or ( ii ) the sum of ( a ) 10.5 % plus ( b ) the prime rate minus 5.5 % . in connection with the loan and security agreement , on october 23 , 2013 , we issued the lender a five year warrant to purchase 20 shares of our common stock at a per share exercise price of $ 25,987.50. the amendment to the loan and security agreement entered into on june 13 , 2016 , provides that , among other things , the principal payment otherwise due and payable would be suspended for a four month period beginning may 1 , 2016 , provided that we receive unrestricted and unencumbered net cash proceeds in an amount of at least $ 10 million from the sale of our equity securities with investors acceptable to the lender on or prior to june 30 , 2016. in addition , we agreed to increase the end of term charge from $ 500,000 to $ 520,000 on the earliest to occur of february 1 , 2017 , or when the loan is paid in full or matures . our obligations under the loan and security agreement were secured by a grant of a security interest in substantially all of our assets . the principal payments due on may 1 , 2016 , and june 1 , 2016 , were suspended , and although the public offering that closed in july 2016 had not closed prior to june 30 , 2016 , the lender agreed to waive the july 1 , 2016 , principal payment . additionally , on july 6 , 2016 , the lender agreed to waive the august 1 , 2016 principal payment , as well . we were required to make monthly payments of interest and principal in the amount of approximately $ 380,000 per month , with the loan maturing on june 1 , 2017. in connection with the third amendment to the loan and security agreement , we entered into a warrant agreement with the lender , pursuant to which we issued on june 13 , 2016 , a five year warrant to purchase up to 1,106 shares of common stock . on march 21 , 2017 , we paid down the remaining $ 1.2 million balance , and all liens and other security interests granted to hercules by us and our subsidiaries were terminated upon such payment . on march 21 , 2016 , we sold 2,201 shares of our common stock and warrants to purchase 1,114 shares of our common stock in a public offering . each purchaser received a warrant to purchase one half of one share of common stock for each share of common stock that it purchased in the offering . the warrants are exercisable immediately and have a term of exercise of 5 years from the date of issuance and an exercise price of $ 516.25. this offering resulted in gross proceeds to us of approximately $ 1.1 million . on march 21 , 2016 , we sold 1,183 shares of our common stock and warrants to purchase 592 shares of our common stock in a private placement . each purchaser received a warrant to purchase one half of one share of common stock for each share of common stock that it purchased in the offering . the warrants are exercisable immediately and have a term of exercise of 5 years from the date of issuance and an exercise price of $ 516.25. this offering resulted in gross proceeds to us of approximately $ 0.6 million . these offerings on march 21 , 2016 , resulted in net proceeds to us of approximately $ 1.4 million after deducting placement agent fees and other estimated offering expenses . 54 on july 7 , 2016 , we closed a public offering of 442,424 shares of series b preferred stock and accompanying “ series a ” warrants to purchase up to 50,620 shares of common stock . each share of series b preferred stock and the accompanying warrants were sold at a price of $ 33.00. each share of series b preferred stock was initially convertible into 0.114 shares of common stock reflecting a conversion price equal to $ 288.75 per share . in accordance with the anti-dilution price protection contained in the certificate of designation for the series b preferred stock , upon closing of the march 2017 offering , we reduced the series b preferred stock conversion price upon closing of the march 2017 offering to $ 56.00 per share of common stock , and each share of series b preferred stock became convertible into 0.589 shares of common stock .

results of operations twelve months ended december 31 , 2017 compared to the twelve months ended december 31 , 2016 revenues . for the twelve months ended december 31 , 2017 , revenue increased by $ 867,000 , or 45.8 % , to $ 2,761,000 , from $ 1,894,000 during the twelve months ended december 31 , 2016. this increase was predominantly driven by a 67.6 % increase in sales of cguard eps from $ 1,147,000 in 2016 , to $ 1,922,000 in 2017 , as we transitioned from our prior exclusive distribution partner for most of europe to local distributors , expanded into new geographies such as russia , and continued focus on expanding existing markets such as italy . the transition to local distributors reflects an effort to broaden our sales efforts from only interventional neuroradiologists to include vascular surgeons , interventional cardiologists and interventional radiologists , as well . in addition to the increase in sales of cguard eps , sales of mguard prime eps increased by 12.3 % or $ 92,000 , from $ 747,000 in 2016 , to $ 839,000 in 2017. with respect to regions , the increase in revenue was primarily attributable to an increase of $ 640,000 in revenue from sales made in europe ( driven by $ 735,000 growth of cguard eps for reasons mentioned above , offset by a decrease in revenues of mguard prime eps largely driven by doctors increasingly using drug-eluting stents rather than bare metal stents such as mguard prime eps in stemi patients ) as well as an increase of $ 246,000 in sales made in latin america ( driven by $ 222,000 growth of mguard prime eps resulting from increased geographical coverage and an increase of $ 24,000 in revenues from cguard eps ) . gross profit ( loss ) .

we are a clinical-stage biotechnology company that discovers , develops and seeks to commercialize novel , hospital-based therapies capable of transforming treatment paradigms in the management of acute , life-threatening critical care conditions . our initial product candidates target rare , acute , life-threatening neurological and other conditions for which we believe the approved existing therapies , if any , are inadequate . page | 61 index we believe eg-1962 , our lead product candidate , can fundamentally improve patient outcomes and transform the management of asah , which is bleeding around the brain due to a ruptured brain aneurysm . a single dose of eg-1962 delivers high concentrations of nimodipine , the current standard of care , directly to the brain with sustained drug exposure over 21 days . eg-1962 utilizes our proprietary , programmable , biodegradable polymer-based development platform , or our precisa tm development platform , through a novel delivery mechanism that enables targeted and sustained drug exposure while potentially avoiding dose-limiting side effects associated with currently available formulations of nimodipine . eg-1962 has been granted orphan drug designation and fast track designation by the fda , for the treatment of patients with subarachnoid hemorrhage . the european commission has granted orphan drug designation to eg-1962 for treatment of asah . in july 2016 , we commenced the phase 3 newton 2 study for eg-1962 . newton 2 is a multi-center , multi-national , randomized , double-blind , placebo-controlled , parallel-group study comparing the efficacy and safety of eg-1962 to standard of care oral nimodipine in adults with an asah . the primary endpoint of the newton 2 study is the proportion of subjects with a favorable clinical outcome ( a score of 6 – 8 on the gose ) at day 90. the key secondary endpoint is the subject 's score on moca . we expect the results of an interim analysis of newton 2 to be completed in early 2018. depending on the results of the interim analysis , the study may continue to full data readout , in which case we expect the results of the study to be available in late 2018. the final results of the newton 2 study , if positive , are expected to form the basis for a marketing application to the fda and other global health regulatory authorities for the approval of eg-1962 for the treatment of asah . in the united states , we plan to use the fda section 505 ( b ) ( 2 ) regulatory pathway . our phase 1/2 clinical study of eg-1962 in north america , which we refer to as our newton north america study , met its primary and secondary endpoints of safety , tolerability , defining the mtd and pharmacokinetics . the results of the principal exploratory efficacy endpoint from the 90-day follow-up demonstrated that 60 % ( 27 of 45 ) of patients treated with eg-1962 experienced a favorable clinical outcome ( a score of 6-8 on the gose ) versus 28 % ( 5 of 18 ) of patients treated with the standard of care oral nimodipine . at the final assessment , of the 45 patients treated with eg-1962 , 29 % ( 13 of 45 ) of patients achieved the highest clinical outcome score ( gose=8 , upper good recovery ) versus 6 % ( 1 of 18 ) patients treated with the standard of care oral nimodipine . a phase 1 study of the safety , pharmacokinetics and clinical outcomes of eg-1962 administered intracisternally , or directly into the basal cisterns of the brain is open for enrollment for patients with asah who do not receive an evd but remain at risk for delayed neurological complications following surgical repair of a ruptured aneurysm . this study is a multicenter , randomized , controlled , open-label study in which nine patients are expected to receive eg-1962 via intracisternal administration and three patients are expected to receive standard of care oral nimodipine . we expect data to be available from this study during 2017. in addition to eg-1962 , we are using our precisa development platform to develop additional product candidates targeting other acute , serious conditions where limited or no current approved therapies exist . we are developing our second product candidate , eg-1964 , as a prophylactic treatment in the management of csdh , to prevent recurrent bleeding on the surface of the brain . a csdh is a liquefied hematoma that has accumulated on the surface of the brain in an area referred to as the subdural space and is often caused by minor head trauma . following neurosurgical intervention to drain the hematoma , bleeding in the subdural space typically recurs in 3 % to 33 % of patients at which point another costly and risky surgical intervention is required . eg-1964 contains aprotinin , a serine protease inhibitor isolated from the lungs and pancreas which was approved to reduce bleeding after cardiac surgery . aprotinin works by slowing the breakdown of blood clots . we are in the process of formulating eg-1964 to deliver a high concentration of aprotinin directly to the subdural space by way of a single administration at the time of initial neurosurgical intervention with sustained drug exposure over 21 to 28 days . if approved , we expect that eg-1964 can become the standard of care as a prophylactic treatment in the management of csdh to prevent recurrent bleeding . we intend to complete formulation development activities and commence non-clinical studies of eg-1964 in 2017. based on the results of those studies , in 2018 , we may submit to the fda a request for authorization to investigate a new drug in human clinical studies , known as an ind , for eg-1964 . from our inception in 2009 , we have devoted substantially all of our efforts to business planning , engaging regulatory , manufacturing and other technical consultants , developing operating assets , planning and executing clinical trials and raising capital . we have never been profitable and have incurred net losses in each year since inception . story_separator_special_tag we anticipate we will make determinations as to which product candidates to pursue and how much funding to direct to each product candidate on an ongoing basis in response to the scientific and clinical success of each product candidate as well as ongoing assessments as to the commercial potential of our product candidates . general and administrative expenses general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation , related to our executive , finance , legal , business development and support functions . other general and administrative expenses include travel expenses , professional fees for auditing , tax and legal services and facility-related costs . the following table summarizes our general and administrative expenses incurred for the periods indicated ( in thousands ) : replace_table_token_4_th we expect that general and administrative expenses will increase in the future as we expand our operating activities and incur additional costs associated with being a publicly-traded company . these increases will likely include legal , accounting and filing fees , directors ' and officers ' liability insurance premiums and fees and other costs associated with investor relations . warrant remeasurement warrant remeasurement reflects adjustments to fair value of our liability-classified warrants . as of december 31 , 2015 we no longer had liability classified warrants . page | 64 index other expense other expense reflects the loss on asset disposal representing the book value of leasehold improvements at our former location due to the company 's relocation of its corporate office and debt issuance costs on our new loan in 2016. interest income interest income consists of interest income earned on our cash and cash equivalents . interest expense interest expense consists of interest expense on our borrowings under the loan agreement with hercules capital , inc. critical accounting policies and significant judgments and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which have been prepared in accordance with u.s. gaap . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements , as well as the reported revenue generated and expenses incurred during the reporting periods . our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . while our significant accounting policies are described in the notes to our financial statements appearing in this annual report , we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results . income taxes we file u.s. federal income tax returns and new jersey state tax returns . our deferred tax assets are primarily comprised of federal and state tax net operating losses and tax credit carryforwards and are recorded using enacted tax rates expected to be in effect in the years in which these temporary differences are expected to be utilized . at december 31 , 2016 , we had federal net operating loss , or nol , carryforwards of approximately $ 69.5 million , which expire at various dates between 2029 and 2036. at december 31 , 2016 , we had federal research and development credits carryforwards of approximately $ 1.3 million and orphan drug credit of approximately $ 11.4 million . we may be subject to the net operating loss utilization provisions of section 382 of the internal revenue code . the effect of an ownership change would be the imposition of an annual limitation on the use of nol carryforwards attributable to periods before the change . the amount of the annual limitation depends upon our value immediately before the ownership change , changes to our capital during a specified period prior to the change , and the federal published interest rate . although we have not completed an analysis under section 382 of the code , it is likely that the utilization of the nols will be limited . accrued clinical expenses when preparing our financial statements , we are required to estimate our accrued clinical expenses . this process involves reviewing open contracts and communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual cost . payments under some of the contracts we have with parties depend on factors , such as successful enrollment of certain numbers of patients , site initiation and the completion of clinical trial milestones . when accruing clinical expenses , we estimate the time period over which services will be performed and the level of effort to be expended in each period . if possible , we obtain information regarding unbilled services directly from our service providers . however , we may be required to estimate the cost of these services based only on information available to us . if we underestimate or overestimate the cost associated with a trial or service at a given point in time , adjustments to research and development expenses may be necessary in future periods . historically , our estimated accrued clinical expenses have approximated actual expense incurred . stock-based compensation we estimate the fair value of our stock-based awards to employees and non-employees using the black-scholes option-pricing model , which requires the input of highly subjective assumptions , including : ( 1 ) the expected volatility of our stock , ( 2 ) the expected term of the award , ( 3 ) the risk-free interest rate and ( 4 ) expected dividends .

results of operations comparison of the years ended december 31 , 2016 and 2015 replace_table_token_6_th research and development expenses research and development expenses increased to $ 24.8 million in the year ended december 31 , 2016 from $ 17.8 million for the same period in 2015. the increase of $ 7.0 million was primarily attributable to an increase in external expenses for the eg-1962 product of $ 5.0 million and additional internal personnel costs of $ 2.9 million to support the growth in our r & d activities , offset by a decrease in the eg-1964 study of $ 0.7 million . page | 66 index general and administrative expenses general and administrative expenses increased to $ 14.7 million in the year ended december 31 , 2016 from $ 8.7 million for the same period in 2015. the $ 6.0 million increase was due primarily to increases in personnel costs of $ 1.1 million , stock based compensation of $ 1.4 million , facilities expense of $ 0.8 million , insurance costs of $ 0.7 million and professional fees of $ 1.9 million . warrant remeasurement warrant remeasurement reflects adjustments to fair value of our liability classified warrants . as of december 31 , 2015 , we no longer had liability classified warrants . other expense other expense reflects the loss on asset disposal representing the book value of leasehold improvements at our former location due to the company 's relocation of its corporate office and debt issuance costs on our new loan . interest income and expense , net interest income and expense , net increased primarily due to interest expense for our loan offset by an increase in interest income from interest earned on our cash and cash equivalents .

current cost of lifo-valued inventories was $ 793.0 million at june 30 , 2019 and $ 760.8 million at june story_separator_special_tag background and general our discussions below in this item 7 should be read in conjunction with our consolidated financial statements , including the notes thereto , included in this annual report on form 10-k. we are a producer and distributor of premium specialty alloys , including titanium alloys , powder metals , stainless steels , alloy steels , and tool steels as well as drilling tools . we are a recognized leader in high-performance specialty alloy-based materials and process solutions for critical applications in the aerospace , defense , transportation , energy , medical , industrial and consumer markets . we have evolved to become a pioneer in premium specialty alloys , including titanium , nickel , and cobalt , as well as alloys specifically engineered for additive manufacturing ( `` am '' ) processes and soft magnetics applications . we have expanded our am capabilities to provide a complete “ end-to-end ” solution to accelerate materials innovation and streamline parts production . we primarily process basic raw materials such as nickel , cobalt , titanium , manganese , chromium , molybdenum , iron scrap and other metal alloying elements through various melting , hot forming and cold working facilities to produce finished products in the form of billet , bar , rod , wire and narrow strip in many sizes and finishes . we also produce certain metal powders and parts . our sales are distributed directly from our production plants and distribution network as well as through independent distributors . unlike many other specialty steel producers , we operate our own worldwide network of service and distribution centers . these service centers , located in the united states , canada , mexico , europe and asia allow us to work more closely with customers and to offer various just-in-time stocking programs . as part of our overall business strategy , we have sought out and considered opportunities related to strategic acquisitions and joint collaborations as well as possible business unit dispositions aimed at broadening our offering to the marketplace . we have participated with other companies to explore potential terms and structures of such opportunities and expect that we will continue to evaluate these opportunities . while we prepare our financial statements in accordance with u.s. generally accepted accounting principles ( “ u.s . gaap ” ) , we also utilize and present certain financial measures that are not based on or included in u.s. gaap ( we refer to these as “ non-gaap financial measures ” ) . please see the section “ non-gaap financial measures ” below for further discussion of these financial measures , including the reasons why we use such financial measures and reconciliations of such financial measures to the nearest u.s. gaap financial measures . 17 business trends selected financial results for the past three fiscal years are summarized below : replace_table_token_6_th ( 1 ) see the section “ non-gaap financial measures ” below for further discussion of these financial measures . ( 2 ) includes pounds from specialty alloys operations segment , and certain performance engineered products segment businesses including dynamet , carpenter powder products and lpw technology ltd. our sales are across diverse end-use markets . the table below summarizes our sales by end-use market over the past three fiscal years : replace_table_token_7_th impact of raw material prices and product mix we value most of our inventory utilizing the lifo inventory costing methodology . under the lifo inventory costing method , changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers . in a period of rising raw material costs , the lifo inventory valuation normally results in higher cost of sales . conversely , in a period of decreasing raw material costs , the lifo inventory valuation normally results in lower cost of sales . 18 the volatility of the costs of raw materials has impacted our operations over the past several years . we , and others in our industry , generally have been able to pass cost increases on major raw materials through to our customers using surcharges that are structured to recover increases in raw material costs . generally , the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month which correlates to the prices we pay for our raw material purchases . however , a portion of our surcharges to customers may be calculated using a different surcharge formula or may be based on the raw material prices at the time of order , which creates a lag between surcharge revenue and corresponding raw material costs recognized in cost of sales . the surcharge mechanism protects our net income on such sales except for the lag effect discussed above . however , surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report . approximately 25 percent of our net sales are sales to customers under firm price sales arrangements . firm price sales arrangements involve a risk of profit margin fluctuations , particularly when raw material prices are volatile . in order to reduce the risk of fluctuating profit margins on these sales , we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the related products sold . firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are established . story_separator_special_tag excluding special items , earnings per share would have been $ 2.50 per diluted share for fiscal year 2018. our fiscal year 2019 results reflect strong market conditions combined with our solutions focused approach that drove increasing sales in the majority of our end-use markets and further implementation of the carpenter operating model . 20 net sales net sales for fiscal year 2019 were $ 2,380.2 million , which was a 10 percent increase from fiscal year 2018 . excluding surcharge revenue , sales were 8 percent higher than fiscal year 2018 on 1 percent higher volume . the results reflect stronger demand and improved product mix across key end-use markets demonstrating our focus on high-value solutions and market share gain by deepening our existing relationships and adding new customers . geographically , sales outside the united states increased 6 percent from fiscal year 2018 to $ 773.5 million . the increase is primarily due to stronger product demand in the aerospace and defense end-use market in asia pacific , south america and canada partially offset by lower demand in europe . in addition , demand was stronger in the energy and medical end-use markets in europe and asia pacific . a portion of our sales outside the united states are denominated in foreign currencies . the impact of fluctuations in foreign currency exchange rates resulted in a $ 4.5 million decrease in sales during fiscal year 2019 compared to fiscal year 2018. international sales as a percentage of our total net sales represented 32 percent and 34 percent for fiscal year 2019 and fiscal year 2018 , respectively . sales by end-use markets we sell to customers across diversified end-use markets . the following table includes comparative information for our net sales , which includes surcharge revenue , by principal end-use markets . we believe this is helpful supplemental information in analyzing the performance of the business from period to period . replace_table_token_10_th the following table includes comparative information for our net sales by the same principal end-use markets , but excluding surcharge revenue : replace_table_token_11_th sales to the aerospace and defense market increased 12 percent from fiscal year 2018 to $ 1,327.9 million . excluding surcharge revenue , sales increased 10 percent on 2 percent higher shipment volume . the results reflect the impact of stronger demand for materials used across all aerospace sub-markets and defense , driven by aerospace engines , fasteners , avionics and program specific defense applications . sales to the medical market increased 17 percent to $ 205.0 million from fiscal year 2018 . excluding surcharge revenue , sales increased 18 percent on 17 percent higher shipment volume . the results reflect improved product mix for higher value solutions , market share gains with key customers and the positive impact of supply chain inventory rebuilding for titanium materials within the surgical and cardiology sub-markets . 21 sales to the energy market of $ 181.7 million reflected a 24 percent increase from fiscal year 2018 . excluding surcharge revenue , sales increased 18 percent . the results were driven by revenue and volume increases during the first half of the fiscal year in the oil and gas sub-market , particularly rental and replacement activity through our amega west services ( “ amega west ” ) business , and higher demand for materials used in power generation applications . transportation market sales remained flat from fiscal year 2018 at $ 157.7 million . excluding surcharge revenue , sales decreased 1 percent on 6 percent lower shipment volume . the results reflect a strengthening of heavy-duty truck applications , partially offset by trade actions and global economic uncertainty . industrial and consumer market sales increased 2 percent to $ 371.5 million for fiscal year 2019 . excluding surcharge revenue , sales increased 1 percent on 4 percent lower shipment volume . the results reflect the impact of stronger demand for materials used in consumer goods including the sporting sub-market . gross profit gross profit in fiscal year 2019 increased to $ 444.8 million , or 18.7 percent of net sales from $ 382.3 million , or 17.7 percent of net sales for fiscal year 2018 . excluding the impact of the surcharge revenue , our gross margin in fiscal year 2019 was 22.9 percent compared to 21.3 percent in fiscal year 2018. the results reflect the impact of improved product mix coupled with capacity gains and operating cost reductions compared to the same period a year ago . fiscal year 2019 also reflects an $ 11.4 million benefit related to an insurance recovery in our third fiscal quarter . our surcharge mechanism is structured to recover increases in raw material costs , although in certain cases with a lag effect as discussed above . while the surcharge generally protects the absolute gross profit dollars , it does have a dilutive effect on gross margin as a percent of sales . the following represents a summary of the dilutive impact of the surcharge on gross margin . we present and discuss these financial measures because management believes removing the impact of surcharge provides a more consistent and meaningful basis for comparing results of operations from period to period . see the section “ non-gaap financial measures ” below for further discussion of these financial measures . replace_table_token_12_th selling , general and administrative expenses selling , general and administrative expenses in fiscal year 2019 were $ 203.4 million , or 8.5 percent of net sales ( 10.5 percent of net sales excluding surcharge revenue ) , compared to $ 193.0 million , or 8.9 percent of net sales ( 10.8 percent of net sales excluding surcharge revenue ) , in fiscal year 2018 .

business segment results summary information about our operating results on a segment basis is set forth below . for more detailed segment information , see note 19 to the consolidated financial statements included in item 8 . “ financial statements and supplementary data ” . the following table includes comparative information for volumes by business segment : replace_table_token_21_th * pounds sold data for pep segment includes dynamet and carpenter powder products businesses only . the following table includes comparative information for net sales by business segment : replace_table_token_22_th the following table includes comparative information for our net sales by business segment , but excluding surcharge revenue : replace_table_token_23_th 29 specialty alloys operations segment net sales in fiscal year 2018 for the sao segment increased 23 percent to $ 1,803.8 million , as compared with $ 1,461.6 million in fiscal year 2017. excluding surcharge revenue , net sales increased 17 percent from fiscal year 2017. the fiscal year 2018 net sales reflected 13 percent higher shipment volume as compared to fiscal year 2017. the results reflect the impact of stronger product demand driven by improving market conditions across our end-use markets compared to fiscal year 2017. operating income for the sao segment in fiscal year 2018 was $ 232.4 million , or 12.9 percent of net sales ( 16.2 percent of net sales excluding surcharge revenue ) , compared to $ 172.3 million , or 11.8 percent of net sales ( 14.1 percent of net sales excluding surcharge revenue ) , for fiscal year 2017. the increase in operating income reflects the impact of higher product demand and stronger product mix driven by improving market conditions across our end-use markets compared to fiscal year 2017. performance engineered products segment net sales for fiscal year 2018 for the pep segment were $ 429.7 million as compared with $ 366.6 million for fiscal year 2017. excluding surcharge revenue , net sales increased 17 percent from

prior to story_separator_special_tag ” for further discussion and reconciliation of adjusted ebitda , adjusted ebitda margin , free cash flow and free cash flow margin to the related gaap financial measures . the following schedules reflect all other non-gaap financial measures and reconcile such non-gaap financial measures to the related gaap financial measures : replace_table_token_19_th ​ 49 replace_table_token_20_th ​ ​ 50 liquidity and capital resources as of december 31 , 2020 , we had cash and cash equivalents of $ 303.1 million and retained earnings of $ 21.9 million . prior to july 31 , 2020 , our primary sources of capital had been from sales of our solutions and proceeds from bank lending facilities . on july 31 , 2020 , we received $ 423.0 million in proceeds , net of underwriting fees and commissions , from the sale of 23,812,216 shares of our class a common stock and used a portion of the proceeds to pay off the $ 175.0 million term loan facility . as a result , we have no outstanding bank debt after such redemption . the net proceeds remaining after payment of offering costs are being used for working capital and other corporate purposes . we believe that our existing cash resources and our $ 100 million bank line of credit will be sufficient to meet our capital requirements and fund our operations for at least the next 12 months . however , if these sources are insufficient to satisfy our liquidity requirements , we may seek to sell additional equity or debt securities or borrow from our banks . if we raise additional funds by issuing equity securities , our stockholders will experience dilution . debt financing , if available , may involve covenants restricting our operations or our ability to incur additional debt . any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders . additional financing may not be available at all , or in amounts or on terms unacceptable to us . historical cash flows years ended december 31 , 2020 and 2019 the following table presents a summary of our cash flows for the periods indicated : replace_table_token_21_th ​ operating activities . cash provided by operating activities was $ 59.5 million in 2020 compared to $ 92.5 million in 2019 , a decrease of $ 33.0 million . this decrease was primarily attributable to $ 22.9 million in cash payments for redemption of sars converted to stock options in connection with the offering where such cash flows are required under gaap to be classified as operating consistent with the original sars ' liability classification . the remaining decrease in operating cash flows of $ 10.1 million was a result of an increase in costs associated with increased development activity associated with nascent technologies and comparatively lower cash generated through changes in operating assets and liabilities , which included changes in accounts receivable and deferred revenues as a result of timing , sales mix and differences in customer payment terms . investing activities . cash used in investing activities was $ 44.4 million in 2020 compared to $ 37.6 million in 2019 , an increase of $ 6.8 million . this increase was primarily related to the acquisition of a controlling interest in systax , partially offset by a $ 5.4 million decrease in cash consumed to support on-premise capitalized software additions in 2020 compared to 2019. this decrease in on-premise capitalized software development costs is associated with the continued shift in our development efforts to cloud-based solutions . investments in cloud-based solutions increased by $ 4.5 million in 2020 over 2019 and are included in internal use software as additions to property and equipment . these increased investments in cloud-based solutions offset the reductions in investments in other property and equipment due to delays as a result of the covid-19 pandemic . financing activities . cash provided by ( used in ) financing activities was $ 213.6 million in 2020 compared to $ ( 30.6 ) million in 2019 , an increase of $ 244.2 million . this increase was primarily due to $ 423.0 million in net proceeds received from the offering , partially offset by $ 117.6 million of increased distributions paid to stockholders prior to the offering and a $ 45.7 million increase in net repayments of indebtedness . 51 years ended december 31 , 2019 and 2018 the following table presents a summary of our cash flows for the periods indicated : replace_table_token_22_th ​ operating activities . cash provided by operating activities was $ 92.5 million in 2019 compared to $ 80.4 million in 2018 , an increase of $ 12.1 million . this increase was primarily due to increased net income of $ 4.5 million , after adding back the 2018 asset impairment of $ 32.7 million , increases in stock-based compensation of $ 4.4 million and a net increase in cash from operating assets and liabilities of $ 3.6 million . investing activities . cash used in investing activities was $ 37.6 million in 2019 compared to $ 33.3 million in 2018 , an increase of $ 4.2 million . this increase is due to investments focused on productivity enhancement associated with process automation and implementation of new tools . financing activities . cash used in financing activities was $ 30.6 million in 2019 compared to $ 30.7 million in 2018 , a decrease of $ 0.1 million . this decrease was primarily due to an increase in principal repayments of bank debt of $ 2.3 million , offset by an increase in cash collected with respect to customer funds obligations of $ 2.6 million . story_separator_special_tag for a summary of our significant accounting policies , see note 1 to our consolidated financial statements beginning on page f-1 of this annual report on form 10-k. 53 revenue recognition revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration expected to be received in exchange for those products or services . we enter into contracts that can include various combinations of products and services , which are generally capable of being distinct and accounted for as separate performance obligations . revenue is recognized net of allowance for subscription and non-renewal cancellations and any taxes collected from customers , which are subsequently remitted to governmental authorities . licenses for on-premise software subscriptions provide the customer with a right to use the software as it exists when made available to the customer . customers purchase a subscription to these licenses , which includes the related software and tax content updates and product support . the updates and support , which are part of the subscription agreement , are essential to the continued utility of the software . therefore , we have determined the software and the related updates and support to be a single performance obligation . accordingly , when on-premise software is licensed , the revenue associated with this combined performance obligation is recognized ratably over the license term as these subscription services are provided for the duration of the license term . revenue recognition begins on the later of the beginning of the subscription period or the date the software is made available to the customer to download . our on-premise software subscription prices in the initial subscription year are higher than standard renewal prices . the excess initial year price over the renewal price ( `` new sale premium '' ) is considered to be a material right . we recognize revenue associated with the material right over the estimated period of benefit to the customer , generally three years . cloud-based subscriptions allow customers to use company-hosted software over the contract period without taking possession of the software . the cloud-based offerings also include related updates and support . all services within the cloud-based contracts would consistently provide a benefit to the customer during the subscription period , thus the associated revenue is recognized ratably over the subscription period . revenue recognition begins on the later of the beginning of the subscription period or the date the customer is provided access to the cloud-based services . revenue from deliverable-based services is recognized as services are delivered . revenue from fixed fee services is recognized as services are performed using the percentage of completion input method . we have elected the `` right to invoice '' practical expedient for revenue related to services that are billed on an hourly basis , which enables revenue to be recognized as the services are performed . we have determined that the methods applied to measuring our progress toward complete satisfaction of performance obligations recognized over time are a faithful depiction of our transfer of control of software and services to customers . significant judgments contracts with customers often include promises to transfer multiple products and services to a customer . determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment . identification of the amortization periods of material rights and contract costs requires significant judgement by management . contract balances timing of revenue recognition may differ from the timing of invoicing customers . a receivable , or contract asset , is recorded in the consolidated balance sheet when customers are billed related to revenue to be collected and recognized for subscription agreements as there is an unconditional right to invoice and receive payment in the future related to these subscriptions . a receivable and related revenue may also be recorded in advance of billings to the extent services have been performed and we have a right under the contract to bill and collect for such performance . subscription-based customers are generally invoiced at the beginning of each annual subscription period . a contract liability is recorded as deferred revenue on the consolidated balance sheet when subscription-based customers are billed in advance of performance obligations being satisfied , and revenue is recognized subsequent to invoicing ratably over the subscription period or over the amortization period of material rights . deferred sales commissions earned by our sales force and certain sales incentive programs and vendor referral agreements are considered incremental and recoverable costs of obtaining a contract with a customer . an asset is recognized for these incremental contract costs and reflected as deferred commissions in the consolidated balance sheet . 54 these contract costs are amortized on a straight-line basis over a period consistent with the transfer of the associated product and services to the customer , which is generally three years . amortization of these costs are included in selling and marketing expense in the consolidated statements of comprehensive income ( loss ) . we periodically review these contract assets to determine whether events or changes in circumstances have occurred that could impact the period of benefit of these assets . there were no contract asset impairment losses recorded for the periods presented . payment terms payment terms and conditions vary by contract , although our terms generally include a requirement of payment within 30 days . in instances where the timing of revenue recognition differs from the timing of payment , we have determined that our contracts do not include a significant financing component . the primary purpose of invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services , not to receive financing from customers or to provide customers with financing . stock-based compensation we apply the provisions of asc 718 , compensation—stock compensation , for the award of equity-based instruments .

income taxes , on the basis of a two-step process whereby : ( i ) management determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position , and ( ii ) for those tax positions that meet the more likely than not recognition threshold , management recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate settlement with the related tax authority . the impact as a result of the application of asc 740 is reflected in the 57 consolidated financial statements . the company assesses its income tax positions and records tax benefits or expense based upon management 's evaluation of the facts , circumstances , and information available at the reporting date . recent accounting pronouncements a discussion of recent accounting pronouncements is included in note 1 to our consolidated financial statements beginning on page f-1 of this annual report on form 10-k. jobs act as a company with less than $ 1.07 billion in revenue during our last fiscal year , we qualify as an “ emerging growth company , ” as defined in the jobs act . an emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies . these provisions include : ● not being required to comply with the auditor attestation requirements of section 404 of the sarbanes-oxley act ; ● reduced disclosure obligations regarding executive compensation in our periodic reports , proxy statements and registration statements ; and ● exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved . we may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of our offering .

management 's discussion and analysis contains forward-looking statements that are provided to assist in the understanding of anticipated future performance . however , future performance involves risks and uncertainties which may cause actual results to differ materially from those expressed in the forward-looking statements . see “ forward-looking statements ” . overview we specialize in the placement of information technology , engineering , and accounting professionals for direct hire and contract staffing for our clients , and provide temporary staffing services for our light industrial clients . as a result of our acquisition of scribe solutions in april 2015 , we now also offer data entry assistants ( medical scribes ) who specialize in electronic medical records ( emr ) services for emergency departments , specialty physician practices and clinics . there is currently a growing need for medical scribes due to the rise in emr being utilized for billing and documentation of health care services and the meaningful use requirements that are part of the affordable care act . the acquisitions of agile resources , inc. a georgia corporation ( `` agile '' ) , access data consulting corporation , a colorado corporation ( `` access '' ) and paladin consulting inc. , a texas corporation ( `` paladin '' ) expanded our geographical footprint within the placement and contract staffing of information technology . our staffing services are provided through a network of twenty branch offices located in downtown or suburban areas of major u.s. cities in ten states . we have one office located in each of arizona , colorado , georgia , indiana , illinois and massachusetts , two offices in each of california , and texas , three offices in florida and seven offices in ohio . 12 management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions , financed primarily through the issuance of equity and debt , to improve the overall profitability and cash flows of the company . we believe our current segments complement one another and position us for future growth . story_separator_special_tag style= '' margin : 0px '' > change in derivative liability change in derivative liability for the year ended september 30 , 2016 , decreased to $ 0 , compared with the prior year as a result of the brio loan being fully converted to stock in the prior year . change in contingent consideration at the time the company makes an acquisition , the company estimates contingent consideration , such as earn-outs or other guarantees that could affect the purchase price when the contingency is resolved . contingent consideration is evaluated by management each quarter or when the contingency is resolved . the change in contingent consideration with respect to the company 's acquisitions was approximately $ 1,581,000 during the year ended september 30 , 2016. the change was related to an $ 1,956,000 gain recognized from the reduction in access contingent consideration as a result of a decrease in expected ebitda , offset by a $ 375,000 loss recognized for the increase in paladin expected contingent consideration as a result of an increase in their expected ebitda . loss on extinguishment of debt loss on the extinguishment of debt for the year ended september 30 , 2016 , decreased to $ 0 , compared with the prior year as the debt was converted during the prior year . interest expense interest expense for the year ended september 30 , 2016 , increased $ 1,058,000 , or 194 % compared with the prior year primarily as a result of a new lender , the interest expense for acquisition payments and higher average borrowings during fiscal year 2016. liquidity and capital resources the following table sets forth certain consolidated statements of cash flows data ( in thousands ) : replace_table_token_6_th 15 as of september 30 , 2016 , the company had cash of approximately $ 2,528,000 , which was a decrease of approximately $ 3,404,000 from approximately $ 5,932,000 at september 30 , 2015. negative working capital at september 30 , 2016 was approximately $ ( 597,000 ) , as compared to working capital of approximately $ 5,636,000 for september 30 , 2015. the cash has been used primarily in the acquisitions of several entities . the company 's current ratio was approximately 96 % , a decrease of approximately 80 % from the prior year . shareholders ' equity as of september 30 , 2016 , was approximately $ 24,533,000 which represented approximately 53 % of total assets . at the company 's option , approximately $ 500,000 of its current liabilities related to the acquisitions can be paid in stock at market price , instead of cash . the net income for the year ended september 30 , 2016 , was approximately $ 1,173,000. net cash provided by ( used in ) operating activities for the years ended september 30 , 2016 and 2015 was approximately $ 723,000 and $ ( 650,000 ) , respectively . the fluctuation is due to the significant increase in accounts payable and offset by the reduction of accrued compensation and other current items . in addition to non-cash related expense for depreciation , amortization and stock compensation . net cash used in investing activities for the years ended september 30 , 2016 and 2015 was ( $ 9,515,000 ) and ( $ 2,762,000 ) respectively . the primary use of cash was for the acquisitions of access and paladin during the year ended september 30 , 2016. net cash flow provided by financing activities for the years ended september 30 , 2016 and 2015 was approximately $ 5,388,000 and $ 9,176,000 , respectively . fluctuations in financing activities are attributable to the level of net borrowings and the proceeds of the subordinated debt . all of the company 's office facilities are leased . story_separator_special_tag . borrower acknowledges and agrees that the above ebitda covenant levels , and lender 's adjustment in accordance with the preceding sentence , have been established by lender based on borrower 's operations as conducted on september 1 , 2016 , and that any material change to such operations , whether by strategic acquisition or otherwise , will necessitate an adjustment by lender of the above ebitda covenant levels , and that lender will make such adjustments in lender 's permitted discretion . as of september 30 , 2016 , the company was in compliance with the ebitda covenant and all other administrative covenants . at september 30 , 2016 , there was approximately $ 1,250,000 available on the line of credit . the interest expense related to the lines of credit for the years ended september 30 , 2016 and 2015 approximated $ 723,000 and $ 347,000 , respectively . the company believes that the borrowing availability under the acf facility will be adequate to fund the working capital needs . in recent years , the company has incurred significant losses and negative cash flows from operations . management has implemented a strategy which included cost reduction efforts as well as identifying strategic acquisitions , financed primarily through the issuance of equity and debt , to improve the overall profitability and cash flows of the company . in addition , as discussed above , the company entered into the acf facility to provide working capital financing . on january 8 , 2015 , the company completed a securities offering with 18 individuals who collectively have purchased a total of 200,000 shares of preferred stock ( “ series a preferred stock ” ) from the company for a total purchase price of $ 2,000,000. each share of series a preferred stock was initially convertible , at the election of the holder , into 50 shares of the company 's common stock . the company netted approximately $ 1,960,000 , with approximately $ 1,000,000 to be used as working capital and the remaining $ 960,000 for marketing , acquisitions , expansion and to further the operations of the company . all shares of series a preferred stock issued to the aforementioned individuals were converted into common stock prior to september 30 , 2015. on july 22 , 2015 , the company entered into an underwriting agreement ( the `` underwriting agreement '' ) with roth capital partners , llc ( the `` representative '' ) , as the representative of the several underwriters identified therein ( collectively , the `` underwriters '' ) , pursuant to which the company agreed to offer and sell up to 1,120,000 shares of the company 's common stock , no par value ( the `` common stock '' ) , at a price of $ 7.00 per share . under the terms of the underwriting agreement , the company granted the representative an option , exercisable for 30 days , to purchase up to an additional 168,000 shares of common stock to cover over-allotments , if any . 17 the company received net proceeds from this offering and the overallotment , after deducting underwriting discounts and commissions and offering expenses payable by the company of approximately $ 7.8 million and issued 1,246,000 common shares , this includes the underwriters exercise of the over-allotment option . the company also issued warrants ( the `` underwriter 's warrant '' ) to the underwriters to purchase up to a total of 124,600 shares of common stock , at a price of $ 8.30 per common share and are exercisable for five years . the underwriter 's warrant has a seven-year piggyback registration right with respect to shares of common stock underlying the underwriter 's warrant from the date of the underwriting agreement . on october 2 , 2015 , the company issued and sold a subordinated note in the aggregate principal amount of $ 4,185,000 ( the “ subordinated note ” ) to jax legacy – investment 1 , llc ( the “ investor ” ) pursuant to a subscription agreement dated october 2 , 2015 between the company and the investor ( the “ subscription agreement ” ) . the subordinated note is due on october 2 , 2018 ( the “ maturity date ” ) . interest on the subordinated note is payable as follows : ( i ) 10 % interest per annum on the outstanding principal balance of the subordinated note shall be payable quarterly in arrears , in cash , on each december 30th , march 30th , june 30th , and september 30th , until the maturity date and ( ii ) 4 % interest per annum until the maturity date on the original principal balance of the subordinated note ( $ 502,200 ) , was paid in advance on the issuance date of the subordinated note through the issuance to the investor of 91,309 shares of the company 's common stock ( the “ interest shares ” ) . the company may prepay the principal and interest under the subordinated note at any time , without penalty , provided , however , the interest shares shall be deemed paid in full and earned upon the issuance of the subordinated note . the subordinated note is subordinated in payment to the obligations of the company to acf finco i llp pursuant to the terms and provisions of a subordination and inter-creditor agreement dated october 2 , 2015 between , acf finco i llp and the investor .

results of operations net revenues consolidated net revenues are comprised of the following : replace_table_token_3_th consolidated net revenues increased approximately $ 39,687,000 or 91 % compared with the same period last year . the company acquired scribe as of april 1 , 2015 , agile as of july 31 , 2015 , access as of october 4 , 2015 , and paladin as of january 1 , 2016 , which increased the professional contract services by approximately $ 3,915,000 , $ 10,725,000 , $ 19,015,000 and $ 14,461,000 , respectively . the acquisition of agile , access and paladin increased direct hire placement service revenue by approximately $ 841,000 , $ 196,000 , and $ 236,000 , respectively for the year ended september 30 , 2016. with the july 2015 capital raise and addition of executive management , the company has stabilized its sales force and is investing in revenue growth . industrial contract services were down due to the loss of a client , subsequent to the period ended march 31 , 2015 , with annual revenues of approximately two million dollars and due to certain non-profitable business that management eliminated . management continues to take action to increase the number of experienced sales agents and recruiters to increase sales . cost of contract services consolidated cost of contract services are comprised of the following : replace_table_token_4_th cost of services includes wages and related payroll taxes and employee benefits of the company 's employees while they work on contract assignments . cost of contract services for the year ended september 30 , 2016 , increased by approximately 97 % to approximately $ 59 million compared with the prior year of approximately $ 30 million . cost of contract services , as a percentage of contract revenue , for the year ended september 30 , 2016 , increased by approximately 2 % to 72 % compared to 70 % in the prior year .

these include , among others , our ability to maximize value from our land and water resources and our ability to obtain new financings as needed to meet our ongoing working capital needs . see additional discussion under the heading `` risk factors '' above . overview we are a land and water resource development company with 45,000 acres of land in three areas of eastern san bernardino county , california . virtually all of this land is underlain by high-quality , naturally recharging groundwater resources , and is situated in proximity to the colorado river and the colorado river aqueduct ( `` cra '' ) , california 's primary mode of water transportation for imports from the colorado river into the state . our properties are suitable for various uses , including large-scale agricultural development , groundwater storage and water supply projects . our main objective is to realize the highest and best use of these land and water resources in an environmentally responsible way . we believe that the long-term highest and best use of our land and water assets will be realized through the development of a combination of water supply and storage projects at our properties . therefore , we have primarily focused on the development of the cadiz valley water conservation , recovery and storage project ( `` water project '' or `` project '' ) , which will capture and conserve millions of acre-feet 2 of native groundwater currently being lost to evaporation from the aquifer system beneath our 34,500-acre property in the cadiz and fenner valleys of eastern san bernardino county ( the `` cadiz/fenner property '' ) , and deliver it to water providers throughout southern california ( see `` water resource development '' ) . a second phase of the water project would offer storage of up to one million acre-feet of imported water in the aquifer system . we believe that the ultimate implementation of this water project will provide a significant source of future cash flow . 2 one acre-foot is equal to approximately 326,000 gallons or the volume of water that will cover an area of one acre to a depth of one-foot . an acre-foot is generally considered to be enough water to meet the annual water needs of one average california household . 22 the primary factor driving the value of such projects is ongoing pressure on california 's traditional water supplies and the resulting demand for new , reliable supply solutions that can meet both immediate and long-term water needs . available supply is constrained by regulatory restrictions on each of the state 's three main water sources : the cra , the state water project , which provides water supplies from northern california to the central and southern parts of the state , and the los angeles aqueduct , which delivers water from the eastern sierra nevada mountains to los angeles . southern california 's water providers rely on imports from these systems for a majority of their water supplies , but deliveries from all three into the region have been below capacity over the last several years , even in wet years . further , the availability of supplies in california differs greatly from year to year due to natural hydrological variability . over the last decade , california struggled through an historic drought featuring record-low winter precipitation . then , following a series of strong storms that delivered record amounts of rain and snow during the 2016-2017 winter , state officials declared an end to the drought . yet , the 2017-2018 winter has delivered few precipitation events and , through february 2018 , 82 % of the state is again abnormally dry according to the us drought monitor . the rapid swings between wet and dry years challenges california 's traditional supply system and supports the need for reliable storage and local supply . southern california water providers are presently pursuing investments in storage , supply and infrastructure to meet long-term demand given the variety of challenges and limitations faced by the state 's traditional infrastructure . the cadiz water project is a local supply option in southern california that could help address the region 's water supply challenges by providing new reliable supply and local groundwater storage opportunities ( see `` water resource development '' below ) in both dry and wet years . following a multi-year california environmental quality act ( `` ceqa '' ) review and permitting process , the water project received permits that allow the capture and conservation of 2.5 million acre-feet of groundwater over 50 years in accordance with the terms of a groundwater management plan approved by san bernardino county , the public agency responsible for groundwater use at the project area . our current working capital requirements relate largely to the final development activities associated with the water project and those activities consistent with the water project related to further development of our land and agricultural assets . while we continue to believe that the ultimate implementation of the water project will provide the primary source of our future cash flow , we also believe there is significant additional value in our underlying agricultural assets . demand for agricultural land with water rights is at an all-time high ; therefore , in addition to our water project proposal , we are engaged in agricultural joint ventures at the cadiz/fenner property that put some of the groundwater currently being lost to evaporation from the underlying aquifer system to immediate beneficial use . we have farmed portions of the cadiz/fenner property since the late 1980s relying on groundwater from the aquifer system for irrigation and the site is well suited for various permanent and seasonal crops . presently , the property has 2,100 acres leased for cultivation of a variety of crops , including citrus , dried-on-the-vine raisins and seasonal vegetables . story_separator_special_tag the structure of the smwd purchase agreement calls for an annually adjusted water supply payment , plus a pro rata portion of the capital recovery charge and operating and maintenance costs . the capital recovery charge is calculated by amortizing the total capital investment by the company over a 30-year term . agreements entered into prior to the beginning of the ceqa review process provide the right to acquire an annual supply of 5,000 acre-feet of water at $ 775 per acre-foot ( 2010 dollars , subject to adjustment ) , which is competitive with the incremental cost of new water . in addition , these agencies received options to acquire storage rights in the water project to allow for the management of their water project supplies in complement with their own water resources . up to 150,000 acre-feet of carry-over storage is available for reservation by the agencies prior to construction commencement . participants that elect to achieve year-to-year flexibility in their use of project water by utilizing carry-over storage will reserve storage capacity for $ 1,500 per acre-foot prior to construction . lois that have been entered into since completion of the ceqa review process reserve supplies from the water project at $ 960 per acre-foot ( 2014 dollars , subject to adjustment ) . these lois also include the option to reserve carry-over storage capacity for $ 1,500 per acre-foot prior to construction . 25 presently , total reservations of supplies from the water project via these agreements are in excess of water project capacity . prior to construction of the water project , we expect to convert existing option agreements and lois to purchase agreements . we are working collaboratively with the participating water agencies to account for any oversubscription in the final definitive purchase and sale agreements we enter into with these agencies and allow for inclusive participation across southern california . ( 2 ) conveyance arrangements prior to construction of the water project , and in coordination with final participation contracts described in ( 1 ) above , an agreement and terms for moving water supplies in the cra must be negotiated with metropolitan water district of southern california ( `` metropolitan '' ) , which owns and controls the cra . water supplies conserved by the project would enter the cra at the termination of the project 's conveyance pipeline near rice , ca . the ceqa process considered a variety of options to enter the cra and assumed final entry into the cra would be determined by mwd in consultation with the project 's participating agencies . once arrangements are reached , the metropolitan board would take action as a responsible agency under ceqa regarding the terms and conditions of the water project 's use of the cra to transport water to its participating agencies . there is no application yet before metropolitan related to entry and transportation of project supplies , but we expect such a formal application will be filed in 2018 as the project 's contractual arrangements with participants are finalized . any agreement as to the terms and conditions of the water project 's use of the cra will be negotiated between and entered into by metropolitan and the project participating agencies , not the company . discussions with metropolitan regarding conveyance of project water in the cra have been led by smwd , the water project 's ceqa lead agency . water project supplies entering the cra will comply with metropolitan 's published engineering , design and water quality standards and will be subject to all applicable fees and charges routinely established by metropolitan for the conveyance of water within its service territory . we believe there are multiple benefits that can be secured by mwd upon making space reasonably available for the water project supplies and having the flexibility of relying on the water project in both wet and dry years . ( 3 ) final design and permitting as a component of completing contract terms with participating agencies and related wheeling arrangements with metropolitan , we must also finalize design of project facilities and acquire relevant construction permits with state and local agencies . together with smwd we have engaged engineering and environmental consultants to complete design plans for the 43-mile pipeline , project wellfield , any necessary water treatment facilities , and facilities required to connect to the metropolitan system at and near the cra . this work is ongoing and expected to proceed in coordination with the negotiation of contracts and wheeling arrangements . once facility design and layout near completion , we will need to obtain additional permits and approvals from state or local entities prior to construction . this may include but is not limited to confirmation of existing access rights , easements and rights-of-way , for areas that may be crossed by project facilities in the project area subject to final pipeline configuration . 26 phase ii in a second phase of the water project , we expect to make available up to one million acre-feet of capacity in the aquifer system for storage of surplus water conveyed to the project area . under the imported water storage component , or phase ii , water from the colorado river or the state water project could be conveyed to spreading basins that would be constructed on our private property to percolate into the aquifer system and held in storage . when needed , previously stored water would be returned to phase ii participating agencies via the project 's 43-mile conveyance pipeline to the cra , described above , or via an existing 96-mile pipeline that extends from our cadiz property northwest to barstow and bakersfield , california ( see `` northern pipeline '' below ) . phase ii has already been the subject of programmatic environmental review in accordance with ceqa , but still requires project-level environmental review and permitting once participating agencies are identified . phase ii may also require federal permits subject to the national environmental policy act , or nepa .

results of operations ( a ) year ended december 31 , 2017 compared to year ended december 31 , 2016 we have not received significant revenues from our water resource and real estate development activities to date . our revenues have been limited to rental income from the fvf lease ( see `` agricultural development '' , above ) . as a result , we have historically incurred a net loss from operations . we had revenues of $ 437 thousand for the year ended december 31 , 2017 , and $ 412 thousand for the year ended december 31 , 2016. the net loss totaled $ 33.9 million for the year ended december 31 , 2017 , compared with a net loss of $ 26.3 million for the year ended december 31 , 2016. the higher loss in 2017 was primarily related to a $ 3.5 million loss on extinguishment of debt and $ 2.6 million in unrealized losses recorded for warrant liabilities . the higher 2017 loss was also related to an increase in stock compensation resulting from the vesting of milestone shares earned by employees , an increase in cash bonus awards to employees , and an increase in general and administrative expense due to pre-construction engineering activities in connection with the water project . 29 our primary expenses are our ongoing overhead costs associated with the development of the water project ( i.e. , general and administrative expense ) and our interest expense . we will continue to incur non-cash expense in connection with our management and director equity incentive compensation plans . revenues . revenue totaled $ 437 thousand during the year ended december 31 , 2017 , compared to $ 412 thousand during the year ended december 31 , 2016. the 2017 revenue is primarily related to rental income from the fvf lease ( see `` agricultural development '' , above ) . general and administrative expenses .

are stock.” on april 10 , 2018 , our board of directors , including a “required majority” ( as such term is defined in section 57 ( o ) of the 1940 act ) thereof , approved the modified asset coverage requirements set forth in section 61 ( a ) ( 2 ) of the 1940 act . as a result , the company 's asset coverage requirements for senior securities changed from 200 % to 150 % , effective april 10 , 2019. as of september 30 , 2020 , our asset coverage on our “senior securities representing indebtedness” was 202.6 % . recent developments distributions in october 2020 , our board of directors declared the following monthly cash distributions to common stockholders : replace_table_token_12_th libor transition in general , our investments in debt securities have a term of five years , accrue interest at variable rates ( based on the 30-day libor ) and , to a lesser extent , at fixed rates . libor is currently anticipated to be phased out during late 2021. libor may transition to a new standard rate , the sofr , which will incorporate certain overnight repo market data collected from multiple data sets . to attain an equivalent 30-day rate , we currently intend to adjust the sofr to minimize the difference between the interest that a borrower would be paying using libor versus what it will be paying using sofr . we are currently monitoring the transition and can not assure you whether sofr will become a standard rate for variable rate debt . however , we expect we will need to renegotiate certain loan documents with our portfolio companies that utilize libor as a factor in determining the interest rate to replace libor with the new standard that is established and may also need to renegotiate certain provisions of the credit facility . assuming that sofr replaces libor and is appropriately adjusted to equate to 30-day libor , we expect that there should be minimal impact on our operations . 64 covid-19 we continue to monitor and work with the management teams and shareholders of our portfolio companies to navigate the significant market , operational and economic challenges created by the covid-19 pandemic . the company 's investment portfolio continues to be focused on a diversified mix of industries and sectors that are generally expected to be more durable than industries or sectors that are more prone to economic cycles including consumer or retail industries . we believe our portfolio companies have taken immediate actions to effectively and efficiently respond to the challenges posed by covid-19 and related orders imposed by state and local governments including paused or reversed reopening orders , including developing liquidity plans supported by internal cash reserves , shareholder support , and as appropriate accessing the government paycheck protection program . we believe we have sufficient levels of liquidity to support our existing portfolio companies , as necessary , and selectively deploy capital in new investment opportunities . 65 story_separator_special_tag new roman '' > for the year ended september 30 , 2020 , we recorded a net realized loss on investments of $ 7.5 million , which resulted primarily from the sale of our investment in meridian in january 2020 for a $ 5.6 million realized loss and the loss recognized on our investment in new trident of $ 4.4 million in december 2019 , partially offset by a realized gain of $ 2.5 million from the sale of our investment in mochi in january 2020. for the year ended september 30 , 2019 , we recorded a net realized loss on investments of $ 16.4 million , which resulted primarily from the restructuring of our investment in francis drilling fluids , ltd. ( “fdf” ) in december 2018 and the associated recognition of a $ 26.9 million net realized loss , partially offset by the sale of our investment in alloy die casting co ( “adc” ) in august 2019 for an $ 8.7 million realized gain . net unrealized appreciation of investments during the year ended september 30 , 2020 , we recorded net unrealized depreciation of investments in the aggregate amount of $ 18.7 million . the net realized gain ( loss ) and unrealized appreciation ( depreciation ) across our investments for the year ended september 30 , 2020 were as follows : 68 replace_table_token_15_th since march 2020 , the u.s. loan market has exhibited a heightened level of volatility and wider credit spreads associated with the uncertainty and potentially adverse economic ramifications of the spread of covid-19 . the combination of the marked increase in market spreads for comparable loan investments and discounts applied to any portfolio company whose markets , or operations have been impacted by the covid-19 pandemic , were the primary drivers of net unrealized depreciation of investments of $ 18.7 million for year ended september 30 , 2020. the decreased performance of certain of our portfolio companies , a decrease in comparable multiples used to estimate the fair value of certain of our portfolio companies , and the reversal of previously recorded unrealized appreciation of mochi upon exit , partially offset by the reversal of previously recorded unrealized depreciation upon the exit of meridian and new trident also impacted the total net unrealized depreciation . 69 during the year ended september 30 , 2019 , we recorded net unrealized appreciation of investments in the aggregate amount of $ 11.8 million . the net realized gain ( loss ) and unrealized appreciation ( depreciation ) across our investments for the year ended september 30 , 2019 were as follows : replace_table_token_16_th the largest driver of our net unrealized appreciation of $ 11.8 million for the year ended september 30 , 2019 was the reversal of previously recorded unrealized depreciation upon the restructure of fdf . story_separator_special_tag this appreciation was 70 partially offset by the decline in the valuation of lwo acquisitions company llc due to its financial and operational performance . as of september 30 , 2020 , the fair value of our investment portfolio was less than its cost basis by approximately $ 44.3 million and our entire investment portfolio was valued at 91.1 % of cost , as compared to cumulative net unrealized depreciation of $ 25.6 million and a valuation of our entire portfolio at 94.0 % of cost as of september 30 , 2019. this year over year increase in the cumulative unrealized depreciation on investments represents net unrealized depreciation of $ 18.7 million for the year ended september 30 , 2020. the cumulative net unrealized depreciation of our investments does not have an impact on our current ability to pay distributions to stockholders ; however , it may be an indication of future realized losses , which could ultimately reduce our income available for distribution to stockholders . net unrealized ( appreciation ) depreciation of other during the year ended september 30 , 2020 , we recorded $ 0.5 million of unrealized appreciation on our credit facility at fair value as compared to $ 0.2 million of unrealized depreciation during the year ended september 30 , 2019. comparison of the year ended september 30 , 2019 to the year ended september 30 , 2018 replace_table_token_17_th 71 investment income interest income increased by 4.1 % for the year ended september 30 , 2019 , as compared to the prior year . this increase was primarily due to an increase in the weighted average yield on our interest-bearing portfolio . the weighted average yield on our interest-bearing investments is based on the current stated interest rates on interest-bearing investments which increased to 12.3 % for the year ended september 30 , 2019 compared to 11.8 % for the year ended september 30 , 2018 , inclusive of any allowances on interest receivables made during those periods . the increase in the weighted average yield was partially driven by the receipt and recognition of $ 0.9 million of past due interest upon the exit of our investment in adc in august 2019. the weighted average principal balance of our interest-bearing investment portfolio remained relatively flat for the year ended september 30 , 2019 , compared to the prior year . as of september 30 , 2019 , two portfolio companies , meridian and trident , were on non-accrual status with an aggregate debt cost basis of approximately $ 8.5 million , or 2.2 % of the cost basis of all debt investments in our portfolio . as of september 30 , 2018 , one portfolio company , fdf was on non-accrual status , with an aggregate debt cost basis of approximately $ 26.9 million , or 6.9 % of the cost basis of all debt investments in our portfolio . other income increased by 162.9 % during the year ended september 30 , 2019 , as compared to the prior year , primarily due to an increase in success fees and prepayment penalties received . for the year ended september 30 , 2019 , other income consisted primarily of $ 1.9 million in success fees recognized , $ 1.2 million in prepayment fees received , and $ 1.1 million in dividend income . for the year ended september 30 , 2018 , other income consisted primarily of $ 0.6 million in prepayment fees received , $ 0.5 million in dividend income , and $ 0.4 million in success fees recognized . as of september 30 , 2019 and 2018 , no single investment represented greater than 10 % of the total investment portfolio at fair value . expenses expenses , net of any non-contractual , unconditional and irrevocable credits to fees from the adviser , increased $ 3.0 million , or 13.2 % , for the year ended september 30 , 2019 as compared to the prior year period . this increase was primarily due to a $ 2.2 million increase in interest expense on borrowings . interest expense increased by 37.2 % during the year ended september 30 , 2019 , as compared to the prior year , primarily due to the issuance of $ 57.5 million aggregate principal amount of the 2023 notes in november 2018 and an increase in the effective interest rate on our credit facility . we incurred $ 3.2 million in interest expense related to the 2023 notes during the year ended september 30 , 2019 versus no such amounts in the prior year period . the weighted average balance outstanding on our credit facility decreased during the year ended september 30 , 2019 compared to the prior year period with the issuance of the 2023 notes . the weighted average balance outstanding during the year ended september 30 , 2019 , was $ 71.5 million , as compared to $ 114.7 million in the prior year , a decrease of 37.7 % . the effective interest rate on our credit facility , including unused commitment fees incurred but excluding the impact of deferred financing costs , was 6.8 % during the year ended september 30 , 2019 , compared to 5.1 % during the prior year . the increase in the effective interest rate was driven by an increase in libor as compared to the prior year period and an increase in unused commitment fees paid in the current year period , partially offset by a decrease in the marginal interest rate on our credit facility effective march 9 , 2018. the net base management fee earned by the adviser decreased by $ 0.3 million , or 5.6 % , during the year ended september 30 , 2019 , as compared to the prior year , resulting primarily from an increase in credits from the adviser year over year , which are driven mainly by origination fees on new deals closed during the year . 72 the

results of operations comparison of the year ended september 30 , 2020 to the year ended september 30 , 2019 replace_table_token_13_th nm – not meaningful investment income interest income increased by 0.6 % for the year ended september 30 , 2020 , as compared to the prior year . the increase was due primarily to an increase in the weighted average principal balance of our interest-bearing portfolio , partially offset by a decrease in the weighted average yield on our interest-bearing portfolio . the weighted average yield on our interest-bearing investments is based on the current stated interest rate on interest-bearing investments , which decreased to 11.0 % for the year ended september 30 , 2020 , compared to 12.3 % for 66 the year ended september 30 , 2019 , inclusive of any allowances on interest receivables made during those periods . the decrease was driven mainly by a decrease in libor over the two respective years . the weighted average principal balance of our interest-bearing investment portfolio for the year ended september 30 , 2020 , was $ 418.0 million , compared to $ 373.7 million for the year ended september 30 , 2019 , an increase of $ 44.3 million , or 11.9 % . as of september 30 , 2020 , loans to one portfolio company , b+t group acquisition inc. ( “b+t” ) , were on non-accrual status , with an aggregate debt cost basis of approximately $ 7.2 million , or 1.6 % of the cost basis of all debt investments in our portfolio . as of september 30 , 2019 , loans to two portfolio companies , meridian and new trident , were on non-accrual status with an aggregate debt cost basis of approximately $ 8.5 million , or 2.2 % of the cost basis of all debt investments in our portfolio .

long-lived assets held for sale and the related liabilities are separately reported , with the long-lived assets reported at the lower of their carrying amounts or their estimated fair values , less their costs to sell , and are not depreciated after reclassification to real estate held for sale . cost capitalization see the real estate assets and depreciation of investment in real estate section for a discussion of the company 's policy with respect to capitalization vs. expensing of fixed asset/repair and maintenance costs . in addition , the company capitalizes an allocation of the payroll and associated costs of employees directly responsible for and who spend their time on the execution and supervision of major capital and or renovation projects . these costs are reflected on the balance sheets as increases to depreciable property . for all development projects , the company uses its professional judgment in determining whether such costs meet the criteria for capitalization or must be expensed as incurred . the company capitalizes interest , real estate taxes and insurance and payroll and associated costs for those individuals directly responsible for and who spend their time on development activities , with capitalization ceasing no later than 90 days following issuance of the certificate of occupancy . these costs are reflected on the balance sheets as construction-in-progress for each specific property . the company expenses as incurred all payroll costs of on-site employees working directly at our properties , except as noted above on our development properties prior to certificate of occupancy issuance and on specific major renovations at selected properties when additional incremental employees are hired . during the years ended december 31 , 2015 , 2014 and 2013 , the company capitalized $ 22.3 million , $ 22.4 million and $ 16.5 million , respectively , of payroll and associated costs of employees directly responsible for and who spend their time on the execution and supervision of development activities as well as major capital and or renovation projects . cash and cash equivalents the company considers all demand deposits , money market accounts and investments in certificates of deposit and repurchase agreements purchased with a maturity of three months or less at the date of purchase to be cash equivalents . the company maintains its cash and cash story_separator_special_tag the following discussion and analysis of the results of operations and financial condition of the company and the operating partnership should be read in connection with the consolidated financial statements and notes thereto . due to the company 's ability to control the operating partnership and its subsidiaries , the operating partnership and each such subsidiary entity has been consolidated with the company for financial reporting purposes , except for three unconsolidated operating properties and our military housing properties . capitalized terms used herein and not defined are as defined elsewhere in this annual report on form 10-k for the year ended december 31 , 2015 . forward-looking statements forward-looking statements in this item 7 as well as elsewhere in this annual report on form 10-k are intended to be made pursuant to the safe harbor provisions of the private securities litigation reform act of 1995. these statements are based on current expectations , estimates , projections and assumptions made by management . while the company 's management believes the assumptions underlying its forward-looking statements are reasonable , such information is inherently subject to uncertainties and may involve certain risks , which could cause actual results , performance or achievements of the company to differ materially from anticipated future results , performance or achievements expressed or implied by such forward-looking statements . many of these uncertainties and risks are difficult to predict and beyond management 's control . forward-looking statements are not guarantees of future performance , results or events . the forward-looking statements contained herein are made as of the date hereof and the company undertakes no obligation to update or supplement these forward-looking statements . factors that might cause such differences include , but are not limited to the following : 38 ▪ we intend to actively acquire , develop and rehab multifamily properties for rental operations as market conditions dictate . we may also acquire multifamily properties that are unoccupied or in the early stages of lease up . we may be unable to lease up these apartment properties on schedule , resulting in decreases in expected rental revenues and or lower yields due to lower occupancy and rates as well as higher than expected concessions or higher than expected operating expenses . we may not be able to achieve rents that are consistent with expectations for acquired , developed or rehabbed properties . we may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position , to complete a development property or to complete a rehab . additionally , we expect that other real estate investors with capital will compete with us for attractive investment opportunities or may also develop properties in markets where we focus our development and acquisition efforts . this competition ( or lack thereof ) may increase ( or depress ) prices for multifamily properties . we may not be in a position or have the opportunity in the future to make suitable property acquisitions on favorable terms . we have acquired in the past and intend to continue to pursue the acquisition of properties and portfolios of properties , including large portfolios , that could increase our size and result in alterations to our capital structure . story_separator_special_tag acquisitions and developments may be financed from various sources of capital , which may include retained cash flow , issuance of additional equity and debt , sales of properties and joint venture agreements . in addition , the company may acquire properties in transactions that include the issuance of partnership interests in the operating partnership ( “ op units ” ) as consideration for the acquired properties . such transactions may , in certain circumstances , enable the sellers to defer , in whole or in part , the recognition of taxable income or gain that might otherwise result from the sales . the company may acquire land parcels to hold and or sell based on market opportunities as well as options to buy more land in the future . the company may also seek to acquire properties by purchasing defaulted or distressed debt that encumbers desirable properties in the hope of obtaining title to property through foreclosure or deed-in-lieu of foreclosure proceedings . over the past several years , the company has done an extensive repositioning of its portfolio from low barrier to entry/non-core markets to high barrier to entry/core markets . since 2005 , the company has sold nearly 168,000 apartment units primarily in its non-core markets for an aggregate sales price of approximately $ 16.6 billion , acquired over 68,000 apartment units primarily in its core markets for approximately $ 19.8 billion and began approximately $ 5.7 billion of development projects primarily in its core markets . we are currently seeking to acquire and develop assets in the following six core coastal metropolitan areas : boston , new york , washington d.c. , southern california , san francisco and seattle . the sale of the starwood portfolio combined with the other 2016 dispositions will complete the company 's planned exit from the south florida , denver and phoenix markets as well as certain new england submarkets . see further discussion below regarding the company 's 2016 disposition activity . as part of its strategy , the company purchases completed and fully occupied apartment properties , partially completed or partially occupied properties and takes options on land or acquires land on which apartment properties can be constructed . we intend to hold a diversified portfolio of assets across our target markets . as of december 31 , 2015 , no single market/metropolitan area accounted for more than 17.6 % of our noi , though noi concentration has increased in 2016 following the sale of the starwood portfolio . we endeavor to attract and retain the best employees by providing them with the education , resources and opportunities to succeed . we provide many classroom and on-line training courses to assist our employees in interacting with prospects and residents as well as extensively train our customer service specialists in maintaining our properties and improvements , equipment and appliances . we actively promote from within and many senior corporate and property leaders have risen from entry level or 40 junior positions . we monitor our employees ' engagement by surveying them annually and have consistently received high engagement scores . we have a commitment to sustainability and consider the environmental impacts of our business activities . sustainability and social responsibility are key drivers of our focus on creating the best apartment communities for residents to live , work and play . we have a dedicated in-house team that initiates and applies sustainable practices in all aspects of our business , including investment activities , development , property operations and property management activities . with its high density , multifamily housing is , by its nature , an environmentally friendly property type . our recent acquisition and development activities have been primarily concentrated in pedestrian-friendly urban locations near public transportation . when developing and renovating our properties , we strive to reduce energy and water usage by investing in energy saving technology while positively impacting the experience of our residents and the value of our assets . we continue to implement a combination of irrigation , lighting , hvac and renewable energy improvements at our properties that will reduce energy and water consumption . the company was named the 2015 global residential sector leader by the global real estate sustainability benchmark ( `` gresb '' ) survey , a globally recognized analysis of the sustainability indicators of more than 700 real estate portfolios worldwide . for additional information regarding our sustainability efforts , see our december 2015 corporate social responsibility and sustainability report at our website , www.equityresidential.com . for 2016 , we have added an express company-wide goal regarding enhanced sustainability efforts . employees , including our executives , will have their performance against this goal evaluated as part of our annual performance review process . current environment following the approval by the company 's board of trustees , the company executed an agreement with controlled affiliates of starwood capital group ( `` starwood '' ) on october 23 , 2015 to sell a portfolio of 72 operating properties consisting of 23,262 apartment units located in five markets across the united states for $ 5.365 billion ( the `` starwood transaction '' ) . on january 26 and 27 , 2016 , the company closed on the sale of all of the portfolio described above . the sale of the starwood portfolio , combined with other planned 2016 dispositions , will result in the company 's planned exit from the south florida , denver and phoenix markets as well as certain new england submarkets . the company intends to use the majority of the proceeds from the starwood transaction and other planned 2016 dispositions to pay two special dividends to its shareholders and holders of op units of between $ 10.00 and $ 12.00 per share/unit in the aggregate .

results of operations in conjunction with our business objectives and operating strategy , the company continued to invest in apartment properties located in our high barrier to entry/core markets and sell apartment properties located in our low barrier to entry/non-core markets during the years ended december 31 , 2015 and december 31 , 2014 . in summary , we : year ended december 31 , 2015 : ▪ acquired four consolidated apartment properties consisting of 625 apartment units for $ 296.0 million at a weighted average cap rate ( see definition below ) of 4.5 % and three contiguous land parcels for $ 27.8 million ; and ▪ sold eight consolidated apartment properties consisting of 1,857 apartments units as well as a 193,230 square foot medical office building for $ 513.3 million at a weighted average cap rate of 5.3 % generating an unlevered internal rate of return ( `` irr '' ) , inclusive of indirect management costs , of 13.4 % . year ended december 31 , 2014 : ▪ acquired four consolidated apartment properties consisting of 1,011 apartment units for $ 363.2 million at a weighted average cap rate of 4.8 % and two land parcels for $ 28.8 million ; ▪ acquired two consolidated apartment properties , one that had just completed lease up and the other which was still in lease up , consisting of 342 apartment units for $ 106.6 million and are expected to stabilize at a 6.4 % yield on cost and a 4.9 % yield on cost , respectively ; ▪ acquired the 95 % equity interest it did not own in one previously unconsolidated development project with a stabilized real estate value of $ 87.5 million and an adjusted purchase price of $ 64.2 million ; ▪ sold ten consolidated apartment properties consisting of 3,092 apartments units for $ 467.0 million at a weighted average cap rate of 6.1 % generating an unlevered irr , inclusive of management costs , of 8.9 % and three land parcels for

10.10 ( 10 ) letter agreement , dated as of july 1 , 2013 , among american realty capital properties , inc. , american realty capital trust iv , inc. , american realty capital operating partnership iv , l.p. , american realty capital trust iv special limited partner , llc , american realty capital advisors iv , llc and american realty capital properties iv , llc . 10.11 ( 10 ) asset purchase and sale agreement , dated as of july 1 , 2013 , between arc properties operating partnership , l.p. and american realty capital advisors iv , llc . 10.12 ( 12 ) augmenting lender and increasing lender supplement and incremental amendment , dated as of march 28 , 2013 , to the credit agreement , among arc properties operating partnership , l.p. , tiger acquisition , llc , american realty capital properties , inc. , the lenders party thereto and wells fargo bank , national association story_separator_special_tag the following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements of the company and the notes thereto . 47 restatement and recast as discussed under “ item 1. business – recent developments – audit committee investigation and restatement ” , arcp previously restated its consolidated financial statements and related financial information for the years ended december 31 , 2013 and 2012 and the fiscal periods ended march 31 , 2014 and 2013 , june 30 , 2014 and 2013 and september 30 , 2013 and the op restated and amended its consolidated financial statements and related financial information as of and for the years ended december 31 , 2013 and 2012 and the quarterly periods ended june 30 , 2014 and 2013. for a discussion of reconciliations of originally reported amounts to the corresponding restated amounts , see one of the following filings made with the sec on march 2 , 2015 : amendment no . 2 to our annual report on form 10-k/a for the fiscal year ended december 31 , 2013 or our quarterly reports on form 10-q/a for the fiscal periods ended march 31 , 2014 and june 30 , 2014. in addition , on january 3 , 2014 , we acquired arct iv , and together we were considered to be entities under common control because the entities ' advisors were wholly-owned subsidiaries of arc . accordingly , our consolidated financial statements have been recast in applying the carryover basis of accounting to include arct iv . see note 1 – organization to the consolidated financial statements in this report for further explanation . the following discussion and analysis of our financial condition and results of operations is based on the restated and recasted amounts . overview we are a self-managed maryland corporation incorporated on december 2 , 2010 that qualified as a reit for u.s. federal income tax purposes beginning in the taxable year ended december 31 , 2011. on september 6 , 2011 , the company completed the ipo . the company 's common stock trades on nasdaq under the symbol “ arcp. ” we operate through two business segments , real estate investment and our private capital management business , cole capital , as further discussed in note 5 – segment reporting . through the rei segment , we acquire , own and operate single-tenant , freestanding , commercial real estate properties , primarily subject to long-term net leases with high credit quality tenants . we seek to acquire net lease assets by self-originating individual or small portfolio acquisitions , by executing sale-leaseback transactions , and in connection with build-to-suit or forward take-out opportunities , to the extent they are appropriate in terms of capitalization rate and scale . we have also advanced our investment objectives through strategic mergers and acquisitions . see note 2 – mergers and significant acquisitions and sales to the consolidated financial statements in this report . cole capital is contractually responsible for managing the affairs of the managed reits on a day-to-day basis , identifying and making acquisitions and investments on the managed reits ' behalf , and recommending to each of the managed reit 's respective board of directors an approach for providing investors with liquidity . cole capital receives compensation and reimbursement for services relating to these services . substantially all of our rei segment is conducted through the op . we are the sole general partner and holder of 97.4 % of the common equity interests in the op as of december 31 , 2014 , with the remaining 2.6 % common equity interests owned by certain unaffiliated investors . under the lpa , after holding units of limited partner interests in the op for a period of one year , unless otherwise consented to by us , holders of op units have the right to redeem the op units for the cash value of a corresponding number of shares of our common stock or , at our option , a corresponding number of shares of our common stock . the remaining rights of the holders of op units are limited , however , and do not include the ability to replace the general partner or to approve the sale , purchase or refinancing of the op 's assets . substantially all of the cole capital segment is conducted through cca , an arizona corporation and a wholly owned subsidiary of the op . cca is treated as a trs under the internal revenue code . prior to january 8 , 2014 , we retained the former manager to manage our affairs on a day-to-day basis with the exception of certain acquisition , accounting and portfolio management services performed by our employees . in august 2013 , our board of directors determined that it is in the best interests of us and our stockholders to become self-managed and we completed our transition to self-management on january 8 , 2014. see note 20 – related party transactions and arrangements to the consolidated financial statements . story_separator_special_tag the 64 multi-tenant properties and seven single-tenant properties included in such sale were the same properties that would have been spun off into arcm and , consequently , we abandoned our proposed spin-off at such time . on june 11 , 2014 , certain of our indirect subsidiaries entered into an agreement of purchase and sale with the blackstone/ddr joint venture , an entity indirectly jointly owned by affiliates of blackstone and ddr , pursuant to which the parties consummated the sale of our multi-tenant shopping center portfolio . on october 17 , 2014 , we completed the sale of the multi-tenant portfolio for $ 1.9 billion to the blackstone/ddr joint venture . additionally , we entered into a letter of 49 intent with an unrelated third party to sell five multi-tenant properties for $ 52.3 million bringing total expected sale proceeds to $ 2.0 billion . the transaction aimed to simplify our rei business model , allowing us to focus solely on its single-tenant , net lease investments of $ 1.3 billion of net proceeds , of which $ 1.2 billion was used to reduce our leverage by paying down our line of credit and $ 542.8 million of secured mortgage debt was either repaid or assumed by the blackstone/ddr joint venture . we reported a net loss on sale of $ 262.0 million , which includes the write-off of $ 195.5 million of goodwill allocated to the cost basis of the multi-tenant portfolio . see note 4 – acquisitions of caplease , cole and ccpt and note 22 – property dispositions to our consolidated financial statements in this report for further discussion on the mergers , acquisitions and dispositions . critical accounting policies and significant accounting estimates our accounting policies have been established to conform to gaap . the preparation of financial statements in conformity with gaap requires us to use judgment in the application of accounting policies , including making estimates and assumptions . these judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods . if our judgment or interpretation of the facts and circumstances relating to the various transactions had been different , it is possible that different accounting policies would have been applied , thus resulting in a different presentation of the financial statements . additionally , other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses . set forth below is a summary of the significant accounting estimates and critical 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 . these significant accounting estimates include : revenue recognition upon the acquisition of real estate , certain properties will have leases where minimum rent payments change during the term of the lease . the company will record rental revenue for the full term of each lease on a straight-line basis . when the company acquires a property , the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation . cost recoveries from tenants are included in tenant reimbursement income in the period the related costs are incurred , as applicable . the company 's revenues , which are derived primarily from rental income , include rents that each tenant pays in accordance with the terms of each lease reported on a straight-line basis over the initial term of the lease . since many of the leases provide for rental increases at specified intervals , straight-line basis accounting requires the company to record a receivable , and include in revenues , unbilled rent receivables that the company will only receive if the tenant makes all rent payments required through the expiration of the initial term of the lease . straight-line rent receivables are included in prepaid expenses and other assets on the consolidated balance sheets . see note 10 – deferred costs and other assets , net to the consolidated financial statements contained in this report . the company defers the revenue related to lease payments received from tenants in advance of their due dates . as of december 31 , 2014 and 2013 , the company had $ 57.8 million and $ 20.4 million , respectively , of deferred rental income , which is included in deferred rent and other liabilities on the consolidated balance sheets . the company continually reviews receivables related to rent and unbilled rent receivables and determines collectability by taking into consideration the tenant 's payment history , the financial condition of the tenant , business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located . in the event that the collectability of a receivable is in doubt , the company will record an increase in the allowance for uncollectible accounts or record a direct write-off of the receivable in the consolidated statements of operations and comprehensive loss . as of december 31 , 2014 and december 31 , 2013 , the company recorded an allowance for uncollectible accounts of $ 2.5 million and $ 0.2 million , respectively . real estate investments the company records acquired real estate at cost and makes assessments as to the useful lives of depreciable assets . the company considers the period of future benefit of the asset to determine the appropriate useful lives . depreciation is computed using a straight-line method over the estimated useful life of 40 years for buildings , five to 15 years for building fixtures and improvements and the remaining lease term for acquired intangible lease assets .

summary of significant accounting policies and note 11 – fair value of financial instruments to our consolidated financial statements in this report for further discussion . 56 interest expense , net interest expense increased $ 347.1 million to $ 452.6 million for the year ended december 31 , 2014 , compared to $ 105.5 million during the year ended december 31 , 2013 . the increase in interest expense was due to an increase in the debt balance to $ 10.5 billion for the year ended december 31 , 2014 compared to $ 4.3 billion for the year ended december 31 , 2013 . the increase in debt was primarily due to the assumption of mortgage notes in connection with the various mergers and portfolio acquisitions , the issuance of the corporate bonds and the increased draws on the credit facilities . additionally , we recorded $ 32.6 million in interest expense as amortization of deferred financing costs associated with the termination of the barclays facility . the average annualized interest rate on all debt , including the effect of derivative instruments used to hedge the effects of interest rate volatility but excluding amortization of deferred financing costs and non-usage fees , for the year ended december 31 , 2014 and 2013 was 3.74 % and 4.08 % , respectively . extinguishment of debt , net loss on extinguishment of debt for the year ended december 31 , 2014 was $ 21.9 million , which is comprised of $ 35.9 million of prepayment fees related to to the defeasance of mortgage notes payable and other corporate debt , partially offset by the write-off of $ 14.0 million of net premiums and discounts associated with the debt . there was no loss on extinguishment of debt recorded for the year ended december 31 , 2013 .

our wholly-owned subsidiary prospect small business lending , llc ( “ psbl ” ) was formed on january 27 , 2014 and purchases small business whole loans on a recurring basis from online small business loan originators , including ondeck capital , inc. ( “ ondeck ” ) . on september 30 , 2014 , we formed a wholly-owned subsidiary prospect yield corporation , llc ( “ pyc ” ) and effective october 23 , 2014 , pyc holds our investments in collateralized loan obligations ( “ clos ” ) . each of these subsidiaries have been consolidated since operations commenced . effective july 1 , 2014 , we began consolidating certain of our wholly-owned and substantially wholly-owned holding companies formed by us in order to facilitate our investment strategy . the following companies have been included in our consolidated financial statements since july 1 , 2014 : amu holdings inc. ( “ airmall ” ) ; aph property holdings , llc ( “ aph ” ) ; arctic oilfield equipment usa , inc. ; ccpi holdings inc. ; cp holdings of delaware llc ; credit central holdings of delaware , llc ; energy solutions holdings inc. ; first tower holdings of delaware llc ( “ first tower delaware ” ) ; harbortouch holdings of delaware inc. ; mity holdings of delaware inc. ; nationwide acceptance holdings llc ; nmmb holdings , inc. ; nph property holdings , llc ( “ nph ” ) ; sti holding , inc. ; uph property holdings , llc ( “ uph ” ) ; valley electric holdings i , inc. ; valley electric holdings ii , inc. ; and wolf energy holdings inc. on october 10 , 2014 , concurrent with the sale of the operating company , our ownership increased to 100 % of the outstanding equity of arrm services , inc. which was renamed sb forging company , inc. ( “ sb forging ” ) . as such , we began consolidating sb forging on october 11 , 2014. effective may 23 , 2016 , in connection with the merger of american property reit corp. ( “ aprc ” ) and united property reit corp. ( “ uprc ” ) with and into national property reit corp. ( “ nprc ” ) , aph and uph merged with and into nph , and dissolved . we collectively refer to these entities as the “ consolidated holding companies. ” we are externally managed by our investment adviser , prospect capital management l.p. ( “ prospect capital management ” or the “ investment adviser ” ) . prospect administration llc ( “ prospect administration ” ) , a wholly-owned subsidiary of the investment adviser , provides administrative services and facilities necessary for us to operate . our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments . we invest primarily in senior and subordinated debt and equity of private companies in need of capital for acquisitions , divestitures , growth , development , recapitalizations and other purposes . we work with the management teams or financial sponsors to seek investments with historical cash flows , asset collateral or contracted pro-forma cash flows . we currently have nine origination strategies in which we make investments : ( 1 ) lending in private equity sponsored transactions , ( 2 ) lending directly to companies not owned by private equity firms , ( 3 ) control investments in corporate operating companies , ( 4 ) control investments in financial companies , ( 5 ) investments in structured credit , ( 6 ) real estate investments , ( 7 ) investments in syndicated debt , ( 8 ) aircraft leasing and ( 9 ) online lending . we continue to evaluate other origination strategies in the ordinary course of business with no specific top-down allocation to any single origination strategy . 64 lending in private equity sponsored transactions – we make loans to companies which are controlled by leading private equity firms . this debt can take the form of first lien , second lien , unitranche or unsecured loans . in making these investments , we look for a diversified customer base , recurring demand for the product or service , barriers to entry , strong historical cash flow and experienced management teams . these loans typically have significant equity subordinate to our loan position . historically , this strategy has comprised approximately 50 % -60 % of our business , but more recently it is less than 50 % of our business . lending directly to companies – we provide debt financing to companies owned by non-private equity firms , the company founder , a management team or a family . here , in addition to the strengths we look for in a sponsored transaction , we also look for the alignment with the management team with significant invested capital . this strategy often has less competition than the private equity sponsor strategy because such company financing needs are not easily addressed by banks and often require more diligence preparation . direct lending can result in higher returns and lower leverage than sponsor transactions and may include warrants or equity to us . historically , this strategy has comprised approximately 5 % -15 % of our business , but more recently it is less than 5 % of our business . control investments in corporate operating companies – this strategy involves acquiring controlling stakes in non-financial operating companies . our investments in these companies are generally structured as a combination of yield-producing debt and equity . we provide enhanced certainty of closure to our counterparties , give the seller personal liquidity and generally look for management to continue on in their current roles . this strategy has comprised approximately 10 % -15 % of our business . control investments in financial companies – this strategy involves acquiring controlling stakes in financial companies , including consumer direct lending , sub-prime auto lending and other strategies . our investments in these companies are generally structured as a combination of yield-producing debt and equity . story_separator_special_tag industries , inc. ( “ r-v ” ) ; uses corp. ( “ uses ” ) ; valley electric company , inc. ( “ valley electric ” ) ; and wolf energy , llc . we also own an affiliated interest in bnn holdings corp and targus international , llc ( “ targus ” ) . the following shows the composition of our investment portfolio by level of control as of june 30 , 2016 and june 30 , 2015 : 67 replace_table_token_6_th the following shows the composition of our investment portfolio by type of investment as of june 30 , 2016 and june 30 , 2015 : replace_table_token_7_th ( 1 ) participating interest includes our participating equity investments , such as net profits interests , net operating income interests , net revenue interests , and overriding royalty interests . the following shows our investments in interest bearing securities by type of investment as of june 30 , 2016 and june 30 , 2015 : replace_table_token_8_th 68 the following shows the composition of our investment portfolio by geographic location as of june 30 , 2016 and june 30 , 2015 : replace_table_token_9_th 69 the following shows the composition of our investment portfolio by industry as of june 30 , 2016 and june 30 , 2015 : replace_table_token_10_th ( 1 ) our clo investments do not have industry concentrations and as such have been separated in the table above . 70 portfolio investment activity during the year ended june 30 , 2016 , we acquired $ 375,409 of new investments , completed follow-on investments in existing portfolio companies totaling approximately $ 573,338 , funded $ 9,824 of revolver advances , and recorded pik interest of $ 20,531 , resulting in gross investment originations of $ 979,102 . the more significant of these transactions are briefly described below . on july 1 , 2015 , we provided $ 31,000 of first lien senior secured financing to intelius , inc. ( “ intelius ” ) , an online information commerce company , of which $ 30,200 was funded at closing . on august 11 , 2015 , we made a $ 13,500 follow-on first lien senior secured debt investment in intelius , of which $ 13,000 was funded at closing , to support an acquisition . the $ 21,500 term loan a note bears interest at the greater of 6.5 % or libor plus 5.5 % and has a final maturity of july 1 , 2020. the $ 21,500 term loan b note bears interest at the greater of 12.5 % or libor plus 11.5 % and has a final maturity of july 1 , 2020. the $ 1,500 senior secured revolver , which was not funded at closing , bears interest at 9.5 % or libor plus 8.5 % and has a final maturity of august 11 , 2016. on july 23 , 2015 , we made an investment of $ 37,969 to purchase 80.73 % of the subordinated notes issued by halcyon loan advisors funding 2015-3 ltd. in a co-investment transaction with priority income fund , inc. , a closed-end fund managed by an affiliate of prospect capital management . on august 6 , 2015 , we provided $ 92,500 of first lien senior secured debt to support the refinancing of crosman corporation ( “ crosman ” ) . concurrent with the refinancing , we received repayment of the $ 40,000 second lien term loan previously outstanding . the $ 52,500 term loan a note bears interest at the greater of 9.0 % or libor plus 8.7 % and interest payment in kind of 4.0 % , and has a final maturity of august 5 , 2020. the $ 40,000 term loan b note bears interest at the greater of 16.0 % or libor plus 15.7 % and interest payment in kind of 4.0 % , and has a final maturity of august 5 , 2020. on august 12 , 2015 , we made an investment of $ 22,898 to purchase 50.04 % of the subordinated notes issued by octagon investment partners xviii , ltd. on august 12 , 2015 , we sold 780 of our small business whole loans ( with a cost of $ 30,968 ) purchased from ondeck to jefferies asset funding llc for proceeds of $ 26,619 , net of related transaction expenses , and a trust certificate representing a 41.54 % interest in the marketplace loan trust , series 2015-od2 . we realized a loss of $ 775 on the sale . on august 21 , 2015 , we committed to funding a $ 16,000 second lien secured investment in sitel worldwide corporation , a provider of customer care outsourcing services . the second lien term loan bears interest at the greater of 10.5 % or libor plus 9.5 % and has a final maturity of september 18 , 2022. on september 16 , 2015 , we made an investment of $ 26,773 to purchase 75.09 % of the subordinated notes issued by apidos clo xxii in a co-investment transaction with priority income fund , inc. , a closed-end fund managed by an affiliate of prospect capital management . on october 2 , 2015 , we provided $ 17,500 of first lien senior secured debt to easy gardener products , inc. , a designer , marketer , and manufacturer of branded lawn and garden products . the first lien term loan bears interest at the greater of 10.25 % or libor plus 10.0 % and has a final maturity of september 30 , 2020. on october 16 , 2015 , we made a $ 37,000 second lien secured debt investment in universal fiber systems , llc , a manufacturer of custom and specialty fiber products used in high performance applications . the second lien term loan bears interest at the greater of 10.5 % or libor plus 9.5 % and has a final maturity of october 2 , 2022. on november 2 , 2015 , we provided $ 50,000 of first lien senior secured debt to coverall north america , inc. ( “ coverall ” ) , a leading franchiser of commercial cleaning businesses .

fourth quarter highlights investment transactions we seek to be a long-term investor with our portfolio companies . during the three months ended june 30 , 2016 , we acquired $ 62,930 of new investments , completed follow-on investments in existing portfolio companies totaling approximately $ 214,370 , funded $ 3,682 of revolver advances , and recorded paid in kind ( “ pik ” ) interest of $ 13,056 , resulting in gross investment originations of $ 294,038 . during the three months ended june 30 , 2016 , we sold our investment in harbortouch and sold down two investments to lower retained amounts , and received several partial prepayments and amortization payments totaling $ 383,460 , including realized losses totaling $ 6,180 . the more significant of these transactions are discussed in “ portfolio investment activity. ” debt issuances and redemptions during the three months ended june 30 , 2016 , we issued $ 13,573 aggregate principal amount of prospect capital internotes® for net proceeds of $ 13,403 . these notes were issued with stated interest rates of 5.50 % with a weighted average interest rate of 5.50 % . these notes mature between april 15 , 2021 and june 15 , 2021 . the following table summarizes the prospect capital internotes® issued during the three months ended june 30 , 2016 . tenor at origination ( in years ) principal amount interest rate range weighted average interest rate maturity date range 5 $ 13,573 5.50 % 5.50 % april 15 , 2021 – june 15 , 2021 during the three months ended june 30 , 2016 , we repaid $ 3,300 aggregate principal amount of prospect capital internotes® at par in accordance with the survivor 's option , as defined in the internotes® offering prospectus .

mattel has omitted discussion of 2017 results where it would be redundant to the discussion previously included in part ii , item 7 `` management 's discussion and analysis of financial condition and results of operations , '' of mattel 's amended annual report on form 10-k/a for the year ended december 31 , 2018. the following discussion also includes gross sales and currency exchange rate impact , non-gaap financial measures within the meaning of regulation g promulgated by the securities and exchange commission ( `` regulation g '' ) , to supplement the financial results as reported in accordance with gaap . gross sales represent sales to customers , excluding the impact of sales adjustments , such as trade discounts and other allowances . the currency exchange rate impact reflects the portion ( expressed as a percentage ) of changes in mattel 's reported results that are attributable to fluctuations in currency exchange rates . mattel uses these non-gaap financial measures to analyze its continuing operations and to monitor , assess , and identify meaningful trends in its operating and financial performance . these measures are not , and should not be viewed as , a substitute for gaap financial measures . refer to `` non-gaap financial measures '' in this annual report on form 10-k for a more detailed discussion , including a reconciliation of gross sales , a non-gaap financial measure , to net sales , its most directly comparable gaap financial measure . overview mattel is a leading global children 's entertainment company that specializes in the design and production of quality toys and consumer products . mattel 's products are among the most widely recognized toy products in the world . mattel 's mission is to `` create innovative products and experiences that inspire , entertain , and develop children through play . '' in order to deliver on this mission , mattel is focused on the following two-part strategy to transform mattel from a toy manufacturing company into an intellectual property ( `` ip '' ) driven , high-performing toy company : in the short- to mid-term , restore profitability by reshaping operations and regain topline growth by growing mattel 's power brands ( barbie , hot wheels , fisher-price and thomas & friends , and american girl ) and expanding mattel 's brand portfolio . in the mid- to long-term , capture the full value of mattel 's ip through franchise management and the development of mattel 's online retail and e-commerce capabilities . reorganization of gross sales by categories and brand in 2019 although there were no changes to mattel 's commercial operations that impacted its operating segments , in the first quarter of 2019 , mattel modified its reporting structure for revenues , as outlined below , and reorganized its regional sales reporting structure within the international segment . prior period amounts have been reclassified to conform to the current period presentation . gross sales by categories are presented as follows : dolls —including brands such as barbie , american girl , enchantimals , and polly pocket . infant , toddler , and preschool —including brands such as fisher-price and thomas & friends , power wheels , fireman sam , and shimmer and shine ( nickelodeon ) . vehicles —including brands such as hot wheels , matchbox , and cars ( disney pixar ) . action figures , building sets , and games —including brands such as mega , uno , toy story ( disney pixar ) , jurassic world ( nbcuniversal ) , and wwe . 28 the following table provides a summary of mattel 's consolidated gross sales by categories , along with supplemental information by brand for the years ended december 31 , 2018 and 2017 , based on mattel 's current reporting structure for revenues : replace_table_token_3_th the following table provides a summary of mattel 's consolidated gross sales by brand results for the years ended december 31 , 2018 and 2017 , as presented in mattel 's annual report on form 10-k/a for the year ended december 31 , 2018 : replace_table_token_4_th 29 results of operations 2019 compared to 2018 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; font-style : italic ; '' > provision for income taxes mattel 's provision for income taxes was $ 55.2 million in 2019 , as compared to $ 116.2 million in 2018 . the 2019 income tax provision included a $ 13.4 million tax benefit related to the release of valuation allowances in certain foreign tax jurisdictions , and a $ 16.9 million tax benefit related to reassessments of prior year 's tax liabilities based on the status of audits and settlements in various jurisdictions . the 2018 income tax provision included a $ 14.6 million expense related to changes to its indefinite reinvestment assertion and a $ 3.7 million expense related to the deemed repatriation of accumulated foreign earnings ( net of related valuation allowance change ) . 32 segment results north america segment net sales for the north america segment were $ 2.28 billion in 2019 , an increase of $ 3.0 million as compared to $ 2.27 billion in 2018. the following table provides a summary of mattel 's gross sales for the north america segment by categories , along with supplemental information by brand , for 2019 and 2018 : replace_table_token_7_th ( a ) mattel modified its reporting structure for revenues in the first quarter of 2019 to disclose revenues by categories . gross sales for the north america segment were $ 2.43 billion in 2019 , an increase of $ 10.2 million , as compared to $ 2.42 billion in 2018 , with an unfavorable impact from changes in currency exchange rates of 1 percentage point . gross sales in 2018 included the toys `` r '' us sales reversal of approximately $ 27 million . story_separator_special_tag american girl segment net sales for the american girl segment were $ 256.6 million in 2019 , a decrease of $ 70.2 million as compared to $ 326.8 million in 2018. the following table provides a summary of mattel 's gross sales for the american girl segment for 2019 and 2018 : replace_table_token_9_th gross sales for the american girl segment were $ 268.5 million in 2019 , a decrease of $ 72.7 million , or 21 % , as compared to $ 341.2 million in 2018 . the decrease in american girl gross sales was primarily due to lower sales in proprietary retail and direct channels . cost of sales decreased 23 % in 2019 , as compared to a 21 % decrease in net sales , primarily due to lower product and other costs . gross margin in 2019 increased primarily due to incremental structural simplification savings , lower obsolescence expense , favorable product mix , partially offset by higher freight and logistics expense , the unfavorable impact of fixed cost absorption due to lower sales , and input cost inflation due to higher plant labor costs . american girl segment loss was $ 58.8 million in 2019 , as compared to segment loss of $ 17.7 million in 2018 , driven primarily by lower net sales and a $ 25.9 million impairment charge related to certain american girl retail store assets , as a result of lower fourth quarter sales in certain retail stores . cost savings programs structural simplification cost savings program during the third quarter of 2017 , mattel initiated its structural simplification cost savings program . as of december 31 , 2019 , mattel successfully completed its structural simplification cost savings program and achieved $ 875 million of run-rate savings , exceeding the program 's target of $ 650 million . the major initiatives of the structural simplification cost savings program included : reducing manufacturing complexity , including sku reduction , and implementing process improvement initiatives at owned and co-manufacturing facilities ; streamlining the organizational structure and reducing headcount expense to better align with the revenue base ; and optimizing advertising spend . 35 mattel realized cost savings ( before severance , investments , and cost inflation ) of approximately $ 366 million ( approximately $ 219 million within gross profit , approximately $ 123 million within other selling and administrative expenses , and approximately $ 24 million within advertising and promotion expenses ) during the year ended december 31 , 2019 in connection with the program . mattel recorded severance and other restructuring charges of $ 21.5 million during the year ended december 31 , 2019 in connection with the program . of the total charges recorded during the year ended december 31 , 2019 , $ 11.7 million relate to severance charges and $ 9.8 million relate to other restructuring costs , which consisted primarily of consulting fees and other termination costs . mattel recorded severance and other restructuring charges of $ 109.8 million during the year ended december 31 , 2018. of the total charges recorded during the year ended december 31 , 2018 , $ 62.9 million relate to severance charges and $ 47.0 million relate to other restructuring costs . of the $ 47.0 million of other restructuring costs , $ 5.7 million relate to non-cash plant restructuring charges , and the remainder consists primarily of consulting fees . mattel has recorded cumulative severance and other restructuring charges of $ 176.5 million in connection with the program . capital light program during the first quarter of 2019 , mattel announced the commencement of its capital light program to optimize mattel 's manufacturing footprint ( including the sale or consolidation of manufacturing facilities ) , increase the productivity of its plant infrastructure , and achieve additional efficiencies across its entire supply chain . in conjunction with the capital light program , mattel discontinued production in 2019 at certain plants located in china , indonesia , and mexico . in addition to the discontinued production at the three plants , mattel announced that it will discontinue production in 2020 at its plant located in canada . mattel recorded severance and other restructuring charges of $ 37.6 million during the year ended december 31 , 2019 in connection with the program . of the total charges recorded during the year ended december 31 , 2019 , $ 19.0 million was recorded within other selling and administrative expenses which is included in corporate and other expense and of the $ 18.6 million recorded within cost of sales in the consolidated statements of operations , $ 10.4 million , $ 8.0 million and $ 0.2 million are included in north america , international , and american girl segments , respectively , which is presented within segment income ( loss ) in `` note 13 to the consolidated financial statements—segment information . '' to date , mattel has recorded cumulative severance and other restructuring charges of $ 37.6 million , including non-cash charges of approximately $ 11 million , in connection with the program and currently expects to incur total severance and restructuring charges , excluding non-cash charges , of approximately $ 35 million . mattel is currently evaluating other cost saving measures , including the optimization of owned and operated manufacturing facilities and the geographical footprint of co-manufacturing facilities , which may result in incremental cost savings . mattel expects to realize cumulative run-rate cost savings of approximately $ 65 million in 2020 , and $ 72 million by 2021 related to the capital light program actions taken to date . mattel realized cost savings ( before severance , restructuring costs , and cost inflation ) of approximately $ 15 million , primarily within gross profit , during the year ended december 31 , 2019 in connection with the program . income taxes mattel 's provision for income taxes was $ 55.2 million in 2019 , as compared to $ 116.2 million in 2018 .

consolidated results net sales for 2019 were $ 4.50 billion , as compared to $ 4.51 billion in 2018 . net loss for 2019 was $ 213.5 million , or $ 0.62 loss per share , as compared to a net loss of $ 533.3 million , or $ 1.55 loss per share , in 2018 , primarily due to higher gross profit and lower selling and administrative expenses . net loss for 2019 included the impact of approximately $ 38 million related to the inclined sleeper product recalls , of which approximately $ 6 million was a reduction to net sales , approximately $ 22 million was included in cost of sales , and approximately $ 10 million was included in other selling and administrative expenses . net loss for 2018 includes a sales reversal of approximately $ 30 million and bad debt expense , net of approximately $ 32 million as a result of the toys `` r '' us liquidation . the following table provides a summary of mattel 's consolidated results for 2019 and 2018 : replace_table_token_5_th n/m - not meaningful 30 sales net sales for 2019 were $ 4.50 billion as compared to $ 4.51 billion in 2018 . the following table provides a summary of mattel 's consolidated gross sales by categories , along with supplemental information by brand for 2019 and 2018 : replace_table_token_6_th ( a ) mattel modified its reporting structure for revenues in the first quarter of 2019 to disclose revenues by categories . gross sales were $ 5.06 billion in 2019 , as compared to $ 5.08 billion in 2018 , with an unfavorable impact from changes in currency exchange rates of 2 percentage point s. gross sales in 2018 included the toys `` r '' us sales reversal of approximately $ 30 million .

the term “ incremental ” is used to highlight the impact acquisitions had on the current year results , for which there was no comparable prior-year period . therefore , the results of operations for acquisitions are incremental for the first twelve months from the date of acquisition . the remaining businesses are referred to as the “ organic ” . the definition of “ organic ” excludes the effect of foreign currency translation . company organization our management 's discussion and analysis of financial condition and results of operations begins with an overview of our company , followed by economic and industry-wide factors impacting our company and the markets we serve , a discussion of the overall results of operations , and finally a more detailed discussion of those results within each of our reportable operating segments . we manage and evaluate our operations based on the products and services we offer and the different industries and markets we serve . based on this approach , we have three reportable segments : flow control , controls , and surface technologies . for further information on our products and services and the major markets served by our three segments , refer to the business description in part i , item i of this annual report on form 10-k. market analysis and economic factors economic factors impacting our markets general economy many of curtiss-wright 's industrial businesses are driven in large part by global economic growth . world economies continue to slowly recover from the 2008-2009 global recession , as well as from the aftermath of the tsunami that struck japan early in 2011. however , pockets of global economic instability remain , particularly in europe . in 2013 , the u.s. economy , as measured by real gross domestic product ( gdp ) , showed only modest growth of 1.9 % , according to the most recent estimate , compared with a 2.8 % increase in 2012 and a 1.8 % increase in 2011. while u.s. gdp continues to grow modestly from the global economic recession , the u.s. continues to deal with high levels of unemployment , higher taxes , and uncertainty in the housing market . 26 looking ahead to 2014 , the broader u.s. economy is expected to continue to recover at a moderate pace , with current estimates for u.s. real gdp growth ranging from 2.5 % to 3.0 % . however , world economies may continue to experience volatility due to the impact of europe 's debt crisis and possible contagion effects that could undermine economic growth in europe and the rest of the world . overall , 2014 gdp growth in world economies is expected to be higher than 2013 , led by brazil , russia , india , and china , while european economies are expected to increase slightly . given that backdrop , we remain cautiously optimistic that our commercial and industrial markets will continue to improve in 2014. defense during 2013 , approximately 30 % of our business was attributed to the defense sector , predominantly in the united states , and characterized by long-term programs and contracts driven primarily by the dod budgets and funding levels . we have a well-diversified portfolio of products and services that supply all branches of the u.s. military , with content on many high performance programs and platforms . the u.s. defense budget serves as a leading indicator of our defense market , and its future outlook has been marked with some uncertainty . following a period of significant growth in defense spending and related supplemental budgets in the previous decade , future defense spending , as it relates to u.s. defense spending , is expected to be flat over the next five years . in january 2014 , president obama signed into law the consolidated appropriations act , 2014 , an omnibus spending bill . the law provides $ 520.5 billion for defense and $ 491.7 billion for non-defense discretionary programs through september 30 , 2014 and replaces what would have been the second round of across-the-board sequester cuts “ sequestration ” mandated by the 2011 budget control act . the act provides for modest sequester relief in fy14 and provides the dod additional stability and flexibility to entertain multi-year contracts . while we monitor the budget process as it relates to programs in which we participate , we can not predict the ultimate impact of future dod budgets , which tend to fluctuate year-by-year and program-by-program . as a result , some of the budget reductions and program cancellations may negatively impact programs in which we participate . in our ground defense market , we anticipate ground vehicle upgrades and modernization programs to continue to be funded over the next five years , although the timing is uncertain following years of rapid growth from the supplemental defense budgets and the ongoing draw down of our forces from overseas operations . additionally , we expect to benefit from increased funding levels on c4isr , electronic warfare , unmanned systems , and communications programs within our aerospace defense market . in our naval defense market , we expect continued funding for the u.s. shipbuilding program , particularly as it relates to production on the cvn-79 ford class aircraft carrier . commercial aerospace approximately 17 % of our revenue is derived from the global commercial aerospace market , including the commercial jet , regional jet , and commercial helicopter markets . our primary focus in this market is oem products and services for commercial jets where we provide a combination of flight control and utility actuation systems , sensors , and other sophisticated electronics , as well as shot and laser peening services , to our primary customers , in boeing and airbus . shot and laser peening are also utilized on highly stressed components of turbine engine fan blades , landing gear , and aircraft structures . the largest driver of our commercial aerospace business is oem parts , which is highly dependent on new aircraft production . story_separator_special_tag additionally , as assessments and analysis from the events at fukushima continue to drive safety and reliability improvements , we have seen and continue to expect increased opportunities worldwide for our vast portfolio of advanced nuclear technologies that are specifically designed to enhance plant safety , fire safety , seismic design and controls , spent fuel storage , backup site power , and also comply with other regulatory requirements on existing plants , particularly the tier 1 regulations proposed by the nrc . in addition to plant recertifications , there are several emerging factors that could precipitate an expansion in global commercial nuclear power demand over the next several years . the eia forecasts that worldwide total energy consumption is expected to increase at an average annual rate of 0.3 % between 2011 and 2040. continued growth in global demand for electricity , especially in developing countries with limited supply such as china and india , will require increased capacity . in addition , the continued supply constraints and environmental concerns attributed to the current dependence on fossil fuels have led to a reassessment of the value of nuclear technology as the most efficient and environmentally friendly source of energy available today . as a result , we expect growth opportunities in this market both domestically and internationally , although the timing of orders remains uncertain . 28 domestically , four new build reactors are under construction , and applications for 22 new reactors at 13 power plants have been submitted to the nrc . thus far , the westinghouse ap1000 reactor design , for which we are the sole supplier of reactor coolant pumps , has been selected for 12 of the potential new reactors . internationally , new nuclear plant construction is active . currently , there are approximately 72 new plants under construction in 15 countries , with approximately 172 planned and over 312 more proposed . in particular , china intends to expand its nuclear power capabilities significantly through the construction of new nuclear power plants over the next several years . as a result , we expect to see continued solid new order activity and increased sales for our vast array of nuclear technologies due to ongoing maintenance and upgrade requirements on operating nuclear plants , a renewed interest in products to aid safety and extend the reliability of existing reactors , and the continued emphasis on global nuclear power construction . general industrial approximately 17 % of our revenue is derived from our diversified offering to the general industrial market , which consists of industrial sensors and control systems , surface treatment services , and motor and machine control systems . we supply our products and service to oems and industrial customers , including the transportation , commercial trucking , off-road equipment , construction , hvac , automotive , and medical industries . our performance in this market is typically sensitive to the performance of the u.s. and global economies , with gains in global gdp and industrial production leading to higher volumes , particular for our surface treatment services . for 2013 , we experienced a modest increase in our general industrial market , primarily related to improved performance in sensors and controls systems , most notably for electronic throttle controls , shift controls , and traction control systems , as well as surface treatment services including shot peening , engineered coatings , and analytical services . increased demand for electronic control systems and sensors has been driven by the need for improved operational efficiency , safety , repeatability , reduced emissions , and greater fuel efficiencies to customers worldwide . looking ahead , based on expectations for steadily improved economic conditions both domestically and internationally in 2014 , the general industrial market is likely to experience continued modest growth based on higher volumes across several industries in which we participate . 29 results of operations replace_table_token_8_th sales sales increased $ 413 million , or 20 % , in 2013 , as compared with 2012 . the increase in sales in 2013 is primarily due to an increase in sales in our flow control and controls segments of $ 204 million and $ 171 million , respectively . the increase in sales in our flow control and controls segment were primarily due to the incremental impact of acquisitions of $ 204 million and $ 170 million , respectively . the increase in sales in our surface technologies segment was due to the incremental impact of acquisitions of $ 26 million and to a lesser extent strong organic demand for our shot peening , coatings , and analytical services . sales increased $ 81 million , or 4 % , in 2012 , as compared with 2011. the increase in sales in 2012 is primarily due to an increase in sales in our flow control and surface technologies segments of $ 35 million and $ 29 million , respectively . the increase in sales in our flow control segment was primarily due to the incremental impact of acquisitions of $ 50 million , while the increase in sales in our surface technologies segment was due to strong demand for our shot peening , coatings , and analytical services and the incremental impact of acquisitions . 30 net sales by market replace_table_token_9_th components of sales and operating income growth ( decrease ) : replace_table_token_10_th year ended december 31 , 2013 compared to year ended december 31 , 2012 sales defense sales decreased $ 19 million , or 2 % , as compared to the prior year period , primarily due to lower sales in the aerospace defense and ground defense markets . in our flow control segment , naval defense sales increased due to increased production on the cvn-79 , the ramping up of production on the virginia class submarine program , and a new shipboard helicopter handling systems contract . this was partially offset by lower levels of production on the ddg-1000 and ddg-51 destroyer programs and completion of production on the advanced arresting gear program .

results by business segment flow control the following tables summarize sales , operating income and margin , and new orders , and certain items impacting comparability within the flow control segment . replace_table_token_11_th ( 1 ) on august 24 , 2012 , workers at emd 's cheswick , pennsylvania facility went on strike . the financial impacts of the strike were an $ 18 million and $ 6 million shift in revenue and operating income , respectively , from 2012 to 2013 , due to the temporary suspension of work and an additional $ 5 million unfavorable impact to operating income as a result of unrecoverable absorption of overhead costs . on september 24 , 2012 , the company ratified an agreement with the union to end the strike . 34 components of sales and operating income growth ( decrease ) : replace_table_token_12_th year ended december 31 , 2013 compared to year ended december 31 , 2012 sales sales increased $ 204 million , or 19 % , to $ 1,300 million , as compared to the prior year period , primarily due to the incremental impact of our cimarron , phönix , and ap services acquisitions , which contributed $ 135 million , $ 53 million , and $ 17 million , of incremental sales , respectively . sales in the defense market increased 6 % due to increased production on the cvn -79 aircraft carrier program , the ramping up of production on the virginia class submarine program , and a new shipboard helicopter handling systems contract . this was partially offset by lower levels of production on the ddg-1000 and ddg-51 destroyer programs , and completion of production on the advanced arresting gear program .

we are currently evaluating the impact of 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 the notes thereto included elsewhere in this annual report on form 10-k , as well as the information presented under part ii , item 6 , `` selected financial data '' of this annual report on form 10-k. we have applied the fast act modernization and simplification of regulation s-k , which allows for the discussion of the two most recent fiscal years . this discussion and analysis reflects comparisons of material changes in the consolidated financial statements for 2019 and 2018 for all matters excluding selling , general and administrative expenses , other operating charges and ebit . selling , general and administrative expenses and other operating charges also includes comparison for 2018 and 2017 as these items have not previously been disclosed with the current presentation . ebit discussions also includes comparison for 2018 and 2017 as this has not previously been disclosed due to the change in our primary performance metric . for the comparison of 2018 and 2017 for all other operating results , see the management 's discussion and analysis of financial condition and results of operations in part ii , item 7 of our 2018 annual report on form 10-k , filed with the securities and exchange commission on february 26 , 2019. forward-looking statements many statements made in the following discussion and analysis of our financial condition and results of operations and elsewhere in this annual report on form 10-k that are not statements of historical fact , including statements about our beliefs and expectations , are `` forward-looking statements '' within the meaning of federal securities laws and should be evaluated as such . forward-looking statements include information concerning possible or assumed future results of operations , including descriptions of our business plan , strategies and capital structure . these statements often include words such as `` anticipate , '' `` expect , '' `` suggests , '' `` plan , '' `` believe , '' `` intend , '' `` estimates , '' `` targets , '' `` projects , '' `` should , '' `` could , '' `` would , '' `` may , '' `` will , '' `` forecast '' and other similar expressions . we base these forward-looking statements or projections on our current expectations , plans and assumptions that we have made in light of our experience in the industry , as well as our perceptions of historical trends , current conditions , expected future developments and other factors we believe are appropriate under the circumstances and at such time . as you read and consider this annual report on form 10-k , you should understand that these statements are not guarantees of performance or results . the forward-looking statements and projections are subject to and involve risks , uncertainties and assumptions , including , but not limited to , the risks and uncertainties described in `` non-gaap financial measures '' and `` forward-looking statements , '' as well as `` risk factors '' and you should not place undue reliance on these forward-looking statements or projections . although we believe that these forward-looking statements and projections are based on reasonable assumptions at the time they are made , you should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those expressed in the forward-looking statements and projections . factors that may materially affect such forward-looking statements and projections include : adverse developments in economic conditions and , particularly , in conditions in the automotive and transportation industries ; volatility in the capital , credit and commodities markets ; our inability to successfully execute on our growth strategy ; the outcome or timing of our previously announced comprehensive review of strategic alternatives to maximize shareholder value ; increased competition ; reduced demand for some of our products as a result of improved safety features on vehicles , insurance company influence , new business models or new methods of travel ; risks of the loss or change in purchasing levels of any of our significant customers or the consolidation of msos , distributors and or body shops ; our reliance on our distributor network and third-party delivery services for the distribution and export of certain of our products ; credit risk exposure from our customers ; price increases or business interruptions in our supply of raw materials ; failure to develop and market new products and manage product life cycles ; 34 business disruptions , security threats and security breaches , including security risks to our information technology systems ; risks associated with our outsourcing strategies ; risks associated with our non-u.s. operations ; currency-related risks ; terrorist acts , conflicts , wars , natural disasters , pandemics and other health crises that may materially adversely affect our business , financial condition and results of operations ; risks associated with the united kingdom 's withdrawal from the european union ; failure to comply with the anti-corruption laws of the united states and various international jurisdictions ; failure to comply with anti-terrorism laws and regulations and applicable trade embargoes ; risks associated with protecting data privacy ; significant environmental liabilities and costs as a result of our current and past operations or products , including operations or products related to our business prior to our acquisition of dupont performance coatings ; transporting certain materials that are inherently hazardous due to their toxic nature ; litigation and other commitments and contingencies ; ability to recruit and retain the experienced and skilled personnel we need to compete ; unexpected liabilities under any pension plans applicable to our employees ; work stoppages , union negotiations , labor disputes and other matters associated with our labor force ; our ability to protect and enforce intellectual property rights ; intellectual property infringement suits against us by third parties ; our ability to realize the anticipated story_separator_special_tag other operating charges our other operating charges include termination benefits and other employee related costs , strategic review and retention costs , acquisition and divestiture-related costs , and deconsolidation and impairment charges , details of which are included in our reconciliations of segment operating performance to income before income taxes . research and development expenses research and development expenses represent costs incurred to develop new products , services , processes and technologies or to generate improvements to existing products or processes . interest expense , net interest expense , net consists primarily of interest expense on institutional borrowings and other financing obligations and changes in fair value of interest rate derivative instruments , net of capitalized interest expense . interest expense , net also includes the amortization of debt issuance costs and debt discounts associated with our senior secured credit facilities and other indebtedness . 38 other ( income ) expense , net other ( income ) expense , net represents costs incurred , net of income , on various non-operational items including costs incurred in conjunction with our debt refinancing and extinguishment transactions , interest income , as well as foreign exchange gains and losses and non-operational impairment losses unrelated to our core business . provision for income taxes we and our subsidiaries are subject to income tax in the various jurisdictions in which we operate . while the extent of our future tax liability is uncertain , changes to the debt and equity capitalization of our subsidiaries , and the realignment of the functions performed , and risks assumed by the various subsidiaries are among the factors that will determine the future book and taxable income of the respective subsidiary and the company as a whole . results of operations the following discussion should be read in conjunction with the information contained in the accompanying financial statements and related notes included elsewhere in this annual report on form 10-k. our historical results of operations summarized and analyzed below may not necessarily reflect what will occur in the future . during the year ended december 31 , 2019 , the presentation of the consolidated statements of operations was updated and the 2018 and 2017 consolidated statements of operations were updated for comparability with the current year presentation . for further information , refer to note 1 to the consolidated financial statements included elsewhere in this annual report on form 10-k. net sales replace_table_token_4_th net sales decreased due to the following : n lower sales volumes across both segments driven by subdued global automotive production and accelerated industrial slowdown in various regions , partially offset by a modest volumes increase in our commercial vehicle end-market n unfavorable impacts of currency translation , due primarily to the weakening of the euro , chinese renminbi , brazilian real and argentine peso compared to the u.s. dollar n negative impacts as a result of portfolio changes , which included the sale of our consolidated joint venture interests within our performance coatings segment , as noted in note 3 to the consolidated financial statements included elsewhere in this annual report on form 10-k partially offset by : n higher average selling prices across both segments and all regions , except for our commercial vehicle end-market , which realized lower selling prices due to adverse changes in product mix 39 cost of sales replace_table_token_5_th cost of sales decreased due to the following : n lower sales volumes across both segments n favorable impacts of currency translation of 2.8 % , due primarily to the weakening of the euro , chinese renminbi , brazilian real and argentine peso compared to the u.s. dollar n decline in stock-based compensation expense of $ 6.9 million due to management attrition resulting in forfeitures n decline in depreciation of operating equipment partially offset by : n increased raw material costs across both segments n increased accelerated depreciation expense of $ 14.0 million to $ 24.3 million in the current year associated with the announced closure of our mechelen , belgium facility , compared to $ 10.3 million for the comparable period cost of sales as a percentage of net sales decreased slightly due to the following : n price and product mix increases to net sales to more than offset higher raw material costs , partially offset by lower sales volumes covering fixed costs n decline in stock-based compensation expense of $ 6.9 million due to management attrition resulting in forfeitures , partially offset by increased accelerated depreciation expense of $ 14.0 million to $ 24.3 million in current year associated with the closure of our mechelen , belgium facility , compared to $ 10.3 million for the comparable period selling , general and administrative expenses 2019 compared to 2018 replace_table_token_6_th selling , general and administrative expenses decreased due to the following : n decline in commissions and sales incentive compensation driven by decrease in net sales n reduction in costs due to operational efficiencies associated with our cost savings initiatives n favorable impacts of currency translation of 2.8 % , due primarily to the weakening of the euro , chinese renminbi , brazilian real and argentine peso compared to the u.s. dollar n decline in stock-based compensation expense of $ 14.7 million due to management attrition resulting in forfeitures 40 2018 compared to 2017 replace_table_token_7_th ( 1 ) related to the adoption of asu 2014-09 , `` revenue from contracts with customers , '' on january 1 , 2018. see note 2 to the consolidated financial statements included elsewhere in this annual report on form 10-k. selling , general and administrative expenses , excluding the impact of asu 2014-09 , increased due to the following : n incremental impact from our acquisitions of $ 5.9 million n unfavorable impacts of foreign currency translation of 1.0 % , primarily related to the strengthening of the euro and chinese renminbi against the u.s. dollar partially offset by : n reduction in costs due to operational efficiencies associated with our cost savings initiatives other operating charges replace_table_token_8_th 2019 compared to 2018 other operating charges decreased due to the following : n reductions

business highlights general business highlights our net sales decreased 4.6 % for the year ended december 31 , 2019 compared to the year ended december 31 , 2018 , primarily driven by a net decrease in volumes of 4.8 % , which included the impacts of the sale of our consolidated joint venture net of acquisitions , which contributed to a decrease of 1.1 % in volumes , as well as the impacts of unfavorable foreign currency translation of 3.0 % . partially offsetting the decline in volumes during the period was an increase in higher average selling prices and product mix of 3.2 % . the following trends have impacted our segment and end-market sales performance : performance coatings : net sales decreased 3.6 % compared to 2018 driven primarily by a decrease in volumes across both end-markets of 4.7 % , inclusive of the negative impacts of portfolio changes of 1.7 % associated with the sale of our consolidated joint venture in china , as well as the impacts of unfavorable foreign currency translation of 2.9 % . partially offsetting the decline in volumes during the period was an increase in average selling prices and product mix of 4.0 % , of which both end-markets positively contributed . transportation coatings : net sales decreased by 6.3 % compared to 2018 driven primarily by a decrease in volumes of 4.9 % as a result of declines in global light vehicle production as well as the impacts of unfavorable foreign currency translation of 3.0 % . partially offsetting the decline in volumes during the period was an increase in average selling prices and product mix of 1.6 % as a result of light vehicle end-market contributions .

as of december 31 , 2015 , we operated 13 production and packaging facilities , including the largest rock salt mine in the world in goderich , ontario , canada and the largest dedicated rock salt mine in the u.k. in winsford , cheshire . our salt business sells sodium chloride and magnesium chloride , which is used for highway deicing , dust control , consumer deicing , water conditioning , consumer and industrial food preparation , and agricultural and industrial applications . our solar evaporation facility located in ogden , utah , is both the largest sop production site and the largest solar salt production site in north america . in addition , we operate a records management business utilizing excavated areas of our winsford salt mine with one other location in london , u.k. , which provide services to businesses throughout the u.k. company highlights total sales for 2015 were $ 1,098.7 million , a decrease of 14 % from 2014 , largely due to mild winter weather in the fourth quarter of 2015 and the weak agriculture market . net earnings were $ 159.2 million in 2015 , a 27 % decrease from 2014. net earnings in 2014 of $ 217.9 million were positively impacted by an insurance settlement of $ 60.6 million ( net of tax ) related to the tornado that hit our facilities in goderich , ontario , in 2011. adjusted earnings before interest , taxes , depreciation and amortization ( adjusted `` ebitda '' ) was $ 299.7 million , a 2 % decrease from 2014 adjusted ebitda of $ 305.7 million . product cost of 46 % of sales in 2015 increased from the product cost of 41 % in 2014. the 2014 product cost was favorably impacted due to a gain of approximately $ 82.3 million from the aforementioned settlement . diluted earnings per share of $ 4.69 decreased by 27 % from 2014 diluted earnings per share . completed the acquisition of a 35 % equity stake in produquímica industria e comercio s.a. ( `` produquímica '' ) , a leading brazilian specialty plant nutrition company . general we contract bulk shipping vessels , barges , trucking and rail services to move products from our production facilities to distribution outlets and customers . our north american salt mines and sop production facilities are near either water or rail transport systems , which reduces our shipping and handling costs . however , shipping and handling costs still account for a relatively large portion of the total delivered cost of our products . per-unit salt shipping and handling costs decreased in 2015 from the prior year primarily due to lower fuel costs , which was partially offset by trucking and rail supply constraints . in 2014 , per-unit shipping and handling costs were higher due to trucking and rail supply constraints , which were partially offset by lower fuel costs . manpower costs , energy costs , packaging , and certain raw material costs , particularly potassium chloride ( `` kcl '' ) , which can be used to make a portion of our sop , deicing , and water conditioning products , are also significant . our production workforce is typically represented by labor unions with multi-year collective bargaining agreements . our energy costs result from the consumption of electricity with relatively stable , rate-regulated pricing , and natural gas , which can have significant pricing volatility . we manage the pricing volatility of our natural gas purchases with natural gas forward swap contracts up to 36 months in advance of purchases , helping to reduce the impact of short-term spot market price volatility . we focus on building intrinsic value by improving our ebitda and by improving our asset quality . we can employ our operating cash flow and other sources of liquidity to pay dividends , re-invest in our business , pay down debt and make acquisitions . our goal is to achieve $ 500 million in ebitda by 2018. salt segment highlights salt segment sales were $ 849.0 million , a decrease of 15 % from 2014 primarily due to mild winter weather in the fourth quarter of 2015. salt segment average selling price increased 2 % from 2014. replace_table_token_30_th compass minerals international , inc. 2015 form 10-k salt segment volumes were down 17 % from 2014. our operating results are impacted by the winter weather in the markets we serve . we assess the severity of winter weather compared to recent averages , using official government snow data and comparisons of our sales volumes to historical trends and other relevant data . our assessment of the frequency of winter events in the three past winter weather seasons in the markets we serve are summarized below ( a ) : 2013 near average in the first quarter above average in the fourth quarter 2014 above average in first quarter below average in the fourth quarter 2015 slightly above average in the first quarter significantly below average in the fourth quarter ( a ) the number of snow events reported may not directly correlate to compass minerals ' deicing results due to a variety of factors , including the relative significance to each city we serve within our market regions . the weather data should be used only as an indicator of year-to-year variations in winter weather conditions in our markets . general salt is indispensable and enormously versatile with thousands of reported uses . in addition , there are no known cost-effective alternatives for most high-volume uses . as a result , our cash flows from salt have not been materially impacted through a variety of economic cycles . we are among the lowest-cost salt producers in our markets due to our high-grade quality salt deposits , which are among the most extensive in the world , and through the use of effective mining techniques and efficient production processes . story_separator_special_tag ◦ the investment has been accounted for as an equity method investment in our financial statements . ◦ this is a key step in our plant nutrition growth strategy and provides an attractive entry into brazil 's specialty plant nutrition market . ◦ we expect that this investment will be accretive in its first year , net of our incremental $ 100 million debt financing . ◦ the agreement also includes a path to full ownership by early 2019 at the latest . ogden facility ◦ over the past several years , we have made investments to strengthen our solar-pond-based sop production through upgrades to our processing plant and our solar evaporation ponds . through these investments , we have been able to increase our annual solar harvest and extraction yield and thereby , our production capacity . our current production capacity is 320,000 tons per year . we have identified opportunities and have begun to further expand our solar-pond-based sop production capacity . after the completion of this additional expansion , we expect our sop production capacity to be approximately 550,000 tons , including tons produced using kcl feedstock . 2016 outlook assuming normal winter weather for the remainder of 2016 , we expect salt segment sales volumes to surpass 2015 results . the plant nutrition outlook continues to be negatively impacted by the overall weakness in the agriculture market , as well as increased imports of sop driven largely by the current strength of the u.s. dollar . our 2016 plant nutrition selling prices will be negatively impacted in some geographies as we look to drive sop sales volumes up to more normal levels . we expect to benefit from improved plant nutrition production costs in the second half of 2016 after we sell through higher-cost kcl inventory from 2015. in february 2016 , we announced steps to align our inventories with market demand and we are undergoing a thorough review of our cost structure . this effort is expected to result in a restructuring charge in the first quarter of 2016 of approximately $ 4 million , or $ 0.07 per diluted share , related to a workforce reduction of 150 positions . a significant portion of this total results from our investment in continuous mining at its goderich , ontario location . we expect the majority of the workforce reduction to be completed by the end of 2016. we expect ongoing annualized savings of approximately $ 15 million beginning in 2018. replace_table_token_32_th compass minerals international , inc. 2015 form 10-k story_separator_special_tag # 000000 ; padding-left:12px ; padding-top:2px ; padding-bottom:2px ; padding-right:2px ; '' > » gross profit for the salt segment contributed approximately $ 113 million to the increase in gross profit which included a settlement of $ 82.3 million for the insurance claim related to the tornado in goderich , ontario , in 2011 . » gross profit for the salt segment was also favorably impacted by higher sales volumes for consumer and industrial products , higher deicing average selling prices and lower per-unit costs in 2014 due to higher production volumes at our north american rock salt mines . » the increase in salt gross profit was offset partially by the impact of purchased rock salt to supplement our production , higher logistics costs and the impact of exchange rates used to translate our operations denominated in foreign currencies in u.s. dollars in 2014 , which unfavorably impacted salt gross profit by $ 9 million . » gross profit for the plant nutrition segment contributed approximately $ 26 million primarily due to higher sales volumes . » in addition , the acquisition of our compass manitoba business in april 2014 increased plant nutrition gross profit . » increases in plant nutrition gross profit were partially offset by higher use of purchased kcl in 2014 , which increased per-unit costs and the impact of gain of $ 9 million recognized in 2013 from the settlement of an insurance claim resulting from a loss of mineral-concentrated brine due to an asset failure at our ogden facility in 2010. replace_table_token_35_th compass minerals international , inc. 2015 form 10-k selling , general and administrative ( `` sg & a '' ) expenses 2015 vs. 2014 sg & a : decreased $ 1.7 million or 2 % increased to 9.9 % from 8.6 % as a percentage of sales » the decrease in expense was due to lower professional services expenses in both segments , which totaled approximately $ 2.8 million in comparison to the prior year . » sg & a in 2015 was also impacted by lower incentive compensation in both segments and corporate and other , which totaled approximately $ 2.2 million . » the decrease was partially offset by an increase in costs in corporate and other related to information technology and ongoing costs related to our compass manitoba business in our plant nutrition segment . 2014 vs. 2013 sg & a : increased $ 10.0 million or 10 % decreased to 8.6 % from 8.9 % as a percentage of sales » the increase was primarily due to the acquisition and increased ongoing costs associated with the compass manitoba business in our plant nutrition segment which totaled $ 9.5 million . » sg & a in 2014 was also affected by higher incentive compensation in both segments and corporate and other , which totaled approximately $ 1.8 million . » the increases were partially offset by lower corporate salaries due to a reorganization of our management in 2013. interest expense 2015 vs. 2014 interest expense : increased $ 1.4 million to $ 21.5 million » the increase was primarily due to the refinancing of our $ 100.0 million senior notes ( `` 8 % senior notes '' ) with $ 250.0 million senior notes ( `` 4.875 % senior notes '' ) in june 2014 .

results of operations the following table presents consolidated financial information with respect to sales from our salt and plant nutrition segments for the years ended december 31 , 2015 , 2014 and 2013. sales primarily include revenues from the sales of our products , or `` product sales , '' and the impact of shipping and handling costs incurred to deliver salt and plant nutrition products to our customers . the results of operations of the consolidated records management business and other incidental revenues include sales of $ 11.3 million , $ 9.7 million and $ 10.5 million for 2015 , 2014 and 2013 , respectively . these revenues are not material to our consolidated financial results and are not included in the following table . the following discussion should be read in conjunction with the information contained in our consolidated financial statements and the notes thereto included in this annual report on form 10-k. replace_table_token_33_th 2015 vs. 2014 salt product sales : decreased 12 % or $ 83.4 million » salt sales volumes declined 2.2 million tons or 17 % due to lower highway and consumer deicing sales volumes as a result of milder winter weather experienced in the fourth quarter of 2015 when compared to the same period in the prior year . » lower sales volumes for north american highway and consumer deicing customers contributed approximately $ 123 million to the decrease in salt product sales . » the decrease in north american salt volumes was partially offset by higher u.k. sales volumes . » unfavorable foreign currency exchange rates contributed approximately $ 24 million to the decrease in salt product sales . » an increase of 2 % in highway salt deicing average selling prices and lower per-unit shipping and handling costs compared to the prior year partially offset the decline in product sales .

since these assets had no alternative future use , the company recorded ipr & d charges of $ 4.5 million in fiscal 2012. f-12 intangible assets consisted of the following : replace_table_token_37_th in fiscal 2012 , as a result of its acquisition of gen-probe , the company recorded $ 1.57 billion of developed technology assets and $ 227.0 million of ipr & d assets related to six projects . in fiscal 2013 , management revised its valuation analysis for a correction of projected revenues expected from certain of the development projects which increased the value of the developed technology assets to $ 1.7 billion and reduced the ipr & d assets to $ 117.0 million . the company recorded this adjustment in fiscal 2013 and determined it was immaterial to its financial statements . subsequent to the acquisition and through september 2014 , the company has received united states food and drug administration ( `` fda `` ) approval for four projects with story_separator_special_tag the following discussion and analysis should be read in conjunction with the consolidated financial statements and the information described under the caption “ risk factors ” in part i , item 1a of this report . overview we are a developer , manufacturer and supplier of premium diagnostics products , medical imaging systems and surgical products . our core business units are focused on diagnostics , breast health , gyn surgical and skeletal health . we sell and service our products through a combination of direct sales and service forces and a network of independent distributors and sales representatives . we offer a wide range of diagnostic products which are used primarily to aid in the diagnosis of human diseases and screen donated human blood . our primary diagnostics products include our aptima family of assays , including our advanced instrumentation ( panther and tigris ) , our thinprep system , the rapid fetal fibronectin test and procleix blood screening assays . the aptima family of assays is used to detect the infectious microorganisms that cause the common sexually transmitted diseases , or stds , chlamydia and gonorrhea , certain high-risk strains of human papillomavirus , or hpv , and trichomonas vaginalis , the parasite that causes trichomoniasis . the thinprep system is primarily used in cytology applications , such as cervical cancer screening , and the rapid fetal fibronectin test assists physicians in assessing the risk of pre-term birth . in blood screening , we develop and manufacture the procleix family of assays , which are used to detect various infectious diseases . these blood screening products are marketed worldwide by our blood screening collaborator , grifols s.a. , or grifols , under grifols ' trademarks . our breast health products include a broad portfolio of breast imaging and related products and accessories , including digital and film-based mammography systems , computer-aided detection , or cad , for mammography and minimally invasive breast biopsy devices , breast biopsy site markers , breast biopsy guidance systems and breast brachytherapy products . our most advanced breast imaging platform , dimensions , utilizes a technology called tomosynthesis to produce 3d images , as well as conventional 2d full field digital mammography images . our gyn surgical products include our novasure endometrial ablation system , or novasure , and our myosure hysteroscopic tissue removal system , or myosure . the novasure system involves a trans-cervical procedure for the treatment of abnormal uterine bleeding . the myosure system is a tissue removal device that is designed to provide incision-less removal of fibroids , polyps , and other pathology within the uterus . our skeletal health products include dual-energy x-ray bone densitometry systems , an ultrasound-based osteoporosis assessment product , and our fluoroscan mini c-arm imaging products . unless the context otherwise requires , references to we , us , hologic or our company refer to hologic , inc. and its consolidated subsidiaries . recent developments market acceptance of our medical products in the united states and other countries is dependent upon the purchasing and procurement practices of our customers , patient demand for our products and procedures , and the reimbursement of patients ' medical expenses by government healthcare programs , private insurers or other healthcare payors . in the united states , the centers for medicare & medicaid services , known as cms , establishes coverage policies and payment rates for medicare beneficiaries . under current cms policies , varying payment levels have been established for certain of our products and treatments . coverage and payment policies and rates applicable to patients with private insurance are dependent upon individual private payor decisions which may not follow the policies and rates established by cms . the use of our products outside the united states is similarly affected by payment policies adopted by foreign regulatory authorities and insurance carriers . on october 31 , 2014 , cms for the first time released payment rates for screening and diagnostic 3d mammography ( breast tomosynthesis ) . this action establishes national average payment rates for the category i current procedural terminology , or cpt , code for 3d mammography screening and creates a new add-on healthcare common procedure coding system , or hcpcs , code for 3d diagnostic mammography . these codes and rates go into effect january 1 , 2015. coverage policies for 3d mammography still need to be determined by most government and private payors . 40 the continuing uncertainty surrounding worldwide financial markets and macroeconomic conditions has caused and may continue to cause the purchasers of medical equipment to decrease or delay their medical equipment purchasing and procurement activities . economic uncertainty as well as increasing health insurance premiums , deductibles and co-payments have resulted and may continue to result in cost-conscious consumers focusing on acute care rather than wellness , which has and may continue to adversely affect demand for our products and procedures . story_separator_special_tag replace_table_token_4_th diagnostics product revenues decreased 1.7 % in fiscal 2014 compared to fiscal 2013 primarily due to a reduction in thinprep revenues of $ 31.5 million and a decrease of $ 23.1 million in lifecodes revenue as a result of the divestiture of this product line in the second quarter of fiscal 2013. these decreases were partially offset by an increase in our molecular diagnostics products of $ 12.4 million primarily due to an increase in revenues from our aptima family of assays and an increase in blood screening revenues of $ 24.5 million , which were partially offset by lower sales of our tigris and panther instrumentation and lower prodesse sales . we attribute the reduction in thinprep revenues primarily to lower domestic sales volumes resulting from an increase in screening intervals based on guidelines released in 2012 by the american congress of obstetrics and gynecologists and the u.s. preventative services task force and lower average sales prices internationally . the increase in revenues in the current year related to our aptima family of assays was primarily due to increased volumes from our strategic alliance with quest diagnostics incorporated , or quest , entered into in the third quarter of fiscal 2013 , our increased installed base of panther instruments , and increased sales volumes of our hpv screening assay , which was fda approved for use on our panther system in the fourth quarter of fiscal 2013. these increases were partially offset by slightly lower average sales prices for our aptima products due to increased competitive pressures , and a reduction in cervista hpv revenues as our larger customers transition to our panther system and aptima hpv assay . the reduction in instruments sales was primarily due to the ramp up of unit sales to quest in the fourth quarter of fiscal 2013. prodesse revenues decreased in the current year primarily due to a milder flu season this year compared to the corresponding period in the prior year and the recent introduction of competitive products . our blood screening revenues increased in fiscal 2014 compared to fiscal 2013 primarily due to the inclusion of contingent revenue under our blood screening collaboration that was not recognized in the first quarter of fiscal 2013 , and to a lesser extent the second quarter of fiscal 2013 , due to unbilled accounts receivable being recorded as a fair value adjustment in purchase accounting . under the collaboration , a portion of our blood screening revenue is contingent on donations testing revenue earned by our blood screening collaborator . as a result , amounts that were to be received for this contingent revenue related to inventory on hand and not yet utilized by novartis ' ( our blood screening collaborator at the time ) customers as of the date we acquired gen-probe were recorded as unbilled accounts receivable on the balance sheet in purchase accounting , and these amounts were not recorded as revenue in our results of operations in fiscal 2013. the amount of this contingent revenue not recorded as revenue in the prior year was $ 23.5 million . we also experienced an increase in volume due to the recent agreement between grifols , our current blood screening partner , and the japanese red cross . these increases were partially offset by lower west nile virus assay sales compared to the corresponding period in fiscal 2013 as last year had a higher incidence of the west nile virus resulting in higher donation testing in the prior year . breast health product revenues increased 2.0 % in fiscal 2014 compared to fiscal 2013 . our digital mammography systems and related products revenue increased $ 22.8 million in fiscal 2014 compared to fiscal 2013 primarily due to the increase in 3d dimensions units sold on a worldwide basis and higher workstations and workflow product revenue driven by our c-view product . as expected , we continue to experience a decline in the number of 2d systems sold as customers transition to the 3d dimensions systems , which is occurring primarily in the united states . in addition , our breast biopsy products revenue increased $ 2.3 million in fiscal 2014 compared to fiscal 2013 primarily due to the increase in the number of eviva biopsy devices sold worldwide . these increases were partially offset by declines in our analog mammography systems and hitec imaging products . 44 gyn surgical product revenues increased 0.3 % in fiscal 2014 compared to fiscal 2013 primarily due to an increase in myosure system sales of $ 18.3 million partially offset by lower novasure device sales of $ 16.8 million . the myosure system continues to gain strong market acceptance as unit sales increase globally , partially offset by product mix . we experienced a decrease in the number of novasure devices sold in the united states , which we continue to believe is primarily attributable to patients delaying surgery or opting for lower cost and generally less effective alternatives , partially offset by higher international volume . skeletal health product revenues increased 1.4 % in fiscal 2014 compared to fiscal 2013 primarily due to an increase in our osteoporosis assessment product sales , namely our horizon product , which was introduced in late fiscal 2013 , and to a lesser extent our mini c-arm systems , partially offset by lower volumes of our older discovery products and pricing pressures . in fiscal 2014 , 73.6 % of product revenues were generated in the united states , 13.8 % in europe , 8.6 % in asia-pacific , and 4.0 % in other international markets . in fiscal 2013 , 73.9 % of product revenues were generated in the united states , 13.6 % in europe , 8.9 % in asia-pacific , and 3.6 % in other international markets . service and other revenues . replace_table_token_5_th service and other revenues are primarily comprised of revenue generated from our field service organization to provide ongoing service , installation and repair of our products . the majority of these revenues are generated within our breast health segment .

segment results of operations we report our business as four segments : diagnostics , breast health , gyn surgical and skeletal health . the accounting policies of the segments are the same as those described in the footnotes to the accompanying consolidated financial statements contained in item 15 of this annual report . we measure segment performance based on total revenues and operating income or loss . revenues from product sales of each of these segments are described in further detail above . the discussion that follows is a summary analysis of total revenues and the primary changes in operating income or loss by segment . diagnostics . replace_table_token_9_th diagnostics revenues decreased in fiscal 2014 compared to fiscal 2013 primarily due to the decrease in product revenues discussed above . operating income for this business segment increased in fiscal 2014 compared to fiscal 2013 , primarily due to the goodwill impairment charge of $ 1.1 billion recorded in the fourth quarter of fiscal 2013 related to our molecular diagnostics reporting unit discussed above . gross profit in absolute dollars increased primarily due to the inclusion in the prior fiscal year of fair value adjustments of $ 52.4 million for acquired gen-probe inventory that did not recur in the current year . in addition , we were able to record contingent revenue under our blood screening collaboration in the current fiscal year that had previously been recorded as unbilled accounts receivable in purchase accounting as described above . furthermore , we experienced favorable manufacturing variances across many of our products , lower royalty costs for thinprep , and lower instrumentation sales , partially offset by lower thinprep volumes and slightly lower pricing on thinprep and aptima sales .

the operators of the company 's facilities provide a range of health care and related services to patients and residents , including skilled nursing and assisted living services , social services , various therapy services , and other rehabilitative and healthcare services for both long-term and short-stay patients and residents . we were incorporated in ohio on august 14 , 1991 , under the name passport retirement , inc. in 1995 , we acquired substantially all of the assets and liabilities of adcare health systems , inc. and changed our name to adcare health systems , inc. adcare completed its initial public offering in november 2006. initially based in ohio , we expanded our portfolio through a series of strategic acquisitions to include properties in a number of other states , primarily in the southeast . in 2012 , we relocated our executive offices and accounting operations to georgia , and adcare changed its state of incorporation from ohio to georgia on december 12 , 2013. historically , our business focused on owning , leasing and operating skilled nursing and assisted living facilities . the company also managed certain facilities on behalf of unaffiliated long-term care operators and owners and operators with whom we entered into management contracts . in july 2014 , the board approved a strategic plan to transition the company to a healthcare property holding and leasing company through a series of leasing and subleasing transactions . as of december 31 , 2015 , we completed the transition through : ( i ) leasing to third-party operators all of the healthcare properties which we own and previously operated ; ( ii ) subleasing to third-party operators all of the healthcare properties which we lease ( but do not own ) and previously operated ; and ( iii ) continuing in effect the one remaining management agreement to manage two skilled nursing facilities and one assisted living facility . we lease our currently-owned healthcare properties , and sublease our currently-leased healthcare properties , on a triple-net basis , meaning that the lessee ( i.e . , the new third-party operator of the property ) is obligated under the lease or sublease , as applicable , for all liabilities of the property in respect to insurance , taxes and facility maintenance , as well as the lease or sublease payments , as applicable . these leases are generally long-term in nature with renewal options and annual escalation clauses . the company has many of the characteristics of a reit . the board is analyzing and considering : ( i ) whether and , if so , when , we could satisfy the requirements to qualify as a reit under the code ; ( ii ) the structural and operational complexities which would need to be addressed before the we could qualify as a reit , including the disposition of certain assets or the termination of certain operations which may not be reit compliant ; and ( iii ) if we were to qualify as a reit , whether electing reit status would be in the best interests of the company and its shareholders in light of various factors , including our significant consolidated federal net operating losses of approximately $ 58.3 million as of december 31 , 2015. there is no assurance that the company will qualify as a reit in future taxable years or , if it were to so qualify , that the board would determine that electing reit status would be in the best interests of the company and its shareholders . as a result of the transition , the company is now focused on the ownership , acquisition and leasing of healthcare related properties . on march 29 , 2016 , the company announced that given that the transition to a healthcare property holding and leasing company is complete , the board of directors has begun to explore strategic alternatives for the company . 33 the following table provides summary information regarding the number of facilities and related beds/units as of december 31 , 2015 : replace_table_token_6_th liquidity at december 31 , 2015 , we had $ 2.7 million in cash and cash equivalents as well as restricted cash of $ 12.7 million . over the next twelve months , we anticipate both access to and receipt of several sources of liquidity , including cash flows from operations , and sales of preferred stock pursuant to an at-the-market shelf registration . we routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and , in recent periods , have refinanced shorter term acquisition debt , including seller notes , with traditional longer term mortgage notes , some of which have been executed under government guaranteed lending programs . during 2016 , we anticipate net proceeds of approximately $ 9.1 million on the refinancing of existing debt with such government guaranteed lending programs . at december 31 , 2015 , we had $ 125.5 million in indebtedness of which the current portion is $ 51.0 million . we anticipate our operating cash requirements in 2016 as being less than in 2015 due to the completion of the transition . we expect sufficient funds for our operations , scheduled debt service , at least through the next twelve months . we have been successful in recent years in raising new equity capital and believe , based on recent discussions , that these markets will continue to be available to us for raising capital in 2016 and beyond . we believe our long-term liquidity needs will be satisfied by these same sources , as well as borrowings as required to refinance indebtedness . on march 24 , 2016 , the company received a commitment to refinance the bentonville , heritage park and river valley credit facility , the little rock credit facility , and the northridge , woodland hills and abington credit facility for a combined total of $ 25.4 million of debt , subject to definitive documentation and certain closing conditions . story_separator_special_tag if our evaluation of these factors indicates it is probable that we will be unable to recover the full value of the receivable , we provide a reserve against the portion of the receivable that we estimate may not be recovered . if our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments due in the future , we provide a reserve against the recognized straight-line rent receivable asset for the portion that we estimate may not be recovered . if we change our assumptions or estimates regarding the collectibility of future rent payments required by a lease , we may adjust our reserve to increase or reduce the rental revenue recognized in the period we make such change in our assumptions or estimates . at december 31 , 2015 , we allowed for approximately $ 12.5 million on approximately $ 20.9 million of gross patient care related receivables . allowance for patient care receivables are estimated based on an aged bucket method incorporating different payor types . all patient care receivables exceeding 365 days are fully allowed at december 31 , 2015. asset impairment the company reviews the carrying value of long-lived assets that are held and used in our operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operations to which the assets relate , utilizing management 's best estimate , assumptions , and projections at the time . if the carrying value is determined to be unrecoverable from future operating cash flows , the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset . we estimate the fair value of assets based on the estimated future discounted cash flows of the asset . management has evaluated its long-lived assets and has identified asset impairment during the years ended december 31 , 2015 and 2014 . the company tests indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable . goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations . goodwill is subject to annual testing for impairment . in addition , goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a facility below its carrying amount . the company performs its annual test for impairment during the fourth quarter of each year ( see note 6 - intangible assets and goodwill to our consolidated financial statements included in part ii , item 8. , `` financial statements and supplementary data. '' ) . the company 's asset impairment analysis is consistent with the fair value measurements described in asc topic 820 , fair value measurements and disclosures . during the year ended december 31 , 2014 , the company recorded an impairment of $ 1.8 million related to an adjustment to the fair value less the cost to sell the 102-bed nursing facility located in tulsa , oklahoma . during the year ended december 31 , 2015 , the company recognized impairment charges of approximately $ 0.5 million and $ 0.1 million to write down the carrying value of its two office buildings located in roswell , georgia and one office building located in rogers , arkansas , respectively ( see note 11 - discontinued operations to our consolidated financial statements included in part ii , item 8. , `` financial statements and supplementary data '' ) . the impairment charges represent the difference between fair values from the carrying value . stock-based compensation the company follows the provisions of asc topic 718 , compensation - stock compensation ( `` asc 718 '' ) , which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees , non-employees , and directors based upon estimated fair values . the black-scholes-merton option-pricing model , consistent with the provisions of asc 718 , was used to determine the fair value of each option and warrant granted . option valuation models require the input of highly subjective assumptions , including the expected stock price volatility . the company uses projected volatility rates , which are based upon historical volatility rates , trended into future years . because the company 's stock options have characteristics significantly different from those of traded options , and because changes in the subjective input assumptions can materially affect the fair value estimate , in management 's opinion , the existing models do not necessarily provide a reliable single measure of the fair value of our options . income taxes 36 as required by asc topic 740 , income taxes ( `` asc 740 '' ) , the company establishes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates in effect when such temporary differences are expected to reverse . when necessary , we record a valuation allowance to reduce our net deferred tax assets to the amount that is more likely than not to be realized . at december 31 , 2015 , the company has a valuation allowance of approximately $ 24.6 million . in future periods , we will continue to assess the need for and adequacy of the remaining valuation allowance . asc 740 provides information and procedures for financial statement recognition and measurement of tax positions taken , or expected to be taken , in tax returns . in determining the need for a valuation allowance , the annual income tax rate , or the need for and magnitude of liabilities for uncertain tax positions , we make certain estimates and assumptions .

results of operations year ended december 31 , 2015 and 2014 the following table sets forth , for the periods indicated , statement of operations items and the amount and percentage of change of these items . the results of operations for any particular period are not necessarily indicative of results for any future period . the following data should be read in conjunction with our consolidated financial statements and the notes thereto , which are included herein . given the company 's transition to a healthcare property holding and leasing company during 2014 and 2015 , the amounts presented below are not reflective of our ongoing annualized performance due to leasing activity throughout the periods . certain reclassifications have been made to the 2014 financial information to conform to the 2015 presentation with no effect on the company 's consolidated financial position or results of operations . these reclassifications did not affect total assets , total liabilities , or stockholders ' equity . reclassifications were made to the consolidated statements of operations for the year ended december 31 , 2014 to reflect the same facilities in discontinued operations for both periods presented . 37 replace_table_token_8_th year ended december 31 , 2015 compared to year ended december 31 , 2014 : rental revenues —total rental revenue increase d by $ 15.4 million , or 841.8 % , to $ 17.3 million for the year ended december 31 , 2015 , compared with $ 1.8 million for the year ended december 31 , 2014 . the increase reflects the company 's continuing transition to a healthcare property holding and leasing company in 2015 and accordingly an increase in leasing of facilities to third-party operators . as of december 31 , 2015 , we have leased or subleased all of our facilities . as of december 31 , 2014 , we had leased three owned and five subleased skilled nursing and rehabilitation facilities .

in this discussion , we use financial measures that are considered non‑gaap financial measures under securities and exchange commission rules . these rules regarding non-gaap financial measures require supplemental explanation and reconciliation , which is included elsewhere in this annual report on form 10-k. investors should not consider non‑gaap financial measures in isolation from or in substitution for , financial information presented in compliance with u.s. generally accepted accounting principles , or gaap . company overview cargurus is a global , online automotive marketplace connecting buyers and sellers of new and used cars . using proprietary technology , search algorithms , and innovative data analytics , we provide information and analysis that create a differentiated automotive search experience for consumers . our trusted marketplace empowers users with unbiased third‑party validation on pricing and dealer reputation as well as other information that aids them in finding “ great deals from top-rated dealers. ” in addition to the united states , we operate online marketplaces in canada , the united kingdom , germany , italy , and spain . we generate marketplace subscription revenue from dealers through listing and dealer display subscriptions , and advertising revenue from automobile manufacturers and other auto‑related brand advertisers . we generated revenue of $ 454.1 million in 2018 , $ 316.9 million in 2017 , and $ 198.1 million in 2016 , representing year-over-year increases of 43 % in 2018 and 60 % in 2017. in 2018 , we generated net income of $ 65.2 million and our adjusted ebitda was $ 49.0 million , compared to a net income of $ 13.2 million and adjusted ebitda of $ 24.1 million in 2017 , and a net income of $ 6.5 million and adjusted ebitda of $ 11.0 million in 2016. see “ selected consolidated financial data — adjusted ebitda ” for more information regarding our use of adjusted ebitda , a non-gaap financial measure , and a reconciliation of adjusted ebitda to our net income . we have two reportable segments , united states and international . see note 11 of our consolidated financial statements included in item 8 of this annual report on form 10-k for more information . key business metrics we regularly review a number of metrics , including the key metrics listed below , to evaluate our business , measure our performance , identify trends affecting our business , formulate financial projections , and make operating and strategic decisions . we believe it is important to evaluate these metrics for the united states and international segments . the international segment derives revenues from marketplace subscriptions , advertising services , and other revenues from customers outside of the united states . international markets perform differently from the united states market due to a variety of factors , including our operating history in the market , our rate of investment , market size , market maturity , and other dynamics unique to each country . 39 monthly unique users for each of our websites , we define a monthly unique user as an individual who visited such website within a calendar month , based on data as measured by google analytics . we calculate average monthly unique users as the sum of the monthly unique users in a given period , divided by the number of months in that period . we count a unique user the first time a computer or mobile device with a unique device identifier accesses one of our websites during a calendar month . if an individual accesses one of our websites using a different device within a given month , the first access by each such device is counted as a separate unique user . we view our average monthly unique users as a key indicator of the quality of our user experience , the effectiveness of our advertising and traffic acquisition , and the strength of our brand awareness . measuring unique users is important to us because our marketplace subscription revenue depends , in part , on our ability to provide dealers with connections to our users and exposure to our marketplace audience . we define connections as interactions between consumers and dealers on our marketplace through phone calls , email , managed text and chat , and clicks to access the dealer 's website or map directions to the dealership . replace_table_token_4_th monthly sessions we define monthly sessions as the number of distinct visits to our websites that take place each month within a given time frame , as measured and defined by google analytics . we calculate average monthly sessions as the sum of the monthly sessions in a given period , divided by the number of months in that period . a session is defined as beginning with the first page view from a computer or mobile device and ending at the earliest of when a user closes their browser window , after 30 minutes of inactivity , or at midnight eastern time each night . a session can be made up of multiple page views and visitor actions , such as performing a search , visiting vehicle detail pages , and connecting with a dealer . we believe the volume of sessions in a time period , when considered in conjunction with the number of unique users in that time period , is an indicator of consumer satisfaction and engagement with our marketplace . replace_table_token_5_th number of paying dealers a paying dealer is a dealer , based on a distinct associated inventory feed , that subscribes to our enhanced or featured listing product at the end of a defined period . we believe that the number of paying dealers is indicative of the value proposition of our listing products , and our sales and marketing success , including our ability to retain paying dealers and develop new dealer relationships . replace_table_token_6_th 40 average annual revenue per subscribing dealer ( aarsd ) we measure the average annual revenue we receive from each paying dealer . story_separator_special_tag product , technology , and development product , technology , and development expenses , which include research and development costs , consist primarily of personnel costs of our development team , including payroll , benefits , stock‑based compensation expense and allocated overhead costs . other than website development costs and other costs that qualify for capitalization , research and development costs are expensed as incurred . we expect product , technology , and development expenses to increase as we develop new products and make improvements to our existing platform . general and administrative general and administrative expenses consist of personnel costs and related expenses for executive , finance , legal , human resources , and administrative personnel , including salaries , benefits , incentive compensation , and stock‑based compensation expense , in addition to the costs associated with professional fees for external legal , accounting and other consulting services , insurance premiums , payment processing and billing costs , and allocated overhead costs . we expect general and administrative expenses to increase as we continue to incur the costs of compliance associated with being a publicly traded company , including legal , audit , and consulting fees . depreciation and amortization depreciation and amortization expenses consist of depreciation on property and equipment and leasehold improvements . 42 other incom e , net other income , net consists primarily of interest income earned on our cash , cash equivalents , and investments , interest expense on lease obligations , and net foreign exchange gains and losses . ( benefit from ) provision for income taxes we are subject to federal and state income taxes in the united states and taxes in foreign jurisdictions in which we operate . we have recognized a benefit from income taxes for the period ended december 31 , 2018 as a result of stock-based compensation benefits recorded . we have recorded a provision for income taxes for the periods ended december 31 , 2017 and 2016 as a result of our consolidated taxable income position . we recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates . we regularly assess the need to record a valuation allowance against net deferred tax assets if , based upon the available evidence , it is more likely than not that some or all of the deferred tax assets will not be realized . we have not provided a valuation allowance against our net deferred tax assets at december 31 , 2018 or 2017. story_separator_special_tag style= '' text-align : justify ; margin-bottom:0pt ; margin-top:0pt ; text-indent:0 % ; font-family : times new roman ; font-size:11pt ; '' > depreciation and amortization expenses increased $ 0.1 million , or 6 % , in the year ended december 31 , 2018 compared to the year ended december 31 , 2017. other income , net replace_table_token_19_th other income , net increased $ 1.7 million , or 307 % , in the year ended december 31 , 2018 compared to the year ended december 31 , 2017. the $ 1.4 million increase in interest income is primarily due to the investment of cash in certificates of deposit , money market funds arising from our increased cash from operations , and an increase in interest rates . the $ 0.3 million increase in other income ( expense ) is primarily due the euro strengthening against the u.s. dollar in 2017 and remaining relatively flat in 2018 . 47 ( benefit from ) provision for income taxes replace_table_token_20_th nm — not meaningful the benefit from income taxes recorded during the year ended december 31 , 2018 , as compared to the provision for income taxes recorded during the year ended december 31 , 2017 , was principally due to $ 40.8 million in stock-based compensation benefits recorded during the year ended december 31 , 2018 , as well as an increase in federal and state research and development tax credits and a lower federal statutory tax rate due to the tax cuts and jobs act , or the tcja , as compared to year ended december 31 , 2017. income ( loss ) from operations by segment replace_table_token_21_th nm — not meaningful united states income from operations increased $ 16.8 million , or 40 % , in the year ended december 31 , 2018 compared to the year ended december 31 , 2017. this increase was due to an increase in revenue of $ 129.7 million , offset in part by the increases in cost of revenue of $ 6.8 million and operating expenses of $ 106.1 million . international loss from operations increased $ 8.9 million , or 34 % in the year ended december 31 , 2018 compared to the year ended december 31 , 2017. the increase in international loss from operations reflects our continued investment into international markets and expansion into new countries . 48 year ended decembe r 31 , 2017 compared to year ended december 31 , 2016 revenue revenue by source replace_table_token_22_th overall revenue increased $ 118.7 million , or 60 % , in the year ended december 31 , 2017 compared to the year ended december 31 , 2016. marketplace subscription revenue increased by 65 % while advertising and other revenue grew by 27 % . marketplace subscription revenue increased $ 111.4 million in the year ended december 31 , 2017 compared to the year ended december 31 , 2016 , and represented 89 % of total revenue in 2017 compared to 86 % of total revenue in 2016. this increase in marketplace subscription revenue was attributable primarily to a 30 % growth in the number of u.s. and international paying dealers , to 27,670 as of december 31 , 2017 from 21,301 as of december 31 , 2016 , and to a 16 % growth in our aarsd for u.s. dealers to $ 12,055 in the year ended december 31 , 2017 from $ 10,383 in the year ended december 31 , 2016. we believe that this increase in paying dealers was driven by the overall

results of operations the following table sets forth our selected consolidated statements of operations data for each of the periods indicated . the period‑to‑period comparison of financial results is not necessarily indicative of future results . replace_table_token_8_th 43 replace_table_token_9_th the following table sets forth our selected consolidated statements of operations data as a percentage of revenue for each of the periods indicated . replace_table_token_10_th replace_table_token_11_th 44 year ended december 31 , 2018 compared to year ended december 31 , 2017 revenue revenue by source replace_table_token_12_th overall revenue increased $ 137.2 million , or 43 % , in the year ended december 31 , 2018 compared to the year ended december 31 , 2017. marketplace subscription revenue increased by 44 % while advertising and other revenue grew by 41 % . marketplace subscription revenue increased $ 123.1 million in the year ended december 31 , 2018 compared to the year ended december 31 , 2017 , and represented 89 % of total revenue in both 2018 and 2017. this increase in marketplace subscription revenue was attributable primarily to a 14 % growth in the number of united states and international paying dealers , to 31,472 as of december 31 , 2018 from 27,670 as of december 31 , 2017 , and to a 23 % growth in our aarsd for united states dealers to $ 14,819 as of december 31 , 2018 from $ 12,055 as of december 31 , 2017. the increase in paying dealers was driven by the efforts of our sales and marketing teams to subscribe dealers to our enhanced and featured listing paid products . the increase in our aarsd for united states dealers was driven by the investments made in building our brand and growing our audience which resulted in growth in volume of connections .

during the fiscal year ended march 31 , 2014 , $ 841 thousand related to the contingent purchase consideration as part of the acquisition of simena was paid to the former owner story_separator_special_tag the following information should be read in conjunction with the audited consolidated financial information and the notes thereto included in this annual report on form 10-k. in addition to historical information , the following discussion and other parts of this annual report contain forward-looking statements that involve risks and uncertainties . you should not place undue reliance on these forward-looking statements . actual events or results may differ materially due to competitive factors and other factors discussed in item 1a . “ risk factors ” and elsewhere in this annual report . these factors may cause our actual results to differ materially from any forward-looking statement . overview netscout was founded in 1984 and is headquartered in westford , massachusetts . we are an industry leader for advanced network , application and service assurance solutions , providing high-quality performance analytics and operational intelligence solutions that facilitate the evolution toward new computing paradigms , such as virtualization , mobility and cloud . we design , develop , manufacture , market , license , sell and support these products focused on assuring service delivery quality , performance and availability for some of the world 's largest , most demanding and complex internet protocol ( ip ) based service delivery environments . we manufacture and market these products in integrated hardware and software solutions that are used by commercial enterprises , large governmental agencies and telecommunication service providers worldwide . we have a single operating segment and substantially all of our identifiable assets are located in the united states . our solutions are intended to help users in various roles to : quickly analyze data , achieve real-time visibility into and intelligence about their organization 's operations , identify service delivery issues early , improve service levels , reduce operational costs , mitigate security risks , and drive better business decisions . our value proposition to our customers is helping them to achieve their objectives regarding return on investments and risk mitigation as they develop their it infrastructure to support their business needs . our proactive intelligence and analytics provides our customer with knowledge regarding potential issues before their users are impacted . our mission is to enable information technology ( it ) and service providers to realize maximum benefit with minimal risk from technology advances , like ip convergence , network function virtualization ( nfv ) , software defined networking ( sdn ) , virtualization , cloud , mobility , bring your own device ( byod ) , web , and the evolving internet by managing the inherent complexity in a cost-effective manner . our adaptive session intelligence ( asi ) technology , which we have developed in support of this mission , has the potential of not only expanding our leadership in the network performance management and application performance management ( npm+apm ) space , but can also serve as a gateway for future intelligence solutions including cyber and business intelligence . many of the largest service providers , cloud based businesses , enterprise and government customers rely on us to assure service delivery and the user experience of their customers . our customers are in just about every vertical market including financials , health care , utilities , internet , manufacturing , retail , as well as the service providers . we are a market leader in helping service provider 's get a return on their 4g/lte investment by providing them with the intelligence they need about aspects of service delivery from handset performance to user preferences to network speed . 24 our operating results are influenced by a number of factors , including , but not limited to , the mix and quantity of products and services sold , pricing , costs of materials used in our products , growth in employee related costs , including commissions , and the expansion of our operations . factors that affect our ability to maximize our operating results include , but are not limited to , our ability to introduce and enhance existing products , the marketplace acceptance of those new or enhanced products , continued expansion into international markets , development of strategic partnerships , competition , successful acquisition integration efforts , our ability to achieve expense reductions and make structural improvements and current economic conditions . during the first quarter of our fiscal year 2014 , netscout announced the release of the ngeniusone unified performance management platform . the ngeniusone platform converges application and network performance management functionality into a single unified platform that delivers a top-down , serviced-focused perspective of performance characteristics of all infrastructure and application elements associated with service delivery . this product is based on our unique asi technology , which provides real-time performance analytics and operational intelligence . our key objectives have been to continue to gain market share in the wireless service provider market and to accelerate our enterprise growth by extending into the application performance management segment . a common component of both initiatives has been the acceptance of our unified services delivery management strategy . this strategy has been bolstered by our acquisitions and integration of both voice/video and packet flow or monitoring switch technology . during the first quarter of our fiscal year 2014 , management performed a review of its summation of revenue by industry . as a result , we changed our method of apportioning revenue to our revenue sectors , and the categorization of certain customers to different sectors . this change in the manner of describing fluctuations by sector will not affect our total net revenues , total product and service revenues , or revenue by geography . results overview we saw continued growth during the fiscal year ended march 31 , 2014 , with product revenue growth of 18 % and overall revenue growth of 13 % compared to the prior fiscal year . story_separator_special_tag we periodically evaluate whether a decline in fair value below cost basis is other-than-temporary by considering available evidence regarding these investments including , among other factors , the duration of the period that , and extent to which , the fair value is less than cost basis , the financial health of and business outlook for the issuer , including industry and sector performance and operational and financing cash flow factors , overall market conditions and trends and our intent and ability to retain our investment in the security for a period of time sufficient to allow for an anticipated recovery in market value . once a decline in fair value is determined to be other-than-temporary , a write-down is recorded and a new cost basis in the security is established . assessing the above factors involves inherent uncertainty . write-downs , if recorded , could be materially different from the actual market performance of investments and marketable securities in our portfolio if , among other things , relevant information related to our investments and marketable securities was not publicly available or other factors not considered by us would have been relevant to the determination of impairment . revenue recognition product revenue consists of sales of our hardware products ( which include required embedded software that works together with the hardware to deliver the hardware 's essential functionality ) , licensing of our software products , and sale of hardware bundled with a software license . product revenue is recognized upon shipment , provided that evidence of an arrangement exists , title and risk of loss have passed to the customer , fees are fixed or determinable and collection of the related receivable is probable . because many of our solutions are comprised of both hardware and more than incidental software components , we recognize revenue in accordance with authoritative guidance on both hardware and software revenue recognition . service revenue consists primarily of fees from customer support agreements , consulting and training . we generally provide software and hardware support as part of product sales . revenue related to the initial bundled software and hardware support is recognized ratably over the support period . in addition , customers can elect to purchase extended support agreements for periods after the initial software warranty expiration . support services generally include rights to unspecified upgrades ( when and if available ) , telephone and internet-based support , updates and bug fixes . reimbursements of out-of-pocket expenditures incurred in connection with providing consulting services are included in services revenue , with the offsetting expense recorded in cost of service revenue . training services include on-site and classroom training . training revenues are recognized as the related training services are provided . generally , our contracts are accounted for individually . however , when contracts are closely interrelated and dependent on each other , it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts . multi-element arrangements are concurrent customer purchases of a combination of our product and service offerings that may be delivered at various points in time . for multi-element arrangements comprised only of hardware products and related services , we allocate the total arrangement consideration to the multiple elements based on each element 's selling price compared to the total relative selling price of all the elements . each element 's selling price is based on management 's best estimate of selling price ( besp ) paid by customers based on the element 's historical pricing when vsoe or third party evidence ( tpe ) does not exist . we have established besp for product elements as the average selling price the element was sold for over the past six quarters , whether sold alone or sold as part of a multiple element transaction . our internal list price for products , reviewed quarterly by senior management , with consideration in regards to changing factors in our technology and in the marketplace , is generated to target the desired gross margin from sales of product after analyzing historical discounting trends . we review sales of the product elements on a quarterly basis and update , when appropriate , besp for such elements to ensure that it reflects recent pricing experience . we have established vsoe for services related undelivered elements based on historical stand-alone sales . for multi-element arrangements comprised only of software products and related services , we allocate a portion of the total arrangement consideration to the undelivered elements , primarily support agreements and training , using vsoe of fair value for the undelivered elements . the remaining portion of the total arrangement consideration is allocated to the delivered software , referred to as the residual method . vsoe of fair value of the undelivered elements is based on the price customers pay when the element is sold separately . we review the separate sales of the undelivered elements on a quarterly basis and update , when appropriate , our vsoe of fair value for such elements to ensure that it reflects recent pricing experience . if we can not objectively determine the vsoe of the fair value of any undelivered software element , we defer revenue until all elements are delivered and services have been performed , or until fair value can objectively be determined for any remaining undelivered elements . 27 for multi-element arrangements comprised of a combination of hardware and software elements , the total arrangement consideration is bifurcated between the hardware and hardware related deliverables and the software and software related deliverables based on the relative selling prices of all deliverables as a group . then , arrangement consideration for the hardware and hardware-related services is recognized upon delivery or as the related services are provided outlined above and revenue for the software and software-related services is allocated following the residual method and recognized based upon delivery or as the related services are provided . our product is distributed through our direct sales force and indirect distribution channels through alliances with resellers .

results of operations comparison of years ended march 31 , 2014 and 2013 revenue product revenue consists of sales of our hardware products and licensing of our software products . service revenue consists of customer support agreements , consulting and training . during the fiscal year ended march 31 , 2014 , one direct customer accounted for more than 10 % of total revenue , while no single indirect channel partner accounted for more than 10 % of total revenue . during the fiscal year ended march 31 , 2013 , no single direct customer or indirect channel partner accounted for more than 10 % of total revenue . replace_table_token_7_th product . the 18 % , or $ 35.5 million , increase in product revenue was primarily due to a $ 17.9 million increase in revenue from our service provider sector , an $ 11.0 million increase in revenue from our general enterprise sector and a $ 6.7 million increase in revenue from our government enterprise sector . compared to the same period in the prior year , we realized a 16 % increase in units shipped and a 7 % increase in the average selling price per unit of our products . we expect continued growth in our service provider sector through the fiscal year ending march 31 , 2015. we also expect accelerated growth in our general enterprise market for the fiscal year ending march 31 , 2015. service . the 7 % , or $ 10.6 million , increase in service revenue was primarily due to an $ 8.0 million increase in revenue from new maintenance contracts and renewals from a growing support base and a $ 3.3 million increase in premium support contracts . these were partially offset by a $ 443 thousand decrease in consulting revenue . we expect single digit percentage growth in our service revenues .

the variable rate for the unused portion of the credit facility was 0.30 % per annum as of december 31 , 2015. as story_separator_special_tag f financial condition and results of operations this annual report on form 10-k contains forward-looking statements within the meaning of the private securities litigation reform act of 1995. actual results and the timing of events could differ materially from those projected in forward-looking statements due to a number of factors , including those described under “ item 1a - risk factors ” and elsewhere in this annual report on form 10-k. see “ special note regarding forward-looking statements. ” ( all amounts referenced in this item 7 are in thousands , except per subscriber and per installation amounts , unless otherwise stated ) the following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. executive summary we transmit music , sports , entertainment , comedy , talk , news , traffic and weather channels , as well as infotainment services , in the united states on a subscription fee basis through our two proprietary satellite radio systems . subscribers can also receive music and other channels , plus features such as siriusxm on demand and mysxm , over our internet radio service , including through applications for mobile devices . we are also a leader in providing connected vehicle services . our connected vehicle services are designed to enhance the safety , security and driving experience for vehicle operators while providing marketing and operational benefits to automakers and their dealers . we have agreements with every major automaker ( “ oems ” ) to offer satellite radios in their vehicles . we also acquire subscribers through marketing to owners and lessees of previously owned vehicles that include factory-installed satellite radios that are not currently subscribing to our services . additionally , we distribute our satellite radios through retailers online and at locations nationwide and through our website . satellite radio services are also offered to customers of certain rental car companies . as of december 31 , 2015 , we had approximately 29.6 million subscribers of which approximately 24.3 million were self-pay subscribers and approximately 5.3 million were paid promotional subscribers . our subscriber totals include subscribers under our regular pricing plans ; discounted pricing plans ; subscribers that have prepaid , including payments either made or due from automakers for subscriptions included in the sale or lease price of a vehicle ; subscribers to our internet services who do not also have satellite radio subscriptions ; and certain subscribers to our weather , traffic , and data services who do not also have satellite radio subscriptions . subscribers and subscription related revenues and expenses associated with our connected vehicle services are not included in our subscriber count or subscriber-based operating metrics . our primary source of revenue is subscription fees , with most of our customers subscribing on an annual , semi-annual , quarterly or monthly plan . we offer discounts for prepaid , longer term subscription plans , as well as a multiple subscription discount . we also derive revenue from activation and other fees , the sale of advertising on select non-music channels , the direct sale of satellite radios and accessories , and other ancillary services , such as our weather , traffic and data services . in certain cases , a subscription to our radio services is included in the sale or lease price of new vehicles or previously owned vehicles . the length of these subscriptions varies but is typically three to twelve months . we receive payments for these subscriptions from certain automakers . we also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles . liberty media beneficially owns , directly and indirectly , over 50 % of the outstanding shares of our common stock . as a result , we are a “ controlled company ” for the purposes of the nasdaq corporate governance requirements . liberty media owns interests in a range of media , communications and entertainment businesses . we also have an approximate 37 % equity interest in sirius xm canada which offers satellite radio services in canada . subscribers to the sirius xm canada service are not included in our subscriber count . 22 story_separator_special_tag streaming , and advertising revenue share . · 2015 vs. 2014 : for the years ended december 31 , 2015 and 2014 , revenue share and royalties were $ 1,034,832 and $ 810,028 , respectively , an increase of 28 % , or $ 224,804 , and increased as a percentage of total revenue . the increase was primarily due to $ 128,256 in expense recorded during the year ended december 31 , 2015 related to our settlements associated with our use of certain pre-1972 sound recordings through december 31 , 2015. revenue share and royalties also increased due to greater revenues subject to royalty and revenue sharing arrangements and a 5.3 % increase in the statutory royalty rate for the performance of post-1972 sound recordings . 24 · 2014 vs. 2013 : for the years ended december 31 , 2014 and 2013 , revenue share and royalties were $ 810,028 and $ 677,642 , respectively , an increase of 20 % , or $ 132,386 , and increased as a percentage of total revenue . the inc rease was primarily attributable to the elimination of the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the merger , greater revenues subject to royalt y and or revenue sharing arrangements , and a 5.6 % increase in the statutory royalty rate for the performance of post-1972 sound recordings . for the year ended december 31 , 2013 , revenue share and royalties was positively impacted by a benefit of $ 122,534 t o earnings from the amortization of deferred credits on executory contracts associated with the merger . story_separator_special_tag subscriber acquisition costs include hardware subsidies paid to radio manufacturers , distributors and automakers ; subsidies paid for chipsets and certain other components used in manufacturing radios ; device royalties for certain radios and chipsets ; commissions paid to automakers and retailers ; product warranty obligations ; freight ; and provisions for inventory allowances attributable to inventory consumed in our oem and retail distribution channels . the majority of subscriber acquisition costs are incurred and expensed in advance of , or concurrent with , acquiring a subscriber . subscriber acquisition costs do not include advertising costs , marketing , loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios . · 2015 vs. 2014 : for the years ended december 31 , 2015 and 2014 , subscriber acquisition costs were $ 532,599 and $ 493,464 , respectively , an increase of 8 % , or $ 39,135 , and remained flat as a percentage of total revenue . increased costs related to a larger number of satellite radio installations in new vehicles were partially offset by improved oem and chipset subsidy rates per vehicle . · 2014 vs. 2013 : for the years ended december 31 , 2014 and 2013 , subscriber acquisition costs were $ 493,464 and $ 495,610 , respectively , a decrease of less than 1 % , or $ 2,146 , and decreased as a percentage of total revenue . improved oem subsidy rates per vehicle and a change in a contract with an automaker decreased subscriber acquisition costs . the decrease was partially offset by the elimination of the benefit to earnings in 2014 from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the merger and increased subsidy costs related to a larger number of satellite radio installations in new vehicles . for the year ended december 31 , 2013 , the benefit to earnings from amortization of deferred credits was $ 64,365. we expect subscriber acquisition costs to fluctuate with oem installations and aftermarket volume ; however , the cost of subsidized radio components is expected to decline . we intend to continue to offer subsidies , commissions and other incentives to acquire subscribers . sales and marketing includes costs for marketing , advertising , media and production , including promotional events and sponsorships ; cooperative marketing ; and personnel . marketing costs include expenses related to direct mail , outbound telemarketing and email communications . · 2015 vs. 2014 : for the years ended december 31 , 2015 and 2014 , sales and marketing expenses were $ 354,189 and $ 336,480 , respectively , an increase of 5 % , or $ 17,709 , but decreased as a percentage of total revenue . the increase was primarily due to additional subscriber communications and retention programs associated with a greater number of subscribers and promotional trials and higher personnel-related costs . · 2014 vs. 2013 : for the years ended december 31 , 2014 and 2013 , sales and marketing expenses were $ 336,480 and $ 291,024 , respectively , an increase of 16 % , or $ 45,456 , and increased as a percentage of total revenue . the increase was primarily due to additional subscriber communications and retention programs associated with a greater number of subscribers and promotional trials , the inclusion of a full year of costs associated with our connected vehicle services business , increased personnel costs , and the elimination of the benefit to earnings in 2014 from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the merger ; partially offset by lower loyalty costs due to a change in a contract with an automaker . the benefit to earnings from the amortization of the deferred credit for acquired executory contracts for the year ended december 31 , 2013 was $ 12,922. we anticipate that sales and marketing expenses will increase as we expand programs to retain our existing subscribers , win back former subscribers , and attract new subscribers . 26 engineering , design and development consists primarily of compensation and related c osts to develop chipsets and new products and services , including streaming and connected vehicle services , research and development for broadcast information systems and costs associated with the incorporation of our radios into new vehicles manufactured by automakers . · 2015 vs. 2014 : for the years ended december 31 , 2015 and 2014 , engineering , design and development expenses were $ 64,403 and $ 62,784 , respectively , an increase of 3 % , or $ 1,619 , and remained flat as a percentage of total revenue . the increase was driven primarily by additional costs associated with streaming development , partially offset by lower personnel costs . · 2014 vs. 2013 : for the years ended december 31 , 2014 and 2013 , engineering , design and development expenses were $ 62,784 and $ 57,969 , respectively , an increase of 8 % , or $ 4,815 , and remained flat as a percentage of total revenue . the increase was driven primarily by the inclusion of a full year of costs associated with our connected vehicle services business and higher personnel costs . we expect engineering , design and development expenses to increase in future periods as we continue to develop our infrastructure , products and services . general and administrative primarily consists of compensation and related costs for personnel and facilities , and include costs related to our finance , legal , human resources and information technologies departments . · 2015 vs. 2014 : for the years ended december 31 , 2015 and 2014 , general and administrative expenses were $ 324,801 and $ 293,938 , respectively , an increase of 10 % , or $ 30,863 , and remained flat as a percentage of total revenue .

results of operati ons set forth below are our results of operations for the year ended december 31 , 2015 compared with the year ended december 31 , 2014 and the year ended december 31 , 2014 compared with the year ended december 31 , 2013. replace_table_token_4_th our results of operations discussed below include the impact of purchase price accounting adjustments associated with the july 2008 merger between our wholly owned subsidiary , vernon merger corporation , and xm satellite radio holdings inc. ( the “ merger ” ) . the purchase price accounting adjustments related to the merger , include the : ( i ) elimination of deferred revenue associated with the investment in xm canada , ( ii ) recognition of deferred subscriber revenues not recognized in purchase price accounting , and ( iii ) elimination of the benefit of deferred credits on executory contracts , which are primarily attributable to third party arrangements with an oem and programming providers . the deferred credits on executory contracts attributable to third party arrangements with an oem included in revenue share and royalties , subscriber acquisition costs , and sales and marketing concluded with the expiration of the acquired contract during 2013. the purchase price accounting adjustments related to programming providers concluded with the expiration of the acquired contract in june 2015. the impact of these purchase price accounting adjustments is detailed in our adjusted revenues and operating expenses tables on pages 37 through 38 of our glossary . total revenue subscriber revenue includes subscription , activation and other fees .

( see note 8. stock option plan to the consolidated financial statements ) . starting october 1 st , 2004 , independent directors ' compensation was increased from story_separator_special_tag the following discussion and analysis should be read in conjunction with the selected consolidated financial data set forth above and the consolidated financial statements included elsewhere in this report . story_separator_special_tag and executive officers of the registrant ) and the company incurred significant non-recurring general and administrative expenses ( see below : costs and expenses ) . on october 11 , 2004 , the company entered into a $ 45,000,000 long-term debt agreement with fortis bank in order to refinance all of its outstanding debt including its 11.25 % senior notes due 2008. following the prepayment of its debt , the company recorded a net loss on extinguishment of debt of $ 1,107,369 in the 4 th quarter of 2004 ( see note 5. long term debt ) . the refinancing is expected to provide substantial interest expenses savings in the next few years . in 2005 , the interest saving will be approximately $ 1,545,615. revenue the company had gross revenue from charterhire and other sources of $ 31,895,393 for the year ended december 31 , 2004 , a 10.9 % decrease from gross revenue of $ 35,797,522 in 2003. the revenue decrease resulted mainly from the sale of four vessels in july 2003. the average rate per day on hire ( computed as total revenues divided by total number of days on -hire for the vessels on time charter ) was $ 7,313 in 2004 ( $ 7,437 in 2003 ) . in 2004 , the company 's on-hire performance of the vessels on time charter was 99.4 % on a potential 4,026 days ( 95.1 % on a potential 4,015 days in 2003 ) . the increase in on-hire performance was mainly due to a reduction in the number of dry-docks in 2004 : one vessel on time charter was dry-docked in 2004 against eight vessels in 2003. in 2004 , the vessels on time charter experienced off-hire time for the following reasons : ( i ) 0.3 % of the total available days were lost due to technical reasons ( `` operating off-hire '' ) and ( ii ) 0.3 % of the total available days were lost due to dry-docking and planned repair time . costs and expenses commission on charterhire was $ 759,673 in 2004 , a 15.1 % decrease from the $ 895,394 incurred during 2003. this decrease is a direct result of decreased revenues . vessel operating expenses plus amortisation of dry-docking costs totalled $ 18,254,712 for the year ended december 31 , 2004 , representing a decrease of 4.4 % from 2003 vessel operating expenses plus amortisation of dry-docking which amounted to $ 19,052,643. vessel operating expenses comprise vessel running costs , direct costs ( such as fuel costs , port charges and canal dues incurred directly while vessels are unemployed or are employed on voyage charters ) and management fees . as a percentage of revenue , vessel operating expenses plus amortisation of dry-docking costs were equal to 57.2 % in 2004 compared to 53.2 % in 2003. the increase in vessel operating expenses as a percentage of revenues in 2004 is due to the sale of vessels operated on a bareboat basis which do not have any operating expenses ( see item 7. overview ) . 11 depreciation was $ 5,140,639 for the year ended december 31 , 2004 , compared to $ 8,295,583 in 2003. the reduction resulted from the sale of four vessels in july 2003. at the beginning of 2004 , in view of rising scrap prices in the last years , management decided to increase for accounting purposes the estimated residual values of its container vessels . the net effect of this change of estimate was to reduce depreciation and to increase net income by $ 327,997 in the first three quarters of 2004. subsequently , the company reconsidered this change in accounting estimate and reflected an additional depreciation charge of $ 327,997 in the first three quarters of 2004. there will be no effect on the 2005 operating results of the company as the container vessels were sold in january . general and administrative expenses were $ 2,577,213 for the year ended december 31 , 2004 , compared to $ 1,419,368 in 2003. this represented 8.1 % of revenue in 2004 as compared to 4.0 % of revenue in 2003. the 82 % increase in general and administrative expenses in 2004 is substantially due to the non-recurring legal and advisory expenses incurred in relation with the change of ownership of the company , the offer for additional equity received by the company and severance payments . in addition , the appreciation of the euro had a negative impact on the overhead expenses which were denominated in euros . impairment loss as of december 31 , 2004 , the company evaluated the recoverability of its vessels in accordance with fas 144 and determined that no provision for impairment loss was required . in 2003 , the company had recorded a provision for estimated impairment loss of $ 2,693,650. in january 2005 , the company received appraisals for its gas fleet from leading independent shipbrokers . the market value of the container vessels was assumed to be equal to the sale price received in january 2005. on this basis , the appraised value of the company 's entire fleet was approximately $ 91,850,000 compared to a book value of $ 57,051,369 on december 31 , 2004. if there are indicators of impairment , evaluating recoverability require management to make estimates and assumptions regarding future cash flows ( see critical accounting estimates ) . actual results could differ from those estimates , which could have a material effect on the recoverability of vessels . management regularly obtains valuations of its vessels and will continue to monitor such valuations in order to determine if any indicators of impairment in vessel values occur . story_separator_special_tag vessels on time charter the average rate per day on-hire ( computed as total revenues divided by total number of days on -hire for the vessels on time charter ) was $ 7,437 in 2003 ( $ 7,633 in 2002 ) . the reduction is mainly due to the reduction in charterhire of the four remaining containerships in october 2003. in 2003 , the company 's on-hire performance of the vessels on time charter was 95.1 % on a potential 4,015 days ( 97.6 % on a potential 4,517 days in 2002 ) . the decrease in on-hire performance was mainly due to the large number of dry-docks in 2003. in 2003 , the vessels on time charter experienced off-hire time for the following reasons : ( i ) 0.72 % of the total available days were lost due to technical reasons ( `` operating off-hire '' ) ; ( ii ) 3.61 % of the total available days were lost due to dry-docking and planned repair time ; and ( iii ) 0.54 % of the total available days represented time spent in positioning for subsequent employment . vessels on bareboat charter the average rate per day on hire for the vessels on bareboat charter was $ 6,000 per day in 2003 and 2002. bareboat charter rates are generally lower than time charter rates since the vessel operating expenses are paid by the charterer . the on-hire performance was 100 % . the vessels on bareboat charter were sold in july 2003. costs and expenses commission on charterhire was $ 895,394 in 2003 , an 18.6 % decrease from the $ 1,100,422 incurred during 2002. this decrease is a direct result of decreased revenues . vessel operating expenses plus amortisation of dry-docking costs totalled $ 19,052,643 for the year ended december 31 , 2003 , representing a decrease of 5.3 % from 2002 vessel operating expenses plus amortisation of dry-docking which amounted to $ 20,122,621. vessel operating expenses comprise vessel running costs , direct costs ( such as fuel costs , port charges and canal dues incurred directly while vessels are unemployed or are employed on voyage charters ) and management fees . as a percentage of revenue , vessel operating expenses plus amortisation of dry-docking costs were equal to 53.2 % in 2003 compared to 48.1 % in 2002. the increase in vessel operating expenses as a percentage of revenues in 2003 is due to the sale of vessels operated on a bareboat basis which do not have any operating expenses . 14 depreciation was $ 8,295,583 for the year ended december 31 , 2003 , compared to $ 9,127,713 in 2002. the decrease resulted from the reduced fleet size . general and administrative expenses were $ 1,419,368 for the year ended december 31 , 2003 , compared to $ 1,382,587 in 2002. this represented 4.0 % of revenue in 2003 as compared to 3.3 % of revenue in 2002. the increase in percentage is due to the fact that these expenses are rather stable and revenues were down . impairment loss in 2002 , a provision for estimated impairment loss of $ 1,687,370 was recorded as the values of two vessels earmarked for sale in december 2001 were adjusted to market value . these vessels were reclassified from `` held for sale '' to `` held and used '' at the end of 2002. they were reinstated at the carrying amount , before they were classified as held for sale , adjusted for any depreciation expense that would have been recognised had the vessels been continuously classified as held and used , which amount was lower than fair value at year end . in march 2003 , the board approved the sale of two other vessels . the vessels were written down to the lower of book value or fair market value less costs to sell . since these vessels could not be sold , they were reclassified from `` held for sale '' to `` held and used '' at the end of 2003. the provision for estimated impairment loss recorded in 2003 was $ 2,693,650. as of december 31 , 2003 , the company had no vessels earmarked for sale . in january 2004 , the company received appraisals for its fleet from leading independent shipbrokers . the appraised value of the company 's fleet was approximately $ 61.8 million . this indicated that the aggregate market value of the vessels was approximately equal to the carrying values . the aggregate market value of the container carriers were approximately $ 10.6 million above their carrying values while the aggregate market value of the gas carriers were $ 11 million below their carrying values . the company 's estimates of undiscounted cash flows indicated at that time that such carrying values were expected to be recovered . evaluating recoverability requires management to make estimates and assumptions regarding future cash flows ( see critical accounting estimates ) . actual results could differ from those estimates , which could have a material effect on the recoverability of vessels . management regularly obtains valuations of its vessels and will continue to monitor such valuations in order to determine if any permanent impairment in asset values occurs , and whether any write-downs in asset values are necessary . other income and expenses interest expense amounted to $ 4,866,062 for the year ended december 31 , 2003 as compared to $ 6,418,537 in 2002 , and represented 13.6 % of revenue as compared with 15.3 % in 2002. the decrease in interest expense resulted from a reduction in interest expense on the notes due to the repurchases and to lower interest rates in 2003 on the company 's existing credit facility with fortis bank and banque nationale de paris `` bnp '' . interest income totalled $ 110,603 in 2003 , a decrease from interest income of $ 127,559 in 2002. the decrease in interest earnings was due to the reduction in the general level of interest rates and lower cash balances .

overview revenues and expenses since its founding , the company has been engaged in the business of investing in , owning and operating second-hand vessels . as of december 31 , 2004 , the company 's fleet included seven liquefied petroleum gas ( `` lpg '' ) carriers , four containerships and two multipurpose seariver vessels . each of the company 's vessels is owned by a separate wholly owned subsidiary of the company . the company generally employs its vessels on time charter , bareboat charter or spot charter . with time charters , the company receives a fixed charterhire per on-hire day and is responsible for meeting all the operating expenses of the vessels , such as crew costs , voyage expenses , insurance , repairs and maintenance . in the case of bareboat charters , the company receives a fixed charterhire per day for the vessel and the charterer is responsible for all the costs associated with the vessel 's operation during the bareboat charter period . in the case of voyage charters , the vessel is contracted only for a voyage between two ports : the company is paid for the cargo transported and pays all voyage costs . in all chartering arrangements , both shipowner and charterer will generally employ the services of one or more brokers , who are paid a commission on the total value of the daily charterhire or a lump sum payable under the charter party or contract . the level of the company 's revenues and expenses will vary from year to year depending on , inter alia , the number of vessels controlled by the company during each year and the charter rates of those vessels . shipping markets in 2004 , the market recovery accelerated in the small pressurised lpg sector . charter rates have increased substantially since december 31 , 2003 and the company is slowly able to take advantage of such better rates as the existing charters come for renewal .

we have made it increasingly easy to standardize on sprout social as the centralized system of record for social and to help customers maximize the value of this mission critical channel . currently , more than 26,000 customers across 100 countries rely on our platform . introduced in 2011 , our cloud software brings together social messaging , data and workflows in a unified system of record , intelligence and action . operating across major networks , including twitter , facebook , instagram , pinterest , linkedin , google , reddit , glassdoor and youtube , we provide organizations with a centralized platform to manage their social media efforts across stakeholders and business functions . virtually every aspect of business has been impacted by social media , from marketing , sales and public relations to customer service , product and strategy , creating a need for an entirely new category of software . we offer our customers a centralized , secure and powerful platform to manage this broad , complex channel effectively across their organization . since our founding , we have achieved several key milestones : 2010 — founded company , launched v1 beta and lightbank became an investor ; 2011 — launched our sprout platform , surpassed 1,000 customers and entities affiliated with nea became investors ; 2013 — reached 100 employees ; 2015 — surpassed 15,000 customers ; 2016 — reached 250 employees and goldman sachs became an investor ; 2017 — completed first business acquisition and awarded one of glassdoor 's “ best places to work , companies under 1,000 employees , 2017 ” and one of the “ top ceos , companies under 1,000 employees , 2017 ” ; 2018 — surpassed 20,000 customers , opened emea office , reached 500 employees , launched first add-on module ( listening ) , future fund became an investor and awarded one of glassdoor 's “ best places to work , companies under 1,000 employees , 2018 ” and one of the “ top ceos , companies under 1,000 employees , 2018 ” ; 2019 — completed our ipo resulting in $ 134.3 million of net proceeds ( excluding $ 10.0 million of additional net proceeds from the underwriters ' exercise of their over-allotment option in january 2020 ) , surpassed $ 100 million in total arr and awarded one of glassdoor 's “ top ceos , companies under 1,000 employees , 2019 ” ; and 2020 — completed our follow-on offering resulting in $ 42.1 million in net proceeds , awarded one of glassdoor 's “ best place to work ” in 2020 , recognized as one of fortune 's 100 best 58 small and medium workplaces , one of fortune 's 25 best small and medium workplaces for women , and selected as a recipient of the 2020 tech cares award from trustradius , awarded to tech companies that went above and beyond to support their clients and communities during the covid-19 pandemic . we generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model . our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term . subscription revenue is recognized ratably over the contract terms beginning on the date the product is made available to customers , which typically begins on the commencement date of each contract . we also generate revenue from professional services related to our platform provided to certain customers , which is recognized at the time these services are provided to the customer . this revenue has historically represented less than 1 % of our revenue and is expected to be immaterial for the foreseeable future . our tiered subscription-based model allows our customers to choose among three core plans to meet their needs . each plan is licensed on a per user per month basis at prices dependent on the level of features offered . additional product modules , which offer increased functionality depending on a customer 's needs , can be purchased by the customer on a per user per month basis . we generated revenue of $ 132.9 million , $ 102.7 million and $ 78.8 million during the years ended december 31 , 2020 , 2019 , and 2018 , respectively , representing growth of 29 % in 2020 and 30 % in 2019. excluding the impact of the 2017 acquisition of simply measured , inc. , or simply measured , our organic growth rate in 2020 and 2019 was 36 % and 44 % , respectively . this organic growth rate excludes the impact of revenue generated from legacy simply measured products as well as revenue from the transition of legacy customers to our platform up to an amount equal to such customers ' prior spend on legacy simply measured products . this organic growth rate includes all incremental revenue generated above such prior spend from the sale of additional or higher-priced products and users and profiles to legacy customers of simply measured . in 2020 , software subscriptions contributed 99 % of our revenue . we generated net losses of $ 31.7 million , $ 46.8 million , and $ 20.9 million during the years ended december 31 , 2020 , 2019 , and 2018 , respectiv ely . our net losses include stock-based compensation expense of $ 11.1 million , $ 25.3 million and $ 0.1 million in the years ended december 31 , 2020 , 2019 , and 2018 , respectively . the higher stock-based compensation expense in 2019 was primarily due to the vesting of rsus in connection with our ipo in december 2019. we expect to continue investing in the growth of our business and , as a result , generate net losses for the foreseeable future . covid-19 in december 2019 , a novel coronavirus disease ( “ covid-19 ” ) was identified . on march 11 , 2020 , the world health organization characterized covid-19 as a pandemic . story_separator_special_tag we believe global demand for our platform and offerings will continue to increase as awareness of our platform in international markets grows . we plan to continue adding to our local sales , customer support and customer success teams in select international markets over time . key business metrics we review the following key business metrics to evaluate our business , measure our performance , identify trends , formulate financial projections and make strategic decisions . number of customers we define a customer as a unique account , multiple accounts containing a common non-personal email domain , or multiple accounts governed by a single agreement . number of customers excludes customers exclusively using legacy products obtained through the acquisition of simply measured . we believe that the number of customers using our platform is an indicator not only of our market penetration , but also of our potential for future growth as our customers often expand their adoption of our platform over time based on an increased awareness of the value of our platform and products . replace_table_token_5_th total arr total arr is arr from all of our products . we define arr as the annualized revenue run-rate of subscription agreements from all customers as of the last date of the specified period . total arr includes the impact of recurring revenue generated from legacy simply measured products , which a small number of legacy simply measured customers have continued to access in the periods presented . we believe total arr is an indicator of the scale of our entire platform while mitigating fluctuations due to seasonality and contract term . as of december 31 , 2020 2019 ( in thousands ) total arr $ 158,268 $ 117,846 61 organic arr organic arr is arr excluding the impact of recurring revenue generated from legacy simply measured products . we believe organic arr is an indicator of the scale and visibility of our core platform while mitigating fluctuations due to seasonality and contract term . as of december 31 , 2020 2019 ( in thousands ) organic arr $ 157,182 $ 115,185 number of customers contributing more than $ 10,000 in arr we view the number of customers that contribute more than $ 10,000 in arr as a measure of our ability to scale with our customers and attract larger organizations . we believe this represents potential for future growth , including expanding within our current customer base . over time , larger customers have constituted a greater share of our revenue . we define customers contributing more than $ 10,000 in arr as those on a paid subscription plan that had more than $ 10,000 in arr as of a period end . replace_table_token_6_th components of our results of operations revenue subscription we generate revenue primarily from subscriptions to our social media management platform under a software-as-a-service model . our subscriptions can range from monthly to one-year or multi-year arrangements and are generally non-cancellable during the contractual subscription term . subscription revenue is recognized ratably over the contract terms beginning on the date our product is made available to customers , which typically begins on the commencement date of each contract . our customers do not have the right to take possession of the online software solution . we also generate a small portion of our subscription revenue from third-party resellers . professional services we sell professional services consisting of , but not limited to , implementation fees , specialized training , one-time reporting services and recurring periodic reporting services . professional services revenue is recognized at the time these services are provided to the customer . this revenue has historically represented less than 1 % of our revenue and is expected to be immaterial for the foreseeable future . cost of revenue subscription cost of revenue primarily consists of expenses related to hosting our platform and providing support to our customers . these expenses are comprised of fees paid to data providers , hosted data 62 center costs and personnel costs directly associated with cloud infrastructure , customer success and customer support , including salaries , benefits , bonuses and allocated overhead . these costs also include depreciation expense and amortization expense related to acquired developed technologies . overhead associated with facilities and information technology is allocated to cost of revenue and operating expenses based on headcount . although we expect our cost of revenue to increase in absolute dollars as our business and revenue grows , we expect our cost of revenue to decrease as a percentage of our revenue over time . professional services and other cost of professional services primarily consists of expenses related to our professional services organization and are comprised of personnel costs , including salaries , benefits , bonuses and allocated overhead . gross profit and gross margin gross margin is calculated as gross profit as a percentage of total revenue . our gross margin may fluctuate from period to period based on revenue earned , the timing and amount of investments made to expand our hosting capacity , our customer support and professional services teams and in hiring additional personnel , and the impact of acquisitions . we expect our gross profit and gross margin to increase as our business grows over time . operating expenses research and development research and development expenses primarily consist of personnel costs , including salaries , benefits and allocated overhead . research and development expenses also include depreciation expense and other expenses associated with product development . we plan to increase the dollar amount of our investment in research and development for the foreseeable future as we focus on developing new features and enhancements to our plan offerings . however , we expect our research and development expenses to decrease as a percentage of our revenue over time . sales and marketing sales and marketing expenses primarily consist of personnel costs directly associated with our sales and marketing department , online advertising expenses , as well as allocated overhead , including depreciation expense and amortization related to acquired developed technologies .

results of operations the following tables set forth information comparing the components of our results of operations in dollars and as a percentage of total revenue for the periods presented . replace_table_token_7_th _ ( 1 ) includes stock-based compensation expense as follows : replace_table_token_8_th 65 replace_table_token_9_th year ended december 31 , 2020 compared to year ended december 31 , 2019 revenue replace_table_token_10_th the increase in subscription revenue was primarily driven by revenue from new customers and expansion within existing customers . the total number of customers grew from 23,693 as of december 31 , 2019 to 26,718 as of december 31 , 2020. the increase in new customers was primarily 66 driven by our growing sales force capacity to meet market demand . expansion within existing customers was driven by our ability to increase the number of users , social profiles and products purchased by customers . this is in part attributable to the expansion of use-cases across various functions within our existing customers ' organizations . cost of revenue and gross margin replace_table_token_11_th the increase in cost of subscription revenue for the year ended december 31 , 2020 compared to the year ended december 31 , 2019 was primarily due to the following : change ( in thousands ) data provider fees $ 4,790 personnel costs 1,220 stock-based compensation expense ( 377 ) other 701 subscription cost of revenue $ 6,334 fees paid to our data providers increased due to revenue growth . personnel costs increased primarily as a result of a 12 % increase in headcount as we continue to grow our customer support and customer success teams to support our customer growth .

the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the united states of america ( u.s. gaap ) requires us to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and the accompanying notes including various claims and contingencies related to lawsuits , taxes , environmental and other matters arising during the normal course of business . we apply our best judgment , our knowledge of existing facts and circumstances and actions that we may undertake in the future in determining the estimates that affect our consolidated financial statements . we evaluate our estimates on an ongoing basis using our historical experience , as well as other factors we believe appropriate under the circumstances , such as current economic conditions , and adjust or revise our estimates as circumstances change . as future events and their effects can not be determined with precision , actual results may differ from these estimates . ball corporation and its subsidiaries are referred to collectively as “ball corporation , ” “ball , ” “the company” or “we” or “our” in the following discussion and analysis . overview business overview and industry trends ball corporation is one of the world 's leading suppliers of metal packaging to the beverage , food , personal care and household products industries . our packaging products are produced for a variety of end uses , are manufactured in facilities around the world and are competitive with other substrates , such as plastics and glass . in the rigid packaging industry , sales and earnings can be increased by reducing costs , increasing prices , developing new products , expanding volumes and making strategic acquisitions . we also provide aerospace and other technologies and services to governmental and commercial customers . we sell our packaging products mainly to large , multinational beverage , food , personal care and household products companies with which we have developed long-term customer relationships . this is evidenced by our high customer retention and our large number of long-term supply contracts . while we have a diversified customer base , we sell a majority of our packaging products to relatively few major companies in north america , europe , asia and south america , as do our equity joint ventures in the u.s. and vietnam . the overall metal container industry is growing globally and is expected to continue to grow in the medium to long term despite the north american industry seeing a continued decline in standard-sized aluminum beverage packaging for the carbonated soft drink market . the primary customers for the products and services provided by our aerospace and technologies segment are u.s. government agencies or their prime contractors . we purchase our raw materials from relatively few suppliers . we also have exposure to inflation , in particular the rising costs of raw materials , as well as other direct cost inputs . we mitigate our exposure to the changes in the costs of metal through the inclusion of provisions in contracts covering the majority of our volumes to pass through metal price changes , as well as through the use of derivative instruments . the pass-through provisions generally result in proportional increases or decreases in sales and costs with a greatly reduced impact , if any , on net earnings . because of our customer and supplier concentration , our business , financial condition and results of operations could be adversely affected by the loss , insolvency or bankruptcy of a major customer or supplier or a change in a supply agreement with a major customer or supplier , although our contract provisions generally mitigate the risk of customer loss , and our long-term relationships represent a known , stable customer base . we recognize sales under long-term contracts in the aerospace and technologies segment using percentage-of-completion under the cost-to-cost method of accounting . throughout the period of contract performance , we regularly reevaluate and , if necessary , revise our estimates of aerospace and technologies total contract revenue , total contract cost and progress toward completion . because of contract payment schedules , limitations on funding and other contract terms , our sales and accounts receivable for this segment include amounts that have been earned but not yet billed . 21 corporate strategy our drive for 10 vision encompasses five strategic levers that are key to growing our business and achieving long-term success . since launching drive for 10 in 2011 , we made progress on each of the levers as follows : · maximizing value in our existing businesses by rationalizing standard beverage container and end capacity in north america and expanding specialty container production to meet current demand ; leveraging plant floor systems in our metal beverage facilities to improve efficiencies and reduce costs ; consolidating and or closing multiple metal beverage and metal food and aerosol packaging facilities ; relocating our european headquarters to zurich , switzerland , to gain business , customer and supplier efficiencies ; and implementing cost-out and value-in initiatives across all of our businesses ; · expanding further into new products and capabilities by expanding into extruded aluminum aerosol manufacturing with our mexican acquisition in december 2012 and the installation of a new extruded aluminum aerosol line in our deforest , wisconsin , facility during 2014 ; and successfully commercializing extruded aluminum aerosol packaging that utilizes a significant amount of recycled material ; · aligning ourselves with the right customers and markets by investing capital to meet double-digit volume growth for specialty beverage containers throughout our global network , which now represent over 27 percent of our global beverage packaging mix , and the introduction of next generation aluminum bottle-shaping technology in north america for a customer under a long term arrangement that is scheduled to start up at the end of the first quarter 2015 ; · broadening our geographic reach with new investments in a metal beverage manufacturing facility in myanmar , as well as an extruded aluminum aerosol manufacturing facility in india , and the award of a south story_separator_special_tag 23 story_separator_special_tag face= '' times new roman '' size= '' 2 '' style= '' font-size:10.0pt ; '' > critical and significant accounting policies and new accounting pronouncements for information regarding the company 's critical and significant accounting policies , as well as recent accounting pronouncements , see notes 1 and 2 to the consolidated financial statements within item 8 of this annual report . 26 subsequent events on february 19 , 2015 , the company and rexam plc ( rexam ) announced the terms of a recommended offer by the company to acquire all of the outstanding shares of rexam in a cash and stock transaction . under the terms of the offer , for each rexam share , rexam shareholders will receive 407 pence in cash and 0.04568 new shares of the company . the transaction values rexam at 610 pence per share based on the company 's 90-day volume weighted average price as of february 17 , 2015 , and an exchange rate of us $ 1.54 : £1 on that date representing an equity value of £4.3 billion ( $ 6.6 billion ) . on february 19 , 2015 , the company entered into a £3.3 billion unsecured bridge loan agreement , pursuant to which lending institutions have agreed , subject to limited conditions , to provide financing necessary to pay the cash portion of the consideration payable to rexam shareholders upon consummation of the proposed acquisition of rexam and related fees and expenses . on february 19 , 2015 , the company entered into a new $ 3 billion revolving credit facility to replace the existing approximate $ 1.1 billion bank credit facility , redeem the 2020 and 2021 senior notes and provide ongoing liquidity for the company . in addition , on february 19 , 2015 , the company announced the redemption of all of the outstanding 6.75 percent senior notes due in september 2020 and all of the 5.75 percent senior notes due in may 2021 , each in the amount of $ 500 million . the redemption of these bonds will result in a pre-tax charge in interest expense of approximately $ 56.3 million ( $ 36.9 million after tax ) , composed of the redemption premiums and the write-offs of related debt financing costs . financial condition , liquidity and capital resources cash flows and capital expenditures our primary sources of liquidity are cash provided by operating activities and external committed borrowings . we believe that cash flows from operations and cash provided by short-term , long-term and committed revolver borrowings , when necessary , will be sufficient to meet our ongoing operating requirements , scheduled principal and interest payments on debt , dividend payments , proposed acquisitions , including the announced , proposed acquisition of rexam , and anticipated capital expenditures . the following summarizes our cash flows : replace_table_token_12_th cash flows from operations in 2014 improved compared to 2013 due to higher net earnings and favorable working capital changes . the favorable working capital changes were primarily related to lower days sales outstanding , lower inventory days on hand and higher days payable outstanding . days sales outstanding decreased from 36 days to 34 days , inventory days on hand decreased from 53 days to 52 days and days payable outstanding increased from 51 days to 69 days . working capital changes in 2013 compared to 2012 were primarily related to higher days payable outstanding and lower days sales outstanding , partially offset by higher inventory days on hand . days payable outstanding increased from 47 days to 51 days , days sales outstanding decreased from 37 days to 36 days and inventory days on hand increased from 51 days to 53 days . we have entered into several regional uncommitted accounts receivable factoring programs with various financial institutions for certain accounts receivables of the company . the programs are accounted for as true sales of the receivables , without recourse to ball , and had combined limits of approximately $ 293 million at december 31 , 2014. a total of $ 197.6 million and $ 137.5 million were sold under these programs as of december 31 , 2014 and 2013 , respectively . in addition , latapack-ball has non-recourse uncommitted accounts receivable factoring programs with a combined limit of approximately $ 8 million at december 31 , 2014. there were no accounts receivable sold as of december 31 , 2014 , and $ 6.0 million was sold as of december 31 , 2013. annual cash dividends paid on common stock were 52 cents per share in both 2014 and 2013 and 40 cents per share in 2012. total dividends paid were $ 72.7 million in 2014 , $ 75.2 million in 2013 and $ 61.8 million in 2012. we also paid dividends to noncontrolling interests of $ 12.2 million in 2014 , $ 12.9 million in 2013 and $ 7.6 million in 2012. share repurchases the company 's share repurchases , net of issuances , totaled $ 360.1 million in 2014 , $ 398.8 million in 2013 and $ 494.1 million in 2012. the repurchases were completed using cash on hand and available borrowings and included accelerated share repurchase agreements and other purchases under our ongoing share repurchase program . additional details about our share repurchase activities are provided in note 15 accompanying the consolidated financial statements within item 8 of this annual report . 27 debt facilities and refinancing given our cash flow projections and unused credit facilities that are available until june 2018 , our liquidity is strong and is expected to meet our ongoing cash and debt service requirements . total interest-bearing debt was $ 3.2 billion at december 31 , 2014 , compared to $ 3.6 billion at december 31 , 2013. on december 9 , 2013 , we announced the redemption of our outstanding 7.375 percent senior notes due in september 2019 in the amount of $ 315.4 million .

results of business segments ball 's operations are organized and reviewed by management along its product lines and geographical areas and presented in the four reportable segments discussed below . metal beverage packaging , americas and asia replace_table_token_8_th ( a ) further details of these items are included in note 5 to the consolidated financial statements within item 8 of this annual report . the metal beverage packaging , americas and asia , segment consists of operations located in the u.s. , canada , brazil and the prc , which manufacture aluminum containers used in beverage packaging . during february 2015 , we announced the introduction of a next-generation aluminum bottle-shaping technology in our conroe , texas , facility , which is expected to begin production at the end of the first quarter 2015. additionally , in may 2014 , we announced the expansion of our asian operations with the construction of a new one-line beverage can manufacturing facility in myanmar , which is expected to begin production in early 2016. segment sales in 2014 were $ 53.4 million higher compared to 2013 due primarily to $ 101 million higher sales volumes , offset by a reduction in the pass through price of aluminum . segment sales in 2013 were $ 348.3 million lower compared to 2012 due to $ 320 million for the combination of lower sales volumes , principally related to lower standard 12-ounce container sales volumes in north america , and a reduction in the pass through price of aluminum , partially offset by higher specialty container sales volumes . segment earnings in 2014 were $ 22.4 million higher than in 2013 due to $ 36 million from higher sales volumes , partially offset by higher incentive compensation and other individually insignificant costs .

'' of this annual report on form 10-k. all amounts and percentages are approximate due to rounding and all dollars are in thousands , except per share amounts or where otherwise noted . when we cross-reference to a `` note , '' we are referring to our `` notes to consolidated financial statements , '' unless the context indicates otherwise . results of operations fiscal year 2018 summary results revenue : revenue for fiscal year 2018 increased 5 % to $ 1,796.1 million , or 1 % on a constant currency basis as compared with prior year . the increase was mainly driven by an increase in research revenue due to a full year of revenue from the atypon acquisition in fiscal year 2018 and growth in open access and , to a lesser extent , higher education services ( opm ) revenue in solutions . these increases were partially offset by a decline in publishing revenue , primarily in stm and in professional and education publishing , which reflected market conditions . see the `` segment operating results '' below for additional details on each segment 's revenue and contribution to profit performance . cost of sales and gross profit margin : cost of sales for fiscal year 2018 increased 5 % to $ 485.2 million , or 2 % on a constant currency basis as compared with prior year . the increase was primarily a result of higher revenues and higher royalty costs on research journals due to title mix and an increase in new titles at a higher royalty rate . gross profit margin for fiscal year 2018 was 73.0 % and decreased slightly compared with the prior year on a constant currency basis , primarily in our publishing segment as a result of the decline in revenue . operating and administrative expenses : operating and administrative expenses for fiscal year 2018 remained flat at $ 994.6 million , but decreased 1 % on a constant currency basis as compared with prior year due to the following :  lower technology costs in the current year of $ 18 million associated with our erp implementation and other reductions in outsourcing and system development consulting costs ; · a one-time pension settlement charge in the prior year related to changes in our retiree and long-term disability plans of $ 9 million ; and  savings from operational excellence initiatives and restructuring activities . these factors were partially offset by :  one-time benefits in the prior year related to changes in our retiree and long-term disability plans of $ 4 million and a life insurance recovery of $ 2 million ;  a full year of costs in fiscal year 2018 associated with the atypon acquisition , which resulted in an incremental impact of $ 9 million ;  an increase in strategy consultation costs in the current year of $ 7 million ; and  an impairment charge in the current year related to one of our publishing brands of $ 4 million . restructuring and related charges : beginning in fiscal year 2013 , we initiated a global program ( the `` restructuring and reinvestment program '' ) to restructure and realign our cost base with current and anticipated future market conditions . we are targeting a majority of the cost savings achieved to improve margins and earnings , while the remainder will be reinvested in high-growth digital business opportunities . 20 in fiscal years 2018 and 2017 , we recorded pre-tax restructuring charges of $ 29 million and $ 13 million , respectively , related to this program . these charges are reflected in restructuring and related charges on the consolidated statements of income and summarized in the following table : replace_table_token_5_th other activities in 2017 reflects leased facility consolidations contract termination costs , and the curtailment of certain defined benefit pension plans . amortization of intangibles : amortization of intangibles for fiscal year 2018 declined 3 % to $ 48 million , or 5 % on a constant currency basis compared with prior year . the decrease was a result of the completion of amortization of certain acquired intangible assets . interest expense : interest expense for fiscal year 2018 decreased $ 4 million to $ 13 million on a reported and constant currency basis . this decrease was due to lower average debt balances outstanding , partially offset by a higher average effective borrowing rate . foreign exchange transaction ( losses ) gains : we reported foreign exchange transaction losses of $ 13 million for fiscal year 2018 compared to gains of $ 0.4 million in the prior year . the losses in fiscal year 2018 were primarily due to the impact of the change in average foreign exchange rates as compared to the u.s. dollar on our intercompany and third-party accounts receivable and payable balances . provision for income taxes : the following table summarizes the effective tax rate for fiscal years 2018 and 2017 : replace_table_token_6_th on december 22 , 2017 , the u.s. government enacted comprehensive federal tax legislation originally known as the tax cuts and jobs act of 2017 ( the `` tax act '' ) . in december 2017 , the sec staff issued staff accounting bulletin no . 118 , income tax accounting implications of the tax cuts and jobs act ( `` sab 118 '' ) , which allows us to record provisional amounts related to the effect of the tax act during a measurement period not to extend beyond one year of the enactment date . as the tax act was passed in december 2017 , and ongoing guidance and accounting interpretation are expected over the 12 months following enactment , we consider the accounting of the transition tax , deferred tax re-measurements , and other items to be provisional due to the forthcoming guidance and our ongoing analysis of final data and tax positions . we expect to complete our analysis within the measurement period in accordance with sab 118 . story_separator_special_tag 22 the tax act creates new taxes , effective for us on may 1 , 2018 , including a provision designed to tax global low taxed income ( `` gilti '' ) and a provision establishing new minimum taxes , such as the base erosion anti-abuse tax ( `` beat '' ) . we continue to evaluate the tax act , but due to the complexity and incomplete guidance of various provisions , we have not completed our accounting for the income tax effects of certain elements of the tax act , including the new gilti and beat taxes . we have not yet determined whether such taxes should be recorded as a current-period expense when incurred or factored into the measurement of our deferred taxes . as a result , we have not included an estimate of any tax expense or benefit related to these items for the year ended april 30 , 2018. because of our estimated benefit from the tax act as well as other factors , we expect an approximate estimated effective tax rate of 23 % –24 % in fiscal year 2019. this effective tax rate excludes the tax impact of certain provision of the tax act whose impact is not yet known , as well as the tax impact of certain items we can not yet provide . these items are not available without unreasonable effort due to the high variability , complexity , low visibility or uncertainty , including restructuring charges and credits , gains and losses on foreign currency , and other gains and losses . earnings per diluted share ( `` eps '' ) : eps for fiscal year 2018 was $ 3.32 per share compared with $ 1.95 per share in the prior year . eps results included the following items , which impacted comparability : replace_table_token_7_th excluding the impact of the items included above , adjusted eps for fiscal year 2018 increased 14 % to $ 3.43 per share compared with $ 3.01 per share in the prior year . on a constant currency basis , adjusted eps increased 3 % . segment operating results : replace_table_token_8_th ( a ) adjusted to exclude restructuring charges 23 revenue : research revenue increased 9 % to $ 934.4 million , or 4 % on a constant currency basis as compared with prior year . the increase was primarily due to :  a full year of revenue from atypon , which was acquired in september 2016 , of which $ 14 million was the incremental impact ;  open access growth driven by the strong performance of existing titles and , to a lesser extent , new title launches ; and  other journal revenue increases , particularly in reprints , backfiles and the licensing of intellectual content . as of april 30 , 2018 , calendar year 2018 journal subscription renewals were 2 % higher than calendar year 2017 on a constant currency basis with approximately 97 % of targeted business under contract . gross profit : gross profit increased 8 % to $ 686.7 million , or 3 % on a constant currency basis as compared with prior year . the increase was driven by higher revenues . gross profit margin declined by 80 basis points due primarily to higher journal royalty costs associated with title mix and an increase in new titles at higher royalty rates . we anticipate that we will continue to experience gross margin pressure due to higher journal royalty rates in fiscal year 2019. to offset this gross margin pressure , we will continue to pursue additional operations efficiencies . contribution to profit : contribution to profit increased 9 % to $ 275.5 million as compared with prior year . on a constant currency basis and excluding restructuring charges , contribution to profit remained flat as compared with prior year as the increase in gross profit was fully offset by higher operating expenses . the increase in operating expenses was primarily due to : · a full year of costs in fiscal year 2018 from atypon which resulted in an incremental impact of $ 9 million ; · higher employment-related costs of $ 5 million , which included higher incentive compensation from the achievement of certain financial goals and targets ; · higher content and editorial costs of $ 3 million ; and · an increase in product technology costs of $ 5 million . these factors were partially offset by savings from operational excellence initiatives and restructuring activities . society partnerships for calendar year 2018 , 15 new society contracts were signed , with combined annual revenue of approximately $ 14 million , and 10 society contracts were not renewed with combined annual revenue of approximately $ 3 million . 24 replace_table_token_9_th ( a ) adjusted in fiscal year 2018 and 2017 to exclude restructuring charges , and in fiscal year 2018 also excludes a publishing brand impairment charge . revenue : publishing revenue decreased 2 % to $ 617.6 million , or 4 % on a constant currency basis as compared with prior year . the decline was driven by lower print book revenues , particularly in education publishing , due to overall softness in the market as well as other retail options such as rental and digital . also contributing to the decline in publishing revenue was a decline in course workflow ( wileyplus ) , primarily due to the timing of revenue recognition associated with multi-semester offerings , which are recognized in periods extending across two semesters . gross profit : gross profit decreased 4 % to $ 422.7 million , or 5 % on a constant currency basis as compared with prior year . the decrease was mainly driven by the decline in revenues , partially offset by lower inventory costs due to cost savings initiatives . contribution to profit : contribution to profit decreased 1 % to $ 123.9 million as compared with prior year .

segment operating results : effective august 1 , 2016 , we completed a number of changes to our organizational structure that resulted in a change in how we manage our businesses , allocate resources , and measure performance . as a result , we revised our segments into three new reporting segments to reflect how management currently reviews financial information and makes operating decisions . all prior period amounts have been restated to reflect the new reporting segment structure . the new reporting structure consists of research ( journals and related content and services ) , publishing ( books and related content , course workflow , and test preparation ) , and solutions ( online program management , corporate learning , and professional assessment ) . 29 replace_table_token_12_th ( a ) adjusted to exclude the fiscal year 2017 and 2016 restructuring charges revenue : research revenue for fiscal year 2017 increased 3 % to $ 853.5 million , or 7 % on a constant currency basis . this increase was mainly driven by the following : · journal subscriptions revenue of $ 35 million due to the transition to time-based digital journal subscription agreements from issue-based ; · incremental revenue from the acquisition of atypon of $ 19 million ; and · author-funded access revenue growth of $ 7 million , reflecting new titles and increased business as well as growth associated with the journal of american heart association . these factors were partially offset by a decline in licensing , reprints , backfiles , and other of $ 6 million , primarily due to a large backfile sale in the prior year . excluding the transition to time-based revenue and the impact of foreign exchange , journal subscription revenue was consistent with the prior period . as of april 30 , 2017 , calendar year 2017 journal subscription renewals were 1 % higher than calendar year 2016 on a currency neutral basis , with approximately 97 % of targeted business under contract .

total issued and outstanding shares of common stock on a fully-diluted basis immediately after the ipo . on august 12 , 2016 , the company filed a registration statement on form s-8 ( which became effective upon filing ) for the registration of 3,199,447 shares of common stock pursuant to the 2007 plan . 13 . 401 ( k ) plan during 2002 , the company established a plan under section 401 ( k ) of the internal revenue code ( the 401 ( k ) plan ) . the 401 ( k ) plan covers substantially all of its employees who have attained 18 years of age . employees may elect to contribute part of their annual compensation to the 401 ( k ) plan , up to the maximum deferral allowance for individuals by the internal revenue service under code section 401 ( k ) , and the company may make a matching contribution . during 2016 and 2015 , there were no matching contributions made by the company . 14. income taxes the income/ ( loss ) before provision for income taxes consisted of the following ( in thousands ) : year ended december 31 , 2016 2015 domestic $ ( 12,610 ) $ ( 9,513 ) international – – total $ ( 12,610 ) $ ( 9,513 ) the company had no income tax expense due to operating losses incurred for the year ended december 31 , 2016. the company accounts for income taxes in accordance with asc 740 , which requires that the tax benefit of net operating losses , temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is `` more likely than not . `` realization of the future tax benefits is dependent on the company 's ability to generate sufficient taxable income within the carryforward period . because of the company 's recent history of operating losses , management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and , accordingly , has provided a full valuation allowance . 38 the company 's deferred tax assets are as follows ( in thousands ) : replace_table_token_17_th the company has decided to early adopt asu 2016-09 in the fourth quarter of 2016 and has elected to recognizing forfeitures as they occur rather than estimate their forfeiture rate . the asu 2016-09 is considered to be effective from the beginning of the year of adoption . in the year of adoption , asu 2016-09 requires that the cumulative effect adjustment be recorded to retained earnings . due to the full valuation allowance , there is no cumulative effect adjustment to record . excess windfall net operating loss carryforwards are converted into deferred tax net operating losses with a corresponding increase in valuation allowance as of the beginning of 2016 ; the year of adoption . net operating losses and tax credit carryforwards as of december 31 , 2016 , are as follows ( in thousands ) : replace_table_token_18_th the effective tax rate of the company 's provision ( benefit ) for income taxes story_separator_special_tag the following discussion and analysis of our results of operations and financial condition should be read in conjunction with our financial statements and the notes to those financial statements that are included elsewhere in this report . our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties , such as our plans , objectives , expectations and intentions . actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors , including those set forth under the “ business ” section and elsewhere in this report . we use words such as “ anticipate , ” “ estimate , ” “ plan , ” “ project , ” “ continuing , ” “ ongoing , ” “ expect , ” “ believe , ” “ intend , ” “ may , ” “ will , ” “ should , ” “ could , ” and similar expressions to identify forward-looking statements . all forward-looking statements included in this report are based on information available to us on the date hereof and , except as required by law , we assume no obligation to update any such forward-looking statements . overview we are engaged in the business of developing , commercializing and licensing proprietary processes and technologies for the $ 350+ billion semiconductor industry . our lead technology , named mears silicon technology tm , or mst ® , is a thin film of reengineered silicon , typically 100 to 300 angstroms ( or approximately 20 to 60 silicon atomic unit cells ) thick . mst ® can be applied as a transistor channel enhancement to cmos-type transistors , the most widely used transistor type in the semiconductor industry . mst ® is our proprietary and patent-protected performance enhancement technology that we believe addresses a number of key engineering challenges facing the semiconductor industry . we believe that by incorporating mst ® , transistors can be smaller , with increased speed , reliability and energy efficiency . in addition , since mst ® is an additive and low cost technology , it can be deployed on an industrial scale , with machines commonly used in semiconductor manufacturing . we believe that mst ® can be widely incorporated into the most common types of semiconductor products , including analog , logic , optical and memory integrated circuits . we do not intend to design or manufacture integrated circuits directly . instead , we intend to develop and license technologies and processes that will offer the designers and manufacturers of integrated circuits a low-cost solution to the industry need for greater performance and lower power consumption . story_separator_special_tag our customers and partners are expected to include : · foundries , which manufacture integrated circuits on behalf of fabless manufacturers ; · integrated device manufacturers , or idms , which are the fully integrated designers and manufacturers of integrated circuits ; · fabless semiconductor manufacturers , which are designers of integrated circuits who outsource the manufacture of their chips to foundries ; · original equipment manufacturers , or oems , that manufacture the epitaxial , or epi , machines used to deposit semiconductor layers , such as the mst ® onto the base silicon wafer ; and · electronic design automation companies , which make tools used throughout the industry to simulate performance of semiconductor products using different materials , design structures and process technologies . we intend to generate revenue through licensing arrangements whereby foundries and idms pay us a license fee for their use of mst ® technology in the manufacture of silicon wafers as well as a royalty for each silicon wafer or device that incorporates our mst ® technology . we also intend to enter into licensing arrangements with fabless semiconductor manufacturers pursuant to which we will charge them a royalty for each device they sell that incorporates our mst ® technology . we were organized as a delaware limited liability company under the name nanovis llc on november 26 , 2001. on march 13 , 2007 , we converted to a delaware corporation under the name mears technologies , inc. on january 12 , 2016 , we changed our name to atomera incorporated . on march 17 , 2015 , we completed the private placement of $ 14.75 million in senior secured convertible promissory notes , which we issued for cash consideration of $ 7.40 million and the exchange for previously issued promissory notes that at the time of exchange had principal and accrued interest in the aggregate amount of $ 7.35 million . on april 1 , 2016 we completed the private placement of an additional $ 5.96 million in senior secured convertible notes on the same terms as the promissory notes placed in march 2015. we refer to these promissory notes in this annual report as our “ secured notes. ” during october 2015 , we conducted a recapitalization of our outstanding options and warrants to purchase shares of our common stock . pursuant to the recapitalization , we offered all holders of our options and warrants as of december 31 , 2014 a one-time opportunity to exchange their options and warrants for shares of our common stock at a ratio of two options or warrants for one share of common stock regardless of exercise price . the offer resulted in 166,230 options and 601,861 warrants converting to a total of 384,045 shares of common stock . in connection with the recapitalization , we incurred a one-time non-cash charge of approximately $ 2.09 million in the fourth quarter of 2015 relating to our loss on the exchange of the options and warrants for the common stock . on december 11 , 2015 , we effected a 1-for-15 reverse stock split of our common stock . all historical share amounts and share price information presented in this report have been proportionally adjusted to reflect the impact of this reverse stock split . 17 on august 10 , 2016 , we closed our initial public offering of 3,680,000 share of common stock at a public offering price of $ 7.50 per share . the common stock included 480,000 shares sold as a result of the underwriter 's exercise in full of its overallotment option . gross proceeds to us from this offering were $ 27,600,000 before deducting underwriting discounts , commissions and other offering expenses . in accordance with the terms of the secured notes , all principal plus accrued interest ( totaling approximately $ 23.5 million ) converted automatically upon consummation of the ipo into 6,264,659 million shares of common stock . results of operations for the years ended december 31 , 2016 and 2015 revenues . we have not commenced revenue-producing operations . operating expenses . operating expenses consist of research and development , general and administrative , and selling and marketing expenses . for the years ended december 31 , 2016 and 2015 our operating expenses totaled approximately $ 10.0 million and $ 5.5 million , respectively . research and development expense . to date , our operations have focused on the research , development , patent protection , and commercialization of our processes and technologies , including our proprietary and patent-protected mst ® performance enhancement technology . our research and development costs primarily consist of payroll and benefit costs for our engineering staff and costs of outsourced fabrication and metrology of semiconductor wafers incorporating our mst ® technology . the timing and amount of our outsourced fabrication and metrology is highly dependent on evaluations by our prospective customers and partners . as a result , the level of our research and development costs can vary significantly among accounting periods . for the years ended december 31 , 2016 and 2015 , we incurred approximately $ 4.0 million and $ 2.0 million , respectively , of research and development expense , an increase of approximately $ 2.0 million or 97 % . the increase in research and development expense is primarily due to an increase of approximately $ 939,000 in spending on outsourced fabrication and metrology to support increased engagements with potential customers evaluating our mst ® and an increase of approximately $ 783,000 in payroll expense reflecting an increase in engineering headcount and accrual of bonus expenses under a program implemented during 2016. we expect that engineering headcount in 2017 will remain at or above the level of 2016. story_separator_special_tag plan and we may be unable to continue operations . 19 net cash used in operating activities of approximately $ 6.8 million for the year ended december 31 , 2016 resulted primarily from our net loss of approximately $ 12.6

general and administrative expense . general and administrative expenses consist primarily of payroll and benefit costs for administrative personnel , office-related costs and professional fees . general and administrative costs for the years ended december 2016 and 2015 were approximately $ 5.1 million and $ 3.4 million , respectively , representing an increase of approximately $ 1.7 million or 48 % . the increase in costs was primarily due to an increase of $ 2.8 million in compensation expense ( including an increase of $ 1.6 million in stock compensation expense ) resulting from the hiring of our chief executive officer in october 2015 and our chief financial officer in february 2016 , severance payments totaling approximately $ 208,000 to three employees in connection with moving our headquarters to california in 2016 , our commencement of compensation in both cash and equity of our non-employee directors after the ipo , payment of an ipo incentive bonus to our chief executive officer in the amount of $ 250,000 , accrual of approximately $ 429,000 in bonus expense in 2016 and approximately $ 1.4 million of equity compensation expense resulting from awards of restricted stock to certain directors and officers upon completion of the ipo . these increases were offset in part by a $ 1.5 million decrease in professional fees , reflecting a charge of approximately $ 1.0 million to general and administrative expense for the fair value of a warrant issued for strategic consulting services in 2015 , as well as the move of our former chief executive officer to the role of executive vice president of strategic business development and a $ 249,000 decrease in legal and accounting expense related to our recapitalization in 2015 whereas in 2016 the legal and accounting expenses related to our ipo were capitalized and offset against additional paid-in capital upon closing the offering .

note 6 : property , plant and equipment ( in millions ) replace_table_token_41_th on august 8 , 2011 , we completed the sale of two story_separator_special_tag general our fiscal year ends on the sunday closest to september 30. the fiscal year ended on october 3 , 2010 included 53 weeks with the 53 rd week falling in the fourth fiscal quarter . the fiscal years ended on october 2 , 2011 and september 27 , 2009 both included 52 weeks . comparable store sales percentages for fiscal 2010 are calculated excluding the 53 rd week . all references to store counts , including data for new store openings , are reported net of related store closures , unless otherwise noted . story_separator_special_tag international , and cpg . our seattle 's best coffee operating segment is reported in “other , ” along with our digital ventures business and unallocated corporate expenses that pertain to corporate administrative functions that support our operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments . the us and international segments both include company-operated stores and licensed retail stores . licensed stores generally have a higher operating margin than company-operated stores . under the licensed model , starbucks receives a reduced share of the total store revenues , but this is more than offset by the reduction in its share of costs as these are primarily borne by the licensee . the international segment has a higher relative share of licensed stores versus company-operated stores compared to the us segment ; however , the us segment has been operating significantly longer than the international segment and has developed deeper awareness of , and attachment to , the starbucks brand and stores among its customer base . as a result , the more mature us segment has significantly more stores , and higher total revenues than the international segment . average sales per store are also higher in the us due to various factors including length of time in market and local income levels . further , certain market costs , particularly occupancy costs , are lower in the us segment compared to the average for the international segment , which comprise a more diverse group of operations . as a result of the relative strength of the brand in the us segment , the number of stores , the higher unit volumes , and the lower market costs , the us segment , despite its higher relative percentage of company-operated stores , has a higher operating margin than the less-developed international segment . starbucks international store base continues to expand and we continue to focus on achieving sustainable growth from established international markets while at the same time investing in emerging markets , such as china . newer 23 international markets require a more extensive support organization , relative to the current levels of revenue and operating income . the cpg and seattle 's best coffee segments include packaged coffee and tea and other branded products operations worldwide , as well as the us foodservice business . in prior years through the first several months of fiscal 2011 , we sold a selection of starbucks and seattle 's best coffee branded packaged coffees and tazo ® teas in grocery and warehouse club stores throughout the us and to grocery stores in canada , the uk and other european countries through a distribution arrangement with kraft foods global , inc. kraft managed the distribution , marketing , advertising and promotion of these products as a part of that arrangement . beginning in the second quarter of fiscal 2011 , we successfully transitioned these businesses including the marketing , advertising , and promotion of these products , from our previous distribution arrangement with kraft and began selling these products directly to the grocery and warehouse club stores . our cpg segment also includes ready-to-drink beverages , which are primarily manufactured and distributed through the north american coffee partnership , a joint venture with the pepsi-cola company . the proportionate share of the results of the joint venture is included , on a net basis , in income from equity investees on the consolidated statements of earnings . the us foodservice business sells coffee and other related products to institutional foodservice companies with the majority of its sales through national broad-line distribution networks . the cpg segment reflects relatively lower revenues , a modest cost structure , and a resulting higher operating margin , compared to the other two reporting segments , which consist primarily of retail stores . acquisitions see note 17 to the consolidated financial statements in this 10-k. results of operations — fiscal 2011 compared to fiscal 2010 consolidated results of operations ( in millions ) : revenues replace_table_token_9_th consolidated net revenues were $ 11.7 billion for fiscal 2011 , an increase of 9 % , or $ 993 million over fiscal 2010. the increase was primarily due to an increase in company-operated retail revenues driven by an 8 % increase in global comparable stores sales ( contributing approximately $ 672 million ) . the increase in comparable store sales was due to a 6 % increase in number of transactions ( contributing approximately $ 499 million ) and a 2 % increase in average value per transaction ( contributing approximately $ 173 million ) . also contributing to the increase in total net revenues was favorable foreign currency translation ( approximately $ 126 million ) resulting from a weakening of the us dollar relative to foreign currencies and an increase in licensed stores revenues ( approximately $ 106 million ) . this increase was partially offset by the impact of the extra week in fiscal 2010 ( approximately $ 207 million ) . 24 operating expenses replace_table_token_10_th cost of sales including occupancy costs as a percentage of total net revenues increased 70 basis points . the increase was primarily due to higher commodity costs ( approximately 220 basis points ) , mainly driven by increased coffee costs . story_separator_special_tag global consumer products group replace_table_token_14_th revenues total cpg net revenues for fiscal 2011 increased 22 % , or $ 153 million . the increase was primarily due to the benefit of recognizing full revenue from packaged coffee and tea sales under the direct distribution model for the majority of the year ( approximately $ 70 million ) . on march 1 , 2011 , we successfully transitioned to a direct distribution model from our previous distribution arrangement with kraft for the sale of packaged starbucks ® and seattle 's best coffee ® coffee products in grocery and warehouse club stores throughout the us , and to grocery stores in canada , the uk and other european countries . we successfully transitioned the tazo ® tea business to a direct distribution model in january 2011. also contributing to the increase were improved revenues from us foodservice ( approximately $ 26 million ) and the expanded distribution of starbucks via ® ready brew in fiscal 2011 ( approximately $ 24 million ) , partially offset by the extra week in fiscal 2010 ( approximately $ 16 million ) . operating expenses operating margin decreased 530 basis points over the prior year primarily due to increased commodity costs ( approximately 830 basis points ) , driven by higher coffee costs . partially offsetting the increase in commodity costs were the benefit of price increases ( approximately 200 basis points ) and lower marketing expenses for starbucks via ® ready brew in the current year ( approximately 120 basis points ) . 28 other replace_table_token_15_th other is comprised of the seattle 's best coffee operating segment , the digital ventures business , and expenses pertaining to corporate administrative functions that support our operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments . substantially all net revenues in other are generated from the seattle 's best coffee operating segment . the increase in revenues for seattle 's best coffee was primarily due to the recognition of a full year of sales to national accounts added in the latter part of fiscal 2010 as well as new accounts added during fiscal 2011 ( approximately $ 20 million ) . this was partially offset by the impact of the closure of the seattle 's best coffee locations in borders bookstores . total operating expenses in fiscal 2011 increased 31 % , or $ 155 million . this increase is the result of an increase of $ 71 million in general and administrative expenses due to higher corporate expenses to support growth initiatives and higher donations to the starbucks foundation . also contributing was an increase of $ 59 million in other operating expenses primarily due to the impairment of certain assets in our seattle 's best coffee business associated with the borders bankruptcy in april 2011 and an increase in marketing expenses . this increase in operating expenses was partially offset by a gain on the sale of corporate real estate in fiscal 2011 ( approximately $ 30 million ) . results of operations — fiscal 2010 compared to fiscal 2009 consolidated results of operations ( in millions ) : replace_table_token_16_th consolidated net revenues were $ 10.7 billion for fiscal 2010 , an increase of 9.5 % over fiscal 2009. the increase was primarily due to an increase in company-operated retail revenues driven by a 7 % increase in global comparable stores sales ( contributing approximately $ 551 million ) . the increase in comparable store sales was due to a 4 % increase in number of transactions ( contributing approximately $ 298 million ) and a 3 % increase in average value per transaction ( contributing approximately $ 253 million ) . also contributing to the increase in revenues was the extra week in fiscal 2010 ( approximately $ 207 million ) , foreign currency translation resulting from the weakening of the us dollar primarily in relation to the canadian dollar ( approximately $ 101 million ) , and the effect of consolidating our previous joint venture in france ( approximately $ 87 million ) . this increase was partially offset by a net decrease of 72 company-operated stores from fiscal 2009 ( approximately $ 119 million ) . 29 replace_table_token_17_th cost of sales including occupancy costs as a percentage of total revenues decreased 260 basis points . the decrease was primarily driven by supply chain efficiencies which contributed to lower food costs ( approximately 70 basis points ) and lower beverage and paper packaging product costs ( approximately 50 basis points ) . also contributing to the decrease were lower occupancy costs as a percentage of total net revenues ( approximately 80 basis points ) primarily due to sales leverage . store operating expenses as a percentage of company-operated retail revenues decreased 230 basis points primarily due to increased sales leverage from increased revenues . restructuring charges include lease exit and related costs associated with the actions to rationalize our global store portfolio and reduce the global cost structure in fiscal 2009 and 2008. the restructuring charges incurred in fiscal 2010 reflect charges incurred on the previously announced store closures . with the previously-announced store closures essentially complete , we do not expect to report any further restructuring costs related to these activities . partially offsetting these favorable fluctuations were increased advertising costs included primarily in other operating expenses and higher performance based compensation expenses , which drove the 70 basis point increase in general and administrative expenses as a percentage of revenues . replace_table_token_18_th net interest income and other increased $ 13 million over the prior period . the increase was driven by the impact of an accounting gain recorded in the first quarter of fiscal 2010 related to our acquisition of a controlling interest in our previous joint venture operations in france .

financial highlights consolidated operating income was $ 1.7 billion for fiscal 2011 compared to $ 1.4 billion in fiscal 2010 and operating margin increased to 14.8 % compared to 13.3 % in fiscal 2010. the operating margin expansion was driven by increased sales leverage , partially offset by higher commodity costs . comparable store sales growth at company-operated stores was 8 % in fiscal 2011 compared to 7 % in fiscal 2010. eps for fiscal 2011 was $ 1.62 , compared to eps of $ 1.24 reported in fiscal 2010 , with the increase driven by the improved sales leverage and certain gains recorded in the fourth quarter of fiscal 2011. we recognized a gain from a fair market value adjustment resulting from the acquisition of the remaining ownership interest in our joint venture in switzerland and austria as well as a gain on the sale of corporate real estate . these gains contributed approximately $ 0.10 to eps in fiscal 2011. cash flow from operations was $ 1.6 billion in fiscal 2011 compared to $ 1.7 billion in fiscal 2010. capital expenditures were approximately $ 532 million in fiscal 2011 compared to $ 440 million in fiscal 2010. available operating cash flow after capital expenditures during fiscal 2011 was directed at returning approximately $ 945 million of cash to our shareholders via share repurchases and dividends . overview starbucks results for fiscal 2011 reflect the strength and resiliency of our business model , the global power of our brand and the talent and dedication of our employees . our business has performed well this year despite significant headwinds from commodity costs and a continuingly challenging consumer environment . strong global comparable stores sales growth of 8 % for the full year ( us 8 % and international 5 % ) drove increased sales leverage and resulted in higher operating margins and net earnings .

for saas , story_separator_special_tag overview citrix is a cloud computing company that enables mobile workstyles- empowering people to work and collaborate from anywhere , accessing enterprise apps and data on any of the latest devices , as easily as they would in their own office- simply and securely . citrix cloud computing solutions help it and service providers build both private and public clouds , leveraging virtualization and networking technologies to deliver high-performance , elastic and cost-effective services for mobile workstyles . we market and license our products directly to enterprise customers , over the web , and through systems integrators , or sis , in addition to indirectly through value-added resellers , or vars , value-added distributors , or vads , and original equipment manufacturers , or oems . citrix is a delaware corporation founded on april 17 , 1989. executive summary we believe our approach is unique in the market because we have combined innovative technologies to enable and power mobile workstyles . our technologies mobilize desktops , apps , workloads and people to help our customers drive business value . our mobile and desktop products are leaders in the area of desktop management , including desktop virtualization marketed as xendesktop and xenapp . in addition , in january of 2013 , we acquired zenprise , inc. , or zenprise , and its mobile device management , or mdm , products , which will be integrated with our citrix cloudgateway product offering to provide customers a complete solution for mobile enterprise management . our networking and cloud products offer customers a value-added approach to building and delivering it to end-users , including our cloud networking products , which allow our customers to deliver services to mobile users with high performance , security and reliability , and our cloud platform products , which allow our customers to build scalable and reliable private and public cloud computing environments . we believe this combination of products allows us to deliver a comprehensive end-to-end mobile lifestyles solution , and one that we believe , when considered as a whole , is competitively differentiated by its feature set and interoperability . in today 's business environment there is a sharp focus on it products and services that can reduce cost and deliver a quick , tangible return on investment , or roi . with our customers focused on economic value in technology solutions , we continue highlighting our products ' abilities to reduce it costs , increase business flexibility and deliver roi with a simpler more flexible approach to computing . in 2011 , we saw uncertainties surrounding it spending , particularly in the european markets . through the third quarter of 2012 , we continued to encounter hesitancy on the part of customers in initiating large capital projects causing opportunities to be pushed into the future or to be split into smaller transactions . in the fourth quarter of 2012 , we saw improvements in demand across all geographies , which contributed to our overall product and license revenue growth . see our summary of results section below . although we experienced greater demand in the fourth quarter of 2012 , we believe that continued economic uncertainty may adversely affect sales of our products and services and may result in longer sales cycles , slower adoption of technologies and increased price competition , particularly in north america and europe . in 2013 , we plan to focus on helping our customers embrace and power mobile workstyles and build cloud infrastructure so cloud services can be delivered virtually anywhere with a high quality user experience . we plan to sustain the long-term growth of our businesses around the world by expanding our go-to-market reach and direct customer touch through hiring additional enterprise account managers and expanding consulting and technical support capacity ; investing in product innovation , bringing new technologies to market and improving integration across our product portfolio to drive simplicity and better end-user experience ; and making selective and strategic acquisitions of technology , talent and or businesses . we also plan to invest in new service provider channel programs that allow our partners to upgrade their capabilities in desktop virtualization , giving us more capacity to drive strategic mobile and desktop transactions and to cross-sell cloud networking , cloud platforms , collaboration and data sharing . enterprise division our desktop virtualization products are built to transform and reduce the cost of traditional desktop management by virtualizing the desktop , with our xendesktop product , and virtualizing applications , with our xenapp product , in a customer 's datacenter . we are moving the delivery of desktops and related applications to an on-demand service rather than the delivery of a device . we continue to see growing customer interest in xendesktop and , in addition , by making the xendesktop trade-up program a standard program , we are maximizing our xenapp install base and driving continued xendesktop adoption . 31 in january 2013 , we completed our acquisition of zenprise , a privately held leading innovator in mdm . we are currently working to integrate the zenprise products for mdm with our citrix cloudgateway product for managing mobile apps and data to offer our enterprise it customers comprehensive products that make it easier to manage and secure devices , apps and data , while allowing users to embrace mobile workstyles and access enterprise apps from virtually any device . we believe our mobility products will offer a comprehensive approach that can transform organizations into mobile enterprises with the security and control it requires , the ease of use and flexibility users desire , and the productivity business demands . our cloud networking products power mobile workstyles while altering the traditional economics of the datacenter by providing greater levels of flexibility of computing resources , especially with respect to servers , improving application performance and thereby reducing the amount of processing power involved , and allowing easy reconfiguration of servers by permitting storage and network infrastructure to be added-in virtually rather than physically . story_separator_special_tag transaction costs associated with the acquisition were approximately $ 2.9 million , all of which we expensed during the year ended december 31 , 2011 , and are included in general and administrative expense in the accompanying consolidated statements of income in this annual report on form 10-k for the year ended december 31 , 2012. in addition , in connection with the acquisition we assumed non-vested stock units , which were converted into the right to receive up to 288,742 shares of our common stock and certain stock options which are exercisable for 183,780 shares of our common stock , for which the vesting period reset fully upon the closing of the transaction . ringcube in august 2011 , we acquired all of the issued and outstanding securities of ringcube technologies , inc. , or ringcube , a privately-held company that specializes in user personalization technology for virtual desktops . ringcube became part of our enterprise division and the acquisition further solidifies our position in desktop virtualization . the total consideration for this transaction was approximately $ 32.2 million , net of $ 0.5 million of cash acquired , and was paid in cash . transaction costs associated with the acquisition were approximately $ 0.6 million , all of which we expensed during the year ended december 31 , 2011 , and are included in general and administrative expense in the accompanying consolidated statements of income in this annual report on form 10-k for the year ended december 31 , 2012. in addition , in connection with the ringcube acquisition , we assumed non-vested stock units which were converted into the right to receive up to 58,439 shares of our common stock , for which the vesting period reset fully upon the closing of the transaction . 34 sharefile in october 2011 , we acquired all of the issued and outstanding securities of novell labs , inc. d/b/a sharefile , or sharefile , a privately-held provider of secure data sharing and collaboration solutions . sharefile initially became part of our enterprise division and in the first quarter of 2012 it was transferred to our online services division . the total consideration for this transaction was approximately $ 54.0 million , net of $ 1.7 million of cash acquired , and was paid in cash . transaction costs associated with the acquisition were approximately $ 0.7 million , all of which we expensed during the year ended december 31 , 2011 and are included in general and administrative expense in our consolidated statements of income included in this annual report on form 10-k for the year ended december 31 , 2012. in addition , in connection with the acquisition we assumed non-vested stock units , which were converted into the right to receive up to 180,697 shares of our common stock and assumed certain stock options which are exercisable for 390,775 shares of our common stock , for which the vesting period reset fully upon the closing of the transaction . app-dna in november 2011 , we acquired all of the issued and outstanding securities of app-dna , a privately-held company that specializes in application migration and management . app-dna became part of our enterprise division . the total consideration for this transaction was approximately $ 90.8 million , net of $ 3.2 million of cash acquired , and was paid in cash . transaction costs associated with the acquisition were approximately $ 1.3 million , all of which we expensed during the year ended december 31 , 2011 , and are included in general and administrative expense in our consolidated statements of income included in this annual report on form 10-k for the year ended december 31 , 2012. in addition , in connection with the acquisition we assumed non-vested stock units , which were converted into the right to receive up to 114,487 shares of our common stock , for which the vesting period reset fully upon the closing of the transaction . 2011 other acquisition during the first quarter of 2011 , we acquired certain assets of a wholly-owned subsidiary of a privately-held company for total cash consideration of approximately $ 10.5 million . we accounted for this acquisition as a business combination in accordance with the authoritative guidance and it became part of our enterprise division , thereby expanding our solutions portfolio for service providers and developing unique integrations with our application delivery solutions . we have included the effects of all of the companies acquired in 2011 in our results of operations prospectively from the date of each acquisition . purchase of non-controlling interest kaviza inc. in may 2011 , we acquired all of the non-controlling interest of kaviza inc. , or kaviza , a provider of virtual desktop infrastructure solutions , for $ 17.2 million . as a result of this transaction , we have obtained a 100 % interest in this subsidiary . in accordance with the authoritative guidance , the excess of the proceeds paid over the carrying amount of the non-controlling interest of kaviza has been reflected as a reduction of additional paid-in capital . in addition , in connection with the purchase of the non-controlling interest of kaviza , we assumed non-vested stock units which were converted into the right to receive up to 88,687 shares of our common stock and assumed certain stock options which are exercisable for 33,301 shares of our common stock , with existing vesting schedules . subsequent events on january 2 , 2013 , we acquired all of the issued and outstanding securities of zenprise , inc. , or zenprise , a privately-held leader in mobile device management . we will integrate the zenprise products for mobile device management , with our citrix cloudgateway products for managing mobile apps and data . the total preliminary consideration for this transaction was approximately $ 324.2 million , net of $ 2.9 million of cash acquired , and was paid in cash .

summary of results for the year ended december 31 , 2012 compared to the year ended december 31 , 2011 , we delivered the following financial performance : product and license revenue increased 11.6 % to $ 830.6 million ; software as a service revenue increased 18.9 % to $ 511.3 million ; license updates and maintenance revenue increased 19.7 % to $ 1,125.1 million ; professional services revenue increased 30.1 % to $ 119.1 million ; operating income decreased 6.3 % to $ 390.8 million ; and diluted earnings per share decreased 0.3 % to $ 1.86 . the increase in our product and licenses revenue was primarily driven by sales of our networking and cloud products , led by netscaler and increased sales of our mobile and desktop products , led by xendesktop . we currently target our product and licenses revenue to increase when comparing the first quarter of 2013 to the first quarter of 2012. our software as a service revenue increased due to increased sales of our collaboration products , led by gotomeeting and our data sharing product , sharefile . the increase in license updates and maintenance revenue was primarily due to an increase in renewals and sales of our subscription advantage product and an increase in maintenance revenues , primarily driven by increased sales of our networking and cloud products , led by netscaler . professional services revenue increased primarily due to increases in consulting revenues related to increased implementation sales of our enterprise division 's products . we currently target that total revenue to increase when comparing the first quarter of 2013 to the first quarter of 2012. in addition , when comparing the 2013 fiscal year to the 2012 fiscal year we target total revenue to increase .

under the multi-year agreement , ipvalue will originate and assist us with negotiating transactions related to patent licensing worldwide with respect to certain third parties . our employees include the core development team behind our patent portfolio , technology and software . this team has worked together for over ten years and is the same team that invented and developed this technology while working at leidos , is a fortune 500® scientific , engineering and technology applications company that uses its deep domain knowledge to solve problems of vital importance to the nation and the world , in national security , energy and the environment , critical infrastructure and health . the team has continued its research and development work started at leidos , and expanded the set of patents we acquired in 2006 from leidos , into a larger portfolio with over 100 u.s. and international patents with over 75 pending applications . this portfolio now serves as the foundation of our licensing business and planned service offerings and is expected to generate the majority of our future revenue in license fees and royalties . we intend to continue our research and development efforts to further strengthen and expand our patent portfolio . see – operations – research and development expenses for a description of our research and development expenses for the past three fiscal years discussed below . we intend to continue using an outsourced and leveraged model to maintain efficiency and manage costs as we grow our licensing business by , for example , offering incentives to early licensing targets or asserting our rights for use of our patents . we also intend to expand our design pilot in participation with leading 4g/lte companies ( domain infrastructure providers , chipset manufacturers , service providers , and others ) and build our secure domain name registry . developments in the year ended december 31 , 2015 litigation we have one intellectual property infringement lawsuit pending against apple , inc. in the united states district court for the eastern district of texas , tyler division , pursuant to which we allege that this party infringes on certain of our patents . we seek damages and injunctive relief in all the complaints . virnetx inc. v. apple , inc. ( case 6:12-cv-00855-led ) – consolidated lead case on march 30 , 2015 , the united states court for the eastern district of texas , tyler division , issued an order finding substantial overlap between the remanded portions of the civil action case 6:10-cv-00417-led ( virnetx vs. cisco et . al . ) , and the ongoing civil action case 6:12-cv-00855-led ( virnetx inc. v. apple , inc. ) . the court consolidated the two civil actions under civil action case 6:12-cv-00855-led ( virnetx inc. v. apple , inc. ) and designated it as the lead case . the jury trial in this case was held on january 25 , 2016. on february 4 , 2016 , a jury in the united states court for the eastern district of texas , tyler division , awarded us $ 625.6 million in a verdict against apple corporation for infringing four of our us patents , marking it the second time a federal jury has found apple liable for infringing virnetx 's patented technology . the verdict includes royalties awarded to us based on an earlier patent infringement finding ( case 6:10-cv-00417-led ) against apple . the jury found that apple 's modified vpn on-demand , imessage and facetime services infringed virnetx 's patents and that apple 's infringement was willful . in addition to determining the royalty owed by apple for its prior infringement , this verdict also includes an award based on the jury 's finding that apple 's modified vpn on demand , imessage and facetime services have continued to infringe virnetx 's patents . in its order , issued on february 16 , 2016 , the court has set all post-trial motions for hearing on may 25 , 2016 at 10:00 a.m. in the united states court for the eastern district of texas , texarkana division . the court has also ordered both parties to attend mediation by may 16 , 2016. virnetx inc. v. cisco systems , inc. et al . ( 13-1489-lp virnetx , case 6:10-cv-00417-led ) on august 11 , 2010 , we initiated a lawsuit by filing a complaint against aastra , apple , cisco , and nec in the united states district court for the eastern district of texas , tyler division , pursuant to which we alleged that these parties infringe on certain of our patents . we sought damages and injunctive relief . aastra and nec agreed to sign license agreements with us and we agreed to drop all the accusations of infringement against them . at the pre-trial hearing , the judge decided to conduct separate jury trial for each defendant , and try only the case against apple on the scheduled trial date . the jury trial of our case against cisco was held on march 4 , 2013. the jury in our case against cisco came back with a verdict of non-infringement also determined that all our patents-in-suit patents are not invalid . our motions for a new trial and cisco 's infringement of certain virnetx patents were denied and the case against cisco was closed . 27 the jury trial of our case against apple was held on october 31 , 2012. on november 6 , 2012 , a jury in the united states court for the eastern district of texas , tyler division , awarded us over $ 368 million in a verdict against apple corporation for infringing four of our patents . on february 26 , 2013 , the court issued its memorandum opinion and order regarding post-trial motions resulting from the prior jury verdict denying apple 's motion to reduce the damages awarded by the jury for past infringement . story_separator_special_tag currently , we are not a party to any other pending legal proceedings , and are not aware of any proceeding threatened or contemplated against us by any governmental authority or other party . patents on february 17 , 2015 , the united states patent and trademark office ( “uspto” ) denied five petitions for inter partes review ( “ipr” ) filed by apple inc. these petitions sought review of certain claims of our u.s. patent nos . 7,418,504 , 7,490,151 , and 7,921,211. the uspto found that the petitions were not filed within the time limit imposed by the applicable statute because related iprs initiated by microsoft corp. , which apple inc. had sought to join , had been dismissed . on may 11 , 2015 , the uspto entered two final decisions in ipr proceedings filed by apple inc. , finding certain claims of our u.s. patent no . 8,504,697 to be unpatentable . we have filed an appeal in the u.s. court of appeals for the federal circuit with respect to these decisions . on july 29 , 2015 , the uspto entered two final decisions in ipr proceedings filed by apple inc. , finding certain claims of our u.s. patent no . 7,987,274 to be unpatentable . we have filed an appeal in the u.s. court of appeals for the federal circuit with respect to these decisions . on august 24 , 2015 , the uspto entered two final decisions in ipr proceedings filed by apple inc. , finding certain claims of our u.s. patent no . 7,188,180 to be unpatentable . we have filed an appeal in the u.s. court of appeals for the federal circuit with respect to these decisions . on september 11 , 2015 , the uspto granted a petition for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,850,009 , and two petitions for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,868,705. on september 16 , 2015 , the uspto denied a petition for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,850,009. on september 29 , 2015 , the uspto entered a final decision in a inter partes reexamination filed by apple inc. finding certain claims of our u.s. patent no . 8,051,181 to be unpatentable . we have filed an appeal in the u.s. court of appeals for the federal circuit with respect to this decision . on october 1 , 2015 , the uspto granted two petitions for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,560,705 , one petition for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,516,131 , and one petition for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,458,341. on the same day , the uspto also denied one petition for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,516,131 , and denied one petition for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,458,341. on october 7 , 2015 , the uspto granted a petition for ipr filed by the mangrove partners master fund , ltd. seeking review of certain claims of our u.s. patent no . 7,490,151 , and a petition for ipr filed by the mangrove partners master fund , ltd. seeking review of certain claims of our u.s. patent no . 6,502,135. on october 29 , 2015 , the uspto granted two petitions for ipr filed by apple inc. seeking review of certain claims of our u.s. patent no . 8,843,643. commitments and related party transactions we lease our offices under an operating lease with a third party expiring in october 2017 for $ 5 per month . we recognize rent expense on a straight-line basis over the term of the lease . on january 31 , 2015 we entered into a 12 month non-exclusive lease for the use of an aircraft from k2 investment fund llc ( “llc” ) for business travel for employees of our company . we incurred approximately $ 593 in rental fees ( including fees and other reimbursements ) to the llc during the year ended december 31 , 2015. our chief executive officer and chief administrative officer are the managing partners of the llc and control the equity interests of the llc . the lease for use of the plane calls for a rental-rate of $ 8 per flight hour , with no minimum usage requirement . the agreement contains other terms and conditions normal in such transactions and can be cancelled by 29 either us or the llc with a 30 day notice . the lease renews on an annual basis unless terminated by the lessor or lessee . neither party has yet exercised their termination rights . critical accounting policies the preparation of financial statements in conformity with accounting principles generally accepted in the united states requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period . the critical accounting policies we employ in the preparation of our consolidated financial statements are those which involve impairment of long-lived assets , income taxes , fair value of financial instruments and stock-based compensation . basis of consolidation the consolidated financial statements include the accounts of virnetx holding corporation and our wholly-owned subsidiaries . all intercompany balances and transactions have been eliminated . use of estimates the preparation of consolidated financial statements in conformity with u.s. gaap requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes . actual results could differ materially from these estimates .

company overview we develop software and technology solutions for securing real-time communications over the internet . our patented gabriel connection technology combines industry standard encryption protocols with our patented techniques for automated domain name system , or dns , lookup mechanisms , and enables users to create a secure communication link using secure domain names over wired or wireless ( 4g/lte ) networks . our gabriel collaboration suite is available for download and free trial , for android , ios , windows , linux and mac os x platforms , at http : //www.gabrielsecure.com/ . we continue to enhance our products and add new functionality to our 25 products . we will provide updates to new and existing customers as they are released to the general public . over 80 small and medium businesses have installed our gabriel secure communication platform and gabriel collaboration suite products in their corporate networks . we continue to rapidly expand our customer base with targeted promotions and direct sales initiatives . we also intend to establish the exclusive secure domain name registry in the united states and other key markets around the world . our portfolio of intellectual property is the foundation of our business model . we currently own over 100 u.s. and international patents with over 75 pending applications . our patent portfolio is primarily focused on securing real-time communications over the internet , as well as related services such as the establishment and maintenance of a secure domain name registry . our patented methods also have additional applications in the key areas of device operating systems and network security for cloud services , m2m communications in areas of smart city , connected car and connected home . we have submitted a declaration with the 3rd generation partnership project , or 3gpp , identifying a group of our patents and patent applications that we believe are or may become essential to certain developing specifications in the 3gpp lte , sae project .

45 the company 's financial covenants under the credit agreement require : an adjusted leverage ratio of ( a ) consolidated total indebtedness minus unencumbered u.s. cash on hand in the u.s. in excess of $ 15,000,000 to ( b ) consolidated ebitda , determined as of the end of each of its fiscal quarters for the then most recently ended four fiscal quarters , to not be greater than 3.0 to 1.0 , and a fixed charge coverage ratio of ( a ) the sum of ( i ) consolidated ebitda , minus ( ii ) 50 % of depreciation expense , minus ( iii ) taxes paid , minus ( iv ) dividends and distributions paid , to ( b ) the sum of ( i ) scheduled principal payments on indebtedness due and or paid , plus ( ii ) interest expense , calculated on a consolidated basis in accordance with gaap , determined as of the end of each of its fiscal quarters for the trailing four fiscal quarters then ending , to not be less than 1.10 to story_separator_special_tag business overview kimball international , inc. ( the “ company , ” “ kimball , ” “ we , ” “ us , ” or “ our ” ) is a leading manufacturer of design driven , technology savvy , high quality furnishings sold under the company 's family of brands : national , kimball office , and kimball hospitality . our diverse portfolio provides solutions for the workplace , learning , healing , and hospitality environments . customers can access our products globally through a variety of distribution channels . recognized with a reputation for excellence as a trustworthy company and recognized with the great place to work® designation , kimball international is committed to a high performance culture with a foundation of sound ethics , continuous improvement , and social responsibility . key economic indicators currently point toward continued strengthening in the overall economy . however , events such as the strengthening of the u.s. dollar , the uncertainty about greece staying in the eurozone , and the growing signs of weakness in china 's economy as well as other uncertainties may pose a threat to our future growth as they have the tendency to cause disruption in business strategy , execution , and timing in many of the markets in which we compete . in relation to the office furniture industry , the business and institutional furniture manufacturer association ( “ bifma ” ) forecast ( by ihs as of may 2015 ) projects a year-over-year increase of 8.1 % for calendar year 2015 and 12.9 % for calendar year 2016. the forecast for two of the leading indicators for the hospitality furniture market ( may 2015 pwc and june 2015 str , inc. reports ) indicate an increase in occupancy rates of 1 % to 2 % for calendar year 2015 and an increase of less than 1 % for calendar year 2016 and an increase in revpar ( revenue per available room ) of 7 % for calendar year 2015 and 6 % for calendar year 2016. we invest in capital expenditures prudently for projects in support of both organic growth and potential acquisitions that would enhance our capabilities and diversification while providing an opportunity for growth and improved profitability . we have a 19 strong focus on cost control and closely monitor market changes and our liquidity in order to proactively adjust our operating costs , discretionary capital spending , and dividend levels as needed . managing working capital in conjunction with fluctuating demand levels is likewise key . in addition , a long-standing component of our profit sharing incentive bonus plan is that it is linked to our worldwide and business unit performance which is designed to adjust compensation expense as profits change . we continue to maintain a strong balance sheet . our short-term liquidity available , represented as cash and cash equivalents plus the unused amount of our credit facility , was $ 63.7 million at june 30 , 2015 . in addition to the above discussion , management currently considers the following events , trends , and uncertainties to be most important to understanding our financial condition and operating performance : successful execution of the company 's restructuring plan is critical to the company 's future performance . the success of the restructuring initiatives is dependent on accomplishing the plan in a timely and effective manner . a critical component of the restructuring initiatives is the transfer of production among facilities which will result in some manufacturing inefficiencies and excess working capital during the transition period . the company 's restructuring plan is discussed below . we continue to focus on mitigating the impact of raw material commodity pricing pressures . due to the contract and project nature of the furniture markets , fluctuation in the demand for our products and variation in the gross margin on those projects is inherent to our business . effective management of our manufacturing capacity is and will continue to be critical to our success . see below for further details regarding current sales and open order trends . while both the hospitality and office furniture markets are expanding , we continue to see volatility in order rates which in turn can impact our operating results . globalization continues to reshape not only the markets in which we operate but also our key customers and competitors . in addition , demand is increasing for hospitality furniture manufactured in the u.s. , and we are shifting focus of underutilized manufacturing capacity to fill this need . employees throughout our business operations are an integral part of our ability to compete successfully , and the stability of the management team is critical to long-term share owner value . our career development and succession planning processes help to maintain stability in management . story_separator_special_tag employee contributions comprise approximately 90 % of the serp investment . in addition , fiscal year 2015 incentive compensation costs declined compared to fiscal year 2014 due to the retirement of key executives as of the spin-off date . we also had a favorable year-over-year variance driven by a $ 1.2 million impairment charge recorded in fiscal year 2014 related to the decision to downsize the plane fleet from three jets to two during fiscal year 2014. in november 2014 , we approved a capacity utilization restructuring plan which includes the consolidation of our metal fabrication production from an operation located in post falls , idaho , into existing production facilities in indiana , and the further reduction of our company plane fleet from two jets to one . the jet was sold in the third quarter of fiscal year 2015 , and as a result of the aircraft fleet reduction , we began realizing the expected pre-tax annual savings of $ 0.8 million . the remaining jet is primarily used for transporting customers to visit our showrooms , offices , research and development center , and manufacturing locations . we recognized pre-tax restructuring expense related to continuing operations of $ 5.3 million in fiscal year 2015 and recognized no restructuring expense in fiscal year 2014 . see note 18 - restructuring expense of notes to consolidated financial statements for further information on restructuring . other income ( expense ) consisted of the following : replace_table_token_10_th our fiscal year 2015 effective tax rate was 37.0 % , as the favorable impact of a $ 0.9 million net reduction in our unrecognized tax benefit driven by the expiration of statutes of limitations more than offset the $ 0.8 million unfavorable impact of nondeductible spin-off expenses in the u.s. our effective tax rate of 18.8 % for fiscal year 2014 which was favorably impacted by a decrease in a foreign deferred tax asset valuation allowance . our june 30 , 2014 balance sheet was prior to the spin-off transaction which was completed on october 31 , 2014 , and thus includes the kimball electronics balances . comparing the balance sheet as of june 30 , 2015 to june 30 , 2014 , excluding the impact of the spin-off of kimball electronics , inventory levels increased due to lead time requirements of select hospitality customers and in conjunction with office furniture product introductions . 22 story_separator_special_tag 1.4 at june 30 , 2015 and 2.0 at june 30 , 2014 . the change in working capital and current ratio was primarily driven by the spin-off of kimball electronics . kimball 's short-term liquidity available , represented as cash and cash equivalents plus the unused amount of our credit facility , totaled $ 63.7 million at june 30 , 2015 . cash flows as cash management was centralized prior to the spin-off , cash flows include kimball electronics cash flows through the october 31 , 2014 spin-off date for each cash flow statement category on the company 's consolidated statements of cash flows . the following table reflects the major categories of cash flows for fiscal years 2015 , 2014 , and 2013 . replace_table_token_13_th cash flows from operating activities for fiscal years 2015 and 2014 , net cash provided by operating activities was $ 13.8 million and $ 69.9 million , respectively . changes in working capital balances used $ 33.2 million of cash in fiscal year 2015 and provided $ 5.4 million in fiscal year 2014 . cash generated from operating activities in fiscal year 2013 totaled $ 63.9 million and changes in working capital balances provided $ 6.4 million of cash . 24 the $ 33.2 million usage of cash from changes in working capital balances in fiscal year 2015 was primarily driven by increases in our inventory balance and accounts receivable balance . slightly more than half of the $ 21.9 million usage of cash for inventory was driven by increased inventory levels in our furniture operations while the remainder was related to inventory fluctuations of the discontinued ems business prior to the spin date . the $ 15.3 million usage of cash for receivables was primarily driven by increased receivables levels in our furniture operations and to a lesser extent increased receivables levels of the discontinued ems business prior to the spin date . the $ 5.4 million of cash provided by changes in working capital balances in fiscal year 2014 was primarily driven by a $ 19.5 million increase in accrued expenses largely due to higher accrued profit-based incentive compensation and a $ 15.7 million increase in accounts payable related to increased inventory purchases and an increase in customer deposits received on custom orders . these sources of cash were partially offset by a $ 14.9 million inventory increase during fiscal year 2014 to support increased sales volumes and a $ 14.6 million increase in accounts receivable driven by the increased sales levels and a shift in the payment practices of several customers of our former ems segment . the $ 6.4 million of cash provided by changes in working capital balances in fiscal year 2013 was driven by a $ 17.7 million accounts payable increase primarily resulting from increased production volumes within our former ems segment and a $ 7.9 million increase in accrued expenses due to higher accrued profit-based incentive compensation . these sources of cash were offset partially by a $ 19.5 million increase in accounts receivable primarily resulting from higher fiscal year 2013 sales volumes of our former ems segment and a shift in the mix of sales at the end of fiscal year 2013 of our former ems segment toward customers with longer payment terms . as estimated on a continuing operations basis , our measure of accounts receivable performance , also referred to as days sales outstanding ( “ dso ” ) , for the fiscal years ended june 30 , 2015 and june 30 , 2014 was approximately 30 days and 31 days , respectively .

fiscal year 2014 results of operations the following discussion of operating results is based on income from continuing operations and therefore has been recast to exclude all income statement activity of the discontinued operations . replace_table_token_11_th fiscal year 2014 consolidated net sales were $ 543.8 million compared to fiscal year 2013 net sales of $ 500.0 million , or an 8.8 % increase . the increase in sales during fiscal year 2014 was driven by the positive impact of increased sales volumes and price increases . sales to all vertical markets in fiscal year 2014 increased compared to fiscal year 2013 except for a small decline in government sales as lower federal government sales more than offset the improved state government sales . in fiscal year 2014 we recorded income from continuing operations of $ 3.4 million , or $ 0.09 per class b diluted share , inclusive of $ 1.4 million , or $ 0.04 per class b diluted share , of after-tax external costs related to the spin-off of our ems segment . in fiscal year 2013 we recorded a loss from continuing operations of $ 6.6 million , or $ 0.17 per class b diluted share . open orders at june 30 , 2014 increased 1.6 % when compared to the open order level as of june 30 , 2013 on higher orders of hospitality furniture which more than offset a decline in office furniture open orders . gross profit as a percent of net sales increased 2.6 percentage points in fiscal year 2014 compared to fiscal year 2013. benefits realized in fiscal year 2014 from sales price increases , higher margin projects that shipped during fiscal year 2014 , our increased focus on project execution and process discipline , and operational improvements , and fixed cost leverage associated with the higher revenue were partially offset by an unfavorable shift in sales mix .

pricewaterhousecoopers llp chicago , illinois february 28 , 2018 we have served as the company 's auditor since 2009. f-2 horizon pharma plc consolidated balance sheets ( in thousands , except share data ) replace_table_token_22_th the accompanying notes are 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 the related notes appearing at the end of this annual report on form 10-k. some of the information contained in this discussion and analysis or set forth elsewhere in this annual report on form 10-k , including information with respect to our plans and strategy for our business and related financing , includes forward-looking statements that involve risks and uncertainties . you should read the “ risk factors ” section of this annual report on form 10-k for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis . the discussion below contains “ forward-looking statements , ” as defined in section 21e of the securities exchange act of 1934 , as amended , that reflect our current expectations regarding our future growth , results of operations , cash flows , performance and business prospects and opportunities , as well as assumptions made by , and information currently available to , our management . we have tried to identify forward-looking statements by using words such as “ anticipate , ” “ believe , ” “ plan , ” “ expect , ” “ intend , ” “ will , ” and similar expressions , but these words are not the exclusive means of identifying forward-looking statements . these statements are based on information currently available to us and are subject to various risks , uncertainties , and other factors , including , but not limited to , those matters discussed in item 1a . “ risk factors ” in part i of this annual report on form 10-k , that could cause our actual growth , results of operations , cash flows , performance and business prospects and opportunities to differ materially from those expressed in , or implied by , these statements . except as expressly required by the federal securities laws , we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events , developments , or changed circumstances , or for any other reason . overview unless otherwise indicated or the context otherwise requires , references to “ we ” , “ us ” and “ our ” refer to horizon pharma plc and its consolidated subsidiaries . beginning in the first quarter of 2017 , we modified our presentation of certain operating expenses . previously , we presented “ general and administrative ” expenses as one line item in our consolidated statement of comprehensive ( loss ) income , and “ selling and marketing ” expenses as another . for the year ended december 31 , 2017 presentation and prior-period comparisons , we now combine these two line items into one line item , titled “ selling , general and administrative ” expenses . 86 our business we are a biopharmaceutical company focused on researching , developing and commercializing innovative medicines that address unmet treatment needs for rare and rheumatic diseases . by fostering a growing pipeline of medicines in development and exploring all potential uses for currently marketed medicines , we strive to make a powerful difference for patients , their caregivers and physicians . our marketed medicines are : orphan business unit ravicti ® ( glycerol phenylbutyrate ) oral liquid procysbi ® ( cysteamine bitartrate ) delayed-release capsules actimmune ® ( interferon gamma-1b ) ; marketed as imukin ® outside the united states , canada and japan buphenyl ® ( sodium phenylbutyrate ) tablets and powder ; marketed as ammonaps ® in certain european countries and japan quinsair ( levofloxacin inhalation solution ) rheumatology business unit krystexxa ® ( pegloticase ) rayos ® ( prednisone ) delayed-release tablets ; marketed as lodotra ® outside the united states primary care business unit pennsaid ® ( diclofenac sodium topical solution ) 2 % w/w , or pennsaid 2 % duexis ® ( ibuprofen/famotidine ) vimovo ® ( naproxen/esomeprazole magnesium ) migergot ® ( ergotamine tartrate & caffeine suppositories ) during the years ended december 31 , 2017 , 2016 and 2015 , we completed the following acquisitions and divestitures : on june 30 , 2017 , we completed our acquisition of certain rights to interferon gamma-1b from boehringer ingelheim international gmbh , or boehringer ingelheim international , in all territories outside of the united states , canada and japan . on june 23 , 2017 , we sold our european subsidiary that owned the marketing rights to procysbi ® ( cysteamine bitartrate ) delayed-release capsules and quinsair ( levofloxacin inhalation solution ) in europe , the middle east and africa , or emea , regions , or the chiesi divestiture , to chiesi farmaceutici s.p.a. , or chiesi . on may 8 , 2017 , we completed our acquisition of river vision development corp. , or river vision , which added the late development-stage rare disease biologic medicine candidate teprotumumab to our research and development pipeline . on october 25 , 2016 , we completed our acquisition of raptor pharmaceutical corp. , or raptor , which added the rare disease medicines procysbi and quinsair to our medicine portfolio . on january 13 , 2016 , we completed our acquisition of crealta holdings llc , or crealta , which added the rare disease medicine krystexxa and the primary care medicine migergot to our medicine portfolio . on may 7 , 2015 , we completed our acquisition of hyperion therapeutics , inc. , or hyperion , which added the rare disease medicines ravicti and buphenyl to our medicine portfolio . story_separator_special_tag this settlement was accounted for as a reduction of net sales in the consolidated statement of comprehensive loss for the year ended december 31 , 2016. the table below reconciles our gross to net sales for the years ended december 31 , 2017 and 2016 ( in millions ) : replace_table_token_11_th 91 during the year ended december 31 , 2017 , wholesaler fees and commercial rebates , as a percentage of gross sales , increased to 15.8 % from 4.2 % during the year ended december 31 , 2016 , and co-pay and other patient assistance , as a percentage of gross sales , decreased to 47.0 % from 52.6 % during the year ended december 31 , 2016. during the second half of 2016 , we entered into business arrangements with pbms and other payers in an effort to secure formulary status and reimbursement of our medicines , such as our arrangements with express scripts , cvs caremark and prime therapeutics llc , which resulted in lower co-pay and other patient assistance costs as a percentage of gross sales during the year ended december 31 , 2017. the mix of pbm healthcare plans that adopted our primary care medicines onto their formulary during 2017 was more heavily weighted towards those plans for which we pay a higher commercial rebate . in addition , we also experienced a higher rate of managed care control in our non-contracted business , which resulted in significantly lower net pricing during the year ended december 31 , 2017 , when compared to the year ended december 31 , 2016. on a quarter-to-quarter basis , our net sales have traditionally been lower in first half of the year , particularly in the first quarter , with the second half of the year representing a greater share of overall net sales each year . this is due to annual managed care plan changes and the re-setting of patients ' medical insurance deductibles at the beginning of each year , resulting in higher co-pay and other patient assistance costs as patients meet their annual medical insurance deductibles during the first and second quarters , and higher net sales in the second half of the year after patients meet their deductibles and healthcare plans reimburse a greater portion of the total cost of our medicines . cost of goods sold . cost of goods sold increased $ 153.0 million to $ 546.3 million during the year ended december 31 , 2017 , from $ 393.3 million during the year ended december 31 , 2016. as a percentage of net sales , cost of goods sold was 51.7 % during the year ended december 31 , 2017 , compared to 40.1 % during the year ended december 31 , 2016. costs of goods sold as a percentage of net sales was higher during the year ended december 31 , 2016 due to the one-time reduction in net sales in the year ended december 31 , 2016 as a result of the litigation settlement with express scripts . additionally , we recorded an increase in cost of goods sold in the year ended december 31 , 2017. the increase in cost of goods sold was primarily attributable to a $ 59.9 million increase in intangible amortization expense , a $ 48.0 million increase in inventory step-up expense , a $ 20.7 million increase in royalty remeasurement expense , a $ 10.7 million increase in drug substance harmonization costs , a $ 10.5 million increase in royalty accretion expense and a $ 9.6 million increase in employee costs , which reflects the increase in manufacturing activities resulting from the growth of our medicine portfolio . during the year ended december 31 , 2016 we recorded a loss of $ 14.3 million in relation to purchase commitments with boehringer ingelheim , which related to additional units of actimmune following the cancellation of the phase 3 trial , safety , tolerability and efficacy of actimmune dose escalation in friedreich 's ataxia study , or the fa program . during the year ended december 31 , 2017 , we updated our forecast for future demand and renegotiated our purchase commitments with boehringer ingelheim and recorded additional net expense of $ 1.7 million to cost of goods sold . the increase in intangible amortization of $ 59.9 million during the year ended december 31 , 2017 compared to the prior year was primarily due to an increase of $ 59.1 million in amortization of developed technology related to procysbi ( acquired in october 2016 ) . because inventory step-up expense is acquisition-related , will not continue indefinitely and has a significant effect on our gross profit , gross margin percentage and net income ( loss ) for all affected periods , we disclose balance sheet and income statement amounts related to inventory step-up within the notes to the consolidated financial statements . the increase in inventory step-up expense of $ 48.0 million recorded to cost of goods sold during the year ended december 31 , 2017 compared to the prior year was primarily due to krystexxa inventory step-up expense of $ 78.3 million ( acquired in january 2016 ) and procysbi and quinsair inventory step-up expense of $ 40.8 million ( acquired in october 2016 ) recorded during the year ended december 31 , 2017 , compared to $ 48.8 million recorded during the year ended december 31 , 2016 related to krystexxa and migergot inventory step-up expense and $ 22.3 million recorded related to procysbi and quinsair inventory step-up expense . 92 research and development expenses . research and development expenses increased $ 164.3 million to $ 225.0 million during the year ended december 31 , 2017 , from $ 60.7 million during the year ended december 31 , 2016. the increase was primarily attributable to $ 150.3 million related to the acquisition of river vision during the year ended december 31 , 2017. pursuant to accounting standards codification topic 805 , business combinations , or asc 805 , as amended by asu no .

results of operations year ended december 31 , 2017 compared to year ended december 31 , 2016 replace_table_token_8_th net sales . net sales increased $ 75.1 million , or 8 % , to $ 1,056.2 million during the year ended december 31 , 2017 , from $ 981.1 million during the year ended december 31 , 2016 , primarily due to lower net sales during the year ended december 31 , 2016 , as a result of the $ 65.0 million litigation settlement with express scripts , inc. , or express scripts . the following table presents a summary of total net sales attributed to geographic sources for the years ended december 31 , 2017 and 2016 ( in thousands ) : replace_table_token_9_th 89 the following table reflects the components of net sales for the years ended december 31 , 2017 and 2016 ( in thousands ) : replace_table_token_10_th net sales were higher during the year ended december 31 , 2017 compared to the year ended december 31 , 2016 , primarily due to lower net sales during the year ended december 31 , 2016 as a result of the $ 65.0 million litigation settlement with express scripts , the recognition of procysbi sales following the acquisition of raptor in october 2016 and higher net sales of krystexxa and ravicti , offset by lower net sales of pennsaid 2 % , vimovo and duexis . ravicti . net sales increased $ 42.4 million , or 28 % , to $ 193.9 million during the year ended december 31 , 2017 , from $ 151.5 million during the year ended december 31 , 2016. net sales in the united states increased by approximately $ 39.4 million , which was composed of $ 31.5 million resulting from prescription volume growth and $ 7.9 million due to higher net pricing . net sales outside the united states increased by approximately $ 3.0 million primarily due to higher sales volume . pennsaid 2 % .

our consolidated financial statements have been prepared and , unless otherwise stated , the information derived therefrom as presented in this discussion and analysis is presented , in accordance with accounting principles generally accepted in the united states of america ( u.s. gaap ) . in addition to historical information , the following discussion contains forward-looking statements based upon our current views , expectations and assumptions that are subject to risks and uncertainties . actual results may differ substantially from those expressed or implied by any forward-looking statements due to a number of factors , including , among others , the risks described in the “ risk factors ” section and elsewhere in this annual report . as used in this discussion and analysis , unless the context indicates otherwise , the terms the “ company , ” “ innovus , ” “ we , ” “ us , ” and “ our ” refer to innovus pharmaceuticals , inc. and its consolidated subsidiaries , consisting of novalere , inc. ( novalere ) , semprae laboratories , inc. ( semprae ) , fastrack pharmaceuticals , inc. ( fastrack ) , supplement hunt , inc. ( supplement hunt ) , and prime savings club , inc. ( prime savings club ) . overview we are an emerging over-the-counter ( “ otc ” ) consumer goods and specialty pharmaceutical company engaged in the commercialization , licensing and development of safe and effective non-prescription medicine , consumer care products , supplements and medical devices to improve men 's and women 's health and vitality . our products currently focus in six main categories including sexual health , pain management , general muscle health , respiratory , sleep , and diabetic care . we deliver innovative and unique health solutions of otc medicines , devices , consumer and health products , and clinical supplements through four general channels including direct to consumer marketing , e-commerce , retail/wholesale , and international distribution . collectively these channels make up our proprietary beyond human ® sales & marketing platform , which was acquired 2016 , and significantly expanded through the development of proprietary algorithms to target consumers and improve efficiency and return in 2018. we are dedicated to being a leader in developing and marketing new otc and branded abbreviated new drug application ( “ anda ” ) products , supplements and medical devices . we are actively pursuing opportunities where existing prescription drugs have recently , or are expected to , change from prescription ( or rx ) to otc . these “ rx-to-otc switches ” require food and drug administration ( “ fda ” ) approval through a process initiated by the new drug application ( “ nda ” ) holder . our business model leverages our ability to ( a ) develop and build our current pipeline of proprietary products , and ( b ) to also acquire outright or in-license commercial products that are supported by scientific and or clinical evidence , place them through our existing supply chain , retail and on-line ( including our amazon® , ebay® , wish.com , walmart.com® , and walgreens.com on-line stores and our own product websites and platforms among other e-commerce business platforms ) channels to tap new markets and drive demand for such products and to establish physician relationships . -21- our strategy our corporate strategy focuses on two primary objectives : 1. developing a diversified product portfolio of exclusive , unique and patented non-prescription otc and branded anda drugs , devices , consumer health products , and clinical supplements through : ( a ) the introduction of line extensions and reformulations of either our or third-party currently marketed products ; ( b ) the development of new proprietary otc products , supplements and devices ; and ( c ) the acquisition of products or obtaining exclusive licensing rights to market such products ; and 2. building an innovative , u.s. and global sales and marketing model through direct to consumer approaches such as our proprietary beyond human® sales and marketing platform , the addition of new online platforms such as amazon® , ebay® , wish.com , sears.com , walmart.com® and walgreens.com and commercial partnerships with established international complementary partners that : ( a ) generates revenue , and ( b ) requires a lower cost structure compared to traditional pharmaceutical companies , thereby increasing our gross margins . 3. developing and acquiring on-line marketplaces such as supplementhunt.com and primesavingsclub.com that focus on certain market segments such as lower priced , soon to expire supplement business with the supplementhunt.com acquisition and with the select consumer product business through primesavingsclub.com among others in which we sell third party , brand or non-branded products . our products marketed products we currently market and sell over 35 products in the u.s. and more than 10 in multiple countries around the world through our 12 international commercial partners . we have five core products which we define as having more than $ 1.0 million in annual sales or rapidly growing product . the following represents these core products : 1. vesele® 2. urivarx® 3. fluticare® 4. apeaz® 5. diabasens® 6. prostagorx ® 7. sensum ® in addition , we currently expect to launch in the u.s. the following products in 2019 , subject to the applicable regulatory approvals , if required : 1. thermomax® is a hand cream with two strengths that provides up to eight hours of hand warming relief ( second quarter of 2019 ) ; 2. breastlift is a clinically tested cream to provide safe and natural way to firm sagging breasts ( second quarter of 2019 ) ; 3. healthifeet ® is a foot cream that provides foot warming relief ( second quarter of 2019 ) ; 4. mzs sleeping aid with hemp-derived thc-free oil and melatonin is in tincture form ( launched in first quarter of 2019 ) ; 5. trexar is a supplement to provide neuropathy support and enhanced sensation ( second quarter of 2019 ) ; 6. musclin ® is a proprietary supplement made of two fda generally recognized as safe ( gras ) approved ingredients story_separator_special_tag private placement on january 3 , 2019 , the company completed a sale of common stock and warrants under a securities purchase agreement with an accredited investor , pursuant to which the company sold an aggregate of 431,490 units ( “ units ” ) for $ 7.35 per unit , with each unit consisting of ( i ) one share of common stock ( “ shares ” ) , ( ii ) one warrant to purchase one share of common stock at an exercise price of $ 7.35 per share ( “ series a warrant ” ) , and ( iii ) one warrant to purchase one share of common stock at an exercise price of $ 8.40 per share ( “ series b warrant ” ) ( the “ private placement ” ) ; provided , however , that in order to ensure that the investor 's beneficial ownership did not exceed 9.99 % of the outstanding shares of our common stock , the investor elected to exercise its right to purchase 200,637 prefunded warrants ( “ series c warrants , ” and together with the series a warrants and series b warrants , the “ investor warrants ” ) in lieu of shares as part of the units , which series c warrants have a nominal exercise price of $ 0.105 per share . in addition , the company issued series b warrants to purchase 32,362 shares of common stock , an amount equal to 7.5 % of the aggregate number of shares , including series c warrants , sold in the private placement , at an exercise price of $ 9.19 per share ( the “ placement agent warrants ” ) to the designees of h.c. wainwright & co. , llc ( the “ placement agent ” ) , the company ' s sole placement agent , as compensation for its services in connection with the private placement . the investor warrants and placement agent warrants are exercisable immediately upon issuance , subject to an issuance limitation set forth therein equal to the number of authorized and unreserved shares of our common stock available for issuance on the date thereof , and shall terminate as follows : ( i ) the series a warrants shall terminate 18-months from the date of the reverse split , ( ii ) the series b warrants shall terminate five and a half years from the date of the reverse split , and ( iii ) the series c warrants shall terminate at such time that they are exercised in full . in addition , each of the investor warrants contains a 4.99 % beneficial ownership limitation , which may be increased up to 9.99 % at the sole option of the investor upon 61 day prior notice to the company ( the “ beneficial ownership limitation ” ) , and which prevents the investor from exercising the investor warrants in the event such exercise would cause the investor 's beneficial ownership of the company 's outstanding shares of common stock to exceed the beneficial ownership limitation .  in connection with the sale of the units , the company granted certain registration rights with respect to the shares and shares of common stock issuable upon exercise of the investor warrants , pursuant to a registration rights agreement by and between us and the investor ( the “ registration rights agreement ” ) . under the terms of the registration rights agreement , we agreed to file a registration statement no later than 30 days after the closing date in order to register the shares and shares of common stock underlying the investor warrants sold and issued in connection with the private placement which was filed on january 14 , 2019 and declared effective on february 12 , 2019. we also agreed to register the shares of common stock underlying the placement agent warrants issued to the placement agent 's designees as compensation for its services in connection with the private placement . asset purchase agreement on january 1 , 2019 , the company completed an asset purchase agreement ( “ apa ” ) , pursuant to which the company agreed to purchase substantially all of the assets of prime consultants , llc for a total cash payment of $ 343,000 ( the “ purchase price ” ) . of the total purchase price , the company acquired $ 313,000 of inventory . prime consultants , llc is an e-commerce business with sales of products primarily through the amazon platform generating approximately $ 2.8 million in revenue in 2018 . -23- story_separator_special_tag style= '' background-color : null ; '' > we recognized interest expense of approximately $ 1.4 million and $ 0.9 million for the years ended december 31 , 2018 and 2017 , respectively . interest expense primarily includes interest related to our debt , amortization of debt discounts and the fair value of the embedded conversion feature derivative liability in excess of the proceeds allocated to the debt in 2017 ( see note 5 to the accompanying consolidated financial statements included elsewhere in this annual report ) . due to the shares , warrants and cash discounts provided to our lenders , the effective interest rate is significantly higher than the coupon rate . the increase in interest expense during the year ended december 31 , 2018 is due to the increase in the note agreements entered into during the year to enable us to increase the sales and marketing throughout the period . we recognized a loss on extinguishment of debt of approximately $ 1.3 million during the year ended december 31 , 2018. the loss on debt extinguishment was the result of the securities exchange agreements entered into with certain notes payable holders . in exchange for the settlement of approximately $ 1.9 million in principal and interest , we issued 195,185 shares of our common stock to such holders , with an aggregate fair value of $ 2.9 million .

results of operations year ended december 31 , 2018 compared to year ended december 31 , 2017 ( dollars in thousands ) replace_table_token_2_th net revenue we recognized net revenue of approximately $ 24.0 million and $ 8.8 million for the years ended december 31 , 2018 and 2017 , respectively . the increase in net revenue in 2018 was primarily the result of new product launches in late 2017 and 2018 as well as an increase in marketing spend through the sales and marketing platform acquired in the beyond human® asset acquisition in march 2016. diabasens ® was launched in the first quarter of 2018 , and we recognized net sales of approximately $ 5.5 million during the fiscal year and established a subscription base of approximately $ 108,000 monthly as of december 31 , 2018. during the fourth quarter of 2016 we launched urivarx® and during 2017 we launched prostagorx® , apeaz® and arthrivarx® , three of the four of which were core products in fiscal 2018 and collectively recognized net sales of approximately $ 9.5 million during the year ended december 31 , 2018 compared with $ 4.3 million during the year ended december 31 , 2017 and established a subscription base of approximately $ 137,000 monthly as of december 31 , 2018. two of our historical products , vesele® and sensum+® , also recognized continued growth in the year ended december 31 , 2018 , generating net revenue of $ 5.4 million compared with $ 3.4 million during the year ended december 31 , 2017. the following represents the number of units of our top products shipped in north america during the years ended december 31 , 2018 and 2017 : replace_table_token_3_th -24- cost of product sales we recognized cost of product sales of approximately $ 4.3 million and $ 1.8 million for the years ended december 31 , 2018 and 2017 , respectively .

the company records its federal income taxes in accordance with accounting for income taxes under gaap which results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the book carrying amounts and the tax basis of assets and liabilities . deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable 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. the following discussion contains “ forward-looking statements ” that reflect our future plans , estimates , beliefs and expected performance . we caution that assumptions , expectations , projections , intentions or beliefs about future events may , and often do , vary from actual results , and the differences can be material . some of the key factors which could cause actual results to vary from our expectations include changes in oil and natural gas prices , weather and environmental conditions , the timing of planned capital expenditures , availability of acquisitions , uncertainties in estimating proved reserves and forecasting production results , operational factors affecting the commencement or maintenance of producing wells , the condition of the capital markets generally , as well as our ability to access them , the proximity to and capacity of transportation facilities , and uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business , as well as those factors discussed below and elsewhere in this annual report on form 10-k , all of which are difficult to predict . in light of these risks , uncertainties and assumptions , the forward-looking events discussed may not occur . see “ cautionary note regarding forward-looking statements. ” overview we are an independent e & p company focused on the acquisition and development of unconventional oil and natural gas resources primarily in the north dakota and montana regions of the williston basin . since our inception , we have acquired properties that provide current production and significant upside potential through further development . our drilling activity is primarily directed toward projects that we believe can provide us with repeatable successes in the bakken and three forks formations . opna conducts our domestic oil and natural gas e & p activities . we also operate a midstream services business through oms and a well services business through ows , both of which are separate reportable business segments that are complementary to our primary development and production activities . the revenues and expenses related to work performed by oms and ows for opna 's working interests are eliminated in consolidation and , therefore , do not directly contribute to our consolidated results of operations . our use of capital for acquisitions and development allows us to direct our capital resources to what we believe to be the most attractive opportunities as market conditions evolve . we have historically acquired properties that we believe will meet or exceed our rate of return criteria . we built our williston basin assets through acquisitions and development activities , which were financed with a combination of capital from private investors , borrowings under our revolving credit facility , cash flows provided by operating activities , proceeds from our notes , proceeds from our public equity offerings , the sale of certain non-core oil and gas properties and cash settlements of derivative contracts . for acquisitions of properties with additional development , exploitation and exploration potential , we have focused on acquiring properties that we expect to operate so that we can control the timing and implementation of capital spending . in some instances , we have acquired non-operated property interests at what we believe to be attractive rates of return either because they provided an entry into a new area of interest or complemented our existing operations . in addition , the acquisition of non-operated properties in new areas provides us with geophysical and geologic data that may lead to further acquisitions in the same area , whether on an operated or non-operated basis . we intend to continue to acquire both operated and non-operated properties to the extent we believe they meet our return objectives . due to the geographic concentration of our oil and natural gas properties in the williston basin , we believe the primary sources of opportunities , challenges and risks related to our business for both the short and long-term are : commodity prices for oil and natural gas ; transportation capacity ; availability and cost of services ; and availability of qualified personnel . our revenue , profitability and future growth rate depend substantially on factors beyond our control , such as economic , political and regulatory developments as well as competition from other sources of energy . prices for oil and natural gas can fluctuate widely in response to relatively minor changes in the global and regional supply of and demand for oil and natural gas , as well as market uncertainty , economic conditions and a variety of additional factors . since the inception of our oil and natural gas activities , commodity prices have experienced significant fluctuations and may fluctuate widely in the future . as a result of current oil prices , we have increased our planned 2017 capital expenditures as compared to 2016 , excluding acquisitions , and we are continuing to concentrate our drilling activities in certain areas that are the most economic in the williston basin . extended periods of low prices for oil or natural gas could materially and adversely affect our financial position , our results of operations , the quantities of oil and natural gas reserves that we can economically produce and our access to capital . story_separator_special_tag the unweighted arithmetic average first-day-of-the-month prices for the prior twelve months for the years ended december 31 , 2016 , 2015 and 2014 were $ 42.60 per bbl for oil and $ 2.47 per mmbtu for natural gas , $ 50.16 per bbl for oil and $ 2.63 per mmbtu for natural gas and $ 95.28 per bbl for oil and $ 4.35 per mmbtu for natural gas , respectively . these prices were adjusted by lease for quality , transportation fees , geographical differentials , marketing bonuses or deductions and other factors affecting the price received at the wellhead . future operating costs , production taxes and capital costs were based on current costs as of each year-end . changes in commodity prices and future operating costs may significantly affect the economic viability of drilling projects as well as the economic valuation and economic recovery of oil and gas reserves . an extended period of low oil prices could result in a significant decrease in our estimated net proved reserves and related future net revenues , pv-10 and standardized measure in the future . forward commodity prices and estimates of future production also play a significant role in determining impairment . as a result of lower commodity prices and their impact on our estimated future cash flows , we have continued to review our proved oil and natural gas properties for impairment . in 2014 , we recorded a proved impairment loss of $ 40.0 million due to lower oil prices . in 2015 and 2016 , we recorded an impairment charge of $ 9.4 million and $ 1.1 million to write down our proved properties held for sale to their estimated fair value , less costs to sell . no other proved impairment charges were recorded during the year ended december 31 , 2016. in addition , the excess of our expected undiscounted future cash flows over the carrying value of our proved oil and natural gas properties in the bakken and three forks formations has increased to $ 4,111.9 million as of december 31 , 2016 , an increase of approximately 225 % as compared to an excess of $ 1,264.8 million at december 31 , 2015. the underlying commodity prices embedded in our expected undiscounted cash flows were determined using nymex forward strip prices for five years , escalating 3 % per year thereafter . our expected undiscounted estimated cash flows also included a 3 % inflation factor applied to the future operating and development costs after five years . if expected future commodity prices decline by approximately 30 % as compared to december 31 , 2016 , holding all other factors constant , the expected undiscounted cash flows may not exceed the carrying value of our proved oil and natural gas properties in the bakken and three forks formations , and as a result , we may recognize additional proved impairment charges in the future , and such impairment charges could exceed $ 2.5 billion assuming a discount rate of 10 % . 2016 story_separator_special_tag style= '' line-height:120 % ; font-size:10pt ; '' > 55 offset by our 38.1 total net well completions in the core of the williston basin , which had higher gas to oil ratios that resulted in a 40 % increase in natural gas production sold year over year , and the williston basin acquisition completed on december 1 , 2016. see note 6 to our audited consolidated financial statements for a description of our acquisitions and divestitures . midstream revenues . midstream revenues were $ 35.4 million for the year ended december 31 , 2016 , which was a $ 11.6 million increase year over year . this increase was driven by a $ 6.1 million increase related to higher natural gas volumes gathered and processed with the start up of our natural gas processing plant in the third quarter of 2016 , coupled with a $ 6.0 million increase related to increased water volumes flowing through our salt water disposal systems as a result of new well connections and capacity additions . well services revenues . in response to the low commodity price environment , we decreased the pace of our well completions and reduced ows to one fracturing fleet during the first quarter of 2016. as a result , our well services revenues decreased by $ 10.5 million to $ 33.8 million for the year ended december 31 , 2016 as compared to the year ended december 31 , 2015 . well completion revenue decreased $ 7.8 million year over year due to the decreased activity , partially offset by the impact of ows completing opna wells with a higher average third-party working interest year over year . in addition , product sales to third parties decreased $ 1.7 million as a result of ows completing all of opna 's operated wells and equipment rentals decreased $ 1.0 million in 2016 as compared to 2015. year ended december 31 , 2015 as compared to year ended december 31 , 2014 oil and gas revenues . our oil and gas revenues decreased $ 582.3 million , or 45 % , to $ 721.7 million during the year ended december 31 , 2015 compared to the year ended december 31 , 2014 , primarily due to lower realized oil and natural gas sales prices , partially offset by increased production volumes sold . average daily production sold increased by 4,821 boe per day , or 11 % , to 50,477 boe per day during the year ended december 31 , 2015 as compared to the year ended december 31 , 2014. the increase in average daily production sold was primarily a result of our 64.3 total net well completions in the williston basin during 2015 , offset by the natural decline in production in wells that were producing as of december 31 , 2014. production from wells completed contributed to average daily production during 2015 by approximately 11,366 boe per day .

highlights average daily production was 50,372 boe per day in 2016. we completed and placed on production 57 gross ( 37.6 net ) operated wells during 2016 . as of december 31 , 2016 , the company had 83 gross operated wells awaiting completion . we closed on an accretive acquisition of approximately 55,000 net acres on december 1 , 2016 in the williston basin ( the “ williston basin acquisition ” ) for a purchase price of $ 765.8 million , subject to further customary post-close purchase price adjustments . we completed and brought online our natural gas processing plant and other midstream infrastructure in wild basin . excluding acquisitions , capital expenditures were $ 400.0 million for the year ended december 31 , 2016 , a 31 % decrease as compared to 2015 . we increased total net proved oil and natural gas reserves at december 31 , 2016 by 40 % to 305.1 mmboe , which included an increase of almost 30 % in net proved developed reserves and more than 60 % in net proved undeveloped reserves year over year . we ended the year with a leasehold position of 517,801 total net acres in the williston basin , primarily targeting the bakken and three forks formations . in addition , we increase d our acreage that is held by production to 484,321 net acres as of december 31 , 2016 . we decreased lease operating expenses per boe to $ 7.35 per boe for the year ended december 31 , 2016 . we completed a $ 300.0 million public offering of senior unsecured convertible notes due 2023 and repurchased an aggregate principal amount of $ 447.0 million of our outstanding senior notes . at december 31 , 2016 , we had $ 11.2 million of cash and cash equivalents and had total liquidity of $ 785.9 , including the availability under our revolving credit facility .

we believe that one of our major strengths is our ability to deliver comprehensively structured insurance and risk management services to our clients . our brokers , agents and administrators act as intermediaries between underwriting enterprises and our clients and we do not assume net underwriting risks . we are headquartered in rolling meadows , illinois , have operations in 49 countries and offer client-service capabilities in more than 150 countries globally through a network of correspondent brokers and consultants . in 2019 , we expanded , and expect to continue to expand , our international operations through both acquisitions and organic growth . we generate approximately 69 % of our revenues for the combined brokerage and risk management segments domestically , with the remaining 31 % derived internationally , primarily in australia , bermuda , canada , the caribbean , new zealand and the u.k. ( based on 2019 revenues ) . we expect that our international revenue as a percentage of our total revenues in 2020 will be comparable to 2019. we have three reportable segments : brokerage , risk management and corporate , which contributed approximately 68 % , 14 % and 18 % , respectively , to 2019 revenues . our major sources of operating revenues are commissions , fees and supplemental and contingent revenues from brokerage operations and fees from risk management operations . investment income is generated from invested cash and fiduciary funds , clean energy investments , and interest income from premium financing . this management 's discussion and analysis of financial condition and results of operations contains certain statements relating to future results which are forward-looking statements as that term is defined in the private securities litigation reform act of 1995. please see “ information concerning forward-looking statements ” at the beginning of this annual report , for certain cautionary information regarding forward-looking statements and a list of factors that could cause our actual results to differ materially from those predicted in the forward-looking statements . summary of financial results - year ended december 31 , see the reconciliations of non-gaap measures on pages 27 and 28. replace_table_token_4_th 26 in our corporate segment , net after tax earnings from our clean energy investments was $ 88.5 million and $ 118.6 million in 2019 and 2018 , respectively . our current estimate of the 2020 annual net after tax earnings , including irc section 45 tax credits , which will be produced from all of our clean energy investments in 2020 , is $ 80.0 million to $ 100.0 million . we expect to use the additional cash flow generated by these earnings to continue our mergers and acquisition strategy in our core brokerage and risk management operations . the following provides information that management believes is helpful when comparing revenues before reimbursements , net earnings , ebitdac and diluted net earnings per share for 2019 and 2018. in addition , these tables provide reconciliations to the most comparable gaap measures for adjusted revenues , adjusted ebitdac and adjusted diluted net earnings per share . reconciliations of ebitdac for the brokerage and risk management segments are provided on pages 35 and 41 of this filing . replace_table_token_5_th * for 2019 , the pretax impact of the brokerage segment adjustments totals $ 10.4 million , with a corresponding adjustment to the provision for income taxes of $ 0.9 million relating to these items . the pretax impact of the risk management segment adjustments totals $ 5.5 million , with a corresponding adjustment to the provision for income taxes of $ 1.3 million relating to these items . the pretax impact of the corporate segment adjustments totals $ 17.9 million , with an adjustment to the benefit for income taxes of $ 3.9 million . for the corporate segment , the clean energy related adjustments are described on pages 47 to 48. for 2018 , the pretax impact of the brokerage segment adjustments totals $ 51.0 million , with a corresponding adjustment to the provision for income taxes of $ 12.9 million relating to these items . the pretax impact of the risk management segment adjustments totals $ ( 3.2 ) million , with a corresponding adjustment to the provision for income taxes of $ ( 1.0 ) million relating to these items . there was no pretax impact of the corporate segment adjustments , with an adjustment to the benefit for income taxes of $ 30.9 million . 27 reconciliation of non-gaap measures - pre-tax earnings and diluted net earnings per share ( in millions except share and per share data ) replace_table_token_6_th insurance market overview fluctuations in premiums charged by property/casualty underwriting enterprises have a direct and potentially material impact on the insurance brokerage industry . commission revenues are generally based on a percentage of the premiums paid by insureds and normally follow premium levels . insurance premiums are cyclical in nature and may vary widely based on market conditions . various factors , including competition for market share among underwriting enterprises , increased underwriting capacity and improved economies of scale following consolidations , can result in flat or reduced property/casualty premium rates ( a “ soft ” market ) . a soft market tends to put downward pressure on commission revenues . various countervailing factors , such as greater than anticipated loss experience , unexpected loss exposure and capital shortages , can result in increasing property/casualty premium rates ( a “ hard ” market ) . a hard market tends to favorably impact commission revenues . hard and soft markets may be broad-based or more narrowly focused across individual product lines or geographic areas . as markets 28 harden , buyers of insurance ( such as our brokerage clients ) , have historically tried to mitigate premium increases and the higher commissions these premiums generate , including by raising their deductibles and or reducing the overall amount of insurance coverage they purchase . as the market softens , or costs decrease , these trends have historically reversed . story_separator_special_tag uncertain tax positions are measured based upon the facts and circumstances that exist at each reporting period and involve significant management judgment . subsequent changes in judgment based upon new information may lead to changes in recognition , derecognition and measurement . adjustments may result , for example , upon resolution of an issue with the taxing authorities , or expiration of a statute of limitations barring an assessment for an issue . we recognize interest and penalties , if any , related to unrecognized tax benefits in our provision for income taxes . see note 19 to our 2019 consolidated financial statements for a discussion regarding the possibility that our gross unrecognized tax benefits balance may change within the next twelve months . tax law requires certain items to be included in our tax returns at different times than such items are reflected in the financial statements . as a result , the annual tax expense reflected in our consolidated statements of earnings is different than that reported in our tax returns . some of these differences are permanent , such as expenses that are not deductible in our tax returns , and some differences are temporary and reverse over time , such as depreciation expense and amortization expense deductible for income tax purposes . temporary differences create deferred tax assets and liabilities . deferred tax liabilities generally represent tax expense recognized in the financial statements for which a tax payment has been deferred , or expense which has been deducted in the tax return but has not yet been recognized in the financial statements . deferred tax assets generally represent items that can be used as a tax deduction or credit in tax returns in future years for which a benefit has already been recorded in the financial statements . in fourth quarter 2017 , new tax legislation was enacted in the u.s. , which lowered the u.s. corporate tax rate from 35.0 % to 21.0 % effective january 1 , 2018. accordingly , we adjusted our deferred tax asset and liability balances in 2017 to reflect this rate change . we establish or adjust valuation allowances for deferred tax assets when we estimate that it is more likely than not that future taxable income will be insufficient to fully use a deduction or credit in a specific jurisdiction . in assessing the need for the recognition of a valuation allowance for deferred tax assets , we consider whether it is more likely than not that some portion , or all , of the deferred tax assets will not be realized and adjust the valuation allowance accordingly . we evaluate all significant available positive and negative evidence as part of our analysis . negative evidence includes the existence of losses in recent years . positive evidence includes the forecast of future taxable income by jurisdiction , tax-planning strategies that would result in the realization of deferred tax assets and the presence of taxable income in prior carryback years . the underlying assumptions we use in forecasting future taxable income require significant judgment and take into account our recent performance . such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein . the ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which temporary differences are deductible or creditable . see note 19 to our 2019 consolidated financial statements related to changes in our valuation allowances . intangible assets/earnout obligations - see intangible assets in note 1 to our 2019 consolidated financial statements . current accounting guidance related to business combinations requires us to estimate and recognize the fair value of liabilities related to potential earnout obligations as of the acquisition dates for all of our acquisitions subject to earnout provisions . the maximum potential earnout payables disclosed in the notes to our consolidated financial statements represent the maximum amount of additional consideration that could be paid pursuant to the terms of the purchase agreement for the applicable acquisition . the amounts recorded as earnout payables , which are primarily based upon the estimated future operating results of the acquired entities over a two- to three-year period subsequent to the acquisition date , are measured at fair value as of the acquisition date and are included on that basis in the recorded purchase price consideration . we will record subsequent changes in these estimated earnout obligations , including the accretion of discount , in our consolidated statement of earnings when incurred . the fair value of these earnout obligations is based on the present value of the expected future payments to be made to the sellers of the acquired entities in accordance with the provisions outlined in the respective purchase agreements , which is a level 3 fair value measurement . in determining fair value , we estimate the acquired entity 's future performance using financial projections developed by management for the acquired entity and market participant assumptions that were derived for revenue growth and or profitability . we estimate future payments using the earnout formula and performance targets specified in each purchase agreement and these financial projections . we then discount these payments to present value using a risk-adjusted rate that takes into consideration market-based rates of return that reflect the ability of the acquired entity to achieve the targets . changes in financial projections , market participant assumptions for revenue growth and or profitability , or the risk-adjusted discount rate , would result in a change in the fair value of recorded earnout obligations . see note 3 to our 2019 consolidated financial statements for additional discussion on our 2019 business combinations . 30 business combinations and dispositions see note 3 to our 2019 consolidated financial statements for a discussion of our 2019 business combinations .

results of operations information regarding non-gaap measures and other in the discussion and analysis of our results of operations that follows , in addition to reporting financial results in accordance with gaap , we provide information regarding ebitdac , ebitdac margin , adjusted ebitdac , adjusted ebitdac margin , adjusted ebitdac margin ( before acquisitions ) , diluted net earnings per share , as adjusted ( adjusted eps ) , adjusted revenues , adjusted compensation and operating expenses , adjusted compensation expense ratio , adjusted operating expense ratio and organic revenue . these measures are not in accordance with , or an alternative to , the gaap information provided in this report . we believe that these presentations provide useful information to management , analysts and investors regarding financial and business trends relating to our results of operations and financial condition because they provide investors with measures that our chief operating decision maker uses when reviewing the company 's performance , and for the other reasons described below . our industry peers may provide similar supplemental non-gaap information with respect to one or more of these measures , although they may not use the same or comparable terminology and may not make identical adjustments . the non-gaap information we provide should be used in addition to , but not as a substitute for , the gaap information provided . we make determinations regarding certain elements of executive officer incentive compensation , performance share awards and annual cash incentive awards , partly on the basis of measures related to adjusted ebitdac . adjusted non-gaap presentation - we believe that the adjusted non-gaap presentation of our 2019 , 2018 and 2017 information , presented on the following pages , provides stockholders and other interested persons with useful information regarding certain financial metrics that may assist such persons in analyzing our operating results as they develop a future earnings outlook for us .

in some cases , you can identify forward-looking statements by terminology such as “ may , ” “ will , ” “ expect , ” “ plan , ” “ anticipate , ” “ believe , ” “ estimate , ” “ intend , ” “ potential ” or “ continue ” or the negative of these terms or other comparable terminology . forward-looking statements involve risks and uncertainties . our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors , including product performance , a lack of acceptance in the marketplace by physicians and customers , insufficient customer demand , the inability to manufacture products in commercial quantities at an acceptable cost , possible delays in our research and development programs , the inability of customers to receive reimbursements from third-party payors , the impact of competitive products and pricing , our ability to obtain regulatory approvals and introduce new products , other uncertainties related to regulatory processes , our ability to respond to changing laws and regulations affecting our industry and changing enforcement practices related thereto , inadequate financial and other resources , global economic conditions , and the other risks set forth below under “ risk factors ” and elsewhere in this report . we assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results . overview we are a medical device company focused on the design , development and commercialization of continuous glucose monitoring systems for ambulatory use by people with diabetes and for use by healthcare providers in the hospital for the treatment of people with and without diabetes . the majority of our product revenue comes from sales of our g4 platinum ambulatory continuous glucose monitoring system , which we began commercializing in the fourth quarter of 2012. we also have received ce mark approval for the glucoclear in-hospital system , and in partnership with edwards , we initiated a very limited launch of the first generation glucoclear system in europe in 2009 and edwards initiated another limited launch in europe of the second generation glucoclear system in 2013. from inception to 2006 , we devoted substantially all of our resources to start-up activities , raising capital and research and development , including product design , testing , manufacturing and clinical trials . since 2006 , we have devoted considerable resources to the commercialization of our ambulatory continuous glucose monitoring systems , including the seven plus and g4 platinum , as well as the continued research and clinical development of our technology platform . as of december 31 , 2013 , we generated $ 431.1 million of product and development grant and other ( non-product ) revenue , and we have incurred net losses in each year since our inception in may 1999. as of december 31 , 2013 , we had an accumulated deficit of $ 475.4 million . we expect our losses to continue as we proceed with our commercialization and research and development activities . we have financed our operations primarily through offerings of equity securities and debt . in november 2012 , we entered into a loan and security agreement that provides for up to $ 35.0 million in credit facilities and term loans , with $ 28.0 million currently available . in july 2013 , we were awarded a $ 4.0 million grant from the helmsley trust to accelerate the development of the sixth generation of our advanced glucose-sensing technologies . financial operations revenue we expect that revenues we generate from the sales of our products will fluctuate from quarter to quarter . between 2008 and 2012 , we entered into joint development and collaboration agreements with animas and tandem , as well as other third parties under agreements that have since expired , under which we recognized development grant and other revenue received pursuant to that agreement ratably over the term of the development period . we recognize development milestones associated with each agreement as revenue upon achievement of each milestone if the milestone is considered substantive . cost of sales product cost of sales includes direct labor and materials costs related to each product sold or produced , including assembly , test labor and scrap , as well as factory overhead supporting our manufacturing operations . factory overhead includes facilities , material procurement and control , manufacturing engineering , quality assurance , supervision and management . these costs are primarily salary , fringe benefits , share-based compensation , facility expense , supplies and purchased services . a large portion of our costs are currently fixed due to our moderate level of production volumes compared to our potential capacity . all 47 of our manufacturing costs are included in product cost of sales . development and other cost of sales consists primarily of salaries , fringe , facilities , and supplies directly attributable to our development contracts . research and development our research and development expenses primarily consist of engineering and research expenses related to our continuous glucose monitoring technology , clinical trials , regulatory expenses , quality assurance programs , materials and products for clinical trials . research and development expenses are primarily related to employee compensation , including salary , fringe benefits , share-based compensation , and temporary employee expenses . we also incur significant expenses to operate our clinical trials including clinical site reimbursement , clinical trial product and associated travel expenses . our research and development expenses also include fees for design services , contractors and development materials . selling , general and administrative our selling , general and administrative expenses primarily consist of salary , fringe benefits and share-based compensation for our executive , financial , sales , marketing and administrative functions . other significant expenses include trade show expenses , sales samples , insurance , professional fees for our outside legal counsel and independent auditors , litigation expenses , patent application expenses and consulting expenses . story_separator_special_tag net cash provided by investing activities was $ 28.4 million for the twelve months ended december 31 , 2012 , compared to $ 46.4 million used in investing activities for the same period of 2011. the increase in cash provided by investing activities was primarily due to $ 36.3 million decrease in cash used to purchase available-for-sale marketable securities and by $ 40.0 million increase in proceeds from the maturity of available-for-sale marketable securities for the twelve months ended december 31 , 2012 as compared to the same period in 2011. for the twelve months ended december 31 , 2013 , 2012 and 2011 , we invested $ 7.9 million , $ 9.5 million and $ 8.0 million , respectively , to purchase equipment to support manufacturing improvements . net cash provided by financing activities . net cash provided by financing activities increased $ 1.6 million to $ 11.8 million for the twelve months ended december 31 , 2013 , compared to $ 10.2 million for the same period of 2012 . the increase was due to increased proceeds from the issuance of common stock pursuant to the exercise of then-outstanding stock options for the twelve months ended december 31 , 2013 compared to the same period of 2012 . net cash provided by financing activities decreased $ 64.0 million to $ 10.2 million for the twelve months ended december 31 , 2012 , compared to $ 74.2 million for the same period of 2011. the decrease was primarily due to the approximately $ 3.6 million in net proceeds generated by the sale of common stock for the twelve months ending december 31 , 2012 compared to approximately $ 74.7 million in the same period of 2011 , offset by net proceeds of $ 6.6 million from the loan and security agreement entered into during the twelve months ending december 31 , 2012 compared to none in the same period of 2011. operating capital and capital expenditure requirements we anticipate that we will continue to incur net losses as we incur expenses and expand the commercialization of our approved products , develop additional continuous glucose monitoring products , and expand our marketing , manufacturing and corporate infrastructure . we believe that our cash , cash equivalents , short-term marketable securities balances , and projected cash contributions from existing partnership arrangements will be sufficient to meet our anticipated cash requirements with respect to the continued scale-up of our commercialization activities , research and development activities , including clinical trials , the expansion of our marketing , manufacturing and corporate infrastructure , and to meet our other anticipated cash needs through at least december 31 , 2014 . if our available cash , cash equivalents and short-term marketable securities are insufficient to satisfy our liquidity requirements , or if we develop additional products , we may seek to sell additional equity or debt securities or obtain an additional credit facility . the sale of additional equity and debt securities may result in additional dilution to our stockholders . if we raise additional funds through the issuance of debt securities or preferred stock , these securities could have rights senior to those of our common stock and could contain covenants that would restrict our operations . we may require additional capital beyond our currently forecasted amounts . any such required additional capital may not be available on reasonable terms , if at all . additionally , there can be no assurance that we will be successful in obtaining additional cash contributions from future partnership arrangements . our ability to transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support our cost structure . if events or circumstances occur such that we do not meet our operating plan as expected , or if we are unable to obtain additional financing , we may be required to reduce planned increases in compensation related expenses or other operating expenses related to research , development , and commercialization activities , which could have an adverse impact on our ability to achieve our intended business objectives . 50 because of the numerous risks and uncertainties associated with the development of continuous glucose monitoring technologies , we are unable to estimate the exact amounts of capital outlays and operating expenditures associated with our current and anticipated clinical trials . our future funding requirements will depend on many factors , including , but not limited to : the revenue generated by sales of our approved products and other future products ; the expenses we incur in manufacturing , developing , selling and marketing our products ; the quality levels of our products and services ; the third-party reimbursement of our products for our customers ; our ability to efficiently scale our manufacturing operations to meet demand for our current and any future products ; the costs , timing and risks of delays of additional regulatory approvals ; the costs of filing , prosecuting , defending and enforcing any patent claims and other intellectual property rights , including , but not limited to , defending the patent infringement lawsuit filed against us by abbott ; the rate of progress and cost of our clinical trials and other development activities ; the success of our research and development efforts ; the emergence of competing or complementary technological developments ; the terms and timing of any collaborative , licensing and other arrangements that we may establish ; and the acquisition of businesses , products and technologies . on march 6 , 2012 , we acquired sweetspot . through our acquisition of sweetspot , we have a software platform that enables our customers to aggregate and analyze data from certain diabetes devices and to share it with their healthcare providers . in november 2011 , sweetspot received 510 ( k ) clearance from the fda to market to clinics a data management service , which helps healthcare providers and patients see , understand and use blood glucose meter data to diagnose and manage diabetes .

results of operations fiscal year ended december 31 , 2013 compared to december 31 , 2012 revenue , cost of sales and gross profit product revenue increased $ 64.1 million to $ 157.1 million for the twelve months ended december 31 , 2013 , compared to $ 93.0 million for the twelve months ended december 31 , 2012 based primarily on increased sales volume , due , in part , to the commercial launch in october 2012 of the g4 platinum system . product cost of sales increased $ 9.8 million to $ 58.1 million for the twelve months ended december 31 , 2013 , compared to $ 48.3 million for the twelve months ended december 31 , 2012 primarily due to increased sales volume . the product gross profit of $ 99.0 million for the twelve months ended december 31 , 2013 increased $ 54.3 million compared to $ 44.7 million for the same period in 2012 , primarily due to increased revenue , and the greater sales mix of our higher margin g4 platinum system compared to our seven plus system . development grant and other revenues decreased $ 4.0 million to $ 2.9 million for the twelve months ended december 31 , 2013 , compared to $ 6.9 million for the twelve months ended december 31 , 2012 . development and other cost of sales decreased $ 3.2 million to $ 1.8 million for the twelve months ended december 31 , 2013 , compared to $ 5.0 million for the twelve months ended december 31 , 2012 .

our operations consist of two reportable segments , hotel ownership , which derives its revenue from the operation of the hotels and technology reservation services for approximately 2,000 unrelated hotel properties . we provide management services for the hotels and a hotel owned by affiliates of james f. wirth , the trust 's chairman and chief executive officer . one of the affiliate hotels owned by james f. wirth was sold in february 2017. we also provide trademark and licensing services to the hotels , one hotel owned by affiliates of mr. wirth and one unrelated hotel property . our results are significantly affected by occupancy and room rates at the hotels , our ability to manage costs , and changes in the number of available suites caused by acquisition and disposition activities . results are also significantly impacted by overall economic conditions and conditions in the travel industry . unfavorable changes in these factors could negatively impact hotel room demand and pricing , which would reduce our profit margins on rented suites . additionally , our ability to manage costs could be adversely impacted by significant increases in operating expenses , resulting in lower operating margins . management expects greater demand and steady supply to continue . however , either a further increase in supply or a further decline in demand could result in increased competition , which could have an adverse effect on the revenue of the hotels in their respective markets . although we experienced stronger economic conditions during fiscal year 2018 , we anticipate that a steady economy will exist during all of 2019. we expect the major challenge for fiscal year 2018 to be the continuation of strong competition for corporate leisure group and government business in the markets in which we operate , which may affect our ability to increase room rates while maintaining market share . we believe that we have positioned the hotels to remain competitive through selective refurbishment , by offering a relatively large number of two-room suites at each location and by maintaining a robust complementary guest internet access system . our strategic plan is to obtain the full benefit of our real estate equity and to migrate our focus from a hotel owner to a hospitality service company by expanding our trademark license , management , reservation , and advertising services , through ibc hotels . for more information on our strategic plan , including information on our progress in disposing of our hotel properties , see “ future positioning ” in this management 's discussion and analysis of financial condition and results of operations . 8 ibc hospitality technologies inndependent boutique collection ( “ ibc ” , “ ibc hotels ” , “ ibc hotels , llc ” , “ ibc hospitality ” or “ ibc hospitality technologies ” ) , a wholly owned subsidiary of innsuites hospitality trust , has a network of approximately 2,000 unrelated hospitality properties with proprietary software exclusive marketing distribution and services as well as brand-like cost savings solutions to independent boutique hotels and alternative lodging ( serviced apartments , b & b 's , villas and muli-unit ownership/management of luxury private residences ) . additionally , ibc provides software and solutions to a variety of branded hotels looking to increase direct bookings and receive full guest information ibc 's patent-pending loyalty program allows consumers to book highly discounted travel when logged in and shopping for lodging on www.ivhtravel.com . ivhtravel.com and its proprietary booking engine has over 1.1 million lodging choices globally and provides add-on capability for activities , rental car and cancellation protection with airfare , all on the technologically developed roadmap in 2019. ibc was born out of an independent hotelier 's frustration over being denied cost-effective access to enterprise hospitality services and software that served their large corporate competitors coupled with the inability to secure a global and robust guest loyalty program . instead of giving up independence , the founders of ibc hired a development team to create the patent-pending inndependent inncentives guest loyalty program . with the success of the patent-pending inncentives loyalty program ibc began adding hotel services and software specifically for independent and boutique hotels . these solutions address the following challenges : revpar and profitability optimization , operational management and soft brand benefits . revpar , or revenue per available room , is a hospitality performance metric that is calculated by dividing a hotels total guestroom revenue by the room count and the number of days in the period being measured or by multiplying the average daily rate by the occupancy . our technology division is broken into two business lines , international vacation hotels travel ( “ ivh ” ) and ibc hospitality technologies . each of these divisions customer base is very different , and the services provided to each customer base ranges dramatically . international vacation hotels travel ( “ ivh ” ) transactional business to consumer ( “ b-to-c ” ) a. ivh collect – ivh will charge the guests in full on booking and remit the payments to the hotel for all completed stays for rates contracted less the agreed upon commission . wire and ach fees will be paid by the hotel as applicable . b. hotel collect – the hotel will charge the guests in full upon arrival and ivh will invoice the hotel at the end of each month the agreed upon commission for the hotel guest stays completed . c. split – guest pays deposit to ivh equal to the commission , provides credit card details and pays the balance to the member upon arrival . in each of the above b-to-c revenue streams , ivh provides a proprietary internet website or customized proprietary internet landing pages for each of the hotel properties . ivh 's customer base is the guests who are booking the reservations , not the hotels that are contracted with ibc . story_separator_special_tag retargeting is a tool designed to help hotels reach 98 % of guests who do n't book their hotel accommodations on their first visit . ibc , on behalf of the contracted member hotel , purchases “ clicks ” from various online resources to generate additional demand for the hotel property . ibc reviews complex demographic data to target and accurately pinpoint potential guests to advertise to ; thus ibc not only purchases advertising space , but also provides a value added service thru various marketing optimization methods . 10 ibc competition we operate in highly competitive markets . ibc competes with several other regional and global travel marketplace providers , including other local distribution systems and direct distribution by travel suppliers . in addition to other gdss and direct distributors , there are a number of other competitors in the travel distribution marketplace , including new entrants in the travel space that offer metasearch capabilities that direct shoppers to supplier websites and or otas , third party aggregators and peer-to-peer options for travel services . story_separator_special_tag times , serif ; font-size : 10pt '' > ibc technology division for the fiscal year ended january 31 , 2018 , we had total revenue of approximately $ 1,112,000 compared to approximately $ 670,000 for the fiscal year ended january 31 , 2017 , an increase of approximately $ 739,000 or 204 % . our ibc technologies division provides marketing and reservation services to our hotel properties . we have continued to make significant sales , marketing and technology investment in this segment . included in the total revenue of approximately $ 1,112,000 for the fiscal year ended january 31 , 2018 , we included approximately $ 234,000 of reservation acquisition costs relating to our prepaid reservations between august 2017 – january 2018. starting february 1 , 2018 , we will account for ibc revenues on a “ net ” basis and not include the reservations acquisition costs in revenues . we anticipate strong growth in this segment over the next several fiscal years but can provide no assurance regarding such growth . expenses – continuing operations : hotel operations & corporate overhead segment total expenses net of interest expense and income tax provision was approximately $ 14,880,000 for the twelve months ended january 31 , 2018 reflects an increase of approximately $ 3,065,000 compared to total expenses net of interest expense and income tax provision of approximately $ 11,815,000 for the twelve months ended january 31 , 2017. the increase was primarily due to an increase in operating expenses due to increased occupancy at the hotel properties . room expenses consisting of salaries and related employment taxes for property management , front office , housekeeping personnel , reservation fees and room supplies were approximately $ 2,733,000 for the fiscal year ended january 31 , 2018 compared to approximately $ 2,422,000 in the prior year period for an increase of approximately $ 311,000 , or 12.8 % , increase in costs . room expenses increased as occupancy at the hotels increased and management elected to deep clean the hotel property rooms and additional expenses were incurred with the increased occupancy . 13 food and beverage expenses included food and beverage costs , personnel and miscellaneous costs to provide banquet events . for the fiscal year ended january 31 , 2018 , food and beverage expenses were flat at approximately $ 91,000 as compared to approximately $ 91,000 for the fiscal year ended january 31 , 2017. while food and beverage income doubled as we expanded our available products , management sourced its food from cheaper vendors and in some cases , reevaluated the hotel property 's limited food offerings to provide a better , more efficient menu . telecommunications expense , consisting of telephone and internet costs , increased 55 % for the fiscal year ended january 31 , 2018 which were approximately $ 37,000 as compared to the prior fiscal year ended january 31 , 2017 which were approximately $ 24,000. best western international required additional internet bandwidth which increased our expenses and management anticipates this will be consistent for the fiscal year ending january 31 , 2019. general and administrative expenses include overhead charges for management , accounting , shareholder and legal services . general and administrative expenses of approximately $ 3,001,000 for the twelve months ended january 31 , 2018 increased approximately $ 133,000 from approximately $ 2,868,000 for the twelve months ended january 31 , 2017 primarily due to increased bad debt expenses , credit card expenses and professional fees at our hotel properties . sales and marketing expense increased approximately $ 108,000 , or 16.9 % , to approximately $ 747,000 for the twelve months ended january 31 , 2018 from approximately $ 639,000 for the twelve months ended january 31 , 2017. management added some additional sales and marketing resources at our properties to increase the marketing exposure in the local community which resulted in additional hotel room revenues . repairs and maintenance expense slightly increased by approximately $ 6,000 from approximately $ 690,000 reported for the twelve months ended january 31 , 2017 compared with approximately $ 696,000 for the twelve months ended january 31 , 2018. we completed significant property improvements at our yuma , arizona and tucson , arizona properties during the fiscal year ended january 31 , 2018. we anticipate that these expenses will decrease during the fiscal year ending january 31 , 2019 as management completes repair and maintenance initiatives to ensure guests ' satisfaction which complies with the increasing best western standards .

general the following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this form 10-k. at january 31 , 2018 , we owned through our sole general partner 's interest in the partnership a direct 22.83 % interest in the albuquerque , new mexico hotel , a 12.79 % direct interest in the yuma , arizona hotel . at january 31 , 2017 , we owned through our sole general partner 's interest in the partnership a direct 50.91 % interest in the albuquerque , new mexico hotel , and a 50.24 % direct interest in the yuma , arizona hotel . additionally , and at january 31 , 2017 , we , together with the partnership , owned a 51.01 % interest in a hotel located in tucson , arizona . on june 2 , 2017 , the trust sold its ontario , california hotel to an unrelated third party for approximately $ 17.5 million . for more information about the disposition of the ontario , california hotel , see note 24 of our consolidated financial statements - “ sale of ontario hospitality properties , lp ” . our expenses consist primarily of property taxes , insurance , corporate overhead , interest on mortgage debt , professional fees , depreciation of the hotels and hotel operating expenses . hotel operating expenses consist primarily of payroll , guest and maintenance supplies , marketing and utilities expenses . under the terms of its partnership agreement , the partnership is required to reimburse us for all such expenses .

we strive to remain a leader in meeting the financial service needs of the local community and to provide quality service to the individuals and businesses in the market areas that we have served since 1853. historically , we have been a community-oriented provider of traditional banking products and services to business organizations and individuals , including products such as residential and commercial real estate loans , consumer loans and a variety of deposit products . we meet the needs of our local community through a community-based and service-oriented approach to banking . we have adopted a growth-oriented strategy that has focused on increasing commercial lending while decreasing our securities portfolio . our strategy also calls for increasing deposit relationships and broadening our product lines and services . we believe that this business strategy is best for our long-term success and viability , and complements our existing commitment to high quality customer service . in connection with our overall growth strategy , we seek to : ● grow our commercial and industrial and commercial real estate loan portfolio by targeting businesses in our primary market area and in northern connecticut as a means to increase the yield on and diversify our loan portfolio and build transactional deposit account relationships ; ● focus on expanding our retail banking franchise and increase the number of households served within our market area ; and ● to supplement the commercial focus , grow the residential loan portfolio to diversify risk and deepen customer relationships . we will maintain our arrangement with a third-party mortgage company which assists in originating and servicing residential real estate loans . by doing this , we reduce the overhead costs associated with these loans . you should read the following financial results for the year ended december 31 , 2013 in the context of this strategy . ● net income was $ 6.8 million , or $ 0.34 per diluted share , for the year ended december 31 , 2013 , compared to $ 6.3 million , or $ 0.26 per diluted share , for the same period in 2012. the results for the year ended december 31 , 2013 showed a decrease in the provision for loan losses as well as a decrease in noninterest expense compared to the same period in 2012 ; however , these were partially offset by a decrease in noninterest income due to loss on prepayment of borrowings . ● we had a credit provision for loan losses of $ 256,000 for the year ended december 31 , 2013 , compared to provision expense of $ 698,000 for the same period in 2012. the credit for loan losses for the year ended december 31 , 2013 is the result of continued improvement in the overall risk profile of the commercial loan portfolio . classified loans that previously carried higher allowances showed considerable improvement , resulting in a lower allowance requirement . the allowance was $ 7.5 million for december 31 , 2013 and $ 7.8 million for december 31 , 2012 , or 1.17 % and 1.31 % of total loans , respectively . ● noninterest expense decreased $ 587,000 to $ 26.6 million at december 31 , 2013 , compared to $ 27.2 million at december 31 , 2012. the decrease in noninterest expense for the year ended december 31 , 2013 was primarily due to a decrease in salaries and benefits of $ 1.1 million resulting from the completion of vesting of certain stock-based compensation during the fourth quarter of 2012 . ● noninterest income decreased $ 1.7 million to $ 4.3 million for the year ended december 31 , 2013 , compared to $ 6.0 million for the same period in 2012. the net gains on the sale of securities of $ 3.1 million for the year ended december 31 , 2013 were completely offset by $ 3.4 million in prepayment expense incurred on the prepayment of $ 43.3 million in repurchase agreements , while in 2012 , the $ 1.0 million prepayment expense incurred on the prepayment of $ 28.0 million in repurchase agreements was offset by $ 2.9 million in net gains on sales of securities . 37 general . our consolidated results of operations depend primarily on net interest and dividend income . net interest and dividend income is the difference between the interest income earned on interest-earning assets and the interest paid on interest-bearing liabilities . interest-earning assets consist primarily of securities , commercial real estate loans , commercial and industrial loans and residential real estate loans . interest-bearing liabilities consist primarily of certificates of deposit and money market account , demand deposit accounts and savings account deposits , borrowings from the fhlbb and securities sold under repurchase agreements . the consolidated results of operations also depend on the provision for loan losses , noninterest income , and noninterest expense . noninterest expense includes salaries and employee benefits , occupancy expenses and other general and administrative expenses . noninterest income includes service fees and charges , income on bank-owned life insurance , and gains ( losses ) on securities . critical accounting policies . our accounting policies are disclosed in note 1 to our consolidated financial statements . given our current business strategy and asset/liability structure , the more critical policies are accounting for nonperforming loans , the allowance for loan losses and provision for loan losses , other than temporary impairment of securities , and the valuation of deferred taxes . in addition to the informational disclosure in the notes to the consolidated financial statements , our policy on each of these accounting policies is described in detail in the applicable sections of “ management 's discussion and analysis of financial condition and results of operations. ” senior management has discussed the development and selection of these accounting policies and the related disclosures with the audit committee of our board of directors . story_separator_special_tag the tax-equivalent adjustment is deducted from tax-equivalent net interest and dividend income to agree to the amount reported in the statements of income . ( 3 ) short-term investments include federal funds sold . ( 4 ) net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities . ( 5 ) net interest margin represents tax-equivalent net interest and dividend income as a percentage of average interest-earning assets . 40 rate/volume analysis . the following table shows how changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected our interest and dividend income and interest expense during the periods indicated . information is provided in each category with respect to : ( 1 ) interest income changes attributable to changes in volume ( changes in volume multiplied by prior rate ) ; ( 2 ) interest income changes attributable to changes in rate ( changes in rate multiplied by prior volume ) ; and ( 3 ) the net change . the changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate . replace_table_token_20_th ­­ ( 1 ) securities and loan income and net interest income are presented on a tax-equivalent basis using a tax rate of 34 % . the tax-equivalent adjustment is deducted from tax-equivalent net interest income to agree to the amount reported in the statements of income . 41 comparison of financial condition at december 31 , 2013 and december 31 , 2012 total assets decreased $ 24.6 million to $ 1.3 billion at december 31 , 2013. net loans increased by $ 42.9 million to $ 630.0 million at december 31 , 2013 from $ 587.1 million at december 31 , 2012. cash and cash equivalents decreased $ 7.9 million to $ 19.7 million at december 31 , 2013 from $ 11.8 million at december 31 , 2012 , as funds were reinvested into the loan portfolio . securities decreased $ 82.0 million to $ 553.8 million at december 31 , 2013 from $ 635.8 million at december 31 , 2012. during the second quarter of 2013 , securities with an amortized cost of $ 172.1 million were reclassified from available-for-sale to held-to-maturity . in addition , during the third quarter of 2013 , securities with an amortized cost of $ 132.8 million were reclassified from available-for-sale to held-to-maturity . the transfers of securities into the held-to-maturity category from the available-for-sale category were made at fair value at the date of transfer . the unrealized holding gain or loss at the date of transfer was retained in accumulated other comprehensive loss and in the carrying value of the held-to-maturity securities . such amounts will be amortized from comprehensive income over the remaining life of the securities . management selected the securities because of our positive intent and ability to hold until maturity . considerations were taken into account in the selection of each security , including our overall sources of liquidity , the ability to pledge the security as collateral if needed , and the impact on our interest rate risk ( irr ) positioning . in a rising rate environment , this reclassification helps to mitigate the effects on shareholders ' equity and tangible book value from changes in the fair market value of securities . this reclassification still allows much flexibility in the balance sheet to manage irr and liquidity . the securities portfolio is primarily comprised of mortgage-backed securities , which totaled $ 395.4 million at december 31 , 2013 and $ 458.8 million at december 31 , 2012 , the majority of which were issued by government-sponsored enterprises such as the federal national mortgage association . there were no privately issued mortgage-backed securities in the portfolio at december 31 , 2013 and 2012. corporate bonds totaled $ 55.0 million and $ 52.3 million at december 31 , 2013 and 2012 , respectively . we began investing in investment grade corporate bonds during the second quarter of 2012 as a means of diversifying our securities portfolio while also increasing the average yield on the portfolio . debt securities issued by government-sponsored enterprises were $ 54.1 million at december 31 , 2013 and $ 62.1 million at december 31 , 2012. securities issued by government-sponsored enterprises include bonds issued by the federal national mortgage association and the federal home loan mortgage corporation . we also invest in municipal bonds primarily issued by cities and towns in massachusetts that are rated as investment grade by moody 's , standard & poor 's or fitch , and the majority of which are also independently insured . municipal bonds were $ 26.2 million at december 31 , 2013 and $ 40.8 million at december 31 , 2012. in addition , we have investments in fhlbb stock , common stock and mutual funds that invest only in securities allowed by the occ . as of september 30 , 2013 , we entered into several forward-starting interest rate swap contracts with a combined notional value of $ 155.0 million . the swap contracts have start dates ranging from the fourth quarter 2013 to the third quarter 2016 and have durations ranging from four to six years . this hedge strategy converts the libor based rate of interest on certain fhlb advances to fixed interest rates , thereby protecting us from floating interest rate variability . on a stand-alone basis , the interest rate swaps introduce potential future volatility in tangible book value and accumulated other comprehensive income ( “ aoci ” ) ; however , the valuation of the swaps are expected to change in the opposite direction of the valuations on the available-for-sale securities portfolio . this is consistent with our objective to reduce total volatility in tangible book value and aoci .

general . net income for the year ended december 31 , 2013 was $ 6.8 million , or $ 0.34 per diluted share , compared to $ 6.3 million , or $ 0.26 per diluted share , for the same period in 2012. interest and dividend income . total interest and dividend income decreased $ 2.1 million to $ 41.0 million for the year ended december 31 , 2013 , compared to $ 43.1 million for the same period in 2012. the decrease in interest income was primarily the result of a decrease in the average yield on interest-earning assets and a decrease in the average balance of interest-earning assets for the year ended december 31 , 2013. the average yield on interest-earning assets , on a tax-equivalent basis , decreased 12 basis points to 3.43 % for the year ended december 31 , 2013 from 3.55 % for the same period in 2012 , while the balance of interest-earning assets decreased $ 22.7 million to $ 1.2 billion at december 31 , 2013. at december 31 , 2013 , the average balance of securities decreased $ 54.4 million to $ 584.0 million , while the average balance of loans increased $ 31.1 million to $ 604.7 million .

however , these component parts can be used for extended and indeterminate periods of time as long as they are properly maintained and or upgraded . it is the company 's practice and current intent to maintain its refinery assets and continue making improvements to those assets based on technological advances . as a result , the company believes that its refinery assets have indeterminate lives for purposes of estimating asset story_separator_special_tag strategy and plan of operations the principal elements of our strategy include : expand feedstock supply volume . we intend to expand our feedstock supply volume by growing our collection and aggregation operations . we plan to increase the volume of feedstock we collect directly by developing new relationships with generators and working to displace incumbent collectors ; increasing the number of collection personnel , vehicles , equipment , and geographical areas we serve ; and acquiring collectors in new or existing territories . we intend to increase the volume of feedstock we aggregate from third-party collectors by expanding our existing relationships and developing new vendor relationships . we believe that our ability to acquire large feedstock volumes will help to cultivate new vendor relationships because collectors often prefer to work with a single , reliable customer rather than manage multiple relationships and the uncertainty of excess inventory . broaden existing customer relationships and secure new large accounts . we intend to broaden our existing customer relationships by increasing sales of used motor oil and re-refined products to these accounts . in some cases , we may also seek to serve as our customers ' primary or exclusive supplier . we also believe that as we increase our supply of feedstock and re-refined products that we will secure larger customer accounts that require a partner who can consistently deliver high volumes . re-refine higher value end products . we intend to develop , lease , or acquire technologies to re-refine our feedstock supply into higher-value end products . we believe that the expansion of our facilities and our technology , and investments in additional technologies , will enable us to upgrade feedstock into end products , such as lubricating base oil , that command higher market prices than the current re-refined products we produce . pursue selective strategic relationships or acquisitions . we plan to grow market share by consolidating feedstock supply through partnering with or acquiring collection and aggregation assets . such acquisitions and or partnerships could increase our revenue and provide better control over the quality and quantity of feedstock available for resale and or upgrading as well as providing additional locations for the implementation of tcep , if we deem such commercially reasonable . in addition , we intend to pursue further vertical integration opportunities by acquiring complementary recycling and processing technologies where we can realize synergies by leveraging our customer and vendor relationships , infrastructure , and personnel , and by eliminating duplicative overhead costs . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; font-weight : bold ; '' > compared to the three months ended december 31 , 2017 set forth below are our results of operations for the three months ended december 31 , 2018 , as compared to the same period in 2017 . replace_table_token_3_th 52 each of our segments ' gross profit ( loss ) during the three months ended december 31 , 2018 and 2017 were as follows : replace_table_token_4_th revenues increased 1 % for the fourth quarter of 2018 , compared to the same period in 2017 , due primarily to higher commodity prices . total volume decreased 24 % and gross profit decreased 38 % for the three months ended december 31 , 2018 compared to same period in 2017 . additionally , our per barrel margin decreased 19 % relative to the three months ended december 31 , 2017 . the majority of this decrease was the result of the sharp drop in commodity prices during the fourth quarter of 2018 which resulted in compressed spreads during this period . notwithstanding the above , and the increase in cost of revenues for the fourth quarter of 2018 , which were a result of rising commodity prices during the first nine months of 2018 , versus the fourth quarter of 2017 , we believe that due to the combination of our fee structure change along with our increased third party supply we were able to make progress in lowering our cost of feedstock during the fourth quarter . this process takes time to implement and we anticipate seeing improvements to our margins during this first quarter of 2019 related to these changes . our black oil segment 's volume decreased approximately 8 % during the three months ended december 31 , 2018 compared to the same period in 2017 . this decrease was mainly due to a turnaround at our heartland facilities during the three months ended december 31 , 2018 . overall volume for the refining and marketing segment increased 26 % during the three month period ended december 31 , 2018 as compared to the same period in 2017 . this segment experienced an increase in production of 49 % for its cutterstock for the three months ended december 31 , 2018 , compared to the same period in 2017 . our gasoline blendstock volumes were down 20 % for the three months ended december 31 , 2018 , compared to the same period in 2017 . our pygas volumes increased 25 % for the three months ended december 31 , 2018 as compared to the same period in 2017 . during the three months ended december 31 , 2018 , our refining and marketing cost of revenues were $ 5,972,018 of which the processing costs for our refining and marketing business located at kmtex were $ 650,481 . revenues for the same period were $ 5,553,741 while gross deficit from operations was $ ( 418,277 ) . story_separator_special_tag in addition we have seen improvement in our finished product quality as well as pricing in 2018 versus 2017. our black oil segment , which includes our tcep facility , the marrero facility and the heartland facility , generated revenues of $ 143,836,981 for the year ended december 31 , 2018 , with cost of revenues of $ 116,524,465 , producing a gross profit of $ 27,312,516 . during the year ended december 31 , 2017 , these revenues were $ 107,988,551 with cost of revenues of $ 91,177,121 , producing a gross profit of $ 16,811,430 . gross profit increased for the year ended december 31 , 2018 , compared to 2017 , as a result of increased finished product values through our various facilities and diligent management of our street collections and pricing . total volume company-wide was flat during fiscal 2018 compared to 2017 , and our per barrel margin increased approximately 39 % for fiscal 2018 , compared to 2017 . this increase was a result of lower prices we paid for feedstock and improved efficiencies at our facilities in columbus , ohio and marrero , louisiana as well as the overall impact from the improvement in commodity markets during 2018 . our refining and marketing segment experienced an increase in production of 24 % for its fuel oil cutterstock product for the year ended december 31 , 2018 , compared to the same period in 2017 , and our fuel oil cutterstock commodity prices increased approximately 30 % over the same period . the average posting ( u.s. gulfcoast no . 2 waterborne ) during 2018 increased 56 $ 19.05 per barrel from $ 63.42 per barrel for the year ended december 31 , 2017 to $ 82.47 per barrel for the year ended december 31 , 2018. our pygas production decreased 25 % for the year ended december 31 , 2018 , compared to the same period in 2017 and commodity prices increased approximately 17 % for our pygas finished product for 2018 , compared to the same period in 2017 . our gasoline blendstock volumes decreased 5 % for the year ended december 31 , 2018 as compared to 2017 . the average posting ( u.s. gulfcoast unleaded 87 waterborne ) during 2018 increased $ 0.27 per gallon from $ 1.62 per gallon for 2017 to $ 1.89 per gallon during 2018. the overall increase in revenues associated with our refining and marketing segment was due to increases in certain volumes as well as commodity prices for the year ended december 31 , 2018 . overall volume for the refining and marketing segment decreased 9 % during the year ended december 31 , 2018 , compared to the year ended december 31 , 2017 . margins per barrel decreased in the refining and marketing segment as a result of market conditions during 2018. whenever there is a sharp drop in commodity prices , as we saw during the fourth quarter of 2018 , the inventory we have on hand is exposed to these market changes and our gross profit is typically negatively impacted in the short term , while prices are adjusted and the higher priced inventory is liquidated . during the year ended december 31 , 2018 , our refining and marketing cost of revenues were $ 22,290,277 , of which the processing costs for our refining and marketing business located at kmtex were $ 2,331,719. revenues for the same period were $ 22,935,482 while gross profit from operations was $ 645,205 . during the year ended december 31 , 2017 , our refining and marketing cost of revenues were $ 18,425,195 , which included the processing costs at kmtex of $ 1,992,433. revenues for the same period were $ 20,097,325 while gross profit was $ 1,672,130 . our recovery segment includes the business operations of vertex recovery management as well as our group iii base oil business . vertex acts as penthol 's exclusive agent to provide marketing , sales , and logistical duties of group iii base oil from the united arab emirates to the united states . revenues for this segment decreased during 2018 as compared to the same period in 2017 . this segment periodically participates in project work that is not ongoing , thus we expect to see fluctuations in revenue and gross profit from period to period . these projects are typically bid related and can take time to line out and get started ; however we believe these are very good projects for the company and we anticipate more in the upcoming periods . prevailing prices of certain commodity products can significantly impact our revenues and cash flows . as noted above the revenue variances from fiscal 2017 to 2018 were largely impacted due to the changes in commodity pricing between the two periods as detailed below . the following table sets forth the high and low spot prices during 2018 for our key benchmarks . 2018 benchmark high date low date u.s. gulfcoast no . 2 waterborne ( dollars per gallon ) $ 2.32 october 1 $ 1.50 december 28 u.s. gulfcoast unleaded 87 waterborne ( dollars per gallon ) $ 2.20 october 3 $ 1.26 december 27 u.s. gulfcoast residual fuel no . 6 3 % ( dollars per barrel ) $ 73.42 october 9 $ 47.27 december 27 nymex crude oil ( dollars per barrel ) $ 76.41 october 1 $ 44.61 december 27 reported in platt 's us marketscan ( gulf coast ) 57 the following table sets forth the high and low spot prices during 2017 for our key benchmarks . 2017 benchmark high date low date u.s. gulfcoast no . 2 waterborne ( dollars per gallon ) $ 1.89 december 29 $ 1.22 june 23 u.s. gulfcoast unleaded 87 waterborne ( dollars per gallon ) $ 2.06 august 31 $ 1.41 june 22 u.s. gulfcoast residual fuel no .

results of operations description of material financial line items : revenues we generate revenues from three existing operating segments as follows : black oil - revenues for our black oil segment are comprised primarily of product sales from our re-refineries and feedstock sales ( used motor oil ) which are purchased from generators of used motor oil such as oil change shops and garages , as well as a network of local and regional suppliers . volumes are consolidated for efficient delivery and then sold to third-party re-refiners and fuel oil blenders for the export market . in addition , through used oil re-refining , we re-refine used oil into different commodity products . the houston , texas tcep facility finished product is then sold by barge as a fuel oil cutterstock ( provided that tcep has not been used for this purpose since the third quarter of 2015 due to economic reasons and is currently being used to pre-treat our used motor oil feedstock prior to shipping them to our facility in marrero , louisiana ) . through the operations at our marrero , louisiana facility , we produce a vacuum gas oil ( vgo ) product from used oil re-refining which is then sold via barge to crude refineries to be utilized as an intermediate feedstock in the refining process , as well as to the marine fuels market . . through the operations at our columbus , ohio facility we produce a base oil finished product which is then sold via truck or rail car to end users for blending , packaging and marketing of lubricants . refining and marketing - the refining and marketing segment generates revenues relating to the sales of finished products . the refining and marketing segment gathers hydrocarbon streams in the form of petroleum distillates , transmix and other chemical products that have become off-specification during the transportation or refining process .

the company recognizes interest and , if applicable , penalties related to unrecognized tax benefits in income tax provision . included in income tax provision for continuing operations for the years ended december 31 , 2011 , 2010 and 2009 is a $ 1.4 million expense , $ 9.1 story_separator_special_tag management overview iac operates more than 50 leading and diversified internet businesses across 30 countries ... our mission is to harness the power of interactivity to make daily life easier and more productive for people all over the world . iac includes the businesses comprising its search segment ; its match and servicemagic segments ; the businesses comprising its media & other segment ; as well as investments in unconsolidated affiliates . results set forth below are the contributions made by our various segments and corporate operations to consolidated revenue , operating income ( loss ) and operating income before amortization ( as defined in iac 's principles of financial reporting ) for the years ended december 31 , 2011 , 2010 and 2009. replace_table_token_4_th replace_table_token_5_th nm = not meaningful replace_table_token_6_th 27 refer to note 15 to the consolidated financial statements for reconciliations by segment of operating income before amortization to operating income ( loss ) . sources of revenue substantially all of the revenue from our search segment is derived from online advertising , with most of this revenue attributable to our paid listing supply agreement with google inc. ( `` google '' ) . the revenue earned from our match segment is derived primarily from subscription fees for its subscription-based online personals services and also from online advertising . servicemagic 's revenue is derived from fees paid by members of its network of service professionals for consumer leads , regardless of whether the service professional that receives the lead ultimately provides the requested service , as well as from one-time fees charged upon enrollment and activation of new service professionals in its network . the revenue earned by the media & other segment is derived from merchandise sales , online advertising and content production . strategic partnerships , advertiser relationships and online advertising spend our various businesses provide supplier partners with important customer acquisition channels and we believe that the ability of our supplier partners to reach a large qualified audience through our services is a significant benefit . while we aim to build and maintain strong relationships with our supplier partners , we may not succeed in these efforts and there is always the risk that certain supplier partners may not make their products and services available to us in the future . a significant component of the company 's revenue is attributable to a paid listing supply agreement with google , which expires on march 31 , 2016. for the years ended december 31 , 2011 , 2010 and 2009 , revenue earned from google was $ 970.4 million , $ 727.9 million and $ 561.9 million , respectively . the majority of this revenue was earned by the businesses comprising the search segment . we market and offer our products and services directly to consumers through branded websites and membership programs , allowing consumers to transact directly with us in a convenient manner . we have made , and expect to continue to make , substantial investments in online and offline advertising to build our brands and drive traffic to our websites and consumers and advertisers to our businesses . we pay traffic acquisition costs , which consist of payments made to partners who distribute mindspark 's customized browser-based applications , integrate our paid listings into their websites or direct traffic to our websites . we also pay to market and distribute our services on third party distribution channels , such as internet portals and search engines . in addition , some of our businesses manage affiliate programs , pursuant to which we pay commissions and fees to third parties based on revenue earned . these distribution channels might also offer their own products and services , as well as those of other third parties , which compete with those we offer . the cost of acquiring new consumers through online and offline third party distribution channels has increased , particularly in the case of online channels as internet commerce continues to grow and competition in the segments in which iac 's businesses operate increases . 28 results of operations for the years ended december 31 , 2011 , 2010 and 2009 consolidated results revenue replace_table_token_7_th revenue in 2011 increased from 2010 as a result of increases of $ 256.7 million from search , $ 117.3 million from match , $ 23.9 million from media & other and $ 23.7 million from servicemagic . the increase from search reflects strong growth from mindspark 's b2b operations and destination websites as well as growth from mindspark 's b2c operations and citygrid media . the increase from match reflects growth from its core operations ( consisting of match.com in the u.s. , people media and chemistry ) as well as from the impact of meetic , consolidated beginning september 1 , 2011 , and okcupid , acquired january 20 , 2011. the increase from media & other was driven by growth at shoebuy , electus , notional and vimeo , partially offset by a decrease from the daily beast , which following the formation of the newsweek/daily beast company joint venture with harman newsweek on january 31 , 2011 , has been accounted for as an equity method investment , a decline at pronto and the inclusion in 2010 of revenue associated with profit participations related to our former interest in reveille . the increase from servicemagic came from growth in both its domestic and international operations . revenue in 2010 increased from 2009 as a result of increases of $ 155.4 million from search , $ 58.1 million from match , $ 51.1 million from media & other and $ 25.6 million from servicemagic . the increase from search reflected growth in mindspark 's b2b and b2c operations and destination websites . story_separator_special_tag the increase from match is primarily due to an increase of $ 13.3 million in advertising and promotional expenditures related primarily to an advertising agreement entered into during the second quarter of 2010 with yahoo as well as the impact of the acquisitions of people media and singlesnet and the formation of the latin america venture , partially offset by the sale of match europe to meetic . selling and marketing expense from media & other increased primarily due to higher online marketing costs at pronto and advertising and promotional expenditures related to vimeo 's 2010 video festival . partially offsetting these factors is a decrease from search primarily due to lower advertising and promotional expenditures of $ 7.2 million , as 2009 included expenditures associated with the nascar partnership and an ad campaign to rebrand the ask jeeves uk website , as well as a decrease in compensation and other employee-related costs at citygrid media , due in part , to a decrease in average headcount . general and administrative expense replace_table_token_10_th general and administrative expense consists primarily of compensation and other employee-related costs ( including stock-based compensation ) for personnel engaged in executive management , finance , legal , tax and human resources , facilities costs and fees for professional services . general and administrative expense in 2011 increased from 2010 primarily due to increases of $ 18.0 million from match , partially offset by a decrease of $ 7.1 million from search . the increase from match resulted primarily from the acquisition of meetic , as well as an increase in professional fees due , in part , to $ 4.0 million in transaction fees associated with the meetic acquisition , and operating expenses from okcupid , which was not in the prior year period . general and administrative expense from search decreased primarily due to lower professional fees , including a decrease in litigation related expenses , and the inclusion in 2010 of lease termination costs associated with the ask.com restructuring , partially offset by an increase in compensation and other employee-related costs at mindspark and citygrid media . as a percentage of revenue , general and administrative expense decreased from 2010 primarily due to operating expense leverage . general and administrative expense in 2010 increased from 2009 primarily due to increases of $ 12.4 million from corporate , $ 10.5 million from media & other , $ 5.6 million from servicemagic and $ 5.5 million from search . general and administrative expense from corporate increased primarily due to an increase of $ 10.3 million in non-cash compensation expense and $ 5.3 million of transaction expenses in 2010 related to the exchange of substantially all of liberty media corporation 's ( `` liberty '' ) equity stake in iac , partially offset by lower salary expense . on december 1 , 2010 , the company entered into a stock exchange agreement with liberty . under the agreement , liberty agreed to exchange with iac 4.3 million shares of common stock and 8.5 million shares of class b common stock , which were valued at $ 364.2 million based on the closing price of iac common stock on december 1 , 2010 , for evite , gifts.com and iac advertising solutions and $ 217.9 million in cash ( referred to herein as the `` liberty exchange '' ) . the increase in non-cash compensation expense is primarily related to an increase in expense attributable to awards granted subsequent to the second quarter of 2009 , partially offset by awards having become fully vested . the increase from media & 31 other is principally due to electus and notional , which were not in the full prior year period , as well as increased operating expenses associated with vimeo , partially offset by the cost savings related to certain businesses that have been sold or shutdown . general and administrative expense at servicemagic increased primarily due to higher compensation and other employee-related costs . the increase from search is primarily due to an increase in compensation and other employee-related costs at mindspark and employee termination costs associated with the ask.com restructuring that took place in the fourth quarter of 2010 , partially offset by a decrease in litigation related expenses . product development expense replace_table_token_11_th product development expense consists primarily of compensation and other employee-related costs ( including stock-based compensation ) that are not capitalized for personnel engaged in the design , development , testing and enhancement of product offerings and related technology . product development expense in 2011 increased from 2010 primarily due to increases of $ 7.7 million from match and $ 1.3 million from search . the increase from match is primarily due to an increase in compensation and other employee-related costs due , in part , to recent acquisitions as well as an increase in headcount . contributing to the increase at search is a decrease in costs being capitalized in the current year period , partially offset by lower compensation and other employee-related costs due , in part , to staff reductions that took place during the fourth quarter of 2010 associated with the ask.com restructuring . product development expense in 2010 increased from 2009 primarily due to increases of $ 3.3 million from match and $ 2.3 million from search . contributing to the increase at match is an increase in compensation and other employee-related costs driven by growth in headcount related to recent acquisitions . the increase from search is primarily due to the inclusion in 2010 of employee termination costs associated with the ask.com restructuring . depreciation replace_table_token_12_th depreciation in 2011 decreased from 2010 primarily due to the write-off of certain assets in the prior year period , partially offset by the write-off of $ 4.9 million in capitalized software costs in the third quarter of 2011 associated with the exit from the company 's direct sponsored listings business . depreciation in 2010 increased from 2009 primarily due to the write-off of certain capitalized software costs associated with the ask.com restructuring .

segment results in addition to the discussion of consolidated results above , the following is a discussion of the results of each segment . search our search segment includes mindspark , a digital consumer products business consisting of our b2c operations , through which we develop , market and distribute downloadable applications , and our b2b operations , through which we provide customized browser-based applications for software and media companies ; destination websites , including ask.com and dictionary.com , through which we provide search and additional services ; and citygrid media , an online media company that aggregates and integrates local content and advertising for distribution to publishers across web and mobile platforms . for the year ended december 31 , 2011 compared to the year ended december 31 , 2010 revenue increased 31 % to $ 1.1 billion , reflecting strong growth from mindspark 's b2b operations and destination websites as well as growth from mindspark 's b2c operations and citygrid media . the revenue growth in mindspark 's b2b operations was driven by increased contribution from both existing and new partners . the increase in mindspark 's b2c revenue was driven primarily by new products launched since the year ago period . the revenue growth in destination websites reflects strong query gains driven primarily by increased marketing and content optimization . the increase in revenue at citygrid media primarily reflects growth from existing resellers and increased display advertising . operating income before amortization increased 62 % to $ 203.1 million , benefiting from the higher revenue noted above and decreases of $ 8.5 million in depreciation , $ 7.1 million in general and administrative expense and lower product development expense as a percentage of revenue , partially offset by increases of $ 115.3 million in traffic acquisition costs and $ 63.7 million in selling and marketing expense .

overview g-iii designs , manufactures , and markets an extensive range of apparel , including outerwear , dresses , sportswear , women 's suits and women 's performance wear , as well as luggage and women 's handbags , small leather goods and cold weather accessories . we sell our products under our own proprietary brands , which include andrew marc , marc new york and marc moto , licensed brands and private retail labels . as of january 31 , 2012 , g-iii operated 139 retail stores , of which 135 are outlet stores operated under the wilsons leather name and 4 are outlet stores operated under our andrew marc brand . as of january 31 , 2012 , our joint venture with the camuto group operated 11 vince camuto outlet stores . while our products are sold at a variety of price points through a broad mix of retail partners and our own outlet stores , a majority of our sales are concentrated with our ten largest customers . sales to our ten largest customers comprised 55.0 % of our net sales in fiscal 2010 , 62.7 % of our net sales in 2011 and 63.3 % of our net sales in fiscal 2012. our business is dependent on , among other things , retailer and consumer demand for our products . we believe that economic uncertainty and a slowdown in the global macroeconomic environment continue to negatively impact the level of consumer spending for discretionary items . the current uncertain economic environment has been characterized by a decline in consumer discretionary spending that may affect retailers and sellers of consumer goods , particularly those whose goods are viewed as discretionary purchases , such as fashion apparel and related products , such as ours . we can not predict the direction in which the current economic environment will move . continued uncertain macroeconomic conditions may have a negative impact on our results for fiscal 2013. we operate in fashion markets that are intensely competitive . our ability to continuously evaluate and respond to changing consumer demands and tastes , across multiple market segments , distribution channels and geographies is critical to our success . although our portfolio of brands is aimed at diversifying our risks in this regard , misjudging shifts in consumer preferences could have a negative effect on our business . our success in the future will depend on our ability to design products that are accepted in the marketplace , source the manufacture of our products on a competitive basis , and continue to diversify our product portfolio and the markets we serve . we operate our business in three segments , wholesale licensed products , wholesale non-licensed products and retail operations . the wholesale licensed products segment includes sales of products under brands licensed by us from third parties . the wholesale non-licensed products segment includes sales of products under our own brands and private label brands . the retail operations segment consists almost entirely of the operations of our wilsons outlet stores , and beginning in the second half of fiscal 2012 , a limited number of andrew marc outlet stores . we have expanded our portfolio of proprietary and licensed brands through acquisitions and by entering into license agreements for new brands or for additional products under previously licensed brands . our acquisitions have helped to broaden our product offerings , expand our ability to serve different tiers of distribution and add a retail component to our business . our acquisitions are part of our strategy to expand our product offerings and increase the portfolio of proprietary and licensed brands that we offer through different tiers of retail distribution and at a variety of price points . 30 we believe that both andrew marc and the wilsons outlet business leverage our core strength in outerwear and provide us with new avenues for growth . we also believe that these acquisitions complement our other licensed brands , g-iii owned labels and private label programs . we have used the capabilities of companies we acquired to help us expand our product offerings . the jessica howard dress operations we acquired expanded and complemented our dress business that began shipping under the calvin klein label in september 2006. we added to our dress business when we expanded our license with ellen tracy to include dresses and again when we entered into a license agreement for jessica simpson dresses . we continued to grow our dress business when we expanded our relationship with guess in 2010 to include dresses and added licenses in 2011 for dresses with each of vince camuto and kensie . we also intend to grow our jessica howard and eliza j brands and expand private label programs to further develop our dress business . when we acquired andrew marc , it was a supplier of fine outerwear and handbags for both men and women to upscale specialty and department stores . we have since expanded our product categories and product offerings for andrew marc , both in house and through licensing arrangements . we have expanded the distribution of outerwear by penetrating additional doors and selling into new channels of distribution . we enhanced our website for andrew marc ( www.andrewmarc.com ) to expand our online product offerings . we launched andrew marc and marc new york dress lines which began shipping in fall 2009 , leveraging our g-iii dress capabilities and our manufacturing sources . we added to the andrew marc family of brands by creating the marc moto brand , the marc moto offering contains vintage inspired product that embraces legendary style . it is a denim lifestyle collection targeted toward young , independent men . story_separator_special_tag we believe that consumers prefer to buy brands they know and we have continually sought licenses that would increase the portfolio of name brands we can offer through different tiers of retail distribution , for a wide array of products and at a variety of price points . we believe that brand owners will look to consolidate the number of licensees they engage to develop product and they will seek licensees with a successful track record of expanding brands into new categories . it is our objective to continue to expand our product offerings and we are continually discussing new licensing opportunities with brand owners . trends significant trends that affect the apparel industry include increases in raw material , manufacturing and transportation costs , the continued consolidation of retail chains and the desire on the part of retailers to consolidate vendors supplying them . during fiscal 2012 , we and other apparel manufacturers experienced increases in raw material prices and other costs . these conditions are expected to moderate during fiscal 2013. retailers are seeking to expand the differentiation of their offerings by devoting more resources to the development of exclusive products , whether by focusing on their own private label products or on products produced exclusively for a retailer by a national brand manufacturer . retailers are placing more emphasis on building strong images for their private label and exclusive merchandise . exclusive brands are only made available to a specific retailer , and thus customers loyal to their brands can only find them in the stores of that retailer . a number of retailers are experiencing financial difficulties , which in some cases has resulted in bankruptcies , liquidations and or store closings . the financial difficulties of a retail customer of ours could result in 32 reduced business with that customer . we may also assume higher credit risk relating to receivables of a retail customer experiencing financial difficulty that could result in higher reserves for doubtful accounts or increased write-offs of accounts receivable . we attempt to lower credit risk from our customers by closely monitoring accounts receivable balances and shipping levels , as well as the ongoing financial performance and credit standing of customers . we have attempted to respond to these trends by continuing to focus on selling products with recognized brand equity , by attention to design , quality and value and by improving our sourcing capabilities . we have also responded with the strategic acquisitions made by us and new license agreements entered into by us that have added additional licensed and proprietary brands and helped diversify our business by adding new product lines , additional distribution channels and a retail component to our business . we believe that our broad distribution capabilities help us to respond to the various shifts by consumers between distribution channels and that our operational capabilities will enable us to continue to be a vendor of choice for our retail partners . use of estimates and critical accounting policies the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period . significant accounting policies employed by us , including the use of estimates , are presented in the notes to our consolidated financial statements . critical accounting policies are those that are most important to the portrayal of our financial condition and our results of operations , and require management 's most difficult , subjective and complex judgments , as a result of the need to make estimates about the effect of matters that are inherently uncertain . our most critical accounting estimates , discussed below , pertain to revenue recognition , accounts receivable , inventories , income taxes , goodwill and intangible assets and equity awards . in determining these estimates , management must use amounts that are based upon its informed judgments and best estimates . on an on-going basis , we evaluate our estimates , including those related to customer allowances and discounts , product returns , bad debts and inventories , and carrying values of intangible assets . we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances . the results of these 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 and conditions . revenue recognition goods are shipped to retailers in accordance with specific customer orders . we recognize wholesale sales when the risks and rewards of ownership have transferred to the customer , determined by us to be when title to the merchandise passes to the customer . in addition , we act as an agent in brokering sales between customers and overseas factories . on these transactions , we recognize commission fee income on sales that are financed by and shipped directly to our customers . title to goods shipped by overseas vendors , transfers to customers when the goods have been delivered to the customer . we recognize commission income upon the completion of the delivery by our vendors to the customer . we recognize retail sales upon customer receipt of our merchandise , generally at the point of sale . our sales are recorded net of applicable sales tax . net sales take into account reserves for returns and allowances . we estimate the amount of reserves and allowances based on current and historical information and trends . sales are reported net of returns , discounts and allowances . discounts , allowances and estimates of future returns are recognized when the related revenues are recognized . accounts receivable in the normal course of business , we extend credit to our wholesale customers based on pre-defined credit criteria . accounts receivable , as shown on our consolidated balance sheet , are net of allowances and anticipated discounts .

results of operations the following table sets forth selected operating data as a percentage of our net sales for the fiscal years indicated below : replace_table_token_3_th year ended january 31 , 2012 ( “fiscal 2012” ) compared to year ended january 31 , 2011 ( “fiscal 2011” ) net sales for fiscal 2012 increased to $ 1.23 billion from $ 1.06 billion in the prior year . net sales of wholesale licensed product accounted for 65.5 % of our net sales in fiscal 2012 compared to 67.6 % of our net sales in fiscal 2011. excluding net sales in the retail segment , net sales of wholesale licensed product accounted for 75.2 % of net sales of wholesale product in fiscal 2012 and 74.6 % of net sales of wholesale product in fiscal 2011. net sales of wholesale licensed product increased to $ 840.7 million in fiscal 2012 from $ 718.5 million in fiscal 2011. this increase was primarily the result of an increase of $ 85.8 million in net sales of calvin klein licensed product , mainly due to the introduction of calvin klein handbag , accessory and luggage lines , a $ 11.9 million increase in net sales of licensed sports apparel and a $ 11.1 million increase in net sales of jessica simpson dresses . net sales of wholesale non-licensed product increased to $ 277.6 million in fiscal 2012 from $ 244.0 million in fiscal 2011 , primarily due to an increase of $ 33.7 million in net sales of private label outerwear . net sales of our retail operations increased to $ 164.3 million in fiscal 2012 from $ 142.3 million in fiscal 2011 primarily as a result of an increase in the number of stores in fiscal 2012 , as well as a comparative store sales increase of 6.6 % . net sales resulting from new stores opened in fiscal 2012 were approximately $ 8.4 million . gross profit increased to $ 370.7 million , or 30.1

behavioral health care facilities ( 328 inpatient facilities and 21 outpatient facilities ) : located in the u.s. : 185 inpatient behavioral health care facilities , and ; 19 outpatient behavioral health care facilities . located in the u.k. : 140 inpatient behavioral health care facilities , and ; 2 outpatient behavioral health care facilities . located in puerto rico : 3 inpatient behavioral health care facilities . as a percentage of our consolidated net revenues , net revenues from our acute care hospitals , outpatient facilities and commercial health insurer accounted for 54 % during 2019 and 53 % during each of 2018 and 2017. net revenues from our behavioral health care facilities and commercial health insurer accounted for 46 % of our consolidated net revenues during 2019 and 47 % during each of 2018 and 2017. our behavioral health care facilities located in the u.k. generated net revenues of approximately $ 554 million in 2019 , $ 505 million in 2018 and $ 429 million in 2017. total assets at our u.k. behavioral health care facilities were approximately $ 1.270 billion as of december 31 , 2019 , $ 1.224 billion as of december 31 , 2018 and $ 1.098 billion as of december 31 , 2017. services provided by our hospitals include general and specialty surgery , internal medicine , obstetrics , emergency room care , radiology , oncology , diagnostic care , coronary care , pediatric services , pharmacy services and or behavioral health services . we provide capital resources as well as a variety of management services to our facilities , including central purchasing , information services , finance and control systems , facilities planning , physician recruitment services , administrative personnel management , marketing and public relations . forward-looking statements and risk factors you should carefully review the information contained in this annual report , and should particularly consider any risk factors that we set forth in this annual report and in other reports or documents that we file from time to time with the securities and exchange commission ( the “ sec ” ) . in this annual report , we state our beliefs of future events and of our future financial performance . this annual report contains “ forward-looking statements ” that reflect our current estimates , expectations and projections about our future results , performance , prospects and opportunities . forward-looking statements include , among other things , the information concerning our possible future results of operations , business and growth strategies , financing plans , expectations that regulatory developments or other matters will not have a material adverse effect on our business or financial condition , our competitive position and the effects of competition , the projected growth of the industry in which we operate , and the benefits and synergies to be obtained from our completed and any future acquisitions , and statements of our goals and objectives , and other similar expressions concerning matters that are not historical facts . words such as “ may , ” “ will , ” “ should , ” “ could , ” “ would , ” “ predicts , ” “ potential , ” “ continue , ” “ expects , ” “ anticipates , ” “ future , ” “ intends , ” “ plans , ” “ believes , ” “ estimates , ” “ appears , ” “ projects ” and similar expressions , as well as statements in future tense , identify forward-looking statements . in evaluating those statements , you should specifically consider various factors , including the risks related to healthcare industry trends and those set forth herein in item 1a . risk factors . those factors may cause our actual results to differ materially from any of our forward-looking statements . 43 forward-looking statements should not be read as a guarantee of future performance or results , and will not necessarily be accurate indications of the times at , or by which , such performance or results will be achieved . forward-looking information is based on information available at the time and or our good faith belief with respect to future events , and is subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements . such factors include , among other things , the following : our ability to comply with the existing laws and government regulations , and or changes in laws and government regulations ; an increasing number of legislative initiatives have been passed into law that may result in major changes in the health care delivery system on a national or state level . legislation has already been enacted that has eliminated the penalty for failing to maintain health coverage that was part of the original patient protection and affordable care act ( the “ legislation ” ) . president trump has already taken executive actions : ( i ) requiring all federal agencies with authorities and responsibilities under the legislation to “ exercise all authority and discretion available to them to waiver , defer , grant exemptions from , or delay ” parts of the legislation that place “ unwarranted economic and regulatory burdens ” on states , individuals or health care providers ; ( ii ) the issuance of a final rule in june , 2018 by the department of labor to enable the formation of association health plans that would be exempt from certain legislation requirements such as the provision of essential health benefits ; ( iii ) the issuance of a final rule in august , 2018 by the department of labor , treasury , and health and human services to expand the availability of short-term , limited duration health insurance , ( iv ) eliminating cost-sharing reduction payments to insurers that would otherwise offset deductibles and other out-of-pocket expenses for health plan enrollees at or below 250 percent of the federal poverty level ; ( v ) relaxing requirements for state innovation waivers that could reduce enrollment in the individual and small group markets and lead to additional enrollment in short-term story_separator_special_tag we can provide no assurance that reductions to revenues earned pursuant to these programs , particularly in the above-mentioned states , will not have a material adverse effect on our future results of operations ; our ability to continue to obtain capital on acceptable terms , including borrowed funds , to fund the future growth of our business ; our inpatient acute care and behavioral health care facilities may experience decreasing admission and length of stay trends ; our financial statements reflect large amounts due from various commercial and private payers and there can be no assurance that failure of the payers to remit amounts due to us will not have a material adverse effect on our future results of operations ; in august , 2011 , the budget control act of 2011 ( the “ 2011 act ” ) was enacted into law . the 2011 act imposed annual spending limits for most federal agencies and programs aimed at reducing budget deficits by $ 917 billion between 2012 and 2021 , according to a report released by the congressional budget office . among its other provisions , the law established a bipartisan congressional committee , known as the joint select committee on deficit reduction ( the “ joint committee ” ) , which was tasked with making recommendations aimed at reducing future federal budget deficits by an additional $ 1.5 trillion over 10 years . the joint committee was unable to reach an agreement by the november 23 , 2011 deadline and , as a result , across-the-board cuts to discretionary , national defense and medicare spending were implemented on march 1 , 2013 resulting in medicare payment reductions of up to 2 % per fiscal year with a uniform percentage reduction across all medicare programs . the bipartisan budget act of 2015 , enacted on november 2 , 2015 , continued the 2 % reductions to medicare reimbursement imposed under the 2011 act . subsequent legislation enacted by congress extended reductions through 2029. we can not predict whether congress will restructure the implemented medicare payment reductions or what other federal budget deficit reduction initiatives may be proposed by congress going forward ; uninsured and self-pay patients treated at our acute care facilities unfavorably impact our ability to satisfactorily and timely collect our self-pay patient accounts ; changes in our business strategies or development plans ; in june , 2016 , the united kingdom affirmatively voted in a non-binding referendum in favor of the exit of the united kingdom ( “ u.k. ” ) from the european union ( the “ brexit ” ) and it was approved by vote of the british legislature . on march 29 , 2017 , the united kingdom triggered article 50 of the lisbon treaty , formally starting negotiations regarding its exit from the european union . on january 31 , 2020 , the u.k. formally exited the european union . the u.k. and the european union will now enter into a transition period in which the terms of the future relationship must be negotiated . the outcome of these negotiations is uncertain , and we do not know to what extent brexit will ultimately impact the business and regulatory environment in the u.k. , the european union , or other countries . the u.k. will continue to follow european union rules through at least december 31 , 2020 ( the “ transition period ” ) . the transition period may be extended through december 31 , 2022. any of these effects of brexit , and others we can not anticipate , could harm our business , financial condition and results of operations ; fluctuations in the value of our common stock , and ; other factors referenced herein or in our other filings with the securities and exchange commission . 45 given these uncertainties , risks and assumptions , as outlined above , you are cautioned not to place undue reliance on such forward-looking statements . our actual results and financial condition could differ materially from those expressed in , or implied by , the forward-looking statements . forward-looking statements speak only as of the date the statements are made . we assume no obligation to publicly update any forward-looking statements to reflect actual results , changes in assumptions or changes in other factors affecting forward-looking information , except as may be required by law . all forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement . critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes . a summary of our significant accounting policies is outlined in note 1 to the financial statements . we consider our critical accounting policies to be those that require us to make significant judgments and estimates when we prepare our financial statements , including the following : revenue recognition : on january 1 , 2018 , we adopted , using the modified retrospective approach , asu 2014-09 and asu 2016-08 , “ revenue from contracts with customers ( topic 606 ) ” and “ revenue from contracts with customers : principal versus agent considerations ( reporting revenue gross versus net ) ” , respectively , which provides guidance for revenue recognition . the standard 's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services . the most significant change from the adoption of the new standard relates to our estimation for the allowance for doubtful accounts . under the previous standards , our estimate for amounts not expected to be collected based upon our historical experience , were reflected as provision for doubtful accounts , included within net revenue .

other operating results interest expense reflected below are the components of our interest expense which amounted to $ 163 million during 2019 , $ 155 million during 2018 and $ 145 million during 2017 ( amounts in thousands ) : replace_table_token_17_th 72 ( a . ) in october , 2018 , we entered into a sixth amendment to our credit ag reement dated november 15 , 2010 to , among other things : ( i . ) increase the aggregate amount of the revolving commitments by $ 200 million to $ 1 billion ; ( ii ) increase the aggregate amount of the term l oan facility a by approximately $ 29 0 million to $ 2 billion , and ; ( iii ) extend the maturity date of the credit agreement from august 7 , 2019 to october 23 , 2023 . on october 31 , 2018 , we added a seven-year , tranche b term loan facility , which matures on october 31 , 2025 , in the aggregate amount of $ 495 million pursuant to our credit agreement . the credit agreement , as amended in october , 2018 , consists of : ( i ) an $ 1 billion revolving credit facility ( there are no outstanding borrowings under the revolving credit facility as of december 31 , 2019 ) ; ( ii ) a term loan a facility with $ 2.0 billion of outstanding borrowings as of december 31 , 2019 , and ; ( iii ) a term loan b facility with $ 500 million of outstanding borrowings as of december 31 , 2019 . ( b . ) on november 26 , 2018 we redeemed the $ 300 million aggregate principal , 3.75 % senior notes due 2019. the 2019 notes were redeemed for an aggregate price equal to 100.485 % of the principal amount ( premium of approximately $ 1 million ) plus accrued interest to the redemption date .

these agencies approve natural gas rates designed to provide us the opportunity to generate revenues to recover the cost of natural gas delivered to our customers and our fixed and variable costs such as depreciation , interest , maintenance and overhead costs , and to earn a reasonable return for our shareholders . with the exception of atlanta gas light , our largest utility , the earnings of our regulated utilities can be affected by customer consumption patterns that are a function of weather conditions , price levels for natural gas and general economic conditions that may impact our customers ' ability to pay for gas consumed . various mechanisms exist that limit our exposure to weather changes within specified ranges in all of our jurisdictions . our retail energy operations segment , which consists of southstar , also is weather sensitive and uses a variety of hedging strategies , such as weather derivative instruments and other risk management tools , to mitigate potential weather impacts . sequent , our wholly-owned subsidiary within our wholesale services segment is temperature insensitive , but generally has greater opportunity to capture operating margin due to price volatility as a result of extreme weather . our energy investments segment 's primary activity is our natural gas storage business , which develops , acquires and operates high-deliverability salt-dome storage assets in the gulf coast region of the united states . while this business also can generate additional revenue during times of peak market demand for natural gas storage services , the majority of our storage services are covered under medium to long-term contracts at a fixed market rate . for more information on our operating segments , see item 1 , “ business ” . executive summary proposed merger with nicor in december 2010 , we entered into a merger agreement with nicor , which we expect to complete in the second half of 2011. the proposed merger will create a combined company with increased scale and scope in both regulated utility and non-regulated businesses as indicated below : · seven regulated natural gas distribution companies providing natural gas services to approximately 4.5 million customers in illinois , georgia , new jersey , virginia , florida , tennessee and maryland · over 1 million retail customers in the unregulated businesses · physical wholesale gas business delivering approximately 4.7 bcf of natural gas per day · natural gas storage facilities that will provide approximately 31 bcf of storage in 2012 completion of the proposed merger is conditioned upon , among other things , shareholder approval by both companies , expiration or termination of any applicable waiting period under the hart-scott-rodino antitrust improvements act of 1976 , and approval by , among others , the illinois commerce commission . we anticipate that the necessary approvals will be obtained . in january 2011 , we filed a joint application with nicor to the illinois commerce commission for approval of the proposed merger . as stated above , approval by the illinois commerce commission is a condition to completion of the merger . the application did not request a rate increase and included a c ommitment to maintain the number of full-time equivalent employees involved in the operation of nicor 's gas distribution subsidiary at a level comparable to current staffing for a period of three years following merger completion . the illinois commerce commission has eleven months to act upon the application ; however , we and nicor have asked for approval of the merger by october 1 , 2011 . the merger agreement contains certain termination rights for both us and nicor , and further provides for the payment of fees and expenses upon termination under specified circumstances . for additional information relating to the proposed merger please see our form 8-k filed on december 7 , 2010. further information concerning the proposed merger was included in a joint proxy statement/prospectus contained in the registration statement on form s-4 that was filed with the sec on february 4 , 2011. legislative and regulatory update we continue to actively pursue a regulatory strategy that improves customer service and reduces the lag between our investments in infrastructure and the recovery of those investments through various rate mechanisms . if our rate design approvals are not approved , we will continue to work cooperatively with our regulators , legislators and others to create a framework that is conducive to our business goals and the interests of our customers and shareholders . the dodd-frank wall street reform and consumer protection act ( dodd-frank act ) was enacted in july 2010 , representing an overhaul of the framework for regulation of united states financial markets . we are currently evaluating the provisions of the dodd-frank act and the potential impact that it may have on us . glossary of key terms 28 however , we believe that an aspect of the dodd-frank act which requires that various regulatory agencies , including the sec and the commodities futures trading commission , establish additional regulations for participating in financial markets for hedging certain risks inherent in our business , including commodity and interest rate risks , may be applicable to us . as a result , the costs of participating in financial markets for hedging certain risks may be increased as a result of the new legislation . we may also incur additional costs associated with our compliance with new regulations and anticipated additional reporting and disclosure obligations . for additional information on our regulatory strategy see item 1 , “ business ” under the caption “ regulatory planning ” . customer growth initiatives relative to recent years , we continue to see higher than normal rates of unemployment , depressed housing markets with high inventories , significantly reduced new home construction and a slow-down in new commercial development . as a result , we experienced slight customer losses in our distribution operations and retail energy operations segments throughout 2010. we have largely offset t his trend by implementing customer attrition mitigation strategies to retain existing customers at all of our utilities . story_separator_special_tag for more information on our income taxes , including a reconciliation between the statutory federal income tax rate and the effective rate , see note 11. operating metrics selected weather , customer and volume metrics for 2010 , 2009 and 2008 , which we consider to be some of the key performance indicators for our operating segments , are presented in the following tables . we measure the effects of weather on our business through heating degree days . generally , increased heating degree days result in greater demand for gas on our distribution systems . however , extended and unusually mild weather during the heating season can have a significant negative impact on demand for natural gas . our customer metrics highlight the average number of customers to which we provide services . this number of customers can be impacted by natural gas prices , economic conditions and competition from alternative fuels . volume metrics for distribution operations and retail energy operations present the effects of weather and our customers ' demand for natural gas . wholesale services ' daily physical sales represent the daily average natural gas volumes sold to its customers . within our energy investments segment , our natural gas storage businesses generally prefer to have approximately 95 % of their working natural gas capacity under firm subscription . this allows our natural gas storage business to generate additional revenue during times of peak market demand for natural gas storage services , but retain consistency with their earnings . glossary of key terms 31 replace_table_token_13_th replace_table_token_14_th replace_table_token_15_th replace_table_token_16_th ( 1 ) obtained from the national oceanic and atmospheric administration , national climatic data center . normal represents the ten-year averages from january 2000 to december 2010 . ( 2 ) a portion of the ohio customers represents customer equivalents , which are computed by the actual delivered volumes divided by the expected average customer usage . glossary of key terms 32 segment information operating margin , operating expenses and ebit information for each of our segments are contained in the following tables for the last three years . replace_table_token_17_th ( 1 ) these are non-gaap measurements . a reconciliation of operating margin to operating income and ebit to earnings before income taxes and net income is contained in “ results of operations ” herein . ( 2 ) includes intercompany eliminations . distribution operations replace_table_token_18_th glossary of key terms 33 retail energy operations replace_table_token_19_th wholesale services replace_table_token_20_th replace_table_token_21_th the following table indicates the components of wholesale services ' operating margin for 2010 , 2009 and 2008. replace_table_token_22_th for more information on sequent 's expected operating revenues from its storage inventory in 2011 and discussion of commercial activity , see description of the inventory roll-out schedule in item 1 “ business. ” energy investments replace_table_token_23_th glossary of key terms 34 liquidity and capital resources overview the acquisition of natural gas , pipeline capacity , payment of dividends , and working capital requirements are our most significant short-term financing requirements . the need for long-term capital is driven primarily by capital expenditures and maturities of long-term debt . in addition , we anticipate incurring indebtedness in connection with financing the consideration for the proposed nicor merger . the liquidity required to fund our working capital , capital expenditures and other cash needs is primarily provided by our operating activities . our short-term cash requirements not met by cash from operations are primarily satisfied with short-term borrowings under our commercial paper program , which is supported by our credit facility . periodically , we raise funds supporting our long-term cash needs from the issuance of long-term debt or equity securities . we regularly evaluate our funding strategy and profile to ensure that we have sufficient liquidity for our short-term and long-term needs in a cost-effective manner . our capital market strategy has continued to focus on maintaining a strong consolidated statement of financial position , ensuring ample cash resources and daily liquidity , accessing capital markets at favorable times as needed , managing critical business risks and maintaining a balanced capital structure through the appropriate issuance of equity or long-term debt securities . our issuance of various securities , including long-term and short-term debt and equity , is subject to customary approval or review by state and federal regulatory bodies including the various public service commissions of the states in which we conduct business , the sec and the ferc . furthermore , a substantial portion of our consolidated assets , earnings and cash flows are derived from the operation of our regulated utility subsidiaries , whose legal authority to pay dividends or make other distributions to us is subject to regulation . we believe the amounts available to us under our senior notes and credit facility , bridge facility , term loan facility and through the issuance of debt and equity securities , combined with cash provided by our operating activities , will continue to allow us to meet our needs for working capital , pension contributions , construction expenditures , anticipated debt redemptions , interest payments on debt obligations , dividend payments , common share repurchases , financing requirements for the nicor merger and other cash needs through the next several years . nevertheless , our ability to satisfy our working capital requirements and debt service obligations , or fund planned capital expenditures , will substantially depend upon our future operating performance ( which will be affected by prevailing economic conditions ) , and financial , business and other factors , some of which we are unable to control . these factors include , among others regulatory changes , the price of natural gas , the demand for natural gas and operational risks . we will continue to evaluate our need to increase available liquidity based on our view of working capital requirements , including the impact of changes in natural gas prices , liquidity requirements established by rating agencies , the proposed merger with nicor and other factors .

results of operations we generate nearly all our operating revenues through the sale , distribution and storage of natural gas . we include in our consolidated revenues an estimate of revenues from natural gas distributed , but not yet billed , to residential and commercial customers from the latest meter reading date to the end of the reporting period . no individual customer or industry accounts for a significant portion of our revenues . the following table provides more information regarding the components of our operating revenues . replace_table_token_9_th we evaluate segment performance using the measures of operating margin and ebit , which include the effects of corporate expense allocations . operating margin is a non-gaap measure that is calculated as operating revenues minus cost of gas , which excludes operation and maintenance expense , depreciation and amortization , taxes other than income taxes , and the gain or loss on the sale of our assets . these items are included in our calculation of operating income as reflected in our consolidated statements of income . ebit is also a non-gaap measure that includes operating income , other income and expenses . items that we do not include in ebit are financing costs , including interest and debt expense and income taxes , each of which we evaluate on a consolidated basis . we believe operating margin is a better indicator than operating revenues for the contribution resulting from customer growth in our distribution operations segment since the cost of gas can vary significantly and is generally billed directly to our customers . we also consider operating margin to be a better indicator in our retail energy operations , wholesale services and energy investments segments since it is a direct measure of operating margin before overhead costs .

director fees deferred into stock units are calculated and expensed each calendar quarter by taking total fees earned during the calendar quarter and dividing by the closing price of our common stock on the last day of the calendar quarter , rounded to the nearest whole share . the total annual retainer , board and board committee fees for non-employee directors that are not deferred into stock options , but which includes amounts deferred into story_separator_special_tag the following discussion and analysis should be read in conjunction with item 6 , `` selected consolidated financial data '' and our consolidated financial statements and related notes appearing elsewhere in this report . this annual report on form 10-k contains forward-looking statements within the meaning of the private securities litigation reform act of 1995. see `` forward-looking statements `` and part i , item 1a. `` risk factors . `` overview hibbett sports , inc. is an athletic specialty retailer operating in small to mid-sized markets , predominantly in the south , southwest , mid-atlantic and midwest regions of the united states . hibbett sports stores provide an extensive selection of premium brand footwear , apparel and team sports equipment , emphasizing convenient locations and a high level of customer service . as of january 28 , 2017 , we operated a total of 1,078 stores in 35 states composed of 1,059 hibbett sports stores and 19 sports additions athletic shoe stores . the hibbett sports store is our primary retail format and growth vehicle and is an approximately 5,000 square foot store located primarily in strip centers which are frequently influenced by a wal-mart store . our hibbett sports store base consisted of 847 stores located in strip centers , 24 free-standing stores and 188 enclosed mall locations . we expect to continue to grow our store base in strip centers versus enclosed malls . we do not expect that the average size of our stores opening in fiscal 2018 will vary significantly from the average size of stores opened in fiscal 2017. hibbett operates on a 52- or 53-week fiscal year ending on the saturday nearest to january 31 of each year . the consolidated statements of operations for fiscal 2017 , fiscal 2016 and fiscal 2015 included 52 weeks of operations . fiscal 2018 will include 53 weeks of operations . we became a public company in october 1996. fiscal 2017 experienced a total company-wide square footage increase of 2.8 % . our plan for fiscal 2018 is to increase total company-wide square footage by approximately 2 % . to supplement new store openings , we continue to expand high performing stores , increasing the square footage in 8 existing stores in fiscal 2017 for an average increase in square footage of 39 % . in fiscal 2017 , comparable store sales increased 0.2 % , although footwear experienced a mid-single digit comparable store sales gain . for fiscal 2018 , comparable store sales are expected to increase in the low-single digit range . we expect overall gross margin rate to be relatively flat , although merchandise margin is expected to decline as we start to incur freight costs associated with our store-to-home and e-commerce initiatives . logistics and store occupancy expenses are expected to decrease as a percentage of net sales due to leverage gained from comparable store sales . we expect operating , selling and administrative expenses to increase as a percentage of net sales in fiscal 2018. this is primarily due to expenses associated with our e-commerce initiative , including on-going development costs , third party support costs , pre-launch website marketing and additions to our digital team . we also expect to continue to generate sufficient cash to enable us to expand and remodel our store base , to enable capital expenditures including technology upgrade projects and to repurchase our common stock under our stock repurchase program . comparable store net sales data for the periods presented reflects sales for our traditional format hibbett sports and sports additions stores open throughout the period and the corresponding period of the prior fiscal year . if a store remodel , relocation or expansion results in the store being closed for a significant period of time , its sales are removed from the comparable store base until it has been open a full 12 months . when we begin sales through our e-commerce channel , we will recognize these sales as a component of comparable store sales . 26 story_separator_special_tag furthermore : · total salary and benefit costs increased 53 basis points as a percentage of net sales due to de-leverage associated with lower comparable store sales and higher health care costs . · data processing costs increased 9 basis points as a percentage of net sales due to the implementation of new systems and the upgrade of existing systems , as well as significant improvements in our infrastructure and disaster recovery capabilities . · advertising expense increased 6 basis points as a percentage of net sales due to increased costs related to mobile marketing initiatives and communicating to our growing base of loyalty members . depreciation and amortization . depreciation and amortization as a percentage of net sales was 1.8 % in fiscal 2016 and in fiscal 2015. in fiscal 2016 , depreciation expense increased due to the full year effect of our new wholesale and logistics facility placed in service in april 2014 , the addition of new stores and the capitalization of it investments . provision for income taxes . the combined federal , state and local effective income tax rate as a percentage of pre-tax income was 36.9 % for fiscal 2016 and 37.6 % for fiscal 2015. the decrease in rate resulted primarily from additional utilization of state tax credits associated with our wholesale and logistics facility . 29 liquidity and capital resources our capital requirements relate primarily to new store openings , stock repurchases , facilities and systems to support company growth and working capital requirements . story_separator_special_tag the financing activity cash fluctuation between years is primarily the result of repurchases of our common stock . we expended $ 43.1 million , $ 91.3 million and $ 61.0 million on repurchases of our common stock during fiscal 2017 , fiscal 2016 and fiscal 2015 , respectively , which included cash used to settle net share equity awards of $ 0.9 million , $ 2.1 million and $ 4.7 million during fiscal 2017 , fiscal 2016 and fiscal 2015 , respectively . financing activities also consisted of proceeds from stock option exercises and employee stock plan purchases and the excess tax benefit from the exercise of incentive stock options . as stock options are exercised and shares are purchased through our employee stock purchase plan , we will continue to receive proceeds and expect a tax deduction ; however , the amounts and timing can not be predicted . at january 28 , 2017 , we had two unsecured revolving credit facilities that allow borrowings up to $ 30.0 million and $ 50.0 million , and which renew in august 2018 and november 2018 , respectively . the facilities do not require a commitment or agency fee nor are there any covenant restrictions . we plan to renew these facilities as they expire and do not anticipate any problems in doing so ; however , no assurance can be given that we will be granted a renewal or terms which are acceptable to us . as of january 28 , 2017 , we did not have any debt outstanding under either of these facilities . 31 the following table lists the aggregate maturities of various classes of obligations and expiration amounts of various classes of commitments related to hibbett sports , inc. at january 28 , 2017 ( in thousands ) : replace_table_token_11_th ( 1 ) see `` part ii , item 8 , consolidated financial statements note 6 – leases . '' ( 2 ) purchase obligations include all material legally binding contracts such as software license commitments and service contracts . the table above also includes a stand-by letter of credit in conjunction with our self-insured workers ' compensation and general liability insurance coverage . contractual obligations that are not binding agreements , including purchase orders for inventory , are excluded from the table above . store utility contracts , including waste disposal agreements , are also excluded . ( 3 ) other liabilities include amounts accrued for various deferred compensation arrangements . see `` part ii , item 8 , consolidated financial statements note 7 – defined contribution benefit plans '' for a discussion regarding our employee benefit plans . non-current liabilities have been excluded from the above table to the extent that the timing and or amount of any cash payment are uncertain . excluded from this table are approximately $ 1.3 million of unrecognized tax benefits , which have been recorded as liabilities in accordance with asc topic 740 , income taxes , as the timing of such payments can not be reasonably determined . see `` part ii , item 8 , consolidated financial statements note 1 – deferred rent '' for a discussion on our deferred rent liabilities . see `` part ii , item 8 , consolidated financial statements note 9 – income taxes '' for a discussion of our unrecognized tax benefits . off-balance sheet arrangements we have not provided any financial guarantees through january 28 , 2017. we have not created , and are not party to , any special-purpose or off-balance sheet entities for the purpose of raising capital , incurring debt or operating our business . we do not have any arrangements or relationships with entities that are not consolidated into the financial statements . inflation and other economic factors our ability to provide quality imported merchandise on a profitable basis may be subject to political and economic factors and influences that we can not control . national or international events , including changes in government trade or other policies , could increase our merchandise costs and other costs that are critical to our operations . consumer spending could also decline because of economic pressures . see `` risk factors . `` we do not believe that inflation has had a material impact on our financial position or results of operations to date . a high rate of inflation or other increases in the cost of conducting our business in the future may have an adverse effect on our ability to maintain current levels of gross profit and selling , general and administrative expenses as a percentage of net sales if the selling prices of our merchandise do not increase with these increased costs . 32 our critical accounting policies our critical accounting policies reflected in the consolidated financial statements are detailed below . revenue recognition . we recognize revenue , including layaway , customer order and gift card sales , in accordance with asc topic 605 , revenue recognition . retail merchandise sales occur on-site in our stores . we recognize revenue at the time the customer takes possession of the merchandise . retail sales are recorded net of returns and discounts and exclude sales taxes . layaways : customers have the option of paying a down payment and placing merchandise on layaway . the customer may make further payments in installments , but the entire purchase price must be received by us within 30 days . the down payment and any installments are recorded as short-term deferred revenue until the customer pays the entire purchase price for the merchandise . customer orders : customers may order merchandise available in other hibbett store locations for pickup in the selling store at a later date . customers make a deposit payment with the remaining balance due at pickup . the deposits are recorded as short-term deferred revenue until the remaining balance is paid and the customer takes possession of the merchandise . during fiscal 2018 , we expect to launch ship-to-home functionality . customers will make full payment at the time the order is placed .

executive summary following is a highlight of our financial results over the last three fiscal years : replace_table_token_8_th during fiscal 2017 , hibbett opened 65 new stores and closed 31 underperforming stores , bringing the store base to 1,078 in 35 states as of january 28 , 2017. inventory on a per store basis at january 28 , 2017 decreased by 4.0 % compared to the prior fiscal year . hibbett ended fiscal 2017 with $ 39.0 million of available cash and cash equivalents on the consolidated balance sheet and full availability under its $ 80.0 million unsecured credit facilities . recent accounting pronouncements see note 2 of item 8 of this annual report on form 10-k for the fiscal year ended january 28 , 2017 , for information regarding recent accounting pronouncements . results of operations the following table sets forth the percentage relationship to net sales of certain items included in our consolidated statements of operations for the periods indicated . replace_table_token_9_th note : columns may not sum due to rounding . 27 fiscal 2017 compared to fiscal 2016 net sales . net sales increased $ 29.9 million , or 3.2 % , to $ 973.0 million for fiscal 2017 from $ 943.1 million for fiscal 2016. furthermore : · we opened 65 hibbett sports stores while closing 31 underperforming hibbett sports stores for net addition of 34 stores in fiscal 2017. stores not in the comparable store net sales calculation accounted for $ 28.1 million of the increase in net sales . we expanded , remodeled or relocated 10 high performing stores . store openings and closings are reported net of relocations . · comparable store net sales for fiscal 2017 increased 0.2 % compared to fiscal 2016. during fiscal 2017 , 941 stores were included in the comparable store sales comparison . comparable store net sales were driven by gains in footwear , offset by declines in apparel and equipment .

48 myers industries , inc. and subsidiaries . notes to consolidated financial statements — ( continued ) ( dollar amounts in thousands , except where otherwise indicated ) the accrued liability balance for severance and other exit costs associated with restructuring is included in other accrued expenses on the accompanying consolidated statements of financial position . replace_table_token_31_th as a result of restructuring activity including plant closures , approximately $ 5.7 million and $ 5.0 million of property , plant and equipment has been classified as held for sale as of december 31 , 2011 and 2010 , respectively , and is included in other assets in the consolidated statements of financial position . the company is actively pursuing disposal including the sale of these facilities . during 2010 , the company sold its facility in shelbyville , kentucky , which was previously classified as held for sale with a carrying value of $ 4.4 million . the proceeds from this sale were $ 5.1 million and the company recorded a gain of $ 0.7 million which is included in general and administrative expenses . stock compensation the company 's 2008 incentive stock plan ( the “2008 plan” ) authorizes the compensation committee of the board of directors to issue up to 3,000,000 shares of various types of stock based awards including stock options , restricted stock and stock appreciation rights to key employees and directors . in general , options granted and outstanding vest over a three to five year period and expire ten years from the date of grant . the following tables summarize stock option activity in the past three years : options granted in 2011 , 2010 and 2009 : replace_table_token_32_th 49 myers industries , inc. and subsidiaries . notes to consolidated financial statements — ( continued ) ( dollar amounts in thousands , except where otherwise indicated ) options exercised in 2011 , 2010 and 2009 : replace_table_token_33_th in addition , options totaling 153,426 , 175,909 and 127,076 expired or were forfeited during the years ended december 31 , 2011 , 2010 and 2009 , respectively . options outstanding and exercisable at december 31 , 2011 , 2010 and 2009 were as follows : replace_table_token_34_th stock compensation expense reduced income before taxes approximately $ 2,595 , $ 2,326 and $ 2,660 for the years ended december 31 , 2011 , 2010 , and 2009 , respectively . these expenses are included in selling , general and administrative expenses in the accompanying consolidated statements of income ( loss ) . total unrecognized compensation cost related to non-vested share based compensation arrangements at december 31 , 2011 was approximately $ 2.7 million , which will be recognized over the next three to four years . the fair value of options granted is estimated using an option pricing model based on assumptions set forth in the following table . the company uses historical data to estimate employee exercise and departure behavior . the risk free interest rate is based on the u.s. treasury yield curve in effect at the time of grant and through the expected term . the dividend yield is based on the story_separator_special_tag story_separator_special_tag 27.3 % in 2011 compared to 16.0 % in 2010. the 2011 effective tax rate reflects the company 's reversal of approximately $ 4.9 million of previously unrecognized tax benefits , primarily related to the incurred loss on the sale of its european material handling business in 2007 and other tax adjustments , including provision to return adjustments resulting from changes in estimates . the 2010 effective tax rate of 16.0 % on the loss before taxes of $ 51.0 million was primarily due to the $ 72.0 million goodwill impairment charge recognized in that year , $ 26.7 million of which was not deductible . results of operations : 2010 versus 2009 net sales from continuing operations : replace_table_token_14_th net sales for 2010 increased 5 % primarily due to improved sales volumes in all of the company 's business segments . in addition , higher selling prices increased sales approximately $ 9.1 million and sales increased $ 11.5 million from the effect of foreign currency translation , primarily the canadian dollar . 26 in the material handling segment , sales increased $ 3.7 million or 1 % in 2010 compared to 2009. the increase reflects the impact of $ 6.7 million from higher selling prices and $ 2.2 million from foreign currency translation , which was partially offset by reduced volumes . sales volumes were significantly lower for custom pallets in 2010 but partially offset by increased sales of legacy product lines such as reusable bulk containers for agriculture . net sales in the lawn and garden segment in 2010 increased by $ 3.5 million or 2 % compared to 2009. sales increased $ 8.4 million due to foreign currency translation related to the favorable impact of exchange rates mostly for the canadian dollar . in 2010 , sales declined $ 2.2 million from reduced volume and $ 2.3 million from lower selling prices in the year . net sales in the distribution segment increased $ 12.0 million or 7 % in 2010 compared to 2009. sales increased $ 7.2 million due to higher volumes and $ 3.1 million from increased selling prices . the distribution segment experienced steady improvement in demand in 2010 and sales benefited from stronger replacement tire sales . in the engineered products segment , net sales in 2010 increased $ 18.8 million , or 22 % compared to 2009. the increase is due to significant volume increases in the automotive , recreational vehicle , marine and custom markets of approximately $ 15.0 million . story_separator_special_tag cost of sales & gross profit from continuing operations : replace_table_token_15_th gross profit margin in 2010 of 22.3 % was down slightly compared to 2009. raw material costs , primarily for plastic resins , were , on average , approximately 47 % higher for polypropylene and 29 % higher for polyethylene in 2010 compared to the prior year . in addition , the liquidation of inventories valued at lifo cost reduced cost of sales by approximately $ 4.0 million in 2009 compared to $ 0.7 million in 2010. the impact of higher raw material costs and the liquidation of lifo inventories were largely offset by lower manufacturing costs and a reduction in unabsorbed overhead resulting from restructuring cost savings and higher sales volumes . selling , general and administrative expenses : replace_table_token_16_th sg & a expenses decreased $ 8.2 million or 5.5 % compared with 2009. expenses in 2010 include charges of approximately $ 2.7 million for the movement of machinery and equipment and other restructuring activities . sg & a expenses in 2009 included $ 16.6 million of charges related to consulting and severance costs in restructuring the company 's manufacturing businesses . excluding these charges , other sg & a expenses in 2010 increased $ 5.7 million compared to 2009 , primarily from freight and selling expenses due to increased sales volumes . impairment charges : in 2010 , the company recorded goodwill impairment charges of $ 72.0 million related to its lawn and garden business as discussed in the goodwill and intangible assets footnote to the consolidated financial 27 statements in item 8. in 2009 , the company recorded fixed asset impairment charges of $ 2.0 million related to restructuring its lawn and garden business , $ 1.3 million for its material handling business , and $ 2.2 million in the engineered products business . the 2009 fixed asset impairment charges were the result of closing manufacturing facilities . interest expense : replace_table_token_17_th net interest expense in 2010 decreased $ 1.1 million because of lower average borrowing levels . income ( loss ) before taxes : replace_table_token_18_th loss before taxes in 2010 was $ 51.0 million compared to income of $ 8.8 million in 2009. results were significantly impacted by the goodwill impairment charge of $ 72.0 million in 2010 and restructuring and impairment charges totaling $ 24.8 million in 2009. in addition , in 2010 the company recorded a non-operating gain of $ 3.8 million related to a claims settlement . income taxes : replace_table_token_19_th the effective tax rate decreased to 16.0 % in 2010 compared to 20.8 % in 2009. the effective rate for 2010 is lower than the 35 % u.s. federal statutory rate primarily due to the goodwill impairment charge , $ 26.7 million of which is not deductible . in addition , the effective rate was impacted by the mix of domestic and foreign composition of income and the related foreign tax rate differences . the effective tax rate for 2009 was impacted by the mix of domestic and foreign composition income and the related foreign tax rate differences . also in 2009 , the company made an adjustment to record previously unrecognized deferred tax assets which increased the income tax benefit and deferred tax assets by $ 0.4 million and recognized tax benefits of $ 0.3 million from a reduction in valuation allowances and $ 0.2 million from a reduction of uncertain tax liabilities . financial condition & liquidity and capital resources cash provided by operating activities from operations was $ 64.2 million for the year ended december 31 , 2011 compared to $ 45.6 million in 2010. the increase of $ 18.6 million was primarily attributable 28 to improved earnings . net income was $ 24.5 million in 2011 compared to a loss of $ 42.8 million in 2010. non-cash charges including depreciation and impairment charges were $ 42.2 million compared to non-cash charges of $ 20.5 million and a $ 72.0 million goodwill impairment charge in 2010. funds used for working capital improved by $ 1.6 million in 2011 versus 2010. cash used for working capital was $ 2.5 million in 2011 compared to cash used of $ 4.1 million in 2010. in 2011 , a reduction of inventories generated approximately $ 0.5 million of cash compared to $ 5.0 million in 2010. the reduction of inventories in 2011 resulted from ongoing working capital initiatives ; however , more significant reductions of inventory were achieved in 2010 due to restructuring programs . in 2011 , increasing sales resulted in higher accounts receivable and the use of $ 8.7 million of working capital compared with $ 10.0 million of cash used in 2010. in addition , there was an increase of $ 2.6 million in cash generated by accounts payable and accrued expenses in 2011 compared to 2010. the increase in cash from accounts payable and accrued expenses in 2011 was the result of employee compensation and royalties incurred but not yet paid . capital expenditures were approximately $ 21.9 million in 2011 compared to $ 20.5 million in 2010. capital spending in 2011 was higher than the preceding year as investments were made for new manufacturing , molding and automated handling technology . in 2011 , the company paid out cash of $ 1.1 million in connection with the acquisition of material improvements cheesebox and in 2010 , the company paid $ 0.4 million for the acquisition of enviro-fill . in 2011 and 2010 , the company received approximately $ 1.1 million and $ 5.2 million , respectively , in cash proceeds from the sale of property , plant & equipment . during 2011 , the company used cash of $ 20.9 million to purchase two million shares of its own stock under a share repurchase plan . the shares were repurchased in accordance with rule 10b5-1 of the securities exchange act of 1934. in addition , the company used cash to pay dividends of $ 9.5 million and

executive overview the company conducts its business activities in four distinct business segments , including three in manufacturing and one in distribution . the manufacturing segments consist of : material handling , lawn and garden , and engineered products . in our manufacturing segments , the company designs , manufactures , and markets a variety of plastic and rubber products . these products range from plastic reusable material handling containers and small parts storage bins to plastic horticultural pots and hanging baskets , decorative resin planters , plastic and rubber oem parts , tire repair materials , and custom plastic and rubber products . our distribution segment is engaged in the distribution of tools , equipment and supplies used for tire , wheel and undervehicle service on passenger , heavy truck and off-road vehicles . results of operations : 2011 versus 2010 net sales : replace_table_token_8_th net sales for 2011 were $ 755.7 million , an increase of $ 18.1 million or 2 % compared to the prior year . a favorable product and service mix along with higher selling prices increased sales by $ 42.2 million . sales were also impacted by $ 4.4 million from favorable foreign currency translation , primarily from the canadian dollar . these increases were partially offset by lower sales volumes of $ 28.5 million , primarily from a reduction in lower margin custom pallet sales in our material handling segment and lower volumes in the lawn and garden segment . net sales in the material handling segment increased $ 4.0 million or 2 % in 2011 compared to 2010. the increase in current year net sales included $ 22.9 million from improved pricing actions in response to higher raw material costs and customer mix and $ 0.9 million from the effect of favorable foreign currency translation .

also , constrictions in consumer credit , as well as general economic conditions , can increase overall demand for the types of vehicles the company purchases for resale as used vehicles become more attractive than new vehicles in times of economic instability . a negative shift in used vehicle supply , combined with strong demand , results in increased used vehicle prices and thus higher purchase costs for the company . new vehicle sales decreased dramatically beginning with the economic recession of 2008. while sales levels for new vehicles have risen steadily since 2009 , new vehicle sales volumes only returned to pre-recession levels during fiscal 2016. in addition , the challenging macro-economic environment , together with the constriction in consumer credit starting in 2008 , contributed to increased demand for the types of vehicles the company purchases and a resulting increase in used car prices . these negative macro-economic conditions have continued to affect our customers in the years since the recession and , in turn , have helped keep demand high for the types of vehicles we purchase . this increased demand , coupled with depressed levels of new vehicle sales in recent years , negatively impacted both the quality and the quantity of the used vehicle supply available to the company . management expects the tight supply of vehicles and resulting increases in vehicle purchase costs to continue , although some relief is expected as a result of steady increases in new car sales levels in recent periods . the company has devoted significant efforts to improving its purchasing processes to ensure adequate supply at appropriate prices , including expanding its purchasing territories to larger cities in close proximity to its dealerships and increasing its efforts to purchase vehicles from individuals at the dealership level as well as via the internet . the company has also increased the level of accountability for its purchasing agents including the establishment of sourcing and pricing guidelines . even with these efforts , the company expects gross margin percentages to remain under pressure over the near term . the company believes that the amount of credit available for the sub-prime auto industry has increased in recent years and management expects the availability of consumer credit within the automotive industry to be higher over the near term when compared to historical levels . this is expected to contribute to continued strong overall demand for most , if not all , of the vehicles the company purchases for resale . increased competition resulting from availability of funding to the sub-prime auto industry has contributed to lower down payments and longer terms , which have had a negative effect on collection percentages , liquidity and credit losses when compared to prior periods . macro-economic factors can have an effect on credit losses and resulting liquidity . general inflation , particularly within staple items such as groceries , as well as overall unemployment levels can have a significant effect on collection results and ultimately credit losses . the company has made improvements to its business processes within the last few years to strengthen controls and provide stronger infrastructure to support its collections efforts . the company anticipates that credit losses in the near term will be higher than historical ranges due to significant continued macro-economic challenges for the company 's customer base as well as increased competitive pressures . management continues to focus on improved execution at the dealership level , specifically as related to working individually with customers concerning collection issues . 29 the company has generally leased the majority of the properties where its dealerships are located . as of april 30 , 2016 , the company leased approximately 85 % of its dealership properties . the company expects to continue to lease the majority of the properties where its dealerships are located . the company 's revolving credit facilities generally restrict distributions by the company to its shareholders . the distribution limitations under the credit facilities allow the company to repurchase the company 's stock so long as : either ( a ) the aggregate amount of such repurchases does not exceed $ 40 million beginning october 8 , 2014 and the sum of borrowing bases combined minus the principal balances of all revolver loans after giving effect to such repurchases is equal to or greater than 30 % of the sum of the borrowing bases , or ( b ) the aggregate amount of such repurchases does not exceed 75 % of the consolidated net income of the company measured on a trailing twelve month basis ; provided that immediately before and after giving effect to the stock repurchases , at least 12.5 % of the aggregate funds committed under the credit facilities remain available . thus , although the company currently does routinely repurchase stock , the company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the company 's lenders . at april 30 , 2016 , the company had approximately $ 602,000 of cash on hand and $ 61 million of availability under its revolving credit facilities ( see note f to the consolidated financial statements in item 8 ) . on a short-term basis , the company 's principal sources of liquidity include income from operations and borrowings under its revolving credit facilities . on a longer-term basis , the company expects its principal sources of liquidity to consist of income from operations and borrowings under revolving credit facilities or fixed interest term loans . the company 's revolving credit facilities mature in october 2017 and the company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature . furthermore , while the company has no specific plans to issue debt or equity securities , the company believes , if necessary , it could raise additional capital through the issuance of such securities . the company story_separator_special_tag also , constrictions in consumer credit , as well as general economic conditions , can increase overall demand for the types of vehicles the company purchases for resale as used vehicles become more attractive than new vehicles in times of economic instability . a negative shift in used vehicle supply , combined with strong demand , results in increased used vehicle prices and thus higher purchase costs for the company . new vehicle sales decreased dramatically beginning with the economic recession of 2008. while sales levels for new vehicles have risen steadily since 2009 , new vehicle sales volumes only returned to pre-recession levels during fiscal 2016. in addition , the challenging macro-economic environment , together with the constriction in consumer credit starting in 2008 , contributed to increased demand for the types of vehicles the company purchases and a resulting increase in used car prices . these negative macro-economic conditions have continued to affect our customers in the years since the recession and , in turn , have helped keep demand high for the types of vehicles we purchase . this increased demand , coupled with depressed levels of new vehicle sales in recent years , negatively impacted both the quality and the quantity of the used vehicle supply available to the company . management expects the tight supply of vehicles and resulting increases in vehicle purchase costs to continue , although some relief is expected as a result of steady increases in new car sales levels in recent periods . the company has devoted significant efforts to improving its purchasing processes to ensure adequate supply at appropriate prices , including expanding its purchasing territories to larger cities in close proximity to its dealerships and increasing its efforts to purchase vehicles from individuals at the dealership level as well as via the internet . the company has also increased the level of accountability for its purchasing agents including the establishment of sourcing and pricing guidelines . even with these efforts , the company expects gross margin percentages to remain under pressure over the near term . the company believes that the amount of credit available for the sub-prime auto industry has increased in recent years and management expects the availability of consumer credit within the automotive industry to be higher over the near term when compared to historical levels . this is expected to contribute to continued strong overall demand for most , if not all , of the vehicles the company purchases for resale . increased competition resulting from availability of funding to the sub-prime auto industry has contributed to lower down payments and longer terms , which have had a negative effect on collection percentages , liquidity and credit losses when compared to prior periods . macro-economic factors can have an effect on credit losses and resulting liquidity . general inflation , particularly within staple items such as groceries , as well as overall unemployment levels can have a significant effect on collection results and ultimately credit losses . the company has made improvements to its business processes within the last few years to strengthen controls and provide stronger infrastructure to support its collections efforts . the company anticipates that credit losses in the near term will be higher than historical ranges due to significant continued macro-economic challenges for the company 's customer base as well as increased competitive pressures . management continues to focus on improved execution at the dealership level , specifically as related to working individually with customers concerning collection issues . 29 the company has generally leased the majority of the properties where its dealerships are located . as of april 30 , 2016 , the company leased approximately 85 % of its dealership properties . the company expects to continue to lease the majority of the properties where its dealerships are located . the company 's revolving credit facilities generally restrict distributions by the company to its shareholders . the distribution limitations under the credit facilities allow the company to repurchase the company 's stock so long as : either ( a ) the aggregate amount of such repurchases does not exceed $ 40 million beginning october 8 , 2014 and the sum of borrowing bases combined minus the principal balances of all revolver loans after giving effect to such repurchases is equal to or greater than 30 % of the sum of the borrowing bases , or ( b ) the aggregate amount of such repurchases does not exceed 75 % of the consolidated net income of the company measured on a trailing twelve month basis ; provided that immediately before and after giving effect to the stock repurchases , at least 12.5 % of the aggregate funds committed under the credit facilities remain available . thus , although the company currently does routinely repurchase stock , the company is limited in its ability to pay dividends or make other distributions to its shareholders without the consent of the company 's lenders . at april 30 , 2016 , the company had approximately $ 602,000 of cash on hand and $ 61 million of availability under its revolving credit facilities ( see note f to the consolidated financial statements in item 8 ) . on a short-term basis , the company 's principal sources of liquidity include income from operations and borrowings under its revolving credit facilities . on a longer-term basis , the company expects its principal sources of liquidity to consist of income from operations and borrowings under revolving credit facilities or fixed interest term loans . the company 's revolving credit facilities mature in october 2017 and the company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature . furthermore , while the company has no specific plans to issue debt or equity securities , the company believes , if necessary , it could raise additional capital through the issuance of such securities . the company

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 , 2016 , the company operated 143 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 14 % per year over the last ten years ( average 9 % ) . growth results from same dealership revenue growth and the addition of new dealerships . revenue increased 7.1 % for the fiscal year ended april 30 , 2016 compared to fiscal 2015 primarily due to a 7.0 % increase in average retail sales price and a 6.3 % increase in interest income . 20 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 .

prepaid expenses and other assets prepaid expenses and other assets are generally comprised of fair value of interest rate swaps , earnest money , equity in patronage banks , prepaid insurance , prepaid rent , prepaid operating costs , fixed assets , and deferred costs associated with pending acquisitions . prepaid expenses are expensed over the applicable usage period or reclassified to other asset accounts upon being put into service in future periods . balances without future economic benefit are written off as they are identified . deferred financing costs deferred financing costs are comprised of costs incurred in connection with securing financing from third-party lenders and are capitalized and amortized on a straight-line basis ( which approximates the effective interest rate method ) over the terms of the related financing arrangements . deferred financing costs relating to term story_separator_special_tag the following discussion and analysis should be read in conjunction with the selected financial data in item 6 – selected financial data above and our accompanying consolidated financial statements and notes thereto in item 8 – financial statement and supplementary data . see also “ cautionary note regarding forward-looking statements ” preceding part i. overview we continued to execute our business growth strategy during 2018. operationally , we focused on generating cash flows from sustainable harvests and improved harvest mix on high-quality industrial timberlands , opportunistic land sales , as well as active investment management to provide recurring dividends to our stockholders . we continued to practice intensive forest management and silvicultural techniques that increase the biological growth of our forest . joint venture , acquisition , and large disposition activities in july 2018 , we entered into the triple t joint venture with a consortium of institutional investors . we invested $ 200.0 million in the triple t joint venture , equal to 21.6 % of the total equity contributions , in exchange for a common limited partnership interest in the triple t joint venture , which owns 1.1 million acres of east texas industrial timberlands . the triple t joint venture partnership agreement provides for liquidation rights and distribution priorities that are significantly different from our stated ownership percentage based on total equity contributions . as such , we use the hypothetical-liquidation-at-book-value method , or hlbv , to determine our equity in the earnings of the triple t joint venture . for the year ended december 31 , 2018 , we recognized $ 109.6 million of losses from the triple t joint venture under the hlbv method of accounting . we earned $ 5.5 million of asset management fees from the triple t joint venture for the year ended december 31 , 2018. see note 4 — unconsolidated joint ventures to our accompanying consolidated financial statements for further details . in august 2018 , we acquired approximately 18,100 acres of high-quality timberlands in the pacific northwest ( the `` bandon property '' ) for $ 89.7 million , exclusive of transaction costs . the acquisition of the bandon property established our first position in the pacific northwest , increased our geographic and market diversity and provides additional harvest options . the bandon property is strategically situated within the douglas fir/western hemlock zone and offer the high-quality stocking characteristics and sustainability attributes that we seek in property acquisitions . it added approximately 615,600 tons to our merchantable timber inventory , comprised of 90 % conifer plantations by acreage and 83 % sawtimber by tons . more than 90 % of the average five-year harvest volume from the pacific northwest is expected to be derived from sawtimber . we expect a higher percentage of stumpage sales versus delivered sales from the bandon property as compared to our u.s. south properties , especially in the near term . in november 2018 , we completed the sale of approximately 56,100 acres of our wholly-owned timberlands located in texas and louisiana ( the `` southwest property '' ) for approximately $ 79.3 million . the net proceeds received from the southwest property disposition were used to pay down $ 79.0 million of our outstanding debt previously used to fund the acquisition of the bandon property . capital activities 36 in march 2018 , we issued 5.75 million shares of common stock at a price of $ 12.60 per share in a public offering ( the `` 2018 equity offering '' ) . after deducting $ 3.5 million in underwriting commissions and fees and other issuance costs , we received net proceeds of $ 69.0 million . in august 2018 , we and our lenders entered into the 2018 amended credit agreement , which expanded the total borrowing capacity by $ 75.0 million to $ 643.6 million , added a new $ 140.0 million seven-year term loan ( the “ term a-4 loan ” ) to replace existing debt , and reduced the capacity under the seven-year multi-draw term credit facility from $ 265.0 million to $ 200.0 million . see note 5 — notes payable and lines of credit to our accompanying financial statements for further details on our credit agreement amendment . during 2018 , we entered into five separate interest rate swaps with rabobank with a total notional amount of $ 200.0 million to mitigate exposure to changing interest rates on our variable rate debts . as of december 31 , 2018 , we effectively fixed interest rates on $ 350.0 million of our $ 478.6 million outstanding debt balance at 4.26 % . see note 6 — interest rate swaps to our accompanying financial statements footnotes for further details on our interest rate swaps . during 2018 , we paid $ 25.6 million of dividends to our stockholders and repurchased $ 1.0 million of shares of common stock under our share purchase program . segment information we have three reportable segments : harvest , real estate and investment management . our harvest segment includes wholly-owned timber assets and associated timber sales , other revenues and related expenses . our real estate segment includes timberland sales , cost of timberland sales and large dispositions . story_separator_special_tag from time to time , we may also sell certain large timberland properties in order to generate capital to fund capital allocation priorities , including but not limited to redeployment into more desirable timberland investments , pay down of outstanding debt or repurchase of shares of our common stock . such large dispositions are typically larger in size and more infrequent than sales under our normal land sales program . shelf registration statement and equity offering on june 2 , 2017 , we filed a shelf registration statement on form s-3 with the sec , which was declared effective by the sec on june 16 , 2017 ( the `` shelf registration statement '' ) . the shelf registration statement provides us with future flexibility to offer , from time to time and in one or more offerings , up to $ 600 million in an undefined combination of debt securities , common stock , preferred stock , depositary shares , or warrants . the terms of any such future offerings would be established at the time of an offering . 38 in march 2018 , under the shelf registration statement , we issued 5.75 million shares of common stock at a price of $ 12.60 per share in the 2018 equity offering . after deducting $ 3.5 million in underwriting commissions and fees and other issuance costs , we received net proceeds of $ 69.0 million from this offering that we used to pay down outstanding debt to support our ability to pursue potential acquisitions and joint venture investments . credit agreement amendment we are party to a credit agreement dated as of december 1 , 2017 , as amended on august 22 , 2018 ( the `` 2018 amended credit agreement '' ) with a syndicate of lenders , including cobank . the 2018 amended credit agreement expanded the total borrowing capacity by $ 75.0 million to $ 643.6 million , added a new $ 140.0 million seven-year term loan to replace existing debt , and reduced the capacity under the seven-year multi-draw term credit facility from $ 265.0 million to $ 200.0 million . as a result , the 2018 amended credit agreement provides for borrowings consisting of the following : a continuation of $ 35.0 million five-year revolving credit facility ( the “ revolving credit facility ” ) ; a reduced $ 200.0 million seven-year multi-draw term credit facility ( the “ multi-draw term facility ” ) ; a continuation of $ 100.0 million ten-year term loan ( the “ term loan a-1 ” ) ; a continuation of $ 100.0 million nine-year term loan ( the “ term loan a-2 ” ) ; a continuation of $ 68.6 million ten-year term loan ( the “ term loan a-3 ” ) ; and a new $ 140.0 million seven-year term loan ( the `` term loan a-4 '' ) . borrowings under the revolving credit facility may be used for general working capital , to support letters of credit , to fund cash earnest money deposits , to fund acquisitions in an amount not to exceed $ 5.0 million , and for other general corporate purposes . the revolving credit facility bears interest at an adjustable rate equal to a base rate plus between 0.50 % and 1.20 % or a libor rate plus between 1.50 % and 2.20 % , in each case depending on our ltv ratio , and will terminate with all amounts outstanding under the facility due and payable on december 1 , 2022. the multi-draw term facility may be used to finance timberland acquisitions and associated expenses , to fund investment in joint ventures , and to reimburse payments of drafts under letters of credit . the multi-draw term facility , which is interest only until its maturity date , will bear interest at an adjustable rate equal to a base rate plus between 0.50 % and 1.20 % or a libor rate plus between 1.50 % and 2.20 % , in each case depending on our ltv ratio , and will terminate with all amounts outstanding under the facility due and payable on december 1 , 2024. the table below presents the details of each credit facility under the 2018 amended credit agreement as of december 31 , 2018 : replace_table_token_9_th ( 1 ) the applicable libor margin on the revolving credit facility and the multi-draw term facility ranges from a base rate plus between 0.50 % and 1.20 % or a libor rate plus 1.50 % to 2.20 % , depending on the ltv ratio . the unused committee fee rates also depend on the ltv ratio . patronage refunds 39 we are eligible to receive annual patronage refunds from our lenders under the 2018 amended credit agreement . the annual patronage refund depends on the weighted-average debt balance with each participating lender ( the `` patronage banks '' ) , as calculated by cobank , for the respective fiscal year under the eligible patronage loans , as well as the financial performance of the patronage banks . in march 2018 , we received a patronage refund of $ 2.7 million on our borrowings under the eligible patronage loans that were outstanding during 2017. of the total amount received , 75 % was received in cash and 25 % was received in equity in patronage banks . the equity component of the patronage refund is redeemable for cash only at the discretion of the patronage banks ' board of directors . as of december 31 , 2018 , we have accrued $ 3.3 million of patronage refund receivable for 2018 , approximately 75 % of which is expected to be received in cash in march 2019. interest rate swaps during 2018 , we entered into five separate interest rate swaps with rabobank with a total notional amount of $ 200.0 million to mitigate exposure to changing interest rates on our variable rate debts . as of december 31 , 2018 , we effectively fixed interest rates on $ 350.0 million of our $ 478.6 million outstanding debt balance at 4.26 % .

results of operations overview for the year ended december 31 , 2018 , we generated total revenues of $ 97.9 million , a 7 % increase from $ 91.3 million in the prior year . our results of operations are materially impacted by the fluctuating nature of timber prices , changes in the levels and mix of our harvest volumes , the level of timberland sales , management fees earned , changes to associated depletion rates , varying interest expense based on the amount and cost of outstanding borrowings , and performance of our unconsolidated joint ventures . timber sales volumes , net timber sales prices , timberland sales , and changes in the levels and composition for each of the years ended december 31 , 2018 , 2017 , and 2016 are shown in the following tables : 42 replace_table_token_12_th ( 1 ) excludes approximately 2,000 tons harvested from the bandon property , which generated timber sales revenue of $ 0.1 million . the bandon property was acquired at the end of august 2018. harvest volume and timber sales revenue from the bandon property since acquisition accounted for less than 1 % of our consolidated total harvest volume and total timber sales revenue . ( 2 ) includes chip-n-saw and sawtimber . ( 3 ) prices per ton are rounded to the nearest dollar and shown on a stumpage basis ( i.e. , net of contract logging and hauling costs ) and , as such , the sum of these prices multiplied by the tons sold does not equal timber sales in the accompanying consolidated statements of operations for the years ended december 31 , 2018 , and 2017 . ( 4 ) excludes value of timber reservations . 43 replace_table_token_13_th ( 1 ) includes chip-n-saw and sawtimber . ( 2 ) prices per ton are rounded to the nearest dollar and shown on a stumpage basis ( i.e.

collaboration revenue consists of revenue received from upfront , milestone and contingent payments received from our collaborators . prior to december 1 , 2019 , we recognized revenue from 99 upfront payments over the term of our estimated period of performance using either a straight-line or input/proportional performance approach , depending on the agreement , in accordance with accounting standards codification ( asc ) 605 , revenue recognition . revenue related to the upfront payment received pursuant to the celgene agreement was recognized using a straight-line basis . effective december 1 , 2019 , we began recognizing revenue from upfront payments over the contract term using a cost-based input method under topic 606 , revenue from contracts with customers . revenue related to the upfront payments received pursuant to the gilead agreement was recognized using the input/proportional performance approach prior to december 1 , 2019 and the cost-based input method beginning december 1 , 2019. there would have been no difference between the revenue recognized under topic 606 and the revenue recognized under asc 605 for the gilead agreement . revenue related to the upfront payment received pursuant to the sanofi agreement was recognized using the cost-based input method . the material right to the two additional targets under the sanofi agreement was accounted for using the practical alternative and the expected consideration to be received on the options was included for revenue allocation . we expect to continue recognizing revenue from upfront payments related to our collaboration agreements using the cost-based input method in the foreseeable future . in addition to receiving upfront payments , we may also be entitled to milestones and other contingent payments upon achieving predefined objectives . if a milestone is considered probable of being reached , and if it is probable that a significant revenue reversal would not occur , the associated milestone amount would also be included in the transaction price . we expect that any collaboration revenue we generate from our current collaboration and license agreements , and from any future collaboration partners , will fluctuate in the future as a result of the timing and amount of upfront , milestones and other collaboration agreement payments and other factors . research and development expenses research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates . we expense both internal and external research and development expenses to operations in the periods in which they are incurred . nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized . the capitalized amounts are then expensed as the related goods are delivered and as services are performed . we track the external research and development costs incurred for each of our product candidates . internal research and development costs include : payroll and personnel expenses , including benefits , stock-based compensation and travel expenses , for our research and development functions ; and depreciation of research and development equipment , allocated overhead and facilities-related expenses . external research and development expenses consist primarily of costs incurred for the development of our product candidates and may include : fees paid to third parties such as consultants , contractors and contract research organizations to conduct our discovery programs , preclinical studies and clinical trials ; costs to acquire , develop and manufacture supplies for preclinical studies and clinical trials , including fees paid to third parties such as cmos ; and expenses related to laboratory supplies and services . we expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities to advance our product candidates into and through our preclinical studies and clinical trials , pursue regulatory approval of our product candidates and expand our product candidate pipeline . the process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming . to the extent that our product candidates advance and continue to advance into clinical trials , our expenses will increase substantially and may become more variable . the actual probability of success for our product candidates may be affected by a variety of factors , including the safety and efficacy of our 100 product candidates , investment in our clinical programs , the ability of collaborators to successfully develop our licensed product candidates , manufacturing capability , competition with other products and commercial viability . as a result of these variables , we are unable to determine when and to what extent we will generate revenue from the commercialization and sale of our product candidates . we may never succeed in achieving regulatory approval for any of our product candidates . general and administrative expenses general and administrative expenses consist primarily of payroll and personnel expenses , including benefits and stock-based compensation , facilities-related expenses and professional fees for legal , consulting , and audit and tax services . we expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to build our infrastructure , increase our headcount and operate as a public company . this may include expenses related to compliance with the rules and regulations of the sec and listing standards applicable to companies listed on a national securities exchange , additional insurance , investor relations activities and other administrative and professional services . we also expect our intellectual property expenses to increase as we expand our intellectual property portfolio . interest and other income , net interest and other income , net primarily consists of interest earned on our cash , cash equivalents and investments . we expect interest income to vary each reporting period depending on our average bank deposit , money market fund , and investment balances during the period and market interest rates . provision ( benefit ) for income taxes the provision for income taxes primarily consists of reserves for unrecognized story_separator_special_tag collaboration revenue consists of revenue received from upfront , milestone and contingent payments received from our collaborators . prior to december 1 , 2019 , we recognized revenue from 99 upfront payments over the term of our estimated period of performance using either a straight-line or input/proportional performance approach , depending on the agreement , in accordance with accounting standards codification ( asc ) 605 , revenue recognition . revenue related to the upfront payment received pursuant to the celgene agreement was recognized using a straight-line basis . effective december 1 , 2019 , we began recognizing revenue from upfront payments over the contract term using a cost-based input method under topic 606 , revenue from contracts with customers . revenue related to the upfront payments received pursuant to the gilead agreement was recognized using the input/proportional performance approach prior to december 1 , 2019 and the cost-based input method beginning december 1 , 2019. there would have been no difference between the revenue recognized under topic 606 and the revenue recognized under asc 605 for the gilead agreement . revenue related to the upfront payment received pursuant to the sanofi agreement was recognized using the cost-based input method . the material right to the two additional targets under the sanofi agreement was accounted for using the practical alternative and the expected consideration to be received on the options was included for revenue allocation . we expect to continue recognizing revenue from upfront payments related to our collaboration agreements using the cost-based input method in the foreseeable future . in addition to receiving upfront payments , we may also be entitled to milestones and other contingent payments upon achieving predefined objectives . if a milestone is considered probable of being reached , and if it is probable that a significant revenue reversal would not occur , the associated milestone amount would also be included in the transaction price . we expect that any collaboration revenue we generate from our current collaboration and license agreements , and from any future collaboration partners , will fluctuate in the future as a result of the timing and amount of upfront , milestones and other collaboration agreement payments and other factors . research and development expenses research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates . we expense both internal and external research and development expenses to operations in the periods in which they are incurred . nonrefundable advance payments for goods or services to be received in future periods for use in research and development activities are deferred and capitalized . the capitalized amounts are then expensed as the related goods are delivered and as services are performed . we track the external research and development costs incurred for each of our product candidates . internal research and development costs include : payroll and personnel expenses , including benefits , stock-based compensation and travel expenses , for our research and development functions ; and depreciation of research and development equipment , allocated overhead and facilities-related expenses . external research and development expenses consist primarily of costs incurred for the development of our product candidates and may include : fees paid to third parties such as consultants , contractors and contract research organizations to conduct our discovery programs , preclinical studies and clinical trials ; costs to acquire , develop and manufacture supplies for preclinical studies and clinical trials , including fees paid to third parties such as cmos ; and expenses related to laboratory supplies and services . we expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development activities to advance our product candidates into and through our preclinical studies and clinical trials , pursue regulatory approval of our product candidates and expand our product candidate pipeline . the process of conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming . to the extent that our product candidates advance and continue to advance into clinical trials , our expenses will increase substantially and may become more variable . the actual probability of success for our product candidates may be affected by a variety of factors , including the safety and efficacy of our 100 product candidates , investment in our clinical programs , the ability of collaborators to successfully develop our licensed product candidates , manufacturing capability , competition with other products and commercial viability . as a result of these variables , we are unable to determine when and to what extent we will generate revenue from the commercialization and sale of our product candidates . we may never succeed in achieving regulatory approval for any of our product candidates . general and administrative expenses general and administrative expenses consist primarily of payroll and personnel expenses , including benefits and stock-based compensation , facilities-related expenses and professional fees for legal , consulting , and audit and tax services . we expect our general and administrative expenses to increase substantially for the foreseeable future as we continue to build our infrastructure , increase our headcount and operate as a public company . this may include expenses related to compliance with the rules and regulations of the sec and listing standards applicable to companies listed on a national securities exchange , additional insurance , investor relations activities and other administrative and professional services . we also expect our intellectual property expenses to increase as we expand our intellectual property portfolio . interest and other income , net interest and other income , net primarily consists of interest earned on our cash , cash equivalents and investments . we expect interest income to vary each reporting period depending on our average bank deposit , money market fund , and investment balances during the period and market interest rates . provision ( benefit ) for income taxes the provision for income taxes primarily consists of reserves for unrecognized

results of operations comparison of the years ended november 30 , 2020 and 2019 replace_table_token_1_th ( 1 ) collaboration revenue for the years ended november 30 , 2020 and 2019 includes related party revenue of $ 0 and $ 28.4 million , respectively . 104 collaboration revenue our collaboration revenue for the years ended november 30 , 2020 and 2019 is summarized as follows : replace_table_token_2_th our collaboration revenue decreased by $ 13.3 million for the year ended november 30 , 2020 compared with the year ended november 30 , 2019. the decrease in collaboration revenue was primarily attributable to the termination of the celgene agreement in june 2019 , offset by an increase in revenue recognized related to the gilead agreement and the revenue related to the sanofi agreement . research and development expenses our research and development expenses for the years ended november 30 , 2020 and 2019 are summarized as follows : replace_table_token_3_th our research and development expenses increased by $ 21.5 million , or 47.7 % , during the year ended november 30 , 2020 , compared to the year ended november 30 , 2019. the increase was primarily related to an increase of $ 7.7 million in supplies and contract research attributable to increases in our preclinical development activities and drug discovery research . there was also an increase of $ 7.1 million in compensation and related personnel costs attributable to an increase in headcount and higher non-cash stock-based compensation expense due to additional stock awards granted since november 30 , 2019. preclinical activities and contract manufacturing costs increased by $ 5.2 million , primarily due to preparation for upcoming clinical programs for our lead drug candidates .

non-competition pursuant to the terms of the amended and restated operating agreement of pzena investment management , llc , all employees who are members of story_separator_special_tag overview we are a public-equity investment management firm that utilizes a classic value investment approach across all of our investment strategies . we currently manage assets in a variety of value-oriented investment strategies across a wide range of market capitalizations in both u.s. and non-u.s. capital markets . at december 31 , 2013 , our assets under management , or aum , was $ 25.0 billion . we manage separate accounts on behalf of institutions and high net worth individuals , and act as sub-investment adviser for a variety of sec-registered mutual 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 , 2013 , the holders of our class a common stock and the holders of class b units of our operating company held approximately 18.7 % and 81.3 % , respectively , of the economic interests in the operations of our business . non-gaap net income our results for the years ended december 31 , 2013 , 2012 , and 2011 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 one-time charges recognized in operating expense in the fourth quarter of 2011. 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 $ 29.3 million and $ 0.44 , respectively , for the year ended december 31 , 2013 , $ 20.4 million and $ 0.31 , respectively , for the year ended december 31 , 2012 , and $ 23.2 million and $ 0.36 , respectively , for the year ended december 31 , 2011 . 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 one-time charges recognized in operating expense in the fourth quarter of 2011. our effective tax rate , exclusive of these adjustments , was 41.7 % for the year ended december 31 , 2013 , and approximately 42.9 % for the years ended december 31 , 2012 and 2011 , 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 . 22 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 . story_separator_special_tag this strategy was launched in november 2008. at december 31 , 2013 , the international ( ex-u.s. ) expanded value strategy generated a one-year annualized gross return of 32.5 % , outperforming its benchmark . the top contributors to relative performance were our stock selection in the financial services , industrials , and consumer discretionary sectors . focused value . 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 , 2013 , the focused value strategy generated a one-year annualized gross return of 43.8 % , outperforming its benchmark . the outperformance was broad based and primarily driven by our overweight position and stock selection in both the financial service and technology sectors and secondarily by our exposure in the consumer discretionary sector and our underweight exposure to the utilities 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 , 2013 , the small cap focused value strategy generated a one-year annualized gross return of 42.2 % , outperforming its benchmark . a broad number of holdings across a diverse range of industries contributed to this outperformance , specifically certain stocks in the financial services , and producer durables sectors . 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 , 2013 , the global expanded value strategy generated a one-year annualized gross return of 35.8 % , outperforming its benchmark . this outperformance was primarily driven by our stock selection and overweight positions in the financial services and technology sectors , along with our stock selection in the industrials and consumer discretionary sectors . 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 , 2013 , the emerging markets focused value strategy generated a one-year annualized gross return of 10.0 % , outperforming its benchmark . the main contributors to this outperformance include holdings across a diverse range of industries , specifically certain positions in the materials , industrials and financial services sectors , as well as certain korean stocks . european focused value . this strategy reflects a portfolio composed of approximately 40-60 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 , 2013 , the european focused value strategy generated a one-year annualized gross return of 35.9 % , outperforming its benchmark . this outperformance was driven primarily by our stock selection and overweight positions in the consumer discretionary , industrials , technology and financial services sectors . 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 th to 1,200 th largest , based on market capitalization . this strategy was launched in september 1998. at december 31 , 2013 , the mid cap focused value strategy generated a one-year annualized gross return of 42.7 % , outperforming its benchmark . financial services holdings were the largest contributors to this 27 outperformance . the outperformance was also driven by positioning in the consumer discretionary sector , partially offset by certain stocks in the health care sector . 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 . the change in aum in our institutional accounts and our retail accounts for the years ended december 31 , 2013 , 2012 , and 2011 is described below . during 2013 , approximately $ 0.6 billion of assets under management that we had previously reported in 2013 in institutional accounts was reclassified to retail accounts . historical information prior to 2013 is not impacted . inflows are composed solely of the investment of new or additional assets by new or existing clients . outflows consist solely of redemptions of assets by existing clients . replace_table_token_8_th 28 the following table describes the allocation of our aum among our investment strategies , as of december 31 , 2013 , 2012 , and 2011 : replace_table_token_9_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 . during the year ended december 31 , 2013 , our aum increased $ 7.9 billion , or 46.2 % , from $ 17.1 billion at december 31 , 2012 . this increase is primarily due to inflows in our global and non-u.s. strategies and market appreciation during the year ended december 31 , 2013 . at december 31 , 2013 , we managed $ 15.4 billion in institutional accounts and $ 9.6 billion in retail accounts , for a total of $ 25.0 billion in assets . for the year ended december 31 , 2013 , we experienced $ 6.9 billion in market appreciation and total gross inflows of $ 4.2 billion , which were partially offset by total gross outflows of $ 3.2 billion .

operating results assets under management and flows as of december 31 , 2013 , our approximately $ 25.0 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 , 2013 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 , 2013 , and in the five-year , three-year , and one-year periods ended december 31 , 2013 , 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 . 25 replace_table_token_7_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. $ .

the following presents the fair value of derivative instruments included in the consolidated balance sheets : derivative type classification april 29 , 2017 april 30 , 2016 assets : interest rate cap agreements other noncurrent assets $ 1,188 $ 816 liabilities : interest rate cap agreements other noncurrent liabilities $ 1,188 $ 816 the following tables present the pre-tax effect of derivative instruments in cash flow hedging relationships on the consolidated statements of story_separator_special_tag overview our financial information for fiscal 2017 is summarized in this management 's discussion and analysis and the consolidated financial statements and related notes . the following background is provided to readers to assist in the review of our financial information . we present three reportable segments : dental , animal health and corporate . dental and animal health are strategic business units that offer similar products and services to different customer bases . dental provides a virtually complete range of consumable dental products , equipment and software , turnkey digital solutions and value-added services to dentists and dental laboratories throughout north america . animal health is a leading , full-line distributor in north america and the u.k. of animal health products , services and technologies to both the production-animal and companion-pet markets . our corporate segment is comprised of general and administrative expenses , including home office support costs in areas such as information technology , finance , legal , human resources and facilities . in addition , customer financing and other miscellaneous sales are reported within corporate results . in august 2015 , we divested our wholly-owned subsidiary patterson medical holdings , inc. ( `` patterson medical '' ) , the entity through which we operated the rehabilitation supply business . we classified the results of operations of patterson medical as discontinued operations for all periods presented in the consolidated statements of income and other comprehensive income . operating margins of the animal health business are considerably lower than the dental business . while operating expenses run at a lower rate in the animal health business when compared to the dental business , gross margins in the animal health business are substantially lower due generally to the low margins experienced on the sale of pharmaceutical products . we operate with a 52-53 week accounting convention with our fiscal year ending on the last saturday in april . fiscal years 2017 , 2016 and 2015 ended on april 29 , 2017 , april 30 , 2016 and april 25 , 2015 , respectively . fiscal years 2017 and 2015 consisted of 52 weeks , while fiscal year 2016 consisted of 53 weeks . fiscal year 2018 will end on april 28 , 2018 and will consist of 52 weeks . we believe there are several important aspects of our business that are useful in analyzing it , including : ( 1 ) growth in the various markets in which we operate ; ( 2 ) internal growth ; ( 3 ) growth through acquisition ; and ( 4 ) continued focus on controlling costs and enhancing efficiency . management defines internal growth as the increase in net sales from period to period , adjusting for differences in the number of weeks in fiscal years , excluding the impact of changes in currency exchange rates , and excluding the net sales , for a period of twelve months following the transaction date , of businesses we have acquired . the following significant activities occurred in fiscal 2016 or 2017 : enterprise resource planning system initiatives . in the third quarter of fiscal 2017 , we completed the application development stage of our enterprise resource planning ( `` erp '' ) system , and we began depreciating our investment in such system . we incurred increased depreciation and other operating expenses of approximately $ 25.0 million in the fiscal year ended april 29 , 2017 as compared to the fiscal year ended april 30 , 2016 , related to this implementation . intangible asset impairment . in fiscal 2006 , we extended our exclusive north american distribution relationship with sirona dental systems for sirona 's cerec 3d dental restorative system . at that time , we paid a $ 100.0 million distribution fee to extend the existing exclusive relationship for at least a 10-year period beginning in 2007. this distribution fee has been accounted for as an intangible asset that has been amortized since 2007. based on our november 2016 decision not to extend sales exclusivity for the full sirona portfolio of products , we recorded a pre-tax non-cash impairment charge of $ 36.3 million , or $ 23.0 million after taxes or $ 0.24 per diluted share in our dental segment in the third quarter of fiscal 2017 , related to the distribution fee associated with the cerec product component of this arrangement . animal health international acquisition . in june 2015 , we completed the acquisition of animal health international , inc. , a leading production animal health distribution company in the u.s. prior to our acquisition , animal health international , inc. generated sales and earnings before interest , income taxes , depreciation and amortization 31 of $ 1.5 billion and $ 68 million , respectively , during the 12 months ended march 2015. our acquisition more than doubled the revenue of our legacy animal health business , which was previously focused on the companion animal market . our animal health business now offers an expanded range of products and services to a broader base of customers in north america and the u.k. during fiscal 2016 , we incurred $ 10.4 million , or $ 0.11 per diluted share , on an after-tax basis , of transaction costs related to the acquisition of animal health international , inc. patterson medical sale . in august 2015 , we sold patterson medical for $ 716.9 million . see note 4 to the consolidated financial statements for additional information . cash repatriation . in fiscal 2016 , we approved a one-time repatriation of approximately $ 200.0 million of foreign earnings . story_separator_special_tag discontinued operations net income from discontinued operations was $ 1.5 million in fiscal 2016 , compared to $ 43.2 million in fiscal 2015. the decrease was primarily due to there being twelve months of operations in the prior year as compared to less than four months of operations in fiscal 2016 , as well as by transaction-related costs related to the sale of patterson medical , which reduced income before taxes from discontinued operations by $ 10.5 million in fiscal 2016 as compared to fiscal 2015. liquidity and capital resources patterson 's operating cash flow has been our principal source of liquidity in the last three fiscal years . during each of these fiscal years , we used our revolving credit facility as a source of liquidity in addition to operating cash flow . net cash provided by operating activities was $ 162.7 million in fiscal 2017 , compared to $ 156.3 million in fiscal 2016 and $ 262.7 million in fiscal 2015 . our cash flows from operating activities are primarily driven by net income from continuing operations , partially offset by uses of cash within discontinued operations of $ 2.9 million in fiscal 2017 and $ 38.5 million in fiscal 2016. in fiscal 2015 , net cash provided by operating activities from discontinued operations was $ 57.6 million . net cash flows provided by investing activities were $ 1.2 million in fiscal 2017 , compared to net cash flows used in investing activities of $ 400.6 million and $ 9.6 million in fiscal 2016 and 2015 , respectively . capital expenditures were $ 47.0 million , $ 79.4 million and $ 60.7 million in fiscal years 2017 , 2016 and 2015 , respectively . significant expenditures in each year included investments in our erp system initiatives . we expect to use a total of approximately $ 50 million for capital expenditures in fiscal 2018. fiscal 2016 included the purchase of animal health international , inc. for $ 1,106.6 million , which was partially offset by the receipt of net cash proceeds of $ 714.4 million from completion of the sale of patterson medical . fiscal years 2016 and 2015 included the sale of securities of $ 48.7 million and $ 40.8 million , respectively . during fiscal 2016 , we entered into a credit agreement ( the `` credit agreement '' ) , under which the lenders provided us with senior unsecured lending facilities of up to $ 1.5 billion , consisting of a $ 1.0 billion unsecured term loan and a $ 500 million unsecured revolving line of credit . the credit agreement was due to expire in fiscal 2021. during fiscal 2017 , we entered into an amendment of the credit agreement ( the “ amended credit agreement ” ) , consisting of a $ 295.1 million term loan and a $ 750 million revolving line of credit . interest on borrowings is variable and is determined as a base rate plus a spread . this spread , as well as a commitment fee on the unused portion of the facility , is based on our leverage ratio , as defined in the amended credit agreement . the term loan and revolving credit facilities will mature no later than january 2022. as of april 29 , 2017 , $ 291.4 million of the amended credit agreement unsecured term loan was outstanding at an interest rate of 2.24 % , and $ 59.0 million was outstanding under the amended credit agreement revolving line of credit at an interest rate of 2.19 % . at april 30 , 2016 , $ 317.6 million was outstanding under the credit agreement unsecured term loan at an interest rate of 1.81 % , and $ 20.0 million was outstanding under the credit agreement revolving line of credit at an interest rate of 3.88 % . in fiscal 2015 , we entered into a note purchase agreement , under which we issued fixed rate senior notes in an aggregate principal amount of $ 250.0 million at an interest rate of 3.48 % per annum , due march 2025. the proceeds were used to repay $ 250.0 million of senior notes that came due in march 2015. also in fiscal 2015 , a cash payment of $ 29.0 million was made to settle an interest rate swap . we originally entered into this swap in january 2014 to hedge interest rate fluctuations in anticipation of refinancing the senior notes that came due on in march 2015. total dividends paid in fiscal years 2017 , 2016 and 2015 were $ 95.9 million , $ 90.6 million and $ 81.8 million , respectively . we expect to continue to pay a quarterly cash dividend for the foreseeable future . in fiscal 2017 , we repurchased 2.9 million shares of common stock for $ 125.4 million . in fiscal 2016 , we repurchased 4.4 million shares of common stock for $ 200.0 million . in fiscal 2015 , we repurchased 1.2 million shares of common stock for $ 47.5 million . under a share repurchase plan authorized by the board of directors in march 2013 , patterson may repurchase up to 25.0 million shares of its common stock . this authorization remains in effect through march 19 , 2018. as of april 29 , 2017 , approximately 13.6 million shares remain available under the current repurchase authorization . 35 we have $ 95.0 million in cash and cash equivalents as of april 29 , 2017 , of which $ 49.8 million is in foreign bank accounts . see note 11 to the consolidated financial statements for further information regarding our intention to permanently reinvest these funds . included in cash and cash equivalents as of april 29 , 2017 is $ 17.9 million of cash collected from previously sold customer financing arrangements that have not yet been settled with the third party . see note 7 to the consolidated financial statements for further information .

results of operations the following table summarizes our results from continuing operations as a percent of sales from continuing operations : replace_table_token_7_th fiscal 2017 compared to fiscal 2016 continuing operations net sales . consolidated net sales in fiscal 2017 were $ 5,593.1 million , an increase of 3.8 % from $ 5,386.7 million in fiscal 2016 . the inclusion of animal health international , inc. results for approximately six additional weeks in fiscal 2017 had a 3.6 % favorable impact on sales , foreign exchange rate changes had an estimated 1.7 % unfavorable impact on fiscal 2017 sales , and one less week of results in fiscal 2017 had a 1.0 % unfavorable impact on sales , resulting in internal growth of 2.9 % . dental segment sales decreased 3.5 % to $ 2,390.2 million in fiscal 2017 from $ 2,476.2 million in fiscal 2016 . one less week of results in the current period had an estimated 1.1 % unfavorable impact on sales . adjusting for this difference in number of weeks , sales decreased 2.4 % . sales of consumables decreased 4.1 % , primarily due to having one less week of results in the current period and to a sales force realignment in the first quarter of fiscal 2017. dental equipment and software sales decreased 3.2 % , primarily due to a decrease in sales of digital products , partially offset by increased sales of core equipment . other dental sales , consisting primarily of technical service parts and labor , software support services and artificial teeth , decreased 1.0 % in fiscal 2017 . animal health segment sales grew 10.4 % to $ 3,159.8 million in fiscal 2017 from $ 2,862.2 million in fiscal 2016 .

fair value of financial instruments we designate fair value measurements into three levels based on the lowest level of substantive input used to make the fair value measurement . those levels are as follows : level 1 - quoted prices in active markets for identical assets or liabilities . level 2 - observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities ; quoted prices in markets that are not active ; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities . level 3 - unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities . f- 11 ( ) front yard common stock the shares of front yard common stock that we hold is reported at fair value based on unadjusted quoted market prices in active markets . upon our adoption of asu 2016-01 effective january 1 , 2018 , changes in the fair value of front yard common stock are recognized through net income . prior to our adoption of asu 2016-01 , changes in the fair value of front yard common stock were recorded in accumulated other comprehensive income ( loss ) as changes in unrealized gain ( loss ) on front yard common stock . see note 1 for additional information regarding asu 2016-01. our ability to sell these securities , or the price ultimately realized for these securities , depends upon the demand in the market and potential restrictions on the timing at which we may be able to sell the front yard common stock when desired . income taxes income taxes are provided for using the asset and liability method . deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases . deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which management expects those temporary differences to be recovered or settled . the effect on deferred taxes of a change in tax rates is recognized in income in the period in which the change occurs . subject to our judgment , we reduce a deferred tax asset by a valuation allowance if it is “ more likely than not ” that some or the entire deferred tax asset will not be realized . tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities . significant judgment is required in evaluating tax positions , and we recognize tax benefits only if it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority . for all temporary differences , we have considered the potential future sources of taxable income against which they may be realized . in so doing , we have taken into account temporary differences that we expect to reverse in future years and those where it is unlikely . where it is more likely than not that there will not be potential future taxable income to offset a temporary difference , a valuation allowance has been recorded . leases on january 1 , 2019 , we adopted asu 2016-02 , including various associated updates and amendments , which together comprise the requirements for lease accounting under asc 842. asu 2016-02 fundamentally changes accounting for operating leases by requiring lessees to recognize a liability to make lease payments and a right-of-use asset over the term of the lease . we also adopted the “ package of practical expedients , ” which permits us not to reassess our prior conclusions about lease identification , lease classification and initial direct costs under the new standard . we also elected the short-term lease exemption for all leases that qualify ; as a result , we will not recognize right-of-use assets or lease liabilities for leases with a term of less than 12 months at inception . we lease office space under various operating leases . our office leases are generally for terms of one to five years and typically include renewal options , which we consider when determining our lease right-of-use assets and lease liabilities to the extent that a renewal option is reasonably certain of being exercised . along with rents , we are generally required to pay common area maintenance , property taxes and insurance , each of which vary from period to period and are therefore expensed as incurred . other non-current assets other non-current assets includes leasehold improvements ; furniture , fixtures and equipment ; deferred tax assets and miscellaneous other assets . the cost basis of fixed assets is depreciated using the straight-line method over an estimated useful life of three to story_separator_special_tag our company we were incorporated in the united states virgin islands on march 15 , 2012. in october 2013 , we applied for and were granted registration by the sec as a registered investment adviser under section 203 ( c ) of the investment advisers act of 1940. we operate in a single segment focused on providing asset management and certain corporate governance services to institutional investors . our primary client is front yard , a publicly traded reit focused on acquiring and managing quality , affordable sfr properties for america 's families . front yard is currently our primary source of revenue and will drive our results . story_separator_special_tag development of new business for aamc during the second quarter of 2019 , front yard commenced a strategic alternatives review process designed to maximize its stockholder value . in light of this process , we appointed a new co-chief executive officer on january 13 , 2020 to serve as an additional resource for us and to be responsible for implementing new business . our potential new businesses are in the development stage under the leadership and direction of our new co-chief executive officer and may include asset management services , investments in real estate related assets or other businesses that leverage the experience of our new co-chief executive officer and our real estate asset acquisition and portfolio management teams . our incumbent co-chief executive officer has continued to focus on the business of front yard and the completion of its strategic alternatives review . on february 17 , 2020 , front yard 's strategic alternatives review was completed , culminating in front yard 's entry into an agreement and plan of merger with affiliates of amherst , providing for the acquisition of front yard by amherst . the merger is expected to close in the second quarter of 2020 , subject to the approval of the holders of a majority of front yard 's outstanding shares and the satisfaction of customary closing conditions . if notice of termination of the amended ama is given upon the consummation of the merger , a termination fee of approximately $ 46.3 million would become payable to us upon the effective date of such termination . such termination fee would be payable , at front yard 's option , in either ( i ) a lump sum on the effective date of the termination or ( ii ) one half on the effective date of the termination with the remainder due in equal installments on each of the six- , nine- and twelve-month anniversaries thereafter . we would also continue to receive management fees under the amended ama through the 180-day notice period of termination . we expect that such termination fee would be used , in conjunction with our current assets , in the development and implementation of new businesses . observations on current market opportunities we believe there is a compelling opportunity in the sfr market and that we have implemented the right strategic plan for front yard to capitalize on the sustained growth in sfr demand . front yard targets the moderately priced single-family home market to acquire rental properties , which , in our view , not only provide a safe , comfortable sfr rental opportunity for our residents , but also offer attractive yield opportunities driven by demand from renters . we believe that front yard 's focus on affordable housing provides it with a potential advantage , as we believe this is an underserved market segment that provides front yard with attractive yield and growth opportunities . in our view , the macroeconomic environment is creating favorable tailwinds for front yard 's business . economic indicators suggest that affordable single-family housing is in short supply , home building is not keeping up with demand and mortgage lending for credit-challenged families remains constrained . front yard provides an important alternative : affordable rental properties that our residents are proud to call home . by targeting moderately priced , single-family homes , we believe that front yard can optimize the yield on its investments and capitalize on the sustained growth in affordable single-family rental demand . 36 ( ) metrics affecting our consolidated results our operating results are affected by various factors and market conditions , including the following : revenues our revenues consist of fees due to us under the asset management agreements with front yard . under the amended ama , our revenues include a quarterly base management fee and a potential annual incentive fee , each of which are dependent upon front yard 's performance and are subject to potential downward adjustments and an aggregate fee cap . beginning in the third quarter of 2019 ( the first full quarter under the amended ama ) , the base management fee we recognize under the amended ama is subject to a quarterly minimum of $ 3,584,000. under the former ama , our revenues included a base management fee and a conversion fee . the base management fee was calculated as a percentage of front yard 's average invested capital , and the conversion fee was based on the number and value of mortgage loans and or reo properties that front yard converted to rental properties for the first time in each period . under both the amended ama and the former ama , our revenues also include reimbursements of certain expenses in our management of front yard 's business , which relate primarily to travel and certain operating expenses solely related to our management of front yard 's business and the base salary , bonus , benefits and stock compensation , if any , solely of the general counsel dedicated to front yard . in addition , during 2019 , we accrued the reimbursement of a one-time bonus payable to an aamc employee on behalf of front yard . all other salary , bonus , benefits and stock compensation of aamc 's employees ( other than front yard share-based compensation issued to them by front yard ) are the responsibility of aamc and are not reimbursed by front yard pursuant to the amended ama . in addition , we receive dividends on the shares of front yard common stock that we own when front yard declares and pays dividends to its holders of common stock .

results of operations the following discussion compares our results of operations for the years ended december 31 , 2019 and 2018 . our results of operations for the periods presented are not indicative of our expected results in future periods . for discussion that compares our results of operations for the years ended december 31 , 2018 and 2017 , see “ item 7. management 's discussion and analysis of financial condition and results of operations - results of operations ” included within our annual report on form 10-k for the year ended december 31 , 2018 filed with the sec on february 27 , 2019 . 37 ( ) fiscal year ended december 31 , 2019 compared to fiscal year ended december 31 , 2018 management fees and expense reimbursements we recognized base management fees from front yard of $ 14.3 million for the year ended december 31 , 2019 compared to $ 14.6 million for the year ended december 31 , 2018 . the decrease in base management fees is primarily driven by ( i ) reductions in front yard 's average invested capital ( as defined in the former ama ) during the first four months of 2019 and ( ii ) the minimum base fee of $ 3.6 million per quarter becoming applicable beginning in may 2019. we earned conversion fees of $ 29,000 and $ 0.2 million for the years ended december 31 , 2019 and 2018 , respectively . this decrease is primarily due to fewer loans and reo properties converting to rental properties as we continue to pare the small number of remaining legacy assets of front yard . under the amended ama , we will no longer receive conversion fees from front yard .

other factors include general conditions in local and national economies ; loan portfolio composition and asset quality indicators ; and internal factors such as changes in underwriting policies , credit administration practices , experience , ability and depth of lending management , among others . the first bancorp - 2016 form 10-k - page 74 the following table summarizes the composition of the allowance for loan losses , by class of financing receivable and allowance , as of december 31 , 2016 and 2015 : replace_table_token_58_th the first bancorp - 2016 form 10-k - page 75 the allowance consists of four story_separator_special_tag the first bancorp , inc. ( the `` company '' or `` the first bancorp '' ) was incorporated in the state of maine on january 15 , 1985 , and is the parent holding company of first national bank ( the `` bank '' ) . on january 28 , 2016 , the board of directors voted to change the bank 's name to first national bank from the first , n.a . the company generates almost all of its revenues from the bank , which was chartered as a national bank under the laws of the united states on may 30 , 1864. the bank , which has sixteen offices along coastal and eastern maine , emphasizes personal service to the communities it serves , concentrating primarily on small businesses and individuals . the bank offers a wide variety of traditional banking services and derives the majority of its revenues from net interest income – the spread between what it earns on loans and investments and what it pays for deposits and borrowed funds . while net interest income typically increases as earning assets grow , the spread can vary up or down depending on the level and direction of movements in interest rates . management believes the bank has modest exposure to changes in interest rates , as discussed in `` interest rate risk management '' elsewhere in management 's discussion . the banking business in the bank 's market area historically has been seasonal with lower deposits in the winter and spring and higher deposits in the summer and fall . this seasonal swing is fairly predictable and has not had a materially adverse effect on the bank . non-interest income is the bank 's secondary source of revenue and includes fees and service charges on deposit accounts , income from the sale and servicing of mortgage loans , and income from investment management and private banking services through first advisors , a division of the bank . forward-looking statements this report contains statements that are `` forward-looking statements . '' we may also make forward-looking statements in other documents we file with the sec , in our annual reports to shareholders , in press releases and other written materials , and in oral statements made by our officers , directors or employees . you can identify forward-looking statements by the use of the words `` believe '' , `` expect '' , `` anticipate '' , `` intend '' , `` estimate '' , `` assume '' , `` outlook '' , `` will '' , `` should '' , `` may '' , `` might , `` could '' , and other expressions that predict or indicate future events or trends and which do not relate to historical matters . you should not rely on forward-looking statements , because they involve known and unknown risks , uncertainties and other factors , some of which are beyond the control of the company . these risks , uncertainties and other factors may cause the actual results , performance or achievements of the company to be materially different from the anticipated future results , performance or achievements expressed or implied by the forward-looking statements . some of the factors that might cause these differences include the following : changes in general national , regional or international economic conditions or conditions affecting the banking or financial services industries or financial capital markets , volatility and disruption in national and international financial markets , government intervention in the u.s. financial system , reductions in net interest income resulting from interest rate volatility as well as changes in the balance and mix of loans and deposits , reductions in the market value of wealth management assets under administration , changes in the value of securities and other assets , reductions in loan demand , changes in loan collectibility , default and charge-off rates , changes in the size and nature of the company 's competition , changes in legislation or regulation and accounting principles , policies and guidelines , and changes in the assumptions used in making such forward-looking statements . in addition , the factors described under `` risk factors '' in item 1a of this annual report on form 10-k may result in these differences . you should carefully review all of these factors , and you should be aware that there may be other factors that could cause these differences . these forward-looking statements were based on information , plans and estimates at the date of this annual report , and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors , new information , future events or other changes . although the company believes that the expectations reflected in such forward-looking statements are reasonable , actual results may differ materially from the results discussed in these forward-looking statements . readers are also urged to carefully review and consider the various disclosures made by the company , which attempt to advise interested parties of the factors that affect the company 's business . critical accounting policies management 's discussion and analysis of the company 's financial condition and results of operations is based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the united states of america . story_separator_special_tag the company formally documents relationships between hedging instruments and hedged items , as well as its risk management objectives and strategy for undertaking various hedge transactions . the company also assesses , both at the hedge 's inception and on an ongoing basis , whether the derivatives that are used in hedging transactions are effective in offsetting changes in cash flows or fair values of hedged items . changes in fair value of a derivative that is effective and that qualifies as a cash flow hedge are recorded in other comprehensive income ( loss ) and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings . changes in fair value of a derivative that qualifies as a fair value hedge and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is effective . those derivatives that are classified as trading instruments are recorded at fair value with changes in fair value recorded in earnings . the company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the cash flows of the hedged item , that it is unlikely that the forecasted transaction will occur , or that the designation of the derivative as a hedging instrument is no longer appropriate . the first bancorp - 2016 form 10-k - page 24 use of non-gaap financial measures certain information in management 's discussion and analysis of financial condition and results of operations and elsewhere in this report contains financial information determined by methods other than in accordance with accounting principles generally accepted in the united states of america ( `` gaap '' ) . management uses these `` non-gaap '' measures in its analysis of the company 's performance and believes that these non-gaap financial measures provide a greater understanding of ongoing operations and enhance comparability of results with prior periods as well as demonstrating the effects of significant gains and charges in the current period . the company believes that a meaningful analysis of its financial performance requires an understanding of the factors underlying that performance . management believes that investors may use these non-gaap financial measures to analyze financial performance without the impact of unusual items that may obscure trends in the company 's underlying performance . these disclosures should not be viewed as a substitute for operating results determined in accordance with gaap , nor are they necessarily comparable to non-gaap performance measures that may be presented by other companies . in several places in this report , net interest income is presented on a fully taxable equivalent basis . specifically included in interest income was tax-exempt interest income from certain investment securities and loans . an amount equal to the tax benefit derived from this tax exempt income has been added back to the interest income total , which adjustments increased net interest income accordingly . management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis , and is particularly useful to investors in understanding and evaluating the changes and trends in the company 's results of operations . other financial institutions commonly present net interest income on a tax-equivalent basis . this adjustment is considered helpful in the comparison of one financial institution 's net interest income to that of another institution , as each will have a different proportion of tax-exempt interest from its earning assets . moreover , net interest income is a component of a second financial measure commonly used by financial institutions , net interest margin , which is the ratio of net interest income to average earning assets . for purposes of this measure as well , other financial institutions generally use tax-equivalent net interest income to provide a better basis of comparison from institution to institution . the company follows these practices . the following table provides a reconciliation of tax-equivalent financial information to the company 's consolidated financial statements , which have been prepared in accordance with gaap . a 35.0 % tax rate was used in 2016 , 2015 and 2014 . replace_table_token_4_th the company presents its efficiency ratio using non-gaap information which is most commonly used by financial institutions . the gaap-based efficiency ratio is noninterest expenses divided by net interest income plus noninterest income from the consolidated statements of income and comprehensive income . the non-gaap efficiency ratio excludes securities losses from noninterest expenses , excludes securities gains from noninterest income , and adds the tax-equivalent adjustment to net interest income . the following table provides a reconciliation between the gaap and non-gaap efficiency ratio : replace_table_token_5_th the first bancorp - 2016 form 10-k - page 25 the company presents certain information based upon average tangible common shareholders ' equity instead of total average shareholders ' equity . the difference between these two measures is the company 's intangible assets , specifically goodwill from prior acquisitions , and preferred stock . management , banking regulators and many stock analysts use the tangible common equity ratio and the tangible book value per common share in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets , typically stemming from the use of the purchase accounting method in accounting for mergers and acquisitions . the following table provides a reconciliation of tangible average shareholders ' equity to the company 's consolidated financial statements , which have been prepared in accordance with gaap : replace_table_token_6_th story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > $ 10.8 million , an increase of $ 938,000 or 9.5 % from the $ 9.9 million posted by the company in 2015 . tax-exempt interest income amounted to $ 5.8 million for the year ended december 31 , 2016 , $ 5.7 million for the year ended december 31 , 2015 and $ 6.4 million for the year ended december 31 , 2014 . net interest income on a tax-equivalent basis increased 2.2 % or $ 956,000 to $ 44.0

executive summary this was the best annual performance in the first bancorp , inc. 's history , surpassing our previous best year in 2015. the company 's 2016 performance was driven by increased net interest income , the result of continued strong growth in earning assets . the company also saw a modest drop in operating expense in 2016 compared to 2015. the company also increased the quarterly dividend by one cent in the second quarter to 23 cents per share , and also declared a special cash dividend of 12 cents per share during the fourth quarter of 2016. net income for the year ended december 31 , 2016 was $ 18.0 million , up $ 1.8 million or 11.1 % from the $ 16.2 million posted for the year ended december 31 , 2015 . earnings per common share on a fully diluted basis were $ 1.66 for the year ended december 31 , 2016 , up $ 0.15 or 9.9 % from the $ 1.51 posted for the year ended december 31 , 2015 . net interest income on a tax-equivalent basis increased $ 2.1 million or 4.7 % for the year ended december 31 , 2016 compared to the year ended december 31 , 2015 , with growth in earning assets responsible for the increase . the company 's net interest margin was 3.05 % in 2016 , compared to 3.10 % in 2015. non-interest income for the year ended december 31 , 2016 was $ 12.5 million or 2.2 % higher than non-interest income posted for the year ended december 31 , 2015 .

also , upon adoption of the new revenue standard , a substantial majority of our sales returns and price protection reserves will be classified as liabilities ( currently , these allowances are classified as contra-assets within receivables on our consolidated balance sheets ) . additionally , the adoption of the new revenue standard requires us to modify our systems , processes , and internal controls , including the internal controls over financial reporting , to reflect the changes to the way in which we recognize revenue story_separator_special_tag overview the following overview is a high-level discussion of our operating results , as well as some of the trends and drivers that affect our business . management believes that an understanding of these trends and drivers provides important context for our results for the fiscal year ended march 31 , 2018 , as well as our future prospects . this summary is not intended to be exhaustive , nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this form 10-k , including in the “ business ” section and the “ risk factors ” above , the remainder of this “ management 's discussion and analysis of financial condition and results of operations ( “ md & a ” ) ” , and the consolidated financial statements and related notes . about electronic arts we are a global leader in digital interactive entertainment , with a mission to inspire the world to play . we develop , market , publish and deliver games and services that can be played on a variety of platforms , including game consoles , pcs , mobile phones and tablets . in our games and services , we use brands that we either wholly own ( such as battlefield , mass effect , the sims and plants v. zombies ) , or license from others ( such as fifa , madden nfl and star wars ) . we develop and publish games and services across diverse genres such as sports , first-person shooter , action , role-playing and simulation . we believe that the breadth and depth of our portfolio gives us the opportunity to engage an increasing number of players across more platforms and geographies and through more business models . financial results our key financial results for our fiscal year ended march 31 , 2018 were as follows : total net revenue was $ 5,150 million , up 6 percent year-over-year . on a constant currency basis , net of hedges , we estimate that total net revenue would have been $ 5,187 million , up 7 percent year over year . digital revenue was $ 3,450 million , up 20 percent year-over-year . international net revenue was $ 3,060 million , up 12 percent year-over-year . on a constant currency basis , net of hedges , we estimate that international net revenue would have been $ 3,096 million , up 14 percent year over year . gross margin was 75.2 percent , up 2 percentage points year-over-year . operating expenses were $ 2,439 million , up 5 percent year-over-year . on a constant currency basis , net of hedges , we estimate that total operating expenses would have been $ 2,421 million , up 4 percent year over year . operating income was $ 1,434 million , up 17 percent year-over-year . net income was $ 1,043 million , up 8 percent year-over-year . diluted earnings per share was $ 3.34 , up 8 percent year-over-year . operating cash flow was $ 1,692 million , up 7 percent year-over-year . total cash , cash equivalents and short-term investments were $ 5,331 million . from time to time , we make comparisons of current periods to prior periods with reference to constant currency . constant currency comparisons are based on translating local currency amounts in the current period at actual foreign exchange rates from the prior comparable period . we evaluate our financial performance on a constant currency basis in order to facilitate period-to-period comparisons without regard to the impact of changing foreign currency exchange rates . 23 trends in our business digital business . players increasingly purchase our games as digital downloads , as opposed to purchasing physical discs , and engage with the live services we provide on an ongoing basis . our live services provide additional depth and engagement opportunities for our players and include microtransactions , extra content , subscriptions , and esports . our net revenue attributable to live services comprised 40 percent of our total net revenue during fiscal year 2018 and we expect that live services net revenue will continue to be material to our business . our most popular live service is the ultimate team mode associated with our sports franchises . ultimate team allows players to collect and trade current and former professional players in order to build and compete as a personalized team . net revenue from ultimate team represented approximately 21 percent of our total net revenue during fiscal year 2018 , a substantial portion of which was derived from fifa ultimate team . our digital transformation is also creating opportunities in platforms , business models and the way in which players engage with our games and services . for example , we have leveraged brands and assets from franchises typically associated with consoles and traditional pc gaming , such as fifa , madden nfl , the sims , simcity and star wars , to create mobile and pc games that are monetized through live services associated with the game . we also provide our ea access and origin access subscription services , which offer players access to a selection of ea games and other benefits for a monthly or annual fee . story_separator_special_tag this stock repurchase program supersedes and replaces the stock repurchase program approved in may 2017 , and expires on may 31 , 2020. under this program , we may purchase stock in the open market or through privately-negotiated transactions in accordance with applicable securities laws , including pursuant to pre-arranged stock trading plans . the timing and actual amount of the stock repurchases will depend on several factors including price , capital availability , regulatory requirements , alternative investment opportunities and other market conditions . we are not obligated to repurchase a specific number of shares under this program and it may be modified , suspended or discontinued at any time . we are actively repurchasing shares under this program . acquisition of respawn llc . on december 1 , 2017 , we completed the acquisition of respawn . respawn is a leading game development studio and creators of games including the critically-acclaimed titanfall franchise . in connection with the acquisition , we paid $ 151 million in cash . in addition , we granted long-term equity awards in the form of restricted stock units to employees with a grant date fair value of $ 167 million . furthermore , we may be required to pay variable cash consideration that is contingent upon the achievement of certain performance milestones relating to the development of future titles , through the end of calendar 2022. the additional consideration is limited to a maximum of $ 140 million . u.s. tax act . on december 22 , 2017 , the tax cuts and jobs act ( the “ u.s . tax act ” ) was enacted which significantly revised the u.s. corporate income tax system by , among other things , lowering the u.s. corporate income tax rates to 21 percent , generally implementing a territorial tax system , and imposing a one-time transition tax on the deemed repatriation of undistributed earnings of foreign subsidiaries ( the “ transition tax ” ) . we recorded a provisional $ 235 million tax charge during the year ended march 31 , 2018 as a result of the application of the u.s. tax act ; $ 192 million of which relates to the transition tax . critical accounting policies and estimates our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states ( “ u.s . gaap ” ) . the preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , contingent assets and liabilities , and revenue and expenses during the reporting periods . the policies discussed below are considered by management to be critical because they are not only important to the portrayal of our financial condition and results of operations , but also because application and interpretation of these policies requires both management judgment and estimates of matters that are inherently uncertain and unknown . as a result , actual results may differ materially from our estimates . 25 revenue recognition , and sales returns and allowances we derive revenue principally from sales of interactive software games , and related content and services on game consoles , pcs , mobile phones and tablets . we evaluate revenue recognition based on the criteria set forth in fasb accounting standards codification ( “ asc ” ) 605 , revenue recognition and asc 985-605 , software : revenue recognition . we classify our revenue as either product revenue or service and other revenue . product revenue . our product revenue includes revenue associated with the sale of software games or related product content or updates , whether delivered digitally ( e.g. , full-game downloads , extra-content ) or via a physical disc ( e . g . , packaged goods ) , and licensing of game software to third-parties . product revenue also includes revenue from mobile full game downloads that do not require our hosting support ( e.g . , premium mobile games ) in order to utilize the game or related content ( i.e . can be played with or without an internet connection ) , and sales of tangible products such as hardware , peripherals , or collectors ' items . service and other revenue . our service revenue includes revenue recognized from time-based subscriptions , games , content or updates that requires our hosting support in order to utilize the game or related content ( i.e . , can only be played with an internet connection ) . this includes ( 1 ) entitlements to content that are accessed through hosting services ( e.g. , microtransactions for internet-based , social network and free-to-download mobile games ) , ( 2 ) massively multi-player online ( “ mmo ” ) games ( both software game and subscription sales ) , ( 3 ) subscriptions for our battlefield premium , ea and origin access , and pogo-branded online game services , and ( 4 ) allocated service revenue from sales of software games with a service of online activities ( e.g . , online playability ) . our other revenue includes advertising and non-software licensing revenue . with respect to the allocated service revenue from sales of software games with a service of online activities ( “ online services ” ) mentioned above , our allocation of proceeds between product and service revenue for presentation purposes is based on management 's best estimate of the selling price of the online services with the residual value allocated to product revenue . our estimate of the selling price of the online services are comprised of several factors including , but not limited to , prior selling prices for the online services , prices charged separately by other third-party vendors for similar service offerings , and a cost-plus-margin approach . we review the estimated selling price of the online services on a regular basis and use this methodology consistently to allocate revenue between product and service for software game sales with online services .

results of operations our fiscal year is reported on a 52 - or 53 -week period that ends on the saturday nearest march 31. our results of operations for the fiscal year ended march 31 , 2018 and 2017 contained 52 weeks each and ended on march 31 , 2018 and april 1 , 2017 , respectively . our results of operations for the fiscal year ended march 31 , 2016 contained 53 weeks and ended on april 2 , 2016. for simplicity of disclosure , all fiscal periods are referred to as ending on a calendar month end . net revenue net revenue consists of sales generated from ( 1 ) video games sold as digital downloads or as packaged goods and designed for play on game consoles and pcs , ( 2 ) video games for mobile phones and tablets , ( 3 ) separate software products and extra-content and online game services associated with these products , ( 4 ) licensing our game software to third parties , ( 5 ) allowing other companies to manufacture and sell our products in conjunction with other products , and ( 6 ) advertisements on our online web pages and in our games . we recognize revenue from the sale of online-enabled games for which we do not have vsoe for the unspecified updates on a straight-line basis , generally over an estimated six-month period for digitally-delivered games and content and an estimated nine-month period beginning in the month after shipment for physical games sold through retail . we provide two different measures of our net revenue . ( 1 ) net revenue by product revenue and service and other revenue , and ( 2 ) net revenue by type , which is primarily based on method of distribution .

further , the company has never generated any cash from its operations and does not expect to generate such cash in the near term . the aforementioned factors raise substantial doubt about the company 's ability to continue as a going concern within one year from the issuance date of the consolidated financial statements . the accompanying consolidated financial statements have been prepared on a going concern basis , which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business . the consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the company be unable to continue as a going concern within one year after the date the consolidated financial statements are issued . as of october 13 , 2020 , the company had cash and cash equivalents of $ 25.3 million . since inception , cash flows from financing activities has been the primary source of the company 's liquidity . the company currently estimates its monthly working capital requirements to be approximately $ 2.3 million , although the company may modify or deviate from this estimate and it is likely that the company 's actual operating expenses and working capital requirements will vary from its estimate . based on these expectations regarding future expenses , rate of consumption , as well as its current cash levels , the company believes its cash resources are insufficient to meet the company 's anticipated needs for the 12 months following the date the consolidated financial statements are issued . the company recognizes it will need to raise additional capital to continue operating its business and fund its planned operations , including research and development , clinical trials and , if regulatory approval is obtained , commercialization of its product candidates . in addition , the company will require additional financing if it desires to in-license or acquire new assets , research and develop new compounds or new technologies and pursue related patent protection , or obtain any other intellectual property rights or other assets . there is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the company or whether the company will become profitable and generate positive operating cash flow . if the company is unable to raise sufficient additional funds when needed , on favorable terms or at all , the company will not be able to continue development of its product candidates as currently planned or at all , will need to reevaluate its planned operations and may need to delay , scale back or eliminate some or all of its development programs , reduce expenses or cease operations , any of which would have a significant negative impact on its prospects and financial condition . f- 15 note 4—investment securities the company did not have any investment securities on its consolidated balance sheets as of july 31 , 2020 and 2019. during the year ended july 31 , 2019 , the company sold investments , categorized as held to maturity , with a net carrying amount of $ 5,989,928 for gross proceeds of $ 5,977,794 and realized a loss of $ 12,134 . the sale of the securities was suggested by the company 's investment advisors and the event is isolated . the company did not sell any investments during the year ended july 31 , 2020. note 5 – balance sheet details property and equipment property and equipment , net , is comprised of the following : replace_table_token_9_th depreciation and amortization expense recorded for the years ended july 31 , 2020 and 2019 was approximately $ 0.2 million and $ 0.2 million , respectively . accounts payable and accrued liabilities accounts payable and accrued liabilities are comprised of the following : replace_table_token_10_th accrued compensation accrued compensation is comprised of the following : replace_table_token_11_th other long-term liabilities other long-term liabilities are comprised of the following : july 31 story_separator_special_tag this management 's discussion and analysis of financial conditions and results of operations and other portions of this report contain forward-looking information that involves risks and uncertainties . our actual results could differ materially from those anticipated by the forward-looking information . factors that may cause such differences include , but are not limited to , availability and cost of financial resources , product demand , market acceptance and other factors discussed in this report under the heading “ risk factors ” . this management 's discussion and analysis of financial condition and results of operations should be read in conjunction with our financial statements and the related notes included elsewhere in this report . overview we are a late-stage biotechnology company focused on designing , developing and commercializing innovative therapies and proprietary medical approaches to stimulate and to guide an anti-tumor immune response for the treatment of cancer . our core technology platform , immunopulse®is a drug-device therapeutic modality platform comprised of proprietary intratumoral electroporation ( “ ep ” ) delivery , devices ( the “ oncosec medical system ( oms ) electroporation device ” or “ oms ep device ” . the oms ep device is designed to deliver plasmid dna-encoded drugs directly into a solid tumor and promote an immunological response against cancer . the oms ep device can be adapted to treat different tumor types , and consists of an electrical pulse generator , a reusable handle and disposable applicators . our lead product candidate is a dna-encoded interleukin-12 ( “ il-12 ” ) called tavokinogene telseplasmid ( “ tavo ” ) . the oms ep device is used to deliver tavo intratumorally , with the aim of reversing the immunosuppressive microenvironment in the treated tumor . story_separator_special_tag registered direct offering on august 19 , 2020 , the company completed the offer and sale of an aggregate of 4,608,589 shares of its common stock at a purchase price of $ 3.25 per share in a registered direct offering . the gross proceeds of the offering were approximately $ 15.0 million , and the net proceeds , after deducting the placement agent 's fee and other offering fees and expenses paid by the company , were approximately $ 13.7 million . in connection with the offering , the company paid the placement agent and other financial advisors an aggregate cash fee equal to 8.0 % of the gross proceeds of the offering , as well as legal and other expenses equal to $ 75,000. sale of new jersey net operating losses ( nols ) in may 2020 , the company received $ 0.9 million in net proceeds from the sale of its new jersey net operating losses under the state of new jersey nol transfer program for the period ended july 31 , 2019. small business administration loan on april 27 , 2020 , the company was granted a loan ( the “ loan ” ) from the banc of california in the aggregate amount of $ 952,744 , pursuant to the paycheck protection program ( the “ ppp ” ) under the coronavirus aid , relief , and economic security act ( “ cares act ” ) , which was enacted march 27 , 2020. the term of the loan is two years , with monthly payments due the first day of each month , beginning seven months from the date of initial disbursement , or december 1 , 2020. interest accrues at 1 % per year , effective on the date of initial disbursement . 57 cgp and sirtex on february 7 , 2020 , the company closed ( the “ closing ” ) a strategic transaction ( the “ transaction ” ) with cgp and its affiliate , sirtex . on october 10 , 2019 , the company and the buyers entered into stock purchase agreements ( as amended , the “ purchase agreements ” ) pursuant to which the company agreed to sell and issue to cgp and sirtex 10,000,000 shares and 2,000,000 shares , respectively , of the company 's common stock for an aggregate purchase price of $ 30 million . the net proceeds , after deducting offering fees and expenses paid by us , were approximately $ 28.0 million . may 2019 offering on may 24 , 2019 , we completed our offer and sale of an aggregate of 3,492,063 shares of our common stock , together with 3,492,063 accompanying warrants to purchase an aggregate of 2,619,047 shares of our common stock , at a combined purchase price of $ 3.15 per share of common stock and warrant . the warrants have an exercise price of $ 3.45 per full share , became exercisable on may 24 , 2019 and expire on may 24 , 2024. the gross proceeds of the offering were approximately $ 11.0 million , and the net proceeds , after deducting the placement agent 's fee and other offering fees and expenses paid by us , were approximately $ 10.0 million . in connection with the offering , we paid the placement agent a cash fee equal to 6.5 % of the gross proceeds of the offering , as well as legal and other expenses equal to $ 90,000. in addition , pursuant to the underwriting agreement , the company granted the underwriters an option , exercisable for 45 days , to purchase up to an additional 523,809 shares of our common stock ( the “ option shares ” ) and or warrants to purchase up to 392,857 shares of common stock ( the “ option warrants ” ) . on may 24 , 2019 , the underwriters partially exercised their option and purchased 238,095 option warrants to purchase an aggregate of 178,571 shares of our common stock , at a purchase price of $ 0.01 per warrant before underwriting discounts , or $ 2,381. the option warrants have an exercise price of $ 3.45 per full share , became exercisable on may 24 , 2019 and expire on may 24 , 2024. aspire capital on march 29 , 2019 , the company entered into a common stock purchase agreement ( the “ purchase agreement ” ) with aspire capital fund , llc , ( “ aspire capital ” ) pursuant to which the company agreed to issue and sell to aspire capital shares of its common stock equal to an aggregate amount of up to $ 20.0 million at the company 's request from time to time during a 30-month period . the company filed with the securities and exchange commission a prospectus supplement to the company 's effective shelf registration statement on form s-3 registering all the shares of common stock that have been offered to aspire capital from time to time . in consideration for entering into the purchase agreement , the company issued to aspire capital 120,201 shares of the company 's common stock which represented 3 % of the aggregate commitment . under the purchase agreement , on any trading day selected by the company , the company had the right , in its sole discretion , to present aspire capital with a purchase notice , directing aspire capital to purchase up to 30,000 shares of the company 's common stock per business day , up to $ 20.0 million of the company 's common stock in the aggregate at a per share price equal to the lesser of : ● the lowest sale price of the company 's common stock on the purchase date ; or ● the arithmetic average of the three ( 3 ) lowest closing sale prices for the company 's common stock

general and administrative our general and administrative expenses increased by approximately $ 6.3 million , from $ 12.0 million during the year ended july 31 , 2019 , to $ 18.3 million during the year ended july 31 , 2020. this increase was largely due to the following approximate increases : ( i ) $ 4.8 million in legal costs primarily related to the alpha holdings litigation and the contested proxy ; ( ii ) $ 0.9 million in consulting costs , primarily due to business development and public relations ( iii ) $ 0.8 million in proxy costs primarily related to the company 's special meeting held in february 2020 and ( iv ) $ 0.5 million increase in payroll and related benefits expenses primarily due to additional headcount and merit increases . these increases were partially offset by a $ 0.5 million reduction in stock-based compensation expense for employees and consultants , and $ 0.2 million in travel and travel related expenses due to covid-19 restrictions . the company believes a significant portion of its legal costs related to the alpha holdings litigation are recoverable and are likely to be recovered . at this point , no amount for insurance recoveries has been recorded . other income , net other income , net , decreased by approximately $ 0.2 million from $ 0.4 million for the year ended july 31 , 2019 to $ 0.2 million for the year ended july 31 , 2020. this decrease was primarily due to reduced interest income as a result of lower cash balances as well as a lower return on our investments for these respective periods .

inventory impairments when conducting our community level review for the recoverability of inventory related to projects in progress , we establish story_separator_special_tag executive overview and outlook market conditions the demand for new and existing homes is dependent on a variety of demographic and economic factors , including job and wage growth , household formation , consumer confidence , mortgage financing , and overall housing affordability . through the first half of fiscal 2019 , the homebuilding industry experienced a softening in demand , after adjusting for normal seasonality , that we believe was a result of the rise in mortgage interest rates and higher home prices , which created affordability challenges for some prospective buyers . as the fiscal year progressed , a decline in mortgage interest rates combined with a positive macroeconomic backdrop led to improved demand . we believe there are multiple factors that will support housing demand moving forward , including low unemployment , rising wages , and growing household formation . our operating strategy focuses on offering homes that provide our customers with extraordinary value at an affordable price . overview of results for our fiscal 2019 fiscal 2019 represented continued progress towards the execution of our balanced growth strategy . specifically , we have successfully improved our balance sheet by reducing our debt balance , extending debt maturities , and reducing our cash interest expense . we have also achieved growth in average active community count , average selling price , net new orders , and homes in backlog . profitability for the fiscal year ended september 30 , 2019 , we recorded net loss from continuing operations of $ 79.4 million , an increase of $ 34.4 million from the prior fiscal year 's net loss from continuing operations of $ 45.0 million . however , there were multiple items that impacted the comparability of our net loss from continuing operations between periods : income tax benefit from continuing operations was $ 37.2 million for fiscal 2019 and income tax expense was $ 94.5 million for fiscal 2018 . the income tax benefit in fiscal 2019 was impacted by our loss from operations and the generation of an additional $ 14.9 million of energy efficient homebuilding federal tax credits . refer to note 13 of the notes to the consolidated financial statements for additional discussion of these matters . we recognized $ 24.9 million in loss on extinguishment of debt in fiscal 2019 , a decrease of $ 2.9 million compared to the prior fiscal year . we recorded $ 148.6 million in inventory impairment and abandonment charges in fiscal 2019 , as compared to $ 6.5 million charges recorded in the prior year . balanced growth strategy we continue to execute against our longer-term balanced growth strategy , which we define as the expansion of earnings at a faster rate than our revenue growth , supported by a less-leveraged and return-driven capital structure . this strategy provides us with flexibility to increase return of capital to investors , reduce leverage , or increase investment in land and other operating assets in response to changing market conditions . the following is a summary of our performance against certain key operating and financial metrics during the current period : sales per community per month was 2.8 and 3.0 for the fiscal years ended september 30 , 2019 and 2018 , respectively . the decrease in sales pace in fiscal 2019 resulted from difficult selling conditions in the first half of the fiscal year . in response , we took actions to increase sales paces , including increasing pricing incentives . these efforts , together with improving conditions in the second half of the year resulted in much better sales pace in our third and fourth quarters we are focused on maintaining a competitive sales pace in the range of 2.8 to 3.2 going forward . during the year ended september 30 , 2019 , we had an average active community count of 166 , up 6.3 % from the prior year . we ended the year with an active community count of 166 . we continue to evaluate strategic opportunities to purchase land within our geographic footprint , balancing our desire to reduce leverage with land acquisition strategies that maximize the efficiency of capital employed . our asp for homes closed during the fiscal year ended september 30 , 2019 was $ 377.7 thousand , up 4.9 % compared to the prior year . the year-over-year increase in asp on closings was primarily a function of geographic mix and product shift , though we also benefited from pricing power in some markets . in addition , we ended fiscal 2019 with an asp of $ 389.4 thousand for our units in backlog , indicating that asp growth may continue in the near term . 27 homebuilding gross margin excluding impairments and abandonments and interest for the fiscal year ended september 30 , 2019 was 19.7 % , down from 21.2 % in the prior year . we experienced a softening of demand for new homes in early fiscal 2019 in many of our markets . we responded by offering price reductions and sales incentives in order to stimulate sales demand which has resulted in lower gross margins than the comparable prior year period . in addition , we also experienced some cost pressures related to labor and materials and a slight shift in geographic mix . we continue to take action to mitigate these pressures through our efforts to reduce construction costs , improve cycle time , and reduce incentives where feasible . sg & a for the fiscal year ended september 30 , 2019 was 11.6 % of total revenue compared with 11.8 % a year earlier . the decrease in sg & a as a percentage of total revenue was due to our continued focus on improving overhead cost management in relation to our revenue growth . capital efficiency , debt reduction , and share repurchases . story_separator_special_tag i & a ) hb gross profit ( loss ) w/o i & a hb gross margin w/o i & a interest amortized to cos ( interest ) hb gross profit w/o i & a and interest hb gross margin w/o i & a and interest west $ 228,637 22.9 % $ — $ 228,637 22.9 % $ — $ 228,637 22.9 % east 102,346 20.0 % — 102,346 20.0 % — 102,346 20.0 % southeast 104,051 18.3 % 793 104,844 18.5 % — 104,844 18.5 % corporate & unallocated ( 86,759 ) 212 ( 86,547 ) 91,132 4,585 total homebuilding $ 348,275 16.8 % $ 1,005 $ 349,280 16.8 % $ 91,132 $ 440,412 21.2 % $ in thousands fiscal year ended september 30 , 2017 hb gross profit ( loss ) hb gross margin impairments & abandonments ( i & a ) hb gross profit ( loss ) w/o i & a hb gross margin w/o i & a interest amortized to cos ( interest ) hb gross profit w/o i & a and interest hb gross margin w/o i & a and interest west $ 186,629 21.9 % $ 1,625 $ 188,254 22.1 % $ — $ 188,254 22.1 % east 109,289 20.5 % 188 109,477 20.5 % — 109,477 20.5 % southeast 103,193 20.2 % — 103,193 20.2 % — 103,193 20.2 % corporate & unallocated ( 86,910 ) 68 ( 86,842 ) 88,764 1,922 total homebuilding $ 312,201 16.5 % $ 1,881 $ 314,082 16.6 % $ 88,764 $ 402,846 21.2 % ( a ) w/o - without 32 our overall homebuilding gross profit decreased to $ 206.0 million for the fiscal year ended september 30 , 2019 , from $ 348.3 million in the prior year . the decrease in homebuilding gross profit was driven by ( 1 ) impairment charges of $ 110.0 million primarily related to impairments recognized during the second quarter of fiscal 2019 for projects in progress in california and ( 2 ) a slight decrease in revenue and gross margin for non-impaired communities . interest amortized to homebuilding cost of sales increased by $ 2.7 million year-over-year ( refer to note 5 and note 6 of the notes to our consolidated financial statements in this form 10-k for additional details ) . when excluding the impact of impairments and abandonments and interest , year-over-year gross profit decreased by $ 30.5 million while our gross margin decreased by 150 basis points to 19.7 % . the year-over-year change in gross margin is due to a variety of factors , including : ( 1 ) mix of closings between geographies/markets , individual communities within each market , and product type ; ( 2 ) our pricing strategies , including margin impact on homes closed during the current fiscal year ; ( 3 ) increased focus on managing our house costs and improving cycle times ; ( 4 ) fluctuations in discrete items in the current period such as warranty costs ; and ( 5 ) the impact of purchase accounting related to our acquisition of venture homes . in fiscal 2019 , we focused on a continuing objective to simplify our product offerings , which includes streamlining our plan and structural options and design studio offerings to improve efficiency and reduce costs . we expect these efforts to positively contribute to our gross margin in the future . our overall homebuilding gross profit increased to $ 348.3 million for the fiscal year ended september 30 , 2018 , from $ 312.2 million in the prior year . the increase was driven by growth in homebuilding revenue of $ 181.5 million combined with slightly higher gross margin . however , as shown in the tables above , the comparability of our gross profit and gross margin was modestly impacted by certain items . specifically , interest amortized to homebuilding cost of sales increased by $ 2.4 million year-over-year , and impairment and abandonment charges decreased by $ 0.9 million over the same period . when excluding the impact of impairments and abandonments , interest , and non-recurring items , year-over-year gross profit increased by $ 37.6 million while our gross margin remained flat at 21.2 % . measures of homebuilding gross profit and gross margin after excluding inventory impairments and abandonments , interest amortized to cost of sales , and other non-recurring items are not gaap financial measures . these measures should not be considered alternatives to homebuilding gross profit and gross margin determined in accordance with gaap as an indicator of operating performance . in particular , the magnitude and volatility of non-cash inventory impairment and abandonment charges for the company and other homebuilders have been significant historically and , as such , have made financial analysis of our industry more difficult . homebuilding metrics excluding these charges , as well as interest amortized to cost of sales and other similar presentations by analysts and other companies , are frequently used to assist investors in understanding and comparing the operating characteristics of homebuilding activities by eliminating many of the differences in companies ' respective level of impairments and levels of debt . management believes these non-gaap measures enable holders of our securities to better understand the cash implications of our operating performance and our ability to service our debt obligations as they currently exist and as additional indebtedness is incurred in the future . these measures are also useful internally , helping management to compare operating results and to measure cash available for discretionary spending . in a given period , our reported gross profit is generated from both communities previously impaired and communities not previously impaired . in addition , as indicated above , certain gross profit amounts arise from recoveries of prior period costs , including warranty items that are not directly tied to communities generating revenue in the period . home closings from communities previously impaired would , in most instances , generate very low or negative gross margins prior to the impact of the impairment .

results of continuing operations the following table summarizes certain key income statement metrics for the periods presented : replace_table_token_9_th ( a ) homebuilding gross margin for fiscal 2019 was impacted by $ 110.0 million of impairments primarily related to impairments recorded in the second quarter for certain projects in progress in california . ( b ) calculated as land sales and other gross profit ( loss ) divided by land sales and other revenue . land sales and other gross margin is shown as a significant negative percentage for fiscal 2019 due to the $ 38.6 million of impairments recorded in the second quarter related to land held for sale assets in california . ( c ) g & a was impacted in fiscal 2017 by a $ 2.7 million charge to write off a deposit on a legacy investment in a development site that we deemed uncollectible . ( d ) calculated as tax ( benefit ) expense for the period divided by ( loss ) income from continuing operations . due to a variety of factors , including the impact of discrete tax items on our effective tax rate , our income tax ( benefit ) expense is not always directly correlated to the amount of pretax ( loss ) income for the associated periods . 29 homebuilding operations data the following table summarizes net new orders and cancellation rates by reportable segment for the periods presented : replace_table_token_10_th net new orders for the year ended september 30 , 2019 increased to 5,576 , up 0.6 % from the year ended september 30 , 2018. the increase in net new orders was primarily driven by an increase in average active communities to 166 , up from 156 in the prior year .

revenues are generated by residuals from banks that we have contracts with . we generate our income as the third-party agent for point-of-sale credit card payment processing providers such as best payment solutions , moneris and national processing center . we have no financing debt associated with the business . unlike banks and credit card issuers , we have no exposure to loss due to nonpayment and bad debt . the processing company and merchants are liable for such debt . cash flows for the year ended september 30 , 2011 , cash used by operating activities was approximately $ 58,276 as compared to cash provided $ 127,672 for the year ended september 30 , 2010. our working capital was $ 82,994 at september 30 , 2011as compared to $ 79,100 at september 30 , 2010 , due to increased operations and payment of accrued taxes . we recorded the following non-cash charges during 2011 : share-based compensation of approximately $ 24,460,600 as compared to $ 37,398 for 2010. for the year ended september 30 , 2011 , cash used in financing activities was $ 0. during the year ended september 30 , 2010 our cash used in financing activities of $ 44,455 made up of payments to our ceo for advances totaling $ 67,755 , offset by cash received from the sale of our common stock of $ 23,300. critical accounting policies the discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements in accordance with us gaap requires us to make estimates and judgments that may affect assets and liabilities . on an on-going basis , we evaluate our estimates , including those related to revenue recognition and related allowances , costs and estimated earnings incurred in excess of billings on uncompleted contracts , inventory , impairments of long-lived assets , including intangible assets , impairments of goodwill , income taxes including the valuation allowance for deferred tax assets , billings in excess of costs and estimated earnings on uncompleted contracts ; contingencies and litigation , and share-based payments . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable , the results of which form the basis for making judgments about the carrying values of assets and liabilities . actual results may differ from these estimates under different assumptions or conditions . 12 we believe the following accounting policies are critical to our business operations and the understanding of our operations and include the more significant judgments and estimates used in the preparation of our consolidated financial statements . the consolidated financial statements include the accounts of deep down , inc. and its wholly-owned subsidiaries . revenue recognition we derive revenues primarily from the electronic processing of credit , charge and debit card transactions that are authorized and captured through third-party networks . typically , merchants are charged for these processing services based on a percentage of the dollar amount of each transaction and in some instances , additional fees are charged for each transaction . certain merchant customers are charged a flat fee per transaction and may also be charged miscellaneous fees , including fees for handling charge backs , monthly minimums , equipment rentals , sales or leasing and other miscellaneous services . revenues are reported net of amounts paid to sponsor banks , as well as interchange and assessments paid to credit card associations ( mastercard and visa ) under revenue sharing agreements pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants . we follow the requirements of asc 605-45 , “revenue recognition , principal agent considerations , ” in determining our revenue reporting . generally , we report revenues at the time of sale on a net basis where we are not the primary obligor in the arrangement , have minimal latitude in establishing the price of the services , do not change the product and perform part of the service , do not have discretion in supplier selection , do not have latitude in determining the product and service specifications to meet our client 's needs and do not assume credit risk . this amount includes interchange paid to card issuing banks and assessments paid to credit card associations pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants . recent accounting pronouncements recent accounting pronouncements are included in “part ii , item 8. financial statements” note 1 to the consolidated financial statements , “summary of significant accounting policies.” off-balance sheet arrangements we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that is material to investors . inflation and seasonality we do not believe that our operations are significantly impacted by inflation . our business is not seasonal in nature . 13 item 7a . story_separator_special_tag revenues are generated by residuals from banks that we have contracts with . we generate our income as the third-party agent for point-of-sale credit card payment processing providers such as best payment solutions , moneris and national processing center . we have no financing debt associated with the business . unlike banks and credit card issuers , we have no exposure to loss due to nonpayment and bad debt . the processing company and merchants are liable for such debt . cash flows for the year ended september 30 , 2011 , cash used by operating activities was approximately $ 58,276 as compared to cash provided $ 127,672 for the year ended september 30 , 2010. our working capital was $ 82,994 at september 30 , 2011as compared to $ 79,100 at september 30 , 2010 , due to increased operations and payment of accrued taxes . we recorded the following non-cash charges during 2011 : share-based compensation of approximately $ 24,460,600 as compared to $ 37,398 for 2010. for the year ended september 30 , 2011 , cash used in financing activities was $ 0. during the year ended september 30 , 2010 our cash used in financing activities of $ 44,455 made up of payments to our ceo for advances totaling $ 67,755 , offset by cash received from the sale of our common stock of $ 23,300. critical accounting policies the discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements in accordance with us gaap requires us to make estimates and judgments that may affect assets and liabilities . on an on-going basis , we evaluate our estimates , including those related to revenue recognition and related allowances , costs and estimated earnings incurred in excess of billings on uncompleted contracts , inventory , impairments of long-lived assets , including intangible assets , impairments of goodwill , income taxes including the valuation allowance for deferred tax assets , billings in excess of costs and estimated earnings on uncompleted contracts ; contingencies and litigation , and share-based payments . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable , the results of which form the basis for making judgments about the carrying values of assets and liabilities . actual results may differ from these estimates under different assumptions or conditions . 12 we believe the following accounting policies are critical to our business operations and the understanding of our operations and include the more significant judgments and estimates used in the preparation of our consolidated financial statements . the consolidated financial statements include the accounts of deep down , inc. and its wholly-owned subsidiaries . revenue recognition we derive revenues primarily from the electronic processing of credit , charge and debit card transactions that are authorized and captured through third-party networks . typically , merchants are charged for these processing services based on a percentage of the dollar amount of each transaction and in some instances , additional fees are charged for each transaction . certain merchant customers are charged a flat fee per transaction and may also be charged miscellaneous fees , including fees for handling charge backs , monthly minimums , equipment rentals , sales or leasing and other miscellaneous services . revenues are reported net of amounts paid to sponsor banks , as well as interchange and assessments paid to credit card associations ( mastercard and visa ) under revenue sharing agreements pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants . we follow the requirements of asc 605-45 , “revenue recognition , principal agent considerations , ” in determining our revenue reporting . generally , we report revenues at the time of sale on a net basis where we are not the primary obligor in the arrangement , have minimal latitude in establishing the price of the services , do not change the product and perform part of the service , do not have discretion in supplier selection , do not have latitude in determining the product and service specifications to meet our client 's needs and do not assume credit risk . this amount includes interchange paid to card issuing banks and assessments paid to credit card associations pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants . recent accounting pronouncements recent accounting pronouncements are included in “part ii , item 8. financial statements” note 1 to the consolidated financial statements , “summary of significant accounting policies.” off-balance sheet arrangements we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that is material to investors . inflation and seasonality we do not believe that our operations are significantly impacted by inflation . our business is not seasonal in nature . 13 item 7a .

results of operations revenues year ended september 30 , 2011 year ended september 30 , 2010 change % revenues $ 459,770 $ 337,288 $ 122,482 36.3 revenues increased by $ 122,482 , or 36.3 percent to $ 459,770 for the year ended september 30 , 2011 from $ 337,288 for the previous year ended september 30 , 2010. the revenue rate increased due to the number of clients and the visa/mastercard volume for our high volume customers . revenues are reported net of amounts paid to sponsor banks , as well as interchange and assessments paid to credit card associations ( mastercard and visa ) under revenue sharing agreements pursuant to which such parties receive payments based primarily on processing volume for particular groups of merchants . operating expenses year ended september 30 , 2011 year ended september 30 , 2010 change % operating expenses $ 24,913,836 $ 271,338 $ 24,642,498 9081 % our operating expenses increased from $ 271,338 for the year ended september 30 , 2010 to $ 24,913,836 for the yearended september 30 , 2011. our largest expenditure for both periods was executive compensation which consisted primarily of stock based compensation to our sole officer , mr. gary deroos of $ 24,445,000. capital resources and liquidity overview over the course of the past three years of operations , including the operations of our predecessor company , we have not seen large , sudden shifts in revenues , although because our business model is reliant on the size of consumer transactions , we have seen , over the past three years , a slight , general increase in revenues likely owing to gradual inflation .

these statements may be identified by words such as “ estimate ” , “ forecast ” , “ project ” , “ plan ” , “ intend ” , “ believe ” , “ expect ” , “ anticipate ” , or variations or negatives thereof or by similar or comparable words or phrases . forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the statements . these risks and uncertainties include , but are not limited to , the following : the global financial and economic situation ; changes in levels of unemployment and other economic conditions in the united states or foreign countries where the company does business , or in particular regions or industries ; reduction in the supply of candidates for temporary employment or the company 's ability to attract candidates ; the entry of new competitors into the marketplace or expansion by existing competitors ; the ability of the company to maintain existing client relationships and attract new clients in the context of changing economic or competitive conditions ; the impact of competitive pressures , including any change in the demand for the company 's services , on the company 's ability to maintain its margins ; the possibility of the company incurring liability for its activities , including the activities of its temporary employees , or for events impacting its temporary employees on clients ' premises ; the possibility that adverse publicity could impact the company 's ability to attract and retain clients and candidates ; the success of the company in attracting , training , and retaining qualified management personnel and other staff employees ; the company 's ability to comply with governmental regulations affecting personnel services businesses in particular or employer/employee relationships in general ; whether there will be ongoing demand for sarbanes-oxley or other regulatory compliance services ; the company 's reliance on short-term contracts for a significant percentage of its business ; litigation relating to prior or current transactions or activities , including litigation that may be disclosed from time to time in the company 's sec filings ; the ability of the company to manage its international operations and comply with foreign laws and regulations ; the impact of fluctuations in foreign currency exchange rates ; the possibility that the additional costs the company will incur as a result of health care reform legislation may adversely affect the company 's profit margins or the demand for the company 's services ; the possibility that the company 's computer and communications hardware and software systems could be damaged or their service interrupted ; and the possibility that the company may fail to maintain adequate financial and management controls and as a result suffer errors in its financial reporting . additionally , with respect to protiviti , other risks and uncertainties include the fact that future success will depend on its ability to retain employees and attract clients ; there can be no assurance that there will be ongoing demand for sarbanes-oxley or other regulatory compliance services ; failure to produce projected revenues could adversely affect financial results ; and there is the possibility of involvement in litigation relating to prior or current transactions or activities . because long-term contracts are not a significant part of the company 's business , future results can not be reliably predicted by considering past trends or extrapolating past results . further information regarding these and other risks and uncertainties is contained in item 1a . “ risk factors. ” executive overview demand for the company 's temporary and permanent staffing and risk consulting and internal audit services is largely dependent upon general economic and labor trends both domestically and abroad . correspondingly , financial results for the year ended december 31 , 2016 were positively impacted by stable global economic conditions . annual net service revenues reached $ 5.25 billion in 2016 , an increase of 3 % from the prior year . full-year 2016 net income decreased 4 % to $ 343 million and diluted net income per share decreased 1 % to $ 2.67 . all three of the company 's reportable segments experienced revenue growth , led by protiviti which increased 9 % in 2016 on a same-day , constant-currency basis compared to last year . during the third quarter of 2016 , the company successfully implemented a new front-office customer relationship management ( `` crm '' ) system for all temporary and permanent staffing branches in the united states as well as a new project management system for its risk consulting and internal audit services segment . the conversions went smoothly , and the company estimates that the related disruption and out-of-pocket costs had an adverse impact to its revenue and net income per share for the year of $ 9 million and $ 0.05 , respectively . we believe that the company is well positioned in the current macroeconomic environment . the united states economic backdrop during 2016 was stable for the company as real gross domestic product ( gdp ) grew 1.6 % , while the unemployment rate declined from 5.0 % in december 2015 to 4.7 % in december 2016 . in the united states , the number of job openings has exceeded the number of hires since february 2015 , creating competition for skilled talent that increases the company 's value to clients . a number of professional occupations are nearing full employment , which is placing pressure on the supply of available talent and increasing our value to clients . the secular demand for temporary staffing is also ongoing . the number of temporary workers as a percentage of the overall u.s. workforce remains near an all-time high , a sign employers are building flexible staffing options into their human resource plans with increasing frequency . 13 protiviti has successfully diversified its service offerings , built a loyal and growing client base , and is seeing steady demand in all of its major consulting solutions . story_separator_special_tag the company completed its annual goodwill impairment analysis as of june 30 , 2016 , and determined that no adjustment to the carrying value of goodwill was required . there were no events or changes in circumstances since the annual goodwill impairment assessment that caused the company to perform an interim impairment assessment . the company follows fasb authoritative guidance utilizing a two-step approach for determining goodwill impairment . in the first step the company determines the fair value of each reporting unit utilizing a present value technique derived from a discounted cash flow methodology . for purposes of this assessment the company 's reporting units are its lines of business . the fair value of the reporting unit is then compared to its carrying value . if the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit , goodwill is not impaired and no further testing is performed . the second step under the fasb guidance is contingent upon the results of the first step . to the extent a reporting unit 's carrying value exceeds its fair value , an indication exists that the reporting unit 's goodwill may be impaired and the company must perform a second more detailed impairment assessment . the second step involves allocating the reporting unit 's fair value to its net assets in order to determine the implied fair value of the reporting unit 's goodwill as of the assessment date . the implied fair value of the reporting unit 's goodwill is then compared to the carrying amount of goodwill to quantify an impairment charge as of the assessment date . the company 's reporting units are accountemps , robert half finance & accounting , officeteam , robert half technology , robert half management resources and protiviti , which had goodwill balances at december 31 , 2016 , of $ 126.9 million , $ 26.0 million , $ 0.0 million , $ 7.0 million , $ 0.0 million and $ 49.9 million , respectively , totaling $ 209.8 million . there were no changes to the company 's reporting units or to the allocations of goodwill by reporting unit for the year ended december 31 , 2016 . the goodwill impairment assessment is based upon a discounted cash flow analysis . the estimate of future cash flows is based upon , among other things , a discount rate and certain assumptions about expected future operating performance . the discount rate for all reporting units was determined by management based on estimates of risk free interest rates , beta and market risk premiums . the discount rate used was compared to the rate published in various third party research reports , which indicated that the rate was within a range of reasonableness . the primary assumptions related to future operating performance include revenue growth rates and profitability levels . in addition , the impairment assessment requires that management make certain judgments in allocating shared assets and liabilities to the balance sheets of the reporting units . solely for purposes of establishing inputs for the fair value calculations described above related to its annual goodwill impairment testing , the company made the following assumptions . the company assumed that year-to-date trends through the date of the most recent assessment would continue for all reporting units through 2016 , using unique assumptions for each reporting unit . in addition , the company applied profitability assumptions consistent with each reporting unit 's historical trends at various revenue levels and , for years 2018 and beyond , used a 5 % growth factor . this rate is comparable to the company 's most recent ten-year annual compound revenue growth rate . the model used to calculate fair value extends a total of 10 years with a terminal value calculation at the end of the 10 year period . in its most recent calculation , the company used a 9.8 % discount rate , which is slightly lower than the 10.0 % discount rate used for the company 's test during the second quarter of 2015. this decrease in discount rate is attributable to decreases in the risk free rate and the equity market risk premium , offset by a slight increase in beta . in order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test , the company applied hypothetical decreases to the fair values of each reporting unit . the company determined that hypothetical decreases in fair value of at least 75 % would be required before any reporting unit would have a carrying value in excess of its fair value . given the current economic environment and the uncertainties regarding the impact on the company 's business , there can be no assurance that the company 's estimates and assumptions made for purposes of the company 's goodwill impairment testing will prove to be accurate predictions of the future . if the company 's assumptions regarding forecasted revenue or profitability growth rates of certain reporting units are not achieved , the company may be required to recognize goodwill impairment charges in future periods . it is not possible at this time to determine if any such future impairment charge would result or , if it does , whether such charge would be material . 15 workers ' compensation . except for states which require participation in state-operated insurance funds , the company retains the economic burden for the first $ 0.5 million per occurrence in workers ' compensation claims . workers ' compensation includes ongoing healthcare and indemnity coverage for claims and may be paid over numerous years following the date of injury . claims in excess of $ 0.5 million are insured .

results of operations demand for the company 's temporary and permanent staffing and risk consulting and internal audit services is largely dependent upon general economic and labor market conditions both domestically and abroad . correspondingly , results of operations were positively impacted by stable global economic conditions during 2016 . because of the inherent difficulty in predicting economic trends and the absence of material long-term contracts in any of the company 's business units , future demand for the company 's services can not be forecast with certainty . we believe the company is well positioned in the current united states macroeconomic environment . the company 's temporary and permanent staffing business has 325 offices in 42 states , the district of columbia and 17 foreign countries , while protiviti has 56 offices in 23 states and 11 foreign countries . 16 non-gaap financial measures the financial results of the company are prepared in conformity with accounting principles generally accepted in the united states of america ( `` gaap '' ) and the rules of the sec . to help readers understand the company 's financial performance , the company supplements its gaap financial results with revenue growth rates derived from non-gaap revenue amounts . variations in the company 's financial results include the impact of changes in foreign currency exchange rates and billing days . the company provides “ same billing days and constant currency ” revenue growth calculations to remove the impact of these items . these calculations show the year-over-year revenue growth rates for the company 's reportable segments on both a reported basis and also on a same day , constant-currency basis for global , u.s. and international operations . the company has provided this data because management believes it better reflects the company 's actual revenue growth rates and aids in evaluating revenue trends over time .

forward-looking statements include statements preceded by , 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 ; diluted earnings per share ; average commissions and transaction fees per trade ; amounts of commissions and transaction fees , asset-based revenues , net interest revenue , insured deposit account fees , investment product fees and other revenues ; net interest margin ; the average yield earned on insured deposit account assets ; the effect of our migration of client cash balances into the insured deposit account offering ; growth in spread-based , fee-based and interest-earning asset balances ; amounts of total operating expenses , advertising expense and other expense ; our effective income tax rate ; and our capital and liquidity needs and our plans to finance such needs . 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 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 . 25 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 . 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 . futures accounts are sub-accounts associated with a brokerage account for clients who wish to trade futures and or options on futures . 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 . interest paid on client credit balances is a reduction of net interest revenue . client credit balances are included in “payable to clients” on our consolidated balance sheets . client margin balances — the total amount of cash loaned to clients in margin accounts . such loans are secured by client assets . interest earned on client margin balances is a component of net interest revenue . client margin balances are included in “receivable from clients , net” on our consolidated balance sheets . story_separator_special_tag “liquid assets — management target” is based on more conservative measures of broker-dealer net capital than “ liquid assets — regulatory threshold ” ( defined below ) because we prefer to maintain significantly more conservative levels of net capital at the broker-dealer subsidiaries than the regulatory thresholds require . 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 , such as the need to provide funding for significant strategic business transactions . 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 the applicable “early warning” net capital requirement and ( d ) tier 1 capital of our trust company in excess of the minimum 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 27 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 , such as the need to provide funding for significant strategic business transactions . “ 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 . 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 . it also includes the value of open futures , foreign exchange and options 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 . market fee-based investment balances — client assets invested in mutual funds ( except money market funds ) and company programs such as advisordirect ® and amerivest , ® on which we earn fee revenues that are largely based on a percentage of the market value of the investment . market fee-based investment balances are a component of fee-based investment balances . fee revenues earned on these balances are included in investment product fees on our consolidated statements of income . 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 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 and interest earned on securities borrowing/securities lending . brokerage interest expense consists of amounts paid or payable to clients based on credit balances maintained in brokerage accounts and interest incurred on securities borrowing/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 . 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 . securities borrowing — we borrow securities temporarily from other broker-dealers in connection with our broker-dealer business . we deposit cash as collateral for the securities borrowed , and generally earn interest revenue on the cash deposited with the counterparty . we also incur interest expense for borrowing certain securities . securities lending — we loan securities temporarily to 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 .

under the securities purchase agreement , we issued and sold in two separate closings an aggregate of 6,000,000 shares of our common stock and warrants to purchase up to an aggregate of 6,000,000 shares of our common stock , for story_separator_special_tag the following discussion 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 report . some of the information contained in this discussion and analysis and set forth elsewhere in this 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 the section titled “risk factors” in part i—item 1a of this 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 . business overview overview we are an innovative drug discovery and development company seeking to discover , develop and deliver to patients best-in-class medicines designed to address diseases with significant unmet need . we combine proven scientific expertise with a passion for developing novel small molecule drugs that target emerging disease pathways . our programs focused on the inhibition of phosphoinositide-3-kinase and heat shock protein 90 are evidence of our innovative approach to drug discovery and development . we have worldwide development and commercialization rights to all of our development candidates and early discovery programs , subject to certain financial obligations to our current licensor and former development partners . ipi-145 , our lead product candidate , is a potent , oral inhibitor of class i pi3k-delta and pi3k-gamma , which we are investigating in both hematologic malignancies and inflammatory diseases . we believe that ipi-145 is the first pi3k-delta , gamma inhibitor in clinical development . the following is a summary of the clinical development of ipi-145 to date : hematologic malignancies we are conducting a phase 1 , open-label , dose-escalation study designed to evaluate the safety , pharmacokinetics and clinical activity of ipi-145 in patients with advanced hematologic malignancies . we are enrolling patients in five additional cohort expansions in the phase 1 study to further evaluate the safety , pharmacokinetics and activity of ipi-145 in patients with the following hematologic malignancies : chronic lymphocytic leukemia , indolent non-hodgkin lymphoma and mantle cell lymphoma t-cell lymphomas aggressive b-cell lymphomas myeloid neoplasms t-cell or b-cell acute lymphoblastic leukemia/lymphoma we are planning to initiate at least two additional trials of ipi-145 in patients with hematologic malignancies in 2013. inflammation we have completed a phase 1 , randomized , double-blind , placebo-controlled trial of ipi-145 in healthy adult subjects designed to support the development of ipi-145 in inflammatory diseases . we are conducting a phase 2a randomized , double-blind , placebo-controlled trial of ipi-145 in patients with mild , allergic asthma . we are planning to initiate in the first half of 2013 a phase 2 , randomized , placebo-controlled study to evaluate the safety and activity of multiple doses of ipi-145 in patients with rheumatoid arthritis . 44 in january 2013 , we announced our second potent , oral pi3k-delta , gamma inhibitor , ipi-443 . we expect to complete in the second half of 2013 nonclinical studies designed to enable the initiation of phase 1 clinical development . our second clinical candidate , retaspimycin hydrochloride ( hcl ) , is a novel , potent and selective inhibitor of heat shock protein 90 ( hsp90 ) . we completed patient enrollment in a phase 2 , randomized , double-blind , placebo-controlled clinical trial evaluating retaspimycin hcl in combination with docetaxel , a chemotherapy , compared to placebo and docetaxel in 226 patients with second- or third-line non-small cell lung cancer ( nsclc ) , who are naive to docetaxel treatment and have a history of heavy smoking . we stratified patients in our phase 2 trial by squamous cell carcinoma and adenocarcinoma based on results from our phase 1b trial in which we observed partial responses in patients with squamous cell carcinoma . in addition , we are prospectively evaluating a novel biomarker that we believe may be predictive of response . we expect to report topline overall survival data from this trial in the first half of 2013. we are also enrolling patients in a phase 1b/2 trial to explore the safety and efficacy of retaspimycin hcl in combination with everolimus , an inhibitor of the mammalian target of rapamycin ( mtor ) , pathway , in nsclc patients with a kras gene mutation . the objective of this phase 1b/2 trial is to determine the recommended dose for the combination treatment and to evaluate the safety and clinical activity of retaspimycin hcl in combination with everolimus . we expect to provide an update from this phase 1b/2 trial in the first half of 2013. in addition to our clinical stage programs , we have multiple innovative projects in earlier stages of development . through our internal discovery efforts , we also discovered ipi-940 , a novel , orally available inhibitor of faah . it is believed that inhibition of faah may enable the body to bolster its own analgesic and anti-inflammatory response , and may have applicability in a broad range of painful or inflammatory conditions . we are currently seeking potential partnering opportunities for our faah program . in june 2012 , we voluntarily stopped all company-sponsored clinical trials of saridegib , our lead hedgehog pathway inhibitor . strategic alliances millennium in july 2010 , we entered into a development and license agreement with intellikine , inc. , or intellikine , under which we obtained rights to discover , develop and commercialize pharmaceutical products targeting the delta and or gamma isoforms of pi3k , including ipi-145 . we paid intellikine a $ 13.5 million up-front license fee . story_separator_special_tag mundipharma and purdue on july 17 , 2012 , we terminated our strategic alliance with mundipharma and purdue and entered into termination and revised relationship agreements with each of those entities , which we refer to as the 2012 termination agreements . the alliance was previously governed by strategic alliance agreements that we entered into with each of mundipharma and purdue in november 2008. the strategic alliance agreement with purdue was focused on the development and commercialization in the united states of products targeting faah . the 46 2008 agreement with mundipharma was focused on the development and commercialization outside of the united states of all products and product candidates that inhibit or target the hedgehog pathway , faah , pi3k , and product candidates arising out of our early discovery projects in all disease fields . our hsp90 program was expressly excluded from the alliance . under the terms of the 2012 termination agreements : all intellectual property rights that we had previously licensed to mundipharma and purdue to develop and commercialize products under the previous strategic alliance agreements terminated , with the result that we have worldwide rights to all product candidates that had previously been covered by the strategic alliance . we have no further obligation to provide research and development services to mundipharma and purdue as of july 17 , 2012. mundipharma and purdue have no further obligation to provide research and development funding to us . under the alliance , mundipharma was obligated to reimburse us for research and development expenses we incurred , up to an annual aggregate cap for each alliance program other than faah . during the year ended december 31 , 2012 , we received $ 55 million in research and development funding . we recognized revenue for reimbursed research and development services we performed for mundipharma and purdue , including $ 45 million in such revenue in the year ended december 31 , 2012. we recognized $ 88.5 million and $ 67.0 million in such revenue , which included $ 3.5 million and $ 2.0 million , respectively , in revenue related to reimbursed research and development services for the transition of the faah program , in the years ended december 31 , 2011 and 2010 , respectively . we did not record a liability for amounts previously funded by purdue and mundipharma as this relationship was not considered a financing arrangement . we are obligated to pay mundipharma and purdue a four percent royalty in the aggregate ( subject to reduction as described below ) , on worldwide net sales of products that were covered by the alliance until such time as they have recovered approximately $ 260 million , representing the research and development funding paid to us for research and development services performed by us through the termination of the strategic alliance . after this cost recovery , our royalty obligations to mundipharma and purdue will be reduced to a one percent royalty on net sales in the united states of products that were previously subject to the strategic alliance . all payments are contingent upon the successful commercialization of products subject to the alliance that are subject to significant further development . as such , there is significant uncertainty about whether any such products will ever be approved or commercialized . if no products are commercialized , no payments will be due by us to mundipharma and purdue ; therefore , no amounts have been accrued . royalties are payable under these agreements until the later to occur of the last-to-expire of specified patent rights and the expiration of non-patent regulatory exclusivities in a country , provided that if royalties are payable solely on the basis of non-patent regulatory exclusivity , each of the royalty rates is reduced by 50 % . in addition , royalties payable under these agreements after mundipharma and purdue have recovered all research and development expenses paid to us are subject to reduction on account of third party royalty payments or patent litigation damages or settlements which might be required to be paid by us if litigation were to arise , with any such reductions capped at 50 % of the amounts otherwise payable during the applicable royalty payment period . line of credit agreement in connection with the previous strategic alliance with mundipharma and purdue , we also entered into a line of credit agreement with purdue and its independent associated company , purdue pharma l.p. , or pplp , that provided for the borrowing by us of one or more unsecured loans up to an aggregate maximum principal amount of $ 50 million . in march 2009 , purdue assigned its interest under the line of credit agreement to pplp . the extension of the line of credit at an interest rate below our incremental borrowing rate represented the transfer of 47 additional value to us in the arrangement . as such , we recorded the fair value of the line of credit of $ 17.3 million as a loan commitment asset on our balance sheet in 2008. the fair value of the loan commitment asset was determined using a discounted cash flow model of the differential between the terms and rates of the line of credit and market rates . we amortized the loan commitment asset to interest expense until we drew down the line of credit in november 2011. we recorded approximately $ 1.6 million and $ 1.7 million of related amortization expense in the years ended december 31 , 2011 and 2010 , respectively . in november 2011 , we borrowed $ 50 million under this line of credit , which we recorded as long-term debt . the loan would have matured and was payable in full , including principal and any accrued interest , on april 1 , 2019 , which we referred to as the maturity date , and would have been subordinate to any senior indebtedness that we may have incurred .

results of operations the following table summarizes our results of operations for the years ended december 31 , 2012 , 2011 and 2010 , in thousands , together with the change in each item as a percentage . replace_table_token_4_th revenue our revenue during the year ended december 31 , 2012 consisted of approximately : $ 45.0 million related to reimbursed research and development services we performed under our strategic alliance entered into with mundipharma and purdue in november 2008 ; and $ 2.1 million related to the amortization of the deferred revenue associated with the grant of rights and licenses under our strategic alliance with mundipharma and purdue . our revenue during the year ended december 31 , 2011 consisted of approximately : $ 88.5 million related to reimbursed research and development services we performed under our strategic alliance with mundipharma and purdue , which includes $ 3.5 million related to the transition of our faah program to mundipharma and purdue ; and $ 4.3 million related to the amortization of the deferred revenue associated with the grant of rights and licenses under our strategic alliance with mundipharma and purdue . our revenue during the year ended december 31 , 2010 consisted of approximately : $ 67.0 million related to reimbursed research and development services we performed under our strategic alliance with mundipharma and purdue , which includes $ 2.0 million related to the transition of our faah program to mundipharma and purdue ; and $ 4.3 million related to the amortization of the deferred revenue associated with the grant of rights and licenses under our strategic alliance with mundipharma and purdue .

executive level overview trimble 's focus is on integrating its broad technological and application capabilities to create system-level solutions that transform how work is done within the industries we serve , enhancing productivity , accuracy , safety and regulatory compliance for our customers . the majority of our markets are end-user markets , including engineering and construction firms , surveyors , farmers , governmental organizations , energy and utility companies and organizations who must manage fleets of mobile workers and assets . we also provide components to original equipment manufacturers to incorporate into their products . in the end user markets , we provide stand-alone systems which may consist of software , hardware or some combination of the two , as well as integrated enterprise or workflow solutions which address the entire work process . some examples of our solutions include products that automate and simplify the process of surveying land , products that automate the control , management and utilization of equipment such as tractors and bulldozers , products for engineering or building design , construction and operations management , products that enable a company to manage its mobile workforce and assets , and products that allow municipalities or utilities to manage their fixed assets and operations . to achieve distribution , marketing , production , and technology advantages in our targeted markets , we manage our operations in the following four segments : engineering and construction , field solutions , mobile solutions , and advanced devices . solutions targeted at the end-user make up a significant majority of our revenue . to create compelling products , we must attain an understanding of the end users ' needs and work flow , and of how our broad based technological capabilities can be deployed and integrated to enable that end user to work faster , more efficiently , more accurately and more safely . we use this knowledge to create highly innovative solutions that change the way work is done by the end-user . with the exception of our mobile solutions and advanced devices segments , our products are primarily sold through a dealer channel , and it is crucial that we maintain a proficient , global , third-party distribution channel . we continue to execute our strategy with a series of actions across new and existing markets : reinforcing our position in new and existing markets we believe many of our markets continue to be underpenetrated and provide us with additional , substantial potential for substituting our technology for traditional methods . we continue to utilize the strength of the trimble brand in our markets to expand our revenue by bringing new products to both new and existing users . in our engineering and construction segment , during the year we acquired sketchup , one of the most popular 3d modeling tools in the world which allows modelers worldwide , across a wide range of industries , to express design concepts easily , accurately and efficiently . subsequently , we were able to extend our bim-to-field capabilities for building contractors by launching the first integration of sketchup file import capabilities into the trimble field link layout software . trimble field link now allows contractors to take their 3d sketchup pro models from the office into the field for quick site verification and viability testing of the proposed prototype . we demonstrated our leadership in technology innovation by introducing the trimble r10 gnss system , which is our next generation state-of-the-art gnss surveying solution . it is the smallest and lightest receiver in its class yet combines powerful features and groundbreaking technologies . in our field solutions segment , the agriculture division introduced four new innovations designed to assist growers with planting and spreading operations-vehicle sync , seed monitoring capability , application management of up to two variable rate products and spinner speed control . these innovations enable enhanced grower efficiency by increasing the quality of seed placement and providing real-time wireless communication between vehicles in the field . furthermore , we launched the connected farm application for smartphone platforms which gives farmers an easy-to-use tool to capture field data for later viewing and analysis online , while also providing agronomists with access to additional data they can use to better assess the needs of their customers . in our mobile solutions segment , our acquisition of trucking industry enterprise software tmw systems will further expand our transportation and logistics reach . tmw 's software capability spans the entire surface transportation lifecycle , delivering visibility , control and decision support for the intricate relationships and complex processes involved in the movement of freight . tmw 's enterprise software currently integrates with trimble 's t & l solutions on many fleets and when combined will jointly serve more than 3,000 fleets around the world . 29 in our advanced devices segment , we introduced our next-generation uhf rfid reader module which is designed to be embedded into a wide variety of handheld , portable and stationary devices . the exceptionally small size and powerful performance of the mercury6e-micro yields increased efficiency , reduced development costs and time-to-market advantages for rfid applications . bringing existing technology to new geographic markets we continue to position ourselves in newer geographic markets that will serve as important sources of future growth . in our engineering and construction segment , we further expanded our network of sitech technology dealers during the year by adding new dealerships to serve geographic markets such as bahrain , kuwait , qatar , united arab emirates , tunisia and siberia . we also expanded coverage of our satellite-delivered trimble rtx technology to most of the world . this technology enables the trimble xfill service , a new technique in surveying that allows surveyors to continue working in the event the primary correction stream is not available . in our field solutions segment , our high-accuracy centerpoint rtx correction service is also now available worldwide for agriculture customers . story_separator_special_tag in evaluating the revenue recognition for our hardware or subscription agreements which contain multiple deliverable arrangements , we determined that in certain instances we were not able to establish vsoe for some or all deliverables in an arrangement as we infrequently sold each element on a standalone basis , did not price products within a narrow range , or had a limited sales history . when vsoe can not be established , we attempt to establish the selling price of each element based on relevant third-party evidence ( tpe ) . tpe is determined based on competitor prices for similar deliverables when sold separately . generally , our go-to-market strategy differs from that of competitors , and offerings may contain a significant level of proprietary technology , customization or differentiation such that the comparable pricing of products with similar functionality can not be obtained . furthermore , we are unable to reliably determine what similar competitor products ' selling prices are on a stand-alone basis . therefore , we typically are not able to establish the selling price of an element based on tpe . when we are unable to establish selling price using vsoe or tpe , we use our best estimate of selling price ( besp ) in our allocation of arrangement consideration . the objective of besp is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis . besp is generally used for offerings that are not typically sold on a stand-alone basis or for new or highly customized offerings . we determine besp for a product or service by considering multiple factors including , but not limited to , pricing practices , market conditions , competitive landscape , internal costs , geographies and gross margin . the determination of besp is made through consultation with and formal approval by our management , taking into consideration our go-to-market strategy . allowance for doubtful accounts our accounts receivable balance , net of allowance for doubtful accounts and sales returns reserve , was $ 323.5 million at the end of fiscal 2012 , as compared with $ 275.2 million at the end of fiscal 2011. the allowance for doubtful accounts was $ 6.3 million and $ 6.7 million at the end of fiscal 2012 and 2011 , respectively . we evaluate ongoing collectibility of our trade accounts receivable based on a number of factors such as age of the accounts receivable balances , credit quality , historical experience , and current economic conditions that may affect a customer 's ability to pay . in circumstances where we are aware of a specific customer 's inability to meet its financial obligations to us , a specific allowance for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount we believe will ultimately be collected . in addition to specific customer identification of potential bad debts , bad debt charges are recorded based on our recent past loss history and an overall assessment of past due trade accounts receivable amounts outstanding . inventory valuation our inventories , net balance was $ 240.5 million at the end of fiscal 2012 as compared with $ 232.1 million at the end of fiscal 2011. our inventory allowances at the end of fiscal 2012 were $ 40.3 million , as compared with $ 37.6 million at the end of fiscal 2011. our inventories are stated at the lower of standard cost ( which approximates actual cost on a first-in , first-out basis ) or market . adjustments to reduce the cost of inventory to its net realizable value , if required , are made for estimated excess , or obsolescence balances . factors influencing these adjustments include decline in demand , technological changes , product life cycle 31 and development plans , component cost trends , product pricing , physical deterioration and quality issues . if actual factors are less favorable than those projected by us , additional inventory write-downs may be required . income taxes income taxes are accounted for under the liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income . a valuation allowance is recorded to reduce the carrying amounts of deferred tax assets if it is more likely than not such assets will not be realized . relative to uncertain tax positions , we only recognize the tax benefit if it is more likely than not that the tax position will be sustained on examination by the taxing authorities , based on the technical merits of the position . the tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 % likelihood of being realized upon ultimate settlement . our practice is to recognize interest and or penalties related to income tax matters in income tax expense . our valuation allowance is primarily attributable to net operating losses and research and development credit carryforwards . management believes that it is more likely than not that we will not realize these deferred tax assets , and , accordingly , a valuation allowance has been provided for such amounts . valuation allowance adjustments associated with an acquisition after the measurement period are recorded through income tax expense . goodwill and purchased intangible assets goodwill represents the excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired in a business combination . intangible assets acquired individually , with a group of other assets , or in a business combination , are recorded at fair value . identifiable intangible assets are comprised of distribution channels and distribution rights , patents , licenses , technology , acquired backlog , trademarks , and in-process research and development . the fair value of intangible assets acquired is generally determined based on a discounted cash flow analysis .

results of operations overview the following table is a summary of revenue , gross margin and operating income for the periods indicated and should be read in conjunction with the narrative descriptions below . replace_table_token_4_th basis of presentation we have a 52-53 week fiscal year , ending on the friday nearest to december 31 , which for fiscal 2012 was december 28 , 2012. fiscal 2012 , 2011 , and 2010 were all 52-week years . revenue beginning in the first quarter of fiscal 2012 , we have presented revenue separately for products , services and subscriptions . prior year amounts have been reclassified to conform to the current year presentation . in fiscal 2012 , total revenue increased by $ 396.0 million , or 24 % , to $ 2.04 billion from $ 1.64 billion in fiscal 2011. of this increase , product revenue increased $ 221.1 million , or 16 % , service revenue increased $ 103.8 million , or 65 % , and subscription revenue increased $ 71.2 million , or 51 % . the product and service revenue increase in fiscal 2012 as compared to fiscal 2011 was driven by organic growth and acquisitions not applicable in the prior periods including tekla and peoplenet which were both acquired in the third quarter of 2011. subscription revenue increased primarily due to organic growth and peoplenet . on a segment basis , the increase in fiscal 2012 was primarily due to stronger results from the engineering and construction , field solutions and mobile solutions segments .

icahn enterprises holdings and its subsidiaries own substantially all of our assets and liabilities and conduct substantially all of our operations . therefore , the financial results of icahn enterprises and icahn enterprises holdings are substantially the same , with differences relating primarily to debt , as discussed further in note 11 , `` debt , '' to the consolidated financial statements , and to the allocation of the general partner interest , which is reflected as an aggregate 1.99 % general partner interest in the financial statements of icahn enterprises . in addition to the above , mr. icahn and his affiliates owned 101,872,909 , or approximately 87.9 % , of icahn enterprises ' outstanding depositary units as of december 31 , 2013 . we are a diversified holding company owning subsidiaries currently engaged in the following continuing operating businesses : investment , automotive , energy , metals , railcar , gaming , food packaging , real estate and home fashion . we also report the results of our holding company , which includes the results of certain subsidiaries of icahn enterprises and icahn enterprises holdings ( unless otherwise noted ) , and investment activity and expenses associated with the holding company . holding company icahn enterprises equity offerings on february 28 , 2013 , icahn enterprises entered into an underwriting agreement ( the “ february 2013 underwriting agreement ” ) with jefferies & company , inc. , providing for the issuance and purchase of an aggregate of 3,174,604 depositary units representing limited partner interests in icahn enterprises at a price to the public of $ 63.00 per depositary unit . the depositary units were delivered to the unitholders on march 6 , 2013. pursuant to the february 2013 underwriting agreement , icahn enterprises also granted jefferies & company , inc. a 30-day option to purchase up to 476,191 additional depositary units at the same public offering price , which expired unexercised . on june 12 , 2013 , icahn enterprises entered into an underwriting agreement ( the “ june 2013 underwriting agreement ” ) with credit suisse securities ( usa ) llc , ubs securities llc , jefferies llc , citigroup global markets inc. , oppenheimer & co. inc. , keefe , bruyette & woods , inc. , wunderlich securities , inc. and keybanc capital markets inc. ( the “ underwriters ” ) , providing for the issuance and purchase of an aggregate of 1,600,000 depositary units representing limited partner interests in icahn enterprises at a price to the public of $ 75.54 per depositary unit . the depositary units were delivered to the unitholders on june 17 , 2013. pursuant to the june 2013 underwriting agreement , icahn enterprises also granted the underwriters a 30-day option to purchase up to an additional aggregate 240,000 additional depositary units at the same public offering price , which expired unexercised . on december 9 , 2013 , icahn enterprises entered into an underwriting agreement ( the “ december 2013 underwriting agreement ” ) with morgan stanley & co. llc ( `` morgan stanley '' ) , providing for the issuance and purchase of an aggregate of 2,000,000 depositary units representing limited partner interests in icahn enterprises at a price to the public of $ 135.00 per depositary unit . the depositary units were delivered to the unitholders on december 13 , 2013. pursuant to the december 2013 underwriting agreement , icahn enterprises also granted morgan stanley a 30-day option to purchase up to an additional aggregate 300,000 additional depositary units at the same public offering price , which expired unexercised . aggregate net proceeds from these equity offerings was $ 581 million during the year ended december 31 , 2013 after deducting underwriting discounts , commissions and other offering related fees and expenses . additionally , in connection with these equity offerings , our general partner made aggregate contributions of $ 12 million to icahn enterprises and icahn 91 enterprises holdings during the year ended december 31 , 2013 in order to maintain its 1 % general partner interest in each of icahn enterprises and icahn enterprises holdings . debt offerings on august 1 , 2013 , we issued $ 500 million aggregate principal amount of the 6.000 % senior notes due 2020 ( the “ 2020 notes ” ) . pursuant to the registration rights agreement dated august 1 , 2013 , we subsequently commenced the exchange offer to exchange the 2020 notes for notes that are registered with the sec ( `` exchange notes '' ) which exchange offer expired on january 15 , 2014. all of the 2020 notes were properly tendered in the exchange offer and accepted by us in exchange for the exchange notes . on january 21 , 2014 , we and icahn enterprises finance corp. ( “ icahn enterprises finance ” ) ( collectively , the “ issuers ” ) closed on our sale of $ 1,200 million in aggre gate principal amount of our 6.000 % senior notes due 2020 ( the “ additional 2020 notes ” ) , $ 1,275 million in aggregate principal amount of our 4.875 % senior notes due 2019 ( the “ 2019 notes ” ) and $ 1,175 million in aggregate principal amount of our 3.500 % senior notes due 2017 ( the “ 2017 notes ” and together with the additional 2020 notes and the 2019 notes , the “ new notes ” ) pursuant to the purchase agreement , dated january 8 , 2014 ( the “ new notes purchase agreement ” ) , by and among the issuers , icahn enterprises holdings , as guarantor , and citigroup global markets inc. , credit suisse securities ( usa ) llc , morgan stanley & co. llc , jefferies llc and ubs securities llc , as initial purchasers ( the “ new notes purchasers ” ) . the additional 2020 notes were priced at 102.000 % of their face amount plus interest accrued from august 1 , 2013 and each of the 2019 and the 2017 notes were priced at 100.000 % of their face amount . story_separator_special_tag the following table summarizes total revenues , net income ( loss ) and net income ( loss ) attributable to icahn enterprises for each of our reporting segments and our holding company for the years ended december 31 , 2013 , 2012 and 2011. eliminations relate to the unrealized gains recorded by our investment segment for its investment in tropicana from the date of its acquisition of a controlling interest in tropicana through the date that its investment in tropicana was transferred to us . refer to note 4 , “ operating units , ” to the consolidated financial statements for further discussion . replace_table_token_7_th ( 1 ) we consolidated cvr effective may 4 , 2012 . 93 icahn enterprises holdings due to the structure of our business , the consolidated results of operations for icahn enterprises and icahn enterprises holdings are substantially the same . differences primarily relate to non-cash portions of interest expense , and are only reflected in the results of operations for our holding company . the following table summarizes total revenues , net income ( loss ) and net income ( loss ) attributable to icahn enterprises holdings for our holding company and the consolidated totals with respect to icahn enterprises holdings for the years ended december 31 , 2013 , 2012 and 2011. replace_table_token_8_th investment our investment segment is comprised of various private investment funds , including icahn partners l.p. ( `` icahn partners '' ) , icahn partners master fund lp , icahn partners master fund ii lp and icahn partners master fund iii lp ( collectively , the `` master funds '' , and together with icahn partners , the `` investment funds '' ) , through which we invest our proprietary capital . effective january 1 , 2014 , icahn partners master fund ii lp and icahn partners master fund iii lp were merged with and into icahn partners . we and certain of mr. icahn 's wholly owned affiliates are the sole investors in the investment funds . icahn onshore lp and icahn offshore lp ( together , the `` general partners '' ) act as the general partner of icahn partners and the master funds , respectively . the general partners provide investment advisory and certain administrative and back office services to the investment funds but do not provide such services to any other entities , individuals or accounts . interests in the investment funds are not offered to outside investors . mr. icahn , along with his affiliates ( excluding icahn enterprises and icahn enterprises holdings ) , makes investments in the investment funds . as of december 31 , 2013 and 2012 , the total fair market value of investments in the investment funds made by mr. icahn and his affiliates was approximately $ 4.7 billion and $ 3.5 billion , respectively . incentive allocations and special profits interest allocations historically , our investment segment 's revenues were affected by the combination of fee-paying assets under management ( `` aum '' ) and the investment performance of the investment funds . the general partners ' incentive allocations and special profits interest allocations earned from the investment funds were accrued on a quarterly basis and were allocated to the general partners at the end of the investment funds ' fiscal year ( or sooner on redemptions ) assuming there were sufficient net profits to cover such amounts . the investment funds returned all fee-paying capital to their investors during 2011. payments were funded through cash on hand and borrowings under existing credit lines . as a result , no further incentive allocations or special profits interest allocations will accrue for periods subsequent to march 31 , 2011. the general partners waived the special profits interest allocations and incentive allocations for our interests in the investment funds and mr. icahn 's direct and indirect holdings . we consolidate certain entities within our investment segment . as a result , in accordance with u.s. gaap , any special profits interest allocations , incentive allocations and earnings on investments in the investment funds are eliminated in consolidation . these eliminations have no impact on our net income ; however , our allocated share of the net income from the investment funds includes the amount of these allocations and earnings . as a result of the return of fee-paying capital as described above , a special profits interest allocation of $ 9 million was allocated to the general partners at march 31 , 2011. no further special profits interest allocation accrued in periods subsequent to march 31 , 2011. as a result of the return of fee-paying capital as described above , an incentive allocation of $ 7 million was allocated to the general partners at march 31 , 2011. no further incentive allocation will accrue in periods subsequent to march 31 , 2011. our interests in the investment funds as of december 31 , 2013 and 2012 , we had investments with a fair market value of approximately $ 3.7 billion and $ 2.4 billion , respectively , in the investment funds . 94 our share of the investment funds ' net profit through our interests in the investment funds , excluding incentive allocations and special profits interest allocations earned , was $ 812 million , $ 157 million , and $ 871 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . returns the following table sets forth performance information for the investment funds for the comparative periods presented . these returns represent a weighted-average composite of the average returns , net of expenses for the investment funds . replace_table_token_9_th ( 1 ) the investments funds ' aggregate gross return would have been 20.2 % if the investment funds had elected not to distribute shares of cvr to our subsidiary iep energy in 2012 and if additional purchases had been made by the investment funds instead of by icahn enterprises . ( 2 ) returns for the year ended december 31 , 2011 was gross of special profits interest allocations and incentive allocations , but net of expenses for the investment funds .

other consolidated results of operations other income ( loss ) , net year ended december 31 , 2013 compared to the year ended december 31 , 2012 our consolidated other income ( loss ) , net for the year ended december 31 , 2013 and 2012 was $ 21 million and $ ( 175 ) million , respectively . included in our consolidated other income ( loss ) , net are gains and losses related to certain of our derivatives . see note 8 , `` financial instruments , '' and note 18 , `` other income ( loss ) , net , '' to the consolidated financial statements for further discussion . year ended december 31 , 2012 compared to the year ended december 31 , 2011 our consolidated other income ( loss ) , net for the year ended december 31 , 2012 and 2011 was $ ( 175 ) million and $ ( 72 ) million , respectively . included in our consolidated other income ( loss ) , net are gains and losses related to certain of our derivatives . see note 8 and note 18 to the consolidated financial statements for further discussion . selling , general and administrative year ended december 31 , 2013 compared to the year ended december 31 , 2012 our consolidated sg & a for the year ended december 31 , 2013 increased by $ 142 million ( 11 % ) as compared to the comparable prior year period . the increase was primarily due to an increase of $ 95 million by our investment segment due to an increase in compensation expense as a result of certain fund performance during 2013. in addition , sg & a increased by $ 39 million related to the sg & a expenses of our automotive segment , which included a net decrease of opeb curtailment gains of $ 32 million over the respective periods ( the effect of which represents an increase in sg & a over the comparable periods ) .

deferred tax assets the company accounts for income taxes related to its story_separator_special_tag retail value inc. ( “ rvi ” or the “ company ” ) ( nyse : rvi ) is an ohio company formed in december 2017 that , as of december 31 , 2020 , owned and operated a portfolio of 22 assets , composed of 11 continental u.s. assets and 11 assets in puerto rico . these properties consisted of retail shopping centers ( including five enclosed malls ) composed of 8.5 million square feet of company-owned gross leasable area ( “ gla ” ) and were located in nine states and puerto rico . the company 's continental u.s. properties and puerto rico properties comprised approximately 48 % and 52 % , respectively of its total consolidated revenue for the year ended december 31 , 2020. at december 31 , 2020 , the aggregate occupancy of the company 's shopping center portfolio was 87.3 % , and the average annualized base rent per occupied square foot was $ 16.25. prior to the company 's separation on july 1 , 2018 , the company was a wholly-owned subsidiary of site centers corp. ( “ site centers ” or the “ parent company ” ) . unless otherwise expressly stated or the context otherwise requires , in the case of information as of dates or for periods prior to the company 's separation from site centers , references to the “ company ” and the “ rvi predecessor ” refer to the combined and consolidated entities of site centers that owned the assets comprising the company 's portfolio as of july 1 , 2018 , assuming that such entities owned only the assets comprising the company 's portfolio as of july 1 , 2018. story_separator_special_tag roman ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; '' > the property management agreements also provide for the payment to site centers of certain leasing commissions and a disposition fee of 1 % of the gross sale s price of each asset sold by the company . retail environment and company fundamentals though leasing prospects are heavily dependent on local conditions , in general the company continues to see demand from tenants for its continental u.s. space , particularly as larger retailers incorporate omni-channel strategies that leverage brick and mortar infrastructure to drive incremental business . value-oriented larger tenants continue to take market share from conventional and national chain department stores . some conventional department stores and national chains have announced bankruptcies , store closures and or reduced expansion plans in recent years leading to a smaller overall number of tenants requiring large store formats . new demand for space at the company 's puerto rico properties is more limited , especially with respect to big box and national tenants as many of those tenants continue to evaluate their presence and operating plans on the island . the company believes that occupancy , leasing spreads and collection rates within the company 's puerto rico portfolio ( especially its enclosed malls ) are likely to continue to lag those at continental u.s. shopping centers in 2021 as a result of reduced leasing activity both before and during the covid-19 pandemic and the impact of curfews and greater operating restrictions in place in puerto rico for most of 2020 and early 2021. the decrease in the company 's continental u.s. occupancy rate during 2020 primarily was due to the disposition of higher occupancy properties and a combination of tenant expirations and tenant bankruptcies . the increase in the occupancy rate for the company 's puerto rico portfolio during 2020 primarily was due to the disposition of a property with a lower occupancy rate , as well as new net leasing activity in excess of bankruptcies and expirations . the company has a significant number of leases expiring in the near term and expects continued volatility and pressure on leasing spreads in both the continental u.s. and puerto rico as the company seeks to prioritize occupancy over rental rate growth . as discussed above , many of the company 's tenants have been impacted by various actions taken by federal , state and local governments to limit the spread of covid-19 . the company 's tenant categories most significantly impacted by covid-19 are theaters , entertainment and restaurants , which collectively account for 18 % of the company 's annualized base rents . operating results for the company are discussed below in “ comparison of 2020 and 2019 results of operations. ” the following table lists the company 's 10 largest tenants based on total annualized rental revenues as of december 31 , 2020 : replace_table_token_8_th ( a ) includes walmart and sam 's club ( b ) includes t.j. maxx , marshalls and homegoods ( c ) includes gap and old navy critical accounting policies the combined and consolidated financial statements of the company include the accounts of the company and all subsidiaries where the company has financial or operating control . the preparation of financial statements in conformity with generally accepted accounting principles ( “ gaap ” ) requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying combined and consolidated financial statements and related notes . in preparing these financial statements , management has used available information , including the company 's and site centers ' history , industry standards and the current economic environment , among other factors , in forming its estimates and judgments of certain amounts included in the company 's combined and consolidated financial statements , giving due consideration to materiality . it is possible that the ultimate outcome as anticipated by management in formulating its estimates inherent in these financial statements might not materialize . 35 application of the critical accounting policies described below involves the exercise of judgment and the use of assumptions as to future uncertainties . accordingly , actual results could differ from these estimates . story_separator_special_tag if the company 's estimates of the projected future cash flows , anticipated holding periods or market conditions change , its evaluation of the impairment charges may be different , and such differences could be material to the company 's combined and consolidated financial statements . plans to hold properties over longer periods decrease the likelihood of recording impairment losses . the company generally considers assets to be held for sale when the transaction has been approved by the appropriate level of management and there are no known significant contingencies relating to the sale such that the sale of the property within one year is considered probable . this generally occurs when a sales contract is executed with no contingencies and the prospective buyer has significant funds at risk to ensure performance . measurement of fair value — real estate the company is required to assess the value of its real estate assets . the fair value of real estate investments used in the company 's impairment calculations is estimated based on the price that would be received from the sale of an asset in an orderly transaction between marketplace participants at the measurement date . assets without a public market are valued based on assumptions made and valuation techniques used by the company . the availability of observable transaction data and inputs can make it more difficult and or subjective to determine the fair value of such assets . as a result , amounts ultimately realized by the company from assets sold may differ from the fair values presented , and the differences could be material . the valuation of impaired real estate assets is determined using widely accepted valuation techniques , including the income capitalization approach or discounted cash flow analysis on the expected cash flows of each asset considering prevailing market capitalization rates , analysis of recent comparable sales transactions , actual sales negotiations , bona fide purchase offers received from third parties and or consideration of the amount that currently would be required to replace the asset , as adjusted for obsolescence . in general , the company considers multiple valuation techniques when measuring fair value of an investment . however , in certain circumstances , a single valuation technique may be appropriate . for operational real estate assets , the significant assumptions include the capitalization rate used in the income capitalization valuation , as well as the projected property net operating income and expected hold period . for the puerto rico properties that were significantly impacted by hurricane maria , the significant assumptions include the discount rate , the timing for the construction completion and project stabilization and the exit capitalization rate . valuation of real estate assets is calculated based on market conditions and assumptions made by management at the measurement date , which may differ materially from actual results if market conditions or the underlying assumptions change . deferred tax assets and tax liabilities the company accounts for income taxes related to its taxable reit subsidiary ( “ trs ” ) under the asset and liability method , which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements . the company records net deferred tax assets to the extent it believes it is more likely than not that these assets will be realized . in making such determinations , the company considers all available positive and negative evidence , including forecasts of future taxable income , the reversal of other existing temporary differences , available net operating loss carryforwards , tax planning strategies and recent results of operations . several of these considerations require assumptions and significant judgment about the forecasts of future taxable income that are consistent with the plans and estimates that the company is utilizing to manage its business . based on this assessment , management must evaluate the need for , and amount of , valuation allowances against the company 's deferred tax assets . the company would record a valuation allowance to reduce deferred tax assets if and when it has determined that an uncertainty exists regarding their realization , which would increase the provision for income taxes . to the extent facts and circumstances change in the future , adjustments to the valuation allowances may be required . in the event the company were to determine that it would be able to realize the deferred income tax assets in the future in excess of their net recorded amount , the company would adjust the valuation allowance , which would reduce the provision for income taxes . the company makes certain estimates in the determination of the use of valuation reserves recorded for deferred tax assets . these estimates could have a direct impact on the company 's earnings , as a difference in the tax provision would impact the company 's earnings . the company has made estimates in assessing the impact of the uncertainty of income taxes . accounting standards prescribe a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return . the standards also provide guidance on de-recognition , classification , interest and penalties , accounting in interim periods , disclosure and transition . these estimates have a direct impact on the company 's net income because higher tax expense will result in reduced earnings . 37 comparison of 2020 and 2019 results of operations where used , references to “ comparable portfolio properties ” reflect shopping center properties owned as of december 31 , 2020. the discussion of the company 's 2020 performance compared to 2019 appears below in “ comparison of 2020 and 2019 results of operations. ” the discussion of the company 's 2019 performance compared to 2018 performance is set forth in part ii , item 7 .

executive summary the company expects to focus on realizing value in its portfolio through operations and sales of its assets . the company primarily intends to use net asset sale proceeds first to repay mortgage debt , second to make distributions on account of its series a preferred shares ( the “ rvi preferred shares ” ) up to the preference amount , and third to make distributions to holders of the company 's common shares . in march 2020 , the world health organization categorized covid-19 as a pandemic , and it continues to spread throughout the u. s. and other countries across the world . beginning in mid-march , federal , state and local governments took various actions to limit the spread of covid-19 , including ordering the temporary closure of non-essential businesses ( which included many of the company 's tenants ) and imposing significant social distancing guidelines and restrictions on the continued operations of essential businesses and the reopening of non-essential businesses . as of march 4 , 2021 , approximately 98 % of the company 's tenants , based on average base rents , were open for business , up from a low of approximately 34 % in early april 2020. the covid-19 pandemic had no impact on the company 's collection of rents for the first quarter of 2020 , but it had a significant impact on collection of rents for april 2020 through january 31 , 2021 . the quarterly rent payment rates as of march 4 , 2021 , represented approximately 81 % of second quarter 2020 rents , 90 % of third quarter 2020 rents , 92 % of fourth quarter 2020 rents and 95 % of january 2021 rents .

69 seenu g. kasturi was appointed as our president , chief financial officer and chairman of the board of directors in january 2017 , and beneficially owned approximately 49.2 % of our common stock at december 31 , 2017. he also served as the president , treasurer and secretary of story_separator_special_tag is based upon our audited consolidated financial statements , which have been prepared in accordance with united states generally accepted accounting principles ( “ gaap ” ) . the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenue and expenses , and related disclosure of contingent assets and liabilities . when making these estimates and assumptions , we consider our historical experience , our knowledge of economic and market factors and various other factors , that we believe to be reasonable under the circumstances . actual results may differ under different estimates and assumptions . the accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to an understanding of our consolidated financial statements because they inherently involve significant judgments and uncertainties . for a more complete discussion of our accounting policies and procedures , see our audited consolidated financial statements beginning on page f-1 of this report . revenue recognition our revenue consists primarily of proceeds from the sale of food and beverage products at our company-owned restaurants , and royalty payments , franchise fees and area development fees that we receive from our franchisees . we generate revenue from our franchisees by entering into franchise agreements with parties to build and operate restaurants using the dick 's wings brand within a defined geographical area . the agreements have a 10-year term and can be renewed for one additional 10-year term . we provide the use of our dick 's wings trademarks and dick 's wings system , which includes uniform operating procedures , standards for consistency and quality of products , technical knowledge , and procedures for accounting , inventory control and management , in return for the royalty payments , franchise fees and area development fees . 43 franchisees are required to operate their restaurants in compliance with their franchise agreements , which includes adherence to operating and quality control procedures established by us . we are not required to provide loans , leases , or guarantees to franchisees or the franchisees ' employees and vendors . if a franchisee becomes financially distressed , we are not required to provide financial assistance . if financial distress leads to insolvency of the franchisee or the filing of a petition by or against the franchisee under bankruptcy laws , we have the right , but not the obligation , to acquire the franchise at fair value as determined by an independent appraiser selected by us . franchisees generally remit royalty payments weekly for the prior week 's sales . franchise and area development fees are paid upon the signing of the related agreements . we recognize revenue when persuasive evidence of an arrangement exists , delivery or performance has occurred , the sales price is fixed and determinable , and collectability is reasonably assured in accordance with financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) topic 605 , revenue recognition . we record revenue from the sale of food and beverages as products are sold . royalties are accrued as earned and are calculated each period based on restaurant sales . franchise fees from individual franchise sales is recognized upon the opening of the franchised restaurant when all material obligations and initial services to be provided by us have been performed . area development fees are dependent upon the number of restaurants in the territory , as are our obligations under the area development agreement . consequently , as obligations are met , area development fees are recognized proportionally with expenses incurred with the opening of each new restaurant and any royalty-free periods . we record gift cards under a dick 's wings system-wide program . gift cards sold are recorded as a gift card liability . when redeemed , the gift card liability account is offset by recording the transaction as revenue . breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed . based on our historical gift card redemption patterns and the fact that our gift cards have no expiration dates or dormancy fees , we can reasonably estimate the amount of gift card balances for which redemption is remote and record breakage income based on this estimate . we update our estimate of the breakage rate periodically and , if necessary , adjusts the gift card liability balance accordingly . investment in paradise on wings on january 20 , 2014 , we purchased a 50 % ownership interest in paradise on wings , which is the franchisor of the wing nutz brand of restaurants . a description of our investment in paradise on wings is set forth herein under note 4. investment in paradise on wings in our consolidated financial statements . we accounted for our investment in paradise on wings under the equity method of accounting in accordance with asc topic 323 , investments – equity method and joint ventures ( “ asc 323 ” ) . asc 323 provides that investments be accounted for under the equity method of accounting when the investor has the ability to exert significant influence , but not control , over the operating and financial policies of the investee . the determination of the level of influence that an investor has over each equity method investment involves consideration of such factors as the investor 's ownership interest , representation on the board of directors , participation in policy-making decisions and material intercompany transactions . story_separator_special_tag we determined that the new revenue guidance will impact the timing of recognition of franchise fees . under existing guidance , these fees are typically recognized upon the opening of restaurants . under the new guidance , the fees will have to be deferred and recognized as revenue over the term of the individual franchise agreements . however , the effect of the required deferral of fees received in a given year will be mitigated by the recognition of revenue from fees retrospectively deferred from prior years . we presently expect to use the modified retrospective method of adoption when the new guidance is adopted in the first fiscal quarter of 2018. upon adoption , we will recognize a deferral in revenue from franchise fees on its balance sheet of approximately $ 344,017 and an increase in our accumulated deficit by the same amount . we also determined that the new revenue guidance will impact the accounting for transactions related to our general advertising fund . currently , franchisee contributions to and expenditures by the fund are not included in our consolidated statements of operations . under the new guidance , we will include contributions to and expenditures by the fund within our consolidated statements of operations . while this change will materially impact the gross amount of reported franchise revenue and expenses , the impact will be an increase to both revenue and expense that , for the most part , will offset such that the impact on gross profit and net income , if any , will not be material . 46 additionally , we determined that the new revenue guidance will impact the accounting for transactions related to our gift card program . estimated breakage income on gift cards will be recognized as gift cards are utilized instead of our current policy of deferring the breakage income until it is deemed remote that the unused gift card balance will be redeemed . we determined that this change will not have a material impact on our consolidated financial statements . the table below presents the expected effects these changes would have had on our consolidated financial statements in 2017 and 2016 had this guidance been adopted by us on january 1 , 2016 : replace_table_token_2_th in august 2014 , the fasb issued asu 2014-15 , presentation of financial statements – going concern ( subtopic 205-40 ) : disclosure of uncertainties about an entity 's ability to continue as a going concern ( “ asu 2014-15 ” ) . asu 2014-15 requires management to assess an entity 's ability to continue as a going concern by incorporating and expanding on certain principles that are currently in u.s. auditing standards . specifically , asu 2014-15 : ( i ) provides a definition of the term “ substantial doubt ” , ( ii ) requires an evaluation every reporting period including interim periods , ( iii ) provides principles for considering the mitigating effects of management 's plans , ( iv ) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management 's plans , ( v ) requires an express statement and other disclosures when substantial doubt is not alleviated , and ( vi ) requires an assessment for a period of one year after the date that the financial statements are issued or available to be issued . asu 2014-15 was effective for fiscal years ending after december 15 , 2016 and for annual periods and interim periods thereafter . early adoption is permitted . as discussed herein under note 2. significant accounting policies – going concern in our consolidated financial statements , we incurred a net loss and negative cash flows from operating activities for the year ended december 31 , 2016. these facts created an uncertainty about our ability to continue as a going concern as of december 31 , 2016. however , we generated net income and positive cash flows from operations for the year ended december 31 , 2017. the improvement was due primarily to our acquisition of two company-owned restaurants in december 2016. in addition , we have received continued financial support from related parties . as a result of these factors , we believe that the substantial doubt about our ability to continue as a going concern had been alleviated as of december 31 , 2017 . 47 in july 2015 , the fasb issued asu 2015-11 , simplifying the measurement of inventory ( “ asu 2015-11 ” ) , which changes the subsequent measurement of inventory from lower of cost or market to lower of cost or net realizable value . asu 2015-11 was effective for fiscal years , and interim periods within those fiscal years , beginning after december 15 , 2016. early adoption was permitted , including adoption in an interim period . the adoption of asu 2015-11 did not have a material impact on our consolidated financial statements . in february 2016 , the fasb issued asu 2016-02 , leases ( “ asu 2016-02 ” ) . asu 2016-02 requires that lease arrangements longer than 12 months result in the lessee recognizing a lease asset and liability . leases will be classified as either finance or operating , with classification affecting the pattern of expense recognition in the income statement . asu 2016-02 is effective for interim and annual periods beginning after december 15 , 2018. early adoption is permitted . we are currently evaluating the impact that the adoption of asu 2016-02 will have on our consolidated financial statements . in november 2016 , the fasb issued asu 2016-18 , statement of cash flows : restricted cash ( “ asu 2016-18 ” ) . asu 2016-18 provides guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows . the guidance is effective for interim and annual periods beginning after december 15 , 2017. early adoption is permitted for any entity in any interim or annual period .

general and administrative expenses . general and administrative expenses consist of compensation expense incurred in connection with our acquisition of seediv , marketing and advertising expenses , bank service charges , computer and internet expenses , dues and subscriptions , licenses and filing fees , insurance expenses , sec filing expenses , stock listing expenses , investor relations expenses , shareholder meeting expenses , office supplies , rent expense , repairs and maintenance expenses , telephone expenses , travel expenses , utilities expenses and other miscellaneous general and administrative expenses . general and administrative expenses decreased $ 625,720 to $ 354,950 for the year ended december 31 , 2017 from $ 980,670 for the year ended december 31 , 2016. the decrease of $ 625,720 was due primarily to decreases of $ 251,309 for a one-time charge that we recorded for compensation expense that we incurred in connection with our acquisition of seediv and $ 502,856 for other one-time charges that we recorded for transaction costs that we incurred in connection with our acquisition of seediv . this was partially offset by increases of $ 178,785 for the earn-out payment that we incurred in connection with our acquisition of seediv and increases in other miscellaneous general and administrative expenses . we expect general and administrative expenses to continue to decrease during the next 12 months because we do not expect to incur any additional one-time charges in connection with our acquisition of seediv . however , we expect to incur increasing expenses for marketing and advertising , investor relations , travel , rent , office supplies , insurance and other miscellaneous items associated with the general growth of our business and operations . loss on impairment of investment .

because of this , our customers , all of the world 's top communications equipment suppliers , and many of the world 's top solution developers and service providers , are able to enhance their competitive position and bring their applications and services to market faster and at lower costs . during 2002 we continued the repositioning of our business , which we initiated during 2001 , to offer systems as well as system building blocks to our customers . the success of this repositioning is dependent upon , among other things , our ability to effect major changes in our prior sales , marketing and sourcing strategies . to support our repositioning , we have several initiatives underway , the effectiveness of which will affect our future operating results . we are increasing our dependence on a direct sales force to penetrate new customers for our systems offerings , including the creation of a sales force to penetrate wireless service providers . we have also begun to leverage our existing supplier relationships and to develop a broader network of strategic partners to support our systems-level 23 product offerings . there can be no assurance that we will be successful at implementing these changes and the failure to achieve successfully one or more of these initiatives could result in reduced revenues and or increased expenses . in addition , there can be no assurance that our repositioning , even if fully implemented , will have a positive effect on our financial results or operations . we expanded our segment reporting in 2002 to include information specific to our three operating business units . these business units are comprised of the voice quality systems ( `` vqs '' ) business unit , the network solutions ( `` ns '' ) business unit and the platform solutions ( `` ps '' ) business unit . the vqs business unit consists of products and services related to our voice quality enhancement and echo cancellation systems . the ns business unit consists of products and services related to our personalized voice and data applications systems . the ps business unit consists of products and services related to our systems building blocks that provide connectivity to communications networks , call processing , and real-time media processing . on april 1 , 2002 , we acquired messagemachines , inc. ( `` mmi '' ) , a privately-held massachusetts company , for a total cost of $ 3.0 million , including transaction costs of $ 365,000. this acquisition was integrated into our ns business unit . in connection with the acquisition , we paid net aggregate cash consideration of $ 2.6 million to the founders and shareholders of mmi . the acquisition was accounted for as a purchase business combination . during the second quarter of 2002 , we wrote down approximately $ 39.3 million of impaired long-lived assets related to the goodwill , indefinite-lived intangible assets and amortizable intangible assets associated with the iml acquisition . as a result of our announced and planned intention to reduce overall workforce , including iml employees , the discontinuation of certain iml products as part of our generally available product offering , continued declining revenues for iml products and the economic condition of the competitive local exchange carriers ( clec ) industry and voice over digital subscriber lines ( vodsl ) market , the estimated value of iml 's goodwill , indefinite-lived intangible assets and amortizable intangible assets decreased . based on the results of the impairment analysis performed on the goodwill , indefinite-lived intangible assets and amortizable intangible assets , these assets were written down to their estimated fair value . during 2002 , we recorded restructuring and other related charges of approximately $ 5.0 million . these charges consist of approximately $ 2.8 million of involuntary severance related costs , approximately $ 1.4 million of lease termination costs , approximately $ 704,000 of fixed asset write-offs and approximately $ 54,000 of other costs . the details of each of these charges are explained further in management 's discussion and analysis of 2002 compared to 2001. during the fourth quarter of 2002 , we wrote down approximately $ 33.2 million of impaired long-lived assets related to the goodwill , indefinite-lived intangible assets , amortizable intangible assets and fixed assets associated with the vqs acquisition . based on the declining historical and forecasted operating results of vqs as they related to earlier estimates , the economic condition of the telecommunications industry as a whole , and our 18 % reduction of vqs workforce , the estimated value of vqs 's goodwill , indefinite-lived intangible assets , amortizable intangible assets and fixed assets had decreased . based on the results of the impairment analysis performed on the goodwill , indefinite-lived intangible assets , amortizable intangible assets and fixed assets , these assets were written-down to their fair value . it is reasonably possible that we may incur additional impairment charges for long-lived assets , including goodwill , in future reporting periods . during 2002 , we paid $ 37.9 million to extinguish $ 59.4 million face value of convertible debt . as a result , we recorded an extraordinary gain of $ 12.5 million , net of tax expense of $ 8.3 million . the board of directors approved a stock repurchase program in october 2001 , authorizing us to repurchase up to 2,500,000 shares of our outstanding common stock for an aggregate purchase price not to exceed $ 5.0 million . during 2002 , we paid $ 2.8 million to repurchase 515,000 shares of our 24 outstanding common stock . as of december 31 , 2002 , cumulative repurchases under the stock repurchase program totaled 915,000 shares for an aggregate purchase price of $ 4.7 million . it is reasonably possible that we will repurchase additional shares of our outstanding common stock in future reporting periods . on a sequential basis , second quarter revenues in 2001 decreased from the prior quarter by 37 % and third quarter revenues in 2001 decreased from the second quarter by 4 % . story_separator_special_tag while such charges taken against the allowance for doubtful accounts have historically been within our expectations and the allowance established , we can not guarantee that we will continue to be able to estimate our future experience with the same success . if the financial condition of our customers were to deteriorate , resulting in their inability to make payments , additional allowances may be required . inventory . we value our inventory at the lower of cost ( first-in , first-out method ) or market . we regularly review inventory quantities on hand and record reserves for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months . any rapid technological changes and future product development could result in an increase in the amount of excess and obsolete inventory quantities on hand . furthermore , if our estimates of future product demand prove to be inaccurate , an increase in our reserves may be required for excess and obsolete inventories , which will increase our cost of revenues . investments . we hold equity investments in which we do not have the ability to exercise significant influence and for which there is not a readily determinable market value . these 26 investments are accounted for under the cost method of accounting . we periodically evaluate the carrying value of these investments for other than temporary impairment . if an impairment is indicated as a result of our analysis , we record a charge to adjust the carrying value of the investment down to fair value . future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments , thereby possibly requiring future charges to write these equity investments down to fair value . long-lived assets and goodwill . we review long-lived assets , goodwill and indefinite-lived intangible assets for impairment on an annual basis and whenever events or changes in business circumstances indicate that the carrying value of the assets may not be fully recoverable . factors we consider important which could trigger an impairment review include the following : significant underperformance relative to expected historical or projected future operating results ; significant changes in the manner of our use of the acquired assets or the strategy for our overall business ; significant negative industry or economic trends ; significant decline in our stock price for a sustained period ; and our market capitalization relative to net book value . in performing this assessment , we assign long-lived assets , goodwill and indefinite-lived intangible assets to reporting units and then perform a two-step analysis to test for impairment . the first step is used to identify a potential impairment loss by comparing the estimated undiscounted cash flows to be generated from the assets of each reporting unit to the unit 's carrying value . in assessing the recoverability of these assets , we must project cash flows that are based on various operating assumptions such as revenue budgets and forecasts , projected expenditures and terminal value of each reporting unit . we develop these cash flow projections on a periodic basis and continuously review the projections based on actual operating trends and economic developments around the globe and within the telecommunications industry in particular . the second step is used to measure the amount of an impairment loss , if any , by comparing the fair value of the reporting unit 's assets , including goodwill , with the carrying value of the reporting unit 's assets . if the carrying value of the reporting unit 's assets is greater than the fair value of its assets , including goodwill , an impairment loss must be recognized for the excess . different assumptions regarding a reporting unit 's cash flow projections and fair value , both of which are highly dependent upon future revenue projections , could result in a change in the timing and amount of impairment losses , if any . income taxes . we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases . deferred tax assets and liabilities are measured using enacted statutory tax rates in effect in the year in which the differences are expected to reverse . a deferred tax asset is established for the expected future benefit of net operating loss and credit carryforwards . because we currently believe that the realization of certain deferred tax assets is more unlikely than not , we have established a full valuation against our deferred tax assets . we will continue to assess the valuation allowance and if we were to determine that we would be able to realize our deferred tax assets , an adjustment to the valuation allowance would increase income in the period such determination was made . restructuring and other related charges . involuntary termination benefits and activity exit costs are recognized when management approves and commits to a sufficiently detailed plan of termination or activity exit plan and this plan is communicated to affected employees . during compilation of a plan of termination or activity exit plan , management makes certain assumptions and estimates regarding certain costs contained in these plans based on information gathered from internal and external sources . if actual results of any of these assumptions or 27 estimates were to exceed or not meet our expectations in the future , we may need to adjust certain restructuring and other related charges in future reporting periods , resulting in increased or decreased operating expense . accounting for acquisitions . we account for acquisitions using the purchase method . in connection with the application of the purchase method , management makes certain estimates regarding the value of tangible and intangible assets acquired and liabilities assumed based on information gathered from internal and external sources .

results of operations the following table sets forth , for the periods indicated , certain items from the company 's consolidated statements of operations as a percentage of revenues . replace_table_token_4_th 28 year ended december 31 , 2002 compared to year ended december 31 , 2001 revenues our revenues consist primarily of product sales and , to a lesser extent , services provided to our customers by our ps and vqs business units . the ps business unit revenues consist of sales of products and services related to our systems building blocks that provide connectivity to communications networks , call processing , and real-time media processing . the vqs business unit revenues consist of sales of products and services related to our voice quality enhancement and echo cancellation systems . total company revenues of $ 102.7 million for the year ended december 31 , 2002 ( `` 2002 '' ) increased 26.8 % from $ 81.0 million for the year ended december 31 , 2001 ( `` 2001 '' ) . the increase is primarily attributable to the full year of revenue generated by vqs , which we acquired on november 30 , 2001. vqs revenue for 2002 was $ 28.9 million as compared to $ 4.3 million for the month of december 2001. these vqs sales were made primarily through the supply agreement with lucent technologies , inc. ( `` lucent '' ) . ps revenues of $ 73.8 million for 2002 decreased 3.8 % from $ 76.7 million for 2001. this decrease is a result of the on-going global economic slowdown that continues to significantly impact the telecommunications industry . revenues from customers located outside the united states of $ 41.0 million for 2002 increased 23.3 % from $ 33.3 million for 2001 and represented 39.9 % and 41.1 % of revenues for the years ended december 31 , 2002 and 2001 , respectively . the increase in sales to customers located outside the united states was primarily due to increased sales volume in asia .

our financial statements have been prepared in accordance with generally accepted accounting principles ( “ gaap ” ) in the united states ( “ u.s. ” ) . key references used in this management 's discussion and analysis unless the context requires otherwise , references to “ we , ” “ us , ” “ our , ” “ enterprise ” or “ enterprise products partners ” are intended to mean the business and operations of enterprise products partners l.p. and its consolidated subsidiaries . references to “ epo ” mean enterprise products operating llc , which is a wholly owned subsidiary of enterprise , and its consolidated subsidiaries , through which enterprise products partners l.p. conducts its business . enterprise is managed by its general partner , enterprise products holdings llc ( “ enterprise gp ” ) , which is a wholly owned subsidiary of dan duncan llc , a privately held texas limited liability company . the membership interests of dan duncan llc are owned by a voting trust , the current trustees ( “ dd llc trustees ” ) of which are : ( i ) randa duncan williams , who is also a director and chairman of the board of directors ( the “ board ” ) of enterprise gp ; ( ii ) richard h. bachmann , who is also a director and vice chairman of the board of enterprise gp ; and ( iii ) dr. ralph s. cunningham . ms. duncan williams and mr. bachmann also currently serve as managers of dan duncan llc along with w. randall fowler , who is also a director and president of enterprise gp . references to “ epco ” mean enterprise products company , a privately held texas corporation , and its privately held affiliates . a majority of the outstanding voting capital stock of epco is owned by a voting trust , the current trustees ( “ epco trustees ” ) of which are : ( i ) ms. duncan williams , who serves as chairman of epco ; ( ii ) dr. cunningham , who serves as vice chairman of epco ; and ( iii ) mr. bachmann , who serves as the president and chief executive officer of epco . ms. duncan williams and mr. bachmann also currently serve as directors of epco along with mr. fowler , who is also the executive vice president and chief administrative officer of epco . epco , together with its privately held affiliates , owned approximately 32 % of our limited partner interests at december 31 , 2016. references to “ oiltanking ” and “ oiltanking gp ” mean oiltanking partners , l.p. and otlp gp , llc , the general partner of oiltanking , respectively . in october 2014 , we acquired approximately 65.9 % of the limited partner interests of oiltanking , all of the member interests of oiltanking gp and the incentive distribution rights ( “ idrs ” ) held by oiltanking gp from oiltanking holding americas , inc. ( “ ota ” ) as the first step of a two-step acquisition of oiltanking . in february 2015 , we completed the second step of this transaction consisting of the acquisition of the noncontrolling interests in oiltanking . as generally used in the energy industry and in this annual report , the acronyms below have the following meanings : /d = per day mmbbls = million barrels bbtus = billion british thermal units mmbpd = million barrels per day bcf = billion cubic feet mmbtus = million british thermal units bpd = barrels per day mmcf = million cubic feet mbpd = thousand barrels per day tbtus = trillion british thermal units 64 cautionary statement regarding forward-looking information this annual report on form 10-k for the year ended december 31 , 2016 ( our “ annual report ” ) contains various forward-looking statements and information that are based on our beliefs and those of our general partner , as well as assumptions made by us and information currently available to us . when used in this document , words such as “ anticipate , ” “ project , ” “ expect , ” “ plan , ” “ seek , ” “ goal , ” “ estimate , ” “ forecast , ” “ intend , ” “ could , ” “ should , ” “ would , ” “ will , ” “ believe , ” “ may , ” “ potential ” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements . although we and our general partner believe that our expectations reflected in such forward-looking statements are reasonable , neither we nor our general partner can give any assurances that such expectations will prove to be correct . forward-looking statements are subject to a variety of risks , uncertainties and assumptions as described in more detail under part i , item 1a of this annual report . if one or more of these risks or uncertainties materialize , or if underlying assumptions prove incorrect , our actual results may vary materially from those anticipated , estimated , projected or expected . you should not put undue reliance on any forward-looking statements . the forward-looking statements in this annual report speak only as of the date hereof . except as required by federal and state securities laws , we undertake no obligation to publicly update or revise any forward-looking statements , whether as a result of new information , future events or any other reason . overview of business we are a publicly traded delaware limited partnership , the common units of which are listed on the new york stock exchange ( “ nyse ” ) under the ticker symbol “ epd. ” we were formed in april 1998 to own and operate certain natural gas liquids ( “ ngls ” ) related businesses of epco and are a leading north american provider of midstream energy services to producers and consumers of natural gas , ngls , crude oil , petrochemicals and refined products . story_separator_special_tag start-up of delaware basin gas processing plant in august 2016 , construction of our joint venture-owned delaware basin cryogenic natural gas processing plant ( referred to as the “ waha ” plant ) was completed , and the facility was placed into service . the waha plant , the construction of which is supported by long-term contracts , has a natural gas processing capacity of 150 mmcf/d and is able to extract in excess of 22 mbpd of ngls . the plant is located in reeves county , texas and was designed to accommodate the growing production of ngl-rich natural gas from the delaware basin . we own a 50 % equity interest in the joint venture that owns the waha plant , which we operate . 66 in conjunction with the completion of the construction of the waha plant , we completed construction of an 82-mile , 12-inch diameter pipeline that connects the waha plant to our chaparral pipeline system , which transports mixed ngls from natural gas processing plants in west texas and new mexico to our ngl fractionation and storage complex in mont belvieu , texas . our texas intrastate system provides transportation services for natural gas processed at the waha plant . addition of propylene export capability at our houston ship channel terminal in july 2016 , we initiated polymer grade propylene ( “ pgp ” ) loading services at our enterprise hydrocarbons terminal ( “ eht , ” formerly known as our “ houston ship channel lpg export terminal ” ) , which is located on the houston ship channel . we are expecting an increase in the number of pgp export cargoes in response to international demand . we now have the capability to load 5,000 metric tons per day of refrigerated pgp at the eht dock facilities , which are directly supplied by propylene fractionators and storage wells at our mont belvieu , texas complex . final payment for efs midstream acquisition in july 2015 , we purchased efs midstream from affiliates of pioneer natural resources company ( “ pxd ” ) and reliance industries limited ( “ reliance ” ) for approximately $ 2.1 billion , which was payable in two installments . the initial payment of $ 1.1 billion was paid at closing on july 8 , 2015. the second and final installment of $ 1.0 billion was paid on july 11 , 2016 using a combination of cash on hand and proceeds from the issuance of short-term notes under epo 's commercial paper program . expansion of delaware basin network with new natural gas processing plant in june 2016 , we announced plans to build an additional cryogenic natural gas processing plant and associated pipeline infrastructure in the delaware basin . the new processing plant will be located near orla , texas in reeves county and have a natural gas processing capacity of 300 mmcf/d and the capability to extract more than 40 mbpd of ngls . in addition , the project includes construction of natural gas gathering lines that will supply the plant , a pipeline that will deliver residue gas to markets at the waha hub , and an extension of our mid-america pipeline system that will provide orla customers with ngl takeaway capacity . the facility and related pipeline infrastructure , all of which we will own and operate , are expected to begin service in the second quarter of 2018. the project is anchored by long-term commitments from a major producer . start-up of south eddy natural gas processing plant in may 2016 , we announced that our new cryogenic natural gas processing plant located in eddy county , new mexico ( the “ south eddy ” plant ) had been placed into service . we constructed the south eddy plant to serve producers in the delaware basin region . the south eddy plant has a nameplate natural gas processing capacity of 200 mmcf/d and is capable of extracting up to 25 mbpd of ngls . we also completed construction of approximately 90 miles of natural gas gathering pipelines to supply the new plant . in addition to the south eddy plant and its related natural gas gathering infrastructure , we also completed a 71-mile extension of our mid-america pipeline system . this extension provides producers in the delaware basin with ngl takeaway capacity and direct access to our integrated network of ngl assets . 67 general outlook for 2017 commercial outlook general commodity price observations as a result of significant advances in non-conventional drilling and production technology , north american reserves and production of hydrocarbons , primarily from shale resource basins such as the eagle ford in south texas , the permian basin in west texas and the appalachia basin in the northeast u.s. , increased substantially in recent years . the increase in u.s. hydrocarbon supplies led to a reduction in imports of crude oil , ngls , refined products and natural gas into the u.s. conversely , this trend has resulted in significant increases in hydrocarbon exports from the u.s. , particularly of refined products and lpgs . in light of weaker global economic growth ( especially in europe and china ) and in the face of increasing production from north america and certain countries in the middle east and africa , global production and inventories of hydrocarbons ( particularly crude oil and refined products ) began to exceed demand in 2014. in response to the growing supplies , beginning in november 2014 , the organization of petroleum exporting countries ( “ opec ” ) , opted to defend its market share by maintaining ( and in some cases increasing ) its crude oil production levels rather than cutting production to balance global markets . the result was a dramatic decline in global crude oil prices from an average of $ 93 per barrel in 2014 , to $ 49 per barrel in 2015 and further to $ 43 per barrel in 2016 , as measured by the price of west texas intermediate ( “ wti ” ) .

consolidated income statement highlights the following information highlights significant changes in our comparative income statement amounts and the primary drivers of such changes . comparison of 2016 with 2015 revenues total revenues for 2016 decreased $ 4.01 billion when compared to total revenues for 2015. revenues from the marketing of crude oil decreased $ 3.93 billion year-to-year due to lower sales volumes and prices , which accounted for a $ 2.77 billion decrease and a $ 1.16 billion decrease , respectively . revenues from the marketing of natural gas , petrochemicals , refined products and octane additives decreased a net $ 513.8 million year-to-year primarily due to lower sales prices , which accounted for a $ 760.0 million decrease , partially offset by a $ 246.2 million increase due to higher sales volumes . revenues from the marketing of ngls increased a net $ 335.7 million year-to-year primarily due to higher sales volumes , which accounted for a $ 956.2 million increase , partially offset by a $ 620.5 million decrease due to lower sales prices . revenues from midstream services increased a net $ 134.6 million year-to-year primarily due to the ongoing expansion of our operations . revenues increased $ 144.5 million year-to-year from the assets we acquired in the efs midstream acquisition in july 2015. revenues from midstream services decreased $ 76.0 million year-to-year due to the sale of our offshore business in july 2015. the remaining $ 66.1 million year-to-year increase in revenues from midstream services is primarily due to contractual increases in committed volumes on pipeline assets , such as atex and the aegis ethane pipeline ( “ aegis ” ) , and the expansion of storage capacity at our terminal assets on the gulf coast .

excluding the impact of the sol d product lines , net sales in the continuing business was down $ 2.3 million compared to 2013. performance coatings and pigments , powders and oxides net sales were down compared with 2013 by $ 11.8 million and $ 8.1 million , respectively , which were partially mitigated by strong performance in performance colors and glass , which achieved strong sales improvem ent of $ 17.7 million compared with 2013. despite the decline in net sales , gross profit increased $ 7.4 million compared with 2013. as a percentage of net sales excluding precious metals , gross profit rate increased approximately 140 basis points to 26.8 % , from 25.4 % in the prior year . for the year ended december 31 , 2014 , selling , general and administrative ( “ sg & a ” ) expenses were up $ 136.0 million , or 90.2 % , compared with 2013 , primarily driven by the pension and oth er postretirement benefits mark-to- market adjustme nt . in 2014 , the adjustment resulted in a loss of $ 82.3 million in sg & a , w hile in 2013 , the adjustment resulted in a gain of $ 69.5 million . for the year ended december 31 , 2014 , net income was $ 86.2 million , compared with net income of $ 72.4 million in 2013 , and net income attributable to common shareholders was $ 86.1 million , compared with net income attributable to common shareholders of $ 71.9 million in 2013. loss from continuing operations was $ 8.6 million for the year ended december 31 , 2014 , compared with income from continuing operations of $ 63.9 million in 2013. gross profit in 2014 was $ 285.1 million , compared with $ 277.7 million in 2013 . 2014 transactional activity disposition of the polymer additives business during the fourth quarter of 2014 , we completed the sale of substantially all of the assets in our north america-based polymer additives business to polymer additives , inc. for $ 153.5 million in cash . the sale resulted in a gain of $ 72.7 million and net cash proceeds of $ 149.5 million . cash proceeds were used to repay debt under the revolving credit facility and will be used to fund strategic growth opportunities . this disposition was part of our value creation strategy , as we turn our focus to our core functional coatings and color businesses . excluded from the transaction was our europe-based polymer additives assets . our europe-based polymer additives assets are being separately marketed for sale . acquisition of vetriceramici s.p.a during the fourth quarter of 2014 , ferro coatings italy s.r.l. , a 100 % owned subsidiary of ferro , acquired 100 % of the outstanding common shares and voting interest of vetriceramici s.p.a. ( “ vetriceramici ” ) for 87.2 million in cash . the sale closed on december 1 , 2014 for a purchase price of $ 108.9 million , based on the exchange rate on that date . vetriceramici is an italian manufacturing , marketing and distribution group that offers a range of products ( principally ceramic glazes , frits , inks and screen printing bases ) to its customers for the production of ceramic tiles , with some diversification in the glass sector . vetriceramici currently has manufacturing facilities in italy and mexico , a mixing plant in poland and research and development and sales offices in italy and turkey . vetriceramici is a leading global supplier of specialty products that enhance the appearance and improve the durability of high-end ceramic tile . its product line includes high-value , specialty frits and grits ( finely-milled frits ) , glazes , digital inks , and other specialized tile coatings . additionally , vetriceramici has developed high-value forehearth color solutions that deliver greater production flexibility , lower manufacturing costs and improved inventory management to customers . the acquisition is expected to improve our growth opportunities by enhancing our product portfolio and improving our position in important growth markets , including the u.s. , mexico , turkey , and eastern europe . we expect to achieve favorable synergies and cost reductions . disposition of the specialty plastics business during the third quarter of 2014 , we completed the sale of substantially all of the assets in our specialty plastics business to a. schulman , inc. for $ 91.0 million in cash . the sale resulted in a gain of $ 54.9 million and net cash proceeds of $ 88.3 million . cash 19 proceeds were used to pay down the 7.785 % senior notes , as discussed below . this disposition was part of our value creation strategy , as we turn our focus to our core functional coatings and color businesses . acquisition of turkey assets during the third quarter of 2014 , the company acquired certain commercial assets of a reseller of our porcelain enamel products in turkey for a cash purchase price of $ 6.7 million . our porcelain enamel sales to this entity in 2013 were approximately $ 6.0 million . this action was an initial step to strengthen sales in growing geographic markets , such as turkey . 7.875 % senior note tender offer as discussed in note 8 , we completed a tender offer for our senior notes resulting in the purchase of $ 143.0 million of notes , with the remaining outstanding notes of $ 107.0 million being redeemed during the third quarter of 2014. new credit facility as discussed in note 8 , on july 31 , 2014 , the company entered into a new credit facility ( the “ new credit facility ” ) with pnc bank , national association ( “ pnc ” ) , as the administrative agent , the collateral agent and an issuer , jpmorgan chase bank , n.a. , as the syndication agent and an issuer , the other agents party thereto and various financial institutions as lenders ( the “ lenders ” ) . story_separator_special_tag sales of precious metals were down compared wit h the prior year primarily due to the sale of our north american and asian metal powders business and the exit of s olar pastes which contributed $ 47.2 million of the decline . gross profit gross profit increased $ 7.4 million , or 2.7 % , in 2014 to $ 285.1 million , compared with $ 277.7 million in 2013 . the significant driver o f the increased gross profit was strong performance in our perfo rmance colors and glass segment which exceeded prior year gross profit by $ 22.1 million , primarily driven by higher sales volumes and favorable mix , favorable product pricing , and favorable manufacturing costs . this increase was partially offset by lower gross profit in our pigments , powders and oxides and performance coatings segments . geographic revenues replace_table_token_5_th the decline in net sales excluding precious metals of $ 26.2 million , compared with 2013 , was driven by de clines in all regions . the decline in sales is largely driven by the sale of our north american and asian metal powders business and exit of solar pastes , which resulted in a decrease of $ 27.5 million , partially mitigated by higher sales in the united states for performance colors and glass products of $ 11.2 million . in addition , lower sales in latin america were due to decreased sales in our performance coatings and pigments , powders and oxides segments of $ 5.5 million and $ 3.0 million , respectively , partially offset by higher sales in performance colors and glass . the decline in sales in europe in 2014 compared with 2013 wa s attributable to lower sales of 22 performance coatings products of $ 1.9 million , partially mitigated by slightly higher sales of pigments , powders and oxides products compared to the prior year . the follow ing table presents our sales on the basis of where the sold product was shipped to , as compared to the table above that shows sales on the basis of where the sale originated . replace_table_token_6_th selling , general and administrative expense the following table presents selling , general and administrative ( “ sg & a ” ) expenses attributable to operating sites and regional costs outside the united states together as performance materials , and regional costs attributable to the united states and other corporate costs together as corporate . performance materials and corporate sg & a expenses exclude the impact of the annual mark-to-market adjustment on our pension and other postretirement benefit plans , as the volatility in this adjustment does not allow for a meaningful co mparison of underlying sg & a costs between periods . replace_table_token_7_th the following represent s the components with significant changes between 2014 and 2013 : replace_table_token_8_th sg & a expenses were $ 136.0 million higher in 2014 compared with the prior year . as a percentage of net sales excluding precious metals , sg & a expenses increased from 13.8 % in the prior year to 26.9 % in 2014 . the most significant driver of the increase in sg & a expenses in 2014 was the mark-to-market loss on our defined benefit pension plans and postretirement health care and lif e insurance benefit plans of $ 82.3 million , and is included within the pension and other postretirement benefits line above . the adjustment was primarily related to changes in actuarial assumptions used in calculating the value of the u.s. pension liability . in 2014 , the discount rate used to value the liability declined by 100 basis points , compared with the prior year , thereby increasing the value of the liability by approximately $ 50 million . in addition , during the fourth quarter of 2014 , the company adopted the use of new mortality tables within its calculation assumptions , which had a one-time impact of increasing the liability . the new mortality tables reflect underlying increases in life expectancy of participants , thus driving longer benefit payment periods . the impact of the change in mortality assumption on the u.s. pension liability was an increase of the liability of approximately $ 18 million . in 2013 , the mark-to-market adjustments result ed in an actuarial gain of $ 69.5 million . the 2013 gain was primarily driven by the change in 23 discount rate used to value the liability , which increased by 95 basis points , compared with 2012 , resulting in a reduction in the value of the liability . excluding the impact s of the mark-to-market adjustment s , sg & a expenses decreased 100 basis points from 20.2 % in the pri or year to 19.2 % in 2014. various restructu ring activities executed in 2013 that had a full year impact in 2014 drove the decrease in personnel expenses . the decreases were partially offset by higher stock-based compensation expense due to higher grants to retirement-eligible employees that require accelerated expense recognition , and the i mpact of improved stock price on our liability based awards . restructuring and impairment charges replace_table_token_9_th restructuring and impairment charges decreased significantly in 2014 compared with 2013. the primary drivers of the decline were the decrease in employee severance cost of $ 18.2 million in 2014 compared with 2013 and the various 2013 impairment charges of $ 10.8 million that did not recur in 2014 . many of our restructuring activities commenced during the first half of 2013 , t hereby driving the higher prior year expenses . we had fewer restructuring activities during 2014. interest expense replace_table_token_10_th interest expense i n 2014 decreased $ 3.9 million compared with 2013 , primarily due to the amendment of our revolving credit facility and retirement of the 7.875 % senior notes . additionally , interest expense decreased due to additional interest capitalization related to the construction project at our antwerp , belgium facility .

we review goodwill for impairment each year using a measurement date of october 31st or more frequently in the event of an impairment indicator . we annually , or more frequently as warranted , evaluate the appropriateness of our reporting units utilizing operating segments as the starting point of our analysis . in the event of a change in our reporting units , we would allocate goodwill based on the relative fair value . we estimate the fair values of the reporting units associated with these assets using the average of both the income approach and the market approach , which we believe provides a reasonable estimate of the reporting units ' fair values , unless facts and circumstances exist that indicate more representative fair values . the income approach uses projected cash flows attributable to the reporting units over their useful lives and allocates certain corporate expenses to the reporting units . we use historical results , trends and our projections of market growth , internal sales efforts and anticipated cost structure assumptions to estimate future cash flows . using a risk-adjusted , weighted-average cost of capital , we discount the cash flow projections to the measurement date . the market approach estimates a price reasonably expected to be paid by a market participant in the purchase of similar businesses . if the fair value of any reporting unit was determined to be less than its carrying value , we would proceed to the second step and obtain comparable market values or independent appraisals of its assets and liabilities to determine the amount of any impairment . 37 the significant assumptions and ranges of assumptions we used in our impairment analyses of goodwill at october 31 , 2014 and 2013 , were as follows : replace_table_token_31_th our estimates of fair value can be adversely affected by a variety of factors .

grant story_separator_special_tag results of operations executive summary teletech holdings , inc. ( “teletech” , “the company” , “we” , “our” or “us” ) is a leading provider of customer strategy , analytics-driven and technology-enabled customer engagement management solutions with 41,000 employees delivering services across 24 countries from 54 delivery centers on five continents . our revenue for fiscal 2013 was $ 1,193 million . founded in 1982 , for over thirty years we have helped clients strengthen their customer relationships through strategy , innovation , technology , and process that provide exceptional customer engagement . the results are customer interactions that are more personalized , seamless , and relevant , and in turn improve our clients ' brand recognition and loyalty . our end-to-end offering originates with the design of data-rich customer-centric strategies , which are then enabled by a suite of technologies and operations that allow for effective management and growth of the economic value of our clients ' customer relationships . 21 we continue to transform the company by providing a distinct value proposition through our integrated customer engagement offerings . our services are value-oriented , outcome-based , and delivered on a global scale across all of our business segments , including customer management services ( cms ) , customer growth services ( cgs ) , customer technology services ( cts ) , and customer strategy services ( css ) . our integrated platform is an industry differentiator , one that unites strategic consulting , data analytics , process optimization , system design and integration , technology solutions and services , and operational excellence . this holistic approach increases customer outcomes , satisfaction and loyalty , improves operating effectiveness and efficiencies , and drives long-term growth and profitability for our clients . we have developed industry expertise and serve more than 250 global clients in the automotive , communications , financial services , government , healthcare , logistics , media and entertainment , retail , technology , travel and transportation industries . we target customer-focused industry leaders in the global 1000 , companies that desire a partner that can quickly and globally scale a suite of integrated services . to improve our competitive position in a rapidly changing market and stay strategically relevant to our clients , we continue to invest in innovation and growth businesses , diversifying our traditional business process outsourcing into high-margined analytics and technology-enabled services . of the $ 1,193 million in revenue we reported in 2013 , approximately 25 % or $ 302.3 million came from customer-centric strategy , growth or technology-based services with the remainder coming from our traditional customer management services . our business is structured around four operating segments structured to execute on our strategy of expanding integrated customer engagement solutions . design – customer strategy services we typically begin by engaging our clients at a strategic level . through our analytics-driven management consulting expertise we help our clients design and build their customer engagement strategies . we improve our clients ' ability to better understand and predict their customers ' behaviors and preferences along with their current and future economic value so that they can deploy resources to achieve the greatest return . using proprietary analytic models , we provide the insight clients need to build the business case for customer centricity , to better optimize their marketing spend and then work alongside them to help implement our recommendations . a key component of this practice involves instilling a high performance culture through a lean management framework . this process optimization capability enables the client to align and cascade the recommended initiatives to ensure accountability and transparency for the ultimate achievement and sustainability of future results . enable – customer technology services once the design of the customer engagement is completed , our ability to architect , deploy and host or manage the client 's customer management environments becomes a key enabler to achieving and sustaining the client 's customer engagement vision . given the proliferation of mobile communication technologies and devices , we enable our clients ' operations to interact with their customers across the growing array of channels including email , social networks , mobile , web , sms text , voice and chat . we design , implement and manage cloud , on-premise or hybrid customer management environments to deliver a consistent and superior experience across all touch points on a global scale that we believe result in higher quality , lower costs and reduced risk for our clients . 22 manage – customer management services we redesign and manage clients ' front-to-back office processes to deliver just-in-time , personalized , multi-channel interactions . our front-office solutions seamlessly integrate voice , chat , e-mail , ecommerce and social media to optimize the customer engagement for our clients . in addition , we manage certain back-office processes for our clients to enhance their ability to obtain a customer-centric view of their relationships and maximize operating efficiencies . our delivery of integrated business processes via our onshore , offshore or work-from-home associates reduces operating costs and allows customer needs to be met more quickly and efficiently , resulting in higher satisfaction , brand loyalty and a stronger competitive position for our clients . grow – customer growth services we offer integrated sales and marketing solutions to help our clients boost revenue in new , fragmented or underpenetrated business-to-consumer or business-to-business markets . we deliver approximately $ 1 billion in client revenue annually via the acquisition , growth and retention of customers through a combination of our highly trained , client-dedicated sales professionals and our proprietary revana analytic multichannel platform tm . this platform continuously aggregates individual customer information across all channels into one holistic view so as to ensure more relevant and personalized communications . these communications are dynamically triggered to send the right message to the right customer at the right time via their preferred communication channel . story_separator_special_tag we use a three step process to assess the realizability of goodwill . the first step , step 0 , is a qualitative assessment that analyzes current economic indicators associated with a particular reporting unit . for example , we analyze changes in economic , market and industry conditions , business strategy , cost factors , and financial performance , among others , to determine if there would be a significant decline to the fair value of a particular reporting unit . a qualitative assessment also includes analyzing the excess fair value of a reporting unit over its carrying value from impairment assessments performed in previous years . if the qualitative assessment indicates a stable or improved fair value , no further testing is required . if a qualitative assessment indicates that a significant decline to fair value of a reporting unit is more likely than not , or if a reporting unit 's fair value has historically been closer to its carrying value , we will proceed to step 1 testing where we calculate the fair value of a reporting unit based on discounted future probability-weighted cash flows . if step 1 indicates that the carrying value of a reporting unit is in excess of its fair value , we will proceed to step 2 where the fair value of the reporting unit will be allocated to assets and liabilities as it would in a business combination . impairment occurs when the carrying amount of goodwill exceeds its estimated fair value calculated in step 2. we estimate fair value using discounted cash flows of the reporting units . the most significant assumptions used in these analyses are those made in estimating future cash flows . in estimating future cash flows , we use financial assumptions in our internal forecasting model such as projected capacity utilization , projected changes in the prices we charge for our services , projected labor costs , as well as contract negotiation status . the financial and credit market volatility directly impacts our fair value measurement through our weighted average cost of capital that we use to determine our discount rate . we use a discount rate we consider appropriate for the country where the business unit is providing services . as of december 1 , 2013 , the company 's assessment of goodwill impairment indicated that for all reporting units , the fair values of the company 's reporting units were substantially in excess of their estimated carrying values , and therefore goodwill in these reporting units was not impaired . 26 similar to goodwill , the company may first use a qualitative analysis to assess the realizability of its indefinite-lived intangible assets . the qualitative analysis will include a review of changes in economic , market and industry conditions , business strategy , cost factors , and financial performance , among others , to determine if there would be a significant decline to the fair value of an indefinite-lived intangible asset . if a quantitative analysis is completed , an indefinite-lived intangible asset ( a trade name ) is evaluated for possible impairment by comparing the fair value of the asset with its carrying value . fair value was estimated as the discounted value of future revenues arising from a trade name using a royalty rate that a market participant would pay for use of that trade name . an impairment charge is recorded if the trade name 's carrying value exceeds its estimated fair value . restructuring liability we routinely assess the profitability and utilization of our delivery centers and existing markets . in some cases , we have chosen to close under-performing delivery centers and complete reductions in workforce to enhance future profitability . severance payments that occur from reductions in workforce are in accordance with postemployment plans and or statutory requirements that are communicated to all employees upon hire date ; therefore , we recognize severance liabilities when they are determined to be probable and reasonably estimable . other liabilities for costs associated with an exit or disposal activity are recognized when the liability is incurred , rather than upon commitment to a plan . derivatives we enter into foreign exchange forward and option contracts to reduce our exposure to foreign currency exchange rate fluctuations that are associated with forecasted revenue earned in foreign locations . we enter into interest rate swaps to reduce our exposure to interest rate fluctuations associated with our variable rate debt . upon proper qualification , these contracts are accounted for as cash flow hedges under current accounting standards . from time-to-time , we also enter into foreign exchange forward contracts to hedge our net investment in a foreign operation . all derivative financial instruments are reported in the accompanying consolidated balance sheets at fair value . changes in fair value of derivative instruments designated as cash flow hedges are recorded in accumulated other comprehensive income ( loss ) , a component of stockholders ' equity , to the extent they are deemed effective . based on the criteria established by current accounting standards , all of our cash flow hedge contracts are deemed to be highly effective . changes in fair value of any net investment hedge are recorded in cumulative translation adjustment in accumulated other comprehensive income ( loss ) in the accompanying consolidated balance sheets offsetting the change in cumulative translation adjustment attributable to the hedged portion of our net investment in the foreign operation . any realized gains or losses resulting from the foreign currency cash flow hedges are recognized together with the hedged transactions within revenue . any realized gains or losses resulting from the interest rate swaps are recognized in interest income ( expense ) . gains and losses from the settlements of our net investment hedges remain in accumulated other comprehensive income ( loss ) until partial or complete liquidation of the applicable net investment . we also enter into fair value derivative contracts to reduce our exposure to foreign currency exchange rate fluctuations associated with changes in asset and liability balances .

our 2013 financial results in 2013 , our revenue increased 2.6 % to $ 1,193 million over the 2012 year , despite a decrease of 1.0 % or $ 12.1 million due to foreign currency fluctuations , primarily the australian dollar . revenue , adjusted for the $ 12.1 million decrease related to foreign exchange , $ 1.2 million of lost revenue due to a typhoon in the philippines during the third quarter , and a $ 37.6 million decrease related to the exit of our business in spain , increased by $ 81.1 million over the prior year . this increase was due to organic growth and revenue from recent acquisitions . our 2013 income from operations increased 29.1 % to $ 101.4 million or 8.5 % of revenue , from $ 78.5 million or 6.8 % of revenue in 2012. this increase is due to the benefits of increased capacity utilization , income from the recent acquisitions , organic revenue growth and the exit of our business in spain which caused large restructuring expenses in the prior year . these were partially offset by $ 5.1 million negative impact from foreign currency fluctuations , $ 3.5 million additional amortization of intangibles related to the acquisitions , $ 0.8 million negative impact from the lost revenue from the typhoon , and investments in sales and research and development . income from operations in 2013 included $ 4.4 million and $ 1.2 million of restructuring charges and asset impairments , respectively . income from operations in 2012 included $ 22.9 million and $ 3.0 million of restructuring charges and impairments , respectively . our offshore delivery centers serve clients based in north america and in other countries . our offshore delivery capacity spans five countries with 18,250 workstations and currently represents 63 % of our global delivery capabilities .