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under the allergan/abbvie agreement , the company granted allergan an exclusive license to develop , commercialize , and otherwise exploit products that contain reverse thermal hydrogel ( “ rtgel ” ) and agreed to supply allergan with pre-clinical and clinical quantities of the rtgel product , also referred to as the rtgel vials . see note 11 for additional discussion related to the company 's license and collaboration agreements . . research and development expenses research and development costs are expen s ed as incurred and consist primarily of the cost of salaries , share-based compensat i on expenses , payroll taxes and other employee benefits , subcontractors and materials used for research and d evelopment activities , including nonclinical studies , clinical trials , manufacturing costs and professional services . the costs of services performed by others in connection with the research a nd development activities of the company , including research and deve l opment conducted by others on behalf of the company , are inc l uded in research and development costs and expensed as the contracted work is performed . the company accrues for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from its external service providers . the company adjusts its accrual as actual costs become known . where contingent milestone payments are due to third parties under research and development arrangements or license agreements , the milestone payment obligations are expensed when the milestone results are achieved . selling , general and administrative expenses selling , general and administrative expenses consist primarily of personnel costs ( including share-based compensation related to directors , employees and consultants ) . other significant costs include commercial , medical affairs , external professional service costs , facility costs , accounting and audit services , legal services and other consulting fees . selling , general and administrative costs are expensed as incurred . the company accrues for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from its service providers and adjusting its accruals as actual costs become known . 99 urogen pharma , ltd. notes to the consolidated financial statements share-based compensation share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period , which is equal to the vesting period . the fair value of options is determined using the black-scholes option-pricing model . the fair value of a restricted stock unit ( “ rsu ” ) equaled the closing price of the company 's ordinary shares on the grant date . the company accounts for forfeitures as they occur in accordance with asc topic 718 , “ compensation—stock compensation ” . the company elected to recognize compen s ation costs for awards conditioned only on conti n ued service that have a graded vesting schedule using the straight-line method and to value the awards based on the sin g le-option award approach . net loss per ordinary share basic net loss per share is computed by dividing the net loss attributable to ordinary shareholders by the weighted-average number of ordinary shares outstanding . diluted net loss per share is computed similarly to basic net loss per share except that the denominator is increased to include the number of additional ordinary shares that would have been outstanding if the potential ordinary shares had been issued and if the additional ordinary shares were dilutive . for all periods presented , potentially dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive . the following table summarizes the calculation of basic and diluted loss per common share for the periods presented ( in thousands , except share and per share amounts ) : replace_table_token_7_th recently adopted accounting pronouncements in june 2016 , the financial accounting standards board , or fasb , issued accounting standards update , or asu , no . 2016-13 , financial instruments - credit losses : measurement of credit losses on financial instruments , or asu 2016-13. asu 2016-13 requires the company to measure and recognize expected credit losses for certain financial instruments , including trade receivables , as an allowance that reflects the company 's current estimate of credit losses expected to be incurred . for available-for-sale debt securities with unrealized losses , the standard requires allowances to be recorded through net income instead of directly reducing the amortized cost of the investment under the prior other-than-temporary impairment model . the company applied the modified retrospective transition method as of the date of initial application , january 1 , 2020 . as of december 31 , 2020 , the company believes the cost basis for its marketable securities were recoverable in all material aspects and no credit impairments were recognized in the period . similarly , the company estimates minimal current expected credit losses on trade receivables and has not recognized any allowance for doubtful accounts in the period . 100 urogen pharma , ltd. notes to the consolidated financial statements note 4-other financial information accounts payable and accrued expenses accounts payable and accrued expenses consist of the following as of december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_8_th interest and other income ( expenses ) , net interest and other income ( expenses ) consisted of the following as of december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_9_th note 5-inventories inventories consist of the following as of december 31 , 2020 and december 31 , 2019 ( in thousands ) : december 31 , 2020 december 31 , 2019 raw materials $ 1,051 — finished goods 913 — total inventories $ 1,964 $ — note 6-fair value measurements the company follows authoritative accounting guidance , which among other things , defines fair value , establishes a consistent framework story_separator_special_tag therefore , we have accounted for the right to agenus 's intellectual property acquired under the license agreement as an asset acquisition of in-process research and development . see note 11 to the consolidated financial statements for further information . selling and marketing expenses to date , selling and marketing expenses consist primarily of commercial personnel costs ( including share-based compensation ) along with pre-commercialization and initial commercialization activities related to jelmyto , formerly known as ugn-101 . we anticipate that our selling and marketing expenses will increase in 2021 as we continue the commercialization of jelmyto . general and administrative expenses general and administrative expenses consist primarily of personnel costs ( including share-based compensation related to directors , executives , finance , medical affairs , business development , investor relations , and human resource functions ) . other significant costs include medical affairs services , external professional service costs , facility costs , accounting and audit services , legal services , and other consulting fees . we anticipate that our general and administrative expenses will increase in the future as we increase our administrative headcount and infrastructure to support the potential approval and commercialization of our other product candidates and our continued research and development programs . these increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants , lawyers and accountants , among other expenses . interest and other income ( expenses ) , net interest and other income ( expenses ) , net , consisted primarily of interest income . 80 income t axes we have yet to generate taxable income in israel . we have historically incurred operating losses resulting in tax loss carry forwards losses totaling approximately $ 250.2 million as of december 31 , 2020. we anticipate that we will continue to generate tax losses for the foreseeable future and that we will be able to carry forward these tax losses indefinitely to future taxable years . accordingly , we do not expect to pay taxes in israel until we have taxable income after the full utilization of our carry forward tax losses . we have provided a full valuation allowance with respect to the deferred tax assets related to these carry forward losses . income tax expense also consists of our estimate of uncertain tax positions , and related interest and penalties . see note 15 to the consolidated financial statements for further information . results of operations comparison of the years ended december 31 , 2020 and 2019 the following table sets forth our results of operations for the years ended december 31 , 2020 and 2019. replace_table_token_1_th revenues revenues were $ 11.8 million and $ 18,000 for the years ended december 31 , 2020 and 2019 , respectively . the increase of $ 11.8 million reflects sales of our product jelmyto following its approval by the fda in april 2020. cost of revenues cost of revenues were $ 1.0 million and $ 0 for the years ended december 31 , 2020 and 2019 , respectively . in periods prior to receiving fda approval for jelmyto , we recognized inventory and related costs associated with the manufacture of jelmyto as research and development expenses . we expect this to continue to impact cost of revenues through the first quarter of 2022 as we produce jelmyto at costs reflecting the full costs of manufacturing and as we deplete inventories that we had expensed prior to receiving fda approval . gross margin would have been approximately 86 % versus 91 % for year ended december 31 , 2020 if we had not sold jelmyto units that were expensed prior to regulatory approval . research and development expenses research and development expenses decreased by $ 2.0 million to $ 47.3 million in the year ended december 31 , 2020 from $ 49.3 million in the year ended december 31 , 2019 . excluding the $ 10 million milestone payment related to our license agreement with agenus inc during 2019 , research and development expenses increased by $ 8.0 million . the increase of $ 8.0 million resulted primarily from a one-time payment of $ 6.6 million to unwind the company 's obligation to the israeli innovation authority during the first quarter of 2020 and increased expenses related to the ugn-102 clinical trial and ugn-201 studies , partially offset by the completion of the phase 3 clinical trial and regulatory activity for jelmyto . 81 selling and marketing expenses selling and marketing expenses were $ 46.5 million and $ 17.9 million for the years ended december 31 , 2020 and 2019 , respectively . the increase in selling and marketing expenses of $ 28.6 million resulted primarily from increased costs and activities related to the commercial launch of jelmyto in june 2020 , including headcount and related costs associated with our sales force . general and administrative expenses general and administrative expenses were $ 43.7 million and $ 42.3 million for the years ended december 31 , 2020 and 2019 , respectively . general and administrative expenses were comprised most significantly of personnel related costs , followed by external professional services and facility costs the increase in general and administrative expenses of $ 1.4 million resulted primarily from increased costs and activities related to the commercial launch of jelmyto in june 2020 , including headcount and related administrative costs . interest and other income ( expenses ) , net interest and other income ( expenses ) , net was income of $ 1.6 million and income of $ 4.3 million for the years ended december 31 , 2020 and 2019 , respectively . the decrease of $ 2.7 million was primarily due to a decrease in our cash and cash equivalents and marketable securities . story_separator_special_tag style= `` margin-bottom:0pt ; margin-top:6pt ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; font-family : 'times new roman ' ; font-size:10pt ; ``

82 cash flows the following table sets forth the significant sources and uses of cash for the periods set forth below : replace_table_token_2_th operating activities net cash used in operating activities was $ 105.9 million during the year ended december 31 , 2020 , compared to $ 71.0 million used in operating activities during the year ended december 31 , 2019. the $ 34.9 million increase was attributable primarily to the increase of $ 23.4 million in the net loss for the year and a net increase in operating assets and liabilities of $ 10.7 million . investing activities net cash provided by investing activities was $ 93.2 million during the year ended december 31 , 2020 , compared to net cash used in investing activities of $ 145.6 million during the year ended december 31 , 2019. the increase of $ 238.8 million is primarily related to increased maturities without associated repurchases in marketable securities through the year ended december 31 , 2020 as compared to the year ended december 31 , 2019. financing activities net cash provided by financing activities was $ 16.5 million during the year ended december 31 , 2020 , compared to net cash provided by financing activities of $ 165.3 million during the year ended december 31 , 2019. the decrease is primarily due to the net proceeds received from the underwritten public offering completed in 2019 as compared to the net proceeds received from sales under the atm sales agreement in 2020 . funding requirements our present and future funding requirements will depend on many factors , including , among other things : the progress , timing and completion of clinical trials for ugn-102 ; < p

no distributions will accrue to or be paid on the restricted units during the vesting period . the following table provides information on the restricted units awarded to non-employee members of our board of directors : replace_table_token_37_th ( 1 ) the fair values of the restricted units shown in this column were calculated based on the closing market prices of our limited partner units on the grant date , with adjustments made to reflect the fact that the restricted units are not entitled to distributions during the vesting period . the impact of the lack of distribution rights during the vesting period was estimated using the value of the most recent distribution as of the applicable date and assumptions that a market participant might make about future distribution growth . this calculation of fair value is consistent with the provisions of asc 718 . ( 2 ) the fair values of the restricted units shown in the this column were calculated based on the closing market price of our limited partner units at march 31 , 2013 of $ 26.90 . no adjustments story_separator_special_tag overview ngl energy partners lp ( “we” , “our” , “us” , or the “partnership” ) is a delaware limited partnership formed in september 2010. ngl energy holdings llc serves as our general partner . as part of our formation , we acquired and combined the assets and operations of ngl supply , which was primarily a wholesale propane and terminaling business that was founded in 1967 , and hicksgas , which was primarily a retail propane business that was founded in 1940. we completed an initial public offering in may 2011. at the time of our initial public offering , we owned and operated retail propane and wholesale natural gas liquids businesses . subsequent to our initial public offering , we significantly expanded our operations through a number of business combinations , as described under part i , item i , “businesses — acquisitions subsequent to initial public offering.” 50 as of march 31 , 2013 , our businesses include : · a crude oil logistics business , the assets of which include crude oil terminals , pipeline injection stations , a fleet of trucks , a fleet of leased rail cars , and a fleet of barges and tow boats ; · a water services business , the assets of which include water treatment and disposal facilities , a fleet of water trucks , and frac tanks ; · our natural gas liquids logistics business , which supplies propane and other natural gas liquids to retailers , wholesalers , and refiners throughout the united states and in canada , and which provides natural gas liquids terminaling services through its 17 terminals throughout the united states and rail car transportation services through its fleet of owned and predominantly leased rail cars ; and · our retail propane business , which sells propane and distillates to end users consisting of residential , agricultural , commercial , and industrial customers in more than 20 states and to certain re-sellers . crude oil logistics our crude oil transportation and marketing business purchases crude oil from producers and transports it for resale at pipeline injection points , storage terminals , barge loading facilities , rail facilities , refineries , and other trade hubs . we attempt to reduce our exposure to price fluctuations by using “back-to-back” contractual agreements whenever possible . in addition , we enter into forward contracts , financial swaps , and commodity spread trades as economic hedges of our physical forward sales and purchase contracts with our customers and suppliers . the operations of our crude oil logistics segment began with our june 2012 merger with high sierra . most of our contracts to purchase or sell crude oil are at floating prices that are indexed to published rates in active markets , such as cushing , oklahoma . we seek to manage price risk by entering into purchase and sale contracts of similar volumes based on similar indexes and by entering into financial derivatives . we utilize our transportation assets to move crude oil from the well head to the highest value market . the spread between crude oil prices in different markets can fluctuate widely , which may expand or limit our opportunity to generate margins by transporting crude to different markets . we also seek to maximize margins by blending crude oil of varying properties . 51 the range of high and low spot prices per barrel of nymex west texas intermediate crude oil at cushing , oklahoma for the periods indicated and the prices as of period end are as follows : spot price per barrel at period low high end for the year ended march 31 , 2013 $ 77.69 $ 106.16 $ 97.23 water services our water services business generates revenues from the gathering , transportation , treatment , and disposal of wastewater generated from oil and natural gas production operations , and from the sale of recycled water and recovered hydrocarbons . the operations of our water services segment began with our june 2012 merger with high sierra . our water processing facilities are strategically located near areas of high crude oil and natural gas production . a significant factor affecting the profitability of our water services segment is the extent of exploration and production in the areas near our facilities , which is based upon producers ' expectations about the profitability of drilling new wells . the primary customers of our facility in wyoming have committed to deliver a specified minimum volume of water to our facility under long-term contracts . the primary customers of our facilities in colorado have committed to deliver to our facilities all wastewater produced at wells in a designated area . the customers of our other facilities are not under volume commitments . story_separator_special_tag during the year ended march 31 , 2013 , the operations of high sierra contributed revenues of $ 563.2 million from sales of other natural gas liquids ( primarily butane ) . these operations sold 447.4 million gallons of other natural gas liquids at an average price of $ 1.26 per gallon . exclusive of the operations acquired in our june 2012 merger with high sierra , the increase in volume sold is due primarily to the november 2011 semstream acquisition , which expanded the markets we are able to serve . we believe the decline in average selling prices is due primarily to a greater than normal supply in the marketplace , due in part to low demand as a result of mild weather . 61 transportation and other revenues for the year ended march 31 , 2013 relate primarily to fees charged for transporting customer-owned product by rail car . cost of sales . exclusive of the operations acquired in our june 2012 merger with high sierra , costs of wholesale propane sales decreased approximately $ 212.2 million during the year ended march 31 , 2013 , as compared to $ 904.1 million during the year ended march 31 , 2012. this resulted from a decrease in the average cost of $ 0.47 per gallon , as compared to an average cost per gallon of $ 1.37 in the prior year . this decrease in cost was partially offset by an increase in volume sold of approximately 112.1 million gallons , as compared to 659.9 million gallons sold in the prior year . cost of propane sales were reduced by $ 14.8 million during the year ended march 31 , 2013 due to $ 11.6 million of realized gains and $ 3.2 million of unrealized gains on derivatives . these derivatives consisted primarily of propane swaps that we entered into as economic hedges against the potential decline in the market value of our propane inventories . excluding gains on derivatives , our average cost of propane sold during the year ended march 31 , 2013 was $ 0.92 cents per gallon . during the year ended march 31 , 2013 , the cost of propane sales of the high sierra operations were $ 109.9 million . these operations sold 140.6 million gallons of propane at an average price of $ 0.78 per gallon . exclusive of the operations acquired in our june 2012 merger with high sierra , cost of wholesale sales of other natural gas liquids increased approximately $ 43.2 million during the year ended march 31 , 2013 , as compared to $ 247.0 million during the year ended march 31 , 2012. this resulted from an increase in volume sold of approximately 50.2 million gallons as compared to 135.0 million gallons in the prior year , partially offset by a decrease in the average cost of $ 0.26 per gallon , as compared to $ 1.83 per gallon in the prior year . cost of other natural gas liquids sales during the year ended march 31 , 2013 was reduced by approximately $ 0.2 million due to realized gains on derivatives . during the year ended march 31 , 2013 , the cost of other natural gas liquids sales of the high sierra operations was $ 546.6 million . these operations sold 447.4 million gallons of other natural gas liquids ( primarily butane ) at an average price of $ 1.22 per gallon . costs of sales of other natural gas liquids during the year ended march 31 , 2013 were increased by $ 7.5 million of unrealized losses and $ 0.3 million of realized losses on derivatives . other cost of sales for the year ended march 31 , 2013 relate primarily to the cost of leasing rail cars used in the transportation of customer-owned product . operating expenses . exclusive of the operations acquired in our june 2012 merger with high sierra , operating expenses of our natural gas liquids logistics segment increased approximately $ 4.4 million during the year ended march 31 , 2013 as compared to operating expenses of $ 8.1 million during the year ended march 31 , 2012. the increase in operating expenses is due primarily to increased compensation and terminal operating expenses resulting from our semstream combination . during the year ended march 31 , 2013 , our natural gas liquids logistics segment incurred $ 15.1 million of operating expenses related to the operations of high sierra . general and administrative expenses . exclusive of the operations acquired in our june 2012 merger with high sierra , general and administrative expenses of our natural gas liquids logistics segment increased approximately $ 0.8 million during the year ended march 31 , 2013 as compared to general and administrative expenses of $ 2.7 million during the year ended march 31 , 2012. this increase is due primarily to increased compensation and related expenses resulting from our semstream combination . during the year ended march 31 , 2013 , our natural gas liquids logistics segment incurred $ 1.7 million of general and administrative expenses related to the operations of high sierra . depreciation and amortization expense . exclusive of the operations acquired in our june 2012 merger with high sierra , depreciation and amortization expense of our natural gas liquids logistics segment increased approximately $ 4.3 million during the year ended march 31 , 2013 , as compared to depreciation and amortization expense of approximately $ 3.7 million during the year ended march 31 , 2012. this increase is due primarily to depreciation and amortization expense related to assets acquired in the semstream combination , including depreciation of terminal assets and amortization of customer relationship intangible assets . during the year ended march 31 , 2013 , our natural gas liquids logistics segment recorded $ 3.1 million of depreciation and amortization expense related to assets acquired in our merger with high sierra . operating income . our natural gas liquids logistics

during the year ended march 31 , 2013 , we borrowed $ 263.5 million on our revolving credit facilities ( net of repayments ) and issued $ 250.0 million of senior notes , primarily to fund acquisitions . during the year ended march 31 , 2013 , we paid $ 20.2 million of debt issuance costs . cash flows from financing activities also include distributions paid to owners . ngl supply made distributions to its preferred stockholder each year as required . ngl supply also made a $ 7.0 million distribution to the owners of its common stock during the six months ended september 30 , 2010 in advance of our formation transactions . we made a distribution of $ 40.0 million to the previous shareholders of ngl supply during the six months ended march 31 , 2011. such distributions and the negative cash flows realized from our operating activities during the six months ended september 30 , 2010 required us to increase our borrowings under our revolving credit facility . we expect our distributions to our partners to increase in future periods under the terms of our partnership agreement . based on the number of common and subordinated units outstanding at march 31 , 2013 , if we made distributions equal to our minimum quarterly distribution of $ 0.3375 per unit ( $ 1.35 annualized ) , total distributions would equal $ 18.1 million per quarter ( $ 72.5 million per year ) . to the extent our cash flows from operating activities are not sufficient to finance our required distributions , we may be required to increase the borrowings under our working capital credit facility . the following table summarizes the distributions declared since our initial public offering : replace_table_token_30_th on may 5 , 2011 , we made a distribution of $ 3.85 million from available cash to our general partner and common unitholders as of march 31 , 2011. also in may 2011 , we used approximately $ 65.0 million of the proceeds from our initial public offering to repay advances under our previous credit facility . 79 contractual obligations < font face= '' times

( x ) incorporated by reference to exhibits filed with the company 's registration statement on form s-8 filed july 30 , 2013 ( file no . 333-190232 ) . ( y ) incorporated by reference to exhibits filed with the company 's quarterly report on form 10-q for the three months ended june 30 , 2016 ( file no . 001-35331 ) . ( z ) incorporated by reference to exhibits filed with the company 's quarterly report on form 10-q for the three months ended march 31 , 2013 ( file no . 001-35331 ) . ( aa ) incorporated by reference to exhibits filed with the company 's quarterly report on form 10-q for the three months ended march 31 , 2015 ( file no . 001-35331 ) . ( bb ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed september 21 , 2015 ( file no . 001-35331 ) . ( cc ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed january 4 , 2016 ( file no . 001-35331 ) . ( dd ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed january 8 , 2016 ( file no . 001-35331 ) . ( ee ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed january 27 , 2016 ( file no . 001-35331 ) . ( ff ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed february 16 , 2016 ( file no . 001-35331 ) . ( gg ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed may 26 , 2016 ( file no . 001-35331 ) . ( hh ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed september 21 , 2016 ( file no . 001-35331 ) . ( ii ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed november 30 , 2016 ( file no . 001-35331 ) . ( jj ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed may 10 , 2017 ( file no . 001-35331 ) . ( kk ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed may 25 , 2017 ( file no . 001-35331 ) . ( ll ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed march 27 , 2018 ( file no . 001-35331 ) . 70 ( mm ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed april 2 , 2018 ( file no . 001-35331 ) . ( nn ) incorporated by reference to exhibits filed with the company 's current report on form 8-k filed december 17 , 2018 ( file no . 001-35331 ) . ( oo ) incorporated by reference to exhibits filed with the company 's current report on form 10-q for the three months ended march 31 , 2018 ( file no . 001-35331 ) . item 16. form 10-k summary . none . 71 index to consolidated financial statements replace_table_token_16_th f-1 management 's report on internal control over financial reporting our management is responsible for establishing and maintaining adequate internal control over financial reporting , as such term is defined in exchange act rules 13a-15 ( f ) and 15d-15 ( f ) . under the supervision and with the participation of our management , including our chief executive officer and chief financial officer , we conducted an evaluation of the effectiveness of our internal control over financial reporting at december 31 , 2018 based on the framework in internal control—integrated framework issued by the committee of sponsoring organizations of the treadway commission ( 2013 framework ) ( coso ) . based on that evaluation , our management concluded that our internal control over financial reporting was effective at december 31 , 2018. our accompanying consolidated financial statements have been audited by the independent registered public accounting firm of ernst & young llp . reports of the independent registered public accounting firm , including the independent registered public accounting firm 's report on our internal control over financial reporting , are included in this report . f-2 report of independent regist ered public accounting firm the board of directors and stockholders acadia healthcare company , inc. opinion on internal control over financial reporting we have audited acadia healthcare company , inc. 's internal control over financial reporting as of december 31 , 2018 , based on criteria established in internal control—integrated framework issued by the committee of sponsoring organizations of the treadway commission ( 2013 framework ) ( the coso criteria ) . in our opinion , acadia healthcare company , inc. ( the company ) maintained , in all material respects , effective internal control over financial reporting as of december 31 , 2018 , based on the coso criteria . we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) ( pcaob ) , the consolidated balance sheets of acadia healthcare company , inc. as of december 31 , 2018 and 2017 , and the related consolidated statements of operations , comprehensive ( loss ) income , shareholders ' equity and cash flows for each of the three years in the period ended december 31 , 2018 , and the related notes and our report dated march 1 , 2019 expressed an unqualified opinion thereon . story_separator_special_tag we entered into foreign currency forward contracts during the year ended december 31 , 2016 in connection with ( i ) acquisitions in the u.k. and ( ii ) certain transfers of cash between the u.s. and the u.k. under our cash management and foreign currency risk management programs . exchange rate changes between the contract date and the settlement date resulted in a gain on foreign currency derivatives of $ 0.5 million for the year ended december 31 , 2016 . 52 transaction-related expenses . transaction-related expenses were $ 24.3 million for the year ended december 31 , 2017 compared to $ 48.3 million for the year ended december 31 , 2016. transaction-related expenses represent costs incurred in the respective periods , primarily related to the 2016 acquisitions , the u.k. divestiture and the related integration efforts , as summarized below ( in thousands ) : replace_table_token_8_th provision for income taxes . for the year ended december 31 , 2017 , the provision for income taxes was $ 37.2 million , reflecting an effective tax rate of 15.7 % , compared to $ 28.8 million , reflecting an effective tax rate of 87.3 % , for 2016. the decrease in the effective tax rate for the year ended december 31 , 2017 was primarily attributable to the company 's estimate of the one-time tax benefit on revaluation of deferred tax items pursuant to the enactment of the tax act as well as changes in the foreign exchange rate between usd and gbp in 2017 and the disparity between the accounting treatment and the tax treatment of the u.k. divestiture on november 30 , 2016. liquidity and capital resources cash provided by continuing operating activities for the year ended december 31 , 2018 was $ 416.6 million compared to $ 401.3 million for the year ended december 31 , 2017. the increase in cash provided by continuing operating activities was primarily attributable to growth in same facility operations . days sales outstanding at december 31 , 2018 was 39 compared to 38 at december 31 , 2017. at december 31 , 2018 and december 31 , 2017 , we had working capital of $ 34.0 million and $ 94.2 million , respectively . cash used in investing activities for the year ended december 31 , 2018 was $ 361.0 million compared to $ 336.5 million for the year ended december 31 , 2017. cash used in investing activities for the year ended december 31 , 2018 primarily consisted of $ 341.5 million of cash paid for capital expenditures and $ 18.4 million of cash paid for real estate . cash paid for capital expenditures for the year ended december 31 , 2018 consisted of $ 74.1 million of routine capital expenditures and $ 267.4 million of expansion capital expenditures . we define expansion capital expenditures as those that increase the capacity of our facilities or otherwise enhance revenue . routine or maintenance capital expenditures were approximately 2.5 % of revenue for the year ended december 31 , 2018. cash used in investing activities for the year ended december 31 , 2017 primarily consisted of $ 274.1 million of cash paid for capital expenditures , $ 41.1 million of cash paid for real estate acquisitions and cash paid for acquisitions of $ 18.2 million . cash paid for capital expenditures for the year ended december 31 , 2017 consisted of $ 70.8 million of routine capital expenditures and $ 203.4 million of expansion capital expenditures . cash used in financing activities for the year ended december 31 , 2018 was $ 67.3 million compared to $ 60.1 million for the year ended december 31 , 2017. cash used in financing activities for the year ended december 31 , 2018 primarily consisted of principal payments on long-term debt of $ 39.7 million , repayment of long-term debt of $ 21.9 million and common stock withheld for minimum statutory taxes of $ 3.4 million . cash provided by financing activities for the year ended december 31 , 2017 primarily consisted of principal payments on long-term debt of $ 34.8 million , repayment of long-term debt of $ 22.5 million and common stock withheld for minimum statutory taxes of $ 3.5 million . we had total available cash and cash equivalents of $ 50.5 million , $ 67.3 million and $ 57.1 million at december 31 , 2018 , 2017 and 2016 , respectively , of which approximately $ 18.0 million , $ 20.4 million and $ 41.4 million was held by our foreign subsidiaries , respectively . our strategic plan does not require the repatriation of foreign cash in order to fund our operations in the u.s. , and it is our current intention to permanently reinvest our foreign cash and cash equivalents outside of the u.s. amended and restated senior credit facility we entered into a senior secured credit facility on april 1 , 2011. on december 31 , 2012 , we entered into the amended and restated credit agreement which amended and restated the senior secured credit facility . we have amended the amended and restated credit agreement from time to time as described in our prior filings with the sec . on january 25 , 2016 , we entered into the ninth amendment to our amended and restated credit agreement . the ninth amendment modified certain definitions and provides increased flexibility to us in terms of our financial covenants . our baskets for 53 permitted investments we re also increased to provide increased flexibility for us to invest in non-wholly owned subsidiaries , joint ventures and foreign subsidiaries . as a result of the ninth amendment , we may invest in non-wholly owned subsidiaries and joint ventures up to 10.0 % of our and our subsidiaries ' total assets in any consecutive four fiscal quarter period , and up to 12.5 % of our and our subsidiaries ' total assets during the term of the amended and restated credit agreement

during year ended december 31 , 2016 , we generated $ 1.7 billion of revenue , or 60.5 % of our total revenue , from our u.s. facilities and $ 1.1 billion of revenue , or 39.5 % of our total revenue , from our u.k. facilities . u.s. same facility revenue increased by $ 109.1 million , or 6.6 % , for the year ended december 31 , 2017 compared to the year ended december 31 , 2016 , resulting from same facility growth in patient days of 4.8 % and an increase in same facility revenue per day of 1.7 % . u.k. same facility revenue increased by $ 28.9 million , or 3.6 % , for the year ended december 31 , 2017 compared to the year ended december 31 , 2016 , resulting from same facility growth in patient days of 2.1 % and an increase in same facility revenue per day of 1.5 % . consistent with the same facility patient day growth in 2016 , the growth in same facility patient days for the year ended december 31 , 2017 compared to the year ended december 31 , 2016 resulted from the addition of beds to our existing facilities and ongoing demand for our services . provision for doubtful accounts . the provision for doubtful accounts was $ 40.9 million for the year ended december 31 , 2017 , or 1.4 % of revenue before provision for doubtful accounts , compared to $ 41.9 million for the year ended december 31 , 2016 , or 1.5 % of revenue before provision for doubtful accounts . salaries , wages and benefits . salaries , wages and benefits ( “ swb ” ) expense was $ 1.5 billion for the year ended december 31 , 2017 compared to $ 1.5 billion for the year ended december 31 , 2016 , a decrease of $ 5.7 million . swb expense included $ 23.5 million and $ 28.3 million of equity-based compensation expense for the years ended december 31 , 2017 and 2016 , respectively . excluding equity-based compensation expense , swb expense was $ 1.5 billion , or 53.3 % of revenue , for the year ended december 31 , 2017 , compared to $ 1.5 billion , or 53.8 % of revenue , for the year ended

deferred revenues deferred revenues primarily consist of amounts that have been billed to or received from customers in advance of revenue recognition and prepayments received from customers in advance for implementation , maintenance and other services , as well as initial subscription fees . the company recognizes deferred revenues as revenues when the services are performed and the corresponding revenue recognition criteria are met . customer prepayments are generally applied against invoices issued to customers when services are performed and billed . deferred revenues that are expected to be recognized as revenues during the succeeding twelve month period are recorded in current liabilities as deferred revenues , current portion , and the remaining portion is recorded in long-term liabilities as deferred revenues , net of current portion . revenues all revenue-generating activities are directly related to the sale , implementation and support of the company 's solutions within a single operating segment . the company derives the substantial majority of its revenues from subscription fees for the use of its solutions hosted in the company 's data centers as well as revenues for implementation and customer support services related to the company 's solutions . a small portion of the company 's customers host the company 's solutions in their own data centers under term license and maintenance agreements , and the company recognizes the corresponding revenues ratably over the term of those customer agreements . revenues are recognized net of sales credits and allowances . the company begins to recognize revenues for a customer when all of the following criteria are satisfied : there is persuasive evidence of an arrangement ; the service has been or is being provided to the customer ; the collection of the fees is reasonably assured ; and the amount of fees to be paid by the customer is fixed or determinable . f-10 q2 holdings , inc. notes to consolidated financial statements ( in thousands , except per share amounts and unless otherwise indicated ) determining whether and when these criteria have been met can require significant judgment and estimates . in general , revenue recognition commences when the company 's solutions are implemented and made available to the customers . the company 's software solutions are available for use in hosted application arrangements under subscription fee agreements . subscription fees from these applications , including related customer support , are recognized ratably over the customer agreement term beginning on the date the solution is made available to the customer . amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues , depending on whether the company 's revenue recognition criteria have been met . the company considers subscription fees to be fixed or determinable unless the fees are subject to refund or adjustment or are not payable within the company 's standard payment terms . in determining whether collection of subscription fees is reasonably assured , the company considers financial and other information about customers , such as a customer 's current credit-worthiness and payment history over time . historically , bad debt expenses have not been significant . the company enters into arrangements with multiple-deliverables that generally include multiple subscriptions and implementation services . additional agreements with existing customers that are not in close proximity to the original arrangements are treated as separate contracts for accounting purposes . for multiple-deliverable arrangements , arrangement consideration is allocated to deliverables based on their relative selling price . in order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting , the deliverables must have standalone value upon delivery . the company 's subscription services have standalone value as such services are often sold separately . in determining whether implementation services have standalone value apart from the subscription services , the company considers various factors including the availability of the services from other vendors . to date , the company has concluded that the implementation services included in multiple-deliverable arrangements do not have standalone value . as a result , when implementation services are sold in a multiple-deliverable arrangement , the company defers any arrangement fees for implementation services and recognizes such amounts ratably over the period of performance for the initial agreement term . when multiple-deliverables included in an arrangement are separated into different units of accounting , the arrangement consideration is allocated to the identified separate units based on a relative selling price hierarchy . the selling price for a deliverable is based on its vendor-specific objective evidence of selling price , or vsoe , if available , third-party evidence of selling price , or tpe , if vsoe is not available or best estimate of selling price , or besp , if neither vsoe nor tpe is available . the company has not established vsoe for its subscription services due to lack of pricing consistency , the introduction of new services and other factors . the company has determined that tpe is not a practical alternative due to differences in its service offerings compared to other parties and the availability of relevant third-party pricing information . accordingly , the company uses besp to determine the relative selling price . the amount of revenue allocated to delivered items is limited by contingent revenues . the company determines besp by considering its overall pricing objectives and market conditions . significant pricing practices taken into consideration include the company 's discounting practices , the size and volume of its transactions , customer characteristics , price lists , go-to-market strategy , historical standalone sales and agreement prices . as the company 's go-to-market strategies evolve , it may modify its pricing practices in the future , which could result in changes in relative selling prices , and include both vsoe and besp . subscription fee revenues the company 's solutions are available as hosted solutions under subscription fee agreements without licensing perpetual rights to the software . story_separator_special_tag total other expense , net total other expense , net , consists primarily of interest income and expense . we earn interest income on our cash , cash equivalents and investments , and expect interest income to increase due to the increase in our cash , cash equivalents and investments as a result of our ipo and follow-on offerings . interest expense consists primarily of the interest incurred on outstanding borrowings under our credit facility with wells fargo bank , national association , or our credit facility , and fees and interest associated with the letter of credit issued through our credit facility to our landlord for the security deposit for our corporate headquarters . provision for income taxes as a result of our current net operating loss position , income tax expenses consist primarily of state income taxes . we incurred minimal state income taxes for each of the years ended december 31 , 2015 , 2014 and 2013 . our net operating loss carryforwards for federal income tax purposes were $ 94.5 million and $ 69.9 million at december 31 , 2015 and 2014 , respectively , and will expire at various dates beginning in 2026 , if not utilized , and the alternative minimum tax credits have an indefinite carryover period . we also held state tax credits of $ 0.2 million for each of the years ended december 31 , 2015 and 2014 , and federal alternative minimum tax credits of $ 0.1 million for each of the years ended december 31 , 2015 and 2014. the state tax credits will expire in 2026 if not utilized , and the federal alternative minimum tax credits have an indefinite carryforward period . 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 consolidated financial statements , which have been prepared in accordance with gaap . the preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities at the date of the consolidated financial statements , and the reported amounts of revenues and expenses . in accordance with gaap , we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances . actual results might differ from these estimates under different assumptions or conditions . our significant accounting policies are described in note 2 to our consolidated financial statements appearing elsewhere in this annual report on form 10-k , and we believe that the accounting policies discussed below involve the greatest degree of complexity and exercise of significant judgments and estimates by our management . the methods , estimates and judgments that we use in applying our accounting policies have a significant impact on our results of operations and , accordingly , we believe the policies described below are the most critical for understanding and evaluating our financial condition and results of operations . revenue recognition all revenue-generating activities are directly related to the sale , implementation and support of our solutions within a single operating segment . we derive the substantial majority of our revenues from subscription fees for the use of our solutions hosted in our data centers as well as revenues for implementation and customer support services related to our solutions . a 47 small portion of our customers host our solutions in their own data centers under term license and maintenance agreements , and we recognize the corresponding revenues ratably over the term of those customer agreements . revenues are recognized net of sales credits and allowances . we begin to recognize revenue for a customer when all of the following conditions are satisfied : there is persuasive evidence of an arrangement ; the service has been or is being provided to the customer ; the collection of the fees is reasonably assured ; and the amount of fees to be paid by the customer is fixed or determinable . determining whether and when these criteria have been met can require significant judgment and estimates . in general , revenue recognition commences when our solutions are implemented and made available to the customers . our software solutions are available for use in hosted application arrangements under subscription fee agreements . subscription fees from these applications , including related customer support , are recognized ratably over the customer agreement term beginning on the date the solution is made available to the customer . amounts that have been invoiced are recorded in accounts receivable and deferred revenues or revenues , depending on whether our revenue recognition criteria have been met . we consider subscription fees to be fixed or determinable unless the fees are subject to refund or adjustment or are not payable within our standard payment terms . in determining whether collection of subscription fees is reasonably assured , we consider financial and other information about customers , such as a customer 's current credit-worthiness and payment history over time . historically , bad debt expenses have not been significant . we enter into arrangements with multiple-deliverables that generally include multiple subscriptions and implementation services . additional agreements with existing customers that are not in close proximity to the original arrangements are treated as separate contracts for accounting purposes . for multiple-deliverable arrangements , arrangement consideration is allocated to deliverables based on their relative selling price . in order to treat deliverables in a multiple-deliverable arrangement as separate units of accounting , the deliverables must have standalone value upon delivery . our subscription services have standalone value as such services are often sold separately . in determining whether implementation services have standalone value apart from the subscription services , we consider various factors including the availability of the services from other vendors . to date , we have concluded that the implementation services included in multiple-deliverable arrangements do not have standalone

for the year ended december 31 , 2013 , our net cash and cash equivalents used by operating activities of $ 1.5 million primarily consisted of a net loss of $ 17.9 million , partially offset by $ 8.6 million of cash provided by changes in operating assets and liabilities and $ 8.0 million attributable to non-cash items . increases in deferred revenues of $ 9.7 million , offset by a $ 3.3 million increase in accounts receivable , are the result of increases in customer prepayments and growth in the number of registered users and transactions processed on our solutions . increases in deferred implementation costs and deferred solution and other costs of $ 3.2 million and $ 4.0 million , respectively , are due to an increase in the number of new customers for whom solutions were being implemented during the period . net increases in accrued liabilities of $ 5.5 million are attributable to increased spending in support of our expanding customer base and related growth in our technical infrastructure . non-cash items consisted primarily of $ 3.0 million of depreciation and amortization expense due to growth in our fixed asset base and data center and other technical infrastructure to support our customer growth , $ 2.8 million of amortization of deferred 58 implementation and deferred solution and other costs and $ 1.6 million of stock-based compensation expense attributable to staffing increases and the related increase in option grants . cash flows from investing activities our investing activities have consisted primarily of purchases and maturities of investments , our recent acquisitions , and purchases of property and equipment to support our growth . purchases of property and equipment may vary from period to period due to the timing of the expansion of our operations and data center and other technical infrastructure . for the year ended december 31 , 2015 , net cash used in investing activities was $ 58.4 million , consisting primarily of $ 43.9 million for the purchase of investments , $ 27.5 million used for acquisitions , $ 7.1 million for the purchase of property and equipment , a $ 0.5 million increase in restricted cash for the deposit securing the lease for the expansion of our corporate headquarters , and $ 0.3 million < font

the placement shares have been registered under the securities act of 1933 , as amended , pursuant to the registration statement on form s-3 ( file no . 333-227466 ) , which was originally filed with the sec on september 21 , 2018 and declared effective by the sec on october 4 , 2018 , the base prospectus contained within the registration statement , and a prospectus supplement that was filed on june 5 , 2020. sales of the company 's common stock , if any , under this prospectus supplement may be made by any method deemed to be an “ at the market offering ” as defined in rule 415 promulgated under the securities act of 1933 , as amended . during the year ended december 31 , 2020 , the company sold 17,725 shares of common stock pursuant to the atm agreement , at an average selling price of $ 10.31 per share . on september 15 , 2017 , in connection with its ipo , celcuity llc filed a certificate of conversion , whereby celcuity llc effected a corporate conversion from a minnesota limited liability company to a delaware corporation and changed its name to celcuity inc. pursuant to the conversion , units of membership interest in the limited liability company were converted into shares of common stock of the corporation at a conversion ratio of 40 units for one share of common stock . the company had 257,604,208 units issued and outstanding as of september 15 , 2017. after giving effect to the corporate conversion , the number of common shares outstanding as of such date was 6,440,139 . as a result of the corporate conversion , accumulated deficit was reduced to zero on the date of the corporate conversion , and the corresponding amount was credited to additional paid-in capital . the corporate conversion was approved by members holding a majority of the outstanding units of celcuity llc , and in connection with such conversion , the company filed a certificate of incorporation and adopted bylaws . the company determined that the corporate conversion is equivalent to a change in the company 's capital structure . on september 22 , 2017 , the company completed its ipo whereby it sold 2,760,000 shares of common stock at a public offering price of $ 9.50 per share . the aggregate net proceeds received by the company from the ipo were approximately $ 23.3 million , net of underwriting commissions of approximately $ 1.8 million and offering expenses of approximately $ 1.1 million . upon the closing of the ipo , 10,082,050 shares of common stock were outstanding , which included 881,911 shares of common stock issued as a result of the conversion of the company 's convertible notes . shares of the company 's common stock began trading on september 20 , 2017 on the nasdaq capital market under the symbol “ celc ” . on may 11 , 2018 , the company filed an amendment to its certificate of incorporation with the secretary of state of the state of delaware to decrease the number of authorized shares of its common stock and preferred stock . pursuant to the company 's amended certificate of incorporation , the company is authorized to issue up to 25,000,000 shares of common stock , $ 0.001 par value per share and 2,500,000 shares of preferred stock , $ 0.001 par value per share . at december 31 , 2020 and 2019 , the company had 10,299,822 and 10,253,988 shares of common stock outstanding , respectively . warrants in connection with the 2016 private placement offering of units , the company issued ten-year warrants to the placement agent of the private placement . the warrants allow the placement agent to purchase up to 55,249 shares of common stock at $ 7.56 per share . the warrants were immediately exercisable and expire on january 14 , 2026 and may 2 , 2026 . these warrants are equity classified and the $ 330,607 fair value of the warrants is reflected as additional paid-in capital . in connection with the private placement offering of convertible notes , the company issued ten-year warrants to the placement agent to purchase 48,615 shares of common stock at a price of $ 8.42 per share . the warrants were immediately exercisable and expire on april 28 , 2027 and may 17 , 2027 . these warrants are equity classified and the $ 286,999 fair value of the warrants is reflected as additional paid-in-capital . in addition , the company granted the purchasers of the convertible notes the right to receive a seven-year warrant to purchase 131,675 shares of common stock at an exercise price equal to the conversion price of the convertible notes . with the completion of the ipo on september 22 , 2017 , these warrants were issued . these warrants were immediately exercisable and expire on september 22 , 2024 . these warrants are equity classified and the $ 776,717 fair value of the warrants is reflected as additional paid-in-capital . 55 in connection with the ipo , the company issued a five-year warrant to the underwriter . the warrant allows the underwriter to purchase up to 138,000 shares of common stock at $ 10.45 per share . this warrant was immediately exercisable and expires on september 19 , 2022 . this warrant is equity classified and the $ 784,111 fair value of the warrant is reflected as additional paid-in-capital . at december 31 , 2020 and 2019 , the company had warrants to purchase 353,585 shares of common stock outstanding , at a weighted average exercise price of $ 9.42 . story_separator_special_tag as we continue to expand clinical trials to evaluate efficacy of targeted therapies in cancer patients selected with one of our celsignia tests , the proportion of research and development expenses allocated to external spending will grow at a faster rate than expenses allocated to internal expenses . general and administrative general and administrative expenses consist primarily of salaries , benefits and stock-based compensation related to our executive , finance and support functions . other general and administrative expenses include professional fees for auditing , tax , and legal services associated with being a public company , director and officer insurance and travel expenses for our general and administrative personnel . sales and marketing sales and marketing expenses consist primarily of professional and consulting fees related to these functions . to date , we have incurred immaterial sales and marketing expenses as we continue to focus primarily on the development of our celsignia platform and corresponding celsignia tests . we expect to begin to incur increased selling and marketing expenses in anticipation of the commercialization of our first celsignia tests . these increased expenses are expected to include payroll-related costs as we add employees in the commercial departments , costs related to the initiation and operation of our sales and distribution network and marketing related costs . interest expense interest expense is the result of finance lease obligations . interest income interest income consists of interest income earned on our cash and cash equivalents . 41 results of operations comparison of the years ended december 31 , 2020 and 2019 replace_table_token_3_th research and development for the year ended december 31 , 2020 , our total research and development expenses increased approximately $ 1.41 million , or 23 % , to approximately $ 7.68 million from $ 6.27 million for the prior year . the increase primarily resulted from a $ 1.15 million increase in compensation related expenses , including approximately $ 0.49 million in non-cash stock-based compensation to support development of our celsignia platform . in addition , other research and development expenses increased $ 0.26 million due to clinical validation and laboratory studies , and operational and business development activities . conducting a significant amount of research and development is central to our business model . we plan to increase our research and development expenses for the foreseeable future as we seek to discover new cancer sub-types and to develop and validate additional celsignia tests to diagnose such sub-types . we also expect to incur increased expenses to support companion diagnostic business development activities with pharmaceutical companies as we develop additional celsignia tests . general and administrative for the year ended december 31 , 2020 , our total general and administrative expenses increased approximately $ 0.34 million , or 22 % , to approximately $ 1.87 million from $ 1.53 million for the prior year . the increase primarily resulted from a $ 0.28 million increase in compensation related expenses , including approximately $ 0.24 million of non-cash stock-based compensation . in addition , other general and administrative expenses increased $ 0.06 million primarily due to professional fees associated with being a public company . we anticipate that our general and administrative expenses will increase in future periods , reflecting both increased costs in connection with the potential future commercialization of celsignia tests , an expanding infrastructure , and increased professional fees associated with being a public company . interest expense for the years ended december 31 , 2020 and 2019 , interest expense is related to finance lease liabilities . interest income for the year ended december 31 , 2020 , interest income decreased approximately $ 0.36 million , or 82 % , to $ 0.08 million from $ 0.44 million for the prior year . the decrease was primarily the result of lower market interest rates . story_separator_special_tag style= `` border-spacing:0 ; font:10pt times new roman ; width:100 % `` > 43 recent accounting pronouncements from time to time new accounting pronouncements are issued by the financial accounting standards board , or fasb , or other standard setting bodies and adopted by us as of the specified effective date . unless otherwise discussed in note 2 to our financial statements included elsewhere in this annual report , we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption . critical accounting policies and use of estimates our management 's discussion and analysis of financial condition and results of operations is based on our financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states , or generally accepted accounted principles ( “ 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 expenses during the reporting periods . these items are monitored and analyzed by us for changes in facts and circumstances , and material changes in these estimates could occur in the future . we base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances ; the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . changes in estimates are reflected in reported results for the period in which they become known . actual results may differ materially from these estimates . our significant accounting policies are more fully described in note 2 to our financial statements included elsewhere in this annual report . of our significant accounting policies , we believe that the following is the most critical : stock-based compensation our stock-based compensation consists of common stock options and restricted stock issued to

non-cash expense items of approximately $ 2.15 million consisted of depreciation of approximately $ 0.39 million and stock-based compensation expense of approximately $ 1.76 million . net cash used in operating activities was approximately $ 6.0 million for the year ended december 31 , 2019 and consisted primarily of a net loss of approximately $ 7.36 million and working capital changes of approximately $ 0.06 million , adjusted for non-cash items of approximately $ 1.42 million . the working capital change was primarily due to approximately $ 0.19 million increase in payroll tax receivable , offset by a $ 0.11 million increase in accrued expenses . non-cash expense items of approximately $ 1.42 million consisted of depreciation of approximately $ 0.34 million , stock-based compensation expense of approximately $ 1.04 million and interest income of approximately $ 0.04 million . investing activities net cash used in investing activities for the year ended december 31 , 2020 was approximately $ 0.09 million and consisted of purchases of property and equipment . net cash provided by investing activities for the year ended december 31 , 2019 was approximately $ 8.53 million and consisted of approximately $ 8.91 million of net proceeds from investments in certificates of deposit and government securities ( u.s. treasury notes and u.s. government agency securities ) , adjusted by approximately $ 0.38 million in purchases of property and equipment . financing activities net cash provided by financing activities for the year ended december 31 , 2020 was approximately $ 0.14 million and primarily reflects net proceeds from the sale of shares of our common stock through the atm agreement and employee stock purchases . net cash provided by financing activities for the year ended december 31 , 2019 was approximately $ 0.26 million and consisted of proceeds from the exercise of common stock warrants and stock options , and employee stock purchases . off-balance sheet arrangements we do not currently have any off-balance sheet arrangements as defined in item 303 ( a ) ( 4 ) of regulation s-k. < table cellpadding= '' 0 ''

, m.b.a. 8/5/2019 8/5/2019 — — — — — 244,078 ( 3 ) 2,191,820 3/10/2020 8/5/2019 — 18,460 ( 4 ) 128,833 $ 2.18 3/9/2030 — — 8/21/2020 7/1/2020 9/1/2020 67,925 584,161 ( 5 ) $ 1.90 8/20/2030 — — christopher slapak , m.d . 8/21/2020 7/1/2020 8/1/2020 15,946 137,141 ( 5 ) $ 1.90 8/20/2030 — — 8/25/2020 7/30/2019 — 54,229 98,889 ( 6 ) $ 1.90 8/24/2030 — — tirtha chakraborty , ph.d. 9/25/2019 9/23/2019 — 14,451 31,794 ( 6 ) $ 1.36 9/24/2030 — — 3/10/2020 9/23/2019 — 7,628 16,782 ( 6 ) $ 2.18 3/9/2030 — — 8/21/2020 7/1/2020 10/1/2020 7,360 63,296 ( 5 ) $ 1.90 8/20/2030 — — 11/18/2020 11/16/2020 — 2,527 118,795 ( 6 ) $ 6.53 11/17/2030 — — ( 1 ) all equity awards were granted under our 2015 plan , the terms of which are described below under the subsection titled “ —equity incentive plans—2015 stock incentive plan . ” ( 2 ) this column represents the fair market value of a share of our common stock of $ 8.98 as of december 31 , 2020 ( the determination of the fair market value by our board of directors as of the most proximate date ) multiplied by the amount shown in the column “ stock awards—number of shares or units of stock that have not vested . ” ( 3 ) the shares were acquired pursuant to the exercise of unvested options granted to dr. ang on august 5 , 2019 and are subject to our right of repurchase upon dr. ang 's termination of service . the shares will be released from our repurchase right in equal monthly installments on the fifth day of each month through august 5 , 2023 , subject to continuous service with us as of each such date . the restricted shares are subject to vesting acceleration , as described in more detail below under the subsection titled “ —offer letters and potential payments upon termination or change in control . ” ( 4 ) twenty-five percent of the shares subject to the option vest on the first anniversary of the vesting commencement date , and thereafter the remaining shares subject to the option vest in 36 equal monthly installments on each monthly anniversary thereafter , subject to continuous service with us as of each such vesting date . the option is exercisable immediately with respect to all shares subject to the option granted on such date , subject to a repurchase right in favor of us which lapses as the option vests . as a result , this reflects the number of shares subject to the option that were exercisable and vested as of december 31 , 2020. the option is subject to vesting acceleration , as described in more detail below under the subsection titled “ —offer letters and potential payments upon termination or change in control . ” ( 5 ) the shares subject to the option vest in equal monthly installments beginning on the vesting commencement date , subject to continuous service as of the vesting cliff date set forth in the table above and further subject to continuous service as of each such vesting date . ( 6 ) twenty-five percent of the shares subject to the option vest on the first anniversary of the vesting commencement date , and thereafter the remaining shares subject to the option vest in 36 equal monthly installments on each monthly anniversary thereafter , subject to continuous service with us as of each such vesting date . 152 401 ( k ) plan we maintain a defined contribution retirement plan that provides eligible u.s. employees , including our named executive officers , with an opportunity to save for retirement . the plan is intended to qualify as a tax-qualified 401 ( k ) plan so that contributions to the 401 ( k ) plan , and income earned on such contributions , are not taxable to participants until withdrawn or distributed from the 401 ( k ) plan ( except in the case of contributions under the 401 ( k ) plan designated as roth contributions ) . eligible employees may defer eligible compensation on a pre-tax basis or make roth post-tax contributions , up to the statutorily prescribed annual limits on contributions under the code . we do not make matching or other contributions . employee contributions are allocated to each participant 's individual account and are then invested in selected investment alternatives according to the participant 's directions . employees are immediately and fully vested in their contributions . health and welfare benefits ; perquisites our named executive officers are eligible to participate in our other benefit programs on the same basis as all employees of our company . we generally do not provide perquisites or personal benefits except in limited circumstances . severance and change in control benefits plan in january 2021 , we adopted our executive severance and change in control benefits plan ( the “ severance plan ” ) , for certain of our employees , including each of our executive officers . under the terms of the severance plan , if the employment of any of our officers or vice presidents is terminated by us without cause or by the officer for good reason prior to or more than 12 months following a change in control , each as defined in the severance plan , and subject to the employee 's execution of a general release of potential claims against us and a non-competition agreement , we have agreed to continue to pay the employee 's then-current base salary for a period of 12 months , in the case of our c-level officers , and six months , in the case of our vice presidents , and to pay premiums for continuation of health coverage under cobra for up to 12 months , in the case of our c-level officers , and up to six months story_separator_special_tag story_separator_special_tag style= `` margin-bottom:0pt ; margin-top:0pt ; margin-left:6.54 % ; text-indent:0 % ; font-size:6pt ; `` > net cash provided by financing activities was approximately $ 82.5 million for the year ended december 31 , 2020 , which was primarily due to proceeds received from the issuance of shares of our preferred stock . net cash provided by financing activities was $ 17.7 million for the year ended december 31 , 2019 , consisting primarily of proceeds from the issuance of shares of our preferred stock . contractual obligations and other commitments in december 2019 , we entered into an operating lease for corporate office and laboratory space in cambridge , massachusetts , and began occupying the space in june 2020 under a lease agreement that expires in june 2030. future minimum lease commitments under this lease through june 2030 are $ 28.0 million . in march 2020 , we entered into an operating lease for certain animal care space in cambridge , massachusetts , and began occupying the space in april 2020 under a lease agreement that expires in march 2022. future minimum lease commitments under this lease through march 22 are $ 0.3 million . we have entered into license agreements with certain parties . such arrangements require ongoing payments , including payments upon the achievement of certain development , regulatory and commercial milestones , receipt of sublicense income , as well as royalties on commercial sales . payments under these arrangements are expensed as incurred . during the year ended december 31 , 2020 , we incurred expenses of $ 0.1 million in milestone payments under our license agreement with the trustees of columbia university in the city of new york . we also incurred $ 0.4 million in license issue fees associated with our license with the national cancer institute of the national institutes of health during the year ended december 31 , 2020. this summary does not include payments that may become due under these agreements as they are cancellable at will with 90 days ' notice . we also have agreements with certain vendors for various services , including services related to clinical operations and support , which we are not contractually able to terminate for convenience and avoid any and all future obligations to the vendors . under such agreements , we are contractually obligated to make certain payments to vendors to reimburse them for their unrecoverable outlays incurred prior to cancellation . the exact amounts of 139 such obligations are dependent on the timing of termination and the exact terms of the relevant agreement and can not be reasonably estimated . we do not include these payments in this summary as they are not fixed and estimable . critical accounting policies and significant judgments and estimates our management 's discussion and analysis of financial condition and results of operations is based on our consolidated financial statements . our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the united states . the preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , costs and expenses , and the disclosure of contingent assets and liabilities in our consolidated financial statements . we base our estimates on historical experience , known trends and events and various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . we evaluate our estimates and assumptions on an ongoing basis . our actual results may differ from these estimates under different assumptions or conditions . while our significant accounting policies are described in more detail in note 2 to our audited consolidated financial statements included elsewhere in this annual report , we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our consolidated financial statements . accrued research and development expenses as part of the process of preparing our consolidated financial statements , we are required to estimate our accrued research and development expenses as of each balance sheet date . this process involves reviewing open contracts and purchase orders , communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs . the majority of our service providers invoice us in arrears for services performed , on a pre-determined schedule or when contractual milestones are met ; however , some require advance payments . we make estimates of our accrued expenses as of each balance sheet date in the consolidated financial statements based on facts and circumstances known to us at that time . we periodically confirm the accuracy of the estimates with the service providers and make adjustments if necessary . determination of the fair value of equity-based awards we measure stock options and other stock-based awards granted to directors , employees and non-employees based on their fair value on the date of the grant and recognize the corresponding compensation expense of those awards over the requisite service period , which is generally the vesting period of the respective award . we have only issued stock options and restricted share awards with service-based vesting conditions and record the expense for these awards using the straight-line method . we determine the fair value of restricted stock awards granted based on the fair value of our common stock . we estimate the fair value of stock option awards granted using the black-scholes option-pricing model , which uses as inputs the fair value of our common stock and subjective assumptions we make , including the expected stock price volatility , the expected term of the award , the

developing pharmaceutical products , including conducting preclinical studies and clinical trials , is a time-consuming , expensive and uncertain process that takes years to complete , and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any product candidate for which we may obtain marketing approval . in addition , our product candidates , if approved , may not achieve commercial success . our commercial revenues , if any , will be derived from sales of drugs that we do not expect to be commercially available for at least several years , if ever . as a result , we will need substantial additional funding to support our continuing operations and pursue our growth strategy . until such time as we can generate significant revenue from product sales , if ever , we expect to finance our operations through the public or private sale of equity , government or private party grants , debt financings or other capital sources , including potential collaborations with other companies or other strategic transactions . to the extent that we raise additional capital through the sale of equity or convertible debt securities , the ownership interest of our shareholders will be or could be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders . debt financing and equity financing , if available , may involve agreements that include covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . if we are unable to obtain additional funding , we could be forced to delay , reduce or eliminate some or all of our research and development programs , product portfolio expansion or any commercialization efforts , which could adversely affect our business prospects , or we may be unable to continue operations . if we raise funds through strategic collaborations or other similar arrangements with third parties , we may have to relinquish valuable rights to our platform technology , future revenue streams , research programs or product candidates or may have to grant licenses on terms that may not be favorable to us and or may reduce the value of our common stock . our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and disruptions to and volatility in the credit and financial markets in the united states and worldwide resulting from the ongoing covid-19 pandemic or otherwise . because of the numerous risks and uncertainties associated with product development , we can not predict the timing or amount of increased expenses , and there is no assurance that we will ever be profitable or generate positive cash

( 5 ) property and equipment property and equipment consisted of the following : replace_table_token_14_th depreciation and amortization expense for the years ended december 31 , 2014 and 2013 was $ 15,000 and $ 22,000 . 65 lipocine inc. and subsidiaries notes to consolidated financial statements december 31 , 2014 and 2013 ( 6 ) income taxes ( a ) income tax expense income tax expense consists of : replace_table_token_15_th ( b ) tax rate reconciliation income tax expense ( benefit ) was $ 200 and ( $ 55,000 ) for the years ended december 31 , 2014 and 2013 and differed from the amounts computed by applying the u.s. federal income tax rate of 34 % to pretax income from continuing operations as a result of the following : replace_table_token_16_th 66 lipocine inc. and subsidiaries notes to consolidated financial statements december 31 , 2014 and 2013 ( 6 ) income taxes – ( continued ) ( c ) significant components of deferred taxes the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at december 31 , 2014 and 2013 are presented below . replace_table_token_17_th on december 19 , 2014 , the tax increase prevention act of 2014 , which includes an extension of the research and experimentation tax credit for amounts paid or incurred through december 31 , 2014 , retroactive to january 1 , 2014 , with no substantive changes to the credit , was signed into law . the valuation allowance for deferred tax assets as of december 31 , 2014 and 2013 was $ 20.9 million and $ 11.7 million . the net change in the valuation allowance was an increase of $ 9.2 million and $ 41,000 in 2014 and 2013. a valuation allowance has been provided for the full amount of the company 's net deferred tax assets as the company believes it is more likely than not that these benefits will not be realized . in assessing the realizability of deferred tax assets , management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized . the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible . management considers the scheduled reversal of deferred tax liabilities ( including the impact of available carryback and carryforward periods ) , projected future taxable income , and tax planning strategies in making this assessment . during the year ended december 31 , 2013 , the company experienced a change in ownership , as defined by the internal revenue code , as amended ( the “ code ” ) under section 382. a change of ownership occurs when ownership of a company increases by more than 50 percentage points over a three-year testing period of certain stockholders . as a result of this ownership change we determined that our annual limitation on the utilization of our federal net operating loss ( “ nol ” ) and credit carryforwards is approximately $ 1.1 million per year . we will only be able to utilize $ 20.2 million of our pre-ownership change nol carryforwards and will forgo utilizing $ 5.5 million of our pre-ownership change nol carryforwards and $ 1.2 million of our pre-change credit carryforwards as a result of this ownership change . we do not account for forgone nol and credit carryovers in our deferred tax assets and only account for the nol and credit carryforwards that will not expire unutilized as a result of the restrictions of code section 382 . 67 lipocine inc. and subsidiaries notes to consolidated financial statements december 31 , 2014 and 2013 ( 6 ) income taxes – ( continued ) as of december 31 , 2014 , we had nol and research and development credit carryforwards for u.s. federal income tax reporting purposes of approximately $ 44.1 million and $ 911,000 , respectively . approximately $ 10.2 million of the nols will begin to expire in 2023 with the balance expiring from 2024 through 2034 and the research and development credits will expire in 2034. we also have state nol and research and development credit carry-forwards of approximately $ 50.0 million and $ 508,000 , respectively . approximately $ 12.4 million of the company 's state nols expire in 2018 with the remaining balance expiring from 2019 through 2029. the state research and development credits expire in 2023 through 2028. the company 's federal and state income tax returns for december 31 , 2011 through 2014 are open tax years . a reconciliation of the beginning and ending amount of total unrecognized tax contingencies , excluding interest and penalties , for the years ended december 31 , 2014 and 2013 are as follows : december 31 2014 2013 balance , beginning of year $ - $ 28,304 balance , end of year $ - $ - the unrecognized tax contingency has been reversed in the 2013 tax provision to reflect the company 's ability to afford itself of tax law which negates the contingency . ( 7 ) leases on august 6 , 2004 , the company assumed a noncancelable operating lease for office space and laboratory facilities . on may 6 , 2014 , the company modified and extended the lease through february 28 , 2018. future minimum lease payments under the noncancelable operating lease as of december 31 , 2014 are : replace_table_token_18_th the company 's rent expense was $ 327,000 and $ 356,000 for the years ended december 31 , 2014 and 2013 . ( 8 ) stockholders ' equity ( a ) issuance of common stock on july 24 , 2013 , the company issued 152,241 shares of common stock to an existing shareholder for the termination of certain rights , including an anti-dilutive provision , contained in its stock purchase agreement . story_separator_special_tag 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 : replace_table_token_3_th research and development expenses the increase in research and development expenses in the year ended december 31 , 2014 was primarily due to an increase in external service provider costs of $ 9.9 million and an increase of $ 443,000 in internal personnel costs . the increase in external service provider costs was primarily due to an increase of $ 10.9 million in clinical research costs and an increase of $ 106,000 in consulting expenses for clinical and regulatory advisors , primarily related to our phase 3 clinical trial for lpcn 1021. the increase in personnel costs included $ 167,000 in severance payments to a terminated officer . these increases was partially offset by a reduction in manufacturing and drug purchase costs of $ 1.1 million which were incurred in 2013 and not repeated in 2014. general and administrative expenses the increase in general and administrative expenses in the year ended december 31 , 2014 was primarily due to an increase in equity compensation of $ 637,000 due primarily to accelerated vesting and or extension of exercise dates for retiring directors and a terminated officer ; increased compensation expense of $ 312,000 for new administrative personnel including a full year of salary of our chief financial officer ; other compensation increases of $ 135,000 , including $ 92,000 in severance payments to a terminated officer , $ 24,000 in employer 401 ( k ) plan match which began in april 2014 , and $ 19,000 in salary increases in 2014 ; increased director and officer liability insurance expense of $ 99,000 for the first full year as a public company ; $ 67,000 for recruiting expense ; and an increase of $ 69,000 for a higher allocation of overhead expenses based on a higher allocation of direct labor hours for general and administrative personnel relative to research and development personnel . 47 reverse merger costs reverse merger costs incurred during the year ended december 31 , 2013 relate to the merger with marathon bar which closed on july 24 , 2013 , and is comprised of $ 340,000 for the cost of the marathon bar shell , $ 527,000 in legal services , $ 98,000 in accounting services , $ 38,000 in printer fees and $ 9,000 in other miscellaneous expenses . settlement for termination of certain rights in stock purchase agreement settlement for termination of certain rights in stock purchase agreement incurred during the year ended december 31 , 2013 relates to 152,241 shares of common stock issued to an existing shareholder on july 24 , 2013 for the termination of certain rights included in a stock purchase agreement , including an anti-dilution provision . other income , net the increase in other income , net , primarily reflects increased interest earned on a larger balance in cash and cash equivalents in 2014 as a result of our offerings of common stock in july 2013 and november 2013. income tax benefit ( expense ) the increase in income tax expense relates to a reversal of accrued income taxes payable in 2013 due to the reversal of an uncertain tax position which was not repeated in 2014. story_separator_special_tag additional capital through debt financing , we may be subject to covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . if we are unable , for any reason , to raise needed capital , we will have to delay research and development programs , liquidate assets , dispose of rights , commercialize or license products or product candidates earlier than planned or on less favorable terms than desired or reduce or cease operations . replace_table_token_4_th operating activities cash used in operating activities was $ 17.3 million for the year ended december 31 , 2014 , and $ 8.6 million for the year ended december 31 , 2013 , an increase of $ 8.7 million . included in the increase was a $ 8.8 million increase in net loss , a $ 913,000 decrease in non-cash expense for settlement for termination of certain rights in stock purchase agreement and a $ 1.1 million decrease in accounts payable . the changes were partially offset by a $ 914,000 increase in stock-based compensation , a $ 1.2 million increase in prepaid expenses and other assets , a $ 922,000 increase in accrued expenses and a $ 55,000 decrease in income taxes payable . investing activities investing activities consist primarily of the refund of a rental deposit and purchases of property and equipment . we received $ 21,000 in a refund of our rental deposit when we extended our property lease in may 2014. additionally , we acquired $ 60,000 of property and equipment in the year ended december 31 , 2014 compared to $ 1,000 in the year ended december 31 , 2013. financing activities financing activities consist primarily of net proceeds from the sale of common stock , the exercise of stock options and the purchase of treasury stock . cash provided by ( used in ) financing activities was $ ( 255,000 ) and $ 48.5 million , respectively , during the year ended december 31 , 2014 and 2013. during year ended december 31 , 2014 , we paid accrued common stock offering costs of $ 271,000 related to the sale of common stock in an underwritten transaction in november and december 2013. during the year ended december 31,2014 , we also received $ 16,000 from the exercise of stock options compared to $ 11,000 from the exercise of stock options during the year ended december 31 , 2013. additionally during the year ended december 31 , 2013 , we repurchased $ 53,000 of treasury stock and received $ 48.5 million from the

sharing or royalties , if any , from our potential products ; 48 the cost of preparing , filing , prosecuting , defending and enforcing any patent claims and other intellectual property rights ; the extent to which we acquire or invest in businesses , products or technologies , although we currently have no commitments or agreements relating to any of these types of transactions ; and the extent to which we grow significantly in the number of employees or the scope of our operations . funding may not be available to us on acceptable terms , or at all . if we are unable to obtain adequate financing when needed , we may have to delay , reduce the scope of or suspend one or more of our clinical studies , research and development programs or commercialization efforts . we may seek to raise any necessary additional capital through a combination of public or private equity offerings , debt financings , collaborations , strategic alliances , licensing arrangements and other marketing and distribution arrangements . to the extent that we raise additional capital through marketing and distribution arrangements or other collaborations , strategic alliances or licensing arrangements with third parties , we may have to relinquish valuable rights to our product candidates , future revenue streams , research programs or product candidates or to grant licenses on terms that may not be favorable to us . if we do raise additional capital through public or private equity offerings , the ownership interest of our existing stockholders will be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders ' rights . if we raise

we have tried to identify forward-looking statements by using words such as “anticipate , ” “believe , ” “expect , ” “intend , ” “trend , ” “will , ” “continue to , ” 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 , 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 . as used in this annual report on form 10-k , the terms “we , ” “us , ” “our , ” “the company , ” and “cec” refer to career education corporation and our wholly-owned subsidiaries . the terms “college , ” “institution , ” and “university” each refer to an individual , branded , proprietary educational institution , owned by us and including its campus locations . the term “campus” refers to an individual main or branch campus operated by one of our colleges , institutions or universities . overview our institutions include , among others , american intercontinental university ( “aiu” ) ; brooks institute ; colorado technical university ( “ctu” ) ; harrington college of design ; le cordon bleu north america ( “lcb” ) ; and sanford-brown institutes and colleges ( “sbi” and “sbc , ” respectively ) . through our institutions , we are committed to providing high-quality education , enabling students to graduate and pursue rewarding career opportunities . during 2014 , we announced the teach-out of three additional sanford-brown campuses : chicago , las vegas and orlando . these campuses are now included in the transitional group segment . during 2014 , we also completed the teach-out of 20 transitional group campuses and one ctu campus as well as sold two campuses ( one previously reported in the career colleges segment and one previously reported in the transitional group segment ) . additionally , during the fourth quarter of 2014 , our board of directors approved a plan to sell our 16 culinary arts campuses ( “lcb” ) . our decision to pursue the divestiture of lcb was the result of an ongoing portfolio review undertaken to evaluate the strategic direction of the company . as a result of the decision to sell lcb , the assets and liabilities of the entities to be sold are classified as held for sale within discontinued operations as of december 31 , 2014. all prior period results have been recast to reflect our reporting segments on a comparable basis . we operate in a highly regulated industry , which has significant impacts on our business and creates risks and uncertainties . we encourage you to review item 1 , “business , ” and item 1a , “risk factors , ” to learn more . the following management 's discussion and analysis of financial condition and results of operations ( “md & a” ) should be read in conjunction with the company 's consolidated financial statements and the notes thereto appearing elsewhere in this annual report on form 10-k. the md & a is intended to help investors understand the results of operations , financial condition and present business environment . the md & a is organized as follows : 2014 overview and 2015 outlook consolidated results of operations 60 segment results of operations summary of critical accounting policies and estimates liquidity , financial position and capital resources note regarding non-gaap measures the company believes it is useful to present non-gaap financial measures which exclude certain significant items as a means to understand the performance of its core business . as a general matter , the company uses non-gaap financial measures in conjunction with results presented in accordance with gaap to help analyze the performance of its core business , assist with preparing the annual operating plan , and measure performance for some forms of compensation . in addition , the company believes that non-gaap financial information is used by analysts and others in the investment community to analyze the company 's historical results and to provide estimates of future performance and that failure to report non-gaap measures could result in a misplaced perception that the company 's results have underperformed or exceeded expectations . we believe adjusted ebitda allows us to compare our current operating results with corresponding historical periods and with the operational performance of other companies in our industry because it does not give effect to potential differences caused by items we do not consider reflective of underlying operating performance . we also present adjusted ebitda because we believe it is frequently used by securities analysts , investors and other interested parties as a measure of performance . in evaluating adjusted ebitda , investors should be aware that in the future we may incur expenses similar to the adjustments presented below . our presentation of adjusted ebitda should not be construed as an inference that our future results will be unaffected by expenses that are unusual , non-routine or non-recurring . story_separator_special_tag administrative expense was lower as compared to the prior year primarily due to both an $ 8.6 million insurance recovery recorded in the current year and 67 approximately $ 11.8 million of legal settlements recorded in the prior year as compared to approximately $ 2.5 million in the current year as well as our continued focus to reduce costs throughout the organization . the lower advertising expense was driven by operational changes within marketing to continue to improve overall efficiency . bad debt expense incurred by each of our segments during the years ended december 31 , 2014 , 2013 and 2012 was as follows ( dollars in thousands ) : replace_table_token_17_th the decrease in bad debt expense was primarily driven by a $ 7.5 million adjustment recorded related to students who withdraw from one of our institutions prior to completing their program . excluding the decrease in bad debt expense related to this adjustment , bad debt expense increased approximately $ 3.0 million primarily due to an increase in the number of payment plans for students within our university segments as well as a slight increase in our reserve rates due to historical performance . goodwill and asset impairment during 2014 , we recorded approximately $ 14.7 million and $ 2.2 million of asset and trade name impairment charges , respectively . approximately $ 14.5 million of the asset impairment charges were recorded within career colleges to reflect the current estimated fair values of certain leased locations based on the related undiscounted future cash flows . the $ 2.2 million trade name impairment was recorded within career colleges related to the sanford-brown trade name . see note 7 “property and equipment” and note 9 “goodwill and other intangible assets” to our consolidated financial statements for additional information . operating loss the operating loss reported for the current year decreased $ 8.1 million or 10.1 % as compared to the prior year . decreases within operating expenses , primarily due to reorganization efforts to reduce costs , lower legal settlement expenses as compared to the prior year period , operational efficiencies instituted across the organization within academics , advertising and admissions as well as strategic decisions made related to optimization of facilities , have contributed to operating margin stabilization . the current year included increased asset impairment charges related to trade name and fixed asset impairments within our career colleges segment . provision for ( benefit from ) income taxes as of december 31 , 2014 , we reported a total deferred tax valuation allowance of $ 150.4 million within our consolidated balance sheet , an increase of $ 67.5 million from december 31 , 2013 as a result of the inability to record an income tax benefit related to the current year losses . we have determined that it is necessary to continue to record this valuation allowance against our net deferred tax assets as of december 31 , 2014. the effective tax provision for the current year was approximately $ 3.7 million , resulting primarily from discrete 68 items for the recent closure of a federal tax audit for the years 2008 through 2012. we will continue to evaluate our valuation allowance in future periods for any change in circumstances that may cause a change in judgment about the realizability of the deferred tax assets , but expect to continue to record a valuation allowance against our deferred tax assets at least through 2015. loss from discontinued operations the results of operations for campuses that have ceased operations , are held for sale or institutions that were sold , and are considered distinct operations as defined under fasb asc topic 205 – presentation of financial statements , are presented within discontinued operations . during the current year , we completed the teach-out of 20 transitional group campuses and one ctu campus as well as sold two campuses ( one previously reported in the career colleges segment and one previously reported in the transitional group segment ) . as a result , all current and prior periods reflect the sold and fully taught out campuses as components of discontinued operations . see note 4 “discontinued operations” to our consolidated financial statements for further discussion . asset held for sale during the fourth quarter of 2014 , our board of directors approved a plan to sell our 16 culinary arts campuses ( “lcb” ) . our decision to pursue the divestiture of lcb was the result of an ongoing portfolio review undertaken to evaluate the strategic direction of the company . as a result of the decision to sell lcb , the results of operations for the entities to be sold are classified within loss from discontinued operations as of december 31 , 2014. prior period results have been recast on a comparable basis . revenue , loss from discontinued operations , new student enrollments and total student enrollments for our lcb asset held for sale during the years ended december 31 , 2014 , 2013 and 2012 was as follows ( dollars in thousands ) : replace_table_token_18_th current year revenue for our assets held for sale declined by $ 4.9 million or 2.8 % as compared to the prior year primarily due to a $ 2.9 million decrease in revenue for an adjustment related to revenue recognition for students who withdraw from one of our institutions prior to completion of their program . this decline in revenue was partially offset with a $ 2.4 million decrease in bad debt expense for the amount we previously had deemed uncollectable related to the revenue earnings for these students . the decrease in revenue was partially offset with increased revenue related to the reintroduction of the associates degree program , which began to positively impact the prior year revenue comparison in the latter half of 2014. total student enrollments were positively impacted by the reintroduction of this program beginning in late 2012 due to the demand from students and employers . this

the revolving credit facility under the credit agreement is scheduled to mature on june 30 , 2016 and replaced our previous credit agreement entered in to on december 30 , 2013. the credit agreement , which includes certain financial covenants , requires that fees and interest are payable monthly and quarterly in arrears , respectively , and principal is payable at maturity . as of december 31 , 2014 , we borrowed $ 10.0 million under the credit agreement . see note 11 “credit agreement” to our consolidated financial statements for additional information . restricted cash . as of december 31 , 2014 , we had approximately $ 22.9 million of restricted cash related to collaterization of borrowings under our credit agreement and certificates of deposit to secure outstanding letters of credit . as of december 31 , 2013 , our restricted cash balances approximated $ 12.6 million related to securitization of outstanding letters of credit . 82 contractual obligations as of december 31 , 2014 , future minimum cash payments due under contractual obligations , for our non-cancelable operating lease arrangements , were as follows ( dollars in thousands ) : replace_table_token_22_th ( 1 ) amounts exclude certain costs associated with real estate leases , such as expense for common area maintenance ( i.e . “cam” ) and taxes , as these amounts are undeterminable at this time and may vary based on future circumstances . ( 2 ) amounts provided are for executed sublease arrangements . operating lease obligations . we lease most of our administrative and educational facilities and equipment under non-cancelable operating leases expiring at various dates through 2023. lease terms generally range from five to ten years with one to two renewal options for extended terms . the amounts included in the table above represent future minimum lease payments for non-cancelable operating leases for continuing operations and discontinued operations . off-balance sheet arrangements . as of december 31 , 2014 , we were not a party to any off-balance sheet financing or contingent payment arrangements , nor do we have any unconsolidated subsidiaries .

credit risk in the portfolio can also materialize as increased capital requirements as assets migrate into lower credit qualities over time . the effect of rating migration on fgl 's capital requirements is also dependent on the economic cycle and increased asset impairment levels may go hand in hand with increased asset related capital requirements . fgl seeks to manage the risk of default and rating migration by applying disciplined credit evaluation and underwriting standards and limiting allocations to lower quality , higher risk investments . in addition , fgl diversifies its exposure by issuer and country , using rating based issuer and country limits . fgl also sets investment constraints that limit its exposure by industry segment . to limit the impact that credit risk can have on earnings and capital adequacy levels , fgl has portfolio-level credit risk constraints in place . limit compliance is monitored on a daily or , in some cases , monthly basis . in connection with the use of call options , fgl is exposed to counterparty credit risk-the risk that a counterparty fails to perform under the terms of the derivative contract . fgl has adopted a policy of only dealing with credit worthy counterparties and obtaining sufficient collateral where appropriate , as a means of mitigating the financial loss from defaults . the exposure and credit rating of the counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst five different approved counterparties to limit the concentration in one counterparty . fgl 's policy allows for the purchase of derivative instruments from counterparties and or clearinghouses that meet the required qualifications under the iowa code . the internal credit department reviews the ratings of all the counterparties periodically . collateral support documents are negotiated to further reduce the exposure when deemed necessary . information regarding fgl 's exposure to credit loss on the call options it holds is presented in the following table : replace_table_token_30_th ( a ) an asterisk ( * ) represents credit ratings that were not available . fgl also has credit risk related to the ability of reinsurance counterparties to honor their obligations to pay the contract amounts under various agreements . to minimize the risk of credit loss on such contracts , fgl diversifies its exposures among many reinsurers and limit the amount of exposure to each based on credit rating . fgl also generally limits its selection of counterparties with which fgl does new transactions to those with an “ a- ” credit rating or above or that are appropriately collateralized and provide credit for reinsurance . when exceptions are made to that principle , fgl ensures that it obtains collateral to mitigate its risk of loss . 116 the following table presents fgl 's reinsurance recoverable balances and financial strength ratings for its four largest reinsurance recoverable balances as of september 30 , 2016 ( in millions ) : financial strength rating parent company/principal reinsurers reinsurance recoverable am best s & p moody 's wilton reassurance $ 1,523.3 a not rated not rated front street re 1,119.5 not rated not rated not rated scottish re 153.2 not rated not rated not rated security life of denver 142.6 a a a2 london life 104.3 a not rated not rated in the normal course of business , certain reinsurance recoverables are subject to reviews by the reinsurers . fgl is not aware of any material disputes arising from these reviews or other communications with the counterparties , and , therefore , as of september 30 , 2016 , no allowance for uncollectible amounts was recorded . equity price risk fgl is primarily exposed to equity price risk through certain insurance products , specifically those products with guaranteed minimum withdrawal benefits . fgl offers a variety of fia contracts with crediting strategies linked to the performance of indices , such as the s & p 500 index , dow jones industrials or the national association of securities dealers automated quotation ( “ nasdaq ” ) 100 index . the estimated cost of providing guaranteed minimum withdrawal benefits incorporates various assumptions about the overall performance of equity markets over certain time periods . periods of significant and sustained downturns in equity markets , increased equity volatility , or reduced interest rates could result in an increase in the valuation of the future policy benefit or policyholder account balance liabilities associated with such products , resulting in a reduction in fgl 's net income . the rate of amortization of intangibles related to fia products and the cost of providing guaranteed minimum withdrawal benefits could also increase if equity market performance is worse than assumed . to seek to economically hedge the equity returns on these products , fgl purchases derivatives to hedge the fia equity exposure . the primary way fgl hedges fia equity exposure is to purchase over the counter equity index call options from broker-dealer derivative counterparties approved by our internal credit department . the second way fgl hedges fia equity exposure is by purchasing exchange traded equity index futures contracts . fgl 's hedging strategy has enabled it to reduce its overall hedging costs and achieve a high correlation of returns on the call options purchased relative to the index credits earned by the fia contractholders . the majority of the call options are one-year options purchased to match the funding requirements underlying the fia contracts . these hedge programs are limited to the current policy term of the fia contracts , based on current participation rates . future returns , which may be reflected in fia contracts ' credited rates beyond the current policy term , are not hedged . fgl attempts to manage the costs of these purchases through the terms of its fia contracts , which permit it to change caps or participation rates , subject to certain guaranteed minimums that must be maintained . story_separator_special_tag utilization of a portion of the nol , capital loss and tax credit carryforwards of hrg and spectrum brands are subject to limitations under internal revenue code ( “ irc ” ) sections 382 and 383. such limitations resulted from ownership changes of more than 50 percentage points over a three-year period . when consummated , the fgl merger is expected to result in a significant amount of tax attribute carryforwards to be realized . as a result , in fiscal 2016 , we reversed a significant portion of our valuation allowance previously recorded against tax attribute carryforwards that are expected to be realized against the tax effects of the fgl merger . see part i. item 1a . risk factor - risks related to hrg - “ hrg and certain of its subsidiaries , including spectrum brands and fgl , may not be able to fully utilize their net operating loss and other tax carryforward ; restrictions in hrg 's certificate of incorporation intended to protect net operating losses and other tax attributes may limit transfer of hrg 's securities . ” 85 ( loss ) income from discontinued operations , net of tax . discontinued operations include fgl 's and compass ' results from operations that were previously reported in our insurance segment and our former energy segment , respectively . loss from discontinued operations , net of tax for fiscal 2016 was $ 224.3 million compared to $ 221.5 million for fiscal 2015 . the $ 2.8 million increase in loss from discontinued operations , net of tax was primarily driven by a decrease in income attributable to fgl of $ 412.2 million , partially offset by an increase in income attributable to compass of $ 409.4 million . the decrease in income of $ 412.2 million attributable to fgl was driven by a write-down of the carrying value of the assets of business held for sale to fair value less cost to sell of $ 362.8 million ( mostly due to the increase in unrealized gains , net of offsets in fgl 's investment portfolio ) . such write-down could be partially reversed if the carrying value of fgl decreases in future reporting periods . if the fgl merger is consummated , the amount of aoci related to fgl will be recognized through ( loss ) income from discontinued operations on the statement of operations and could result in a gain from discontinued operations . in addition , there was a decrease in net income attributable to fgl 's operations of $ 34.2 million which was driven primarily by a decrease in fair value of fgl 's reinsurance related embedded derivative resulting from an increase in the fair value of the underlying assets held in the funds withheld portfolio . partially offsetting these decreases were increases recognized by fgl in net investment income due to increased average assets under management as well as higher earned yields from repositioning activities , tender offer consideration and bond prepayment income ; and insurance and investment product fees due to increases in rider fees on fia policies and in cost of insurance charges on universal life policies . also attributing to the decrease in fgl 's net income in fiscal 2016 was $ 15.2 million of income tax expense primarily related to the establishment of a deferred tax liability of $ 367.9 million at september 30 , 2016 as a result of classifying hrg 's ownership interest in fgl as held for sale , partially offset by the recognition of a $ 94.7 million deferred tax asset related to realized capital losses primarily from the compass sale and $ 258.0 million reduction of valuation allowances on hrg 's net operating and capital loss carryforwards expected to offset the tax effects of the fgl merger . the $ 409.4 million increase in income attributable to compass was primarily due to a decrease of ceiling test impairments in fiscal 2016 of $ 391.9 million year over year ; a gain on sale of oil and gas properties of $ 105.6 million in fiscal 2016 ; and $ 53.6 million gain on disposal of compass ; partially offset by a gain upon gaining control of an equity method investment of $ 141.2 million in fiscal 2015 . loss from discontinued operations , net of tax for fiscal 2015 was $ 221.5 million compared to income from discontinued operations , net of tax of $ 87.3 million for fiscal 2014 . the $ 308.8 million increase in loss from discontinued operations , net of tax was primarily driven by an increase attributable to compass of $ 300.9 million due to higher ceiling test impairments in fiscal 2015 and lower prices of oil , natural gas and natural gas liquids and natural production declines , partially offset by a gain upon gaining control of an equity method investment . noncontrolling interest . the net income attributable to noncontrolling interest reflects the share of the net income of our subsidiaries , which are not wholly-owned , attributable to the noncontrolling interest . such amount varies in relation to such subsidiary 's net income or loss for the period and the percentage interest not owned by hrg . preferred stock dividends and accretion . while outstanding , hrg 's preferred stock dividends and accretion consisted of ( i ) a cumulative quarterly cash dividend at an annualized rate of 8 % ; ( ii ) a quarterly non-cash principal accretion , which accrued under certain circumstances ; ( iii ) accretion of the carrying value of the preferred stock , which was discounted by the bifurcated equity conversion feature and issuance costs ; and ( iv ) any gain or loss realized upon the conversion of the preferred stock . as a result of the conversion of hrg 's preferred stock in the third quarter of fiscal 2014 , hrg no longer recognizes preferred dividends and accretion . on may 15 , 2014 , the company elected

partially offsetting these cash inflows was cash used for ( i ) the repayment of debt , including tender and call premiums of $ 3.1 billion ; ( ii ) $ 49.6 million used for the purchases of shares of spectrum brands as well as on additional interest in coramerica ; ( iii ) payment of dividends by our partially owned subsidiaries to noncontrolling interest holders of $ 31.0 million ; ( iv ) common stock repurchases of $ 22.2 million ; and ( v ) share-based award tax withholding payments of $ 21.0 million . cash used in financing activities during fiscal 2014 was $ 147.0 million primarily driven by ( i ) repayment of debt , including tender and call premiums of $ 770.9 million ; ( ii ) cash used for payment of contractholder account withdrawals , net of contractholder account deposits of $ 135.2 million ; ( iii ) common stock repurchases of $ 65.8 million ; ( iv ) share-based award tax withholding payments of $ 31.5 million ; ( v ) payment of dividends on preferred stock of $ 28.6 million ; and ( vi ) payment of dividends by our partially owned subsidiaries to noncontrolling interest holders of $ 26.0 million . this was offset by the proceeds 98 from issuance of debt , net of financing costs of $ 917.5 million to fund certain acquisitions , organic growth and refinance debt with lower interest rates . debt financing activities at september 30 , 2016 , hrg and its subsidiaries were in compliance with their respective covenants under their respective debt documents . see note 15 , debt , to our consolidated financial statements included in part iv - item 15. exhibits , financial statements and schedules for additional information regarding the company and its subsidiaries ' debt activities during fiscal 2016 . equity financing activities during fiscal 2016 , we granted shares and restricted stock awards representing approximately 99 thousand shares to our employees , our directors , and our consultants . all vesting dates of grants made to our employees are subject to the recipient 's continued employment with us , except as otherwise permitted by our board of directors , or in certain cases if the employee is terminated without cause or resigns for good reason . the total market value of the restricted shares on the date of grant was approximately $ 1.4 million , a portion of which represented unearned restricted stock-based compensation . unearned compensation is amortized to expense over the appropriate vesting

( 2 ) a person is deemed to be a beneficial owner of securities that can be acquired by such person within 60 days upon the exercise of options and warrants or conversion of convertible securities . each beneficial owner 's percentage ownership is determined by assuming that options , warrants and convertible securities that are held by such person ( but not held by any other person ) and that are exercisable or convertible within 60 days have been exercised or converted . except as otherwise indicated , and subject to applicable community property and similar laws , each of the persons named has sole voting and investment power with respect to the shares shown as beneficially owned . ( 3 ) all percentages are determined based on 15,950,256 common shares outstanding as of the march 28 , 2019 . ( 4 ) includes 6,827 common shares owned by mr. villano 's wife . mr. villano disclaims beneficial ownership of the 6,827 common shares owned by his wife for the purposes of section 13 ( d ) or 13 ( g ) of the exchange act . ( 5 ) includes 394,718 and 183,532 common shares owned by ultimate brands inc. and union news of new haven , inc. , respectively , each a corporation of which he is the founder and chief executive officer and over which he has full voting and dispositive control , and 3,251 common shares owned by his daughter . mr. villano disclaims beneficial ownership of the 3,251 common shares owned by his daughter for the purposes of section 13 ( d ) or 13 ( g ) of the exchange act . equity compensation plan information on october 27 , 2016 , we adopted the 2016 equity compensation plan ( the “ plan ) , the purpose of which is to align the interests of our officers , other employees , advisors and consultants or any subsidiary , if any , with those of our shareholders and to afford an incentive to such officers , employees , consultants and advisors to continue as such , to increase their efforts on our behalf and to promote the success of our business . the basis of participation in the plan is upon discretionary grants of awards by the board . the plan is administered by the compensation committee . the maximum number of common shares reserved for the grant of awards under the plan is 1,500,000 , subject to adjustment as provided in section 5 of the plan . approximately fourteen individuals are eligible to participate in the plan including , our two executive officers , nine other employees and three independent directors . 50 plan category number of securities to be issued upon exercise of outstanding options , warrants and rights weighted-average exercise price of outstanding options , warrants and rights number of securities remaining available for future issuance under equity compensation plans ( excluding securities reflected in column ( a ) ( a ) ( b ) ( c ) equity compensation plans approved by security holders 0 not applicable 1,477,116 total 0 not applicable 1,477,116 during the fiscal year ended december 31 , 2018 , we granted an aggregate of 22,884 restricted common shares under the plan . types and terms of awards awards under the plan may take the form of stock options ( either incentive stock options or non-qualified stock options ) or restricted shares . subject to restrictions that are set forth in the plan , the compensation committee will have complete and absolute authority to set the terms , conditions and provisions of each award , including the size of the award , the exercise or base price , the vesting and exercisability schedule ( including provisions regarding acceleration of vesting and exercisability ) and termination and forfeiture provisions . the compensation committee is subject to the following specific restrictions regarding the types and terms of awards : the exercise price for a stock option may not be less than 100 % of the fair market value of the stock on the date of grant . no award may be granted after the expiration of the plan ( more than ten years after the plan adoption date ) . no stock option can be “ repriced ” without the consent of the shareholders and of the option holder if the effect would be to reduce the exercise price per share . amendment and termination of the plan the plan expires on the tenth anniversary of the date of its adoption by the board . prior to the expiration date , the board may at any time , and from time to time , suspend or terminate the plan in whole or in part or amend it from time to time ; provided , however , that unless otherwise determined by the board , an amendment that requires shareholder approval in order for the plan to continue to comply with section 162 ( m ) or any other law , regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of shareholders . notwithstanding the foregoing , no amendment to or termination of the plan shall affect adversely any of the rights of any grantee under any outstanding award granted under the plan without such grantee 's consent . exercise price of an option granted under the plan the exercise price of an option granted under the plan may be no less than the fair market value of a common share on the date of grant , unless , with respect to nonqualified stock options that are not intended as incentive stock options within the meaning of section 422 of the internal revenue code from time to time , otherwise determined by the compensation committee . story_separator_special_tag given that our senior executive officers , jeffrey c. villano and john l. villano , own a significant portion of our outstanding capital shares , we can not assure you that we will be able to maintain that qualification . so long as we qualify as a reit , we , generally , will not be subject to u.s. federal income tax on our taxable income that we distribute currently to our shareholders . if we fail to qualify as a reit in any taxable year and do not qualify for certain statutory relief provisions , we will be subject to u.s. federal income tax at regular corporate income tax rates and may be precluded from electing to be treated as a reit for four taxable years following the year during which we lose our reit qualification . even if we qualify for taxation as a reit , we may be subject to certain u.s. federal , state and local taxes on our income . emerging growth company status we are an “ emerging growth company ” , as defined in the jobs act , and , for as long as we continue to be an emerging growth company , we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies , including , but not limited to , not being required to have our independent registered public accounting firm audit our internal control over financial reporting under section 404 of the sarbanes-oxley act , reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved . as an emerging growth company , we can also delay adopting new or revised accounting standards until those standards apply to private companies . we intend to avail ourselves of these options . once adopted , we must continue to report on that basis until we no longer qualify as an emerging growth company . we will cease to be an emerging growth company upon the earliest of : ( i ) the end of the 2022 fiscal year ; ( ii ) the first fiscal year after our annual gross revenue are $ 1.07 billion or more ; ( iii ) the date on which we have , during the previous three-year period , issued more than $ 1.0 billion in non-convertible debt securities ; or ( iv ) the end of any fiscal year in which the market value of our common shares held by non-affiliates exceeded $ 700 million as of the end of the second quarter of that fiscal year . we can not predict if investors will find our common shares less attractive if we choose to rely on these exemptions . if , as a result of our decision to reduce future disclosure , investors find our common shares less attractive , there may be a less active trading market for our common shares and the price of our common shares may be more volatile . 38 critical accounting policies and use of estimates the preparation of financial statements in conformity with u.s. gaap in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . we base our use of estimates on ( a ) a preset number of assumptions that consider past experience , ( b ) future projections and ( c ) general financial market conditions . actual amounts could differ from those estimates . interest income from commercial loans is recognized , as earned , over the loan period and origination fee revenue on commercial loans is amortized over the term of the respective note . as an “ emerging growth company , ” we intend to avail ourselves of the reduced disclosure requirements and extended transition periods for adopting new or revised accounting standards that would otherwise apply to us as a public reporting company . once adopted , we must continue to report on that basis until we no longer qualify as an emerging growth company . as a result , our financial statements may not be comparable to those of other public reporting companies that either are not emerging growth companies or that are emerging growth companies but have opted not to avail themselves of these provisions of the jobs act and investors may deem our securities a less attractive investment relative to those other companies , which could adversely affect our stock price . results of operations we were formed in january 2016 and , prior to the ipo , had not engaged in any business activity . the results of operations discussed below for the year ended december 31 , 2017 , include those of scp for the portion of the period prior to the ipo . years ended december 31 , 2018 and 2017 total revenue total revenue for the year ended december 31 , 2018 was approximately $ 11.7 million compared to approximately $ 7.0 million for the year ended december 31 , 2017 , an increase of approximately $ 4.7 million , or 67.4 % . the increase in revenue represented an increase in lending operations . for 2018 , approximately $ 9.0 million of revenue represented interest income , approximately $ 1.4 represented origination fees and approximately $ 189,000 represented late and other fees . in comparison , in 2017 approximately $ 5.4 million of revenue represented interest income from loans , approximately $ 802,000 represented origination fees and approximately $ 137,000 represented late and other fees . other income also increased significantly from approximately $ 410,000 in 2017 to approximately $ 837,000 in 2018. components of other

net cash used for investing activities for 2018 year was approximately $ 16.8 million compared to approximately $ 28.9 million for 2017. net cash used for investing activities in 2018 was primarily due to steady lending activity during the year . proceeds from the sale of real estate owned in 2018 was approximately $ 1.85 million compared to approximately $ 530,000 in 2017. the 2018 year also included approximately $ 542,000 of cash used to acquire and improve properties that we acquired in connection with non-performing loans compared to approximately $ 532,000 in 2017. finally , in 2018 , principal disbursements for mortgages receivable were approximately $ 42.1 million and principal collections were approximately $ 24.6 million . in 2017 , the corresponding amounts were approximately $ 53.5 million and approximately $ 24.0 million , respectively . 40 net cash provided by financing activities for 2018 year was approximately $ 9.8 million compared to approximately $ 23.5 million for 2017. net cash provided by financing activities for the 2018 period consists primarily of combined net proceeds from the bankwell credit line and webster facility of approximately $ 77.6 million offset by repayments under the bankwell credit line and webster facility of approximately $ 60.2 million , dividends paid of approximately $ 6.8 million , cost related to the shelf of approximately $ 160,000 and financing costs incurred of approximately $ 595,000 , while net cash provided by financing activities in the 2017 period consists primarily of approximately $ 44.2 million of proceeds from the bankwell credit facility , approximately $ 30.3 million of net proceeds from the ipo and approximately $ 650,000 of member contributions offset by repayments under the bankwell credit line of approximately $ 42.5 million , dividends paid of approximately $ 3.3 million , costs related to the ipo of approximately $ 3.3 million , distributions to members of approximately $ 2.5 million and approximately $ 87,000 of financing costs . we project anticipated cash requirements for our operating needs as well as cash flows generated from operating activities available to meet these needs . our short-term cash requirements primarily include funding of loans and payments for usual and customary operating and administrative expenses , such as employee compensation , rent , sales , marketing expenses and dividends . based on this analysis , we believe that our current cash balances , the amount available to us under the webster facility and our anticipated cash flows from operations will be sufficient

10.37 registration rights agreement among empire state realty trust , inc. and the persons named therein , dated july 15 , 2014 , incorporated by reference to exhibit 10.4 to the registrant 's form 8-k filed with the sec on july 21 , 2014 . 10.38 registration rights agreement , dated august 12 , 2014 , by and among empire state realty op , l.p. , empire state realty trust , inc. and goldman , sachs & co. , incorporated by reference to exhibit 10.1 to the registrant 's form 8-k filed with the sec on august 12 , 2014 . 10.39 form of asset and property management agreement , incorporated by reference to exhibit 10.18 to amendment no . 6 to the registrant 's form s-11 ( registration no . 333-179485 ) , filed with the sec on september 6 , 2013 . 10.40 form of services agreement , incorporated by reference to exhibit 10.19 to amendment no . 6 to the registrant 's form s-11 ( registration no . 333-179485 ) , filed with the sec on september 6 , 2013 . 10.41 stockholders agreement dated as of august 23 , 2016 , by and between empire state realty trust , inc. and q reit holding llc , incorporated by reference to exhibit 10.1 to the registrant 's form 8-k filed with the sec on august 23 , 2016 . 10.42 registration rights agreement dated as of august 23 , 2016 , by and between empire state realty trust , inc. and q reit holding llc , incorporated by reference to exhibit 10.2 to the registrant 's form 8-k filed with the sec on august 23 , 2016 . 21.1 * subsidiaries of registrant 23.1 * consent of ernst & young llp 31.1 * certification of chief executive officer pursuant to rule 13a-14 ( a ) /15d-14 ( a ) of the securities exchange act of 1934 , as amended , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.2 * certification of chief financial officer pursuant to rule 13a-14 ( a ) /15d-14 ( a ) of the securities exchange act of 1934 , as amended , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 32.1 * certification of chief executive officer pursuant to 18 u.s.c . 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 . 32.2 * certification of chief financial officer pursuant to 18 u.s.c . 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 . 101.ins * xbrl instance document 101.sch * xbrl taxonomy extension schema document 101.cal * xbrl taxonomy extension calculation document 101.def * xbrl taxonomy extension definitions document 101.lab * xbrl taxonomy extension labels document 101.pre * xbrl taxonomy extension presentation document notes : * filed herewith . + indicates management contract or compensatory plan or arrangement required to be filed or incorporated by reference as an exhibit to this form 10-k pursuant to item 15 ( b ) of form 10-k. 76 empire state realty trust index to financial statements replace_table_token_22_th 77 report of independent registered public accounting firm the board of directors and stockholders of empire state realty trust , inc. we have audited the accompanying consolidated balance sheets of empire state realty trust , inc. ( the company ) as of december 31 , 2016 and 2015 , and the related consolidated statements of operations , comprehensive income , stockholders ' equity and cash flows for each of the three years in the period ended december 31 , 2016. our audits also included the financial statement schedules listed in the index at item 15 ( a ) . these financial statements and schedules are the responsibility of the company 's management . our responsibility is to express an opinion on these financial statements and schedules based on our audits . we conducted our audits in accordance with the standards of the public company accounting oversight board ( united states ) . those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement . an audit includes examining , on a test basis , evidence supporting the amounts and disclosures in the financial statements . an audit also includes assessing the accounting principles used and significant estimates made by management , as well as evaluating the overall financial statement presentation . we believe that our audits provide a reasonable basis for our opinion . in our opinion , the financial statements referred to above present fairly , in all material respects , the consolidated financial position of empire state realty trust , inc. at december 31 , 2016 and 2015 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended december 31 , 2016 , in conformity with u.s. generally accepted accounting principles . also , in our opinion , the related financial statement schedules , when considered in relation to the basic financial statements taken as a whole , present fairly in all material respects the information set forth therein . we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) , empire state realty trust , inc. 's internal control over financial reporting as of december 31 , 2016 , based on criteria established in internal control-integrated framework issued by the committee of sponsoring organizations of the treadway commission ( 2013 framework ) , and our report dated february 27 , 2017 expressed an unqualified opinion thereon . story_separator_special_tag the unsecured revolving credit facility includes the following financial covenants : ( i ) maximum leverage ratio of total indebtedness to total asset value of the loan parties and their consolidated subsidiaries will not exceed 60 % , ( ii ) consolidated secured indebtedness will not exceed 40 % of total asset value , ( iii ) tangible net worth will not be less than $ 745.4 million plus 75 % of net equity proceeds received by the operating partnership ( other than proceeds received within ninety ( 90 ) days after the redemption , retirement or repurchase of ownership or equity interests in the operating partnership up to the amount paid by the operating partnership in connection with such redemption , retirement or repurchase , where , the net effect is that the operating partnership shall not have increased its net worth as a result of any such proceeds ) , ( iv ) adjusted ebitda ( as defined in the unsecured revolving credit facility ) to consolidated fixed charges will not be less than 1.50x , ( v ) the aggregate net operating income with respect to all unencumbered eligible properties to the portion of interest expense attributable to unsecured indebtedness will not be less than 1.75x , ( vi ) the ratio of total unsecured indebtedness to unencumbered asset value will not exceed 60 % , and ( vii ) consolidated secured recourse indebtedness will not exceed 10 % of total asset value ( provided , however , this covenant shall not apply at any time after either the company or the operating partnership achieves debt ratings from at least two of moody 's , s & p and fitch , and such debt ratings are baa3 or better ( in the case of a rating by moody 's ) or bbb- or better ( in the case of a rating by s & p or fitch ) ) . as of december 31 , 2016 , we were in compliance with the covenants , as described below : replace_table_token_15_th 57 other covenants . the unsecured revolving credit facility contains customary covenants , including limitations on liens , investment , debt , fundamental changes , and transactions with affiliates , and requires certain customary financial reports . events of default . the unsecured revolving credit facility contains customary events of default ( subject in certain cases to specified cure periods ) , including but not limited to non-payment , breach of covenants , representations or warranties , cross defaults , bankruptcy or other insolvency events , judgments , erisa events , invalidity of loan documents , loss of real estate investment trust qualification , and occurrence of a change of control ( defined in the definitive documentation for the unsecured credit facility ) . senior unsecured notes during march 2015 , we issued and sold an aggregate principal amount of $ 350.0 million of senior unsecured notes ( `` series a , b and c senior notes `` ) in a private placement to entities affiliated with prudential capital group . the series a , b and c senior notes consist of $ 100 million of 3.93 % series a senior notes due 2025 , $ 125 million of 4.09 % series b senior notes due 2027 , and $ 125 million of 4.18 % series c senior notes due 2030. the series a , b and c senior notes are senior unsecured obligations and are unconditionally guaranteed by each of our subsidiaries that guarantees indebtedness under the unsecured revolving credit facility . interest on the series a , b and c senior notes is payable quarterly . the terms of the series a , b and c senior notes include customary covenants , including limitations on liens , investment , debt , fundamental changes , and transactions with affiliates and require certain customary financial reports . the series a , b and c senior notes also require compliance with financial ratios consistent with the unsecured credit facility including a maximum leverage ratio , a maximum secured leverage ratio , a minimum amount of tangible net worth , a minimum fixed charge coverage ratio , a minimum unencumbered interest coverage ratio , a maximum unsecured leverage ratio and a maximum amount of secured recourse indebtedness . as of december 31 , 2016 , we were in compliance with the covenants under the series a , b and c senior notes . unsecured term loan facility during august 2015 , we closed on a seven year $ 265.0 million senior unsecured term loan facility ( `` term loan facility `` ) . the term loan facility matures on august 24 , 2022. the term loan facility bears interest at a floating rate equal to , at our election , a libor rate , plus a spread ranging from 1.400 % to 2.350 % ; or a base rate , plus a spread ranging from 0.400 % to 1.350 % . in each case such spread is determined by our leverage ratio and credit rating . pursuant to a forward interest rate swap agreement , we effectively fixed libor at 2.1485 % for $ 265.0 million of the term loan facility for the period from august 31 , 2017 through maturity . the terms of the term loan facility agreement include customary covenants , including limitations on liens , investment , debt , fundamental changes , and transactions with affiliates and require certain customary financial reports . the term loan facility requires compliance with financial ratios including a maximum leverage ratio , a maximum secured leverage ratio , a minimum amount of tangible net worth , a minimum fixed charge coverage ratio , a minimum unencumbered interest coverage ratio , a maximum unsecured leverage ratio and a maximum amount of secured recourse indebtedness . the term loan facility also contains customary events of default ( subject in certain cases to specified cure periods ) . these terms in the

( 2 ) does not include various standing or renewal service contracts with vendors related to our property management . off-balance sheet arrangements as of december 31 , 2016 , we did not have any off-balance sheet arrangements . distribution policy in order to qualify as a reit , we must distribute to our securityholders , on an annual basis , at least 90 % of our reit taxable income , determined without regard to the deduction for dividends paid and excluding net capital gains . in addition , we will be subject to u.s. federal income tax at regular corporate rates to the extent that we distribute less than 100 % of our net taxable income ( including net capital gains ) and will be subject to a 4 % nondeductible excise tax on the amount , if any , by which our distributions in any calendar year are less than a minimum amount specified under u.s. federal income tax laws . we intend to distribute our net income to our securityholders in a manner intended to satisfy the reit 90 % distribution requirement and to avoid u.s. federal income tax liability on our income and the 4 % nondeductible excise tax . before we pay any distribution , whether for u.s. federal income tax purposes or otherwise , we must first meet both our operating requirements and obligations to make payments of principal and interest , if any . however , under some circumstances , we may be required to use cash reserves , incur debt or liquidate assets at rates or times that we regard as unfavorable or make a taxable distribution of our shares in order to satisfy the reit 90 % distribution requirement and to avoid u.s. federal income tax and the 4 % nondeductible excise tax in that year . 60 distribution to equity holders distributions and dividends have been made to equity holders in 2014 , 2015 and 2016 as follows ( amounts in thousands ) : year ended december 31 , 2014 $ 87,721 year ended december 31 , 2015 91,900 year ended december 31 , 2016 114,954 cash flows comparison of year ended december 31 , 2016 to the year ended december 31 , 2015 < div

the company maintains an allowance for doubtful accounts for balances that appear to have specific collection issues . the collection process is based on the age of the invoice and requires attempted contacts with the customer at specified intervals . if , after a specified number of days , the company has been unsuccessful in its collection efforts , a bad debt allowance is recorded for the balance in question . delinquent accounts receivable are charged against the allowance for doubtful accounts once un-collectability has been determined . the factors considered in reaching this determination are the apparent financial condition of the customer and the company 's success in contacting and negotiating with the customer . if the financial condition of the company 's customers were to deteriorate additional allowances may be required . we did not reserve any balance for allowances for doubtful accounts in the years ended december 31 , 2016 and 2015. inventories . finished goods , raw materials , and work-in-process inventories are valued using methods which approximate the lower of cost ( first-in , first-out ) or net realizable value ( nrv ) . distillers ' grains and related products are stated at net realizable value . in the valuation of inventories , nrv is determined as estimated selling price in the ordinary course of business , less reasonably predictable costs of completion , disposal , and transportation . property , plant and equipment . property , plant and equipment are carried at cost less accumulated depreciation after assets are placed in service and are comprised primarily of our buildings , furniture , machinery , equipment , land at keyes plant and kakinada plant . it is our policy to depreciate capital assets over their estimated useful lives using the straight-line method . the company evaluates the recoverability of long-lived assets with finite lives in accordance with asc subtopic 360-10-35 property plant and equipment –subsequent measurements , which requires recognition of impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable , based on estimated undiscounted cash flows , the impairment loss would be measured as the difference between the carrying amount of the assets and its estimated fair value . in addition , our estimates in coming up with forecasts for kakinada plant which was in negative gross margins as of december 31 , 2016 , we used significant assumptions with regard to the cost of inputs mainly palm stearin , and outputs mainly biodiesel . these assumptions were commodity market driven but we also considered the government regulations , import and export tariffs , availability of alternate low cost inputs , and potential customer agreements . we evaluated all assumptions based on conditions which the company believes will become available to increase production at profitable margins in the future . goodwill and intangible assets . intangible assets consist of intellectual property in the form of patents pending , in-process research and development and goodwill . once the patents pending or in-process r & d have secured a definite life in the form of a patent or product , they will be carried at cost less accumulated amortization over their estimated useful life . amortization commences upon the commercial application or generation of revenue and is amortized over the shorter of the economic life or patent protection period . company intangible assets such as goodwill have indefinite lives and as a result need to be evaluated at least annually , or more frequently , if impairment indicators arise . in the company 's review , we determined the fair value of the reporting unit using market indicators and discounted cash flow modeling . the company compares the fair value to the net book value of the reporting unit . an impairment loss would be recognized when the fair value is less than the related carrying value , and an impairment expense would be recorded in the amount of the difference . forecasts of future cash flows are judgments based on the company 's experience and knowledge of the company 's operations and the industries in which the company operates . these forecasts could be significantly affected by future changes in market conditions , the economic environment , including inflation , and the purchasing decisions of the company 's customers . during the year ended december 31 , 2016 and 2015 , the company recognized amortization expense of $ 80 thousand each period related to patents . the company expects to recognize $ 80 thousand in 2017 , $ 108 thousand in 2018 , $ 198 thousand in 2019 , $ 108 thousand in 2020 and 2021 , and $ 698 thousand thereafter . 49 aemetis , inc. notes to the consolidated financial statements ( tabular data in thousands , except par value and per share data ) in december 2015 , pursuant to our annual goodwill impairment test , we recorded a full impairment of goodwill amounting to $ 1.0 million . due to limitations in the our access to capital to develop the acquired technology into a product for sale and current industry conditions , the cash flow projections were lowered and the earnings forecast was revised . we determine the fair value of our reporting units utilizing discounted cash flows and incorporate assumptions that we believe marketplace participants would utilize . warrant liability : the company adopted guidance related to distinguishing liabilities from equity for certain warrants which contain a conditional obligation to repurchase feature . as of december 31 , 2016 and 2015 , there were 18,644 warrants with a conditional obligation to repurchase feature that require liability treatment . as a result , a warrant liability was recorded to recognize the fair value upon issuance of each warrant . story_separator_special_tag revenue from nonmonetary transactions , principally in-kind by-products received in exchange for material processing where the by-product is contemplated by contract to provide value , is recognized at the quoted market price of those goods received or by-products . 31 recoverability of our long-lived assets property and equipment property , plant and equipment are carried at cost less accumulated depreciation after assets are placed in service and are comprised primarily of buildings , furniture , machinery , equipment , land , and plants in north america and india . when property , plant and equipment are acquired as part of an acquisition , the items are recorded at fair value on the purchase date . it is our policy to depreciate capital assets over their estimated useful lives using the straight-line method . impairment of long-lived assets and intangibles our long-lived assets consist of property and equipment and intangibles . we review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable . we measure recoverability of assets to be held and used by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset . if the carrying amount of an asset exceeds its estimated future cash flows , we record an impairment charge in the amount by which the carrying amount of the asset exceeds the fair value of the asset . our intangibles consist of amounts relating to in-process research and development and patents from our acquisition of zymetis , inc. in 2011. we review intangibles at an individual plant or subsidiary level for impairment at least annually , or more frequently whenever events or changes in circumstances indicate that impairment may have occurred . the impairment test for long-lived assets and intangibles requires us to make estimates regarding amount and timing of projected cash flows to be generated by an asset or asset group over an extended period of time . management judgment regarding the existence of circumstances that indicate impairment is based on numerous potential factors including , but not limited to , a decline in our future projected cash flows , a decision to suspend operations at a plant for an extended period of time , adoption of our product by the market , a sustained decline in our market capitalization , a sustained decline in market prices for similar assets or businesses , or a significant adverse change in legal or regulatory factors or the business climate . significant management judgment is required in determining the fair value of our long-lived assets and intangibles to measure impairment , including projections of future cash flows . fair value is determined through various valuation techniques including discounted cash flow models , market values and third-party independent appraisals , as considered necessary . changes in estimates of fair value could result in a write-down of the asset in a future period . during 2015 , our annual impairment analysis indicated an impairment of goodwill . accordingly , we recorded approximately $ 1 million of impairment charge relating to goodwill and patents , which was comprised of a $ 968 thousand charge related to impairment of all goodwill associated with our acquisition of zymetis , inc. in 2011 and a $ 76 thousand charge resulting from abandoning two filed , but not awarded patents no longer being pursued due to changes in patent strategy . our subsidiaries , aemetis advanced fuels keyes , which operates our keyes plant , and ubpl , which operates our kakinada plant , represent our significant long-lived assets . both plants were tested for impairment and the undiscounted future cash flows of each plant exceeded the carrying value on our books , so no impairment was recorded for our company 's long-lived assets . testing for modification or extinguishment accounting during 2016 and 2015 , we evaluated amendments to our debt under the asc 470-50 guidance for modification and extinguishment accounting . this evaluation included comparing the net present value of cash flows of the new debt to the old debt to determine if changes greater than 10 percent occurred . in instances where our future cash flows changed more than 10 percent , we recorded our debt at fair value based on factors available to us for similar borrowings and used the extinguishment accounting method to account for the debt extinguishment . 32 warrant liability accounting certain common stock warrants issued in our equity financing are classified as liabilities under asc 480. we use the black-scholes option pricing model as our method of valuation for warrants subject to warrant liability accounting . warrants subject to liability accounting are valued on the date of issuance and re-measured at the end of each reporting period with the change in value reported in our consolidated statement of operations . the determination of fair value as of the reporting date is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables . these variables include , but are not limited to , expected stock price volatility over the term of the security and risk-free interest rate . in addition , the black-scholes option pricing model requires the input of an expected life for the securities , which we estimated based upon the remaining term of the warrant . the primary factors affecting the fair value of the warrant liability are our stock price and volatility . the use of the black-scholes option pricing model in this context requires the input of highly subjective assumptions , and the model is very sensitive to changes in inputs . other reasonable assumptions in the pricing model could provide differing results . recently issued accounting pronouncements in may 2014 , the fasb issued asu no . 2014-09 , revenue from contracts with customers ( topic 606 ) , which supersedes all existing revenue recognition requirements , including most

our senior lender has provided a series of accommodating amendments to the existing and previous loan facilities in the past as described in further detail in note 4.debt of the notes to consolidated financial statements in part iv of this form 10-k. however , there can be no assurance that our senior lender will continue to provide further amendments or accommodations or will fund additional amounts in the future . we also rely on our working capital lines with j.d . heiskell in california and secunderabad oils limited in india to fund our commercial arrangements for the acquisitions of feedstock . j.d . heiskell currently provides us with working capital for the keyes plant and secunderabad oils limited currently provides us with working capital for the kakinada plant . the ability of both j.d . heiskell and secunderabad oils limited to continue to provide us with working capital depends in part on both of their respective financial strength and banking relationships . 30 change in working capital and cash flows during the twelve months ended december 31 , 2016 , current and long term debt increased $ 10.8 million primarily due to ( i ) additional borrowings of $ 10.5 million received from the eb-5 investors , ( ii ) $ 1.5 million waiver fee , ( iii ) $ 3.1 million maturity date extension fee , ( iv ) $ 0.3 million drawn on the promissory note for operations from our senior lender , ( v ) $ 3.0 million drawn on the promissory note from our senior lender for state bank of india repayment and payment on property tax payment settlement agreement , ( vi ) $ 0.7 million in subordinated debt extension fees , ( vii ) $ 9.0 million in accrued interest , and ( viii ) $ 6.8 million drawn from the india working capital loans . the increase in current and long term debt was partially offset by decreases due to : ( i ) payments of principal of $ 11.9 million to our senior lender , ( ii ) $ 5.0 million and $ 2.1 million of principal payments to our working capital partners in india and on the state bank of india loan , and ( iii ) payments of interest of $ 4.9 million . current assets decreased by $ 1.0 million due to a decrease of $ 1.0 million in other assets and $ 1.6 million in inventories offset by increase in $ 1.2 million in cash and $ 0.4 million in accounts receivable . net cash provided by

over time , accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset . the significant assumptions used in estimating the asset retirement obligation include the third-party cost of removing the asset , the cost of remediating the leased property to its original condition where required and the timing and number of lease renewals , all of which are estimated based on historical experience . the interest rate used to calculate the present value of such costs over the estimated retirement period is based on an estimated risk adjusted credit rate for the same period . deferred revenue and barter transactions deferred revenue includes deferred barter and other transactions in which payments are received prior to the performance of services ( e.g . , cash-in-advance advertising ) . barter transactions are recorded at the estimated fair value of the product or service received . revenue from barter transactions is recognized when commercials are broadcast . the appropriate expense or asset is recognized when merchandise or services are used or received . barter revenues for the ten months ended december 31 , 2019 , and year ended december 31 , 2020 were $ 0.8 million , and $ 0.9 million , respectively . barter expenses were $ 0.9 million for both periods . earnings per share our basic and diluted net loss per share is computed using the two-class method . the two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses . shares of series a preferred stock include rights to participate in dividends and distributions to common stockholders on an if-converted basis , and accordingly are considered participating securities . during periods of undistributed losses however , no effect is given to our participating securities since they are not contractually obligated to share in the losses . we did not have any participating securities for the ten-month period ended december 31 , 2019 , as the preferred stock only became convertible to common stock on may 25 , 2020. for the ten-month period ended december 31 , 2019 , the class a shares issued to emmis at the close of the transaction have been assumed to be outstanding for the whole ten-month period . the following is a reconciliation of basic and diluted net loss per share attributable to class a and class b common shareholders : replace_table_token_14_th because we have incurred a net loss for the period where the company had potentially dilutive securities , diluted net loss per common share is the same as basic net loss per common share . the following convertible equity shares and restricted stock awards were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive . there were no potentially dilutive shares for the ten-month period ended december 31 , 2019 as neither the convertible promissory notes issued to emmis and sg broadcasting described in note 6 , nor the series a convertible preferred stock , were convertible until may 25 , 2020. the company did not issue any restricted stock awards until the year ended december 31 , 2020. replace_table_token_15_th 41 income taxes the company accounts for income taxes under the asset and liability method , which requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the company 's financial statements or income tax returns . income taxes are recognized during the year in which the underlying transactions are reflected in the consolidated statements of operations . deferred taxes are provided for temporary differences between amounts of assets and liabilities as recorded for financial reporting purposes and amounts recorded for income tax purposes . after determining the total amount of deferred tax assets , the company determines whether it is more likely than not that some portion of the deferred tax assets will not be realized . if the company determines that a deferred tax asset is not likely to be realized , a valuation allowance will be established against that asset to record it at its expected realizable value . long-lived tangible assets the company periodically considers whether indicators of impairment of long-lived tangible assets are present . if such indicators are present , the company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value . if less , the company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values . fair value is determined by discounted future cash flows , appraisals and other methods . if the assets determined to be impaired are to be held and used , the company recognizes an impairment charge to the extent the asset 's carrying value is greater than the fair value . the fair value of the asset then becomes the asset 's new carrying value , which , if applicable , the company depreciates or amortizes over the remaining estimated useful life of the asset . estimates the company has been actively monitoring the covid-19 situation and its impact globally , as well as domestically and in the markets we serve . our priority has been the safety of our employees , as well as the informational needs of the communities that we serve . through the first few months of calendar 2020 , the disease became widespread around the world , and on march 11 , 2020 , the world health organization declared a pandemic . story_separator_special_tag accordingly , $ 1.5 million of leased employee expense was waived by emmis during the year ended december 31 , 2020. going concern the accompanying consolidated and combined 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 . pursuant to asc topic 205-40 , “ going concern , ” the company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern within one year of the date of the filing of these financial statements ( march 30 , 2021 ) . management considered the company 's ability to forecast future cash flows , current financial condition , sources of liquidity and debt service obligations due on or before march 30 , 2022. the company has been negatively impacted by covid-19 , and expects covid-19 to continue to negatively impact revenues and profitability for an undetermined period of time . management has considered these circumstances in assessing the company 's liquidity over the next year . liquidity is a measure of an entity 's ability to meet potential cash requirements , maintain its assets , fund its operations , and meet the other general cash needs of its business . the company 's liquidity is impacted by general economic , financial , competitive , and other factors beyond its control . the company 's liquidity requirements consist primarily of funds necessary to pay its expenses , principally debt service and operational expenses , such as labor costs , and other related expenditures . the company generally satisfies its liquidity needs through cash provided by operations . in addition , the company has taken steps to enhance its ability to fund its operational expenses by reducing various costs and is prepared to take additional steps as necessary . the company has debt service obligations of approximately $ 8.6 million due under its senior credit facility from march 30 , 2021 ( the date of issuance of these financial statements ) through march 30 , 2022. in addition , our senior credit facility requires us to maintain minimum liquidity ( as defined in the senior credit facility ) of $ 2.5 million until november 25 , 2021 , and $ 3.0 million for the period thereafter . during the year ended december 31 , 2020 , the company obtained amendments to our senior credit facility in order to , among other things , suspend the testing of the consolidated fixed charge coverage ratio ( as defined in the senior credit facility ) until july 1 , 2021 , at which time the company will once again be required to comply with a fixed charge coverage ratio of 1.10:1.00. the company expects its revenues and profitability will continue to be adversely impacted by the covid-19 pandemic , and the duration and severity of the impact is unknown as of the date of issuance of these financial statements . management anticipates that the company will be unable to meet its liquidity needs and comply with the covenants of our senior credit facility for the next twelve months with cash and cash equivalents on hand , projected cash flows from operations , and or additional borrowings . in addition , the senior credit facility includes a loan to value calculation , whereby the amount of debt outstanding thereunder is limited to a formula based on 60 % of the fair value of the company 's fcc licenses plus a multiple of the company 's billboard cash flow ( as defined in the senior credit facility ) . if the most recent appraisal of the fair value of our fcc licenses obtained in connection with our annual impairment testing as of october 1 , 2020 is deemed to be an acceptable appraisal ( as defined in the senior credit facility ) by our lender in its sole discretion , we will have a shortfall in this calculation , requiring a repayment of approximately $ 8.0 million of senior credit facility debt . our lender is not required to accept this appraisal and has the right to obtain a different appraisal , which could result in a different repayment amount , if any . as a result of the conditions identified above , management has concluded that there is substantial doubt about the company 's ability to continue as a going concern within one year after the date that the financial statements are issued . the company 's independent auditor has included an explanatory paragraph regarding the company 's ability to continue as a going concern in its report on these consolidated and combined financial statements , which constitutes an event of default under the senior credit facility . upon this event of default , under the senior credit facility , the lender may , but is not required to , declare all or any portion of the unpaid principal amount of the senior credit facility , including interest accrued and unpaid , to be immediately due and payable , and or to increase the annual interest rate in effect by 3 % . consequently , amounts outstanding under the senior credit facility as of december 31 , 2020 have been classified as current liabilities in the accompanying consolidated and combined financial statements . furthermore , depending on the duration and severity of the impact the covid-19 pandemic has on our businesses and any action our lender may take , we may record impairments of assets in the future . management intends to request a waiver or amendment to its senior credit facility and seek additional borrowings from standard general to cure the existing event of default and anticipated future covenant violations . while the company has been successful in obtaining waivers and amendments under its senior credit facility and has also received additional liquidity from standard general in the past , no assurances can be made that the company will

3 ” ) to its senior credit facility , in order , among other things , ( i ) to modify certain provisions relating to the repayment of the term loan ( as defined in the senior credit facility ) such that no quarterly payments shall be required beginning with the fiscal quarter ending september 30 , 2020 through and including the fiscal quarter ending june 30 , 2021 and ( ii ) to suspend the testing of the consolidated fixed charge coverage ratio ( as defined in the senior credit facility ) from july 1 , 2020 through and including june 30 , 2021. in connection with amendment no . 3 , the company incurred an amendment fee of approximately $ 0.1 million , which was added to the principal amount of the senior credit facility then outstanding . emmis convertible promissory note on november 25 , 2019 , as part of the consideration owed to emmis in connection with sg broadcasting 's acquisition of a controlling interest in the company , the company issued to emmis the emmis convertible promissory note in the amount of $ 5.0 million . the emmis convertible promissory note carries interest at a base rate equal to the interest on any senior credit facility , or if no senior credit facility is outstanding , of 6.0 % , plus an additional 1.0 % on any payment of interest in kind and , without regard to whether the company pays such interest in kind , an additional increase of 1.0 % following the second anniversary of the date of issuance and additional increases of 1.0 % following each successive anniversary thereafter . because the senior credit facility prohibits the company from paying interest in cash on the emmis convertible promissory note , the company accrues interest using the rate applicable for interest paid in kind . the emmis convertible promissory note is convertible , in whole or in part , into mediaco class a common stock at the option of emmis beginning six months after issuance and at a strike price equal to the thirty day volume weighted average price of the mediaco class a common stock on the date of conversion . the emmis convertible promissory note matures on november 25 , 2024. sg broadcasting promissory note and amendments thereto on november 25 , 2019 , the company issued the sg broadcasting promissory note , a subordinated convertible promissory note payable by the company to sg broadcasting , in return for which sg broadcasting contributed to mediaco $ 6.3 million for working capital and general corporate purposes . the sg broadcasting promissory note carries interest at a base rate equal to the interest on any senior credit facility , or if no senior credit facility is outstanding , of 6.0 % , and an additional increase of 1.0 % following the second anniversary of the date of issuance and additional increases of 1.0 % following each successive anniversary thereafter . the sg

upon a decision to proceed with construction of a mine on the lands , nana maintains the right to purchase between a 16 % -25 % ownership interest in the mine or retain a 15 % net proceeds royalty which is payable after trilogy metals us has recovered certain historical costs , including capital and cost of capital . should nana elect to purchase an ownership interest , consideration will be payable equal to all historical costs incurred on the properties at the elected percentage purchased less $ 40 million , not to be less than zero . the parties would form a joint venture and be responsible for all future costs , including capital costs of the mine based on their pro-rata share . nana would also be granted a net smelter return royalty of between 1 % and 2.5 % upon the execution of a mining lease or a surface use agreement , the amount of which is determined by the classification of land from which production originates . 89 ( c ) option agreement on april 10 , 2017 , trilogy and trilogy metals us entered into an option agreement to form a joint venture with south32 group operations pty ltd. ( “ south32 operations ” ) , a wholly-owned subsidiary of south32 limited , on the ukmp ( as amended , the “ option agreement ” ) , which agreement was later assigned by south32 operations to its affiliate , south32 usa exploration inc. ( “ south32 ” ) . trilogy metals us granted south32 the right to form a 50/50 joint venture to hold all of trilogy metals us ' alaskan assets . upon exercise of the option , trilogy metals us will transfer its alaskan assets , including the ukmp , and south32 will contribute a minimum of $ 150 million to a newly formed limited liability company ( “ jv llc ” ) , plus any amounts trilogy metals us contributes over the option period to a maximum of $ 5 million per year ( the “ subscription price ” ) , less an amount of the initial funding contributed by south32 . to maintain the option in good standing , south32 is required to fund a minimum of $ 10 million per year for up to a three-year period , which funds will be used to execute a mutually agreed upon program at the ukmp . the funds provided by south32 may only be expended based on the approved program . provided that all the exploration data and information has been made available to south32 by no later than december 31 of each year , south32 must decide by the end of january of the following year whether : ( i ) to fund a further tranche of a minimum of $ 10 million , or ( ii ) to withdraw and not provide any further annual funding . if the election to fund a further tranche is not made in january , south32 has until the end of march to exercise the option to form the jv llc and make the subscription payment . during the year ended november 30 , 2017 , the company received the first payment of $ 10.0 million and these funds were expended on the year 1 program at the bornite project . in october 2017 , the company received $ 0.4 million as a first instalment towards the year 2 program and budget to begin preparatory work . during the year ended november 30 , 2018 , the company received payments totaling $ 10.4 million following the approval of the year 2 program and budget in january 2018 , including a $ 0.80 million advance on south32 's year three funding obligation per the option agreement . the company is responsible for the disbursement of these funds in accordance with the approved program and budget and accordingly has not classified the funds as restricted cash . as the initial option payments are credited against the future subscription price upon exercise , the company has accounted for the payments received as deferred consideration for the purchase of the ukmp interest . at such time as the option is exercised , the initial payments received to that date will be recognized as part of the consideration received for the company 's contribution of the ukmp into the jv llc . if south 32 withdraws from the option agreement , the consideration will be recognized as income in the statement of loss at that time . the option to form the jv llc is recognized as a financial instrument at inception of the arrangement with an initial fair value of $ nil . this option is required to be re-measured at fair value at each reporting date with any changes in fair value recorded in loss for the period . the company determined that the fair value of the option remains $ nil as at november 30 , 2018 . ( d ) mineral properties expense the following table summarizes mineral properties expense for the years ended november 30 , 2018 , 2017 and 2016 , and includes expenditures funded by south32 , as applicable . replace_table_token_22_th mineral property expenses consist of direct drilling , personnel , community , resource reporting and other exploration expenses as outlined above , as well as indirect project support expenses such as fixed wing charters , helicopter support , fuel , and other camp operation costs . cumulative mineral properties expense in alaska from the initial earn-in agreement on the property in 2004 to november 30 , 2018 is $ 94.6 million and cumulative acquisition costs are $ 30.6 million totaling $ 125.2 million spent to date . story_separator_special_tag the program in 2016 was focused on moving the arctic project towards pre-feasibility compared to the significant programs undertaken at the bornite and arctic projects in 2017 and 2018. in 2016 , we completed a drill program consisting of 3,058 meters at the arctic project and increased the environmental baseline data collection and engineering site investigations . mineral property expenses consist of direct drilling , personnel , community , resource reporting and other exploration expenses , as well as indirect project support expenses such as fixed wing charters , helicopter support , fuel , and other camp operation costs . additionally , the significant variance in 2016 , compared to 2017 and 2018 , relates to the gain recognized on the sale of sunward investments and the titiribi project of $ 4.4 million , pre-tax . this was a one-time event for which there is no comparable gain in either of the two subsequent years . as a result of the sale , the operations of sunward investments were reclassified as a discontinued operation , retrospectively . expenses of $ 0.6 million for the year ended november 30 , 2016 related to the sunward investments operations were reclassified to discontinued operations . during the year ended november 30 , 2018 , the company sold the remaining 2,365,000 common shares of gmi for proceeds of $ 2.3 million and realized a loss on sale of $ 0.3 million . similarly , during the year ended november 30 , 2017 , the company sold 2,525,000 common shares of gmi for proceeds of $ 3.5 million and realized a loss on sale of $ 0.6 million . for the year ended november 30 , 2017 , we recognized an unrealized loss on held for trading investments of $ 1.6 million on 2,365,000 common shares of gmi and 1,000,000 warrants to purchase a common share of gmi . professional fees for the year ended november 30 , 2018 were $ 0.5 million , a decrease of $ 0.2 million from the $ 0.7 million incurred for the year november 30 , 2017 , and an increase of $ 0.1 million from the $ 0.4 million incurred for the year ended november 30 , 2016. expenses in 2018 decreased from 2017 as the prior year included the arrangement with south32 and preparatory costs associated with the filing of a base shelf prospectus in canada and the us . costs in 2016 were down significantly from other years due to less corporate transaction activity as well as $ 0.2 million in costs related to the sale of sunward recorded to discontinued operations . other variances for the year ended november 30 , 2018 compared to 2017 and 2016 are as follows : ( a ) $ 1.5 million in general and administrative expenses in 2018 compared to $ 1.4 million in 2017 and $ 1.3 million in 2016 due to a less favorable foreign exchange movement ; ( b ) $ 1.5 million in salaries in 2018 compared to $ 1 million in 2017 and 2016 due to changes in staffing levels at the corporate office ; and ( c ) $ 1.4 million in stock based compensation in 2018 compared to $ 0.7 million in 2017 and $ 0.6 million in 2016 due to the fair value of grants valued using the black-scholes model , which is most sensitive to the company 's increased share price and future expected volatility . the comparable basic and diluted loss per common share for 2018 of $ 0.18 is slightly lower than 2017 due to the dilutive effect of the increased weighted average number of shares outstanding at november 30 , 2018 versus the prior year . the basic and diluted loss per common share for 2016 of $ 0.05 is lower than 2017 due to the gain on the sale of sunward investments recognized in the 2016 year . fourth quarter results during the fourth quarter of 2018 , we had a loss of $ 5.3 million compared to a loss of $ 6.7 million in the fourth quarter of 2017. the primary drivers for the difference were $ 0.9 million lower mineral properties expenses , loss on disposition of investments of $ 0.8 million in the fourth quarter of 2017 for which the comparative is nil in the fourth quarter 2018 , all offset by $ 0.5 million in increased salaries benefits in the fourth quarter 2018. we incurred $ 3.8 million of mineral property expenses in the fourth quarter of 2018 compared to $ 4.7 million of mineral property expenses in the fourth quarter of 2017 as the camp closed earlier in the 2018 program ( october 13 , 2018 ) versus the 2017 program ( october 31 , 2017 ) . 71 selected financial data annual information the following annual information is prepared in accordance with u.s. gaap . in thousands of dollars replace_table_token_10_th quarterly information in thousands of dollars , except per share amounts replace_table_token_11_th factors that can cause fluctuations in our quarterly results include the length of the exploration field season at the properties , the type of program conducted , stock option vesting , and issuance of shares . other factors that have caused fluctuations in the quarterly results that would not be expected to re-occur include the acquisition and disposition of sunward , the disposition of investments held for trading and financing activities . our loss for the first quarter ended february 28 , 2017 of $ 3.0 million is significantly increased compared to prior quarterly periods due to an unrealized loss on held for trading investments of $ 1.2 million . the investments are classified as held for trading and changes in the fair value of the investments are recorded through the statement of loss . our loss for the second quarter ended may 31 , 2017 of $ 2.4 million is significantly increased from the comparable period due to a significant increase is the size of our field

upon the exercise of all the forgoing convertible securities , the company would be required to issue an aggregate of 16,927,270 common shares . financial instruments our financial instruments consist of cash and cash equivalents , accounts receivable , deposits , investments , accounts payable and accrued liabilities , and embedded derivatives . the fair value of the financial instruments approximates their carrying value due to the short-term nature of their maturity . our financial instruments initially measured at fair value and then held at amortized cost include cash and cash equivalents , accounts receivable , deposits , and accounts payable and accrued liabilities . our investments are held for trading and are marked-to-market at each period end with changes in fair value recorded to the statement of loss . the south32 purchase option is a derivative financial liability measured at fair value with changes in value recorded to the statement of loss . 73 ( a ) currency risk currency risk is the risk of a fluctuation in financial asset and liability settlement amounts due to a change in foreign exchange rates . the company operates in the united states and canada . the company 's exposure to currency risk at november 30 , 2018 is limited the canadian dollar balances consisting of cash of cdn $ 343,000 , accounts receivable of cdn $ 19,000 , and accounts payable of cdn $ 1,123,000. based on a 10 % change in the us-canadian exchange rate , assuming all other variables remain constant , the company 's net loss would change by approximately $ 51,000 . ( b ) credit risk credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations . we hold cash and cash equivalents with canadian chartered financial institutions . our accounts receivable consists of gst receivable from the federal government of canada , receivable for tenant improvements and other receivables for recoverable expenses . our exposure to credit risk is equal to the balance of cash and cash equivalents and accounts receivable as recorded in the financial statements . ( c ) liquidity risk < p style= '' font : 10pt

we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) , the consolidated financial statements of the company as of and for the year ended december 31 , 2012 , and our report dated march 15 , 2013 expressed an unqualified opinion on those financial statements . grant thornton llp boston , massachusetts march 15 , 2013 f-4 ufp technologies , inc. consolidated balance sheets replace_table_token_9_th the accompanying notes are an integral part of these consolidated financial statements . f-5 ufp technologies , inc. consolidated statements of operations replace_table_token_10_th the accompanying notes are an integral part of these consolidated financial statements . f-6 ufp technologies , inc. consolidated statements of stockholders ' equity years ended december 31 , 2012 , 2011 , and 2010 replace_table_token_11_th the accompanying notes are an integral part of these consolidated financial statements . f-7 ufp technologies , inc. consolidated statements of cash flows replace_table_token_12_th the accompanying notes are an integral part of these consolidated financial statements . f-8 ufp technologies , inc. notes to consolidated financial statements december 31 , 2012 , and 2011 ( 1 ) summary of significant accounting policies ufp technologies , inc. ( “the company” ) is an innovative designer and custom converter of foams , plastics , and natural fiber products principally serving the medical , automotive , aerospace and defense , computer and electronics , consumer , and industrial markets . the company was incorporated in the state of delaware in 1993 . ( a ) principles of consolidation the consolidated financial statements include the accounts and results of operations of ufp technologies , inc. , its wholly-owned subsidiaries , moulded fibre technology , inc. , simco industries , inc. and its wholly-owned subsidiary simco automotive trim , inc. , and stephenson & lawyer , inc. and its wholly-owned subsidiary , patterson properties corporation . all significant intercompany balances and transactions have been eliminated in consolidation . ( b ) use of estimates the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , including allowance for doubtful accounts and the net realizable value of inventory , and disclosure of contingent assets and liabilities at the date of the consolidated financial statements , and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates . ( c ) fair value measurement the company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . when determining the fair value measurements for assets and liabilities , which are required to be recorded at fair value , the company considers the principal or most advantageous market in which the company would transact and the market-based risk measurement or assumptions that market participants would use in pricing the asset or liability , such as inherent risk , transfer restrictions , and credit risk . the company has not elected fair value accounting for any financial instruments for which fair value accounting is optional . ( d ) fair value of financial instruments cash and cash equivalents , accounts receivable , accounts payable , and accrued taxes and other expenses are stated at carrying amounts that approximate fair value because of the short maturity of those instruments . the carrying amount of the company 's long-term debt approximates fair value as the interest rate on the debt approximates the company 's current incremental borrowing rate . ( e ) cash and cash equivalents the company considers all highly liquid investments with original maturities of three months or less to be cash equivalents . at december 31 , 2012 , and 2011 , cash equivalents primarily consisted of money market accounts and certificates of deposit that are readily convertible into cash . the company maintains its cash in bank deposit accounts , money market funds , and certificates of deposit that at times exceed federally insured limits . the company periodically reviews the financial stability of institutions holding its accounts , and does not believe it is exposed to any significant custodial credit risk on cash . the company 's main operating account with bank of america exceeds federal depository insurance limit by approximately $ 28.7 million . f-9 ( f ) accounts receivable the company periodically reviews the collectability of its accounts receivable . provisions are recorded for accounts that are potentially uncollectible . determining adequate reserves for accounts receivable requires management 's judgment . conditions impacting the realizability of the company 's receivables could cause actual asset write-offs to be materially different than the reserved balances as of december 31 , 2012 . ( g ) inventories inventories include material , labor , and manufacturing overhead and are valued at the lower of cost or market . cost is determined using the first-in , first-out ( fifo ) method . the company periodically reviews the realizability of its inventory for potential obsolescence . determining the net realizable value of inventory requires management 's judgment . conditions impacting the realizability of the company 's inventory could cause actual asset write-offs to be materially different than the company 's current estimates as of december 31 , 2012 . ( h ) property , plant , and equipment property , plant , and equipment are stated at cost and are depreciated or amortized using the straight-line method over the estimated useful lives of the assets or the related lease term , if shorter . story_separator_special_tag gross margin decreased slightly to 28.5 % for the year ended december 31 , 2011 , from 28.7 % in 2010. the slight decrease in gross margin is primarily attributable to costs of approximately $ 350,000 incurred as a result of the closure of the company 's manufacturing facility in alabama as well as approximately $ 300,000 incurred in additional health insurance claims ( overhead ) partially offset by manufacturing efficiencies achieved in the company 's plants ( as a percentage of sales material and direct labor collectively decreased by 0.2 % in 2011 ) . sg & a increased 5.6 % to $ 21.4 million for the year ended december 31 , 2011 , from $ 20.2 million in 2010. as a percentage of sales , sg & a was 16.8 % for both the years ended december 31 , 2011 , and 2010. the $ 1.2 million increase in sg & a for the year ended december 31 , 2011 , is primarily due to an increase in professional fees of approximately $ 400,000 associated with the development of enhanced internal operating and information systems and a re-branding and marketing project , approximately $ 400,000 in additional administrative salaries , wages and benefits and approximately $ 200,000 in additional health insurance claims . interest expense net of interest income decreased to approximately $ 27,000 for the year ended december 31 , 2011 , from net interest expense of approximately $ 116,000 in 2010. the decrease in interest expense is primarily attributable to higher interest earned on excess cash balances , as well as lower interest paid on declining term debt balances . 17 the gain on sale of assets of approximately $ 839,000 in 2011 was derived primarily from the sale of real estate in alabama by udt . of this $ 839,000 gain , approximately $ 428,000 relates to non-controlling interests that have been deducted to determine net income attributable to ufp technologies , inc. , and $ 250,000 represents a one-time fee paid to the company for managing the transaction . the company recorded income tax expense as a percentage of income before income tax expense excluding net income attributable to non-controlling interests , of 31.3 % and 34.8 % for the years ended december 31 , 2011 , and 2010 , respectively . the decrease in the effective tax rate for the year ended december 31 , 2011 , is primarily attributable to the reversal in 2011 of approximately $ 385,000 in reserves previously established for uncertain tax benefits due to a favorable outcome on a concluded federal internal revenue service audit and the statute of limitations expiring on certain other federal income tax filings as well as increased deductions associated with domestic manufacturing . the non-controlling interest previously held in udt was not subject to corporate income tax . the company has deferred tax assets on its books associated with net operating losses generated in previous years . the company has considered both positive and negative available evidence in its determination that the deferred tax assets are more likely than not to be realized , and has not recorded a tax valuation allowance at december 31 , 2011. the company will continue to assess whether the deferred tax assets will be realizable and , when appropriate , will record a valuation allowance against these assets . the amount of the net deferred tax asset considered realizable , however , could be reduced in the near term , if estimates of future taxable income during the carry-forward period are reduced . story_separator_special_tag the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . the company 's significant accounting policies are described in note 1 to the consolidated financial statements included in item 8 of this form 10-k. the company believes the following critical accounting policies necessitated that significant judgments and estimates be used in the preparation of its consolidated financial statements . 19 the company has reviewed these policies with its audit committee . revenue recognition the company recognizes revenue at the time of shipment when title and risk of loss have passed to the customer , persuasive evidence of an arrangement exists , performance of its obligation is complete , its price to the buyer is fixed or determinable , and the company is reasonably assured of collection . if a loss is anticipated on any contract , a provision for the entire loss is made immediately . determination of these criteria , in some cases , requires management 's judgment . should changes in conditions cause management to determine that these criteria are not met for certain future transactions , revenue for any reporting period could be adversely affected . goodwill goodwill is tested for impairment annually , and will be tested for impairment between annual tests if an event occurs or circumstances change that would indicate that the carrying amount may be impaired . impairment testing for goodwill is done at a reporting unit level . reporting units are one level below the business segment level , but can be combined when reporting units within the same segment have similar economic characteristics . the company 's reporting units include its component products segment , packaging segment ( excluding its molded fiber operation ) , and its molded fiber operation . an impairment loss generally would be recognized when the carrying amount of the reporting unit 's net assets exceeds the estimated fair value of the reporting unit . the company assessed qualitative factors as of december 31 , 2012 , and determined that it was more likely than not that the fair value of both reporting units with goodwill exceeded their respective carrying amounts . factors considered for each reporting unit included financial performance , forecasts and trends , market cap , regulatory

one of the machines is presently operational . the value of the loan is approximately $ 5 million . the annual interest rate is fixed at 1.83 % . as of december 31 , 2012 , approximately $ 4.4 million had been advanced on the loan and the outstanding balance is approximately $ 4.2 million . the loan will be repaid over a five-year term . the loan is secured by the related molded fiber machines . commitments , contractual obligations , and off-balance-sheet arrangements the following table summarizes the company 's contractual obligations at december 31 , 2012 : replace_table_token_5_th the company requires cash to pay its operating expenses , purchase capital equipment , and to service the obligations listed above . the company 's principal sources of funds are its operations and its revolving credit facility . although the company generated cash from operations in the year ended december 31 , 2012 , it can not guarantee that its operations will generate cash in future periods . subject to the risk factors set forth in part i , item 1a of this report and the general disclaimers set forth in our special note regarding forward-looking statements at the outset of this report , we believe that cash flow from operations will provide us with sufficient funds in order to fund our expected operations over the next twelve months . the company does not believe inflation has had a material impact on its results of operations in the last three years . the company had no off-balance-sheet arrangements in 2012 , other than operating leases . critical accounting policies the preparation of consolidated financial statements requires the company to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues , and expenses , and related disclosure of contingent assets and liabilities . on an ongoing basis , the company evaluates its estimates , including those related to product returns , bad debts , inventories , intangible assets , income taxes , warranty obligations , restructuring charges , contingencies , and litigation . the company bases its estimates on historical experience and on various other assumptions believed to be reasonable under the circumstances , including current and anticipated worldwide economic conditions , both in general and specifically in relation to the packaging industry ,

all assets and liabilities that were not contributed or assumed remained with vtvx holdings i and vtvx holdings ii and are not reflected in the consolidated balance sheets as of december 31 , 2016 and 2015 ; ( 2 ) vtv therapeutics holdings contributed the contributed assets to vtv llc , a newly formed delaware limited liability company , and , for administrative convenience , vtv therapeutics holdings directed that the assets be transferred directly to vtv llc on behalf of vtv therapeutics holdings ; ( 3 ) vtv therapeutics inc. amended and restated its certificate of incorporation and by-laws to provide for two classes of common stock : ( a ) class a common stock , which represents economic interests and has one vote per share , and ( b ) class b common stock , par value $ 0.01 per share ( “ class b common stock ” ) , which represents no economic interests and has one vote per share ; ( 4 ) vtv llc amended and restated its limited liability company agreement ( the “ amended and restated llc agreement ” ) to provide that it has two classes of membership units : ( a ) one managing member unit , which represents no economic interests and has 100 % of the voting power of vtv llc ; and ( b ) non-voting vtv units , which represent economic interests ; ( 5 ) vtv llc issued the managing member unit to vtv therapeutics inc. ; f-7 ( 6 ) vtv llc issued 25,000,000 vtv units to vtv therapeutics holdings ; and ( 7 ) vtv therapeutics inc. issued 25,000,000 shares of class b common stock , which represents no economic interests in the company but has the right to cast one vote per share , to vtv therapeutics holdings which correspond to each vtv unit held by vtv therapeutics holdings . below is a summary of the principal documents entered into in connection with the reorganization transactions : exchange agreement - pursuant to the terms of the exchange agreement , but subject to the amended and restated llc agreement of vtv llc , the vtv units ( along with a corresponding number of shares of the class b common stock ) are exchangeable for ( i ) shares of the class a common stock on a one-for-one basis or ( ii ) cash ( based on the fair market value of the class a common stock as determined pursuant to the exchange agreement ) , at the option of vtv therapeutics inc. ( as the managing member of vtv llc ) , subject to customary conversion rate adjustments for stock splits , stock dividends and reclassifications . any decision to require an exchange for cash rather than shares of class a common stock will ultimately be determined by the entire board of directors of vtv therapeutics inc. ( the “ board of directors ” ) . on october 5 , 2015 , vtv therapeutics holdings was dissolved , and various holders of class b common stock became parties to the exchange agreement . tax receivable agreement - the tax receivable agreement among the company , m & f ttp holdings two llc , as successor in interest to vtv therapeutics holdings ( “ m & f ” ) and m & f ttp holdings llc provides for the payment by the company to m & f ( or certain of its transferees or other assignees ) of 85 % of the amount of cash savings , if any , in u.s. federal , state and local income tax or franchise tax that the company actually realizes ( or , in some circumstances , the company is deemed to realize ) as a result of ( a ) the exchange of class b common stock , together with the corresponding number of vtv units , for shares of the company 's class a common stock ( or for cash ) , ( b ) tax benefits related to imputed interest deemed to be paid by the company as a result of the tax receivable agreement and ( c ) certain tax benefits attributable to payments under the tax receivable agreement . investor rights agreement - the company is party to an investor rights agreement with m & f , as successor in interest to vtv therapeutics holdings ( the “ investor rights agreement ” ) . the investor rights agreement provides m & f with certain demand , shelf and piggyback registration rights with respect to its shares of class a common stock and also provides m & f with certain governance rights , depending on the size of its holdings of class a common stock . under the investor rights agreement , m & f was initially entitled to nominate a majority of the members of the board of directors and designate the members of the committees of the board of directors . on october 1 , 2015 , vtvx holdings i and vtvx holdings ii merged with and into vtv therapeutics holdings , with vtv therapeutics holdings continuing as the surviving limited liability company . on october 5 , 2015 , vtv therapeutics holdings was dissolved and made a liquidating distribution of shares of class b common stock and the corresponding vtv units to its members . as a result of the dissolution , m & f ttp holdings llc became the successor to vtv therapeutics holdings under the investor rights agreement , the exchange agreement and the tax receivable agreement pursuant to the terms of each respective agreement , and various other holders of class b common stock became parties to the exchange agreement . story_separator_special_tag based upon our current operating plan , we believe that our existing cash and cash equivalents and funds available to us under our loan agreement will enable us to fund our operating expenses and capital requirements through the first quarter of 2018 which is when we expect to receive results for part a of our steadfast study . we intend to use our existing cash and cash equivalents to fund the steadfast study , and any additional clinical or preclinical studies necessary to support and to submit an application for azeliragon . however , our current cash , cash equivalents and funds available to us under our loan agreement will not be sufficient for us to complete the steadfast study , and we will need to raise additional capital to complete the development , regulatory submission and commercialization of azeliragon . we are and plan to continue to pursue partnering arrangements with other pharmaceutical companies for our gka and glp-1r programs which may provide additional capital if consummated . we have based our estimates on assumptions that may prove to be wrong , and we may use our available capital resources sooner than we currently expect . because of the numerous risks and uncertainties associated with the development and commercialization of our drug candidates , we are unable to estimate the amounts of increased capital outlays and operating expenditures necessary to complete the development of our drug candidates . our future capital requirements will depend on many factors , including : the progress , costs , results and timing of the steadfast study , and the clinical development of azeliragon ; the willingness of the fda to accept the steadfast study , as well as our other completed and planned clinical and preclinical studies and other work , as the basis for review and approval of azeliragon ; the outcome , costs and timing of seeking and obtaining fda and any other regulatory approvals ; the number and characteristics of drug candidates that we pursue , including our drug candidates in preclinical development ; the ability of our drug candidates to progress through clinical development successfully ; our need to expand our research and development activities ; the costs associated with securing , establishing and maintaining commercialization capabilities ; the costs of acquiring , licensing or investing in businesses , products , drug candidates and technologies ; our ability to maintain , expand and defend the scope of our intellectual property portfolio , including the amount and timing of any payments we may be required to make , or that we may receive , in connection with the licensing , filing , prosecution , defense and enforcement of any patents or other intellectual property rights ; our need and ability to hire additional management and scientific and medical personnel ; the effect of competing technological and market developments ; our need to implement additional internal systems and infrastructure , including financial and reporting systems ; the economic and other terms , timing and success of our existing licensing arrangements and any collaboration , licensing or other arrangements into which we may enter in the future ; and the amount of any payments we are required to make to m & f in the future under the tax receivable agreement . until such time , if ever , as we can generate substantial revenue from drug sales , we expect to finance our cash needs through a combination of equity offerings , debt financings , marketing and distribution arrangements and other collaborations , strategic alliances and licensing arrangements . we do not currently have any committed external source of funds other than those available to us through the loan agreement . to the extent that we raise additional capital through the sale of equity or convertible debt securities , the ownership interests of our common stockholders will be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders . debt financing and preferred equity financing , if available , may involve agreements that include covenants that will further limit or restrict our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . if we raise additional funds through collaborations , strategic alliances or marketing , distribution or licensing arrangements with third parties , we may be required to relinquish valuable rights to our technologies , future revenue streams or drug candidates or grant licenses on terms that may not be favorable to us . 70 disclosures about contractual obligations and commitments the following table summarizes our contractual obligations at december 31 , 2016 ( in thousands ) : replace_table_token_9_th ( 1 ) interest payments associated with the loan agreement are projected based on interest rates in effect as of december 31 , 2016 assuming no variable rate fluctuations going forward . an increase in the interest rates applicable to our loan agreement by 1 % would result in an additional $ 0.1 million of annual cash interest expense . in addition to the estimated monthly cash interest payments , the projected interest payments stated above also include the 6 % final interest payment to be paid upon the maturity of the debt obligation . additionally , we enter into contracts in the normal course of business with cros for clinical trials and clinical supply manufacturing and with vendors for preclinical research studies and other services and products for operating purposes , which generally provide for termination or cancellation within 30 days of notice , and therefore are not included in the table above . additionally , we have entered into employment agreements with our chief executive officer , chief financial officer and chief medical officer that require the funding of specific payments , if certain events occur , such as a change in control or the termination of their employment without cause . these potential payment obligations are not

in each instance , the warrants have or will have an exercise price equal to the lower of ( a ) the volume weighted average price per share of our class a common stock , as reported on the principal stock exchange on which our class a common stock is listed , for 10 trading days prior to the issuance of the applicable warrants or ( b ) the closing price of a share of our class a common stock on the trading day prior to the issuance of the applicable warrants . the warrants wil l expire seven years from their date of issuance . the loan agreement includes customary affirmative and restrictive covenants , including , but not limited to , restrictions on the payment of dividends or other equity distributions and the incurrence of debt or liens upon the assets of the company or its subsidiaries . the loan agreement does not contain any financial maintenance covenants . the loan agreement includes customary events of default , including payment defaults , covenant defaults and material adverse change default . upon the occurrence of an event of default and following any applicable cure periods , a default interest rate of an additional 5 % will be applied to the outstanding loan balances , and the lenders may declare all outstanding obligations immediately due and payable and take such other actions as set forth in the loan agreement . cash flows replace_table_token_8_th operating activities for the year ended december 31 , 2016 , our net cash used in operating activities increased $ 11.3 million from the prior year . the increased use of cash was primarily driven by the increased spending on our clinical trial for azeliragon during 2016. these increased uses of cash were offset by changes in working capital , which were primarily driven by increases in accounts payable balances due to the timing of payments related to our clinical trial expenses . investing activities for the years ended december 31 , 2016 and 2015 , net cash used in investing activities was insignificant . financing activities for the year ended december 31 , 2016 , net cash provided by financing activities was $ 11.8 million compared to net cash provided by financing activities of $ 123.6 million for the year ended december 31 , 2015 , resulting in a decrease of $ 111.8 million . proceeds from debt financings decreased $ 7.5 million from 2015 to 2016. additionally , during 2016 , we received cash proceeds of $ 104.4 million related to our ipo . < p style= '' margin-top:18pt ; margin-bottom:0pt ; text-indent:0 % ; font-weight : bold ; font-style : italic ; font-family : times new

the u.s. dollar effects that arise from changing 67 | translation rates are recorded in other comprehensive income/ ( loss ) , net of tax . the effects of converting non-functional currency assets and liabilities into the functional currency are recorded in other ( income ) /deductions––net . for operations in highly inflationary economies , we translate monetary items at rates in effect at the balance sheet date , with translation adjustments recorded in other ( income ) /deductions––net , and we translate non-monetary items at historical rates . revenue , deductions from revenue and the allowance for doubtful accounts we record revenue from product sales when the goods are shipped and title and risk of loss passes to the customer . at the time of sale , we also record estimates for a variety of deductions from revenue , such as rebates , sales allowances , product returns and discounts . sales deductions are estimated and recorded at the time that related revenue is recorded except for sales incentives , which are estimated and recorded at the time the related revenue is recorded or when the incentive is offered , whichever is later . as applicable , our estimates are generally based on contractual terms or historical experience , adjusted as necessary to reflect our expectations about the future . taxes collected from customers relating to product sales and remitted to governmental authorities are excluded from revenue . as of december 31 , 2016 , and 2015 , accruals for sales deductions included in other current liabilities are approximately $ 122 million and $ 125 million , respectively . we also record estimates for bad debts . we periodically assess the adequacy of the allowance for doubtful accounts by evaluating the collectability of outstanding receivables based on factors such as past due history , historical and expected collection patterns , the financial condition of our customers , the robust nature of our credit and collection practices and the economic environment . amounts recorded for sales deductions and bad debts can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions . for information about the risks associated with estimates and assumptions , see estimates and assumptions . cost of sales and inventories inventories are carried at the lower of cost or market . the cost of finished goods , work-in-process and raw materials is determined using average actual cost . we regularly review our inventories for impairment and adjustments are recorded when necessary . selling , general and administrative expenses selling , general and administrative costs are expensed as incurred . among other things , these expenses include the internal and external costs of marketing , advertising , and shipping and handling as well as certain costs related to business technology , facilities , legal , finance , human resources , business development , public affairs and procurement , among others . advertising expenses relating to production costs are expensed as incurred , and the costs of space in publications are expensed when the related advertising occurs . advertising and promotion expenses totaled approximately $ 119 million in 2016 , $ 106 million in 2015 and $ 132 million in 2014 . shipping and handling costs totaled approximately $ 51 million in 2016 , $ 59 million in 2015 and $ 62 million in 2014 . research and development expenses research and development ( r & d ) costs are expensed as incurred . research is the effort associated with the discovery of new knowledge that will be useful in developing a new product or in significantly improving an existing product . development is the implementation of the research findings . before a compound receives regulatory approval , we record upfront and milestone payments made by us to third parties under licensing arrangements as expense . upfront payments are recorded when incurred , and milestone payments are recorded when the specific milestone has been achieved . once a compound receives regulatory approval in a major market , we record any milestone payments in identifiable intangible assets , less accumulated amortization and , unless the assets are determined to have an indefinite life , we amortize them on a straight-line basis over the remaining agreement term or the expected product life cycle , whichever is shorter . amortization of intangible assets , depreciation and certain long-lived assets long-lived assets include : goodwill —goodwill represents the excess of the consideration transferred for an acquired business over the assigned values of its net assets . goodwill is not amortized . identifiable intangible assets , less accumulated amortization —these acquired assets are recorded at our cost . identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives . identifiable intangible assets with indefinite lives that are associated with marketed products are not amortized until a useful life can be determined . identifiable intangible assets associated with ipr & d projects are not amortized until regulatory approval is obtained . the useful life of an amortizing asset generally is determined by identifying the period in which substantially all of the cash flows are expected to be generated . property , plant and equipment , less accumulated depreciation ––these assets are recorded at our cost and are increased by the cost of any significant improvements after purchase . property , plant and equipment assets , other than land and construction-in-progress , are depreciated on a straight-line basis over the estimated useful life of the individual assets . depreciation begins when the asset is ready for its intended use . for tax purposes , accelerated depreciation methods are used as allowed by tax laws . amortization expense related to finite-lived identifiable intangible assets that contribute to our ability to sell , manufacture , research , market and distribute products , compounds and intellectual property are included in amortization of intangible assets as they benefit multiple business functions . story_separator_special_tag as part of the separation from pfizer , pursuant to agreements with pfizer , pfizer provides us with some of the services related to these functions on a transitional basis in exchange for agreed-upon fees , and we are incurring other costs to replace the services and resources that will not be provided by pfizer . we have also incurred certain nonrecurring costs related to becoming an independent public company , including new branding ( which includes changes to the manufacturing process for required new packaging ) , the creation of standalone systems and infrastructure , site separation and certain legal registration and patent assignment costs . significant accounting policies and application of critical accounting estimates in presenting our financial statements in conformity with u.s. gaap , we are required to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenue , costs and expenses and related disclosures . for a description of our significant accounting policies , see notes to consolidated financial statements— note 3. significant accounting policies . we believe that the following accounting policies are critical to an understanding of our consolidated financial statements as they require the application of the most difficult , subjective and complex judgments and , therefore , could have the greatest impact on our financial statements : ( i ) fair value ; ( ii ) revenue ; ( iii ) asset impairment reviews ; and ( iv ) contingencies . below are some of our more critical accounting estimates . see also notes to consolidated financial statements— note 3. significant accounting policies— estimates and assumptions for a discussion about the risks associated with estimates and assumptions . fair value for a discussion about the application of fair value to our long-term debt and financial instruments , see notes to consolidated financial statements— note 9 . financial instruments . for a discussion about the application of fair value to our business combinations , see notes to consolidated financial statements— note 4 . acquisitions , divestitures and certain investments . for a discussion about the application of fair value to our asset impairment reviews , see asset impairment reviews below . revenue our gross product revenue is subject to deductions that are generally estimated and recorded in the same period that the revenue is recognized and primarily represents sales returns and revenue incentives . for example : for sales returns , we perform calculations in each market that incorporate the following , as appropriate : local returns policies and practices ; returns as a percentage of revenue ; an understanding of the reasons for past returns ; estimated shelf life by product ; an estimate of the amount of time between shipment and return or lag time ; and any other factors that could impact the estimate of future returns , product recalls , discontinuation of products or a changing competitive environment ; and for revenue incentives , we use our historical experience with similar incentives programs to estimate the impact of such programs on revenue . if any of our ratios , factors , assessments , experiences or judgments are not indicative or accurate predictors of our future experience , our results could be materially affected . although the amounts recorded for these revenue deductions are dependent on estimates and assumptions , historically our adjustments to actual results have not been material . the sensitivity of our estimates can vary by program , type of customer and geographic location . 35 | amounts recorded for revenue deductions can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions . for further information about the risks associated with estimates and assumptions , see notes to consolidated financial statements— note 3. significant accounting policies : estimates and assumptions . asset impairment reviews we review all of our long-lived assets for impairment indicators throughout the year and we perform detailed testing whenever impairment indicators are present . in addition , we perform impairment testing for goodwill and indefinite-lived intangible assets at least annually . when necessary , we record charges for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of these assets . our impairment review processes are described below and in notes to consolidated financial statements— note 3. significant accounting policies : amortization of intangible assets , depreciation and certain long-lived assets and , for deferred tax assets , in note 3. significant accounting policies : deferred tax assets and liabilities and income tax contingencies . examples of events or circumstances that may be indicative of impairment include : a significant adverse change in the extent or manner in which an asset is used . for example , restrictions imposed by the regulatory authorities could affect our ability to manufacture or sell a product , and a projection or forecast that demonstrates losses or reduced profits associated with an asset . this could result , for example , from the introduction of a competitor 's product that results in a significant loss of market share or the inability to achieve the previously projected revenue growth , or from the lack of acceptance of a product by customers . our impairment reviews of most of our long-lived assets depend on the determination of fair value , as defined by u.s. gaap , and these judgments can materially impact our results of operations . a single estimate of fair value can result from a complex series of judgments about future events and uncertainties and can rely on estimates and assumptions . for information about the risks associated with estimates and assumptions , see notes to consolidated financial statements— note 3. significant accounting policies : estimates and assumptions . intangible assets other than goodwill we test indefinite-lived intangible assets for impairment at least annually , or more frequently if impairment indicators exist , by first assessing qualitative factors to determine whether it is

we regularly monitor our accounts receivable for collectability , particularly in markets where economic conditions remain uncertain . we believe that our allowance for doubtful accounts is appropriate . our assessment is based on such factors as past due aging , historical and expected collection patterns , the financial condition of our customers , the robust nature of our credit and collection practices and the economic environment . for additional information about the sources and uses of our funds , see the analysis of the consolidated balance sheets and analysis of the consolidated statements of cash flows sections of this md & a . credit facility and other lines of credit in december 2016 , we entered into an amended and restated revolving credit agreement with a syndicate of banks providing for a five-year $ 1.0 billion senior unsecured revolving credit facility ( the credit facility ) , which expires in december 2021. the credit facility replaced the company 's existing revolving credit facility dated as of december 21 , 2012. subject to certain conditions , we have the right to increase the credit facility to up to $ 1.5 billion . the credit facility contains a financial covenant requiring us to not exceed a maximum total leverage ratio ( the ratio of consolidated net debt as of the end of the period to consolidated earnings before interest , income taxes , depreciation and amortization ( ebitda ) for such period ) of 4.25:1 for the fiscal quarter ended december 31 , 2016 and 3.50:1 for any fiscal quarter thereafter . upon entering into a material acquisition , the maximum total leverage ratio increases to 4.00:1 , and extends until the fourth full consecutive fiscal quarter ended immediately following the consummation of a material acquisition . the credit facility also contains a financial covenant requiring that we maintain a minimum interest coverage ratio ( the ratio of ebitda at the end of the period to interest expense for such period ) of 3.50:1 . the amended agreement includes a clause which adds back to adjusted consolidated ebitda , any operational efficiency restructuring charge ( defined as charges recorded by the company during the period commencing on october 1 , 2016 and ending december 31 , 2019 , related to

this update is effective for public entities for fiscal years beginning after december 15 , 2018 , including interim periods within that fiscal year . early adoption is permitted . the company early adopted the provisions of asu no . 2018-17 as of april 1 , 2018 and it did not have a material impact on the financial statements upon adoption . in june 2018 , the fasb issued asu 2018-08 , not-for-profit entities ( topic 958 ) : clarifying the scope and the accounting guidance for contributions received and contributions made . this asu affects not-for-profit entities and business entities that receive or make contributions of cash . the asu clarifies and improves the scope and accounting guidance to assist entities in evaluating if those transactions should be accounted for as contributions under the scope of topic 958 or as an exchange transaction subject to other guidance . this update is effective for public entities for fiscal years beginning after december 15 , 2018. the company is currently evaluating the impact that adoption will have on its financial statements . 59 research and development all research and development costs are expensed as incurred . income taxes the company accounts for income taxes under the asset and liability method . under this method , deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered or settled . realization of deferred tax assets is dependent upon future taxable income . a valuation allowance is recognized if it is more likely than not that some portion or all of a deferred tax asset will not be realized based on the weight of available evidence , including expected future earnings . the company recognizes an uncertain tax position in its financial statements when it concludes that a tax position is more likely than not to be sustained upon examination based solely on its technical merits . only after a tax position passes the first step of recognition will measurement be required . under the measurement step , the tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon effective settlement . this is determined on a cumulative probability basis . the full impact of any change in recognition or measurement is reflected in the period in which such change occurs . the company elects to accrue any interest or penalties related to income taxes as part of its income tax expense . cash and cash equivalents cash and cash equivalents include cash and all highly liquid instruments with original maturities of three months or less . furniture and equipment furniture and equipment are stated at cost less accumulated depreciation . expenditures for maintenance and repairs are charged to earnings as incurred ; additions , renewals and betterments are capitalized . when furniture and equipment are retired or otherwise disposed of , the related cost and accumulated depreciation are removed from the respective accounts , and any gain or loss is included in operations . depreciation is computed using the straight-line method over the estimated useful lives ranging from three to five years . furniture and equipment amounted to $ 216,000 and $ 171,000 at december 31 , 2018 and 2017 , respectively . accumulated depreciation was $ 162,000 and $ 160,000 at december 31 , 2018 and 2017 , respectively . depreciation expense for the years ended december 31 , 2018 and 2017 was $ 14,386 and $ 25,956 , respectively . the company periodically evaluates the carrying value of long-lived assets to be held and used and , if necessary , records impairment losses when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets ' carrying amounts . in that event , a loss is recognized based on the amount by which the carrying amount exceeds the fair market value of the long-loved assets . loss on long-lived assets to be disposed of is determined in a similar manner , except that fair market values are reduced for the cost of disposal . for the years ended december 31 , 2018 and 2017 , no impairment of furniture and equipment was recorded . 60 fair value measurements the company records financial assets and liabilities measured on a recurring and non-recurring basis as well as all non-financial assets and liabilities subject to fair value measurement at the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants . these fair value principles prioritize valuation inputs across three broad levels . level 1 inputs are quoted prices ( unadjusted ) in active markets for identical assets or liabilities . level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability , either directly or indirectly through market corroboration , for substantially the full term of the financial instrument . level 3 inputs are unobservable inputs based on the company 's assumptions used to measure assets and liabilities at fair value . an asset or liability 's classification within the various levels is determined based on the lowest level input that is significant to the fair value measurement . intangible assets intangible assets consist of intellectual property and software acquired . intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets might not be recoverable . story_separator_special_tag the company also recorded changes in the fair value of the liability warrants during the year ended december 31 , 2017 , of $ 280,747. there were no common stock liability warrants issued during the year ended december 31 , 2018. income taxes : we have incurred net operating losses from inception ; we did not record an income tax benefit for our incurred losses for the years ended december 31 , 2018 and 2017 , due to uncertainty regarding utilization of our net operating carryforwards and due to our history of losses . 45 story_separator_special_tag text-indent : 36pt ; font-family : `` times new roman `` , times , serif ; font-size : 10pt ; ' > we do not currently have , nor have we ever had , any relationships with unconsolidated entities or financial partnerships , such as entities often referred to as structured finance or special purpose entities , established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes . in addition , we do not engage in trading activities involving non-exchange traded contracts . recent accounting pronouncements in february 2016 , financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) no . 2016-02 , lease accounting topic 842. the new standard is effective for reporting periods beginning after december 15 , 2018 and early adoption is permitted . the standard will require lessees to report most leases as assets or liabilities on the balance sheet , while lessor accounting will remain substantially unchanged . the standard permits two approaches , one requiring retrospective application of the new guidance with restatement of prior years , and one requiring prospective application of the new guidance . we plan to adopt the new lease standard effective january 1 , 2019 and apply it prospectively . we do not expect the new lease standard to have a material effect on our financial position , results of operations or cash flows . upon adoption of asu 2016-02 , we will be required to recognize an operating lease liability and right-of-use asset of approximately $ 100,000 , based on the lease composition disclosed in footnote 13. in november 2016 , the fasb issued asu no . 2016-18 , statement of cash flows , amending the presentation of restricted cash within the statement of cash flows . the new guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows . the company adopted the provisions of asu no . 2016-18 as of january 1 , 2018 on a retrospective basis . for the years ended december 31 , 2018 and 2017 , we included $ 110,000 and $ 55,000 , respectively , of restricted cash within cash , cash equivalents , and restricted cash on the statement of cash flows . the restricted cash represents a required deposit for the company credit card and is restricted until the company no longer has the credit card or the limit changes on the credit card . in july 2017 , the fasb issued asu 2017-11 , accounting for certain financial instruments with down round features and replacement of the indefinite deferral for mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests with a scope exception . part i of this asu addresses the complexity of accounting for certain financial instruments with down round features . down round features are features of certain equity-linked instruments ( or embedded features ) that result in the strike price being reduced on the basis of future equity offerings . current accounting guidance requires financial instruments with down round features to be accounted for at fair value . part ii of the update applies only to nonpublic companies and is therefore not applicable to the company . the amendments in part i of the update change the classification analysis of certain equity-linked financial instruments ( or embedded features ) with down round features . when determining whether certain financial instruments should be classified as liabilities or equity instruments , a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity 's own stock . as a result , a freestanding equity-linked financial instrument ( or embedded conversion option ) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature . for freestanding equity-classified financial instruments , the amendments require entities that present earnings per share ( eps ) in accordance with topic 260 to recognize the effect of the down round feature when it is triggered . that effect is treated as a dividend and as a reduction of income available to common shareholders in basic eps . this update is effective for public entities for fiscal years beginning after december 15 , 2018. early adoption is permitted . the company early adopted the provisions of asu no . 2017-11 as of january 1 , 2018. as the company does not have any financial instruments with down round features , this asu did not have a material impact on the financial statements upon adoption . in june 2018 , the fasb issued asu 2018-07 , compensation-stock compensation improvements to nonemployee share based payment accounting . this asu simplifies several aspects of the accounting for non-employee share-based payment transactions resulting from expanding the scope of topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees . an entity should apply the requirements of topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost . the amendments also clarify that topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or was granted in conjunction with selling goods or services to customers as part of a contract accounted for under

46 funding requirements we expect to incur ongoing operating losses for the foreseeable future as we continue to develop our planned therapeutic programs including related clinical studies and other programs in the pipeline . we expect that our existing resources combined with the $ 11.3 million proceeds from the march 2019 warrant exercise will be sufficient to fund our planned operations for at least the next 12 to 18 months from the date of this report . if we meet certain requirements , we may sell securities that are registered on our form s-3 registration statement ( file no . 333-220572 ) , and by raising capital through sales of securities to third parties and existing stockholders . if we are unable to raise additional capital when needed , however , we could be forced to curtail or cease operations . our future capital uses and requirements will depend on the time and expenses needed to begin and continue clinical trials for our new drug developments . additional funding may not be available to us on acceptable terms or at all . in addition , the terms of any financing may adversely affect the holdings or the rights of our stockholders . for example , if we raise additional funds by issuing equity securities or by selling debt securities , if convertible , further dilution to our existing stockholders would result . to the extent our capital resources are insufficient to meet our future capital requirements , we will need to finance our future cash needs through public or private equity offerings , collaboration agreements , debt financings or licensing arrangements . if adequate funds are not available , we may be required to terminate , significantly modify or delay our development programs , reduce our planned commercialization efforts , or obtain funds through collaborators that may require us to relinquish rights to our technologies or product candidates that we might otherwise seek to develop or commercialize independently . further , we may elect to raise additional funds even before we need them if we believe the conditions for raising capital are favorable . 47 off-balance sheet arrangements < p style='margin : 0pt ; text-align : left ;

over time , some portion of these instruments is not redeemed . we determine breakage income for gift cards , gift certificates , and credit vouchers based on historical redemption patterns . breakage income is recorded in other income , which is a component of operating expenses in the consolidated statements of income , when we can determine the portion of the liability where redemption is remote . based on our historical information , three years after the gift card , gift certificate , or credit voucher is issued , we can determine the portion of the liability where redemption is remote . when breakage income is recorded , a liability is recognized for any legal obligation to remit the unredeemed portion to relevant jurisdictions . substantially all of our gift cards , gift certificates , and credit vouchers have no expiration dates . credit cards we have credit card agreements ( the “ agreements ” ) with third parties to provide our customers with private label credit cards and or co-branded credit cards ( collectively , the “ credit cards ” ) . each private label credit card bears the logo of gap , banana republic , old navy , or athleta and can be used at any of our u.s. or canadian store locations and online . the co-branded credit card is a visa credit card bearing the logo of gap , banana republic , old navy , or athleta and can be used everywhere visa credit cards are accepted . a third-party financing company is the sole owner of the accounts and underwrites the credit issued under the credit card programs . we receive cash in accordance with the agreements based on usage of the credit cards or specified transactional fees . we recognize income for such cash receipts when the amounts are fixed or determinable and collectibility is reasonably assured , which is generally the time at which the actual usage of the credit cards or specified transaction occurs . the majority of the income is recorded in other income , which is a component of operating expenses in our consolidated statements of income , and the remaining portion of income is recognized as a reduction to cost of goods sold and occupancy expenses in our consolidated statements of income . the credit card programs offer incentives to cardholders in the form of reward certificates upon the cumulative purchase of an established amount . the cost associated with reward points and certificates is accrued as the rewards are earned by the cardholder and is recorded in accrued expenses and other current liabilities in the consolidated balance sheets and in cost of goods sold and occupancy expenses in the consolidated statements of income . other administrative costs related to the credit card programs , including payroll , marketing expenses , and other direct costs , are recorded in operating expenses in the consolidated statements of income . 44 earnings per share basic earnings per share is computed as net income divided by the weighted-average number of common shares outstanding for the period . diluted earnings per share is computed as net income divided by the weighted-average number of common shares outstanding for the period including common stock equivalents . common stock equivalents consist of shares subject to share-based awards with exercise prices less than the average market price of our common stock for the period , to the extent their inclusion would be dilutive . stock options and other stock awards that contain performance conditions are not included in the calculation of common stock equivalents until such performance conditions have been achieved . foreign currency our international subsidiaries primarily use local currencies as their functional currency and translate their assets and liabilities at the current rate of exchange in effect at the balance sheet date . revenue and expenses from their operations are translated using rates that approximate those in effect during the period in which the transactions occur . the resulting gains and losses from translation are recorded in the consolidated statements of comprehensive income and in accumulated oci in the consolidated statements of stockholders ' equity . transaction gains and losses resulting from intercompany balances of a long-term investment nature are also classified as accumulated oci . transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the local functional currency are included in the consolidated statements of income . the aggregate transaction gains and losses recorded in operating expenses in the consolidated statements of income are as follows : replace_table_token_22_th income taxes deferred income taxes are recorded for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements . a valuation allowance is established against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized . our income tax expense includes changes in our estimated liability for exposures associated with our various tax filing positions . at any point in time , many tax years are subject to or in the process of being audited by various taxing authorities . to the extent our estimates of settlements change or the final tax outcome of these matters is different from the amounts recorded , such differences will impact the income tax provision in the period in which such determinations are made . the company recognizes interest related to unrecognized tax benefits in interest expense and penalties related to unrecognized tax benefits in operating expenses in the consolidated statements of income . recent accounting pronouncements in may 2014 , the fasb issued asu no . 2014-09 , revenue from contracts with customers , to clarify the principles of recognizing revenue and create common revenue recognition guidance between u.s. gaap and international financial reporting standards . in august 2015 , the fasb issued asu no . story_separator_special_tag we have deemed athleta and intermix to be the reporting units at which goodwill is tested for athleta and intermix , respectively . during the fourth quarter of fiscal 2015 , we completed our annual impairment testing of goodwill and we did not recognize any impairment charges . we determined that the fair value of goodwill attributed to athleta significantly exceeded its carrying amount as of the date of our annual impairment review . the fair value of goodwill attributed to intermix exceeded its carrying amount by approximately 15 percent as of the date of our annual impairment review . in connection with the acquisitions of athleta in september 2008 and intermix in december 2012 , we allocated $ 54 million and $ 38 million of the respective purchase prices to trade names . the aggregate carrying amount of the trade names was $ 92 million as of january 30 , 2016 . a trade name is considered impaired if the carrying amount exceeds its estimated fair value . if a trade name is considered impaired , we recognize a loss equal to the difference between the carrying amount and the estimated fair value of the trade name . the fair value of the trade names is determined using the relief from royalty method . during the fourth quarter of fiscal 2015 , we completed our annual impairment review of the trade names and we did not recognize any impairment charges . we determined that the fair value of the athleta trade name significantly exceeded its carrying amount as of the date of our annual impairment review . the fair value of the intermix trade name exceeded its carrying amount by approximately 30 percent as of the date of our annual impairment review . these analyses require management to make assumptions and to apply judgment , including forecasting future sales and expenses , and selecting appropriate discount rates and royalty rates , which can be affected by economic conditions and other factors that can be difficult to predict . we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate impairment losses of long-lived assets , goodwill , and intangible assets . however , if actual results are not consistent with our estimates and assumptions used in the calculations , we may be exposed to impairment losses that could be material . revenue recognition while revenue recognition for the company does not involve significant judgment , it represents an important accounting policy . we recognize revenue and the related cost of goods sold at the time the products are received by the customers . for sales transacted at stores , revenue is recognized when the customer receives and pays for the merchandise at the register . for sales where we ship the merchandise to the customer from a distribution center or store , revenue is recognized at the time we estimate the customer receives the merchandise . 29 we sell merchandise to franchisees under multi-year franchise agreements . we recognize revenue from sales to franchisees at the time merchandise ownership is transferred to the franchisee , which generally occurs when the merchandise reaches the franchisee 's predesignated turnover point . we also receive royalties from franchisees primarily based on a percentage of the total merchandise purchased by the franchisee , net of any refunds or credits due them . royalty revenue is recognized primarily when merchandise ownership is transferred to the franchisee . we record an allowance for estimated returns based on our historical return patterns and various other assumptions that management believes to be reasonable . we do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our sales return allowance . however , if the actual rate of sales returns increases significantly , our operating results could be adversely affected . we have not made any material changes in the accounting methodology used to estimate future sales returns in the past three fiscal years . unredeemed gift cards , gift certificates , and credit vouchers upon issuance of a gift card , gift certificate , or credit voucher , a liability is established for its cash value . the liability is relieved and net sales are recorded upon redemption by the customer . over time , some portion of these instruments is not redeemed ( “ breakage ” ) . we determine breakage income for gift cards , gift certificates , and credit vouchers based on historical redemption patterns . breakage income is recorded in other income , which is a component of operating expenses in the consolidated statements of income , when we can determine the portion of the liability where redemption is remote , which is three years after the gift card , gift certificate , or credit voucher is issued . when breakage income is recorded , a liability is recognized for any legal obligation to remit the unredeemed portion to relevant jurisdictions . substantially all of our gift cards , gift certificates , and credit vouchers have no expiration dates . we do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our breakage income . however , if the actual pattern of redemption for gift cards , gift certificates , and credit vouchers changes significantly , our operating results could be adversely affected . we have not made any material changes in the accounting methodology used to estimate breakage income in the past three fiscal years . income taxes we record a valuation allowance against our deferred tax assets when it is more likely than not that some portion or all of such deferred tax assets will not be realized . in determining the need for a valuation allowance , management is required to make assumptions and to apply

we increased our annual dividend from $ 0.88 per share for fiscal 2014 to $ 0.92 per share for fiscal 2015 . we plan to pay an annual dividend of $ 0.92 per share in fiscal 2016 . share repurchases certain financial information about the company 's share repurchases is set forth under the heading `` share repurchases '' in note 8 of notes to consolidated financial statements included in part ii , item 8 of this form 10-k. 26 contractual cash obligations we are party to many contractual obligations involving commitments to make payments to third parties . the following table provides summary information concerning our future contractual obligations as of january 30 , 2016 . these obligations impact our short-term and long-term liquidity and capital resource needs . certain of these contractual obligations are reflected in the consolidated balance sheet as of january 30 , 2016 , while others are disclosed as future obligations . replace_table_token_15_th ( 1 ) represents principal maturities , excluding interest . see note 4 of notes to consolidated financial statements . ( 2 ) excludes maintenance , insurance , taxes , and contingent rent obligations . see note 11 of notes to consolidated financial statements for discussion of our operating leases . ( 3 ) represents estimated open purchase orders to purchase inventory as well as commitments for products and services used in the normal course of business . there is $ 82 million of long-term liabilities recorded in lease incentives and other long-term liabilities in the consolidated balance sheet as of january 30 , 2016 that is being excluded from the table above as the amount relates to uncertain tax positions and deferred compensation and we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time . commercial commitments we have commercial commitments , not reflected in the table above , that were incurred in the normal course of business to support our operations , including standby letters of credit of $ 18 million , surety bonds of $ 39 million , and bank guarantees of $ 17 million outstanding ( of which $ 12 million was issued under the unsecured revolving credit facilities for our operations in foreign locations ) as of january 30 , 2016 . < div

other peis , and those acquired for various debt and regulatory requirements , are accounted for at cost less impairment ( if any ) , plus or minus observable price changes from an identical or similar investment of the same issuer , with such changes recognized in income . periodic reviews are conducted for impairment by comparing carrying values with estimates of fair value determined according to the previous discussion . premises , equipment and software , net premises , equipment , and software are stated at cost , net of accumulated depreciation and amortization . depreciation , computed primarily on the straight-line method , is charged to operations over the estimated useful lives of the properties , generally 25 to 40 years for buildings , three to 10 years for furniture and equipment , and three to 10 years for software , including capitalized costs related to our technology initiatives . leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements ( including any extension options that are reasonably certain to be exercised ) , whichever is shorter . premises , equipment and software are evaluated for impairment on a periodic basis . goodwill and identifiable intangible assets goodwill and intangible assets deemed to have indefinite lives are not amortized . we subject these assets to annual specified impairment tests as of the beginning of the fourth quarter and more frequently if changing conditions warrant . business combinations business combinations are accounted for under the acquisition method of accounting . upon initially obtaining control , we recognize 100 % of all acquired assets and all assumed liabilities , regardless of the percentage owned . the assets and liabilities are recorded at their estimated fair values , with goodwill being recorded when such fair values are less than the cost of acquisition . certain transaction and restructuring costs are expensed as incurred . changes to estimated fair values from a business combination are recognized as an adjustment to goodwill over the measurement period , which can not exceed one year from the acquisition date . results of operations of the acquired business are included in our statement of income from the date of acquisition . other real estate owned other real estate owned ( “ oreo ” ) consists principally of commercial and residential real estate obtained in partial or total satisfaction of loan obligations . amounts are recorded initially at fair value ( less any selling costs ) based on property appraisals at the time of transfer and subsequently at the lower of cost or fair value ( less any selling costs ) . derivative instruments we use derivative instruments — including interest rate swaps and purchased and sold options such as floors and basis swaps—as part of our overall interest rate risk management strategy . derivatives are an important tool used in managing our overall asset and liability sensitivities to remain within management 's stated interest rate risk thresholds . their use allows us to adjust and align our naturally occurring mix of fixed and floating-rate assets and liabilities to manage interest income volatility by synthetically converting variable-rate assets to fixed-rate , or synthetically converting fixed-rate funding instruments to floating-rates . we also execute both interest rate and short-term foreign currency derivative instruments with our commercial banking customers to facilitate their risk management strategies . these derivatives are immediately hedged by offsetting derivatives with third-parties such that we minimize our net risk exposure as a result of such transactions . we record all derivatives at fair value in the balance sheet as either other assets or other liabilities . the accounting for the change in value of a derivative depends on whether or not the transaction has been designated and qualifies 95 t able of contents zions bancorporation , national association and subsidiaries for hedge accounting . derivatives that are not designated as hedges are reported and measured at fair value through earnings . see note 7 for more information . derivatives in designated accounting hedge we apply hedge accounting to certain derivatives executed for risk management purposes , primarily interest rate risk . to qualify for hedge accounting , a derivative must be highly effective at reducing the risk associated with the exposure being hedged and the hedging relationship must be formally documented . we primarily use regression analysis to assess the effectiveness of each hedging relationship , unless the hedge qualifies for other methods of assessing effectiveness ( e.g . , shortcut or critical terms match ) , both at inception and on an ongoing basis . we designate derivatives as fair value and cash flow hedges for accounting purposes and these hedges can be a significant aspect of our overall interest risk sensitivity management . we may add additional hedging strategies and apply hedge accounting to the strategies as it deems necessary . see note 7 for more information regarding the accounting for derivatives designated as hedging instruments . commitments and letters of credit in the ordinary course of business , we enter into commitments to extend credit , commercial letters of credit , and standby letters of credit . such financial instruments are recorded in the financial statements when they become payable . the credit risk associated with these commitments is evaluated in a manner similar to the alll . the rulc is presented separately in the balance sheet . revenue recognition service charges and fees on deposit accounts are recognized in accordance with published deposit account agreements for customer accounts or contractual agreements for commercial accounts . other service charges , commissions , and fees include interchange fees , bank services , and other fees , which are generally recognized at the time of transaction or as the services are performed . share-based compensation share-based compensation generally includes grants of stock options , restricted stock , restricted stock units ( “ rsus ” ) , and other awards to employees and nonemployee directors . story_separator_special_tag as a result of the cecl accounting standard , the acl is subject to economic forecasts that may change materially from period to period . the provision for credit losses , which is the combination of both the provision for loan losses and the provision for unfunded lending commitments , was $ 414 million in 2020 , compared with $ 39 million in 2019. the acl increased $ 309 million to $ 835 million at december 31 , 2020 , compared with $ 526 million at january 1 , 2020. the increase in the acl is almost entirely due to economic stress caused by the covid-19 pandemic coupled with the effect of low oil and gas prices . the ratio of net charge-offs to average loans during 2020 was 0.20 % , compared with 0.08 % during 2019. the provision for credit losses for debt securities was less than $ 1 million during 2020 . 42 zions bancorporation , national association and subsidiaries * january 1 , 2020 amount is used instead of december 31 , 2019 , for comparative purposes because this is the date the cecl accounting standard became effective . the total acl was $ 835 million at december 31 , 2020 , compared with $ 526 million at january 1 , 2020. the bar chart above shows the broad categories of change in the acl . the second bar represents the change in acl due to changes in economic forecasts . the $ 373 million increase from january 1 , 2020 is our estimate of the change in credit losses due to the change in economic forecasts brought on by the onset of the covid-19 pandemic and the resulting economic downturn , including the impact of low oil and gas prices . as of december 31 , 2020 , our base forecast shows economic improvement continuing throughout 2021 , gradually stabilizing by 2022. credit quality factors represented by the third bar include risk-grade migration and specific reserves against loans , which , when combined , add $ 104 million to the acl when compared with 2019 , showing credit quality deterioration during the year . lastly , portfolio changes , driven by non-ppp loan balances declining , the aging of the portfolio , decreased utilization , and other similar factors , generated a $ 168 million reduction in the acl . see note 6 of the notes to consolidated financial statements for more information on how we determine the appropriate level for the alll and the rulc . noninterest income noninterest income represents revenues we earn for products and services that have no associated interest rate or yield and is classified as either customer-related or noncustomer-related fee income . we believe a subtotal of customer-related fees provides a better view of income over which we have more direct near-term control and excludes items such as mark-to-market adjustments on certain derivatives , dividends , insurance-related income , and securities gains and losses . total noninterest income increased by $ 12 million , to $ 574 million in 2020 , compared with $ 562 million in 2019 , and $ 552 million in 2018. noninterest income accounted for approximately 21 % and 20 % of net revenue during 2020 and 2019 , respectively . schedule 10 presents a comparison of the major components of noninterest income for the past three years . 43 zions bancorporation , national association and subsidiaries schedule 10 noninterest income replace_table_token_11_th customer-related fees growing customer-related fee income is a key strategic priority , and several strategic initiatives are underway to support this effort . we are working to leverage our relationship with commercial and small business customers to accelerate sales of capital markets products , treasury management products , and wealth advisory services . total customer-related fees increased to $ 549 million in 2020 , compared with $ 525 million in 2019 , and $ 508 million in 2018. loan-related fees and income increased $ 34 million in 2020 , due to residential mortgage loan originations and sales , which benefited from the reduction in benchmark interest rates and our enhanced customer-facing digital fulfillment process . retail and business banking fees decreased $ 10 million in 2020 , due to fee waivers as a result of the covid-19 pandemic . card fees decreased $ 10 million in 2020 , due to reduced economic activity and transaction volume . customer-related fees increased by $ 17 million , or 3 % , during 2019. capital markets and foreign exchange fees increased by $ 20 million as a result of an $ 11 million increase in income from arranging interest rate hedges for our loan customers , a $ 4 million increase in loan syndication arrangement fees , and a $ 3 million increase in foreign exchange fees . wealth management and trust fees increased by $ 5 million , or 9 % , as a result of increased corporate and personal trust revenue . other customer-related fees decreased by $ 6 million , or 22 % , primarily as a result of the sale of a minor business in 2019. noncustomer-related fees dividends and other income decreased by $ 19 million during 2020 , primarily due to lower dividends received from the federal home loan bank ( “ fhlb ” ) , reflecting less fhlb stock held by us . when comparing 2019 with 2018 , fair value and nonhedge derivative income decreased by $ 8 million due to valuation adjustments on client-related interest rate swaps during 2019. as a result of the decline in interest rates during 2019 and increased client activity during the year , these client-related interest rate swaps significantly increased in value , resulting in the bank having a larger exposure to the clients and a $ 9 million negative valuation adjustment in 2019 , compared with a negative valuation adjustment of $ 1 million in 2018 . 44 zions bancorporation , national association and subsidiaries noninterest expense schedule 11 presents a

the fhlb allows member banks to borrow against their eligible loans and securities to satisfy liquidity and funding requirements . we are required to invest in fhlb and federal reserve stock to maintain our borrowing capacity . the amount available for additional fhlb and federal reserve borrowings was approximately $ 17.1 billion at december 31 , 2020 , compared with $ 15.3 billion at december 31 , 2019. loans with a carrying value of approximately $ 24.7 billion at december 31 , 2020 have been pledged at the fhlb of des moines and the federal reserve as collateral for current and potential borrowings , compared with $ 21.5 million at december 31 , 2019. at december 31 , 2020 , we had no fhlb or federal reserve borrowings outstanding , compared with $ 1.0 billion of short-term fhlb borrowings outstanding and no long-term fhlb or federal reserve borrowings outstanding at december 31 , 2019. at december 31 , 2020 , our total investment in fhlb and federal reserve stock was $ 11 million and $ 98 million , respectively , compared with $ 50 million and $ 107 million at december 31 , 2019. during 2020 , the federal reserve established the paycheck protection program liquidity facility ( “ ppplf ” ) . under the ppplf , we will be able to obtain term financing for ppp loans by pledging them to the frb prior to march 31 , 2021. in deciding whether to utilize the ppplf as a funding source , we will take into account our current funding position and our expectation of early ppp redemption through loan forgiveness . although the ppplf will 74 zions bancorporation , national association and subsidiaries cease after march 31 , 2021 , we will also have the ability to increase our borrowing capacity at the fhlb of des moines by pledging the ppp loans . the ability to pledge ppp loans to the fhlb of des moines does not have a defined expiry , and funding terms may vary . our afs investment securities are primarily held as a source of contingent liquidity . we target securities that can be easily turned into cash through sale or repurchase agreements and whose value remains relatively stable during market disruptions . we regularly manage our short-term funding needs through secured borrowing with the securities pledged as collateral . interest rate risk management is another consideration for selection of investment securities . our afs securities balances increased by $ 2.0 billion during 2020. our loan-to-total deposit ratio

85 item 8. financial statements and supplementary data report of independent registered public accounting firm on internal control over financial reporting 87 report of independent registered public accounting firm 88 audited consolidated financial statements consolidated statements of financial position 89 consolidated statements of operations 90 consolidated statements of comprehensive income 91 consolidated statements of stockholders ' equity 92 consolidated statements of cash flows 93 notes to consolidated financial statements 94 86 report of independent registered public accounting firm on internal control over financial reporting the board of directors and stockholders principal financial group , inc. we have audited principal financial group , inc. 's internal control over financial reporting as of december 31 , 2012 , based on criteria established in internal control — integrated framework issued by the committee of sponsoring organizations of the treadway commission ( `` the coso criteria `` ) . management of principal financial group , inc. ( `` the company `` ) is responsible for maintaining effective internal control over financial reporting , and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management 's report on internal control over financial reporting . our responsibility is to express an opinion on the company 's internal control over financial reporting based on our audit . we conducted our audit in accordance with the standards of the public company accounting oversight board ( united states ) . those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects . our audit included obtaining an understanding of internal control over financial reporting , assessing the risk that a material weakness exists , testing and evaluating the design and operating effectiveness of internal control based on the assessed risk , and performing such other procedures as we considered necessary in the circumstances . we believe that our audit provides a reasonable basis for our opinion . a company 's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles . a company 's internal control over financial reporting includes those policies and procedures that ( 1 ) pertain to the maintenance of records that , in reasonable detail , accurately and fairly reflect the transactions and dispositions of the assets of the company ; ( 2 ) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles , and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company ; and ( 3 ) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition , use , or disposition of the company 's assets that could have a material effect on the financial statements . because of its inherent limitations , internal control over financial reporting may not prevent or detect misstatements . also , projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions , or that the degree of compliance with the policies or procedures may deteriorate . in our opinion , principal financial group , inc. maintained , in all material respects , effective internal control over financial reporting as of december 31 , 2012 , based on the coso criteria . we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) , the consolidated statements of financial position of principal financial group , inc. as of december 31 , 2012 and 2011 , and the related consolidated statements of operations , comprehensive income , stockholders ' equity and cash flows for each of the three years in the period ended december 31 , 2012 , and our report dated february 13 , 2013 , expressed an unqualified opinion thereon . ernst & young llp des moines , iowa february 13 , 2013 87 report of independent registered public accounting firm the board of directors and stockholders principal financial group , inc. we have audited the accompanying consolidated statements of financial position of principal financial group , inc. ( `` the company `` ) as of december 31 , 2012 and 2011 , and the related consolidated statements of operations , comprehensive income , stockholders ' equity and cash flows for each of the three years in the period ended december 31 , 2012. these financial statements are the responsibility of the company 's management . our responsibility is to express an opinion on these financial statements based on our audits . we conducted our audits in accordance with the standards of the public company accounting oversight board ( united states ) . those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement . an audit includes examining , on a test basis , evidence supporting the amounts and disclosures in the financial statements . an audit also includes assessing the accounting principles used and significant estimates made by management , as well as evaluating the overall financial statement presentation . we believe that our audits provide a reasonable basis for our opinion . in our opinion , the financial statements referred to above present fairly , in all material respects , the consolidated financial position of principal financial group , inc. at december 31 , 2012 and 2011 , and the consolidated results of its operations and its cash flows for each of the three years in the period ended december 31 , 2012 , in conformity with u.s. generally accepted accounting principles . story_separator_special_tag if the fair value is greater than the carrying value , then the carrying value of the reporting unit is deemed to be recoverable , and step 2 is not required . if the fair value estimate is less than the carrying value , it is an indicator that impairment may exist , and step 2 is required . in step 2 , the reporting unit 's goodwill implied fair value is determined . the reporting unit 's fair value as determined in step 1 is assigned to all of its net assets ( recognized and unrecognized ) as if the reporting unit were acquired in a business combination as of the date of the impairment test . if the implied fair value of the reporting unit 's goodwill is lower than its carrying amount , goodwill is impaired and written down to its implied fair value . the determination of fair value for our reporting units is primarily based on an income approach whereby we use discounted cash flows for each reporting unit . when available , and as appropriate , we use market approaches or other valuation techniques to corroborate discounted cash flow results . the discounted cash flow model used for each reporting unit is based on either income or distributable cash flow , depending on the reporting unit being valued . for the income model , we determine fair value based on the present value of the most recent income projections for each reporting unit and calculate a terminal value utilizing a terminal growth rate . the significant assumptions in the 40 operating income model include : income projections , including the underlying assumptions ; discount rate and terminal growth rate . for the distributable cash flow model , we determine fair value based on the present value of projected statutory net income and changes in required capital to determine distributable income for the respective reporting unit . the significant assumptions in the distributable cash flow model include : required capital levels ; income projections , including the underlying assumptions ; discount rate ; new business projection period and new business production growth . intangible assets with useful lives are amortized as related benefits emerge and are reviewed periodically for indicators of impairment in value . if facts and circumstances suggest possible impairment , the sum of the estimated undiscounted future cash flows expected to result from the use of the asset is compared to the current carrying value of the asset . if the undiscounted future cash flows are less than the carrying value , an impairment loss is recognized for the excess of the carrying amount of assets over their fair value . for those assets amortized as related benefits emerge , the most significant assumptions involved in the estimation of future benefits include surrender/lapse rates , interest margins and mortality . we did not recognize a material impairment in our 2012 consolidated statement of operations . investment management contracts acquired in our 2006 purchase of wm advisors , inc. are considered an indefinite lived intangible and are the most material intangible asset included in our 2012 consolidated statement of financial position with a carrying value of $ 608.0 million . positive net cash flows and expected future flows combined with significantly lower than expected expenses more than offset lower than expected market returns on the underlying assets acquired . as a result , the fair value of this intangible asset as of december 31 , 2012 , was in excess of its carrying value . we can not predict certain future events that might adversely affect the reported value of goodwill and other intangible assets that totaled $ 543.4 million and $ 927.2 million , respectively , as of december 31 , 2012. such events include , but are not limited to , strategic decisions made in response to economic and competitive conditions , the impact of the economic environment on our customer base , interest rate movements , declines in the equity markets , the legal environment in which the businesses operate or a material negative change in our relationships with significant customers . additional information about impairments is described in item 8 . `` financial statements and supplementary data , notes to consolidated financial statements , note 2 , goodwill and other intangible assets . `` insurance reserves reserves are liabilities representing estimates of the amounts that will come due , at some point in the future , to or on behalf of our policyholders . u.s. gaap , allowing for some degree of managerial judgment , prescribes the methods of establishing reserves . future policy benefits and claims include reserves for individual traditional and group life insurance , accident and health insurance and individual and group annuities that provide periodic income payments , which are computed using assumptions of mortality , morbidity , lapse , investment performance and expense . these assumptions are based on our experience and are periodically reviewed against industry standards to ensure actuarial credibility . for long duration insurance contracts , once these assumptions are made for a given policy or group of policies , they will not be changed over the life of the policy . however , significant changes in experience or assumptions may require us to provide for expected future losses on a product by establishing premium deficiency reserves . premium deficiency reserves may also be established for short duration contracts to provide for expected future losses . our reserve levels are reviewed throughout the year using internal analysis including , among other things , experience studies , claim development analysis and annual statutory asset adequacy analysis . to the extent experience indicates potential loss recognition , we recognize losses on certain lines of business . the ultimate accuracy of the assumptions on these long-tailed insurance products can not be determined until the obligation of the entire block of business on which the assumptions were made is extinguished . short-term variances of actual

dividends from principal life , our primary subsidiary , are limited by iowa law . under iowa laws , principal life may pay dividends only from the earned surplus arising from its business and must receive the prior approval of the insurance commissioner of the state of iowa ( `` the commissioner '' ) to pay stockholder dividends or make any other distribution if such distributions would exceed certain statutory limitations . iowa law gives the commissioner discretion to disapprove requests for distributions in excess 57 of these limits . extraordinary dividends are those , together with dividends or other distributions made within the preceding twelve months , that exceed the greater of ( i ) 10 % of principal life 's statutory policyholder surplus as of the previous year-end or ( ii ) the statutory net gain from operations from the previous calendar year . based on december 31 , 2012 statutory results , the dividend limitation for principal life is approximately $ 472.0 million in 2013. in 2012 , total stockholder dividends paid by principal life to its parent were $ 700.0 million , which were extraordinary and were approved by the commissioner . based on iowa law , principal life could have distributed approximately $ 509.7 million in statutory dividends in 2011. principal life distributed paid-in and contributed surplus in the amount of $ 500.0 million to its parent company in 2011. in addition , principal life requested and received permission from the commissioner to pay an extraordinary dividend in the amount of $ 250.0 million , which was paid by principal life to its parent in 2011. based on iowa law , principal life could have distributed approximately $ 608.7 million in statutory dividends in 2010. no dividends were paid as of december 31 , 2010 ; however , on june 21 , 2010 , principal life distributed paid-in and contributed surplus in the amount of $ 300.0 million to its parent company . operations . our primary consolidated cash flow sources are premiums from insurance products , pension and annuity deposits , asset management fee revenues , administrative services fee revenues , income from investments and proceeds from the sales or maturity of investments . cash outflows consist primarily of payment of benefits to policyholders and beneficiaries , income and other taxes , current operating expenses , payment of dividends to policyholders , payments in connection with investments acquired , payments made to acquire subsidiaries , payments

the company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer at a point in time . the company 's shipping terms provide the primary indicator of the transfer of control . the company 's general shipping terms are f.o.b . shipping point , where title and risk and rewards of ownership transfer at the point when the products leave the company 's warehouse . the company recognizes revenue based on the consideration specified in the invoice with a customer , excluding any sales incentives , discounts , and amounts collected on behalf of third parties ( i.e . , governmental tax authorities ) . based on historical experience with the customer , the customer 's purchasing pattern and its significant experience selling products , the company concluded that a significant reversal in the cumulative amount of revenue recognized will not occur when the uncertainty ( if any ) is resolved ( that is , when the total amount of purchases is known ) . refer to note 2 for additional information . sales taxes the company presents taxes collected and remitted to governmental authorities on a net basis in the accompanying consolidated statements of operations . cost of sales the types of costs included in cost of sales include material , labor , factory and tooling overhead , shipping , and freight costs . major components of these expenses are material costs , such as steel , packaging and cartons , personnel costs , and facility costs , such as rent , depreciation and utilities , related to the production and distribution of the company 's products . inbound freight charges , purchasing and receiving costs , inspection costs , warehousing costs , internal transfer costs , and other costs of the company 's distribution network are also included in cost of sales . tool and die costs tool and die costs are included in product costs in the year incurred . product and software research and development costs product research and development costs , which are included in operating expenses and are charged against income as incurred , were $ 10.9 million , $ 10.8 million and $ 10.6 million in 2019 , 2018 and 2017 , respectively . the types of costs included as product research and development expenses was revised in 2017 and prior years to include all related personnel costs including salary , benefits , retirement , stock-based compensation costs , as well as computer and software costs , professional fees , supplies , tools and maintenance costs . in 2019 , 2018 and 2017 , the company incurred software development expenses related to its continued expansion into the plated truss market and some of the software development costs were capitalized . see `` note 8 — property , plant and equipment . `` the company amortizes acquired patents over their remaining lives and performs periodic reviews for impairment . the cost of internally developed patents is expensed as incurred . selling costs selling costs include expenses associated with selling , merchandising and marketing the company 's products . major components of these expenses are personnel , sales commissions , facility costs such as rent , depreciation and utilities , professional services , information technology costs , sales promotion , advertising , literature and trade shows . 55 advertising costs advertising costs are included in selling expenses are expensed when the advertising occurs and were $ 7.9 million , $ 7.6 million and $ 9.6 million in 2019 , 2018 , and 2017 , respectively . general and administrative costs general and administrative costs include personnel , information technology related costs , facility costs such as rent , depreciation and utilities , professional services , amortization of intangibles and bad debt charges . accounting for stock-based compensation the company recognizes stock-based expense related to restricted stock awards on a straight-line basis , net of forfeitures , over the requisite service period of the awards , which is generally the vesting term of four years . stock-based expense related to performance share grants are measured based on grant date fair value and expensed on a graded basis over the service period of the awards , which is generally a performance period of three years . the assumptions used to calculate the fair value of restricted stock grants are evaluated and revised , as necessary , to reflect market conditions and the company 's experience . income taxes income taxes are calculated using an asset and liability approach . the provision for income taxes includes federal , state and foreign taxes currently payable and deferred taxes , due to temporary differences between the financial statement and tax bases of assets and liabilities . in addition , future tax benefits are recognized to the extent that realization of such benefits is more likely than not . this method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws in the year of enactment . on december 22 , 2017 , the president of the united states signed into law the tax cuts and jobs act of 2017 ( the “ tax reform act ” ) . further information on the tax impacts of the tax reform act is included in note 15 — income taxes of the company 's consolidated financial statements . net income per share basic net income per common share is computed based on the weighted average number of common shares outstanding . potentially dilutive shares are included in the diluted per-share calculations using the treasury stock method for all periods when the effect of their inclusion is dilutive . accounting standards - to be adopted in june 2016 , the fasb issued asu no . 2016-13 , “ financial instruments - credit losses ( topic 326 ) : measurement of credit losses on financial instruments . story_separator_special_tag in local currency , europe net sales increased primarily due to increases in both sales volume and average product prices . gross profit margin decreased to 34.7 % from 35.3 % , primarily due to increased factory and overhead , labor and warehouse costs . selling expense decreased $ 1.0 million primarily due to decreases of $ 0.4 million in personnel costs , $ 0.4 million in cash profit sharing expense and $ 0.2 million in sales and agent commission expense . general and administrative expense decreased $ 4.0 million , primarily due to decreases of $ 1.9 million in severance expense , $ 1.1 million in personnel expense , $ 0.4 million in cash profit sharing expense and $ 0.3 million in consulting and legal expenses . included in general and administrative expense are costs associated with the sap implementation of $ 2.4 million , an increase of $ 0.5 million over the prior year quarter . these expenses were primarily for professional fees . impairment of goodwill - the impairment charge of $ 6.7 million taken in 2018 was associated with assets acquired in denmark in 2001 , and as a result , the goodwill of the denmark reporting unit was fully impaired . see “ critical accounting policies and estimates — goodwill impairment testing . `` 33 income from operations increased $ 9.5 million , mostly due to a non-recurring $ 6.7 million impairment of goodwill taken in 2018 and decreased operating expenses . asia/pacific for information about the company 's asia/pacific segment , please refer to the table above setting forth changes in our operating results for the years ended december 31 , 2019 and 2018 . administrative and all other general and administrative expense increased $ 1.0 million , primarily due to increases of $ 1.5 million in personal expense as well as a $ 0.6 million reduction of rental income , net of expenses , which was partly offset by a decrease of $ 0.7 million in cash profit sharing expense . gain on sale of assets - in november 2018 , the company sold a facility that was previously leased exclusively to a third party . the company received net proceeds of $ 17.5 million , which resulted in a gain of $ 8.8 million . comparison of the years ended december 31 , 2018 and 2017 unless otherwise stated , the below results , when providing comparisons ( which are generally indicated by words such as “ increased , ” “ decreased , ” “ unchanged ” or “ compared to ” ) , compare the results of operations for the year ended december 31 , 2018 , against the results of operations for the year ended december 31 , 2017 . unless otherwise stated , the results announced below , when referencing “ both years , ” refer to the year ended december 31 , 2017 and the year ended december 31 , 2018 . the company changed its presentation of its consolidated statement of operations to display non–operating activities , including foreign exchange gain ( loss ) , and certain other income or expenses as a separate item below income from operations . foreign exchange gain ( loss ) , and other income or expenses were previously included in general and administrative expenses , and in income from operations , respectively . income before tax and net income for the three months and nine months ended september 30 , 2018 presented below were not affected by the change in presentation . 34 the following table shows the change in the company 's operations from 2017 to 2018 , and the increases or decreases for each category by segment : replace_table_token_10_th net sales increased 10.4 % to $ 1,078.8 million from $ 977.0 million . net sales to contractor distributors , dealer distributors , home centers and lumber dealers increased primarily due to increased home construction activity and average net sales unit prices . wood construction product net sales , including sales of connectors , truss plates , fastening systems , fasteners and shearwalls , represented 85 % of the company 's total net sales in both years . concrete construction product net sales , including sales of adhesives , chemicals , mechanical anchors , powder actuated tools and reinforcing fiber materials , represented 15 % of the company 's total net sales in both years . gross profit increased to $ 480.5 million from $ 443.4 million . gross profit margins decreased to 44.5 % from 45.4 % , which was lower than our expected gross profit margins of 45.5 % to 46.5 % . this was due to an unexpected sharp decline in net sales and increased labor and factory and tooling costs during december 2018 resulting in increases in factory , material and labor costs as a percentage of net sales . the gross profit margins , including some intersegment expenses , which were eliminated in consolidation , and excluding other expenses that are allocated according to product group , decreased to 45.2 % from 46.5 % for wood construction products and increased to 37.1 % from 34.7 % , respectively . research and development and engineering expense decreased 9.6 % to $ 43.1 million from $ 47.6 million , primarily due to decreases of $ 2.1 million in personnel costs , $ 1.0 million in severance expenses , $ 0.6 million in cash profit sharing on lower operating income and $ 0.2 million in professional fees . selling expense decreased 4.3 % to $ 109.9 million from $ 114.9 million primarily due to decreases of $ 2.4 million in personnel costs , $ 2.1 million in advertising and promotional costs , $ 1.9 million in severance expense and $ 1.0 million in stock-based compensation expense , which was partly offset by an increase of $ 2.6 million in sales and agent commissions . general and administrative expense increased 11.1 % to $ 158.6 million from $ 142.7

cash used in investing activities of $ 28.0 million during the year ended december 31 , 2019 , consisted primarily of $ 32.7 million for real estate improvements , machinery and equipment and software development , partly offset by $ 12.2 million in proceeds , mostly from the sale of real estate including the november 2019 sale of our selling and distribution facility in canada for a net amount of $ 9.4 million . cash used in financing activities of $ 108.2 million during the year ended december 31 , 2019 , consisted primarily of $ 60.8 million for the repurchase of the company 's common stock and $ 40.2 million used to pay cash dividends . in 2018 , operating activities provided $ 160.1 million in cash and cash equivalents , as a result of $ 126.6 million from net income and $ 50.4 million from non-cash adjustments to net income which includes depreciation and amortization expense and stock-based compensation expense , partly offset by a decrease of $ 17.0 million in the net change in operating assets and liabilities due to increases of $ 26.4 million in inventory and $ 12.6 million in trade accounts receivable , net , partly offset by a decrease of $ 5.3 million in other current assets and increases of $ 9.1 million in accrued liabilities

under the cost method , we recognize our investment in the stock of an investee as an asset . the investment is measured initially at cost . we recognize as income dividends received that are distributed from net accumulated earnings . dividends received in excess of earnings are considered a return of investment and are recorded as reductions of costs of the investment . impairment is assessed at the individual investment level . an investment is impaired if the fair value of the investment is less than its costs . if it is determined that the impairment is other than temporary , then an impairment loss is recognized in earnings . the fair value of the investment would become the new cost basis of the investment and will not be adjusted for subsequent recoveries in fair value . business combinations - the accounting for our business combinations consists of allocating the purchase price to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values , with the excess recorded as goodwill . we have up to one year from the acquisition date to use information as of each acquisition date to adjust the fair value of the acquired assets and liabilities , which may result in material changes to their recorded values with an offsetting adjustment to goodwill . recently adopted asus asu 2014-09 , revenue from contracts with customers ( asc 606 ) , supersedes existing revenue recognition guidance , including asc 605-35 , revenue recognition - construction-type and production-type contracts . asu 2014-09 outlines a single set of comprehensive principles for recognizing revenue under gaap . among other things , it requires companies to identify contractual performance obligations and determine whether revenue should be recognized at a point in time or over time . it also requires new , expanded disclosures regarding revenue recognition . we elected to adopt using the modified retrospective method that applied to those contracts that were not substantially completed as of january 1 , 2018. additional details are included in the revenue recognition policy above and note 3 below . asu 2017-09 , compensation—stock compensation ( asc 718 ) : scope of modification accounting , provides guidance concerning which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in asc 718. specifically , an entity is to account for the effects of a modification , unless all of the following are satisfied : ( 1 ) the fair value ( or calculated value or intrinsic value , if such an alternative measurement method is used ) of the modified award is the same as the fair value ( or calculated value or intrinsic value , if such an alternative measurement method is used ) of the original award immediately before the original award is modified ; ( 2 ) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified ; and ( 3 ) the classification of the modified award as an equity instrument or as a liability instrument is the same as the classification of the original award immediately before the original award is modified . the current disclosure requirements in asc 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in asu 2017-09. the adoption of this asu on january 1 , 2018 did not have an effect on our consolidated financial statements . asu 2017-01 , business combinations ( asc 805 ) —clarifying the definition of a business , clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions ( or disposals ) of assets or businesses . under the guidance in topic 805 , there are three elements of a business : inputs , processes and outputs . while an integrated set of assets and activities ( collectively , a “ set ” ) that is a business usually has outputs , outputs are not required to be present . additionally , all of the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs . the amendments in asu 2017-01 provide a screen to determine when a set is not a business . the screen requires that when substantially all of the fair value of the gross assets acquired ( or disposed of ) is concentrated in a single identifiable asset or a group of similar identifiable assets , the set is not a business . this screen reduces the number of transactions that need to be further evaluated . if , however , the screen is not met , then the amendments in this asu ( 1 ) require that to be considered a business , a set must include , at a minimum , an input and a substantive process that together significantly contribute to the ability to create outputs and ( 2 ) remove the evaluation of whether a market participant could replace missing elements . finally , the amendments in this asu narrow the definition of the term “ output ” so that the term is consistent with the manner in which outputs are described in asc 606. the adoption of this asu on january 1 , 2018 did not have an effect on our consolidated financial statements . asu 2016-15 , statement of cash flows ( topic 230 ) : classification of certain cash receipts and cash payments . story_separator_special_tag estimated losses on contracts at completion were recognized when identified . in certain circumstances , revenue was recognized when contract amendments were not finalized . accounting for business combinations , goodwill and other intangible assets the purchase price of an acquired business is allocated to the tangible assets , financial assets and separately recognized intangible assets acquired less liabilities assumed based upon their respective fair values , with the excess recorded as goodwill . such fair value assessments require judgments and estimates that can be affected by contract performance and other factors over time , which may cause final amounts to differ materially from original estimates . we review goodwill at least annually for impairment , or whenever events or circumstances indicate that the carrying value of long-lived assets may not be fully recoverable . we perform this review at the reporting unit level , which is one level below our one reportable segment . in reviewing goodwill for impairment , we have the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount . if we elect to perform a qualitative assessment and determine that an impairment is more likely than not , the entity is then required to perform the existing two-step quantitative impairment test ( described below ) , otherwise no further analysis is required . we also may elect not to perform the qualitative assessment and , instead , proceed directly to the two-step quantitative impairment test . the goodwill impairment test is a two-step process performed at the reporting unit level . the first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying value ( including goodwill ) . if the reporting unit 's fair value exceeds its carrying value , no further procedures are required . however , if the reporting unit 's fair value is less than its carrying value , an impairment of goodwill may exist , requiring a second step to be performed . step two of this test measures the amount of the impairment loss , if any . step two of this test requires the allocation of the reporting unit 's fair value to its assets and liabilities , including any unrecognized intangible assets , in a hypothetical analysis that calculates the implied fair value of goodwill as if the reporting unit were being acquired in a business combination . if the implied fair value of goodwill is less than 30 the carrying value , the difference is recorded as a goodwill impairment charge in operations . the fair values of the reporting units are determined based on a weighting of the income approach , market approach and market transaction approach . the income approach is a valuation technique in which fair value is based from forecasted future cash flow discounted at the appropriate rate of return commensurate with the risk as well as current rates of return for equity and debt capital as of the valuation date . the forecast used in our estimation of fair value was developed by management based on a contract basis , incorporating adjustments to reflect known contract and market considerations ( such as reductions and uncertainty in government spending , pricing pressure and opportunities ) . the discount rate utilizes a risk adjusted weighted average cost of capital . the market approach is a valuation technique in which the fair value is calculated based on market prices realized in an actual arm 's length transaction . the technique consists of undertaking a detailed market analysis of publicly traded companies that provides a reasonable basis for comparison to us . valuation ratios , which relate market prices to selected financial statistics derived from comparable companies , are selected and applied to us after consideration of adjustments for financial position , growth , market , profitability and other factors . the market transaction approach is a valuation technique in which the fair value is calculated based on market prices realized in actual arm 's length transactions . the technique consists of undertaking a detailed market analysis of merged and acquired companies that provides a reasonable basis for comparison to us . valuation ratios , which relate market prices to selected financial statistics derived from comparable companies , are selected and applied to us after consideration of adjustments for financial position , growth , market , profitability and other factors . to assess the reasonableness of the calculated reporting unit fair values , we compare the sum of the reporting units ' fair values to our market capitalization ( per share stock price times the number of shares outstanding ) and calculate an implied control premium ( the excess of the sum of the reporting units ' fair values over the market capitalization ) , and then assess the reasonableness of our implied control premium . we have elected to perform our annual review as of october 31st of each calendar year . the results of our annual goodwill impairment test as of october 31 , 2018 indicated that the estimated fair value of each reporting unit substantially exceeded its respective carrying value . in addition , management monitors events and circumstances that could result in an impairment . a significant amount of judgment is involved in determining if an indicator of impairment has occurred between annual testing dates . events that could cause the fair value of our long-lived assets to decrease include : changes in our business environment or market conditions ; a material change in our financial outlook , including declines in expected revenue growth rates and operating margins ; or a material decline in the market price for our stock . if any impairment were indicated as a result of a review , we would recognize a loss based on the amount

for the year ended december 31 , 2017 , our net cash flows from financing activities were primarily due to net borrowings under our revolving credit facility to fund the acquisition of infozen and proceeds from the exercise of stock options , which were partially offset by dividend payments and debt issuance costs related the amendment of our credit facility . for the year ended december 31 , 2016 , our net cash used in financing activities were primarily due to dividends paid offset by the proceeds from the exercise of stock options and the excess tax benefits from the exercise of stock options . revolving credit facility we maintain a credit agreement with a syndicate of lenders led by bank of america , n.a. , as sole administrative agent . the credit agreement provides for a $ 500 million revolving credit facility , with a $ 75 million letter of credit sublimit and a $ 30 million swing line loan sublimit . the credit agreement also includes an accordion feature that permits us to arrange with the lenders for the provision of additional commitments . the maturity date is august 17 , 2022 . borrowings under our credit agreement are collateralized by substantially all the assets of us and our material subsidiaries ( as defined in the credit agreement ) and bear interest at one of the following variable rates as selected by us at the time of borrowing : a london interbank offer rate ( libor ) based rate plus market spreads ( 1.25 % to 2.25 % based on our consolidated total leverage ratio ) or bank of america 's base rate plus market spreads ( 0.25 % to 1.25 % based on our consolidated total leverage ratio ) . the terms of the credit agreement permit prepayment and termination of the loan commitments at any time , subject to certain conditions . the credit agreement requires us to comply with specified financial covenants , including the maintenance of certain consolidated leverage ratios and a certain consolidated coverage ratio . the credit agreement also contains various covenants , including affirmative covenants with respect to certain reporting requirements and maintaining certain business activities , and negative covenants that , among other things , may limit or impose restrictions on our ability to incur liens , incur additional indebtedness , make investments , make acquisitions and undertake certain other actions . as of , and

management believes it has made all necessary adjustments so that our accompanying consolidated financial statements are presented fairly and that all such adjustments are of a normal recurring nature . our accompanying consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries . all significant intercompany balances and transactions have been eliminated . 82 consolidation in accordance with article 6 of regulation s-x under the securities act of 1933 , as amended , we do not consolidate portfolio company investments . under the investment company rules and regulations pursuant to the american institute of certified public accountants ( “aicpa” ) audit and accounting guide for investment companies , codified in asc 946 , we are precluded from consolidating any entity other than another investment company , except that asc 946 provides for the consolidation of a controlled operating company that provides substantially all of its services to the investment company or its consolidated subsidiaries . use of estimates preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in our accompanying consolidated financial statements and accompanying notes . actual results may differ from those estimates . reclassifications certain amounts in our prior fiscal year 's consolidated financial statements have been reclassified to conform to the presentation for the year ended september 30 , 2016 with no effect on our financial condition , results of operations or cash flows . classification of investments in accordance with the bdc regulations in the 1940 act , we classify portfolio investments on our accompanying consolidated financial statements into the following categories : control investments — control investments are those where we have the power to exercise a controlling influence over the management or policies of the portfolio company , which may include owning , with the power to vote , more than 25.0 % of the issued and outstanding voting securities ; affiliate investments —affiliate investments are those in which we own , with the power to vote , between 5.0 % and 25.0 % of the issued and outstanding voting securities that are not classified as control investments ; and non-control/non-affiliate investments —non-control/non-affiliate investments are those that are neither control nor affiliate investments and in which we own less than 5.0 % of the issued and outstanding voting securities . cash and cash equivalents we consider all short-term , highly liquid investments that are both readily convertible to cash and have a maturity of three months or less at the time of purchase to be cash equivalents . cash is carried at cost , which approximates fair value . we place our cash with financial institutions , and at times , cash held in checking accounts may exceed the federal deposit insurance corporation insured limit . we seek to mitigate this concentration of credit risk by depositing funds with major financial institutions . restricted cash and cash equivalents restricted cash is cash held in escrow that was generally received as part of an investment exit . restricted cash is carried at cost , which approximates fair value . investment valuation policy accounting recognition we record our investments at fair value in accordance with the fasb accounting standards codification topic 820 , “ fair value measurements and disclosures” ( “asc 820” ) and the 1940 act . investment transactions are recorded on the trade date . realized gains or losses are measured by the difference between the net proceeds from the repayment or sale and amortized cost basis of the investment , without regard to unrealized depreciation or appreciation previously recognized , and include investments charged off during the period , net of recoveries . unrealized depreciation or appreciation primarily reflects the change in investment fair values , including the reversal of previously recorded unrealized depreciation or appreciation when gains or losses are realized . 83 board responsibility in accordance with the 1940 act , our board of directors has the ultimate responsibility for reviewing and approving , in good faith , the fair value of our investments based on our investment valuation policy , which has been approved by our board of directors ( the “policy” ) . such review occurs in three phases . first , prior to its quarterly meetings , our board of directors receives written valuation recommendations and supporting materials provided by professionals of the adviser and administrator with oversight and direction from our chief valuation officer , who reports directly to our board of directors ( the “valuation team” ) . second , the valuation committee of our board of directors , comprised entirely of independent directors , meets to review the valuation recommendations and supporting materials . third , after the valuation committee concludes its meeting , it and our chief valuation officer present the valuation committee 's findings to the entire board of directors and , after discussion , the board of directors ultimately approves the value of our portfolio of investments in accordance with the policy . there is no single method for determining fair value ( especially for privately-held businesses ) , as fair value depends upon the specific facts and circumstances of each individual investment . in determining the fair value of our investments , the valuation team , led by our chief valuation officer , uses the policy and each quarter the valuation committee and board of directors reviews the policy to determine if changes are advisable and also reviews whether the valuation team has applied the policy consistently . use of third party valuation firms the valuation team engages third party valuation firms to provide independent assessments of fair value of certain of our investments . standard & poor 's securities evaluation , inc. ( “spse” ) , a valuation specialist , generally provides estimates of fair value on our proprietary debt investments . story_separator_special_tag as of september 30 , 2016 , the fair value of our investment portfolio was less than its cost basis by approximately $ 59.7 million and our entire investment portfolio was valued at 84.4 % of cost , as compared to cumulative net unrealized depreciation of $ 44.4 million and a valuation of our entire portfolio at 89.2 % of cost as of september 30 , 2015. this increase year over year in the cumulative unrealized depreciation on investments represents net unrealized depreciation of $ 15.3 million for the year ended september 30 , 2016. 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 , 2016 , we reversed $ 0.1 million of unrealized depreciation related to the expiration of our interest rate cap agreement in january 2016. during year ended september 30 , 2015 , we recorded $ 1.3 million of net unrealized depreciation on our credit facility recorded at fair value whereas no such amounts were incurred in the current period . 50 comparison of the year ended september 30 , 2015 to the year ended september 30 , 2014 replace_table_token_14_th nm = not meaningful investment income total interest income increased by 8.5 % for the year ended september 30 , 2015 , as compared to the prior year period . this increase was due primarily to the funding of several new investments during the period , partially offset by several early payoffs at par during the prior year . the level of interest income on our investments is directly related to the principal balance of our interest-bearing investment portfolio outstanding during the year , multiplied by the weighted average yield . the weighted average principal balance of our interest-bearing investment portfolio during the year ended september 30 , 2015 , was $ 319.1 million , compared to $ 280.4 million for the prior year , an increase of $ 38.7 million , or 13.8 % . the weighted average yield on our interest-bearing investments , which is based on the current stated interest rate on interest-bearing investments for the year ended september 30 , 2015 was 10.9 % compared to 11.5 % for the year ended september 30 , 2014 , inclusive of any allowances on interest receivables made during those periods . as of september 30 , 2015 , two portfolio companies , sunshine media holdings and heartland , were either fully or partially on non-accrual status , with an aggregate debt cost basis of approximately $ 26.4 million , or 7.1 % of the cost basis of all debt investments in our portfolio . during the quarter ended december 31 , 2014 , we sold our investment in midwest metal , which had been on non-accrual status . effective january 1 , 2015 , we placed gfrc on non-accrual status and restored two tranches of sunshine debt to accrual status and effective april 1 , 2015 , we placed saunders on non-accrual status . during the quarter ended september 30 , 2015 , we sold our investment in saunders , which was on non-accrual status and restructured our investment in gfrc and restored it to accrual status . as of september 30 , 2014 , three portfolio companies were on non-accrual status , with an aggregate debt cost basis of approximately $ 51.4 million , or 16.1 % , of the cost basis of all debt investments in our portfolio . effective january 1 , 2014 , we placed heartland on non-accrual status and effective june 1 , 2014 we placed midwest metal on non-accrual status . during the quarter ended december 31 , 2013 , we sold our investment in localtel , llc ( “localtel” ) , which had been on non-accrual status . 51 other income decreased by 24.4 % during the year ended september 30 , 2015 , as compared to the prior year . for the year ended september 30 , 2015 , other income consisted primarily of $ 1.9 million in success fees recognized , $ 0.9 million in dividend income , and $ 0.3 million in settlement fees . for the year ended september 30 , 2014 , other income consisted primarily of $ 2.4 million in success fees recognized , $ 1.1 million in dividend income , $ 0.4 million in prepayment fees and $ 0.4 million in settlement fees . the following tables list the investment income for our five largest portfolio company investments at fair value during the respective years : replace_table_token_15_th ( a ) new investment during applicable year . expenses expenses , net of credits from the adviser , increased for the year ended september 30 , 2015 , by 11.8 % as compared to the prior year . this increase was primarily due to increases in our net base management fees to the advisor , interest expense on borrowings , and dividend expense on our mandatorily redeemable preferred stock , partially offset by a decrease in the net incentive fee to the adviser . interest expense increased by $ 1.2 million , or 45.7 % , during the year ended september 30 , 2015 , as compared to the prior year , primarily due to increased borrowings outstanding throughout the period on our credit facility . the weighted average balance outstanding on our credit facility during the year ended september 30 , 2015 , was approximately $ 92.5 million , as compared to $ 41.9 million in the prior year period , an increase of 120.9 % . this was partially offset by lower average borrowing rates on our credit facility . the weighted average borrowing rate during the year ended september 30 , 2015 , was approximately 4.1 % compared

net cash provided by operating activities for the year ended september 30 , 2016 was $ 60.0 million as compared to net cash used in operating activities of $ 74.5 million for the year ended september 30 , 2015. the change was primarily due to the decrease in purchases of investments and an increase in repayments on investments during the year ended september 30 , 2016. for the year ended september 30 , 2014 , net cash provided by operating activities was $ 0.5 million , which was primarily driven by principal repayments during fiscal year 2014 . 55 as of september 30 , 2016 , we had loans to , syndicated participations in or equity investments in 45 private companies , with an aggregate cost basis of approximately $ 381.8 million . as of september 30 , 2015 , we had loans to , syndicated participations in or equity investments in 48 private companies , with an aggregate cost basis of approximately $ 410.2 million . the following table summarizes our total portfolio investment activity during the years ended september 30 , 2016 and 2015 : replace_table_token_19_th ( a ) pik interest is a non-cash source of income and is calculated at the contractual rate stated in a loan agreement and added to the principal balance of a loan . the following table summarizes the contractual principal repayment and maturity of our investment portfolio by fiscal year , assuming no voluntary prepayments , at september 30 , 2016. replace_table_token_20_th ( a ) subsequent to september 30 , 2016 , two debt investments with aggregate principal balances maturing during each of the years ending september 30 , 2017 , september 30 , 2018 , september 30 , 2019 and september 30 , 2020 , of $ 18.4 million , $ 7.7 million , $ 7.0 million and $ 2.0 million , respectively , were repaid at par . financing activities net cash used in financing activities for the year ended september 30 , 2016 was $ 57.7 million , which consisted primarily of $ 56.0 million in net repayments on our credit facility and $ 19.5 million in distributions to common stockholders , partially offset by $ 19.7 million in proceeds from the issuance of common stock , net of underwriting costs . net cash provided by financing activities for the year ended september 30 , 2015 of $ 72.0 million consisted primarily of $ 90.6 million in net borrowings on our credit facility offset by $ 17.7 million in distributions to common stockholders . net cash used in financing activities for the year ended september 30 , 2014 of $ 8.1 million consisted primarily of $ 17.6 million in distributions to common stockholders and $ 10.2 million in net repayments on our credit facility . these financing activities were partially offset by the gross proceeds of

implicit price concessions are recorded for self-pay , uninsured patients and other payors by major payor class based on historical collection experience , aged accounts receivable by payor , and current economic conditions . the implicit price concession represents the difference between amounts billed and amounts expected to be collected based on collection history with similar payors . the company assesses the ability to collect for the healthcare services provided at the time of patient admission based on the verification of the patient 's insurance coverage under medicare , medicaid , and other commercial or managed care insurance programs . amounts due from third-party payors , primarily commercial health insurers and government programs ( medicare and medicaid ) , include variable consideration for retroactive revenue adjustments due to settlements of audits and reviews . the company has determined estimates for price concessions related to regulatory reviews based on historical experience and success rates in the claim appeals and adjudication process . revenue is recorded at amounts estimated to be realizable for services provided . the following table sets forth the percentage of net service revenue earned by category of payor for each segment for the years ending december 31 : replace_table_token_25_th f-10 replace_table_token_26_th medicare home health services the home nursing medicare patients are classified into one of 153 home health resource groups prior to receiving services . based on the patient 's home health resource group , the company is entitled to receive a standard prospective medicare payment for delivering care over a 60 -day period referred to as an episode . revenue is recognized based on the number of days elapsed during an episode of care within the reporting period . final payments from medicare will reflect base payment adjustments for case-mix and geographic wage differences and 2 % sequestration reduction . in addition , final payments may also reflect , but are not limited to , one of four retroactive adjustments to the total reimbursement : ( a ) an outlier payment if the patient 's care was unusually costly ; ( b ) a low utilization adjustment if the number of visits was fewer than five ; ( c ) a partial payment if the patient transferred to another provider or transferred from another provider before completing the episode ; or ( d ) a payment adjustment based upon the level of therapy services required . medicare rates are based on the severity of the patient 's condition , service needs and goals , and other factors relating to the cost of providing services and supplies , bundled into an episode of care , not to exceed 60 days . an episode starts the first day a billable visit is performed and ends 60 days later or upon discharge , if earlier , with multiple continuous episodes allowed . the medicare home health benefit requires that beneficiaries be homebound ( meaning that the beneficiary is unable to leave their home without a considerable and taxing effort ) , require intermittent skilled nursing , physical therapy or speech therapy services , and receive treatment under a plan of care established and periodically reviewed by a physician . all medicare contracts are required to have a signed plan of care which represents a single performance obligation , comprising of the delivery of a series of distinct services that are substantially similar and have a similar pattern of transfer to the customer . accordingly , the company accounts for the series of services ( `` episode `` ) as a single performance obligation satisfied over time , as the customer simultaneously receives and consumes the benefits of the goods and services provided . expected medicare revenue per episode is recognized based on the number of days elapsed during an episode of care within the reporting period . the base episode payment can be adjusted based on each patient 's health including clinical condition , functional abilities , and service needs , as well as for the applicable geographic wage index , low utilization , patient transfers and other factors . the services covered by the episode payment include all disciplines of care in addition to medical supplies . medicare can also make various adjustments to payments received resulting from regulatory reviews , audits , billing reviews and other matters . the company estimates the impact of such adjustments based our historical experience , and records this estimate during the period in which services are rendered as an estimated price concession and a corresponding reduction to patient accounts receivable . a portion of reimbursement from each medicare episode is billed near the start of each episode , and cash is typically received before all services are rendered . the amount of revenue recognized for episodes of care which are incomplete at period end is based on the number of days elapsed during the episode of care within the reporting period . as of december 31 , 2019 and 2018 , the difference between the cash received from medicare for a request for anticipated payment ( “ rap ” ) on episodes in progress and the associated estimated revenue was immaterial and , therefore , the resulting credits were recorded as a reduction to our outstanding patient accounts receivable in our consolidated balance sheets for such periods . hospice services the company records revenue on an accrual basis based upon the date of service at amounts equal to the estimated payment rates . the estimated payment rates are predetermined daily or hourly rates for each of the four levels of care delivered . the company receives one of four predetermined daily rates based upon the level of care the company furnishes . the four levels of care are routine care , general inpatient care , continuous home care , and respite care . there are two separate payment rates for routine care : payment for the first 60 days of care and care beyond 60 days . story_separator_special_tag 48 the following table sets forth each of our segment 's revenue growth or loss , along with key applicable statistical data , for the twelve months ended december 31 , 2019 and the related change from the same period in 2018 ( amounts in thousands , except statistical data , and revenue excludes implicit price concessions ) : replace_table_token_11_th ( 1 ) organic - combination of same store , a location that has been in service with us for greater than 12 months , and de novo , an internally developed location that has been in service for 12 months or less . ( 2 ) acquired - purchased location that has been in service with us 12 months or less , including all legacy almost family locations for the period after april 1 , 2018. almost family locations remained counted as acquired locations due to system integrations , which were completed at the end of 2019. revenue and patient days decreased in our ltachs during the twelve months ended december 31 , 2019 due to the closures of two ltachs during 2018. organic growth is primarily generated by population growth in areas covered by mature agencies and by increased market share in acquired and developing agencies . historically , acquired agencies have the highest growth in admissions and 49 average census in the first 24 months after acquisition , and have the highest contribution to organic growth , measured as a percentage of growth , in the second full year of operation after the acquisition . the following table sets forth the reconciliation of total revenue disclosed above , which excludes implicit price concessions , to net service revenue recognized for the twelve months ended december 31 , 2019 and 2018 ( amounts in thousands ) : replace_table_token_12_th cost of service revenue the following table summarizes cost of service revenue ( amounts in thousands , except percentages , which are percentages of the segment 's respective net service revenue ) : replace_table_token_13_th consolidated cost of service revenue for the year ended december 31 , 2019 was $ 1,324.9 million compared to $ 1,156.4 million for the same period in 2018 , an increase of approximately $ 168.5 million , or 14.6 % . the improvement from 2018 to 2019 as a percentage of net service revenue was the result of our ability to continue to experience synergies and improved operational efficiencies associated with the integration of the afam locations . the dollar increase was the result of the 50 merger and the exclusion of expenses until april 1 , 2018 , when the merger was completed , and 2019 acquisitions . the reduction of total costs in the facility-based services segment was due to the closure of two ltach locations . general and administrative expenses the following table summarizes general and administrative expenses ( amounts in thousands , except percentages , which are percentages of the segment 's respective net service revenue ) : replace_table_token_14_th consolidated general and administrative expenses for the year ended december 31 , 2019 were $ 596.0 million compared to $ 537.9 million for the same period in 2018 , an increase of approximately $ 58.1 million , or 10.8 % . substantially all of the change in consolidated general and administrative expenses was a result of the merger and other acquisitions completed during the latter part of 2018 and 2019. the improvement from 2018 to 2019 as a percentage of net service revenue was the result of our ability to continue to experience synergies and improved operational efficiencies associated with the integration of the afam locations . income tax expense consolidated income tax expense for the year ended december 31 , 2019 was $ 26.6 million compared to $ 22.4 million for the same period in 2018. the increase in income tax expense was primarily attributable to the increase in our results of operations in 2019 as compared to 2018. liquidity and capital resources cash at december 31 , 2019 was $ 31.7 million , compared to $ 49.4 million at december 31 , 2018 . based on our current plan of operations , including acquisitions , we believe this amount , when combined with expected cash flows from operations and amounts available under our revolving credit facility will be sufficient to fund our growth strategy and to meet our anticipated operating expenses , capital expenditures , and debt service obligations for at least the next 12 months . 51 story_separator_special_tag agreement at either the base rate or eurodollar rate are subject to the applicable margins as set forth below : replace_table_token_16_th our credit agreement contains customary affirmative , negative and financial covenants , which are subject to customary carve-outs , thresholds , and materiality qualifiers . these include bankruptcy and other insolvency events , cross-defaults to other debt agreements , a change in control involving us or any subsidiary guarantor and the failure to comply with certain covenants . the credit facility allows us to make certain restricted payments within certain parameters provided we maintain compliance with those financial ratios and covenants after giving effect to such restricted payments or , in the case of repurchasing shares of its stock , so long as such repurchases are within certain specified baskets . at december 31 , 2019 , we were in compliance with all debt covenants contained in the credit agreement governing our credit facility . contractual obligations the following table discloses aggregate information about our contractual obligations and the periods in which payments are due as of december 31 , 2019 ( amounts in thousands ) : replace_table_token_17_th ( 1 ) as of december 31 , 2019 , we recorded a liability for uncertain tax positions of $ 3.9 million . due to the high degree of uncertainty regarding the timing of future cash outflows of liabilities for uncertain tax positions beyond one year , a reasonable estimate of the period of cash settlement beyond twelve months from the balance sheet

revolving loans under the credit agreement bear interest at , as selected by us , either in ( a ) base rate , which is defined as a fluctuating rate per annum equal to the highest of ( 1 ) the federal funds rate in effect on such day plus 0.5 % , ( 2 ) the prime rate in effect on such day , and ( 3 ) the eurodollar rate for one month interest period on such day plus 1.5 % , plus a margin ranging from 0.50 % to 1.25 % per annum or ( b ) eurodollar rate plus a margin ranging from 1.50 % to 2.25 % per annum . 52 swing line loans bear interest at the base rate . we are limited to 15 eurodollar borrowings outstanding at the same time . we are required to pay a commitment fee for the unused commitments at rates ranging from 0.20 % to 0.35 % per annum depending upon our consolidated leverage ratio , as defined in the credit agreement . the effective interest rates on our borrowings under the credit agreement were 3.71 % and 4.19 % as of december 31 , 2019 and 2018 , respectively . at december 31 , 2019 , we had $ 253.0 million drawn , letters of credit in the amount of $ 28.4 million outstanding under the credit facility , and $ 218.6 million remaining borrowing capacity available under the credit agreement . at december 31 , 2018 , we had $ 235.0 million drawn and letters of credit outstanding in the amount of $ 30.4 million under our credit facility . under the credit agreement , a letter of credit fee shall be equal to the applicable eurodollar rate on the average daily amount of the letter of credit exposure . the agent 's standard up-front fee and other customary administrative charges will also be due upon issuance of the letter of credit along with a renewal fee on each anniversary date of such issuance while the letter of credit is outstanding . borrowings accrue interest under the credit

the company imputes interest expense on its royalty purchase obligations by estimating risk adjusted future royalty payments over the term of the royalty agreement , which takes into consideration the probability and timing of obtaining fda approval and the potential future revenue from commercializing its product candidates . in september 2020 , the company initiated a pilot phase 2 clinical trial of avasopasem to evaluate its ability to improve 28-day mortality in hospitalized patients who are critically ill with covid-19 . the trial will enroll up to 50 hospitalized adult patients critically ill with covid-19 at several sites across the u.s. the company expects to report topline data from this trial in the first half of 2021. recent accounting pronouncements in august 2018 , the fasb issued asu no . 2018-13 , fair value measurement ( topic 820 ) : disclosure framework—changes to the disclosure requirements for fair value measurement , which removes and modifies some existing disclosure requirements and adds others . this asu is effective for all entities for fiscal years 130 galera therapeutics , inc. notes to consolidated financial statements beginning after december 15 , 2019 , including interim periods therein . early adoption is permitted for any eliminated or modified disclosures upon issuance of this asu . the company adopt ed this asu on january 1 , 2020 and it did not have a n impact on the company 's consolidated financial statements . in august 2018 , the fasb issued asu no . 2018-15 , intangibles – goodwill and other- internal-use software ( subtopic 350-40 ) : customer 's accounting for implementation costs incurred in a cloud computing service arrangement that is a service contract , which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software . this guidance is effective for fiscal years beginning after december 15 , 2019 , including interim periods therein , the company adopted this guidance on january 1 , 2020 and it did not have a material impact on the company 's consolidated financial statements . 3. fair value measurements the company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible . the company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market . when considering market participant assumptions in fair value measurements , the following fair value hierarchy distinguishes between observable and unobservable inputs , which are categorized in one of the following levels : level 1 inputs : unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date . level 2 inputs : other than quoted prices included in level 1 inputs that are observable for the asset or liability , either directly or indirectly , for substantially the full term of the asset or liability . level 3 inputs : unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available , thereby allowing for situations in which there is little , if any , market activity for the asset or liability at measurement date . the following table presents the company 's assets and liabilities that are measured at fair value on a recurring basis ( amounts in thousands ) : replace_table_token_10_th december 31 , 2019 ( level 1 ) ( level 2 ) ( level 3 ) assets money market funds and u.s. treasury obligations ( included in cash equivalents ) $ 17,447 $ — $ — short-term investments u.s. treasury obligations $ 93,934 $ — $ — there were no changes in valuation techniques during the years ended december 31 , 2020 and 2019. the company 's short-term investment instruments are classified using level 1 inputs within the fair value hierarchy because they are valued using quoted market prices , broker or dealer quotations , or alternative pricing sources with reasonable levels of price transparency . the fair value of level 2 securities is estimated based on observable inputs other than quoted prices in active markets for identical assets and liabilities , quoted prices for identical or similar assets or liabilities in inactive markets , or other inputs that are observable or can be corroborated by observable market data for substantially the full term on the assets or liabilities . 131 galera therapeutics , inc. notes to consolidated financial statements 4. property and equipment property and equipment consist of ( amounts in thousands ) : replace_table_token_11_th depreciation expense was $ 0.4 million and $ 0.3 million for the years ended december 31 , 2020 and 2019 , respectively . 5. accrued expenses accrued expenses consist of ( amounts in thousands ) : replace_table_token_12_th 6. royalty purchase liability pursuant to the royalty agreement , blackstone agreed to pay up to $ 80.0 million ( the royalty purchase price ) in four tranches of $ 20.0 million each upon the achievement of specific phase 3 clinical trial patient enrollment milestones . the company received the first tranche of the royalty purchase price in november 2018. in april 2019 , the company received a $ 20.0 million payment in connection with the achievement of the second milestone under the royalty agreement . in february 2020 , the company received a $ 20.0 million payment in connection with the achievement of the third milestone under the royalty agreement . the company accounts for the royalty agreement as a debt instrument . the $ 60.0 million of proceeds from the first three tranches under the royalty agreement have been recorded as a liability on the accompanying consolidated balance sheets . interest expense is imputed based on the estimated royalty repayment period described below which results in a corresponding increase in the liability balance . the company recognized $ 4.9 story_separator_special_tag general and administrative expense general and administrative expense consists primarily of personnel expenses , including salaries , benefits and share-based compensation expense for employees in executive , finance , accounting , information technology , business development and human resource functions . general and administrative expense also includes corporate facility costs , including rent , utilities , depreciation and maintenance , not otherwise included in research and development expense , as well as legal fees related to intellectual property and corporate matters and fees for accounting and consulting services . 109 we expect that our general and administrative expense will increase in the future to support our continued research and development activities , potential commercialization efforts , and to expand our operations and organizational capabilities . these increases will likely include increased costs related to the hiring of additional personnel , fees to outside consultants , lawyers and accountants and expenses related to services associated with maintaining compliance with the requirements of nasdaq and the sec , insurance and investor relations costs . if any of our current or future product candidates obtains u.s. regulatory approval , we would incur significantly increased expenses associated with building a sales and marketing team . interest income interest income consists of amounts earned on our cash and cash equivalents held with large institutional banks , u.s. treasury obligations and a money market mutual fund invested in u.s. treasury obligations , and our short-term investments in u.s. treasury obligations . interest expense interest expense consists of non-cash interest on proceeds received under the royalty agreement with blackstone and non-cash interest expense associated with the amortization of the debt discount recorded for the blackstone warrants . foreign currency gains ( losses ) foreign currency gains ( losses ) consist primarily of exchange rate fluctuations on transactions denominated in a currency other than the u.s. dollar . income tax benefit in the years ended december 31 , 2020 and 2019 , we recognized an income tax benefit for the revaluation of our deferred tax liability as a result of changes to the anticipated effective tax rate in certain state and local jurisdictions in which we have operations . net operating loss and research and development tax credit carryforwards as of december 31 , 2020 , we had federal and state tax net operating loss carryforwards of $ 135.6 million and $ 157.5 million , respectively , which each begin to expire in 2032 unless previously utilized . we also had foreign net operating loss carryforwards of $ 1.6 million which do not expire . as of december 31 , 2020 , we also had federal , state and foreign research and development tax credit carryforwards of $ 7.5 million . the federal research and development tax credit carryforwards will begin to expire in 2032 unless previously utilized . the foreign research and development tax credit carryforwards do not have an expiration date . utilization of the federal and state net operating losses and credits may be subject to a substantial annual limitation . the annual limitation may result in the expiration of our net operating losses and credits before we can use them . we have recorded a valuation allowance on substantially all of our deferred tax assets , including our deferred tax assets related to our net operating loss and research and development tax credit carryforwards . 110 results of operations for the years ended december 31 , 20 20 and 201 9 the following table sets forth our results of operations for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_2_th research and development expense research and development expense increased by $ 12.5 million from $ 42.3 million for the year ended december 31 , 2019 to $ 54.8 million for the year ended december 31 , 2020. the increase was primarily attributable to an increase of $ 7.4 million for avasopasem development costs , as we expanded enrollment in our roman trial , conducted other clinical trials of avasopasem in the u.s. and europe , and scaled up manufacturing . personnel related and share-based compensation expense increased by $ 4.1 million primarily due to increased employee headcount and stock options granted to new and existing employees . general and administrative expense general and administrative expense increased by $ 7.4 million from $ 8.4 million for the year ended december 31 , 2019 to $ 15.7 million for the year ended december 31 , 2020. the increase was primarily attributable to an increase in personnel related and share-based compensation expense of $ 3.9 million primarily due to increased employee headcount and stock options granted to new and existing employees and board members . insurance expense increased by $ 2.3 million , and legal fees and other professional fees increased by $ 0.8 million ; these increases were primarily as a result of becoming a public company . interest income interest income decreased by $ 0.6 million from $ 1.8 million for the year ended december 31 , 2019 to $ 1.2 million for the year ended december 31 , 2020. the decrease was primarily due to lower interest rates on invested balances . interest expense we recognized $ 4.9 million and $ 3.0 million in non-cash interest expense during the years ended december 31 , 2020 and 2019 , respectively , in connection with the royalty agreement with blackstone . story_separator_special_tag obtain substantial additional funding in connection with our continuing operations . if we are unable to raise capital when needed or on attractive terms , we would be forced to delay , reduce or eliminate our research and development programs or future commercialization efforts . we anticipate that our expenses will increase substantially as we : complete clinical development of avasopasem for the reduction of som in patients with locally advanced hnc , including our ongoing phase 3 roman trial ; prepare and file for regulatory approval of avasopasem for the reduction of som in patients with hnc

the primary use of cash was to fund our operations related to the development of our product candidates . investing activities during the year ended december 31 , 2020 , investing activities provided $ 36.5 million of net cash , primarily attributable to the $ 37.0 million in net proceeds from the purchases and sales of our short-term investments , partially offset by $ 0.5 million for the purchase of property and equipment . during the year ended december 31 , 2019 , we used $ 27.8 million of net cash in investing activities , primarily attributable to the $ 27.2 million in net purchases of our short-term investments and $ 0.6 million for the purchase of property and equipment . 112 financing activities during the year ended december 31 , 2020 , financing activities provided $ 20.5 million in net cash proceeds , primarily attributable to $ 20.0 million in proceeds received in connection with the royalty agreement with blackstone and $ 0.5 million from exercised stock options . during the year ended december 31 , 2019 , financing activities provided $ 78.0 million in net cash proceeds , primarily attributable to $ 58.0 million of net proceeds from the issuance of common stock in connection with the ipo and $ 20.0 million in proceeds received in connection with the royalty agreement with blackstone . funding requirements our operating expenses increased substantially in 2019 and 2020 and we expect our expenses to increase in connection with our ongoing activities , particularly as we continue the research and development of , continue or initiate clinical trials of , and seek marketing approval for , our product candidates . in addition , if we obtain marketing approval for any of our product candidates , we expect to incur significant commercialization expenses related to product sales , marketing , manufacturing and distribution . furthermore , we expect to incur additional costs associated with operating as a public company . accordingly , we will need to

valvoline accounted for its participation in ashland-sponsored pension and other postretirement benefit plans as a participation in a multiemployer plan and recognized its allocated portion of net periodic benefit cost based on valvoline-specific plan participants . commitments and contingencies liabilities for loss contingencies arising from claims , assessments , litigation , fines , penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated . legal costs such as outside counsel fees and expenses are charged to expense in the period incurred and are recorded in selling , general and administrative expenses in the consolidated statements of comprehensive income . revenue recognition sales generally are recognized when persuasive evidence of an arrangement exists , products are delivered or services are rendered , the sales price is fixed or determinable and collectability is reasonably assured . valvoline reports all sales net of tax assessed by qualifying governmental authorities . certain shipping and handling costs paid by the customer are recorded in sales , while those costs paid by valvoline are recorded in cost of sales . shipping and handling costs recorded in sales were $ 10 million in fiscal 2018 and $ 16 million in both fiscal 2017 and 2016. sales rebates and discounts , consisting primarily of promotional rebates and customer pricing discounts , are offered through various programs to customers . sales are recorded net of these rebates and discounts totaling $ 357 million , $ 360 million , and $ 388 million in the consolidated statements of comprehensive income for the years ended september 30 , 2018 , 2017 , and 2016 , respectively . provisions for sales rebates and discounts are established and recognized as incurred , generally at the time of the sale , or over the term of the sales contract . valvoline bases its estimates on historical rates of customer discounts and rebates as well as the specific identification of discounts and rebates expected to be realized . allowances related to these customer incentive programs are adjusted based on actual experience and adjustments are recorded to earnings in the period changes are known and reasonably estimable . reserves for these customer programs and incentives were $ 57 million and $ 54 million as of september 30 , 2018 and 2017 , respectively , and are recorded within accrued expenses and other liabilities in the consolidated balance sheets . franchise revenue included within sales was $ 29 million , $ 28 million , and $ 25 million during fiscal 2018 , 2017 , and 2016 , respectively . franchise revenue generally consists of initial franchise fees and royalties . initial franchise fees are recognized when all material obligations have been substantially performed and the store has opened for business . franchise royalties are based upon a percentage of monthly sales of the franchisees and are recognized as such sales occur . expense recognition cost of sales include material and production costs , as well as the costs of inbound and outbound freight , purchasing and receiving , inspection , warehousing , internal transfers and all other distribution network costs . selling , general and administrative expenses are expensed as incurred and include sales and marketing costs , research and development costs , advertising , customer support , and administrative costs , including allocated corporate charges from ashland in the periods prior to the ipo . advertising costs ( $ 63 million in fiscal 2018 , $ 61 million in fiscal 2017 and $ 58 million in fiscal 2016 ) and research and development costs ( $ 14 million in fiscal 2018 and $ 13 million in both fiscal 2017 and 2016 ) are expensed as incurred . 61 stock-based compensation stock-based compensation expense is recognized within selling , general and administrative expense in the consolidated statements of comprehensive income and is principally based on the grant date fair value of new or modified awards over the requisite vesting period . the company 's outstanding stock-based compensation awards are primarily classified as equity , with certain liability-classified awards based on award terms and conditions . valvoline accounts for forfeitures when they occur . income taxes income tax expense is provided based on income before income taxes . deferred income taxes represent benefits and expenses that will be used to reduce or increase corporate taxes expected to be paid as well as differences between the tax bases and carrying amounts of assets and liabilities that will result in taxable or deductible amounts in future years . deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled . as changes in tax laws or rates occur , deferred tax assets and liabilities are adjusted in the period changes are enacted through income tax expense . valvoline records valuation allowances related to its deferred income tax assets when it is more likely than not that some portion or all of the deferred income tax assets will not be realized . for the periods prior to the distribution , valvoline 's operating results are included in ashland 's consolidated u.s. , state , and certain international subsidiaries ' income tax returns . for these periods , the income tax provision in these consolidated statements of comprehensive income was calculated on a separate return basis as if valvoline was operating on a stand-alone basis and filed separate tax returns in the jurisdictions in which it operated . the company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities , based on the technical merits of the position . story_separator_special_tag gross profit margin decreased during fiscal 2018 primarily due to higher raw material costs and the dilutive impact to margin resulting from price increases to cover costs without additional margin , and to a lesser extent , the mix impacts in the retail and installer channels noted . selling , general and administrative expenses , which include the allocation of corporate costs , decreased approximately $ 1 million during fiscal 2018 compared to 2017. this change is attributed to reduced operating expenses , which more than offset an increase in bad debt expense associated with a retail customer that filed for bankruptcy in early october 2018 . 2017 compared to 2016 core north america sales increased $ 25 million , or 3 % , to $ 1,004 million in fiscal 2017. higher product pricing and favorable changes in product mix increased sales by $ 41 million , partially offset by lower volumes that decreased sales by $ 16 million . gross profit decreased $ 6 million during fiscal 2017 compared to 2016. higher raw material costs , partially offset by higher product pricing and decreased gross profit by $ 14 million , while changes in volume and product mix combined for a net increase in gross profit by $ 8 million . gross profit margin during the year decreased 1.7 percentage points to 39.5 % driven largely by higher raw materials costs during 2017 as compared to 2016. selling , general and administrative expense increased $ 7 million during fiscal 2017 , primarily as a result of $ 2 million of increased employee costs and an $ 8 million increase of shared expenses partially due to stand-alone public company costs , net of a $ 3 million decrease in bad debts . 38 quick lubes quick lubes sales are influenced by the number of service center stores and the business performance of those stores . the following tables provide supplemental information regarding company-owned and franchised stores that valvoline believes is relevant to an understanding of the quick lubes business and its performance . replace_table_token_12_th the year over year change from fiscal 2018 to 2017 is primarily driven by the acquisition of great canadian oil change that added 73 franchised service centers stores , as well as 42 net service center stores openings , including 3 acquired company-owned service center stores . replace_table_token_13_th * valvoline 's franchisees are distinct legal entities and valvoline does not consolidate the results of operations of its franchisees . * * valvoline determines same-store sales growth on a fiscal year basis , with new stores excluded from the metric until the completion of their first full fiscal year in operation . 2018 compared to 2017 quick lubes sales increased $ 119 million , or 22 % , to $ 660 million during fiscal 2018. volume growth increased sales by $ 41 million due to the increase in lubricant gallons and transactions . implemented pricing actions and premium mix led to higher average ticket contributing $ 33 million to the increase . these improvements were due to marketing and customer retention programs and strong in-store execution . furthermore , continued investment in acquisitions increased sales by $ 45 million . gross profit increased $ 46 million during fiscal 2018 compared to 2017. increases in volume and improved premium mix combined to increase gross profit by approximately $ 23 million . favorable pricing in excess of costs increased gross profit by $ 12 million , while acquisitions increased gross profit by $ 11 mil lion . gross profit margin decreased by 0.2 percentage points to 40.1 % as a result of higher costs from acquisitions partially offset by pricing and mix improvements . selling , general and administrative expenses , which include the allocation of corporate costs , increased approximately $ 28 million during fiscal 2018. the increase was primarily a result of $ 16 million in shared infrastructure costs and planned investments . increased 39 advertising spend to drive customer acquisition totale d $ 2 million and acquis ition costs consisting largely of amortization expense related to acquired intangible assets increased $ 8 million . expenses also increased by $ 2 million due to a foreign currency exchange loss associated with a contract to fix the u.s. dollar purchase price for the great canadian oil change ltd. acquisition which closed in fiscal 2018. the quick lubes segment benefited from the sale of two service center stores to a franchisee , which resulted in a $ 3 million gain on the sale that was recorded in equity and other income , net in fiscal 2018 . 2017 compared to 2016 quick lubes sales increased $ 84 million , or 18 % , to $ 541 million during fiscal 2017. volume increased sales by $ 29 million as lubricant sales gallons increased to 22.5 million gallons during 2017. acquisitions increased sales by $ 30 million and favorable product pricing increased sales by approximately $ 17 million . favorable changes in product mix increased sales $ 8 million . gross profit increased $ 28 million during fiscal 2017 compared to 2016. increases in volumes and higher premium product mix combined to increase gross profit by approximately $ 15 million . favorable product pricing , partially offset by increased raw material costs , increased gross profit by $ 7 million , while acquisitions increased gross profit by $ 6 million . gross profit margin during fiscal 2017 decreased 1.3 percentage points to 40.3 % driven largely by higher raw materials costs . selling , general and administrative expense increased $ 15 million during fiscal 2017. the increase was primarily a result of a $ 4 million increase in advertising and sales promotion costs , a $ 3 million increase in operating costs as a result of acquisitions , and an $ 8 million increase in shared expenses partially due to stand-alone public company costs . equity and other income was essentially flat in fiscal 2017 compared to 2016. international 2018 compared

pension and other postretirement plan obligations during fiscal 2018 , the company made contributions of approximately $ 16 million to its u.s. non-qualified and non-u.s. pension plans . in april 2018 , valvoline received a demand for payment of a partial withdrawal liability assessment of approximately $ 30 million related to the sale of a business by ashland in fiscal 2011 and the associated reduction in contributions and the number of employees covered by one of the multiemployer pension plans . the company is vigorously contesting the assessment and the calculation method utilized in its determination and received information in october 2018 indicating the multiemployer plan may accept approximately $ 10 million to settle this liability . valvoline is evaluating the potential settlement options and submitted a formal arbitration request on october 31 , 2018. the company 's current best estimate of cost associated with this assessment is not material to the consolidated financial statements as of and for the periods ended september 30 , 2018. refer to note 13 of the notes to consolidated financial statements in item 8 of part ii of this annual report on form 10-k for additional information . tax-related commitments on december 22 , 2017 , the president of the united states signed into law tax reform legislation , which generally became effective january 1 , 2018. this legislation includes a number of provisions , including lowering the federal corporate income tax rate from a maximum of 35 % to 21 % and changing or limiting certain tax deductions . based on the effective date of the rate reduction , the company 's federal corporate statutory income tax rate was a blended rate of 24.5 % for fiscal 2018 , declining to 21 % beginning in fiscal 2019. the company currently expects that its consolidated effective tax rate for fiscal 2019 will be between 25 % and 26 % . such estimates are based on management 's current assumptions with respect to , among other things , the company 's earnings , state income taxes and tax deductions . the estimated impacts of u.s. tax reform legislation recorded during the fiscal year ended september 30 , 2018 as well as the forward-looking estimates are provisional in nature , and the company will continue to assess the impact and provide additional information

shares of class b common stock to class a common stock — — — — ( 2,640 ) — — — ( 2,640 ) purchase of treasury stock ( 437 ) — — — — — 437 ( 3,527 ) ( 3,527 ) share-based compensation — — — — 13,615 — — — 13,615 restricted stock forfeitures ( 10 ) — — — — — — — — dividends declared — — — — — ( 41,601 ) — — ( 41,601 ) dividend equivalent rights declared — — — — — ( 1,780 ) — — ( 1,780 ) net loss attributable to shareholders — — — — — ( 42,412 ) — — ( 42,412 ) adjustment of temporary equity to redemption value — — — — 170,361 — — — 170,361 balance - december 31 , 2020 43,558 $ 440 13,168 $ — $ 601,129 $ ( 92,392 ) 437 $ ( 3,527 ) $ 505,650 the accompanying notes are an integral part of these consolidated and combined financial statements . f-7 brigham minerals , inc. consolidated and combined statement of cash flows replace_table_token_27_th the accompanying notes are an integral part of these consolidated and combined financial statements . f-8 brigham minerals , inc. consolidated and combined statement of cash flows ( continued ) replace_table_token_28_th the accompanying notes are an integral part of these consolidated and combined financial statements . f-9 brigham minerals , inc. notes to consolidated and combined financial statements 1. business and basis of presentation description of the business brigham minerals , inc. ( together with its wholly owned subsidiaries , “ brigham minerals ” or the “ company ” ) is a delaware corporation formed in june 2018 to become a holding company . brigham minerals acquired an indirect interest in brigham resources , llc ( “ brigham resources ” ) , our predecessor , on july 16 , 2018 in a series of restructuring transactions pursuant to which certain entities affiliated with warburg pincus llc ( “ warburg pincus ” ) contributed all of their respective interests in the entities through which they held interests in brigham resources to brigham minerals in exchange for all of the outstanding shares of common stock of brigham minerals ( the “ july 2018 restructuring ” ) . as a result of such restructuring transactions , brigham minerals became wholly owned by an entity affiliated with warburg pincus , and brigham minerals indirectly owned a 16.5 % membership interest in brigham resources . the remaining outstanding membership interests of brigham resources remained with certain other entities affiliated with warburg pincus , yorktown partners llc and pine brook road advisors , lp , brigham minerals ' management and its other investors ( collectively , the “ original owners ” ) . on november 20 , 2018 , brigham resources underwent a second series of restructuring transactions ( the “ november 2018 restructuring ” ) . in the november 2018 restructuring , brigham resources became a wholly owned subsidiary of brigham minerals holdings , llc ( “ brigham llc ” ) , which was a wholly owned subsidiary of brigham equity holdings , llc ( “ brigham equity holdings ” ) , and brigham equity holdings became wholly owned by the owners of brigham resources immediately prior to such restructuring , directly or indirectly , through brigham minerals . as a result of the foregoing transactions , there was no change in the control or economic interests of the original owners and brigham minerals in brigham resources , although their ownership became indirect through brigham equity holdings and its wholly owned subsidiary , brigham llc . the july 2018 restructuring and the november 2018 restructuring are collectively referred to herein as the “ 2018 corporate reorganizations . ” brigham resources wholly owns brigham minerals , llc and rearden minerals , llc ( collectively , the “ minerals subsidiaries ” ) , which acquire and actively manage a portfolio of mineral and royalty interests . the minerals subsidiaries are brigham resources ' sole material assets . initial public offering in april 2019 , brigham minerals completed its ' initial public offering ( the `` ipo `` ) of 16,675,000 shares of class a common stock at a price to the public of $ 18.00 per share . this resulted in net proceeds of approximately $ 273.4 million , after deducting underwriting commissions and discounts and offering expenses , which proceeds were used to repay $ 200.0 million of existing indebtedness and to fund mineral and royalty acquisitions . as a result of the ipo and the corporate restructuring described in `` note 9—temporary equity `` , brigham minerals became a holding company whose sole material asset consisted of a 43.3 % interest in brigham llc , which wholly owns brigham resources . brigham resources continues to wholly own the minerals subsidiaries , which own all of brigham resources ' operating assets . in connection with the ipo , brigham minerals became the sole managing member of brigham llc and is responsible for all operational , management and administrative decisions relating to brigham llc 's business and consolidates the financial results of brigham llc and its wholly owned subsidiary , brigham resources . december 2019 offering on december 16 , 2019 , brigham minerals completed an offering of 12,650,000 shares of its class a common stock ( the `` december 2019 offering `` ) , including 6,000,000 shares issued and sold by brigham minerals and an aggregate of 6,650,000 shares sold by certain shareholders of the company ( the `` selling shareholders `` ) , of which 5,496,813 represents shares issued upon redemption of an equivalent number of their brigham llc units , at a price to the public of $ 18.10 per share ( $ 17.376 per share net of underwriting discounts and commissions ) . story_separator_special_tag please see “ note 7—long-term debt ” to the consolidated and combined financial statements of brigham minerals included elsewhere in this annual report . income tax expense brigham minerals is subject to u.s. federal and state income taxes as a corporation . texas imposes a franchise tax ( commonly referred to as the texas margin tax ) at a rate of up to 1.00 % on gross revenues less certain deductions , as specifically set forth in the texas margin tax statute . a portion of our mineral and royalty interests are located in texas basins . our predecessor was treated as a flow-through entity , and is currently treated as a disregarded entity , for u.s. federal income tax purposes and , as such , is generally not subject to u.s. federal income tax at the entity level . 69 results of operations year ended december 31 , 2020 compared to year ended december 31 , 2019 the following table provides the components of our revenues and expenses for the periods indicated , as well as each period 's respective average prices and production volumes : replace_table_token_16_th 70 ( 1 ) hedge prices reflect the effect of our commodity derivative transactions on our average sales prices . our calculation of such effects include realized gains and losses on cash settlements for commodity derivatives , which we do not designate for hedge accounting . * * * a percentage calculation is not meaningful due to change in signs , zero-value denominator or a change greater than 300. revenues total revenues for the year ended december 31 , 2020 decreased by 10 % , or $ 9.8 million , compared to the year ended december 31 , 2019. the decrease was attributable to a $ 11.6 million decrease in mineral and royalty revenues during the period , partially offset by a $ 1.8 million increase in lease bonus revenue . the decrease in mineral and royalty revenues was primarily the result of a decrease in realized commodity prices of 31 % resulting in a $ 39.3 million decrease in mineral and royalty revenues . this was partially offset by an increase in drilling and completion activity on our mineral and royalty interests , and to a lesser degree by acquisitions of proved developed producing reserves , which resulted in a 28 % increase in production volumes to 9,483 boe/d and a corresponding increase in mineral and royalty revenues of $ 27.7 million . oil revenues for the year ended december 31 , 2020 decreased by 17 % , or $ 14.1 million , compared to the year ended december 31 , 2019. the decrease in oil revenues was primarily attributable to the 31 % decrease in realized oil price to $ 37.26 per barrel resulting in a decrease in revenue of $ 30.8 million . this was partially offset by a 20 % increase in oil production volumes to 4,980 barrels per day resulting in a $ 16.7 million increase in oil revenues . the increase in oil production volumes for the period was primarily attributable to increased drilling and completion activity on our properties in the permian basin . natural gas revenues for the year ended december 31 , 2020 increased by 7 % , or $ 0.7 million compared to the year ended december 31 , 2019. the increase in natural gas revenues was primarily attributable to the 23 % increase in natural gas production volume to 15,871 mcf/d resulting in a $ 2.3 million increase in natural gas sales . the increase in natural gas production volumes for the period was primarily attributable to increased drilling and completion activity on our properties in the permian basin . this was partially offset by a 13 % decrease in realized natural gas price to $ 1.80 per mcf resulting in a decrease in revenue of $ 1.6 million . ngl revenues for the year ended december 31 , 2020 increased by 29 % , or $ 1.8 million compared to the year ended december 31 , 2019. the increase in ngl revenues was primarily attributable to the 67 % increase in ngl volumes to 1,858 boe/d resulting in a $ 4.1 million increase in ngl sales was primarily attributable to increased drilling and completion activities on our properties in the permian basin . this was partially offset by a 23 % decrease in ngl prices to $ 11.61 per barrel resulting in a decrease in revenue of $ 2.3 million . lease bonus revenues for the year ended december 31 , 2020 increased by 51 % , or $ 1.8 million compared to the year ended december 31 , 2019. the increase was primarily attributable to an increase in leasing activity on our interests in texas , partially offset by a decrease in leasing activity in colorado and oklahoma . other revenues include payments for right-of-way and surface damages and were not a significant portion of the overall amount . operating and other expenses gathering , transportation , and marketing expenses for the year ended december 31 , 2020 increased by 40 % , or $ 2.0 million , as compared to the year ended december 31 , 2019 , which was largely driven by the 28 % increase in our production volumes as well as an increase in gathering , transportation and marketing rates . severance and ad valorem taxes for the year ended december 31 , 2020 decreased by 13 % , or $ 0.8 million , as compared to the year ended december 31 , 2019 , primarily due to the 12 % decrease in mineral and royalty revenues . dd & a expense for the year ended december 31 , 2020 increased by 56 % , or $ 17.3 million , compared to the year ended december 31 , 2019 , which was primarily due to an increase in depletion expense of $ 17.0 million . higher production volumes increased our depletion expense by $ 8.6

for the year ended december 31 , 2020 , our net cash used in investing activities was primarily a result of acquisitions of mineral and royalty interests totaling $ 66.5 million and other fixed assets totaling $ 0.5 million , offset by sales of mineral and royalty interests totaling $ 1.6 million . for the year ended december 31 , 2019 , our net cash used in investing activities was primarily a result of acquisitions of mineral and royalty interests totaling $ 219.5 million and additions to other fixed assets of $ 0.4 million , offset by sales of mineral and royalty interests totaling $ 3.1 million . for the year ended december 31 , 2018 , our net cash used in investing activities was primarily a result of acquisitions of mineral and royalty interests totaling $ 195.6 million and additions to other fixed assets of $ 0.7 million . our cash flows from investing activities for the year ended december 31 , 2018 also reflects $ 0.9 million of proceeds from the sale of equity securities . net cash ( used in ) /provided by financing activities net cash used in financing activities for the year ended december 31 , 2020 was primarily a result of dividends paid to holders of our class a common stock of $ 42.2 million , distributions to holders of temporary equity of $ 24.7 million , the repurchase of shares of our class a common stock from the september 2020 selling shareholders for an aggregate purchase price of approximately $ 3.5 million , and payment related to employee tax withholding for settlement of share-based compensation awards of $ 1.2 million . this was partially offset by borrowings under our revolving credit facility of $ 20.0 million . net cash provided by financing activities for the year ended december 31 , 2019 included the combined net proceeds generated from the ipo and december 2019 offering of $ 379.8 million offset by the combined full repayment of the outstanding balances of the owl rock credit facility and revolving credit facility of $ 175.0 million ( net of additional borrowings of $ 105.0 million incurred during the year ) , dividends paid to holders of our class a common stock of $ 14.7 million , distributions to holders of temporary equity of $ 20.1 million , payment of debt extinguishment fees of $ 2.1 million and payment of loan closing costs of $ 1.3 million . net cash provided by financing activities for the year ended december 31 , 2018 included $ 46.0 million in net capital contributions from the original owners and $ 213.4 million in additional

because restructure charges are estimates based upon assumptions regarding the timing and amounts of future events , significant adjustments to the accrual may be necessary in the future based on the actual outcome of events and as we become aware of new facts and circumstances . if we decide to resume use of the bothell facility , any remaining accrued restructure charges related to the facility will be reversed . this reversal would be reflected as a reduction of restructure expenses and reflected in the period in which use is resumed . we are unable to determine the likelihood of any future adjustments to our accrued restructure charges . we have a $ 200,000 certificate of deposit recorded within other assets that is pledged as collateral for the bothell facility lease . 5. long-term obligations long-term obligations consisted of the following : replace_table_token_17_th as of december 31 , 2007 , we owed $ 335,000 to biogen idec , a beneficial owner of approximately 11 % of our outstanding common shares . this debt is the remaining balance of a $ 10.0 million loan from biogen idec initiated in 2001. outstanding borrowings under this unsecured loan agreement bear interest at the one-year london interbank offered rate , or libor , plus 1 % , which is reset quarterly . the loan contains financial covenants establishing limits on our ability to declare or pay cash dividends . in 2006 , we signed an agreement to restructure the remaining $ 8.15 million of debt payable to biogen idec . under the agreement , biogen idec agreed to exchange $ 5.65 million of debt for one million shares of our common stock with a fair value of $ 2.9 million and we agreed to immediately pay $ 500,000 of the remaining debt . the terms of the restructure resulted in a loan payable balance of $ 2.2 million , which consisted of $ 2.0 million principal and $ 167,000 of estimated future interest payments to be paid to biogen idec in two installments : $ 1.0 million plus accrued interest , which we paid on august 1 , 2007 , with the remaining loan balance due on august 1 , 2008. according to sfas no . 15 , “accounting by debtors and creditors of troubled debt restructures , ” we accounted for this transaction as a troubled debt restructure which resulted in a gain on debt restructure of $ 2.6 million and decreased basic and diluted loss per share by $ 0.26 . we calculated the gain as the difference between the original principal and interest payments due on the biogen idec debt as compared to the cash payments made , the fair value of the common stock issued in the debt restructure and the remaining principal and interest payments due . until the loan balance is repaid , we must apply one-third of certain up-front payments received from future corporate collaborations and one-third of certain milestone payments to the outstanding balance on this loan payable , first to repayment of any accrued and unpaid interest on the principal being repaid , and second to the repayment of outstanding principal . since december 2006 , as a result of the receipt of upfront and milestone payments , we have made principal and interest payments totaling $ 917,000 . as a result of these payments our obligations to biogen idec under this loan as of december 31 , 2007 is $ 335,000 including principal of $ 248,000 and interest of $ 87,000 . 58 targeted genetics corporation notes to consolidated financial statements 5. long-term obligations – ( continued ) our equipment financing obligation relates to secured financing for the purchase of capital equipment and leasehold improvements . this obligation bears interest at 8.98 % and matured in february 2008 . 6. commitments we lease our laboratory , manufacturing and office facilities in seattle , washington under two non-cancelable operating leases . the lease on our primary laboratory , manufacturing and office space expires in april 2009 and contains an option to renew the lease for a five-year period . the lease on our administrative office space expires in april 2014 and contains an option to extend the lease for an additional five years . we lease a facility in bothell , washington under a non-cancelable operating lease that expires in september 2015 , which was intended to accommodate future manufacturing of our product candidates . we follow sfas no . 146 as it relates to our bothell facility lease and have recorded an accrued restructure liability of $ 8.1 million as of december 31 , 2007. this accrual represents the estimated fair value of this liability based on the present value of future lease payments , net of assumed sublease payments . future lease payments on our facility in bothell will reduce the amount of the accrued restructure liability and are included in future minimum lease payments under non-cancelable operating leases which are as follows : replace_table_token_18_th we recognized rent expense under operating leases of $ 977,000 in 2007 , $ 869,000 in 2006 and $ 1.4 million in 2005 . 7. investment in chromos molecular systems , inc. in 2004 , our majority-owned subsidiary , cellexsys inc. , was acquired by and merged into chromos . chromos is a publicly traded company whose common stock is traded on the toronto stock exchange . trading of chromos securities is currently suspended . at the time of the sale , we owned approximately 79 % of cellexsys . as a result of the sale of cellexsys , we received approximately 1.2 million shares of chromos common stock and a 79 % share of any payments made by chromos under an interest bearing debenture issued by chromos . periodically we sold these securities on a specific identification method based on when we received the shares . story_separator_special_tag general and administrative expenses increased to $ 7.0 million in 2007 compared to $ 6.4 million in 2006 due to increased compensation costs , patent prosecution and issuance activities and stock-based compensation . general and administrative expenses were $ 6.4 million in 2006 compared to $ 6.3 million in 2005. we expect our general and administrative expenses in 2008 to remain consistent as compared to 2007. restructure charges . accrued restructure charges represent our best estimate of the fair value of the liability to exit the bothell facility as determined under sfas no . 146 , “accounting for costs associated with exit or disposal activities , ” and are computed as the fair value of the difference 37 between the remaining lease payments due on these leases and estimated sub-lease costs and rental income . during each year , we adjusted our liability to reflect our updated subleasing assumptions for the bothell facility . restructure charges consist of the following : replace_table_token_7_th as of december 31 , 2007 , our accrued restructure balance was $ 8.1 million . restructure charges increased to $ 2.1 million for the year ended december 31 , 2007 , compared to $ 2.0 million in 2006 and $ 1.7 million in 2005. restructure charges for 2007 include $ 1.5 million related to updates in our sublease assumptions from our determination that based on a decline in the bothell real estate market we will not be able to sublease the facility and accretion expense of $ 727,000. restructure charges for 2006 include $ 860,000 related to changes in our expectations regarding market conditions for subleasing our bothell facility including time to find a sublease tenant and adjusting our assumptions with respect to sublease income , $ 221,000 related to employee termination benefits of our restructure efforts to realign our cost structure , $ 174,000 in relation to the early termination of a portion of our seattle facility lease resulting from the head count reductions , and accretion expense of $ 751,000. restructure charges for 2005 include $ 1.1 million related to changes in our expectations regarding market conditions for subleasing our bothell facility and accretion expense of $ 577,000. goodwill impairment charge . we periodically and annually on october 1 st evaluate the carrying value of our goodwill in accordance with sfas no . 142 , “goodwill and other intangible assets , ” and if there is evidence of an impairment in value , we reduce the carrying value of the asset . as discussed in note 8 of the notes to our consolidated financial statements , we recognized a non-cash loss on impairment of goodwill during 2006. as a result of a decline in our share price during june 2006 , to a level which reduced market capitalization to an amount less than the fair value of our net assets , we were required to perform an interim goodwill impairment test . as a result of this evaluation , we recognized a non-cash impairment charge of $ 23.7 million , which was equal to the recorded value of goodwill in excess of its implied value . during 2007 , we performed our annual evaluation and did not have any further indications of impairment on our goodwill balance . gain on debt restructure . in 2006 , we signed an agreement to restructure $ 8.15 million of debt payable to biogen idec . under the agreement , we exchanged $ 5.65 million of debt for one million shares of our common stock with a fair value of $ 2.9 million with biogen idec and recorded a $ 2.6 million gain on debt restructure . inherent in our determination of the gain on debt restructure is an estimate of the amounts and timing of future principal and interest payments . to the extent that changes in our estimates result in increases in estimated future interest payments such costs will be accrued , however , to the extent that changes in our estimates result in decreases in estimated future interest payments such gain will be deferred until realized . investment income . investment income reflects interest income earned on our short term investments and realized gains or losses on our investment in chromos molecular systems inc , or chromos . our investment income decreased to $ 428,000 in 2007 compared to $ 567,000 in 2006 due primarily to the recognition of realized losses related to other-than-temporary impairment charges on our investment in chromos due to the declining market value of chromos ' securities combined with a decline in chromos ' current financial position . we evaluated the investment on december 31 , 2007 and based on facts surrounding the financial outlook for chromos concluded that the fair value of our investment had 38 declined to zero and recognized a realized loss of $ 341,000 for the full year of 2007. excluding the $ 341,000 loss related to the write-down of our investment in chromos , our investment income for 2007 increased to $ 768,000 compared to $ 567,000 in 2006 due to higher cash balances and investment yields in 2007 compared to 2006. our investment income was $ 567,000 in 2006 compared to $ 661,000 in 2005. interest expense . our interest expense relates to interest on outstanding loans from biogen idec and obligations under equipment financing arrangements that we used to purchase laboratory and computer equipment , furniture and leasehold improvements . our interest expense decreased to $ 1,000 in 2007 compared $ 411,000 in 2006. as a result of the restructure of the biogen idec debt in 2006 , the carrying value of the remaining debt includes the related estimated future interest payments , and accordingly , we do not expect to record future interest charges on this restructured debt . interest expense decreased to $ 411,000 in 2006 from $ 512,000 in 2005. story_separator_special_tag warrants to purchase up to 763,000 shares of our common stock . these warrants expire in january 2012 and are exercisable

123r , which requires companies to record stock compensation expense , became effective beginning january 1 , 2006. accounts receivable at december 31 , 2007 was higher than at december 31 , 2006 due to the timing of cash received and significant billings in the fourth quarter of 2007. deferred revenue activity in 2007 compared to 2006 and 2005 reflects changes in the levels of pre-funded work under our collaborative agreements . the net increase in our restructure reserve of $ 766,000 in 2007 was due to charges to the reserve related to our estimation that we will not be able to sublease the space . increases in our restructure reserve , offset by payments of rent for our bothell facility , resulted in net increases in reserves of $ 228,000 in 2006 and $ 802,000 in 2005. our cash used for financing activities in 2007 included $ 1.4 million of loan repayments , including $ 1.3 million to biogen idec and $ 26,000 of equipment financing payments . these results compare to $ 1.2 million of loan payments including $ 1.0 million to biogen idec and $ 155,000 of equipment financing payments in 2006 and $ 3.0 million of loan repayments including $ 2.5 million to biogen idec and $ 499,000 of equipment financing payments in 2005. sales of the shares of our common stock contributed significantly to our cash flows from financing activities in both 2007 and in 2006. our financial results in 2007 include approximately $ 26.0 million of proceeds as a result of the sale of 8.9 million shares of our common stock and our 2006 financial results include approximately $ 4.8 million of proceeds as a result of the sale of 1.3 million shares of our common stock . in january 2007 , we sold 2.2 million shares of our common stock in a private placement at a price of $ 4.00 per share and received net proceeds of approximately $ 8.1 million . in addition , in connection with the financing , we issued

we evaluate the realization of deferred tax assets by considering our historical taxable income and future taxable income based upon the reversal of deferred tax liabilities . as of june 28 , 2012 , we believe that our deferred tax assets are fully realizable and therefore we have provided no valuation allowance . segment reporting we operate in a single reportable operating segment that consists of selling various nut and nut related products through multiple distribution channels . 47 earnings per share basic earnings per common share are calculated using the weighted average number of shares of common stock and class a stock outstanding during the period . diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock . the following table presents the reconciliation of the weighted average shares outstanding used in computing basic and diluted earnings per share : replace_table_token_21_th a weighted average of 107,125 , 125,375 and 133,625 anti-dilutive stock options with a weighted average exercise price of $ 17.63 , $ 16.75 and $ 17.69 were excluded from the computation of diluted earnings per share for the years ended june 28 , 2012 , june 30 , 2011 and june 24 , 2010 , respectively . comprehensive income we account for comprehensive income in accordance with asc topic 220 , “comprehensive income” . this topic establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements . the topic requires that all components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements . a recent update to this topic also now requires that all non-owner changes in stockholders ' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements . recent accounting pronouncements in may 2011 , the fasb issued asu no . 2011-04 , “fair value measurement ( topic 820 ) – amendments to achieve common fair value measurement and disclosure requirements in u.s. gaap and ifrss.” this update establishes common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with u.s. generally accepted accounting principles and international financial reporting standards . the amendments in this update are effective during interim and annual periods beginning after december 15 , 2011. the adoption of this update did not have a material effect on our financial position , results of operations or cash flows . in june 2011 , the fasb issued asu no . 2011-05 , “comprehensive income ( topic 220 ) – presentation of comprehensive income.” the objective of this update is to improve the comparability , consistency , and transparency of financial reporting to increase the prominence of items reported in other comprehensive income . this update requires that all non-owner changes in stockholders ' equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements . the amendments in this update are effective for fiscal years ( and interim periods within those years ) beginning after december 15 , 2011 with early adoption permitted and full retrospective application required . in december 2011 , the fasb issued guidance which indefinitely defers the guidance related to the presentation of reclassification adjustments out of other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented . we adopted the update in fiscal 2012 and we elected to present the components of other comprehensive income in a single continuous statement for all periods presented . while the new guidance changes the presentation of comprehensive income , there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance . the adoption of this update did not have a material effect on our financial position , results of operations or cash flows . 48 in september 2011 , the fasb issued asu 2011-09 , “disclosures about an employer 's participation in a multiemployer plan , ” which pertains to an employer 's participation in multiemployer benefit plans , amending asc 715-80. the adoption of this update is to enhance the disclosures about multiemployer plans in which an employer participates . the adoption of asu 2011-09 is required for fiscal years ending after december 15 , 2011 , and other than enhanced disclosure , the adoption of this update did not have a material effect on our financial position , results of operations or cash flows . note 2 — inventories inventories consist of the following : replace_table_token_22_th note 3 — acquisition of orchard valley harvest , inc. in may 2010 , we purchased certain assets and assumed certain liabilities of ovh ( the “acquisition” ) for a purchase price of $ 32,887 . the purchase agreement provided for additional consideration of up to $ 10,079 contingent upon performance of the acquired business for the 2010 and 2011 calendar years . the earn-out liability initially recorded in purchase accounting represented the fair value of expected future payments , which was estimated by applying the income approach . the fair value was based on significant inputs that were not observable in the market , which asc 820 refers to as level 3 inputs . this additional consideration was not contingent on any selling shareholders remaining employed . earn-out payments of $ 3,444 and $ 4,135 were made during fiscal 2012 and fiscal 2011 , respectively . the period for measuring potential earn-out payments ended during fiscal 2012 and no further earn-out payments remain to be paid . story_separator_special_tag income from operations . due to the factors discussed above , our income from our operations was $ 10.3 million , or 1.5 % of net sales , for fiscal 2011 , compared to $ 29.7 million , or 5.3 % of net sales , for fiscal 2010. interest expense . interest expense was $ 6.4 million for fiscal 2011 compared to $ 5.7 million for fiscal 2010. the increase in interest expense resulted from higher average short-term debt levels during both periods , which were driven by significantly higher acquisition costs for tree nuts . rental and miscellaneous expense , net . net rental and miscellaneous expense was $ 1.0 million for fiscal 2011 compared to $ 1.1 million for fiscal 2010 . 27 income tax expense ( benefit ) . income tax benefit was ( $ 0.05 ) million , or ( 1.8 % ) of income before income taxes , for fiscal 2011 compared to income tax expense of $ 8.4 million , or 36.9 % of income before income taxes for fiscal 2010. the impact of the rate reconciling items for fiscal 2011 is greater than fiscal 2010 primarily because income before income taxes is lower in fiscal year 2011. the 2011 effective tax rate was impacted by the following : ( i ) $ 0.5 million favorable impact of state tax benefits due to favorable resolution of state tax audit , expected utilization of state investment tax credits , state tax rate changes and other tax provision adjustments ; ( ii ) $ 0.2 million favorable impact due to recognizing current year research and development credit and reinstatement of the prior year credit ; ( iii ) $ 0.3 million favorable impact related to the domestic producers deduction which increased to 9 % in 2011 from 6 % in 2010 ; and ( iv ) $ 0.1 million favorable impact due to a lower level of current year federal taxable income which is taxed at 34 % . net income . net income was $ 2.8 million , or $ 0.27 basic and $ 0.26 diluted per common share , for fiscal 2011 , compared to $ 14.4 million , or $ 1.36 basic and $ 1.34 diluted per common share , for fiscal 2010 , due to the factors discussed above . story_separator_special_tag style= `` margin-top:0px ; margin-bottom:0px `` > 29 financing arrangements . on february 7 , 2008 , we entered into the credit facility with a bank group ( the “bank lenders” ) providing a $ 117.5 million revolving loan commitment and letter of credit subfacility . also on february 7 , 2008 , we entered into a loan agreement with an insurance company ( the “mortgage lender” ) providing us with two term loans , one in the amount of $ 36.0 million ( “tranche a” ) and the other in the amount of $ 9.0 million ( “tranche b” ) , for an aggregate amount of $ 45.0 million ( the “mortgage facility” ) . the credit facility is secured by substantially all our assets other than real property and fixtures . the mortgage facility is secured by mortgages on essentially all of our owned real property located in elgin , illinois , gustine , california and garysburg , north carolina ( the “encumbered properties” ) . the encumbered elgin , illinois real property includes almost all of the old elgin site that was purchased prior to our purchase of the land in elgin where the elgin site is located . on july 15 , 2011 , we entered into the second amendment to the credit facility . the second amendment extended the maturity date of the credit facility from february 7 , 2013 to july 15 , 2016. in addition , the second amendment increased the amount by which we may increase the revolving borrowing capacity available under the credit facility from $ 15.0 million to $ 22.5 million . on october 31 , 2011 , we entered into a third amendment to the credit facility ( the “third amendment” ) . the third amendment permits an additional 5 % of outstanding accounts receivable from a major customer to be included as eligible in the borrowing base calculation , and the third amendment also made technical modifications to definitions . the portion of the borrowing base calculation under the credit facility based upon machinery and equipment will decrease by $ 1.5 million per year for the first five years to coincide with amortization of the machinery and equipment collateral . as of june 28 , 2012 , the weighted average interest rate for the credit facility was 2.36 % . the terms of the credit facility contain covenants that require us to restrict investments , indebtedness , capital expenditures , acquisitions and certain sales of assets , cash dividends , redemptions of capital stock and prepayment of indebtedness ( if such prepayment , among other things , is of a subordinate debt ) . if loan availability under the borrowing base calculation falls below $ 25.0 million , we will be required to maintain a specified fixed charge coverage ratio , tested on a monthly basis . all cash received from customers is required to be applied against the credit facility . the bank lenders are entitled to require immediate repayment of our obligations under the credit facility in the event of default on the payments required under the credit facility , a change in control in the ownership of the company , non-compliance with the financial covenants or upon the occurrence of certain other defaults by us under the credit facility ( including a default under the mortgage facility ) . as of june 28 , 2012 , we were in compliance with all covenants under the credit facility and we currently expect to be in compliance with the financial covenant in the credit facility for the foreseeable future . as of june 28 , 2012 , we

28 total inventories were $ 146.4 million at june 28 , 2012 , an increase of $ 17.4 million , or 13.5 % , from the inventory balance at june 30 , 2011. this increase is due primarily to ( i ) an increase in the pounds of inshell pecans on hand due to a later than normal harvest for the 2011 crop , ( ii ) an increase in the pounds of almonds on hand due to increased almond business and ( iii ) an increase in the acquisition cost for peanuts and walnuts due to less supply . the weighted average cost per pound of raw nut input stocks on hand at june 28 , 2012 increased by 3.5 % compared to the weighted average cost per pound of raw nut input stocks on hand at june 30 , 2011. pounds of raw nut input stocks on hand at the end of june 28 , 2012 increased by 6.9 million pounds or 22.5 % when compared to the quantity of raw nut input stocks on hand at june 30 , 2011. the weighted average cost per pound of finished goods on hand at june 28 , 2012 increased by 7.7 % over the weighted average cost per pound of finished goods on hand at june 30 , 2011 , and pounds of finished goods on hand decreased by 10.8 % . net accounts receivable were $ 49.9 million at june 28 , 2012 , an increase of $ 10.8 million , or 27.8 % , from the balance at june 30 , 2011. the increase in net accounts receivable is due primarily to higher dollar sales in the month of june 2012 than in the month of june 2011. accounts receivable allowances were $ 2.9 million at both june 28 , 2012 and june 30 , 2011. challenging economic conditions and increased commodity costs may adversely impact demand for consumer products . these conditions could , among other things , have a material adverse effect on the cash received from our operations . see part i , item 1a — “risk factors” . real estate matters . in august 2008 , we completed the consolidation of our chicago-based facilities into the elgin site . as part of the facility consolidation project , on april 15 , 2005 , we closed on the $ 48.0 million purchase of the elgin site . the elgin site includes both an office building and a warehouse , and affords us increased production and processing capacity , such that we continue to offer our services to existing and new customers on an expanded basis . we are currently attempting to

depreciation and amortization expense for equipment , furniture , fixtures , tooling and leasehold improvements was $ 1,908 , $ 1,707 and $ 1,563 for the years ended december 31 , 2012 , 2011 and 2010 , respectively . other assets , net other assets consist primarily of licensed technology , prepaid royalties and deposits . amortization of licensed technology was $ 670 , $ 1,525 and $ 1,171 for the years ended december 31 , 2012 , 2011 and 2010 , respectively . accrued liabilities and current portion of long-term liabilities accrued liabilities and current portion of long-term liabilities consist of the following : replace_table_token_23_th 51 the following is a summary of the change in our reserve for warranty returns : replace_table_token_24_th 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 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 ) $ 10,000 , or ( ii ) $ 1,000 plus 80 % of eligible domestic accounts receivable and certain foreign accounts receivable . in addition , the revolving loan agreement , as amended also provides for non-formula advances of up to $ 10,000 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 . amounts advanced under the revolving line bear interest at an annual rate equal to the lender 's prime rate plus 0.25 % . the revolving loan agreement , as amended also provides an option for libor advances that bear interest based on the libor rate . interest on the revolving line is due monthly , with the balance due on december 14 , 2014 , which is the scheduled maturity date for the revolving line . the revolving loan agreement , as amended contains customary affirmative and negative covenants , including with respect to the following : compliance with laws , provision of financial statements and periodic reports , payment of taxes , maintenance of inventory and insurance , maintenance of operating accounts at the bank , the bank 's access to collateral , formation or acquisition of subsidiaries , incurrence of indebtedness , dispositions of assets , granting liens , changes in business , ownership or business locations , engaging in mergers and acquisitions , making investments or distributions and affiliate transactions . the covenants also require that the company maintain a minimum ratio of qualifying financial assets to the sum of qualifying financial obligations . the revolving loan agreement , as amended also contains customary events of default , including the following : defaults with respect to covenant compliance , the occurrence of a material adverse change , the occurrence of certain bankruptcy or insolvency events , cross-defaults , judgment defaults and material misrepresentations . 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 . to secure the repayment of any amounts borrowed under the revolving loan agreement , as amended , the company granted to the bank a security interest in substantially all of its assets , excluding its intellectual property assets . the company has agreed not to pledge or otherwise encumber its intellectual property assets without prior written permission from the bank . we had no outstanding borrowings under the revolving line as of december 31 , 2012 and 2011 . 52 note 4. fair value measurements fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . three levels of inputs may be used to measure fair value : level 1 : valuations based on quoted prices in active markets for identical assets and liabilities . level 2 : valuations based on inputs other than quoted prices included within level 1 that are observable for the asset or liability , either directly or indirectly . level 3 : valuations based on unobservable inputs in which there is little or no market data available , which require the reporting entity to develop its own assumptions . the following table presents information about our assets measured at fair value on a recurring basis in the consolidated balance sheets at december 31 , 2012 and 2011 : replace_table_token_25_th we primarily use the market approach to determine the fair value of our financial assets . the fair value of our current assets and liabilities , including accounts receivable and accounts payable approximates the carrying value due to the short-term nature of these balances . we have currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with gaap . story_separator_special_tag the key factors considered by the company in developing the esps include the nature and complexity of different technologies being licensed , our cost to provide the deliverables , the availability of substitute technologies in the marketplace and the company 's historical pricing practices . we then recognize revenue for each unit of accounting depending on the nature of the deliverable ( s ) comprising the unit of accounting in accordance with the revenue recognition criteria mentioned above . 36 sales returns and allowances . our customers do not have a stated right to return product except for replacement of defective products under our warranty program discussed below . however , we have accepted customer returns on a case-by-case basis as customer accommodations in the past . as a result , we provide for these returns in our reserve for sales returns and allowances . at the end of each reporting period , we estimate the reserve for returns based on historical experience and knowledge of any applicable events or transactions . certain of our distributors have stock rotation provisions in their distributor agreements , which allow them to return 5-10 % of the products purchased in the prior six months in exchange for products of equal value . we analyze historical stock rotations at the end of each reporting period . to date , returns under the stock rotation provisions have been nominal . certain distributors also have price protection provisions in their distributor agreements with us . under the price protection provisions , we grant distributors credit if they purchased product for a specific end customer and we subsequently lower the price to the end customer such that the distributor can no longer earn its negotiated margin on in-stock inventory . at the end of each reporting period , we estimate a reserve for price protection credits based on historical experience and knowledge of any applicable events or transactions . product warranties . we warrant that our products will be free from defects in materials and workmanship for a period of twelve months from delivery . warranty repairs are guaranteed for the remainder of the original warranty period . our warranty is limited to repairing or replacing products , or refunding the purchase price . at the end of each reporting period , we estimate a reserve for warranty returns based on historical experience and knowledge of any applicable events or transactions . while we engage in extensive product quality programs and processes , which include actively monitoring and evaluating the quality of our suppliers , should actual product failure rates or product replacement costs differ from our estimates , revisions to the estimated warranty liability may be required . allowance for doubtful accounts . we offer credit to customers after careful examination of their creditworthiness . we maintain an allowance for doubtful accounts for estimated losses that may result from the inability of our customers to make required payments . at the end of each reporting period , we estimate the allowance for doubtful accounts based on our account-by-account risk analysis of outstanding receivable balances . if the financial condition of our customers were to deteriorate , resulting in an impairment of their ability to make payments , additional allowances may be required . inventory valuation . we value inventory at the lower of cost or market . in addition , we write down any obsolete , unmarketable or otherwise impaired inventory to net realizable value . the determination of obsolete or excess inventory requires us to estimate the future demand for our products . the estimate of future demand is compared to inventory levels to determine the amount , if any , of obsolete or excess inventory . if actual market conditions are less favorable than those we projected at the time the inventory was written down , additional inventory write-downs may be required . inventory valuation is re-evaluated on a quarterly basis . amortization of non-cancelable prepaid royalty . as of december 31 , 2012 , we had a prepaid non-cancelable royalty of $ 0.8 million for the license of ip from a third party . we amortize the prepaid based on our estimated average unit cost , which is dependent upon forecasted shipments of our products that contain the licensed ip . if our actual shipments are less than forecasted , the estimated amortization rate will increase in the future . useful lives and recoverability of equipment and other long-lived assets . we evaluate the remaining useful life and recoverability of equipment and other assets , including identifiable intangible assets with definite lives , whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable . if there is an indicator of impairment , we prepare an estimate of future , undiscounted cash flows expected to result from the use of each asset and its eventual disposition . if these cash flows are less than the carrying value of the asset , we adjust the carrying amount of the asset to its estimated fair value . while we have concluded that the carrying value of our long-lived assets is recoverable as of december 31 , 2012 , our analysis is dependent upon our estimates of future cash flows and our actual results may vary . stock-based compensation . we estimate the fair value of stock options using the black-scholes option pricing model , which requires certain estimates , including an expected forfeiture rate and expected term of options granted . we also make decisions regarding the method of calculating expected volatilities and the risk-free interest rate used in the option-pricing model . the resulting calculated fair value of stock options is recognized as compensation expense over the requisite service period , which is generally the vesting period . when there are changes to the assumptions used in the option-pricing model , including fluctuations in the market price of our common stock , there will be variations in

on december 14 , 2012 , we and the bank entered into 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 . 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 . 35 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 , 2012 , we were in compliance with all of the terms of the revolving loan agreement , as amended . we had no outstanding borrowings under the revolving line as of december 31 , 2012 and 2011. equity offering < div

the asu requires additional qualitative and quantitative disclosures with the objective of enabling users of financial statements to assess the amount , timing and uncertainty of cash flows arising from leases . the update and its related amendments resulted in the recognition , as of october 1 , 2019 , of operating right-of-use assets totaling $ 1.5 million and operating lease liabilities totaling $ 1.6 million . a $ 75,000 prior period adjustment to retained earnings was recognized as of october 1 , 2019. the company has presented the necessary disclosures in note 8. recent accounting pronouncements not yet adopted in june 2016 , the fasb issued asu 2016-13 , financial instruments - credit losses : measurement of credit losses on financial instruments , which changes the impairment model for most financial assets . this update is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations . the underlying premise of the update is that financial assets measured at amortized cost should be presented at the net amount expected to be collected , through an allowance for credit losses that is deducted from the amortized cost basis . the allowance for credit losses should reflect management 's current estimate of credit losses that are expected to occur over the remaining life of a financial asset . the income statement will be affected for the measurement of credit losses for newly recognized financial assets , as well as the expected increases or decreases of expected credit losses that have taken place during the period . this update defers the effective date of asu 2016-13 for sec filers that are eligible to be smaller reporting companies , non-sec filers , and all other companies to fiscal years beginning after december 15 , 2022 , including interim periods within those fiscal years . we expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective , but can not yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements . in january 2017 , the fasb issued asu 2017-04 , simplifying the test for goodwill impairment . to simplify the subsequent measurement of goodwill , the fasb eliminated step 2 from the goodwill impairment test . in computing the implied fair value of goodwill under step 2 , an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities ( including unrecognized assets and liabilities ) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination . instead , under the amendments in this update , an entity should perform its annual , or interim , goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount . an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit 's fair value ; however , the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit . in november 2019 , the fasb issued asu 2019-10 , financial instruments ‒ credit losses ( topic 326 ) , derivatives and hedging ( topic 815 ) , and leases ( topic 842 ) , which deferred the effective date for asc 350 , intangibles – goodwill and other , for smaller reporting companies to fiscal years beginning after december 15 , 2022 , and interim periods within those fiscal years . this update is not expected to have a significant impact on the company 's financial statements . ​ in august 2018 , the fasb issued asu 2018-13 , fair value measurement ( topic 820 ) : disclosure framework – changes the disclosure requirements for fair value measurements . the update removes the requirement to disclose the amount of and reasons for transfers between level i and level ii of the fair value hierarchy ; the policy for timing of transfers between levels ; and the valuation processes for level iii fair value measurements . the update requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income ( loss ) for recurring level iii fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop level iii fair value measurements . this update is effective for all entities for fiscal years , and interim periods within those fiscal years , beginning after december 15 , 2019. the company is currently evaluating the impact the adoption of the standard will have on the company 's financial position or results of operations . in may 2019 , the fasb issued asu 2019-05 , financial instruments – credit losses , topic 326 , which allows entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized cost upon adoption of the new credit losses standard . to be eligible for the transition election , the existing financial asset must otherwise be both 77 within the scope of the new credit losses standard and eligible for the applying the fair value option in asc 825-10-3. the election must be applied on an instrument-by-instrument basis and is not available for either available-for-sale or held-to-maturity debt securities . for entities that elect the fair value option , the difference between the carrying amount and the fair value of the financial asset would be recognized through a cumulative-effect adjustment to opening retained earnings as of the date an entity adopted asu 2016-13. changes in fair value of that financial asset would subsequently be reported in current earnings . story_separator_special_tag the efficiency ratio for the fiscal year ended september 30 , 2020 improved to 54.1 % from 58.4 % for fiscal 2019 . ​ 2019 vs. 2018. for the fiscal year ended september 30 , 2019 , non-interest expense increased $ 631,000 , to $ 16.1 million compared to $ 15.6 million for fiscal year 2018. the primary reason for the higher level of non-interest expense experienced during the year ended september 30 , 2019 , as compared to fiscal year 2018 , was the hiring of additional personnel for our lending operations and an increase in fdic deposit insurance expense . in connection with the bank 's increased emphasis on the origination of commercial real estate and construction and land development loans and the attendant increase in such portfolios , the bank has expanded its lending department operations . partially offsetting these 60 increases were decreases in professional fees and occupancy expense as the company maintained its focus on the continued implementation of operating efficiencies . income tax expense . 2020 vs. 2019 . for the year ended september 30 , 2020 , the company recorded income tax expense of $ 1.6 million , compared to $ 1.9 million for fiscal 2019. the reduction in income tax expense in fiscal 2020 was primarily due to tax benefits recognized as a result of stock compensation plans . 2019 vs. 2018 . for the year ended september 30 , 2019 , the company recorded income tax expense of $ 1.9 million , compared to $ 3.7 million for fiscal 2018. the reduction in income tax expense in fiscal 2019 primarily reflected the benefit throughout fiscal 2019 associated with the fully implemented decrease in the federal statutory income tax rate , effective january 1 , 2018 , reducing the company 's statutory tax rate to 21 % . the $ 3.7 million tax expense for the fiscal year ended september 30 , 2018 included a one-time charge of $ 1.8 million related to a revaluation of the company 's deferred tax assets due to the tax legislation enacted in december 2017 that reduced the statutory federal income tax rate from 35 % to 21 % . however , since the company has a september 30 fiscal year , the decrease in the income tax rate was not fully phased in until october 1 , 2018 . ​ covid-19 related information ​ as noted above , in response to the current situation surrounding the covid-19 pandemic , the company is providing assistance to its customers in a variety of ways . the company participated in the ppp loan program offered under the cares act as a small business administration ( “ sba ” ) lender . during the quarter ended june 30 , 2020 , we had originated 63 requests for ppp loans totaling approximately $ 5.1 million . these loans were sold during the quarter ended september 30 , 2020 at a net gain of $ 111,000. no additional ppp loans were originated during the fourth quarter of fiscal 2020. we are working closely with our loan customers to effectively manage our portfolio through the ongoing uncertainty surrounding the duration , impact and government response to the crisis . ​ the primary method of relief is to allow the borrower to defer their loan payments for three months ( and extending the term of the loan accordingly ) . the cares act and regulatory guidelines suspend temporarily the determination of certain loan modifications related to the covid-19 pandemic from being treated as tdrs . see “ business lending activities - asset quality ” above ” . ​ while the company 's banking operations were not restricted by the government stay-at-home orders , the company took steps to protect its employees and customers by providing for remote working for many employees , enhancing cleaning procedures for the company 's offices , in particular its branch offices , requiring face masks to be worn by employees and maintaining appropriate social distancing in our offices . the company continues to assess and monitor the covid-19 pandemic and will take additional such steps as are necessary to protect its employees and assist its depositor and borrower customers during this difficult time . ​ story_separator_special_tag adjustable-rate loans and fixed-rate loans , and as a result of contractual rate adjustments on adjustable-rate loans . annual prepayment rates for adjustable-rate and fixed-rate single-family and multi-family residential and commercial mortgage loans are assumed to range from 12.0 % to 32.4 % . the annual prepayment rate for mortgage-backed securities is assumed to range from 0.5 % to 43.0 % . money market deposit accounts , savings accounts and interest-bearing checking accounts are assumed to have annual rates of withdrawal , or “ decay rates , ” based on information from an internal analysis of our accounts up to a maximum of ten years . ​ replace_table_token_31_th ( 1 ) interest-earning assets are included in the period in which the balances are expected to be redeployed and or repriced as a result of anticipated prepayments , scheduled rate adjustments and contractual maturities . ( 2 ) for purposes of the gap analysis , loans receivable includes non-performing loans , gross of the allowance for loan losses and unamortized discounts and deferred loan fees . ( 3 ) includes restricted stock in the fhlb of pittsburgh and acbb . ( 4 ) interest-rate sensitivity gap represents the difference between total interest-earning assets and total interest-bearing liabilities . certain shortcomings are inherent in the method of analysis presented in the foregoing table . for example , although certain assets and liabilities may have similar maturities or periods to repricing , they may react in different degrees to changes in market interest rates . also , the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates , while interest rates on other types may lag behind changes in market rates . additionally , certain

exposure to changes in interest rates gap analysis . the matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “ interest rate sensitive ” and by monitoring the bank 's interest rate sensitivity “ gap. ” an asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period . the interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period . a gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities . a gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets . during a period of rising interest rates , a negative gap would tend to affect adversely net interest income while a positive gap would tend to result in an increase in net interest income . conversely , during a period of falling interest rates , a negative gap would tend to result in an increase in net interest income while a positive gap would tend to affect adversely net interest income . the table on the next page sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at september 30 , 2020 , which we expect , based upon certain assumptions , to reprice or mature in each of the future time periods shown ( the “ gap table ” ) . except as stated below , the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the 62 contractual maturity of the asset or liability . the table sets forth an approximation of the projected repricing of assets and liabilities at september 30 , 2020 , on the basis of contractual maturities , anticipated prepayments , and scheduled rate adjustments within a three-month period and subsequent selected time intervals . the loan amounts in the table reflect

also , projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions , or that the degree of compliance with the policies or procedures may deteriorate . a material weakness is a deficiency , or combination of control deficiencies , in internal control over financial reporting , such that there is a reasonable possibility that a material misstatement of the company 's annual or interim financial statements will not be prevented or detected on a timely basis . the following material weakness has been identified and included in management 's assessment . management identified a material weakness related to the established process for estimating revenues and costs on its construction projects . in our opinion , because of the effect of the material weakness described above on the achievement of the objectives of the control criteria , sterling construction company , inc. and subsidiaries has not maintained effective internal control over financial reporting as of december 31 , 2011 , based on criteria established in internal control—integrated framework issued by coso . we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) , the consolidated balance sheets of sterling construction company inc. and subsidiaries as of december 31 , 2011 and 2010 and the related consolidated statements of operations , stockholders ' equity , comprehensive income and cash flows for each of the three years in the period ended december 31 , 2011. the material weakness identified above was considered in determining the nature , timing , and extent of audit tests applied in our audit of the 2011 financial statements , and this report does not affect our report dated march 15 , 2012 , which expressed an unqualified opinion on those consolidated financial statements . we do not express an opinion or any other form of assurance on management 's statement referring to company undertaking changes in several areas which will improve the profitability of their projects , reduce the variability in profitability of their projects in the future and strengthen the internal control environment . grant thornton llp houston , texas march 15 , 2012 f2 sterling construction company , inc. & subsidiaries consolidated balance sheets as of december 31 , 2011 and 2010 ( amounts in thousands , except share and per share data ) replace_table_token_11_th the accompanying notes are an integral part of these consolidated financial statements . f3 sterling construction company , inc. & subsidiaries consolidated statements of operations for the years ended december 31 , 2011 , 2010 and 2009 ( amounts in thousands , except per share data ) replace_table_token_12_th the accompanying notes are an integral part of these consolidated financial statements . f4 sterling construction company , inc. & subsidiaries consolidated statements of comprehensive income ( loss ) for the years ended december 31 , 2011 , 2010 and 2009 ( amounts in thousands ) replace_table_token_13_th the accompanying notes are an integral part of these consolidated financial statements . f5 sterling construction company , inc. & subsidiaries consolidated statement of stockholders ' equity for the years ended december 31 , 2011 , 2010 and 2009 ( amounts in thousands ) replace_table_token_14_th the accompanying notes are an integral part of these consolidated financial statements . f6 sterling construction company , inc. & subsidiaries consolidated statements of cash flows for the years ended december 31 , 2011 , 2010 and 2009 ( amounts in thousands ) replace_table_token_15_th the accompanying notes are an integral part of these consolidated financial statements f7 sterling construction company , inc. & subsidiaries notes to consolidated financial statements 1. summary of business and significant accounting policies basis of presentation sterling construction company , inc. ( “ sterling ” or “ the company ” ) , a delaware corporation , is a leading heavy civil construction company that specializes in the building , reconstruction and repair of transportation and water infrastructure in markets in texas , utah , nevada , arizona , california and other states in which we see opportunities . our transportation infrastructure projects include highways , roads , bridges and light and commuter rail foundations and structures , and our water infrastructure projects include water , wastewater and storm drainage systems . sterling provides general contracting services , including excavating , concrete and asphalt paving , installation of large-diameter water and wastewater distribution systems , construction of bridges and similar large structures , construction of light and commuter rail infrastructure , concrete and asphalt batch plant operations , and concrete crushing and aggregate operations primarily to public sector clients . we purchase the necessary materials for our contracts , and perform the majority of the work required by our contracts with our own crews and equipment . sterling owns equity interests in the following subsidiaries : texas sterling construction co. ( “ tsc ” ) , a delaware corporation ; road and highway builders , llc ( “ rhb ” ) , a nevada limited liability company ; road and highway builders , inc. ( “ rhb inc ” ) , a nevada corporation ; road and highway builders of california , inc. ( `` rhbca `` ) , a california corporation ; ralph l. wadsworth construction company , llc ( `` rlw `` ) , a utah limited liability company and ralph l. wadsworth construction company , lp ( “ rlwlp ” ) , an inactive california limited partnership ; j. banicki construction , inc. , an arizona corporation ( “ jbc ” ) ; and myers & sons construction , l.p. ( “ myers ” ) ; a california limited partnership . tsc , rhb , rhb ca , rlw and myers perform construction contracts , and rhb inc produces aggregates from a leased quarry , primarily for use by rhb . story_separator_special_tag the following table sets forth information about our cash flows for the years ended december 31 , 2009 through 2011. replace_table_token_7_th operating activities . significant non-cash items included in operating activities are : · the impairment of goodwill of $ 67.0 million in 2011 ; · depreciation and amortization which increased to $ 17.3 million in 2011 as compared to $ 15.8 million in 2010 as a result of an increase in capital expenditures as well as depreciation associated with jbc and myers which were acquired in 2011 and which increased from $ 13.7 million in 2009 to $ 15.8 million in 2010 as a result of the increase in capital expenditures in 2010 and a full year 's depreciation in 2010 on equipment purchased in the rlw acquisition in december 2009 ; · deferred tax benefit ( expense ) was $ 18.7 million , $ ( 3.9 ) million and $ ( 4.5 ) million in 2011 , 2010 and 2009 , respectively ; the deferred tax benefit for 2011 is primarily the result of recording the impairment of goodwill for financial reporting purposes whereas goodwill is amortized for tax return purposes ; the deferred tax expense in 2010 and 2009 is the result of recognizing accelerated depreciation methods used on equipment for tax purposes as compared to straight-line depreciation used for financial reporting purposes and amortizing goodwill for tax return purposes but not for financial reporting purposes . 35 besides the net income ( loss ) in 2011 , 2010 and 2009 and the non-cash items discussed above , other significant components of cash flows from operations ( which excludes the impact of changes attributable to the net assets of acquired companies ) were : · contracts receivable decreased by $ 1.9 million in 2011 , $ 10.0 million in 2010 and $ 15.2 million in 2009 while the excess of billings over costs incurred and estimated earnings decreased by $ 6.5 million and $ 17.4 million in 2011 and 2010 , respectively , and increased by $ 0.2 million in 2009 ; · the increase in receivables from and equity in unconsolidated construction joint ventures of $ 4.4 million between 2009 and 2010 as a result from our acquisition of the utah operations and increased construction activity in 2010 by such joint ventures ; · accounts payable decreased by $ 7.9 million in 2011 , increased by $ 2.3 million in 2010 and decreased by $ 11.2 million in 2009. investing activities . expenditures for the replacement of certain equipment and to expand our construction fleet totaled $ 24.0 million in 2011 as compared to $ 13.4 million in 2010 and $ 5.3 million in 2009. capital equipment is acquired as needed to support increased levels of production activities and to replace retiring equipment . the increase in 2011 was primarily the result of purchases to replace retiring equipment . the increase in 2010 was primarily due to purchases of equipment by our utah operations in order for it to perform its responsibilities on a large joint venture project , and the lower capital expenditures in 2009 was principally due to management 's cautious view regarding certain of the company 's markets in 2009 and 2010 , due to economic uncertainties . during 2011 , 2010 and 2009 , the company had net purchases ( sales ) of short-term securities of $ 7.9 million , $ ( 2.9 ) million and $ 14.0 million , respectively . the net purchases in 2011 and 2009 were primarily due to the investment of cash generated by operations , after repayment of indebtedness . on august 1 , 2011 , the company used $ 8 million of existing cash and short-term investments to fund the acquisition of jbc , a heavy civil construction business operating in arizona . additional purchase consideration of up to $ 5 million may be paid in connection with this acquisition subject to the achievement of certain earnings requirements during the period from 2011 through july 31 , 2016. also on august 1 , 2011 , the company acquired a 50 % interest in myers , a construction limited partnership located in california . the company paid a purchase price of $ 1.2 million which was funded by available cash of the company . in december 2011 , the company acquired the remaining 8.33 % interest in rhb from the noncontrolling interest owner for $ 8.2 million as a result of the owner 's exercise of his right to put the interest . in december 2009 , the company purchased an 80.0 % equity interest in rlw for a net cash purchase price of $ 60.5 million , net of cash acquired , in order to expand our construction operations to utah . financing activities . financing activities in 2011 primarily reflect distributions to noncontrolling interest owners of $ 7.8 million and purchases of treasury stock of $ 3.6 million . financing activities in 2010 and 2009 primarily reflect a reduction of $ 40.0 million and $ 15.0 million , respectively , in borrowings under our $ 75.0 million credit facility . the amount of borrowings under the credit facility is based on the company 's expectations of working capital requirements . additionally , the company sold 2.76 million shares of common stock in 2009 for net proceeds of $ 46.8 million . story_separator_special_tag style= `` text-indent : 0pt ; display : block ; margin-left : 0pt ; margin-right : 0pt `` > the following table sets forth our fixed , non-cancelable obligations at december 31 , 2011 : replace_table_token_9_th our obligations for interest are not included in the table above as these amounts vary according to the levels of debt outstanding at any time . interest on our credit facility is paid monthly and fluctuates with the balances outstanding during the year , as well as with fluctuations in interest rates . in 2011 , interest on the credit facility was approximately $ 3,000. the

the credit facility contains restrictions on our ability to : · make distributions or pay dividends ; · incur liens and encumbrances ; · incur further indebtedness ; · guarantee obligations ; · dispose of a material portion of assets or merge with a third party ; and · make investments in securities . to date the company has not experienced any difficulty in borrowing under our credit agreement or any material change in its terms , and the company was in compliance with all covenants under the credit facility as of december 31 , 2011. management believes that the credit facility will provide adequate funding for the company 's working capital , debt service and capital expenditure requirements , including seasonal fluctuations , at least through december 31 , 2012. the unpaid principal balance of each loan bears interest under the credit facility at a variable rate equal to either comerica 's prime rate or a rate equal to libor plus 1.75 % . the interest rate on funds borrowed under this revolver during the year ended december 31 , 2011 was 3.25 % at all times that the company had debt outstanding under this facility . 37 mortgage . in 2001 , we completed the construction of a new headquarters building on land owned by us adjacent to our equipment repair facility in houston . the building was financed principally through a mortgage of $ 1.1 million on the land and facilities at a floating interest rate which at december 31 , 2011 was 3.5 % per annum , repayable over 15 years . contractual obligations . < div align= '' justify ''

issuance costs are included in deposits and other assets . the net proceeds from the senior notes are intended to be used for general corporate purposes , the buyback of the company 's convertible notes if the holders exercise their put , and or repurchases of its common stock or convertible notes or special or recurring dividends to the company 's stockholders . in the years ended december 31 , 2013 , 2012 and 2011 , the company incurred approximately $ 16.8 million , $ 15.2 million and $ 14.0 million of interest expense , respectively , related to the senior notes . the senior notes are fully guaranteed on a senior secured basis , jointly and severally , by each of the company 's existing domestic and future material domestic subsidiaries , subject to certain exceptions and permitted liens . under certain circumstances , the company 's subsidiaries may be released from these guarantees without the consent of the holders of the senior notes . the senior notes and the guarantees are secured by ( i ) first priority liens on substantially all of the company 's and guarantors ' assets , ( ii ) all of the equity interests in any of its domestic subsidiaries and ( iii ) 65 % of the equity interests of its first-tier foreign subsidiaries held by the company and its guarantors . the senior notes 56 cogent communications group , inc. , and subsidiaries notes to consolidated financial statements ( continued ) 4. long-term debt : ( continued ) and the guarantees represent the company 's and the guarantors ' senior secured obligations and effectively rank equally and ratably with all of its and the guarantors ' existing and future first lien obligations , to the extent of the value of the collateral securing such indebtedness , subject to permitted liens ; are structurally subordinated to any existing and future indebtedness and liabilities of non-guarantor subsidiaries and rank equally in right of payment with all of its and the guarantors ' existing and future senior indebtedness . the company may redeem the senior notes , in whole or in part , at any time prior to february 15 , 2015 at a price equal to 100 % of the principal amount plus a `` make-whole `` premium , plus accrued and unpaid interest , if any , to the date of redemption . the `` make whole `` premium means , with respect to a note at any date of redemption , the greater of ( i ) 1.0 % of the then-outstanding principal amount of such note and ( ii ) the excess of ( a ) the present value at such date of redemption of ( 1 ) the redemption price of such note at february 15 , 2015 , plus ( 2 ) all remaining required interest payments due on such note through february 15 , 2015 ( excluding accrued but unpaid interest to the date of redemption ) , computed using a discount rate equal to the treasury rate as of such date of redemption plus 50 basis points , over ( b ) the then-outstanding principal amount of such note . the company may also redeem the senior notes , in whole or in part , at any time on or after february 15 , 2015 at the applicable redemption prices specified under the indenture governing the senior notes plus accrued and unpaid interest , if any , to the date of redemption . the redemption prices ( expressed as a percentage of the principal amount ) are 104.118 % during the 12-month period beginning on february 15 , 2015 , 102.094 % during the 12-month period beginning on february 15 , 2016 and 100.0 % during the 12-month period beginning on february 15 , 2017 and thereafter . in addition , the company may redeem up to 35 % of the senior notes before february 15 , 2014 with the net cash proceeds from certain equity offerings at a redemption price of 108.375 % of the principal amount plus accrued and unpaid interest . if the company experiences specific kinds of changes of control , the company must offer to repurchase all of the senior notes at a purchase price of 101.0 % of their principal amount , plus accrued and unpaid interest , if any , to the repurchase date . the company must offer to purchase with the proceeds of certain sales of assets totaling $ 20.0 million or greater , senior notes at 100.0 % of the principal value of the notes plus accrued and unpaid interest . in the event of default , as defined in the indenture , holders of not less than 25.0 % in aggregate principal amount of the senior notes then outstanding may declare all unpaid principal and accrued interest on all senior notes to be due and immediately payable . the indenture governing the senior notes , among other things , limits the company 's ability and its guarantors ' ability to incur indebtedness ; to pay dividends or make other distributions ; to make certain investments and other restricted payments ; to create liens ; consolidate , merge , sell or otherwise dispose of all or substantially all of its assets ; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments ; and to enter into certain transactions with its affiliates . convertible senior notes in june 2007 , the company issued its convertible notes for an aggregate principal amount of $ 200.0 million in a private offering for resale to qualified institutional buyers pursuant to sec rule 144a . the convertible notes mature on june 15 , 2027 , are unsecured , and bear interest at 1.00 % per annum . story_separator_special_tag the net income tax benefit for 2011 includes income tax expense for the united states of approximately $ 3.4 million related to state income taxes ( including approximately $ 3.0 million related to uncertain tax benefits ) an income tax benefit of $ 6.3 million resulting from the reduction of the valuation allowance on net deferred tax assets related to our operations in certain jurisdictions in the united states , and $ 0.9 million of income tax expense related to our european and canadian operations . buildings on-net . as of december 31 , 2012 and 2011 we had a total of 1,867 and 1,744 on-net buildings connected to our network , respectively . liquidity and capital resources in assessing our liquidity , management reviews and analyzes our current cash balances , short-term investments , accounts receivable , accounts payable , accrued liabilities , capital expenditure and operating expense commitments , and required capital lease , interest and debt payments and other obligations . the following table sets forth our consolidated cash flows for the years ended december 31 , 2013 , 2012 , and 2011. replace_table_token_9_th 34 story_separator_special_tag style= `` font-family : times ; `` > the convertible notes are convertible into shares of our common stock at a conversion price of $ 47.52 per share , or 21.043 shares for each $ 1,000 principal amount of convertible notes , subject to additional adjustment for certain events , including dividend payments , as set forth in the indenture . 36 upon conversion of the convertible notes , we will have the right to deliver shares of our common stock , cash or a combination of cash and shares of our common stock . the convertible notes are convertible ( i ) during any fiscal quarter after the fiscal quarter ending june 30 , 2007 , if the closing sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130 % of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter , or ( ii ) specified corporate transactions occur , or ( iii ) the trading price of the convertible notes falls below a certain threshold , or ( iv ) if we call the convertible notes for redemption , or ( v ) on or after april 15 , 2027 , until maturity . in addition , following specified corporate transactions , we will increase the conversion rate for holders who elect to convert convertible notes in connection with such corporate transactions , provided that in no event may the shares issued upon conversion , as a result of adjustment or otherwise , result in the issuance of more than 36.8251 common shares per $ 1,000 principal amount . the convertible notes include an `` irrevocable election of settlement `` whereby we may choose , in our sole discretion , and without the consent of the holders of the convertible notes , to waive our right to settle the conversion feature in either cash or stock or in any combination , at our option . the convertible notes may be redeemed by us at any time after june 20 , 2014 at a redemption price of 100 % of the principal amount plus accrued interest . holders of the convertible notes have the right to require us to repurchase for cash all or some of their convertible notes on june 15 , 2014 , 2017 and 2022 and upon the occurrence of certain designated events at a redemption price of 100 % of the principal amount plus accrued interest . as of december 31 , 2013 , the convertible notes are classified as a current liability since the earliest put date in june 2014 is within one year . common stock buyback program in june 2007 , we used approximately $ 50.1 million of the net proceeds from our issuance of our convertible notes to repurchase approximately 1.8 million shares of our common stock . in august 2007 , our board of directors approved a $ 50.0 million common stock buyback program . in june 2008 , our board of directors approved an additional $ 50.0 million for purchases of our common stock to occur prior to december 31 , 2009. in february 2011 , our board of directors approved an additional $ 50.0 million of purchases of our common stock . in the years ended december 31 , 2011 and 2012 , we purchased approximately 0.2 million , and 0.1 million shares of our common stock , respectively , for approximately $ 3.0 million and $ 1.3 million , respectively and there was $ 45.8 million available for additional purchases at december 31 , 2013. there were no purchases in the year ended december 31 , 2013. all purchased common shares were subsequently retired . in february 2014 , our board of directors extended the february 2011 program through february 2015. dividends on common stock our initial quarterly dividend payment was made in the third quarter of 2012. in addition to our regular quarterly dividends , our board of directors has approved an additional return of capital program ( the `` capital program `` ) for our shareholders . under the capital program we plan on returning an additional capital to our shareholders each quarter through either stock buybacks or a special dividend or a combination of stock buybacks and a special dividend . the aggregate payment under the capital program initially was at least $ 10.0 million each quarter and was increased to be at least $ 10.5 million each quarter . amounts paid under our capital program are in addition to our regular quarterly dividend payments . the initial $ 10.0 million ( $ 0.22 per share ) quarterly dividend payment under the capital program was paid to holders of record on november 27 ,

on august 19 , 2013 , we received net proceeds of approximately $ 69.9 million after deducting $ 1.0 million of issuance costs from issuing $ 65.0 million of senior notes . the senior notes sold in august 2013 were sold at 109.00 % of par value . the $ 5.9 million premium is being amortized as a reduction to interest expense to the maturity date using the effective interest rate 35 method . issuance costs are included in deposits and other assets . the net proceeds from the senior notes are intended to be used for general corporate purposes , the buyback of our convertible notes if the holders exercise their put or if we exercise our right to redeem , and or repurchases of our common stock or convertible notes or special or recurring dividends to our stockholders . the senior notes are fully guaranteed on a senior secured basis , jointly and severally , by each of our existing domestic and future material domestic subsidiaries , subject to certain exceptions and permitted liens . under certain circumstances , subsidiaries may be released from these guarantees without the consent of the holders of the senior notes . the senior notes and the guarantees are secured by ( i ) first priority liens on substantially all of our and our guarantors ' assets , ( ii ) all of the equity interests in any of our domestic subsidiaries and ( iii ) 65 % of the equity interests of our first-tier foreign subsidiaries held by us and our guarantors . the senior notes and the guarantees represent our and the guarantors ' senior secured obligations and effectively rank equally and ratably with all of our and the guarantors ' existing and future first lien obligations , to the extent of the value of the collateral securing such indebtedness , subject to permitted liens ; are structurally subordinated to any existing and future indebtedness and liabilities of non-guarantor subsidiaries and rank equally in right of payment with all of our and the guarantors ' existing and future senior indebtedness . the senior notes may be redeemed , in whole or in part , at any time prior to february 15 , 2015 at a price equal to 100 % of

we routinely enter into arrangements that can include various combinations of multiple training offerings , consulting services , and intellectual property licenses . the timing of delivery and performance of the elements typically varies from contract to contract . generally , these items qualify as separate units of accounting because they have value to the customer on a standalone basis . when the company 's training and consulting arrangements contain multiple deliverables , consideration is allocated at the inception of the arrangement to all deliverables based on their relative selling prices at the beginning of the agreement , and revenue is recognized as each offering , consulting service , or intellectual property license is delivered . we use the following selling price hierarchy to determine the fair value to be used for allocating revenue to the elements : ( i ) vendor-specific objective evidence of fair value ( vsoe ) , ( ii ) third-party evidence ( tpe ) , and ( iii ) best estimate of selling price ( besp ) . generally , vsoe is based on established pricing and discounting practices for the deliverables when sold separately . in determining vsoe , we require that a substantial majority of the selling prices fall within a narrow range . when vsoe can not be established , judgment is applied with respect to whether a selling price can be established based on tpe , which is determined based on competitor prices for similar offerings when sold separately . our products and services normally contain a significant level of differentiation such that the comparable pricing of services with similar functionality can not be obtained . when we are unable to establish a selling price using vsoe or tpe , besp is used in our allocation of arrangement consideration . besps are established as best estimates of what the selling price would be if the deliverables were sold regularly on a stand-alone basis . our process for determining besps requires judgment and considers multiple factors , such as market conditions , type of customer , geographies , stage of product lifecycle , internal costs , and gross margin objectives . these factors may vary over time depending upon the unique facts and circumstances related to each deliverable . however , we do not expect the effect of changes in the selling price or method or assumptions used to determine selling price to have a significant effect on the allocation of arrangement consideration . our multiple-element arrangements generally do not include performance , cancellation , termination , or refund-type provisions . our international strategy includes the use of licensees in countries where we do not have a wholly-owned direct office . licensee companies are unrelated entities that have been granted a license to translate our content and offerings , adapt the content to the local culture , and sell our content in a specific country or region . licensees are required to pay us royalties based upon a percentage of their sales to clients . we recognize royalty income each period based upon the sales information reported to us from our licensees . licensee royalty revenues are included as a component of training sales and totaled $ 10.7 million , $ 10.6 million , and $ 14.4 million for the fiscal years ended august 31 , 2018 , 2017 , and 2016. the decrease in international licensee royalties in fiscal 2017 was primarily due to the conversion of our licensee operations in china into directly-owned offices . revenue is recognized as the net amount to be received after deducting estimated amounts for discounts and product returns . stock-based compensation we record the compensation expense for all stock-based payments , including grants of stock options and the compensatory elements of our employee stock purchase plan , in our consolidated statements of operations based upon their fair values over the requisite service period . for more information on our stock-based compensation plans , refer to note 11 . 61 shipping and handling fees and costs all shipping and handling fees billed to customers are recorded as a component of net sales . all costs incurred related to the shipping and handling of products are recorded in cost of sales . advertising costs costs for advertising are expensed as incurred . advertising costs included in selling , general , and administrative expenses totaled $ 6.9 million , $ 6.4 million , and $ 6.6 million for the fiscal years ended august 31 , 2018 , 2017 , and 2016. income taxes our income tax provision has been determined using the asset and liability approach of accounting for income taxes . under this approach , deferred income taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid . the income tax provision represents income taxes paid or payable for the current year plus the change in deferred taxes during the year . deferred income taxes result from differences between the financial and tax bases of our assets and liabilities and are adjusted for tax rates and tax laws when changes are enacted . a valuation allowance is provided against deferred income tax assets when it is more likely than not that all or some portion of the deferred income tax assets will not be realized . interest and penalties related to uncertain tax positions are recognized as components of income tax benefit or expense in our consolidated statements of operations . we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position . the tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement . story_separator_special_tag as a result of this determination , we wrote off the majority of our book inventory located in japan and expensed $ 2.1 million , which was recorded in cost of sales , as previously described . we also restructured the operations of our u.s/canada direct offices to create new smaller regional market teams that are focused on selling the all access pass . accordingly , we determined that our three remaining regional sales offices were unnecessary since most client partners work from home-based offices , we restructured the operations of the sales performance and winning customer loyalty practices , and we eliminated certain functions to reduce costs in future periods . we expensed $ 1.5 million for these restructuring costs in fiscal 2017. depreciation – depreciation expense increased due to the acquisition of assets in fiscal 2018 , including our new erp software and significantly upgraded aap portal . based on previous property and equipment acquisitions , and expected capital additions during fiscal 2019 , we expect depreciation expense will total approximately $ 6.7 million in fiscal 2019 . 32 amortization – our consolidated amortization expense increased compared with the prior year primarily due to the fiscal 2017 acquisitions of robert gregory partners , llc and jhana education , and the amortization of acquired intangible assets . based on current carrying amounts of intangible assets and remaining estimated useful lives , we anticipate amortization expense from intangible assets will total $ 4.8 million in fiscal 2019. accretion of discount on related party receivables – we have receivables from fc organizational products ( fcop ) , an entity in which we own a 19.5 percent interest . we classify these receivables as current or long-term based on expected payment dates , and discount long-term receivables at a rate of 15 percent , which we believe approximates fcop 's incremental borrowing rate . during fiscal 2018 , fcop paid receivables sooner than expected and we have accelerated the accretion of the discount on these receivables . we expect that fcop will continue to pay its receivables sooner than anticipated in forthcoming periods which may result in additional acceleration of the discount on these long-term receivables . income taxes our effective income tax provision rate for the fiscal year ended august 31 , 2018 was approximately 7 percent compared with a benefit rate of approximately 34 percent in the prior year . the unfavorable change in tax rate for fiscal 2018 was primarily due to the recognition of a $ 3.0 million valuation allowance against our foreign tax credit carryforward from fiscal 2011. our sales of the all access pass and other subscription services have generated , and will likely continue to generate , substantial amounts of deferred revenue for both book and tax purposes . this situation has produced taxable losses for the past two fiscal years and a more-likely-than-not presumption that insufficient taxable income will be available to realize the fiscal 2011 foreign tax carryforward , which expires at the end of fiscal 2021. we also recognized additional income tax expense from unrecognized tax benefits and disallowed travel and entertainment expenses in fiscal 2018. partially offsetting these unfavorable factors were tax benefits from the tax cut and jobs act ( the 2017 tax act ) , which was signed into law on december 22 , 2017. the 2017 tax act decreased the u.s. federal statutory tax rate applicable to our net deferred tax liabilities , resulting in a $ 1.7 million benefit , which was partially offset by $ 0.5 million of reduced benefits resulting from the decrease in the u.s. federal statutory tax rate applied to our pre-tax loss . our effective tax rate in fiscal 2018 was also affected by $ 0.5 million of previously unrecognized tax benefits that were partially offset by additional valuation allowances against the deferred tax assets of a foreign subsidiary and disallowed travel and entertainment expenses . during fiscal 2018 , we paid $ 2.5 million in cash for income taxes , primarily to foreign jurisdictions . we expect to recover a significant portion of our 2018 tax payments as we utilize foreign tax credit carryforwards in the future . over the next four to six years , we expect that our total cash paid for income taxes will be less than our total income tax provision as we utilize carryforwards of net operating losses and foreign tax credits . fiscal 2017 compared with fiscal 2016 sales the following sales analysis for the fiscal year ended august 31 , 2017 is based on activity through our reportable segments as shown in the preceding comparative sales table . direct offices – during fiscal 2017 , our china sales offices recognized $ 11.0 million of sales , which was in line with our expectations for these new offices . however , the increase in sales from the new china offices was offset by decreased domestic direct office revenues and decreased revenues from our office in the united kingdom . our domestic direct office revenues decreased $ 14.2 million compared 33 with the prior year primarily due to the transition to the aap business model and decreased onsite revenues . the majority of new aap contract revenue was deferred in fiscal 2017 and will be recognized over the lives of the underlying contracts . onsite presentation revenues during fiscal 2017 decreased $ 5.6 million compared to the prior year due to fewer days booked and discounted pricing available to aap clients . additionally , our sales performance practice revenues fell by $ 5.3 million and our customer loyalty practice revenues decreased by $ 1.4 million . these practices ' revenues declined primarily due to fewer new contracts during the fiscal year . partially offsetting these decreases was $ 1.2 million of coaching revenue from the acquisition of robert gregory partners , llc and a $ 0.2 million increase in government services sales . international direct office sales increased $ 7.6 million compared with the prior year

37 the various modification agreements preserve existing debt covenants that include ( i ) a funded debt to ebitdar ratio of less than 3.0 to 1.0 ; ( ii ) a fixed charge coverage ratio greater than 1.15 to 1.0 ; ( iii ) an annual limit on capital expenditures ( excluding capitalized curriculum development ) of $ 8.0 million ; and ( iv ) consolidated accounts receivable must exceed 150 percent of the amount outstanding on the line of credit . the other key terms and conditions of the various modification agreements are substantially the same as those defined in the restated credit agreement , except as described above . we believe that we were in compliance with the financial covenants and other terms applicable to the restated credit agreement at august 31 , 2018. in addition to our revolving line of credit facility and term loan obligations , we have a long-term lease on our corporate campus that is accounted for as a financing obligation . for further information on our operating lease obligations , which are not currently recorded on our consolidated balance sheet , refer to the notes to our consolidated financial statements as presented in item 8 of this report on form 10-k. the following discussion is a description of the primary factors affecting our cash flows and their effects upon our liquidity and capital resources during the fiscal year ended august 31 , 2018. cash flows from operating activities our primary source of cash from operating activities was the sale of services and products to our customers in the normal course of business . the primary uses of cash for operating activities were payments for selling , general , and administrative expenses , payments for direct costs necessary to conduct training programs , payments to suppliers for materials used in training manuals sold , and to fund working capital needs . our cash provided by operating activities was $ 16.9 million for the fiscal year ended august 31 , 2018 compared with $ 17.4 million in fiscal 2017. the decrease was primarily due to cash used to support changes in working capital when compared with the prior year , including the deferral of subscription-based revenues . although we are required to defer aap and other subscription-service revenues over the lives of the underlying contracts , we invoice the entire contract amount and collect the associated receivable at the inception of the agreement . cash flows from investing activities and capital expenditures our cash used for investing activities during fiscal 2018 totaled $ 10.6 million . the primary uses of cash for investing activities included purchases of property and equipment in the

not been terminated during such year . in addition , 50 % of all unvested stock options , shares of restricted stock , restricted stock units , stock appreciation rights , or similar stock-based rights granted to mr. slosman shall vest and , if applicable , be immediately exercisable and any risk of forfeiture included in such restricted or other stock grants previously made to mr. slosman shall immediately lapse , and mr. slosman may exercise any outstanding stock options or stock appreciation rights until the earlier of ( x ) the last date on which such stock options or stock appreciation rights could have been exercised pursuant to the terms of the applicable award agreement , irrespective of mr. slosman 's termination of employment ; and ( y ) the date that is two years following his employment termination date . craig shore we have been a party to an employment agreement with craig shore since november 28 , 2010. on may 5 , 2014 , we entered into an amended and restated employment agreement with mr. shore , which was amended on january 5 , 2015 , july 25 , 2016 , and on march 25 , 2019. the employment agreement , as amended , has an initial term that ends on december 31 , 2020 , and will automatically renew for additional one-year periods on january 1st thereafter unless either party gives the other party written notice of its election not to extend such employment at least six months prior to the next january 1st renewal date . if a change in control occurs when less than two full years remain in the initial term or during any renewal term , the employment agreement will automatically be extended for two years from the change in control date and will terminate on the second anniversary of the change in control date . - 69 - under the terms of the employment agreement , as amended by the third amendment to the amended and restated employment agreement , dated march 25 , 2019 , mr. shore is entitled to an annual base salary of at least $ 250,000 . such amount may be reduced only as part of an overall cost reduction program that affects all of our senior executives and does not disproportionately affect mr. shore , so long as such reduction does not reduce the base salary to a rate that is less than 90 % of the amount set forth above ( or 90 % of the amount to which it has been increased ) . the base salary will be reviewed annually by our chief executive officer for increase ( but not decrease , except as permitted as part of an overall cost reduction program ) as part of our annual compensation review . mr. shore is also eligible to receive an annual bonus in an amount equal to 60 % of his then-annual salary upon the achievement of reasonable target objectives and performance goals , to be determined by the board of directors in consultation with mr. shore . mr. shore is eligible to receive the percentage of his annual bonus corresponding to the percentage of his achievement of such target objectives and performance goals . the annual bonus will be reviewed annually by our chief executive officer for increase in the amount of the percentage of his then-base salary ( but not decrease ) , as well as the criteria and the goals , as part of our annual compensation review . in addition , mr. shore is eligible to receive such additional bonus or incentive compensation as the board may establish from time to time in its sole discretion . mr. shore will also be considered for grants of equity awards each year as part of the board 's annual compensation review , which will be made at the sole discretion of the board of directors . each grant will , with respect to any awards that are options , have an exercise price equal to the fair market value of our common stock as of the date of grant , and will be subject to a three-year vesting period subject to mr. shore 's continued service with us , with one-third of each additional grant vesting equally on the first , second , and third anniversary of the date of grant for such awards . if during the term of the employment agreement , mr. shore 's employment is terminated upon his death or disability , by us without cause ( as such term is defined in mr. shore 's employment agreement ) , or upon his resignation for “ good reason ” ( as such term is defined in mr. shore 's employment agreement ) , mr. shore will be entitled to receive , in addition to any amounts he is entitled to receive under the manager 's insurance policy : ( i ) any unpaid base salary and accrued unpaid vacation or earned incentive compensation and the pro rata amount of any bonus plan incentive compensation for the fiscal year of such termination ( based on the number of business days he was actually employed by us during the fiscal year of such termination and based on the percentage of the goals that he actually achieved under the bonus plan ) that he would have received had his employment not been terminated ; ( ii ) a one-time lump sum severance payment equal to 100 % of his base salary , provided that he executes a release relating to employment matters and the circumstances surrounding his termination in favor of us , our subsidiaries and our officers , directors and related parties and agents , in a form reasonably acceptable to us at the time of such termination ; ( iii ) vesting of all unvested stock options , stock appreciation rights or similar stock-based rights granted to him and immediate lapse of any risk story_separator_special_tag our net loss increased by $ 504,000 , or 5.0 % , to $ 10,544,000 , for the twelve months ended december 31 , 2020 , from $ 10,040,000 during the twelve months ended december 31 , 2019. the increase in net loss resulted primarily from a decrease of $ 673,000 in gross profit , offset , in part , by a decrease of $ 109,000 in operating expenses , a decrease of $ 40,000 in financial expenses and a decrease of $ 20,000 in tax expenses . story_separator_special_tag rights , including a commitment by us to file a registration statement with the sec on form s-1 or form s-3 and have such registration statement become effective not later than 150 days following the closing of the transactions under the spa . the transaction closed on february 5 , 2021. twelve months ended december 31 , 2020 compared to the twelve months ended december 31 , 2019 general . at december 31 , 2020 , we had cash and cash equivalents of $ 12,645,000 , as compared to $ 5,514,000 as of december 31 , 2019. we have historically met our cash needs through a combination of issuing new shares , borrowing activities and product sales . our cash requirements are generally for research and development , marketing and sales activities , finance and administrative cost , capital expenditures and general working capital . for the twelve months ended december 31 , 2020 , net cash used in our operating activities decreased by $ 729,000 to $ 9,081,000 , from $ 9,810,000 during the same period in 2019. the primary reason for the decrease in cash used in our operating activities was a decrease of $ 1,293,000 in payments for third party related expenses and for professional services ( primarily due to production related payments and payments related to ide application process ) , offset , in part , by an increase of $ 408,000 in salary and bonus payments from $ 5,690,000 in the twelve months ended december 31 , 2019 to $ 6,098,000 during the same period in 2020 and a decrease of $ 156,000 in payments received from customers to $ 3,447,000 during the twelve months ended december 31 , 2020 , from $ 3,603,000 during the same period in 2019 . - 61 - cash used by our investing activities was $ 187,000 during the twelve months ended december 31 , 2020 compared to $ 387,000 during the twelve months ended december 31 , 2019. the primary reasons for the decrease in cash used by our investing activities was a decrease of $ 218,000 in net payments made for purchase of property , plant and equipment to $ 66,000 during the twelve months ended december 31 , 2020 , from $ 284,000 during the same period in 2019 , offset , in part , by an increase of $ 18,000 in cash deposited to employee funds , to $ 121,000 during the twelve months ended december 31 , 2020 , from $ 103,000 during the same period in 2019. cash provided by financing activities for the twelve months december 31 , 2020 was $ 16,395,000 , compared to $ 6,335,000 during the same period in 2019. the principal sources of the cash provided by financing activities during the twelve months ended december 31 , 2020 were our june 2020 public offering of common stock , pre-funded warrants and warrants , the subsequent exercise of the pre-funded warrants sold in the offering , as well as exercise of warrants f and unit purchase options , that resulted in approximately $ 12,169,000 of aggregate net proceeds , and funds received from our atm facility that resulted in approximately $ 4,126,000 of aggregate net proceeds . the principal source of the cash provided by financing activities during the twelve months ended december 31 , 2019 , was the funds received from our december 2019 public offering of common stock , pre-funded warrants and warrants , as well as the subsequent exercise of the pre-funded warrants sold in the offering , that resulted in approximately $ 4,289,000 of aggregate net proceeds , and funds received from our april 2019 public offering of common stock that resulted in approximately $ 2,046,000 of aggregate net proceeds . as of december 31 , 2020 , our current assets exceeded our current liabilities by a multiple of 4.1. current assets increased by $ 7,529,000 during the period and current liabilities increased by $ 590,000 during the period . as a result , our working capital increased by $ 6,939,000 to $ 11,634,000 as of december 31 , 2020. off balance sheet arrangements we have no off-balance sheet transactions , arrangements , obligations ( including contingent obligations ) , or other relationships with unconsolidated entities or other persons that have , or may have , a material effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources . - 62 - recent accounting pronouncements in june 2016 , the fasb issued asu 2016-13 , financial instruments-credit losses ( topic 326 ) -measurement of credit losses on financial instruments . this guidance replaces the current incurred loss impairment methodology . under the new guidance , on initial recognition and at each reporting period , an entity is required to recognize an allowance that reflects its current estimate of credit losses expected to be incurred over the life of the financial instrument based on historical experience , current conditions and reasonable and supportable forecasts . in november 2019 , the fasb issued asu no . 2019-10 , financial instruments - credit losses ( topic 326 ) , derivatives and hedging ( topic 815 ) , and leases ( topic 842 ) : effective dates ( “ asu 2019-10 ” ) . the purpose of this amendment is to create a two tier rollout of major updates , staggering the effective dates

333-223130 ) , filed with the sec on february 21 , 2018 and the prospectus supplement thereto filed with the sec on july 28 , 2020 , by methods deemed to be an “ at the market offering ” as defined in rule 415 ( a ) ( 4 ) promulgated under the securities act of 1933 , as amended , or if specified by us , by any other method permitted by law . on january 11 , 2021 , we increased the aggregate amount of our shares of common stock that may be sold under the sales agreement from $ 9,300,000 to $ 10,382,954 , and , as a result , utilized and sold the maximum amount allowable under the atm facility , which resulted in an aggregate amount of $ 10,381,958. on february 8 , 2021 , we closed an underwritten public offering of 29,032,258 units , with each such unit being comprised of one share of our common stock , par value $ 0.0001 per share , and one series g warrant to purchase one-half of one share of common stock . the offering price to the public was $ 0.62 per unit . the series g warrants were immediately exercisable at a price of $ 0.682 per share , subject to adjustment in certain circumstances , and expire five years from the date of issuance . we also granted the underwriter of the offering an option to purchase an additional 4,354,838 shares of common stock and series g warrants to purchase 2,177,419 shares of common stock , which the underwriter exercised in full . in connection with the offering , we granted to the underwriter a compensation warrant to purchase up to 1,669,355 shares of common stock with an exercise price of $ 0.682 per share and which are exercisable for five years from february 3 , 2021 , the date of effectiveness of the registration statement filed in connection with the offering . our net proceeds from the offering , after giving effect to the exercise of the underwriter 's over-allotment option , were approximately $ 18.9 million , after deducting underwriting discounts and commissions and payment of other estimated expenses associated with the offering , but excluding the proceeds , if any , from the exercise of series g warrants sold in the offering . on february 3 , 2021 , we entered into a distribution agreement with three china-based partners and on the same day , we entered into an investment transaction with qidi , which

other intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are assessed for potential impairment annually or when events or circumstances indicate that their carrying amounts might be impaired . long-lived assets , such as property , plant , and equipment , and purchased intangible assets subject to amortization , are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset , or asset group , to estimated undiscounted future cash flows expected to be generated by the asset , or asset group . an impairment charge is recognized by the amount by which the carrying amount of the asset , or asset group , exceeds its fair value . the company amortizes intangible assets with estimable useful lives on a straight-line basis over their useful lives . revenue recognition revenue is recognized when all of the following criteria have been met : persuasive evidence of an arrangement exists . the company generally relies upon sales contracts or agreements , and customer purchase orders to determine the existence of an arrangement . delivery has occurred . the company uses shipping terms and related documents , or written evidence of customer acceptance , when applicable , to verify delivery or performance . 68 juniper networks , inc. notes to consolidated financial statements ( continued ) sales price is fixed or determinable . the company assesses whether the sales price is fixed or determinable based on the payment terms and whether the sales price is subject to refund or adjustment . collectability is reasonably assured . the company assesses collectability based on creditworthiness of customers as determined by its credit checks , their payment histories , or changes in circumstances that indicate that collectability is not reasonably assured . when sales arrangements contain multiple elements the company allocates revenue to each element based on a selling price hierarchy . the selling price for a deliverable is based on either vendor-specific objective evidence ( “ vsoe ” ) if available , third-party evidence ( “ tpe ” ) if vsoe is not available , or estimated selling price ( “ esp ” ) if neither vsoe nor tpe is available . the company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition . vsoe of selling price is based on the price charged when the element is sold separately . in determining vsoe , the company requires that a substantial majority of the selling prices fall within a reasonable range based on historical discounting trends for specific products and services . tpe of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similar situated customers . however , as the company 's products contain a significant element of proprietary technology and its solutions offer substantially different features and functionality , the comparable pricing of third-party products with similar functionality typically can not be obtained and therefore tpe is not used . esp is established considering multiple factors including , but not limited to pricing practices in different geographies and through different sales channels , gross margin objectives , internal costs , competitor pricing strategies , and industry technology lifecycles . in multiple element arrangements where software deliverables are included , revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy . if the arrangement contains more than one software deliverable , the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the residual method when vsoe of fair value of the undelivered items exists . under the residual method , the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements . if vsoe of one or more undelivered items does not exist , revenue from the entire arrangement is deferred and recognized at the earlier of : ( i ) delivery of those elements or ( ii ) when fair value can be established unless maintenance services is the only undelivered element , in which case , the entire arrangement fee is recognized ratably over the maintenance service period . the company limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services or subject to customer-specific return or refund privileges . the company records reductions to revenue for estimated product returns and pricing adjustments , such as rebates and price protection , in the same period that the related revenue is recorded . the amount of these reductions is based on historical sales returns and price protection credits , specific criteria outlined in rebate agreements , and other factors known at the time . a portion of the company 's sales is made through distributors under agreements allowing for pricing credits or rights of return . as reliable estimates of these credits or returns can not be made , product revenue on sales made through these distributors is recognized upon sell-through as reported by the distributors to the company . deferred revenue on shipments to distributors reflects the effects of distributor pricing credits given and the amount of gross margin expected to be realized upon sell-through . deferred revenue is recorded net of the related product costs of revenue . service revenues include revenue from maintenance , training , and professional services . maintenance is offered under renewable contracts . story_separator_special_tag we establish a liability for non-cancelable , non-returnable purchase commitments with our contract manufacturers for quantities in excess of our demand forecasts or obsolete materials charges for components purchased by the contract manufacturers based on our demand forecasts or customer orders . we also take estimated recoveries of aged inventory into consideration when determining the liability . as of december 31 , 2014 and december 31 , 2013 , our contract manufacturer liabilities were $ 25.3 million and $ 22.9 million , respectively . significant judgment is used in establishing our forecasts of future demand , recovery rates based on the nature and age of inventory , and obsolete material exposures . we perform a detailed analysis and review of data used in establishing our demand forecasts . if the actual component usage and product demand are significantly lower than forecast , which may be caused by factors within and outside of our control , or if there were a higher incidence of inventory obsolescence 39 because of rapidly changing technology and our customer requirements , we may be required to increase our inventory write-downs and contract manufacturer liabilities , which could have an adverse impact on our gross margins and profitability . we regularly evaluate our exposure for inventory write-downs and adequacy of our contract manufacturer liabilities . inventory and supply chain management remains an area of focus as we balance the risk of material obsolescence and supply chain flexibility in order to reduce lead times . revenue recognition . revenue is recognized when all of the following criteria have been met : ( 1 ) persuasive evidence of an arrangement exists , ( 2 ) delivery has occurred , ( 3 ) sales price is fixed or determinable , and ( 4 ) collectability is reasonably assured . we enter into contracts to sell our products and services , and while some of our sales agreements contain standard terms and conditions , there are agreements that contain multiple elements or non-standard terms and conditions . as a result , significant contract interpretation may be required to determine the appropriate accounting , including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes , and , if so , how the price should be allocated among the elements and when to recognize revenue for each element . changes in the allocation of the sales price between elements may impact the timing of revenue recognition but will not change the total revenue recognized on the contract . under our revenue recognition policies , we allocate revenue to each element based on a selling price hierarchy . the selling price for a deliverable is based on our vendor-specific objective evidence ( “ vsoe ” ) if available , third-party evidence ( `` tpe `` ) if vsoe is not available , or estimated selling price ( “ esp ” ) if neither vsoe nor tpe is available . we establish vsoe of selling price using the price charged for a deliverable when sold separately . tpe of selling price is established by evaluating largely interchangeable competitor products or services in stand-alone sales to similarly situated customers . we do not use tpe as we do not consider our products to be similar or interchangeable to our competitors ' products in standalone sales to similarly situated customers . esp is established considering internal factors such as margin objectives , pricing practices and controls , customer segment pricing strategies and product life cycle . consideration is also given to market conditions such as industry pricing strategies and technology life cycles . when determining esp , we apply management judgment to establish margin objectives and pricing strategies and to evaluate market conditions and product life cycles . revenue from maintenance service contracts is deferred and recognized ratably over the contractual support period , which is generally one to three years . income taxes . we are subject to income taxes in the united states and numerous foreign jurisdictions . significant judgment is required in evaluating our uncertain tax positions and determining our taxes . although we believe our reserves are reasonable , no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provisions and accruals . we adjust these reserves in light of changing facts and circumstances , such as the closing of a tax audit or the refinement of an estimate . to the extent that the final tax outcome of these matters is different than the amounts recorded , such differences will affect the provision for income taxes in the period in which such determination is made . significant judgment is also required in determining any valuation allowance recorded against deferred tax assets . in assessing the need for a valuation allowance , we consider all available evidence , including past operating results , estimates of future taxable income , and the feasibility of tax planning strategies . in the event that we change our determination as to the amount of deferred tax assets that can be realized , we will adjust our valuation allowance with a corresponding impact to the provision for income taxes in the period in which such determination is made . our provision for income taxes is subject to volatility and could be adversely affected by earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates ; by changes in the valuation of our deferred tax assets and liabilities ; by expiration of or lapses in the r & d tax credit laws ; by transfer pricing adjustments , including the effect of acquisitions on our intercompany r & d cost-sharing arrangement and legal structure ; by tax effects of nondeductible compensation ; by tax costs related to intercompany realignments ; by changes in accounting principles ;

see note 18 , subsequent events , in notes to consolidated financial statements in item 8 of part ii of this report for further discussion on our dividend declaration subsequent to december 31 , 2014 . restructuring as of december 31 , 2014 , our restructuring liability was $ 17.0 million of which $ 9.4 million is related to severance , which are expected to be paid in full by the first quarter of 2015 , $ 7.4 million related to facility closures , expected to be paid through march 2018 , and $ 0.2 million related to contract and other charges . see note 9 , restructuring and other charge s , in notes to consolidated financial statements in item 8 of part ii of this report for further discussion on our restructuring plans . deferred revenue deferred product revenue represents unrecognized revenue related to shipments to distributors that have not sold through to end-users , undelivered product commitments , and other shipments that have not met all revenue recognition criteria . deferred product revenue is recorded net of the related costs of product revenue . deferred service revenue represents customer payments made in advance for services , which include technical support , hardware and software maintenance , professional services , and training . the following table summarizes our deferred product and service revenues ( in millions ) : replace_table_token_17_th 51 as of december 31 , 2014 , net deferred product revenue decreased $ 19.4 million to $ 225.6 million , compared to $ 245.0 million as of december 31 , 2013 , as a result of lower distributor inventory and multiple revenue releases in relation to previously deferred product revenue . as of december 31 , 2014 , the increase in deferred service revenue of $ 25.8 million attributed to the execution of several multi-year support agreements , and an increase in annual agreement renewals . off-balance sheet arrangements as of december 31 , 2014 and 2013 , we did not have any relationships with unconsolidated entities or financial partnerships , such as entities often referred to as structured finance or special purpose entities , which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes . it is not our business practice to enter

for derivative instruments that are designated and qualify as a fair value hedge , the gains or losses from adjusting the derivative to its fair value will be immediately recognized in earnings and , to the extent the hedge is effective , offset the concurrent recognition of changes in the fair value of the hedged item . gains or losses from derivative instruments that are designated and qualify as a cash flow hedge or hedge of a net investment in a foreign entity are recognized in other comprehensive income and appear on the balance sheet in accumulated other comprehensive income until the hedged transaction is recognized in earnings ; however , to the extent the change in the value of the derivative exceeds the change in the anticipated cash flows of the hedged transaction , the excess gains or losses will be recognized immediately in earnings . ▪ capitalized interest —interest from external borrowings is capitalized on major projects with an expected construction period of one year or longer . capitalized interest is added to the cost of the underlying asset 's properties , plants and equipment and is amortized over the useful life of the asset . ▪ intangible assets other than goodwill —intangible assets with finite useful lives are amortized by the straight-line method over their useful lives . intangible assets with indefinite useful lives are not amortized but are tested at least annually for impairment . each reporting period , we evaluate the remaining useful lives of intangible assets not being amortized to determine whether events and circumstances continue to support indefinite useful lives . these indefinite-lived intangibles are considered impaired if the fair value of the intangible asset is lower than net book value . the fair value of intangible assets is determined based on quoted market prices in active markets , if available . if quoted market prices are not available , the fair value of intangible assets is determined based upon the present values of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants , or upon estimated replacement cost , if expected future cash flows from the intangible asset are not determinable . ▪ goodwill —goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in a business combination . it is not amortized but is tested annually for impairment and when events or changes in circumstance indicate that the fair value of a reporting unit with goodwill has been reduced below carrying value . the impairment test requires allocating goodwill and other assets and liabilities to reporting units . the fair value of each reporting unit is determined and compared to the book value of the reporting unit . if the fair value of the reporting unit is less than the book value , including goodwill , the implied fair value of goodwill is calculated . the excess , if any , of the book value over the implied fair value of the goodwill is charged to net income . for purposes of testing goodwill for impairment , we have three reporting units with goodwill balances : transportation , refining and marketing and specialties ( m & s ) . ▪ depreciation and amortization —depreciation and amortization of properties , plants and equipment are determined by either the individual-unit-straight-line method or the group-straight-line method ( for those individual units that are highly integrated with other units ) . ▪ impairment of properties , plants and equipment —properties , plants and equipment ( pp & e ) used in operations are assessed for impairment whenever changes in facts and circumstances indicate a possible significant deterioration in the future cash flows expected to be generated by an asset group . if indicators of 78 index to financial statements potential impairment exist , an undiscounted cash flow test is performed . if the sum of the undiscounted pre-tax cash flows is less than the carrying value of the asset group , including applicable liabilities , the carrying value of the pp & e included in the asset group is written down to estimated fair value through additional amortization or depreciation provisions and reported in the “ impairment ” line of our consolidated statement of income in the period in which the determination of the impairment is made . individual assets are grouped for impairment purposes at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets ( for example , at a refinery complex level ) . because there usually is a lack of quoted market prices for long-lived assets , the fair value of impaired assets is typically determined using one or more of the following methods : the present values of expected future cash flows using discount rates and other assumptions believed to be consistent with those used by principal market participants ; a market multiple of earnings for similar assets ; or historical market transactions of similar assets , adjusted using principal market participant assumptions when necessary . long-lived assets held for sale are accounted for at the lower of amortized cost or fair value , less cost to sell , with fair value determined using a binding negotiated price , if available , or present value of expected future cash flows as previously described . the expected future cash flows used for impairment reviews and related fair value calculations are based on estimated future volumes , prices , costs , margins and capital project decisions , considering all available evidence at the date of review . ▪ impairment of investments in nonconsolidated entities —investments in nonconsolidated entities are assessed for impairment whenever changes in the facts and circumstances indicate a loss in value has occurred . when indicators exist , the fair value is estimated and compared to the investment carrying value . story_separator_special_tag in july 2014 , a localized fire occurred in the olefins unit at cpchem 's port arthur , texas facility , shutting down ethylene production . the port arthur ethylene unit restarted in november 2014. cpchem incurred , on a 100 percent basis , $ 85 million of associated repair and rebuild costs . because the port arthur ethylene unit was down due to the fire , cpchem experienced a significant reduction in production and sales in several of its product lines stemming from the lack of the port arthur ethylene supply in 2014. cpchem recorded earnings , on a 100 percent basis , of $ 88 million and $ 120 million for business interruption and property damage insurance proceeds in 2015 and 2014 , respectively . 40 index to financial statements see the “ business environment and executive overview ” section for information on market factors impacting cpchem 's results . 2014 vs. 2013 earnings from the chemicals segment increased $ 151 million , or 15 percent , in 2014 , compared with 2013. the increase in earnings was primarily driven by improved ethylene and polyethylene realized margins due to higher sales prices . additionally , chemicals benefited from higher equity earnings from cpchem 's o & p equity affiliates . these increases were partially offset by lower ethylene and polyethylene sales volumes and increased costs related to the port arthur facility fire . in addition , impairments of $ 69 million after-tax in 2014 further offset a portion of the increase to earnings . 41 index to financial statements refining replace_table_token_13_th 42 index to financial statements the refining segment buys , sells and refines crude oil and other feedstocks into petroleum products ( such as gasoline , distillates and aviation fuels ) at 14 refineries , mainly in the united states and europe . 2015 vs. 2014 earnings for the refining segment increased $ 784 million , or 44 percent , compared with 2014 . the increase in earnings in 2015 primarily resulted from higher realized refining margins due to higher gasoline crack spreads and improved secondary product margins , as well as lower utility costs . these increases were partially offset by lower feedstock advantage , lower distillate crack spreads , lower clean product differentials , and lower refining volumes as a result of higher unplanned downtime and turnaround activities . see the “ business environment and executive overview ” section for information on industry crack spreads and other market factors impacting this year 's results . our worldwide refining crude oil capacity utilization rate was 91 percent in 2015 , compared to 94 percent in 2014 . the decrease reflects higher unplanned downtime and turnaround activities . effective january 1 , 2015 , we aligned the results of the activities previously included in “ other refining ” into the atlantic basin/europe , gulf coast , central corridor , and western/pacific refining regions . there were no changes to the consolidated refining operating segment as a result of this alignment . the new alignment is presented for the year ended december 31 , 2015 , with the prior periods retrospectively adjusted for comparability . 2014 vs. 2013 earnings for the refining segment were $ 1,771 million in 2014 , an increase of $ 24 million , or 1 percent , compared with 2013. the slight increase in earnings in 2014 was primarily due to higher realized refining margins related to secondary products , as well as increased volumes . in addition , earnings were impacted by a gain on disposition and a related deferred tax adjustment associated with the sale of mrc , together totaling $ 369 million after-tax . these increases were mostly offset by : lower earnings from decreased gasoline and distillate margins . negative impacts due to inventory draws in a declining price environment . impairment of the whitegate refinery of $ 131 million after-tax . lower interest income received from equity affiliates . our worldwide refining crude oil capacity utilization rate was 94 percent in 2014 , compared to 93 percent in 2013. the increase reflects lower unplanned downtime related to power outages that occurred in the gulf coast region in 2013 . 43 index to financial statements marketing and specialties replace_table_token_14_th the m & s segment purchases for resale and markets refined petroleum products ( such as gasoline , distillates and aviation fuels ) , mainly in the united states and europe . in addition , this segment includes the manufacturing and marketing of specialty products ( such as base oils and lubricants ) , as well as power generation operations . 2015 vs. 2014 earnings from the m & s segment increased $ 153 million , or 15 percent , in 2015 , compared with 2014 . in july 2013 , we completed the sale of ichp , and deferred the gain from the sale due to an indemnity provided to the buyer . we recognized $ 242 million after-tax and $ 126 million after-tax of the deferred gain in 2015 and 2014 , respectively . earnings from the m & s segment also benefited from higher domestic marketing activities , higher domestic marketing and lubricants volumes , and increased tax credits from biodiesel blending activities . these benefits were partially offset by lower international marketing margins and lubricants margins . see the “ business environment and executive overview ” section for information on marketing fuel margins and other market factors impacting 2015 results . 44 index to financial statements 2014 vs. 2013 earnings from the m & s segment increased $ 140 million , or 16 percent , in 2014 , compared with 2013. both u.s. and international marketing margins benefited from the timing effect of falling gasoline prices experienced in the second half of 2014. u.s. marketing also benefited from a full year of consignment agreements entered into in 2013 , while international marketing margins also benefited from foreign exchange gains in 2014. in 2014 , we recognized $

benefiting 2014 operating cash flow , compared with 2013 , was the receipt of a special distribution from wrb , of which $ 760 million was considered an operating cash flow , partially offset by lower distributions from cpchem . our short- and long-term operating cash flows are highly dependent upon refining and marketing margins , ngl prices , and chemicals margins . prices and margins in our industry are typically volatile , and are driven by market conditions over which we have little or no control . absent other mitigating factors , as these prices and margins fluctuate , we would expect a corresponding change in our operating cash flows . the level and quality of output from our refineries also impacts our cash flows . factors such as operating efficiency , maintenance turnarounds , market conditions , feedstock availability and weather conditions can affect output . we actively manage the operations of our refineries , and any variability in their operations typically has not been as significant to cash flows as that caused by margins and prices . our worldwide refining crude oil capacity utilization was 91 percent in 2015 , compared with 94 percent in 2014 . we expect 2016 utilization to be in the mid 90-percent range . equity affiliates our operating cash flows are also impacted by distribution decisions made by our equity affiliates , including dcp midstream , cpchem and wrb . over the three years ended december 31 , 2015 , we received distributions of $ 452 million from dcp midstream , $ 2,879 million from cpchem and $ 2,938 million from wrb . we can not control the amount or timing of future distributions from equity affiliates ; therefore , future distributions by these and other equity affiliates are not assured . we and our co-venturer in dcp midstream have agreed to forgo distributions from dcp midstream during the current low-commodity price environment . during the second quarter of 2015 , cpchem made a special distribution to its owners , with our share totaling $ 696 million . cpchem funded the distribution by issuing $ 1.4 billion of senior notes with maturities ranging from three to five years , with a combination of fixed and variable interest rates . this cash inflow from cpchem was included in operating cash flows , as we

the amendment is effective for annual periods and interim periods beginning after december 15 , 2013. early adoption is permitted and the amendment is to be applied prospectively . the company does not expect its balance sheet presentation or its disclosures to be affected by asu 2013-11 . 2. acquisitions and divestitures 2013 acquisition on october 17 , 2013 , w & t offshore , inc. entered into a purchase and sale agreement to acquire certain oil and natural gas property interests from callon petroleum operating company ( “ callon ” ) . pursuant to the purchase and sale agreement , transfers of certain properties that had no preferential rights were consummated on november 5 , 2013 and transfers of certain properties subject to preferential rights , of which third-parties declined to exercise their preferential rights , were consummated on december 4 , 2013. the properties acquired from callon ( the “ callon properties ” ) consist of a 15 % working interest in the medusa field ( deepwater mississippi canyon blocks 582 and 583 ) , interest in associated production facilities and various interests in other non-operated fields . all of the callon properties are located in the gulf of mexico . the effective date of the transaction was july 1 , 2013. the transaction included customary adjustments for the effective date , certain closing adjustments and we assumed the related aro . the consideration and the purchase price allocation , as set forth in the table below , are subject to further post-closing adjustments which we expect to be finalized during 2014. the acquisition was funded from borrowings under our revolving bank credit facility and cash on hand . 77 w & t offshore , inc. and subsidiaries notes to consolidated financial statements ( continued ) the following table presents the preliminary purchase price allocation , including estimated adjustments , for the acquisition of the callon properties ( in thousands ) : cash consideration : evaluated properties including equipment $ 73,176 unevaluated properties 9,248 sub-total – cash consideration 82,424 non-cash consideration : asset retirement obligation - current 90 asset retirement obligation - non-current 4,143 sub-total – non-cash consideration 4,233 total consideration $ 86,657 expenses associated with acquisition activities and transition activities related to the acquisition of the callon properties for the year ended december 31 , 2013 were $ 0 . 4 million and are included in general and administrative expenses ( “ g & a ” ) . the acquisition was recorded at fair value , which was determined using both the market and income approaches , and level 3 inputs were used to determine fair value . see note 1 for a description of the level 3 inputs . no goodwill was recorded in connection with the acquisition of the callon properties . 2013 acquisition — revenues , net income and pro forma financial information — unaudited the callon properties were not included in our consolidated results until the respective property transfer dates , which occurred during the fourth quarter of 2013. in the fourth quarter of 2013 , the callon properties accounted for $ 5.8 million of revenues , $ 1.3 million of direct operating expenses , $ 2.4 million of dd & a and $ 0.7 million of income taxes , resulting in $ 1.4 million of net income . the net income attributable to these properties does not reflect certain expenses , such as g & a and interest expense ; therefore , this information is not intended to report results as if these operations were managed on a stand-alone basis . in addition , the callon properties are not recorded in a separate entity for tax purposes ; therefore , income tax was estimated using the federal statutory tax rate . the unaudited pro forma financial information presented below was computed as if the acquisition of the callon properties had been completed on january 1 , 2012. the financial information was derived from w & t 's audited historical consolidated financial statements , the callon properties ' audited historical financial statement , and the callon properties ' unaudited historical financial statement for the periods presented . the pro forma adjustments were based on estimates by management and information believed to be directly related to the purchase of the callon properties . the pro forma financial information is not necessarily indicative of the results of operations had the purchase occurred on january 1 , 2012. if the transaction had been in effect for the periods indicated , the results may have been substantially different . for example , we may have operated the assets differently than callon ; the realized sales prices for oil , ngls and natural gas may have been different ; and the costs of operating the callon properties may have been different . the following table presents a summary of our pro forma financial information ( in thousands except earnings per share ) : replace_table_token_32_th 78 w & t offshore , inc. and subsidiaries notes to consolidated financial statements ( continued ) for the pro forma financial information , certain information was derived from financial records and certain information was estimated . the following table presents incremental items included in the pro forma information reported above for the callon properties ( in thousands ) : replace_table_token_33_th the sources of information and significant assumptions are described below : ( a ) revenues and direct operating expenses for the callon properties were derived from the historical financial records of callon . ( b ) dd & a was estimated using the full-cost method and determined as the incremental dd & a expense due to adding the callon properties ' costs , reserves and production into our currently existing full cost pool in order to compute such amounts . the purchase price allocated to unevaluated properties for oil and natural gas interests was excluded from the dd & a expense estimation . aro was estimated by w & t management . story_separator_special_tag initially , we were granted a stay until february 15 , 2014 in response to our petition and recently we were granted a stay until april 15 , 2014 to facilitate ongoing negotiations . we continue to believe that the parent company qualifies for a supplemental bonding waiver . we intend to continue to work with the boem staff to resolve this matter . if resolving this matter ultimately involves additional bonding , it will result in increased costs of conducting our offshore business and operations and this could utilize a portion of the borrowing capacity available under our revolving bank credit facility . in january 2014 , we identified that we had been receiving an erroneous mmbtu conversion factor from a third party that had the effect of understating natural gas production at our viosca knoll 783 field ( tahoe ) . the incorrect conversion factor had been used on all natural gas production from the field since we acquired it in 2011. the use of the incorrect conversion factor did not affect revenues , operating cash flows or royalty payments to the federal government but did impact reported natural gas production and the calculation of depletion expense . we performed an analysis of the information , assessing both quantitative and qualitative factors , and determined that the impact on our net income reported for prior annual periods , as well as the impact to our earnings trend , was not material to 2011 and 2012 results , thus the adjustment was recognized in 2013. the results for 2013 reflect a one-time increase in production of 1.9 bcf in natural gas ( with no corresponding increase in revenues ) by using the correct conversion factor for the annual periods of 2011 and 2012. excluding the cumulative effect of the volumes adjustments related to 2011 and 2012 , total production for 2013 would have been 106.0 bcfe or 290.5 mmcfe per day and our combined average realized sales price would have been $ 9.26 per mcfe . results of operations year ended december 31 , 2013 compared to year ended december 31 , 2012 revenues . total revenues increased $ 109.6 million , or 12.5 % , to $ 984.1 million in 2013 compared to 2012. oil revenues increased $ 89.4 million , ngls revenues decreased $ 11.3 million , natural gas revenues increased $ 30.9 million and other revenues increased $ 0.6 million . the oil revenue increase was attributable to a 16.3 % increase in sales volumes , partially offset by a $ 1.91 per bbl decrease in the average realized sales price to $ 102.44 per bbl . the ngls revenue decrease was attributable to a 11.8 % decrease in the average realized sales price to $ 35.07 per bbl in 2013 from $ 39.75 per bbl in 2012 and a slight decrease of 1.8 % in sales volumes . the natural gas revenue increase was attributable to a 20.7 % increase in the average realized natural gas sales price to $ 3.55 per mcf from $ 2.94 per mcf for 2012 , with sales volumes decreasing slightly by 1.1 % . production for all commodities was positively impacted by production increases at ship shoal 349 and the onshore properties in west texas . in addition , production was positively impacted by the newfield properties acquired in the fourth quarter 2012 , the callon properties acquired in the fourth quarter of 2013 and the volume adjustments described above in the overview section . production was negatively impacted for all commodities from natural production declines and from production deferrals affecting various fields . the production deferrals were attributable to third-party pipeline outages , platform maintenance , tropical storm karen and various operational issues . we estimate production deferrals were 13.0 bcfe during 2013 for all these issues . specifically , production at mississippi canyon 506 ( wrigley ) continues to be deferred as a result of maintenance at shell 's cognac platform and related pipelines . also , production was deferred at our fairway field due to well and maintenance issues and a turnaround at our yellowhammer plant . during 2012 , we also experienced production deferrals primarily due to hurricane isaac and various pipeline outages , but not near the same magnitude as in 2013. revenues from oil and liquids as a percent of our total revenues were 80.5 % for 2013 compared to 81.7 % for 2012. ngls realized sales prices as a percent of oil realized prices decreased to 34.2 % for 2013 compared to 38.1 % for 2012 . 53 lease operating expenses . lease operating expenses , which include base lease operating expenses , insurance , workovers , maintenance on our facilities , and hurricane remediation costs net of insurance claims , increased $ 38.6 million to $ 270.8 million in 2013 compared to 2012. on a per mcfe basis , lease operating expenses increased to $ 2.51 per mcfe during 2013 compared to $ 2.26 per mcfe during 2012. on a component basis , workover expense increased $ 25.0 million primarily as a result of rig workovers on wells at our ship shoal 349/359 field and our main pass 69 field . base lease operating expenses increased $ 14.5 million primarily as a result of the acquisition of the newfield properties , expanded onshore operations , ad valorem tax refunds received in 2012 , partially offset by increased processing fees charged to third-parties . facilities maintenance expense increased $ 5.1 million primarily attributable to a shutdown for scheduled maintenance at our yellowhammer plant . partially offsetting these increases were decreases in insurance premiums of $ 4.6 million and hurricane costs net of insurance claims of $ 1.5 million . production taxes . production taxes increased to $ 7.1 million during 2013 compared to $ 5.8 million in 2012 primarily due to onshore production and are currently not a large component of our operating costs . most of our production is from federal

56 on november 8 , 2013 , we entered into the credit agreement which provides a revolving bank credit facility of up to $ 1.2 billion with an initial borrowing base of $ 800.0 million . the initial borrowing base for the credit agreement was at the same level as when the prior credit agreement was replaced . letters of credit may be issued up to $ 300.0 million , provided availability under the revolving bank credit facility exists . this is a secured facility that is collateralized by our oil and natural gas properties . the credit agreement terminates on november 8 , 2018 and replaced the prior credit agreement . availability under the credit agreement is subject to a semi-annual borrowing base re-determination set at the discretion of our lenders , and the company and the lenders may each request one additional re-determination per year . the amount of the borrowing base is calculated by our lenders based on their evaluation of our proved reserves and their own internal criteria . any determination by our lenders to change our borrowing base will result in a similar change in the availability under our revolving bank credit facility . borrowings under the credit agreement bear interest at the applicable london interbank offered rate ( “ libor ” ) plus a margin that varies from 1.75 % to 2.75 % depending on the level of total borrowings under the credit agreement , or an alternative base rate equal to the greater of ( a ) prime rate , ( b ) federal funds rate plus 0.5 % , and ( c ) libor plus 1.0 % , plus applicable margin ranging from 0.75 % to 1.75 % . the unused portion of the borrowing base is subject to a commitment fee ranging from 0.375 % to 0.5 % . we currently have 20 lenders within the revolving bank credit facility , with commitments ranging from $ 22.0 million to $ 62.0 million for the current borrowing base . while we have not experienced , nor do we anticipate , any difficulties in obtaining funding from any of these lenders at this time , any lack of or delay in funding by members of our banking group could negatively impact our liquidity position . < p

on april 19 , 2017 , our board of directors appointed mr. rice as chairman of the board . the chairman of the board presides at all meetings of our board of directors ( but not at its executive sessions ) and exercises and performs such other powers and duties as may be assigned to him from time to time by the board or prescribed by our amended and restated bylaws . the chairman of the board is appointed by our board of directors on an annual basis . our board of directors has no established policy on whether it should be led by a chairman who is also the chief executive officer , but periodically considers whether combining , or separating , the role of chairman and chief executive officer is appropriate . at this time , our board is committed to the combined role given the circumstances of our company , including mr. rice 's knowledge of our company 's strategy . our board believes that having a chairman who also serves as the chief executive officer allows timely communication with our board on company strategy and critical business issues , facilitates bringing key strategic and business issues and risks to the board 's attention , avoids ambiguity in leadership within the company , provides a unified leadership voice externally and clarifies accountability for company business decisions and initiatives . however , our board of directors continually evaluates our leadership structure and could , in the future , decide to combine the chairman and chief executive officer positions if it believes that doing so would serve the best interests of our company and our stockholders . 32 board meetings and committees during our fiscal year ended december 31 , 2017 , the board of directors held six meetings , and each director attended at least 75 % of the aggregate of ( i ) the total number of meetings of our board of directors held during the period for which he has been a director and ( ii ) the total number of meetings held by all committees of our board of directors on which he served during the periods that he served . although we do not have a formal policy regarding attendance by members of our board of directors at annual meetings of stockholders , we encourage , but do not require , our directors to attend . each of our then current directors attended our 2017 annual meeting of stockholders , except for one director who was unable to attend . our board has established three standing committees-audit , compensation , and nominating and corporate governance-each of which operates under a written charter that has been approved by our board . until february 15 , 2017 , when our common stock became listed on the nasdaq capital market , we were not required to establish or maintain an audit , nominating or compensation committee . each committee charter has been posted on the investors section of our website at www.sigmalabsinc.com . the reference to our website address does not constitute incorporation by reference of the information contained at or available through our website , and you should not consider it to be a part of this annual report . audit committee the audit committee 's responsibilities include : ● appointing , approving the compensation of , and assessing the independence of our registered public accounting firm ; ● overseeing the work of our registered public accounting firm , including through the receipt and consideration of reports from such firm ; ● reviewing and discussing with management and the registered public accounting firm our annual and quarterly financial statements and related disclosures ; ● monitoring our internal control over financial reporting , disclosure controls and procedures ; ● establishing procedures for the receipt , retention and treatment of accounting related complaints and concerns ; ● meeting independently with our registered public accounting firm and management ; ● reviewing and approving or ratifying any related person transactions ; and ● preparing the audit committee report required by sec rules . the members of our audit committee are messrs. duitch , battinelli and summers , and mr. duitch serves as the chairperson of the committee . our board of directors has determined that each of messrs. duitch , battinelli and summers is an independent director under nasdaq rules and under sec rule 10a-3 . all members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the sec and nasdaq . our board of directors has determined that each member of our audit committee is an “ audit committee financial expert ” as defined by applicable sec rules and has the requisite financial sophistication as defined under the applicable nasdaq rules and regulations . the audit committee met four times during 2017. compensation committee the compensation committee 's responsibilities include : ● annually reviewing and approving corporate goals and objectives applicable to ceo compensation ; ● determining our ceo 's compensation ; ● reviewing and approving , or making recommendations to our board with respect to , the compensation of our other executive officers ; ● overseeing an evaluation of our senior executives ; ● overseeing and administering our equity incentive plans ; ● reviewing and making recommendations to our board with respect to director compensation ; and ● reviewing and discussing annually with management our “ compensation discussion and analysis ” when it is required by sec rules to be included in our proxy statements . 33 the members of our compensation committee are messrs. duitch , battinelli and summers , and mr. battinelli serves as the chairperson of the committee . story_separator_special_tag such critical accounting policies , including the assumptions and judgments underlying them , are disclosed in note 1 to the financial statements included in this annual report . however , we do not believe that there are any alternative methods of accounting for our operations that would have a material effect on our financial statements . results of operations year ended december 31 , 2017 compared to the year ended december 31 , 2016. we expect to generate revenue primarily by selling and licensing our ipqa technologies , selling technical support services and contract manufacturing and selling specialty parts and studies to businesses that seek to improve their manufacturing production processes and production-run quality yields . our ability to generate revenues in the future will depend on our ability to further commercialize and increase market presence of our printrite3d® technologies , and it will depend on if key prospective customers continue to move from am metal prototyping to production . during the fiscal year ended december 31 , 2017 ( “ fiscal 2017 ” ) , we generated an aggregate of $ 641,049 in revenues , as compared to an aggregate of $ 966,422 in revenues generated by us in the fiscal year ended december 31 , 2016 ( “ fiscal 2016 ” ) . the decrease in revenue was primarily due to the strategic reorganization of the company 's priorities and personnel over the second six months of 2017. the company determined that it was essential to transform sigma from being an r & d company into being a technology development and commercialization company . this imperative and the many changes required to implement it derived from the observation that the r & d culture could not meet the demonstrated needs of both new and prospective customers for practical solutions to problems they have now and for technical product introduction processes to support and educate on how to take advantage of the company 's technology . commencing in the summer of 2017 , the company began a rapid shift away from selling and supporting single printrite3d® units to customers who currently focus on r & d and have no material production of am parts ( and thus , have no near term need to buy more printrite3d® units ) . by september 1 , 2017 , the company strategy led to a policy requiring 100 % sales and marketing focus on prospective customers who are already producing am metal parts in production runs , who realize they have low yields and , in some cases , worry that perhaps they are unwittingly shipping parts that are invisibly below specification . concurrent with this new policy of customer focus , the company worked to integrate sales and marketing more closely with product development . this integration included creating a dedicated sigma customer support team for in-field hands-on support of printrite3d® assessments and demonstrations to enable sigma and its newly targeted customer group to cooperate in a simple defined process that provides customers with a demonstration of how to calibrate their am equipment using printrite3d® and how to improve quality using printrite3d® , as substantiated by using a third party laboratory to affirm , part by part , the quality test results . we generated revenues and financed our operations in fiscal 2017 and fiscal 2016 primarily from engineering consulting services we provided to third parties during these periods and through sales of our common stock and debt securities . we expect that our revenue will increase in future periods as we seek , as discussed above , to further commercialize and expand our market presence for our printrite3d®-related technologies , and obtain new contract manufacturing orders in connection with our eos m290 , and continue to provide our services under our contracts with honeywell aerospace for the darpa period 2 program . 25 sigma 's operating expenses for fiscal 2017 were $ 4,420,667 as compared to $ 3,211,258 for fiscal 2016. our operating expenses principally include internal operating and sales expenses , outside service fees , and research & development costs . these three operating expense areas are responsible for $ 1,133,513 or 94 % of the increased operating costs in 2017. personnel costs , specifically the payroll and stock-based compensation components of personnel costs , are the most significant component of the company 's internal operating expenses . in fiscal 2017 , payroll costs were $ 1,269,476 as compared to $ 1,027,306 for the same period in 2016. this increase in payroll was primarily due to the increased salaries associated with the strategic new hires and reorganization of the management team made in the second half of the year . expenses relating to stock-based compensation for year ended december 31 , 2017 were $ 719,796 as compared to $ 341,558 for the same period in 2016. this increase in stock-based compensation costs resulted both from the fact that the majority of stock options were granted after september 30 , 2016 , thus significantly more stock option vesting amortization was recorded in the four quarters comprising fiscal 2017 than in the same periods of 2016 and from the grant of a significant number of options with shorter vesting periods as part of the strategic realignment of key personnel in mid-2017 . this expense also includes the amortization of stock issued for prepaid services . outside services fees paid in 2017 were $ 1,229,304 compared to $ 934,839 paid in 2016. in each year , services in connection with our obligations as an sec reporting company cost us slightly over $ 550,000. however , other legal fees of $ 333,046 were paid in 2017 compared to $ 126,992 in 2016. the increase in these fees was primarily from those paid conjunction with our february 2017 public offering that resulted in net proceeds of approximately $ 5,225,650. in addition outside service expenditures related to advertising and trade show activities were up by $ 59,294 as a result of our shift in strategic

we have no credit lines as of april 10 , 2018 , nor have we ever had a credit line since our inception . based on the funds we have as of april 10 , 2018 , and the proceeds we expect to receive under our printrite3d®-enabled engineering consulting agreements , from selling or licensing our printrite3d® systems and software , sales of contract am manufacturing for metal am parts and the payment of loans made by sigma , we believe that we will have sufficient funds to pay our administrative and other operating expenses through 2018. until we are able to generate significant revenues and royalties from licensing our printrite3d®-enabled technologies and our contact am manufacturing services , our ability to continue to fund our liquidity and working capital needs will be dependent upon revenues from existing and future printrite3d®-enabled engineering consulting contracts , possible strategic partnerships , contract manufacturing orders in connection with our eos m290 , and proceeds received from sales of our debt and or securities . accordingly , we may have to obtain additional capital from the sale of additional securities or by borrowing funds from lenders to fulfill our business plans . if we issue additional equity or debt securities , stockholders may experience additional dilution or the new equity securities may have rights , preferences or privileges senior to those of existing holders of our common stock . there is no assurance that we will be successful in obtaining additional funding . if we fail to obtain sufficient funding when needed , we may be forced to delay , scale back or eliminate all or a portion of our commercialization efforts and operations . inflation and changing prices have had no effect on our continuing operations over our two most recent fiscal years . we have no off-balance sheet arrangements as defined in item 303 ( a ) of regulation

accounts receivable accounts receivable primarily consist s of contract receivables related to certain contracts in our central texas operating segment accounted for under the percentage-of-completion method , income tax receivable s and rebate receivables . we periodically review the collectability of our accounts receivables , and , if it is determined that a receivable might not be fully collectible , an allowance is recorded for the amount deemed uncollectible . as of december 31 , 2016 and 2015 , no allowance was recorded related to accounts receivable . f- 7 inventories and cost of sales we capitalize pre-acquisition , land , development , and other allocated costs , including interest , during development and home construction . land , development , and other common costs are allocated to inventory using the relative-sales-value method ; however , as lots within a project typically have comparable market values , we generally allocate land , development , and common costs equally to each lot within the project . home construction costs are recorded using the specific-identification method . cost of sales for homes closed includes the allocation of construction costs of each home and all applicable land acquisition , land development , and related common costs , both incurred and estimated to be incurred . changes to estimated total development costs subsequent to initial home closings in a community are generally allocated to the remaining homes in the community . when a home is closed , the company generally has not paid all incurred costs necessary to complete the home , and a liability and a charge to cost of home sales revenues are recorded for the amount that is estimated will ultimately be paid related to completed homes . inventories are carried at cost unless events and circumstances indicate that the carrying value may not be recoverable . we review for indicators of impairment at the lowest level of identifiable cash flows , which we have determined as the community level . indicators of impairment include , but are not limited to , significant decreases in local housing market values and selling prices of comparable homes , decreases in actual or trending gross margins or sales absorption rates , significant unforeseen cost in excess of budget , and actual or projected cash flow losses . if an indicator of impairment is identified , we estimate the recoverability of the community by comparing the estimated future cash flows on an undiscounted basis to its carrying value . if the undiscounted cash flows are more than the carrying value , the community is recoverable and no impairment is recorded . if the undiscounted cash flows are less than the community 's carrying value , the community is deemed impaired and is written down to fair value . we generally estimate the fair value of the community through a discounted cash flow approach . when estimating cash flows of a community , we make various assumptions , including the following : ( i ) expected sales prices and sales incentives to be offered , including the number of homes available , pricing and incentives being offered by us or other builders in other communities , and future sales price adjustments based on market and economic trends ; ( ii ) expected sales pace based on local housing market conditions , competition , and historical trends ; ( iii ) costs expended to date and expected to be incurred , including , but not limited to , land and land development costs , home construction costs , interest costs , indirect construction and overhead costs , and selling and marketing costs ; and ( iv ) alternative uses for the property . for the years ended december 31 , 2016 , 2015 and 201 4 , no inventory impairments were recorded . home sales and profit recognition revenues from home sales are recorded and a profit is recognized when the respective units are closed , title has passed , the homeowner 's initial and continuing investment is adequate , and other attributes of ownership have been transferred to the homeowner . sales incentives are recorded as a reduction of revenues when the respective unit is closed . when it is determined that the earnings process is not complete , the sale and the related profit are deferred for recognition in future periods . we also serve as the general contractor for custom homes in our central texas operating segment , where the customer and not the company owns the underlying land ( which we refer to as “ build on your own lot contracts ” ) . accordingly , we recognize revenue for the build on your own lot contracts , which are primarily cost plus contracts , on the percentage-of-completion method where progress toward completion is measured by relating the actual cost of work performed to date to the current estimated total cost of the respective contracts . as the company makes such estimates , judgments are required to evaluate potential variances in the cost of materials and labor and productivity . during the years ended december 31 , 2016 , 2015 and 201 4 , we recognized revenue of $ 7.3 million , $ 6.1 million and $ 22.0 million , respectively , and incurred costs of $ 5 . 3 million , $ 4.8 million and $ 17.4 million , respectivel y , associated with build on your own lot contracts , which are presented in home sales revenues and cost of home sales revenues on the consolidated statement of operations , respectively . as of december 31 , 2016 and 2015 , we had $ 1.0 million and $ 0.8 million in contract receivables , respectively , and $ 0 . story_separator_special_tag 43 other income ( expense ) other income ( expense ) increased by $ 1.4 million to income of $ 1.3 million for the year ended december 31 , 2015 , from an expense of $ 0.1 million for the year ended december 31 , 2014. the increase is primarily driven by a decrease in acquisition related expenses , as well as an increase in forfeited deposit income .          income tax expense our income tax expense for the year ended december 31 , 2015 was $ 20.4 million as compared to $ 10.9 million for the year ended december 31 , 2014. our income tax expense for the year ended december 31 , 2015 results in an effective tax rate of 33.8 % . our effective tax rate is driven by our blended federal and state statutory rate of 37.8 % . our blended federal and state statutory tax rate is reflective of the states in which we operate , including nevada and texas which generally do not have corporate income tax . our blended federal and state statutory tax rate is partially offset by benefits from additional deductions for domestic production activities allowed for under section 199 of the internal revenue code . segment assets replace_table_token_20_th replace_table_token_21_th  total assets increased by $ 247.1 million , or 36.9 % , to $ 917.7 million at december 31 , 2015. the increase is primarily driven by a 28.5 % increase in owned lots from 7,001 at december 31 , 2014 to 8,995 at december 31 , 2015. in particular we increased our lot count , both owned and controlled , in our atlanta segment by 116.5 % at december 31 , 2015 as compared to december 31 , 2014. other homebuilding operating data replace_table_token_22_th net new home contracts ( new home contracts net of cancellations ) for the year ended december 31 , 2015 increased by 1,314 homes , or 126.1 % , to 2,356 , compared to 1,042 for the year ended december 31 , 2014. the increase in our net new home contracts was driven by our entry into the atlanta , houston , and nevada markets through our acquisitions of peachtree , grand view , and lvlh , in november 2014 , august 2014 , and april 2014 , respectively . our atlanta , houston , and nevada operating segments contributed 1,134 , 104 , and 258 net new home contracts , respectively , during the year ended december 31 , 2015 . 44 our overall monthly “ absorption rate ” ( the rate at which home orders are contracted , net of cancellations ) for the years ended december 31 , 2015 and 2014 by segment are included below :  replace_table_token_23_th   replace_table_token_24_th  our selling communities increased by 13 communities , or 17.3 % , to 88 communities at december 31 , 2015 , as compared to 75 communities at december 31 , 2014. replace_table_token_25_th backlog reflects the number of homes , net of actual cancellations experienced during the period , for which we have entered into a sales contract with a customer but for which we have not yet delivered the home . our backlog value increased 10.1 % year over year to $ 271.1 million at december 31 , 2015 from $ 246.3 million at december 31 , 2014. the increase in backlog value of $ 24.8 million is driven by a 19.0 % increase in our average sales price of backlog homes to $ 379.7 thousand , which is partially offset by a decrease in backlog units of 58 homes at december 31 , 2015 as compared to december 31 , 2014. the increase in average sales price of homes in backlog is driven by increases across all of our operating segments as a result of pricing strength due to positive market trends as well as product mix towards higher priced communities .  critical accounting policies critical accounting estimates are those that we believe are both significant and that require us to make difficult , subjective or complex judgments , often because we need to estimate the effect of inherently uncertain matters . we base our estimates and judgments on 45 historical experiences and various other factors that we believe to be appropriate under the circumstances . actual results may differ from these estimates , and the estimates included in our financial statements might be impacted if we used different assumptions or conditions . our management believes that the following accounting policies are among the most important to the portrayal of our financial condition and results of operations and require among the most difficult , subjective or complex judgments : revenue recognition revenues from home sales are recorded and a profit is recognized when the respective units are closed , title has passed , the homeowner 's initial and continuing investment is adequate , and other attributes of ownership have been transferred to the homeowner . sales incentives are recorded as a reduction of revenues when the respective unit is closed . when it is determined that the earnings process is not complete , the sale and the related profit are deferred for recognition in future periods . we also serve as the general contractor for custom homes in our central texas and houston operating segments , where the customer and not the company owns the underlying land ( build on your own lot contracts ) . accordingly , we recognize revenue for the build on your own lot contracts , which are primarily cost plus contracts , on the percentage-of-completion method where progress toward completion is measured by relating the actual cost of work performed to date to the current estimated total cost of the respective contracts . as the company makes such estimates , judgments are required to evaluate potential variances in the cost of materials and labor and productivity . inventories and cost of sales  we

 on august 19 , 2016 , we entered into a third modification agreement with texas capital bank , national association , as administrative agent , the lenders party thereto , and our subsidiary guarantors party thereto , which further modified the credit agreement . the third modification agreement , among other things , ( i ) increased the revolving credit facility from $ 300 million to $ 380 million through our exercise of $ 80 million of the accordion feature of the credit agreement , ( ii ) admitted citibank , n.a . and flagstar bank , fsb as new lenders under the revolving credit facility , ( iii ) increased certain lenders ' respective commitments to the revolving credit facility , and ( iv ) extended the maturity date of the revolving credit facility by one year to mature on october 21 , 2019. the credit agreement contains customary affirmative and negative covenants ( including limitations on the company 's ability to grant liens , incur additional debt , pay dividends , redeem its common stock , make certain investments and engage in certain merger , consolidation or asset sale transactions ) , as well as customary events of default . the credit agreement also requires the company to maintain ( i ) a leverage ratio of not more than 1.50 to 1.0 as of the last day of any fiscal quarter , based upon the ratio of debt to tangible net worth of the company and its subsidiaries on a consolidated basis , ( ii ) an interest coverage ratio of not less than 1.50 to 1.0 for any four fiscal quarter period , based upon the ratio of ebitda to cash interest expense of the company and its subsidiaries on a consolidated basis , ( iii ) a consolidated tangible net worth of not less than the sum of $ 250 million , plus 50 % of the net proceeds of any issuances of equity interests of the company and the guarantors of the revolving credit facility , plus 50 % of the amount of consolidated net income of the company and its subsidiaries , ( iv ) liquidity of not less than $ 25 million , and ( v ) a risk asset ratio of not more than 1.25 to 1.0 , based upon the ratio of the book value of all risk assets owned by the company and its subsidiaries to the company 's tangible net worth . as of december 31 , 2016 and 2015 , we were in compliance with all covenants under the credit

the company adopted this asu on january 1 , 2017 , and it did not have an impact on the company 's consolidated financial statements . 2. other current assets other current assets consist of the following at : replace_table_token_29_th land held for sale represents the company 's purchase of real estate as part of its program to incent franchise development in strategic markets for the company 's brands . during the year ended december 31 , 2017 , the company reclassified a parcel of land with a book value of $ 7.0 million to land held for sale . 3. notes receivable and allowance for losses the company segregates its notes receivable for the purposes of evaluating allowances for credit losses between two categories : mezzanine and other notes receivable and forgivable notes receivable . the company utilizes the level of security it has in the various notes receivable as its primary credit quality indicator ( i.e . senior , subordinated or unsecured ) when determining the appropriate allowances for uncollectible loans within these categories . 73 the company considers loans to be past due and in default when payments are not made when due . although the company considers loans to be in default if payments are not received on the due date , the company does not suspend the accrual of interest until those payments are more than 30 days past due . the company applies payments received for loans on non-accrual status first to interest and then principal . the company does not resume interest accrual until all delinquent payments are received . for impaired loans , the company recognizes interest income on a cash basis . mezzanine and other notes receivables the company has provided financing to franchisees in support of the development of properties in strategic markets . interest income associated with these notes receivable is reflected in the accompanying consolidated statements of income under the caption interest income . the company expects the owners to repay the loans in accordance with the loan agreements , or earlier as the hotels mature and capital markets permit . the company estimates the collectibility and records an allowance for loss on its mezzanine and other notes receivable when recording the receivables in the company 's financial statements . these estimates are updated quarterly based on available information . the company considers a loan to be impaired when , based on current information and events , it is probable that the company will be unable to collect all amounts due according to the contractual terms of the loan agreement . all amounts due according to the contractual terms means that both the contractual interest payments and the contractual principal payments of a loan will be collected as scheduled in the loan agreement . the company measures loan impairment based on the present value of expected future cash flows discounted at the loan 's original effective interest rate or the estimated fair value of the collateral . for impaired loans , the company establishes a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows or the estimated fair value of the collateral . the company applies its loan impairment policy individually to all mezzanine and other notes receivable in the portfolio and does not aggregate loans for the purpose of applying such policy . for impaired loans , the company recognizes interest income on a cash basis . if it is likely that a loan will not be collected based on financial or other business indicators , it is the company 's policy to write off these loans to sg & a expenses in the accompanying consolidated statements of income in the quarter when it is deemed uncollectible . recoveries of impaired loans are recorded as a reduction of sg & a expenses in the quarter received . the company assesses the collectibility of its senior notes receivable by comparing the market value of the underlying assets to the carrying value of the outstanding notes . in addition , the company evaluates the property 's operating performance , the borrower 's compliance with the terms of the loan and franchise agreements , and all related personal guarantees that have been provided by the borrower . in addition , for properties under development , the company evaluates the progress of development as compared to the project 's development schedule and cost budget . for subordinated or unsecured receivables , the company assesses the property 's operating performance , the subordinated equity available to the company , the borrower 's compliance with the terms of loan and franchise agreements , and the related personal guarantees that have been provided by the borrower . the company determined that approximately $ 1.8 million and $ 1.9 million of its mezzanine and other notes receivable were impaired at december 31 , 2017 and 2016 , respectively . the company recorded an allowance for credit losses on these impaired loans of $ 1.6 million for both the years ended december 31 , 2017 and 2016 . for the years ended december 31 , 2017 and 2016 , the average mezzanine and other notes receivable on non-accrual status was approximately $ 1.8 million and $ 1.4 million , respectively . the company recognized approximately $ 44 thousand and $ 43 thousand of interest income on impaired loans during the years ended december 31 , 2017 and 2016 , respectively , on the cash basis . the company provided loan reserves on non-impaired loans totaling $ 0.5 million and $ 0.8 million at december 31 , 2017 and 2016 , respectively . story_separator_special_tag while the company 's hotel pipeline provides a strong platform for growth , a hotel in the pipeline does not always result in an open and operating hotel due to various factors . procurement services : revenues increased $ 3.4 million or 11 % from $ 31.2 million for the year ended december 31 , 2016 to $ 34.7 million for the year ended december 31 , 2017 . the increase in procurement services revenue primarily reflects the 44 implementation of new brand programs as well as an increased volume of business transacted with existing and new qualified vendors and strategic alliance partners . other income : revenue increase d $ 10.8 million from the year ended december 31 , 2016 to $ 34.0 million for the year ended december 31 , 2017 . the increase in other income is primarily due to a $ 2.0 million increase in revenues related to the company 's non-hotel franchising divisions , $ 6.3 million related to the sale of chip-enabled credit card readers to our franchisees , as well as a $ 2.5 million increase in non-compliance and termination awards . selling , general and administrative expenses : the cost to operate the franchising business is reflected in sg & a on the consolidated statements of income . sg & a expenses were $ 163.4 million for 2017 , an increase of $ 14.6 million from the 2016 total of $ 148.7 million . sg & a expenses for the years end december 31 , 2017 and 2016 include approximately $ 16.1 million and $ 28.1 million , respectively , related to the company 's skytouch and vacation rental divisions , and expenses related to the operations of an office building leased to a third party . the decline in sg & a expenses related to non-hotel franchising activities resulted primarily from lower skytouch related costs . in addition , the company recorded a $ 1.2 million impairment of a below market lease acquisition costs associated with the office building that reduced 2017 sg & a costs . the decline in skytouch related sg & a was primarily due to the completion of a multi-year product development plan in 2016. sg & a expenses for the year ended december 31 , 2017 also include $ 12.0 million of compensation expenses related to the acceleration of the company 's chief executive officer succession plan . during the year ended december 31 , 2016 , the company incurred $ 2.2 million of executive termination benefits related to the departure of its chief financial officer . in addition , the company incurred $ 4.0 million and $ 3.3 million of acquisition related transition and transaction costs during the years ended december 31 , 2017 and 2016 , respectively . excluding the sg & a expenses for non-hotel franchising activities and other items noted above , sg & a for the year end december 31 , 2017 increased $ 16.1 million or 14 % from $ 115.1 million in the prior year to $ 131.2 million in the current year primarily due to $ 4.5 million of increased costs related to the distribution of chip-enabled card readers to our franchisees , a $ 1.7 million increase in expenses related to the fluctuation of the fair market value in the company 's non-qualified deferred compensation plans , and $ 4.4 million increase in variable sales compensation related to increased franchise sales and openings as well as increased costs related to franchise support . marketing and reservation system : the company 's franchise agreements require the payment of franchise fees , which include marketing and reservation system fees . the fees , which are primarily based on a percentage of the franchisees ' gross room revenues , are used exclusively by the company for expenses associated with providing franchise services such as central reservation systems , national marketing and media advertising . the company is contractually obligated to expend the marketing and reservation system fees it collects from franchisees in accordance with the franchise agreements ; as such , no net income or loss to the company is generated . cumulative marketing and reservation fees not expended are deferred and recorded as a liability in the company 's financial statements and carried over to the next year and expended in accordance with the franchise agreements . conversely , cumulative marketing and reservation expenditures incurred in excess of fees billed for marketing and reservation activities are deferred and recorded as an asset in the company 's financial statements and recovered in future periods . total marketing and reservation system revenues increase d 8 % or $ 41.4 million from $ 525.7 million for the year ended december 31 , 2016 to $ 567.1 million for the year ended december 31 , 2017 . marketing and reservation system revenues for the year ended december 31 , 2016 were impacted by the recognition of $ 30.7 million of previously deferred revenues . the recognition of deferred revenues during the prior year period was primarily due to a change in the expiration policy for the choice privileges membership program . excluding the impact of the recognition of these deferred revenues , marketing and reservation system revenues increased approximately $ 72.1 million . revenue growth for the year ended december 31 , 2017 primarily reflect new reservation delivery programs as well as improved revenues from the choice privileges loyalty program resulting from the growth in the program membership , increases in average daily rates , as well as a reduction in the actuarial estimate of points earned by members that will ultimately be redeemed . at december 31 , 2017 , cumulative marketing and reservation system fees billed exceeded expenses by $ 4.9 million with the excess reflected as other long-term liability in the accompanying consolidated balance sheets . at december 31 , 2016 , cumulative marketing and reservation system costs exceeded cumulative marketing and reservation system revenues earned by $ 18.1 million

million , which consisted of cash paid , net of cash acquired , of $ 13.3 million , deferred purchase price payable of $ 6.8 million , and liabilities assumed totaling $ 3.5 million . the deferred purchase price is payable over 5 years and is contingent on achievement of certain targets and continued employment . during the year ended december 31 , 2016 , the company paid $ 1.3 million of this deferred purchase price . there were no business acquisition related payments made in 2017. during the year ended december 31 , 2017 , 2016 and 2015 , the company invested $ 50.6 million , $ 34.7 million , and $ 23.7 million in joint ventures accounted for under the equity method of accounting . in addition , the company received distributions from these joint ventures totaling $ 4.6 million , $ 3.7 million , and $ 0.5 million for the years ended december 31 , 2017 , 2016 and 2015 , respectively . the company 's investment in these joint ventures primarily pertain to ventures that either support the company 's efforts to increase business delivery to its franchisees or promote growth of our emerging brands . at december 31 , 2017 , the company had a commitment to extend an additional $ 14.7 million for these purposes within the next twelve months provided certain conditions are met . the company provides financing to franchisees for hotel development efforts and other purposes in the form of mezzanine and other notes receivable . these loans

residential mortgage loans are placed on nonaccrual status at 150 -days past due , with the exception of residential mortgages guaranteed by government agencies which continue to accrue interest at the rate guaranteed by the government agency . we are reimbursed from the government agency for reasonable expenses incurred in servicing loans . for all classes within all loan portfolios , when a loan is placed on nonaccrual status , any accrued interest income is reversed with current year accruals charged to interest income , and prior year amounts charged-off as a credit loss . 111 for all classes within all loan portfolios , cash receipts on nals are applied against principal until the loan or lease has been collected in full , including charged-off portion , after which time any additional cash receipts are recognized as interest income . however , for secured non-reaffirmed debt in a chapter 7 bankruptcy , payments are applied to principal and interest when the borrower has demonstrated a capacity to continue payment of the debt and collection of the debt is reasonably assured . for unsecured non-reaffirmed debt in a chapter 7 bankruptcy where the carrying value has been fully charged-off , payments are recorded as loan recoveries . regarding all classes within the c & i and cre portfolios , the determination of a borrower 's ability to make the required principal and interest payments is based on an examination of the borrower 's current financial statements , industry , management capabilities , and other qualitative measures . for all classes within the consumer loan portfolio , the determination of a borrower 's ability to make the required principal and interest payments is based on multiple factors , including number of days past due and , in some instances , an evaluation of the borrower 's financial condition . when , in management 's judgment , the borrower 's ability to make required principal and interest payments resumes and collectability is no longer in doubt , supported by sustained repayment history , the loan is returned to accrual status . for these loans that have been returned to accrual status , cash receipts are applied according to the contractual terms of the loan . charge-off of uncollectible loans — any loan in any portfolio may be charged-off prior to the policies described below if a loss confirming event has occurred . loss confirming events include , but are not limited to , bankruptcy ( unsecured ) , continued delinquency , foreclosure , or receipt of an asset valuation indicating a collateral deficiency and that asset is the sole source of repayment . additionally , discharged , collateral dependent non-reaffirmed debt in chapter 7 bankruptcy filings will result in a charge-off to estimated collateral value , less anticipated selling costs . c & i and cre loans are either charged-off or written down to net realizable value at 90 -days past due . automobile loans and other consumer loans are charged-off at 120 -days past due . first-lien and junior-lien home equity loans are charged-off to the estimated fair value of the collateral , less anticipated selling costs , at 150 -days past due and 120 -days past due , respectively . residential mortgages are charged-off to the estimated fair value of the collateral at 150 -days past due . impaired loans — for all classes within the c & i and cre portfolios , all loans with an obligor balance of $ 1.0 million or greater are evaluated on a quarterly basis for impairment . except for tdrs , consumer loans within any class are generally not individually evaluated on a regular basis for impairment . all tdrs , regardless of the outstanding balance amount , are also considered to be impaired . loans acquired with evidence of deterioration in credit quality since origination for which it is probable at acquisition that all contractually required payments will not be collected are also considered to be impaired . once a loan has been identified for an assessment of impairment , the loan is considered impaired when , based on current information and events , it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected . this determination requires significant judgment and use of estimates , and the eventual outcome may differ significantly from those estimates . when a loan in any class has been determined to be impaired , the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan 's effective interest rate or , as a practical expedient , the observable market price of the loan , or the fair value of the collateral , less anticipated selling costs , if the loan is collateral dependent . when the present value of expected future cash flows is used , the effective interest rate is the original contractual interest rate of the loan adjusted for any cost , fee , premium , or discount . when the contractual interest rate is variable , the effective interest rate of the loan changes over time . a specific reserve is established as a component of the alll when a loan has been determined to be impaired . subsequent to the initial measurement of impairment , if there is a significant change to the impaired loan 's expected future cash flows , or if actual cash flows are significantly different from the cash flows previously estimated , huntington recalculates the impairment and appropriately adjusts the specific reserve . similarly , if huntington measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral dependent loan , huntington will adjust the specific reserve . when a loan within any class is impaired , the accrual of interest income is discontinued unless the receipt of principal and interest is no longer in doubt . story_separator_special_tag 2015 versus 2014 the provision for income taxes was $ 221 million for 2015 compared with a provision for income taxes of $ 221 million in 2014. both years included the benefits from tax-exempt income , tax-advantaged investments , general business credits , investments in qualified affordable housing projects , and capital losses . in 2015 , a $ 69 million reduction in the provision for federal income taxes was recorded for the portion of federal deferred tax assets related to capital loss carryforwards that are more likely than not to be realized compared to a $ 27 million reduction in 2014. in 2015 , there was essentially no change recorded in the provision for state income taxes , net of federal taxes , for the portion of state deferred tax assets and state net operating loss carryforwards that are more likely than not to be realized , compared to a $ 7 million reduction , net of federal taxes , in the 2014. risk management and capital a comprehensive discussion of risk management and capital matters affecting us can be found in the risk governance section included in item 1a and the regulatory matters section of item 1 of this form 10-k. some of the more significant processes used to manage and control credit , market , liquidity , operational , and compliance risks are described in the following sections . credit risk credit risk is the risk of financial loss if a counterparty is not able to meet the agreed upon terms of the financial obligation . the majority of our credit risk is associated with lending activities , as the acceptance and management of credit risk is central to profitable lending . we also have credit risk associated with our afs and htm securities portfolios ( see note 5 and note 6 of the notes to consolidated financial statements ) . we engage with other financial counterparties for a variety of purposes including investing , asset and liability management , mortgage banking , and trading activities . while there is credit risk associated with derivative activity , based on our underwriting practices we believe this exposure is minimal . ( see note 1 of the notes to consolidated financial statements ) we continue to focus on the identification , monitoring , and managing of our credit risk . in addition to the traditional credit risk mitigation strategies of credit policies and processes , market risk management activities , and portfolio diversification , we use quantitative measurement capabilities utilizing external data sources , enhanced use of modeling technology , and internal stress testing processes . our portfolio management resources demonstrate our commitment to maintaining an aggregate moderate-to-low risk profile . in our efforts to continue to identify risk mitigation techniques , we have focused on product design features , origination policies , and solutions for delinquent or stressed borrowers . 43 the maximum level of credit exposure to individual credit borrowers is limited by policy guidelines based on the perceived risk of each borrower or related group of borrowers . all authority to grant commitments is delegated through the independent credit administration function and is closely monitored and regularly updated . concentration risk is managed through limits on loan type , geography , industry , and loan quality factors . we focus predominantly on extending credit to retail and commercial customers with existing or expandable relationships within our primary banking markets , although we will consider lending opportunities outside our primary markets if we believe the associated risks are acceptable and aligned with strategic initiatives . although we offer a broad set of products , we continue to develop new lending products and opportunities . each of these new products and opportunities goes through a rigorous development and approval process prior to implementation to ensure our overall objective of maintaining an aggregate moderate-to-low risk portfolio profile . the checks and balances in the credit process and the separation of the credit administration and risk management functions are designed to appropriately assess and sanction the level of credit risk being accepted , facilitate the early recognition of credit problems when they occur , and provide for effective problem asset management and resolution . for example , we do not extend additional credit to delinquent borrowers except in certain circumstances that substantially improve our overall repayment or collateral coverage position . loan and lease credit exposure mix at december 31 , 2016 , our loans and leases totaled $ 67.0 billion , representing a $ 16.6 billion , or 33 % , increase compared to $ 50.3 billion at december 31 , 2015 . total commercial loans and leases were $ 35.4 billion at december 31 , 2016 , and represented 53 % of our total loan and lease credit exposure . our commercial loan portfolio is diversified by product type , customer size , and geography within our footprint , and is comprised of the following ( see commercial credit discussion ) : c & i – c & i loans and leases are made to commercial customers for use in normal business operations to finance working capital needs , equipment purchases , or other projects . the majority of these borrowers are customers doing business within our geographic regions . c & i loans and leases are generally underwritten individually and secured with the assets of the company and or the personal guarantee of the business owners . the financing of owner occupied facilities is considered a c & i loan even though there is improved real estate as collateral . this treatment is a result of the credit decision process , which focuses on cash flow from operations of the business to repay the debt . the operation , sale , rental , or refinancing of the real estate is not considered the primary repayment source for these types of loans . as we have expanded our c & i portfolio , we have developed a series

( 3 ) consists of certain mutual fund and equity security holdings . investment securities portfolio the expected weighted average maturities of our afs and htm portfolios are significantly shorter than their contractual maturities as reflected in note 5 and note 6 of the notes to consolidated financial statements . particularly regarding the mbs and abs , prepayments of principal and interest that historically occur in advance of scheduled maturities will shorten the expected life of these portfolios . the expected weighted average maturities , which take into account expected prepayments of principal and interest under existing interest rate conditions , are shown in the following table : replace_table_token_38_th ( 1 ) the average duration of the securities with an average life of 5 years to 10 years is 5.28 years bank liquidity and sources of funding our primary sources of funding for the bank are retail and commercial core deposits . at december 31 , 2016 , these core deposits funded 72 % of total assets ( 107 % of total loans ) . other sources of liquidity include non-core deposits , fhlb advances , wholesale debt instruments , and securitizations . demand deposit overdrafts that have been reclassified as loan balances and were $ 23 million and $ 16 million at december 31 , 2016 and december 31 , 2015 , respectively . the following tables reflect contractual maturities of other domestic time deposits of $ 250,000 or more and brokered deposits and negotiable cds as well as other domestic time deposits of $ 100,000 or more and brokered deposits and negotiable cds at december 31 , 2016 . replace_table_token_39_th 66 the following table reflects deposit composition detail for each of the last three years : replace_table_token_40_th the following table reflects short-term borrowings detail for each of the last three years : replace_table_token_41_th the bank maintains borrowing capacity at the fhlb and the federal reserve bank discount window . the bank does not consider borrowing capacity from the federal reserve bank discount window as a primary source of liquidity . information regarding amounts pledged , for the ability to borrow if necessary , and the unused borrowing capacity at both the federal reserve bank and the fhlb , is outlined in the following table :

the hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities ( level 1 ) and the lowest priority to measurements involving significant unobservable inputs ( level 3 ) . recently adopted accounting pronouncements effective january 1 , 2018 , wesco adopted asu 2014-09 , revenue from contracts with customers , and all the related amendments ( “ topic 606 ” ) using the modified retrospective approach to all open contracts ( see note 3 below ) . there was no impact to wesco 's previously reported consolidated financial statements and wesco does not expect the adoption of topic 606 to have a material impact on its revenue and results of operations on an ongoing basis . in august 2016 , the financial accounting standards board ( fasb ) issued asu 2016-15 , statement of cash flows ( topic 230 ) : classification of certain cash receipts and cash payments ( a consensus of the emerging issues task force ) . this asu provided guidance on eight specific cash flow issues where there was diversity in practice . the company adopted this asu in the first quarter of 2018. the adoption of this guidance did not have an impact on the consolidated financial statements and notes presented herein . in january 2017 , the fasb issued asu 2017-04 , intangibles—goodwill and other ( topic 350 ) : simplifying the test for goodwill impairment , which eliminates step 2 of the goodwill impairment test . under the amendments in this asu , an entity should perform its annual , or interim , goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount . an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit 's fair value ; however , the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit . an entity should apply the amendments in this asu on a prospective basis . this guidance is effective for fiscal years beginning after december 15 , 2019 , including interim periods within those fiscal years . early adoption is permitted . management adopted this asu in the fourth quarter of 2018 when the company performed its annual impairment tests . the adoption of this accounting standard did not have an impact on the consolidated financial statements and notes presented herein . in march 2017 , the fasb issued asu 2017-07 , compensation—retirement benefits ( topic 715 ) : improving the presentation of net periodic pension cost and net periodic postretirement benefit cost . this asu requires that an employer disaggregate the service cost from the other components of net benefit cost . the company adopted this guidance on a retrospective basis in the first quarter of 2018. see note 13 for a description of the impact of this accounting standard on the consolidated statements of income and comprehensive income presented herein . the adoption of this guidance did not have an impact on the company 's consolidated balance sheets and the consolidated statements of cash flows presented herein . 41 wesco international , inc. and subsidiaries notes to consolidated financial statements— ( continued ) in may 2017 , the fasb issued asu 2017-09 , compensation—stock compensation ( topic 718 ) : scope of modification accounting . this asu clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification . under the new guidance , modification accounting is required only if the fair value , the vesting conditions , or the classification of the award ( as equity or liability ) changes as a result of the change in terms or conditions . the company adopted this asu in the first quarter of 2018. the adoption of this guidance did not have an impact on the consolidated financial statements presented and notes herein . recently issued accounting pronouncements in february 2016 , the fasb issued asu 2016-02 , leases , a comprehensive new standard that amends various aspects of existing accounting guidance for leases , including the recognition of a right-of-use asset and a lease liability in the balance sheet and disclosing key information about leasing arrangements . this asu is effective for fiscal years beginning after december 15 , 2018 , including interim periods within those fiscal years . during 2018 , the fasb issued additional asus that address implementation issues and correct or improve certain aspects of the new accounting guidance for leases , including asu 2018-10 , codification improvements to topic 842 , leases and asu 2018-11 , leases ( topic 842 ) : targeted improvements . these asus do not change the core principles in the leasing standard outlined above . the amendments in asu 2018-11 provide an optional transition method that allows entities to initially apply the new lease standard at the adoption date . consequently , an entity 's reporting for the comparative periods will continue to be in accordance with current lease accounting guidance . during 2018 , management established a cross-functional team to evaluate and implement the new standard . the team selected a third-party software solution to facilitate the accounting and financial reporting requirements of the new lease standard . lease data elements have been gathered and migrated to the software solution . the new standard will be adopted in the first quarter of 2019. the company expects to use the optional transition method and elect the package of practical expedients permitted under the transition guidance . the company also expects to elect the practical expedient related to lease and nonlease components . the company anticipates recording right-of-use assets and lease liabilities of $ 200 million to $ 250 million in the consolidated balance sheet as of january 1 , 2019 , most of which will relate to real estate . story_separator_special_tag the term loan facility also provides for customary events of default . accounts receivable securitization facility on november 8 , 2017 , wesco distribution amended its accounts receivable securitization facility ( the `` receivables facility `` ) pursuant to the terms and conditions of a fifth amendment to fourth amended and restated receivables purchase agreement , by and among wesco receivables corp. ( “ wesco receivables ” ) , wesco distribution , the various purchasers from time to time party thereto and pnc bank , national association , as administrator ( the `` amendment `` ) . the amendment extended the term of the receivables facility to september 24 , 2020 and added and amended certain other defined terms . substantially all other terms and conditions of the receivables facility were unchanged . the receivables facility has a purchase limit of $ 550 million with the opportunity to exercise an accordion feature that permits increases in the purchase limit of up to $ 100 million . the interest rate spread and commitment fee of the receivables facility is 0.95 % and 0.45 % , respectively . under the receivables facility , wesco sells , on a continuous basis , an undivided interest in all domestic accounts receivable to wesco receivables , a wholly owned special purpose entity ( the “ spe ” ) . the spe sells , without recourse , a senior undivided interest in the receivables to financial institutions for cash while maintaining a subordinated undivided interest in the receivables , in the form of overcollateralization . since wesco maintains control of the transferred receivables , the transfers do not qualify for “ sale ” treatment . as a result , the transferred receivables remain on the balance sheet , and wesco recognizes the related secured borrowing . wesco has agreed to continue servicing the sold receivables for the third-party conduits and financial institutions at market rates ; accordingly , no servicing asset or liability has been recorded . the expenses associated with the receivables facility are reported as a component of net interest and other in the consolidated statements of income and comprehensive income . 25 as of december 31 , 2018 and 2017 , accounts receivable eligible for securitization totaled $ 758.3 million and $ 751.2 million , respectively . the consolidated balance sheets as of december 31 , 2018 and 2017 include $ 275.0 million and $ 380.0 million , respectively , of account receivable balances legally sold to third parties , as well as borrowings for equal amounts . at december 31 , 2018 , the interest rate for this facility was approximately 2.0 % . revolving credit facility on september 24 , 2015 , wesco international , wesco distribution and certain other subsidiaries of the company entered into a $ 600 million revolving credit facility ( the “ revolving credit facility ” ) , which contains a letter of credit sub-facility of up to $ 125 million , pursuant to the terms and conditions of a second amended and restated credit agreement ( the `` credit agreement `` ) . the revolving credit facility contains an accordion feature allowing wesco distribution to request increases to the borrowing commitments of up to $ 200 million in the aggregate , subject to customary conditions . the revolving credit facility matures in september 2020 and consists of two separate sub-facilities : ( i ) a canadian sub-facility with a borrowing limit of up to $ 400 million , which is collateralized by substantially all assets of wesco canada and the other canadian borrowers , other than , among other things , real property , in each case , subject to customary exceptions and limitations , and ( ii ) a u.s sub-facility with a borrowing limit of up to $ 600 million less the amount of outstanding borrowings under the canadian sub-facility . the u.s. sub-facility is collateralized by substantially all assets of wesco distribution and its domestic subsidiaries which are party to the credit agreement , other than , among other things , real property and accounts receivable sold or intended to be sold pursuant to the receivables purchase agreement . the applicable interest rate for borrowings under the revolving credit facility includes interest rate spreads based on available borrowing capacity that range between 1.25 % and 1.75 % for libor-based borrowings and 0.25 % and 0.75 % for prime rate-based borrowings . at december 31 , 2018 , the interest rate for this facility was approximately 3.5 % . the credit agreement requires ongoing compliance with certain customary affirmative and negative covenants . the credit agreement also contains customary events of default . during 2018 , wesco borrowed $ 473.1 million under the revolving credit facility and made repayments in the aggregate amount of $ 433.5 million . during 2017 , aggregate borrowings and repayments were $ 834.4 million and $ 826.4 million , respectively . wesco had $ 515.9 million available under the revolving credit facility at december 31 , 2018 , after giving effect to $ 27.2 million of outstanding letters of credit , $ 19.5 million of surety bonds , and $ 5.3 million of other reserves , as compared to $ 562.9 million available under the revolving credit facility at december 31 , 2017 , after giving effect to $ 18.0 million of outstanding letters of credit , $ 19.1 million of surety bonds , and $ 7.1 million of other reserves . 5.375 % senior notes due 2021 in november 2013 , wesco distribution issued $ 500 million aggregate principal amount of 2021 notes through a private offering exempt from the registration requirements of the securities act of 1933 , as amended ( the “ securities act ” ) . the 2021 notes were issued at 100 % of par and are governed by an indenture ( the “ 2021 indenture ” ) entered into on november 26 , 2013 between wesco international and u.s. bank national association ,

over the next several quarters , we plan to closely manage working capital , and it is expected that excess cash will be directed primarily at growth initiatives , acquisitions , debt reduction , and share repurchases . we remain focused on maintaining ample liquidity and credit availability . we anticipate capital expenditures in 2019 to be similar to 2018 . we believe our balance sheet and ability to generate ample cash flow provides us with a durable business model and should allow us to fund expansion needs and growth initiatives . we finance our operating and investing needs as follows : international lines of credit certain foreign subsidiaries of wesco have entered into uncommitted lines of credit , which serve as overdraft facilities , to support local operations . the maximum borrowing limit varies by facility and ranges between $ 2.0 million and $ 21.0 million . the applicable interest rate for borrowings under these lines of credit varies by country and is governed by the applicable loan agreement . the international lines of credit are renewable on an annual basis and certain facilities are fully and unconditionally guaranteed by wesco distribution . accordingly , borrowings under these lines directly reduce availability under the revolving credit facility . the average interest rate for these facilities was 8.78 % and 5.42 % at december 31 , 2018 and 2017 , respectively . 24 term loan facility on december 12 , 2012 , wesco distribution , as u.s. borrower , wdcc enterprises inc. ( `` wdcc '' and together with wesco distribution , the “ borrowers ” ) , as canadian borrower , and wesco international entered into a term loan agreement ( the “ term loan agreement ” ) among wesco distribution , wdcc , the company , the lenders party thereto and credit suisse ag cayman islands branch , as administrative agent and as collateral agent . the term loan agreement provided a seven-year term loan facility ( the “ term loan facility ” ) , which consisted of two separate sub-facilities : ( i ) a canadian sub-facility in an aggregate principal amount of cad 150 million , issued at a 2.0 % discount , and ( ii ) a u.s. sub-facility in an aggregate principal amount of $ 700 million , issued at a 1.0 % discount . the proceeds of the term loan facility were used to finance the acquisition of eecol , and to pay fees and expenses incurred in connection with the acquisition and certain other transactions . subject to the terms of the term loan agreement , the borrowers may request incremental term loans from time to time in an aggregate principal amount not to exceed at any time $ 300 million , with an equivalent principal amount in

on may 22 , 2019 , the company entered into an office sublease agreement for 4,677 square feet in san diego , california ( “ san diego lease ” ) which expires on march 31 , 2021. base rent is approximately $ 166,000 annually and the monthly rent expense is being recognized on a straight-line basis over the lease term . the san diego lease is included in the accompanying consolidated balance sheet at the present value of the lease payments . as the san diego lease does not have an implicit interest rate , the present value reflects a 10.0 % discount rate which is the estimated rate of interest that the company would have to pay in order to borrow an amount equal to the lease payments on a collateralized basis over a similar term and in a similar economic environment . the company recognized a net operating lease right-of-use asset and an aggregate lease liability of $ 0.2 million as of december 31 , 2019 , in the accompanying consolidated balance sheet . the weighted average remaining lease term was 1.25 years . maturities of lease liabilities due under this lease agreement as of december 31 , 2019 , are as follows ( in thousands ) : replace_table_token_12_th f-12 related party transactions in january 2019 , the company engaged newfront insurance as its primary insurance broker . the son of richard vincent , the company 's chief financial officer , acted as the company 's agent at newfront insurance . the company paid total related policy premiums of approximately $ 1.2 million during the year ending december 31 , 2019 , for which mr. vincent 's son received a commission of approximately $ 0.1 million . in september 2019 , the company entered into a consulting agreement with robert j. wills . ph.d. , a member of the company 's board of directors , whereby dr. wills will provide services related to the potential out-licensing or sale of the sarm and or sard technology . the company recorded approximately $ 3,500 in related services during the year ended december 31 , 2019. effective in september 2019 , the company and shanghai pharmaceutical ( usa ) inc. ( “ sph usa ” ) entered into a materials supply and services agreement ( “ sph usa services agreement ” ) , pursuant to which the company and sph usa will execute various statements of work for the transfer to sph usa of key reagents and other materials , and for the supply of certain services by the company to sph usa , as contemplated under and in furtherance of the license and development agreement between the company and sph usa effective as of november 2018. during the year ended december 31 , 2019 , the company recorded amounts receivable from sph usa related to statements of work totaling $ 0.2 million . see notes 4 and 6. litigation related to the merger between april 10 and may 1 , 2019 , three putative class action lawsuits and one individual lawsuit were filed in the u.s. district court for the district of delaware : wheby v. gtx , inc. et al . , miller v. gtx , inc. et al . , tabb v. gtx , inc. et al . , and living seas llc v. gtx , inc. et al . ( collectively , the “ delaware actions ” ) . on april 11 and 23 , 2019 , two putative class actions were filed in the u.s. district court for the southern district of new york : kopanic v. gtx , inc. et al . and cooper v. gtx , inc. et al . ( collectively , the “ new york actions ” and , together with the delaware actions , the “ actions ” ) . the actions name as defendants the company and its former board of directors , and , in the case of the wheby and miller actions , private oncternal and merger sub . the actions allege that defendants violated sections 14 ( a ) and 20 ( a ) of the exchange act , as well as rule 14a-9 promulgated thereunder , in connection with the company 's filing of the registration statement in connection with the merger . the delaware actions have now been voluntarily dismissed with prejudice : the wheby action on june 12 , 2019 ; the miller action on july 15 , 2019 ; the living seas action on june 26 , 2019 ; and the tabb action on october 21 , 2019. on september 16 , 2019 , plaintiffs in the new york actions filed an amended complaint , alleging violations of sections 14 ( a ) and 20 ( a ) of the exchange act related to the value gtx 's stockholders received in the merger . the complaint seeks damages and other unspecified relief . on january 10 , 2020 , the defendants filed their motion to dismiss the amended complaint , on january 31 , 2020 , the plaintiffs filed their opposition to defendants ' motion to dismiss , and on february 14 , 2020 , the defendants filed a reply in support of their motion to dismiss . the defendants ' motion to dismiss is pending . the company believes that the new york actions are without merit and intends to vigorously defend these actions . the company can not predict the outcome of or estimate the possible loss or range of loss from any of these matters . zappia vs. gtx incorporated on october 15 , 2019 , joseph zappia and karen zappia filed a lawsuit against us in the u.s. district court for the district of delaware . story_separator_special_tag we expect that our existing cash and cash equivalents will be sufficient to fund our operations into the third quarter of 2020. however , our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties , and actual results could vary materially . we have based this estimate on assumptions that may prove to be wrong , and we could use our capital resources sooner than we expect . additionally , the process of testing product candidates in clinical trials is costly , and the timing of progress , potential dose expansions beyond our planned study protocols based in part on our clinical progress , and expenses in these trials is uncertain . our future capital requirements will depend on many factors , including : the type , number , scope , progress , expansions , results , costs and timing of , our preclinical studies and clinical trials of our product candidates which we are pursuing or may choose to pursue in the future ; the costs and timing of manufacturing for our product candidates , including commercial manufacturing if any product candidate is approved ; the costs of obtaining ibrutinib , for which we currently obtain supply at no cost under our clinical supply agreement with pharmacyclics llc , and vincristine to conduct our clinical trials of cirmtuzumab and tk216 , respectively ; the costs , timing and outcome of regulatory review of our product candidates ; the costs of obtaining , maintaining and enforcing our patents and other intellectual property rights ; our efforts to enhance operational systems and hire additional personnel to satisfy our obligations as a public company , including enhanced internal controls over financial reporting ; the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase ; the costs and timing of establishing or securing sales and marketing capabilities if any product candidate is approved ; 111 our ability to achieve sufficient market acceptance , adequate coverage and reimbursement from third-party payors and adequate market share and revenue for any approved products ; the terms and timing of establishing and maintaining collaborations , licenses and other similar arrangements ; and costs associated with any products or technologies that we may in-license or acquire . until such time , if ever , as we can generate substantial product revenues to support our cost structure , we expect to finance our losses from operations and capital funding needs through a combination of equity offerings , debt financings , government funding and other sources , including potentially collaborations , licenses and other similar arrangements . to the extent we raise additional capital through the sale of debt or equity securities , the ownership interest of our stockholders will be or could be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders . debt financing and preferred equity financing , if available , may involve agreements that include covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . if we raise funds through collaborations , licenses and other similar arrangements with third parties , we may have to relinquish valuable rights to our technologies , future revenue streams , research programs or product candidates or grant licenses on terms that may not be favorable to us and or may reduce the value of our common stock . if we are unable to raise additional funds through debt or equity financings when needed , we may be required to delay , limit , reduce or terminate our product development or future commercialization efforts or grant rights to develop and market our product candidates even if we would otherwise prefer to develop and market such product candidates by ourselves . there can be no assurance that we will be able to obtain any sources of financing on acceptable terms , or at all . contractual obligations and commitments the following table summarizes our contractual obligations at december 31 , 2019 ( in thousands ) : : replace_table_token_5_th ( 1 ) our operating lease obligations relate to our corporate headquarters in san diego , california . we lease 4,677 square feet of office space under an operating lease that expires in march 2021. we are party to a number of license agreements , pursuant to which we have payment obligations that are contingent upon future events such as our achievement of specified development , regulatory and commercial milestones and are required to make royalty payments in connection with the sale of products developed under those agreements . as of december 31 , 2019 , we were unable to estimate the timing or likelihood of achieving the milestones or making future product sales and , therefore , any related payments are excluded from the table above . see note 4 to our consolidated financial statements included elsewhere in this annual report for a description of these agreements . we enter into contracts in the normal course of business with clinical trial sites and clinical supply manufacturers and with vendors for preclinical studies , research supplies and other services and products for operating purposes . these contracts generally provide for termination after a notice period , and , therefore , are cancelable contracts and are excluded from the table above . 112 georgetown university ( “ georgetown ” ) in march 2014 , we entered into an exclusive license agreement ( the “ georgetown license agreement ” ) with georgetown , pursuant to which we : ( i ) licensed the exclusive worldwide right to patents and technologies for the development and commercialization of certain product candidates targeting ews-fli1 as an anti-tumor therapy for therapeutic , diagnostics , or research tool purposes , ( ii ) are solely responsible for all development

as of february 28 , 2020 , our public float calculated pursuant to the instructions set forth in form s-3 was approximately $ 51.8 million , based on 11,800,518 shares of outstanding common stock held by non-affiliates at a price of $ 4.39 per share , which is the last reported sale price of our common stock on the nasdaq capital market on february 20 , 2020. so long as our public float is below $ 75.0 million , we will be limited by the baby shelf rules until such time as our public float exceeds $ 75.0 million , which means we only have the capacity to sell shares up to one-third of our public float under shelf registration statements in any twelve-month period . as of february 28 , 2020 , we calculated our future capacity to issue up to approximately $ 17.3 million of additional shares of common stock pursuant to the atm sales agreement . if our public float decreases , the amount of securities we may sell under our form s-3 shelf registration statement will also decrease . future sales under the atm sales agreement will depend on a variety of factors including , but not limited to , prevailing market conditions , the trading price of our common stock and our capital needs . there can be no assurance that stifel will be successful in consummating future sales based on prevailing market conditions or in the quantities or at the prices that we deem appropriate . cash flows the following table summarizes our sources and uses of cash for each of the periods presented ( in thousands ) : replace_table_token_4_th operating activities during the year ended december 31 , 2019 , operating activities used $ 16.7 million of cash , resulting from our net loss of $ 34.2 million , which included non-cash charges of : ( i ) $ 18.1 million related to the acquisition of in-process research and development , ( ii ) $ 1.3 million related to the change in fair value of warrant liability , and ( iii ) $ 0.5 million related to stock-based compensation charges ; partially offse t by a $ 2.4 million change in operating assets and liabilities . the $ 2.4 million change in operating assets and liabilities primarily consisted of a $ 6.0 million decrease in accounts payable and accrued liabilities and a $ 3.6 million increase in deferred revenue . 110 during the year ended december 31 , 2018 , operating activities used $ 7.4 million of cash , resulting primarily from our net loss of $ 6.6 million , non-cash

segment data the company manages its operations as a single segment for the purposes of assessing performance and making operating decisions . the company 's singular focus is on advancing medicines to treat central nervous system disorders , where there are inadequate or no approved existing therapies , including status epilepticus . all tangible assets are held within the u.s. comprehensive loss comprehensive loss includes net loss as well as other changes in stockholders ' equity ( deficit ) that result from transactions and economic events other than those with stockholders . for the years ended december 31 , 2014 , 2013 and 2012 , there was no difference between net loss and comprehensive loss . government grants the company records amounts received under grants as a reduction to research and development expense in the period it has incurred the expenditures in compliance with the specific restrictions of the grant . the company recorded $ 129 , $ 96 and $ 0 for the years ended december 31 , 2014 , 2013 and 2012 , respectively . initial public offering on july 23 , 2014 , the company completed the sale of 5,750,000 shares of its common stock in its initial public offering ( the “ipo” ) , at a price to the public of $ 18.00 per share , resulting in net proceeds to the company of $ 94.0 million after deducting underwriting discounts and commissions and offering costs paid by the company . the shares began trading on nasdaq global market on july 18 , 2014. in connection with preparing for the ipo , the company 's board of directors and stockholders approved a 1-for-3.15 reverse stock split of the company 's common stock effective july 2 , 2014. all share and per share amounts in the financial statements contained herein and notes thereto have been retroactively adjusted , where necessary , to give effect to this reverse stock split . in connection with the closing of the ipo , all of the company 's outstanding redeemable convertible preferred stock automatically converted into shares of common stock as of july 23 , 2014 , resulting in the issuance by the company of an additional 18,007,575 shares of common stock . the significant increase in common stock outstanding in july 2014 will impact the year-over-year comparability of the company 's net loss per share calculations over the next year . recently issued accounting pronouncements in may 2014 , the financial accounting standards board , ( “fasb” ) , issued accounting standards update ( “asu” ) 2014-09 , revenue from contracts with customers ( topic 606 ) , ( “asu 2014-09” ) . asu 2014-09 outlines a new , single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance , including industry-specific guidance . this new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized . the new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services . asu 2014-09 is effective for public entities for annual reporting periods beginning after december 15 , 2016 and interim periods within those periods . early adoption is not permitted . companies may f-10 use either a full retrospective or a modified retrospective approach to adopt asu 2014-09. the company is currently assessing the method of adoption and the impact this new accounting guidance will have on its financial statements and footnote disclosures . in june 2014 , the financial accounting standard board , or fasb , issued amended accounting guidance for development stage entities . the amendment eliminates certain financial reporting requirements for development stage entities , specifically , the presentation of inception-to-date information , the development stage entity label on the financial statements , the description of the activities in which the entity is engaged , and disclosure in the first year that the entity is no longer a development stage entity that it had been in prior years . the amendment is effective retrospectively for annual reporting periods beginning after december 15 , 2014 , and interim periods therein with early adoption permitted . the company elected to early adopt this standard in the period ended june 30 , 2014. other than a change in presentation , the adoption of this guidance did not have an impact on the company 's financial statements . in august 2014 , the fasb issued asu 2014-15 , presentation of financial statements—going concern ( subtopic 205-40 ) . the new guidance addresses management 's responsibility to evaluate whether there is substantial doubt about an entity 's ability to continue as a going concern and to provide related footnote disclosures . management 's evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued . the standard will be effective for the first interim period within annual reporting periods beginning after december 15 , 2016. early adoption is permitted . the company is evaluating the effect that this guidance will have on its financial statements . 3. balance sheet components property and equipment , net property and equipment , net consists of the following : replace_table_token_18_th depreciation expense for the years ended december 31 , 2014 , 2013 and 2012 was $ 51 , $ 47 , and $ 44 , respectively . accrued expenses accrued expenses consist of the following : replace_table_token_19_th f-11 4. commitments and contingencies operating leases the company rents its 6,500 square foot office space under an operating lease that was executed in 2011 and expires in 2017. in march 2013 , the company entered into a second lease for an additional 4,100 square feet . story_separator_special_tag other income ( expense ) , net interest income ( expense ) , net and other income ( expense ) , net were insignificant for the years ended december 31 , 2014 and 2013. comparison of the years ended december 31 , 2013 and 2012 the following table summarizes our results of operations for the years ended december 31 , 2013 and 2012 : replace_table_token_9_th 84 research and development expenses replace_table_token_10_th research and development expenses for the year ended december 31 , 2013 were $ 14.4 million , compared to $ 7.2 million for the year ended december 31 , 2012. the increase of $ 7.1 million year over year was primarily due to the following : an increase of $ 3.8 million in expenses of our sage-547 program , consisting primarily of external clinical and drug manufacturing costs associated with the preparation of our phase 1/2 clinical trial of sage-547 , as compared to only $ 0.1 million being spent on the program in 2012 ; an increase of $ 1.7 million in expenses of our sage-689 program , consisting primarily of external costs related to ind-enabling toxicology and safety pharmacology testing and manufacturing activities that were incurred as that program progressed into non-clinical studies during the second half of 2013 ; $ 1.1 million of expenses of our sage-217 program , consisting primarily of costs for external drug discovery efforts ; a net decrease $ 0.1 million in expenses of our other research and development programs , which consist of our chemistry platform-related work and other research programs ; an increase of $ 0.6 million in employee related spending to support the growth in our research and development activities , reflecting increases in salaries and bonus expenses , including the effects of hiring additional , full-time employees during 2013. general and administrative expenses replace_table_token_11_th general and administrative expenses for the year ended december 31 , 2013 were $ 3.9 million , compared to $ 2.4 million for the year ended december 31 , 2012. the increase of $ 1.5 million in general and administrative expenses was primarily due to increased personnel related costs of $ 0.9 million , which were principally due to employee salary and bonus increases of $ 0.5 million , including the effects of hiring additional , full-time employees during 2013 to support operations , finance and business development activities . the increase year over year in general and administrative expenses was also due to a $ 0.3 million increase in professional fees . 85 other income ( expense ) , net interest income ( expense ) , net and other income ( expense ) , net were insignificant for the years ended december 31 , 2013 and 2012. story_separator_special_tag initiation , progress , timings , costs , and results of non-clinical studies and clinical trials for our other programs and potential product candidates ; 87 the number and characteristics of the product candidates we pursue ; the costs of preparing , filing and prosecuting patent applications , maintaining and enforcing our intellectual property rights and defending intellectual property-related claims ; the extent to which we acquire or in-license other products and technologies ; and our ability to establish any future collaboration arrangements on favorable terms , if at all . until such time , if ever , as we can generate substantial product revenue , we expect to finance our cash needs through a combination of equity offerings , debt financings , collaborations , strategic alliances and licensing arrangements . to the extent that we raise additional capital through the sale of equity or convertible debt securities , the ownership interest of our stockholders will be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder . debt financing , if available , may involve agreements that include covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends and may require the issuance of warrants , which could potentially dilute your ownership interest . if we raise additional funds through collaborations , strategic alliances or licensing arrangements with third parties , we may have to relinquish valuable rights to our technologies , future revenue streams or research programs or to grant licenses on terms that may not be favorable to us . if we are unable to raise additional funds through equity or debt financings when needed , we may be required to delay , limit , reduce or terminate our product development or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer to develop and market ourselves . contractual obligations and commitments the following table summarizes our contractual obligations at december 31 , 2014 and the effect such obligations are expected to have on our liquidity and cash flow in future periods : replace_table_token_13_th ( 1 ) we lease office space in cambridge , massachusetts under an operating lease agreement that initially expires on february 28 , 2017. the minimum lease payments in the table do not include related common area maintenance charges or real estate taxes , which costs are variable . ( 2 ) we have acquired exclusive and non-exclusive rights to use , research , develop and offer for sale certain products and patents under three separate licensing agreements , including amendments entered into in april and may 2014 , with washington university , cydex pharmaceuticals , inc. and the regents of the university of california . the licensing rights obligate us to make payments to the licensors for license fees , milestones , license maintenance fees and royalties . we are obligated to make future milestone payments under these agreements of up to $ 29.8 million upon achieving certain pre-commercialization milestones , such as clinical trials and regulatory approvals . we reasonably anticipate that we may be required to pay $ 0.5 million

million from the issuance of series a redeemable convertible preferred stock and from the exercise of stock options . operating capital requirements to date , we have not generated any revenue from product sales . we do not know when , or if , we will generate any revenue from product sales . we do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize one of our current or future product candidates . we anticipate that we will continue to generate losses for the foreseeable future , and we expect the losses to increase as we continue the development of , and seek regulatory approvals for , our product candidates and begin to commercialize any approved products . we expect to incur additional costs associated with operating as a public company . in addition , subject to obtaining regulatory approval of any of our product candidates , we expect to incur significant commercialization expenses for product sales , marketing and manufacturing . accordingly , we anticipate that we will need substantial additional funding in connection with our continuing operations . based on our current operating plan , we expect that our existing cash and cash equivalents as of december 31 , 2014 , including the net proceeds from our ipo which closed on july 23 , 2014 , will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months . in that time , we expect that our expenses will increase substantially as we advance clinical development of sage-547 including completing our phase 3 clinical trial , fund ind-enabling activities and phase 1 clinical development for sage-689 , fund ind-enabling activities for sage-217 , fund new and ongoing research and development activities and working capital , and fund other general corporate purposes . we have based our estimates on assumptions that may prove to be wrong , and we may use our available capital resources sooner than we currently expect . because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates , we are unable to estimate the amounts of increased

report of independent registered public accounting firm to the board of directors and stockholders of water now , inc. opinion on the financial statements we have audited the accompanying balance sheets of water now , inc. ( the company ) as of december 31 , 2017 and 2016 , and the related statements of operations , changes in stockholders ' equity ( deficit ) , and cash flows for the year ended december 31 , 2017 and period from february 10 , 2016 ( inception ) to december 31 , 2016 , and the related notes ( collectively referred to as the financial statements ) . in our opinion , the financial statements present fairly , in all material respects , the financial position of the company as of december 31 , 2017 and 2016 , and the results of its operations and its cash flows for the year ended december 31 , 2017 and period from february 10 , 2016 ( inception ) to december 31 , 2016 , in conformity with accounting principles generally accepted in the united states of america . basis for opinion these financial statements are the responsibility of the company 's management . our responsibility is to express an opinion on the company 's financial statements based on our audits . we are a public accounting firm registered with the public company accounting oversight board ( united states ) ( pcaob ) and are required to be independent with respect to the company in accordance with the u.s. federal securities laws and the applicable rules and regulations of the securities and exchange commission and the pcaob . we conducted our audits in accordance with the standards of the pcaob . those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement , whether due to error or fraud . the company is not required to have , nor were we engaged to perform , an audit of its internal control over financial reporting . as part of our audits , we are required to obtain an understanding of internal control over financial reporting , but not for the purpose of expressing an opinion on the effectiveness of the company 's internal control over financial reporting . accordingly , we express no such opinion . our audits included performing procedures to assess the risks of material misstatement of the financial statements , whether due to error or fraud , and performing procedures that respond to those risks . such procedures included examining , on a test basis , evidence regarding the amounts and disclosures in the financial statements . our audits also included evaluating the accounting principles used and significant estimates made by management , as well as evaluating the overall presentation of the financial statements . we believe that our audits provide a reasonable basis for our opinion . montgomery coscia greilich llp we have served as the company 's auditor since 2016. plano , texas april 2 , 2018 f- 1 water now , inc. balance sheets replace_table_token_6_th the accompanying notes are an integral part of these financial statements . f- 2 water now , inc. statements of operations replace_table_token_7_th the accompanying notes are an integral part of these financial statements . f- 3 water now , inc. statement of changes in stockholders ' equity ( deficit ) for the period from february 10 , 2016 ( inception ) to december 31 , 2017 replace_table_token_8_th the accompanying notes are an integral part of these financial statements . f- 4 water now , inc. statement of cash flows replace_table_token_9_th the accompanying notes are an integral part of these financial statements . f- 5 water now , inc. notes to financial statements december 31 , 2017 1. business and organization water now , inc. was incorporated in texas on february 10 , 2016. the founding shareholder received 25,929,500 shares of common stock of the company upon formation . the company has filed an application for a patent for the design of its water purification technology with the united states patent and trademark office . on september 27 , 2016 , the company consummated a transaction whereby vcab one corporation , a texas corporation ( “ vcab ” ) , merged with and into the company . at the time of the merger vcab was subject to a bankruptcy proceeding and had minimal assets , no equity owners and no liabilities , except for approximately 1,500 holders of class 5 allowed general unsecured claims and a holder of allowed administrative expenses ( collectively , “ claim holders ” ) . pursuant to the terms of the merger , and in accordance with the bankruptcy plan , the company issued an aggregate of 900,000 shares of common stock ( the “ plan shares ” ) to the claim holders as full settlement and satisfaction of their respective claims . as provided in the bankruptcy plan , the plan shares were issued pursuant to section 1145 of the united states bankruptcy code . as a result of the merger , the separate corporate existence of vcab was terminated . the company entered into the merger in order to increase its shareholder base in order to , among other things , assist in satisfying the listing standards of a national securities exchange . the company recorded total restructuring expenses of $ 615,000 , including $ 165,000 of consulting fees in cash and $ 450,000 for the issuance of the plan shares for settlement of claims held by the claim holders . story_separator_special_tag compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period ( s ) for which the requisite service has already been rendered . if the performance target becomes probable of being achieved before the end of the requisite service period , the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period . the total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest . the requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved . as indicated in the definition of vest , the stated vesting period ( which includes the period in which the performance target could be achieved ) may differ from the requisite service period . the amendments in this asu are effective for annual periods and interim periods within those annual periods beginning after december 15 , 2015. the implementation of this standard did not have a material impact on the company 's accompanying financial statements . management does not believe that any recently issued , but not yet effective , accounting standards if currently adopted would have a material effect on the accompanying financial statements . results of operations year ended december 31 , 2017 , compared to the period from february 10 , 2016 ( inception ) through december 31 , 2016 revenue we generated revenues of approximately $ 36,000 and $ 0 and incurred operating expenses of approximately $ 1,736,000 and $ 1,880,000 for the fiscal year ended december 31 , 2017 and for the period from february 10 , 2016 ( inception ) through december 31 , 2016 , respectively . 22 research and development expenses below is a summary of our research and development expenses for the fiscal year ended december 31 , 2017 and for the period from february 10 , 2016 ( inception ) through december 31 , 2016 , respectively : replace_table_token_0_th payroll expenses related to our r & d function increased during the year ended december 31 , 2017 primarily related to increases in the salaries , payroll taxes and benefits for our employees engaged in research and development . stock-based compensation expenses decreased during the year ended december 31 , 2017 due to granting fewer stock awards to our employees and advisors during 2017. general and administrative expenses the following is a summary of our general and administrative expenses for the year ended december 31 , 2017 and for the period from february 10 , 2016 ( inception ) through december 31 , 2016 , respectively : replace_table_token_1_th payroll expenses increased during the fiscal year ended december 31 , 2017 primarily related to increases in salaries , payroll taxes and benefits for our employees needed for the increased levels of operations . stock-based compensation expense decreased during the fiscal year 2017 as a limited number of issuances were made under new or existing arrangements . other general and administrative expenses increased during the fiscal year ended december 31 , 2017 primarily related to increases in insurance , rental expenses , travel expenses , and professional fees due to the increase in operations . 23 other income ( expense ) below is a summary of our other income ( expense ) for the fiscal year ended december 31 , 2017 and for the period from february 10 , 2016 ( inception ) through december 31 , 2016 , respectively . replace_table_token_2_th there was an increase in interest expenses paid on the note payable – related parties . see note 4 of the notes to condensed financial statements for the period ended december 31 , 2017. net losses we incurred net losses of $ 1,726,000 and $ 1,883,000 for the fiscal year ended december 31 , 2017 and for the period from february 10 , 2016 ( inception ) through december 31 , 2016 , respectively , because of the factors discussed above . net loss per share for the fiscal year ended december 31 , 2017 and for the period from february 10 , 2016 ( inception ) through december 31 , 2016 was approximately $ ( 0.06 ) and $ ( 0.07 ) , respectively , based on the weighted-average number of shares issued and outstanding during the period . it is anticipated that future operating expenses will increase as the company complies with its periodic reporting requirements . such expenses would also increase if the company were to effects a business combination , although there can be no assurance that the company will be successful in effecting a business combination . liquidity and capital resources story_separator_special_tag 0.75in ; text-align : justify `` > until such time , if ever , as we can generate substantial product revenues , we expect to finance our cash needs through a combination of equity offerings , debt financings , and strategic alliances . we do not have any committed external source of funds . to the extent that we raise additional capital through the sale of equity or convertible debt securities , the ownership interest of our shareholders will be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect the rights of common shareholders . debt financing , if available , may involve agreements that include covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . if we raise additional funds through strategic alliances or licensing arrangements with third parties , we may have to relinquish valuable rights to our technologies and future revenue streams or grant licenses on terms that may not be favorable to us . if we

we anticipate that our expenses will increase substantially if and as we : establish a sales , marketing and distribution infrastructure to commercialize our water purification units and any other products we successfully develop ; maintain , expand and protect our intellectual property portfolio ; and add operational and financial personnel to handle the public company reporting and other requirements to which we will be subject following effectiveness of this registration statement . we expect that we will require approximately $ 5,000,000 in additional capital to fund operations , including hiring additional employees and increasing inventory levels , during the next twelve ( 12 ) month period . we have based this estimate on assumptions that may prove to be wrong , and we could use our available capital resources sooner than we currently expect . because of the numerous risks and uncertainties associated with the development and commercialization of our water purification units , we are unable to estimate the amounts of increased capital outlays and operating expenses associated with successfully commercializing such products . our future capital requirements will depend on many factors , including : 25 the costs and timing of commercialization activities for our water purification units , including manufacturing , sales , marketing and distribution ; revenues received from sales of our products ; the costs of preparing , filing and prosecuting patent applications , maintaining and enforcing our intellectual property rights and defending intellectual property-related claims ; and our ability to maintain manufacturing and distribution relationships on favorable terms , if at all . < p style= '' font : 10pt times new roman , times , serif ; margin : 0 0 0

52 northrop grumman corporation accumulated other comprehensive loss the components of accumulated other comprehensive loss are as follows : replace_table_token_35_th the changes in unamortized benefit plan costs , net of tax , resulted in other comprehensive loss of $ 1.3 billion and $ 1.2 billion for the years ended december 31 , 2012 and 2011 , respectively , in the consolidated statements of earnings and comprehensive income . unamortized benefit plan costs consist primarily of net after-tax actuarial loss amounts totaling $ 5.1 billion and $ 3.9 billion as of december 31 , 2012 and 2011 , respectively . net actuarial gains or losses are re-determined annually and principally arise from changes in the rate used to discount the benefit obligations and differences in expected and actual returns on plan assets . net actuarial gains or losses are amortized to expense in future periods when they exceed 10 percent of the greater of the plan assets or projected benefit obligations by benefit plan . the excess of gains or losses over the ten percent threshold are subject to amortization over the average future service period of employees of approximately 10 years . 2. earnings per share , share repurchases and dividends on common stock basic earnings per share basic earnings per share from both continuing and discontinued operations are calculated by dividing the respective earnings by the weighted-average number of shares of common stock outstanding during each period . diluted earnings per share diluted earnings per share includes the dilutive effect of awards granted to employees under stock-based compensation plans . the dilutive effect of these securities totaled 4.8 million , 4.8 million , and 4.2 million shares for the years ended december 31 , 2012 , 2011 , and 2010 , respectively . the weighted-average diluted shares outstanding for the years ended december 31 , 2012 , 2011 , and 2010 , excludes anti-dilutive stock options to purchase approximately 1.8 million , 2.8 million , and 2.8 million shares , respectively , because such options have exercise prices in excess of the average market price of the company 's common stock during the year . share repurchases the table below summarizes the company 's share repurchases : replace_table_token_36_th ( 1 ) on june 16 , 2010 , the company 's board of directors authorized a share repurchase program of up to $ 2.0 billion of the company 's common stock . following this initial authorization , the board of directors increased the remaining repurchase authorization to $ 4.0 billion in april 2011. after further repurchases reduced the remaining authorization to less than $ 1 billion , the board of directors again increased the remaining authorization to $ 2.0 billion in september 2012. as of december 31 , 2012 , repurchases under the program totaled $ 3.9 billion , and $ 1.5 billion remained under this share repurchase authorization . the repurchase program will expire when we have used all authorized funds for repurchase . ( 2 ) includes commissions paid . 53 northrop grumman corporation share repurchases take place under pre-established programs , depending on market conditions in the open market or in privately negotiated transactions . the company retires its common stock upon repurchase and has not made any purchases of common stock other than in connection with these publicly announced repurchase program authorizations . in connection with the spin-off of the former shipbuilding business ( see note 3 ) , the company obtained a private letter ruling from the internal revenue service ( irs ) that generally limits our share repurchases to approximately 88 million shares within two years of the spin-off . the limitation expires on march 31 , 2013. since the spin-off we have repurchased approximately 61 million shares of our common stock , and as of december 31 , 2012 , the company may repurchase approximately 27 million shares under the private letter ruling limitation . cash available from unusual transactions , such as the disposition of significant assets , should they arise , can be used to repurchase additional shares . dividends on common stock in may 2012 , the company increased the quarterly common stock dividend to $ 0.55 per share ; an increase from the previous amount of 0.50 per share . in may 2011 , the company increased the quarterly common stock dividend to $ 0.50 per share from the previous amount of 0.47 per share . in may 2010 , the company increased the quarterly common stock dividend to $ 0.47 per share from the previous amount of 0.43 per share . 3. business dispositions there were no material dispositions in 2012. huntington ingalls industries , inc. ( hii ) effective march 31 , 2011 , the company completed the spin-off to its shareholders of hii . hii was formed to operate the company 's former shipbuilding business . the company made a pro rata distribution to its shareholders of one share of hii common stock for every six shares of the company 's common stock held on the record date of march 30 , 2011 , or 48.8 million shares of hii common stock . hii paid a $ 1.4 billion cash contribution to the company . there was no gain or loss recognized as a result of the spin-off transaction . prior to the completion of the spin-off , the company and hii entered into a separation and distribution agreement dated march 29 , 2011 , and several other agreements that govern the post-separation relationship . these agreements generally provide that each party is responsible for its respective assets , liabilities and obligations following the spin-off , including employee benefits , intellectual property , information technology , insurance , and tax-related assets and liabilities . in connection with the spin-off , the company incurred $ 28 million of non-deductible transaction costs for each of the years ended december 31 , 2011 and 2010 , which were included in discontinued operations . story_separator_special_tag 2011 - product sales in 2011 decreased $ 1.0 billion , compared to 2010 , primarily due to lower sales volume on space and military aircraft programs at aerospace systems and lower sales volume in land and self protection systems at electronic systems . 32 northrop grumman corporation product costs in 2011 decreased by $ 981 million , compared to 2010 , due to the decline in sales volume . specifically , aerospace systems sales decreased by approximately $ 600 million due to declines in space and military aircraft programs , partially offset by sales increases in advanced concepts and technology . service sales and service costs 2012 - service sales in 2012 decreased $ 415 million , compared to 2011 , primarily due to lower service sales at information systems across a number of programs , partially offset by the transitioning of the icbm program from product to service at technical services and higher service volume at electronic systems . service costs in 2012 decreased $ 544 million , due to lower sales at information systems , partially offset by the transitioning of the icbm program from product to service at technical services , as described above , and higher service volume at electronic systems . the service activities at aerospace systems and electronic systems were at higher margin than the prior year , resulting in service costs decreasing more than service sales . 2011 - service sales in 2011 decreased $ 684 million , compared to 2010 , primarily due to the reduced participation by technical services in the nstec joint venture , resulting in no sales recorded for the joint venture in 2011 , compared to $ 579 million in 2010 , and lower sales volume on defense and civil programs at information systems . service costs in 2011 decreased $ 790 million , due to the overall decline in sales for the period and margin rate improvements at information systems , technical services and electronic systems , offset somewhat by an unfavorable margin rate change at aerospace systems . contributing to the overall decline in revenues was the company 's reduced participation in the nstec joint venture , which resulted in the deconsolidation of this business in 2011. nstec contributed revenues of $ 579 million and segment cost of sales of $ 559 million in 2010 when it was included in technical service 's sales , thus driving a 80 basis point improvement in margin rate for this segment . more modest margin rate improvements at electronic systems and information systems effectively offset the decline in margin rate at the aerospace systems business . backlog total backlog includes both funded backlog ( firm orders for which funding is contractually obligated by the customer ) and unfunded backlog . unexercised contract options and indefinite delivery indefinite quantity ( idiq ) contracts are not included in backlog until the time the option or idiq task order is exercised or awarded . for multi-year service contracts with non-u.s. government customers having no stated contract values , backlog includes only the amounts committed by the customer . backlog is converted into sales as costs are incurred or deliveries are made . on january 1 , 2012 , the company transferred its missile business , previously reported in aerospace systems to technical services . as a result of this realignment , $ 599 million of backlog was transferred from aerospace systems to technical services . total backlog as of december 31 , 2011 , reflects this transfer . backlog consisted of the following at december 31 , 2012 and 2011 : replace_table_token_21_th approximately $ 21.4 billion of the $ 40.8 billion total backlog at december 31 , 2012 , is expected to be converted into sales in 2013 . total u.s. government orders , including those made on behalf of foreign governments , comprised 82 percent of the total backlog at the end of 2012 . international orders accounted for 12 percent of the total backlog at the end of 2012 . domestic commercial backlog represented 6 percent of total backlog at the end of 2012 . new awards 2012 – the estimated value of contract awards booked during 2012 is $ 26.5 billion . significant new awards during 2012 include $ 1.7 billion for the nato ags unmanned system program , $ 1.4 billion for the jwst program , $ 1.3 billion for the f-35 program , $ 1.2 billion for the e-2d advanced hawkeye program , $ 1.0 billion for international air defense programs and $ 689 million for the global hawk program . 33 northrop grumman corporation 2011 - the estimated value of contract awards added to backlog during the year ended december 31 , 2011 , is $ 25.3 billion . significant new awards in 2011 included $ 2.0 billion for the f/a-18 program , $ 1.1 billion for the e-2d advanced hawkeye program , $ 1.0 billion for the global hawk program , $ 1.1 billion for the b-2 program , $ 886 million for the f-35 program and $ 404 million for the kc-10 program . liquidity and capital resources we endeavor to ensure the most efficient conversion of operating earnings into cash for deployment in our business and to maximize shareholder value . in addition to our cash position , we use various financial measures to assist in capital deployment decision-making , including , but not limited to , net cash provided by operations , free cash flow , net debt-to-equity and debt-to-capital . we believe these measures are useful to investors in assessing our financial performance and condition . cash balances and cash generated from continuing operations , supplemented by borrowings under credit facilities and or in the capital markets , if needed , is expected to be sufficient to fund our operations for at least the next 12 months . as of december 31 , 2012 , the amount of cash , cash equivalents , and marketable securities held outside of the

additionally , there was higher volume of approximately $ 200 million on the f-35 program due to deliveries on lrip 5 , the first f-35 contract accounted for under the units-of-delivery method . these increases were offset by the termination of a weather satellite program , which reduced sales by approximately $ 175 million , as well as lower sales on the joint surveillance target attack radar system ( jstars ) , f/a-18 and certain restricted space programs . operating income and margin rate for 2012 were comparable to the prior year . the operating income and margin rate reflect approximately $ 90 million lower operating income from the f/a-18 program 's lower volume and transition from the multi-year 2 contract to the lower margin multi-year 3 contract , principally offset by performance improvements in space systems and higher margin rates and volume on sales of unmanned systems . 2011 - aerospace systems sales for 2011 decreased $ 472 million , or 5 percent , as compared with 2010. the decrease was primarily due to approximately $ 430 million lower sales in space systems due to reduced funding for weather satellite programs and the james webb space telescope ( jwst ) , as well as lower volume for several other space programs . military aircraft systems declined approximately $ 130 million primarily due to lower volume on the f-35 program , which transitioned to a units-of-delivery revenue recognition method beginning with low rate initial production lot 5 , the completion of the aerial targets program and lower volume on ea-18g growler , offset by higher volume on long endurance multi-intelligence vehicle ( lemv ) and jstars . these decreases were partially offset by higher sales at advanced concepts and technology , primarily due to increased volume on restricted programs . 29 < div

we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) , the consolidated balance sheets of tejon ranch co. and subsidiaries as of december 31 , 2015 and 2014 and the related consolidated statements of operations , comprehensive income , equity and cash flows for each of the three years in the period ended december 31 , 2015 of tejon ranch co. and subsidiaries and our report dated march 8 , 2016 expressed an unqualified opinion thereon . ernst & young llp los angeles , california march 8 , 2016 56 report of independent registered public accounting firm the board of directors and stockholders of tejon ranch co. and subsidiaries we have audited the accompanying consolidated balance sheets of tejon ranch co. and subsidiaries as of december 31 , 2015 and 2014 , and the related consolidated statements of operations , comprehensive income , equity , and cash flows for each of the three years in the period ended december 31 , 2015 . these financial statements are the responsibility of the company 's management . our responsibility is to express an opinion on these financial statements based on our audits . we conducted our audits in accordance with the standards of the public company accounting oversight board ( united states ) . those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement . an audit includes examining , on a test basis , evidence supporting the amounts and disclosures in the financial statements . an audit also includes assessing the accounting principles used and significant estimates made by management , as well as evaluating the overall financial statement presentation . we believe that our audits provide a reasonable basis for our opinion . in our opinion , the financial statements referred to above present fairly , in all material respects , the consolidated financial position of tejon ranch co. and subsidiaries at december 31 , 2015 and 2014 , and the consolidated results of their operations and their cash flows for each of the three years in the period ended december 31 , 2015 , in conformity with u.s. generally accepted accounting principles . we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) , tejon ranch co. and subsidiaries ' internal control over financial reporting as of december 31 , 2015 , based on criteria established in internal control-integrated framework issued by the committee of sponsoring organizations of the treadway commission ( 2013 framework ) and our report dated march 8 , 2016 expressed an unqualified opinion thereon . ernst & young llp los angeles , california march 8 , 2016 57 tejon ranch co. and subsidiaries consolidated balance sheets ( $ in thousands ) replace_table_token_18_th see accompanying notes . 58 tejon ranch co. and subsidiaries consolidated statements of income ( $ in thousands , except per share amounts ) replace_table_token_19_th see accompanying notes . 59 tejon ranch co. and subsidiaries consolidated statements of comprehensive income ( $ in thousands ) replace_table_token_20_th see accompanying notes . 60 tejon ranch co. and subsidiaries consolidated statements of equity ( $ in thousands , except share information ) replace_table_token_21_th see accompanying notes . 61 tejon ranch co. and subsidiaries consolidated statements of cash flows ( $ in thousands ) replace_table_token_22_th see accompanying notes . 62 tejon ranch co. and subsidiaries notes to consolidated financial statements december 31 , 2015 1. summary of significant accounting policies the company tejon ranch co. ( the company , tejon , we , us and our ) is a diversified real estate development and agribusiness company committed to responsibly using our land and resources to meet the housing , employment , and lifestyle needs of californians . current operations consist of land planning and entitlement , land development , commercial sales and leasing , leasing of land for mineral royalties , water asset management and sales , grazing leases , income portfolio management , and farming . these activities are performed through our five major segments : real estate - commercial/industrial real estate - resort/residential mineral resources farming ranch operations our prime asset is approximately 270,000 acres of contiguous , largely undeveloped land that , at its most southerly border , is 60 miles north of los angeles and , at its most northerly border , is 15 miles east of bakersfield . we create value by securing entitlements for our land , facilitating infrastructure development , strategic land planning , development , and conservation , in order to maximize the highest and best use for our land . we are involved in several joint ventures , which facilitate the development of portions of our land . we are also actively engaged in land planning , land entitlement , and conservation projects . any references to the number of acres , number of buildings , square footage , number of leases , occupancy , and any amounts derived from these values in the notes to the consolidated financial statements are unaudited . principles of consolidation the consolidated financial statements include the accounts of the company , and the accounts of all subsidiaries and investments in which a controlling interest is held by the company . all significant intercompany transactions have been eliminated in consolidation . we have evaluated subsequent events through the date of issuance of our consolidated financial statements . cash equivalents the company considers all highly liquid investments with maturities of three months or less when purchased , to be cash equivalents . the carrying amount for cash equivalents approximates fair value . marketable securities the company considers those investments not qualifying as cash equivalents , but which are readily marketable , to be marketable securities . the company classifies all marketable securities as available-for-sale . story_separator_special_tag the percentage rent calculation was modified to exclude the greenhouse gas assessment taxes that are collected by the tenant and passed on to the state of california and in connection therewith the company issued the tenant a one-time credit of $ 467,000 in 2014. in addition , we recognized an additional $ 215,000 and $ 412,000 in property management fees and common area maintenance fee reimbursements , respectively , from our joint venture properties , most noticeably the outlets at tejon , which opened in august 2014. lastly , in 2015 we placed into service a land lease with carl 's jr and operating leases with pieology and starbucks at trcc east , contributing an additional $ 428,000 in lease revenues . in 2015 , we recognized $ 225,000 in additional landscaping revenues on services rendered to new and existing tenants . the 2015 improvements were partially offset by two non-recurring revenue streams occurring in 2014. in 2014 , we sold land to our ta/petro unconsolidated joint venture partner of which $ 458,000 was recognized during 2014 with the remaining $ 687,000 deferred until the time we exit the joint venture or the joint venture is terminated . additionally , in 2014 , we recognized $ 587,000 in additional development fees from the development of the outlets at tejon . commercial/industrial real estate segment expenses were $ 6,694,000 during 2015 , a decrease of $ 512,000 , or 7 % , compared to the same period in 2014 , primarily due to a $ 591,000 decrease in tejon-castac water district , or tcwd , fixed water assessments during 2015. tcwd decreased water assessment taxes as a result of an increase in tcwd water sales to parties outside of the district , which provided additional funds to tcwd . the decrease in commercial/industrial expenses were partially offset by a $ 173,000 increase in landscape maintenance costs resulting from a full year of operations from the outlets at tejon along with our three new tenants discussed above . during 2014 , our commercial/industrial segment revenues were relatively flat when compared to 2013. commercial/industrial segment revenues increased $ 390,000 , or 2 % during 2014 compared to 2013 primarily due to a land sale to our ta/petro unconsolidated joint venture partner as discussed above . the increase in commercial/industrial segment revenues was also attributed to an increase of $ 587,000 in development fees mainly related to the construction of the outlets at tejon . this increase was partially offset by a $ 788,000 reduction in our pef power plant percentage rent resulting from lower 2014 prices and to a one-time credit of $ 467,000 that is discussed above . the amendment is related to percentage rent paid by pef on the collection of greenhouse gas assessment taxes that are now included in the energy revenue component of the percentage rent . the percentage rent calculation has been modified to exclude these taxes that are collected by pef and passed on to the state of california . the retroactive amendment resulted in a credit of $ 467,000 that will be applied over time to future earned percentage rent . at december 31 , 2014 , the outstanding amount of the credit was $ 68,000. our expectations are that percentage rent from this lease will continue to range between $ 400,000 and $ 600,000 as it has traditionally done . we will continue to focus our efforts for trcc-east and trcc-west on the labor and logistical benefits of our site and the success that current tenants and owners within our development have experienced to capture more of the warehouse distribution market . our strategy fits within the logistics model that many companies are using , which favors larger single-site buildings rather than a number of decentralized smaller distribution centers . the world class logistics operators located within trcc have demonstrated success in serving all of california and the western united states through utilization of large centralized distribution centers which have been strategically located to maximize outbound efficiencies . we believe that our ability to provide fully entitled shovel-ready land parcels to support buildings of 1.0 million square feet or larger can provide us with a potential marketing advantage in the future . we are also increasing our marketing efforts to industrial users in the santa clarita valley of northern los angeles county and the northern part of the san fernando valley due to the limited availability of new product and the high real estate costs in these locations . tenants in these geographic areas are typically users of relatively smaller facilities . to meet this market we will be developing a building for rent of approximately 250,000 square feet . we estimate this building will be completed in late 2016 . 31 a potential disadvantage to our development strategy is our distance from the ports of los angeles and long beach in comparison to the warehouse/distribution centers located in the inland empire , a large industrial area located east of los angeles which continues its expansion eastward beyond riverside and san bernardino to include perris , moreno valley , and beaumont . strong demand for large distribution facilities is driving development farther east in a search for large entitled parcels . during 2015 , vacancy rates in the inland empire were comparable to 2014 at 4.3 % , primarily due to an increase in the development of buildings for lease . without this increase in new development in the inland empire the vacancy rate would have declined in that region . the low vacancy rates have also led to an increase in lease rates of 12 % within the inland empire from 2014 to 2015. as lease rates increase in the inland empire , we may begin to have greater pricing advantages due to our lower land basis . we expect the commercial/industrial segment to continue to experience costs , net of amounts capitalized , primarily related to professional service fees , marketing costs ,

these expenditures were partially offset by net proceeds of $ 12,319,000 from marketable securities . included in the $ 24,775,000 of capital expenditures during 2014 was $ 1,128,000 related to mv , $ 2,437,000 related to centennial founders llc , and $ 6,352.000 related to grapevine . the remaining capital expenditures consisted of $ 14,625,000 of investments in trcc infrastructure related to roads , utilities , and water infrastructure to support new development and capital investment in farming equipment replacements and crop development . our estimated capital investment for 2016 is primarily related to our real estate projects as it was in 2015. these estimated investments include approximately $ 10,500,000 of infrastructure development at trcc-east and west to support continued commercial retail and industrial development and to expand water facilities to support future anticipated absorption . we are also investing approximately $ 1,200,000 to begin development of a new almond orchard and costs related to new developments that are not currently in production . the farm investments are part of a long-term farm management program to redevelop declining orchards and vineyards to maintain and improve future farm revenues . we expect to possibly invest up to $ 16,000,000 for land planning , entitlement activities , and development activities at mv , centennial , and grapevine during 2016. the timing of these investments is dependent on our coordination efforts with kern county and los angeles county regarding entitlement efforts for grapevine and centennial and tentative tract maps for mv . our plans also call for the potential investment of up to $ 3,900,000 in water infrastructure to include the drilling of water wells and as opportunities arise to help secure additional water assets for real estate , farming , and as an investment . we are also planning to potentially invest up to $ 2,500,000 in the normal replacement of operating equipment , such as farm and ranch equipment , and updates to our information technology systems . during 2015 , financing activities used $ 8,015,000 resulting from borrowing < font

the resulting compensation expense is recognized over the requisite service period , generally one to four years . restricted shares and units granted to employees are valued at the fair market value at the date of grant . the company amortizes the amount to expense over the service period on a straight-line basis for those shares with graded vesting . if the shares are subject to performance objectives , the resulting compensation expense is amortized over the anticipated vesting period and is subject to adjustment based on the actual achievement of objectives . shares purchased by employees under the 2004 employee stock purchase plan were considered to be compensatory and were accounted for in accordance with general accounting principles for share-based payments . shares purchased by employees under the 2009 employee stock purchase plan are considered to be non-compensatory . 44 net earnings ( loss ) per common share basic earnings ( loss ) per common share is computed by dividing the net earnings ( loss ) for the period by the weighted average number of common shares outstanding during the period . in periods where there is net income , we apply the two-class method to calculate basic and diluted net income ( loss ) per share of common stock , as our convertible preferred stock is a participating security . the two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders . in periods where there is a net loss , the two-class method of computing earnings per share does not apply as our convertible preferred stock does not contractually participate in our losses . we compute diluted net income ( loss ) per common share using net income ( loss ) as the “ control number ” in determining whether potential common shares are dilutive , after giving consideration to all potentially dilutive common shares , including stock options , warrants , unvested restricted stock units outstanding during the period and potential issuance of stock upon the conversion of our convertible preferred stock issued and outstanding during the period , except where the effect of such securities would be antidilutive . the company did not include any portion of unearned restricted shares , outstanding options , stock appreciation rights , warrants or convertible preferred stock in the calculation of diluted loss per common share because all such securities are anti-dilutive for all periods presented . the application of the two-class method of computing earnings per share under general accounting principles for participating securities is not applicable during these periods because those securities do not contractually participate in its losses . as of december 31 , 2019 , the company had 1,857,599 shares of common stock issuable upon the exercise of outstanding options and stock appreciation rights at a weighted average exercise price of $ 2.22 per share , 46,155 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $ 0.70 per share , 42,497,068 shares of our common stock issuable upon conversion of our series a convertible preferred stock , and 5,610,121 shares of our common stock issuable upon conversion of our series b convertible preferred stock . the company had no unearned restricted shares outstanding for the period ended december 31 , 2019. income taxes in accordance with general accounting principles for income taxes , a deferred income tax asset or liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates that will be in effect when these differences reverse . the company provides a valuation allowance against net deferred income tax assets unless , based upon available evidence , it is more likely than not the deferred income tax assets will be realized . product warranty provisions the company 's standard policy is to warrant all systems against defects in material or workmanship for one year following installation . the company 's estimate of costs to service the warranty obligations is based on historical experience and current product performance trends . a regular review of warranty obligations is performed to determine the adequacy of the reserve and adjustments are made to the estimated warranty liability ( included in other accrued liabilities ) as appropriate . patent costs costs related to filing and pursuing patent applications are expensed as incurred , as recoverability of such expenditures is uncertain . concentrations of risk the majority of the company 's cash , cash equivalents and investments are deposited with one major financial institution in the u.s. deposits in this institution exceed the amount of government provided insurance on such deposits . revenue from biosense webster inc. related to royalties and odyssey system sales accounted for $ 2.8 million and $ 2.9 million , or 10 % , of total net revenue for the years ended december 31 , 2019 and 2018. no other single customer accounted for more than 10 % of total revenue for the year ended december 31 , 2019. no single country other than the u.s. accounted for more than 10 % of total revenue for the years ended december 31 , 2019 and 2018. reclassifications certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation . these reclassifications had no effect on reported losses . story_separator_special_tag story_separator_special_tag received net proceeds of approximately $ 23.1 million , after offering expenses . the company plans to use the funds for general corporate purposes . series a convertible preferred stock and warrants in september 2016 , the company issued 24,000 shares of series a convertible preferred stock , par value $ 0.001 with a stated value of $ 1,000 per share which are convertible into shares of the company 's common stock at an initial conversion rate of $ 0.65 per share and ( ii ) warrants to purchase an aggregate of 36,923,078 shares of common stock . the convertible preferred shares are entitled to vote on an as-converted basis with the common stock , subject to specified beneficial ownership issuance limitations . the convertible preferred shares bear dividends at a rate of six percent ( 6 % ) per annum , which are cumulative and accrue daily from the date of issuance on the $ 1,000 stated value . such dividends will not be paid in cash except in connection with any liquidation , dissolution or winding up of the company or any redemption of the convertible preferred shares . each holder of convertible preferred shares has the right to require us to redeem such holder 's convertible preferred shares upon the occurrence of specified events , which include certain business combinations , the sale of all or substantially all of the company 's assets , or the sale of more than 50 % of the outstanding shares of the company 's common stock . in addition , the company has the right to redeem the convertible preferred shares in the event of a defined change of control . the convertible preferred shares rank senior to our common stock as to distributions and payments upon the liquidation , dissolution , and winding up of the company . since the convertible preferred shares are subject to conditions for redemption that are outside the company 's control , the convertible preferred shares are presently reported in the mezzanine section of the balance sheet . the warrants issued in conjunction with the convertible preferred stock ( the “ spa warrants ” ) have an exercise price equal to $ 0.70 per share subject to adjustments as provided under the terms of the warrants . the warrants are exercisable through september 29 , 2021 , subject to specified beneficial ownership issuance limitations . prior to their modification in february 2018 , the warrants were puttable upon the occurrence of certain events outside of the company 's control , and were classified as liabilities under accounting standards codification ( “ asc ” ) topic 480-10. the calculated fair value of the warrants was periodically re-measured with any changes in value recognized in “ other income ( expense ) ” in the statements of operations . see note 10 for additional details . the warrants were modified on february 28 , 2018 to allow for a reduction in the exercise price from $ 0.70 per share to $ 0.28 per share for a period between march 1 , 2018 and march 5 , 2018. additionally , the beneficial ownership limitation related to the warrants was modified and the right of holders to require the company to redeem their spa warrants in exchange for cash in certain circumstances was eliminated . following these modifications , the warrants were no longer subject to liability accounting and were reclassified to equity . during the restricted exercise period , stereotaxis received exercise notices for 35,791,927 warrants and received an aggregate of $ 10.0 million in cash from the warrant exercise . as a result of these transactions , total stockholders ' equity increased by $ 27 million and common shares outstanding increased by 35,791,927 shares . the consent and amendment and the amended and restated form of warrants are available in a form 8-k filed with the securities and exchange commission on march 6 , 2018. liquidity the following table summarizes our cash flow by operating , investing and financing activities for each of years ended december 31 , 2019 and 2018 ( in thousands ) : replace_table_token_1_th net cash used in operating activities . we used approximately $ 4.6 million and $ 2.5 million of cash in operating activities during the years ended december 31 , 2019 and 2018 , respectively . the increase in cash used in operating activities from 2018 to 2019 was driven by larger operating losses . net cash used in investing activities . we used less than $ 0.1 million of cash during the year ended december 31 , 2019 for the purchases of equipment , and approximately $ 0.3 million for leasehold improvements and purchases of equipment for the year ended december 31 , 2018. net cash provided by financing activities . we generated approximately $ 24.0 million of cash for the year ended december 31 , 2019 , compared to approximately $ 9.9 million generated for the year ended december 31 , 2018. the cash generated in the year ended december 31 , 2019 was driven by the net proceeds from the sale of our common stock and series b preferred stock securities purchase agreement described above in august 2019 and proceeds received from the exercise of warrants . t he cash generated in the year ended december 31 , 2018 was primarily related to the warrant exercise in march 2018. at december 31 , 2019 , we had working capital of approximately $ 26.7 million , compared to a working capital of approximately $ 7.8 million at december 31 , 2018. the increase in working capital was primarily driven by the net proceeds from the august securities purchase agreement , offset slightly by the net loss incurred during the year ended december 31 , 2019 and adoption of the new lease accounting guidance . 32 as of december 31 , 2019 and december 31 , 2018 , the company had no outstanding debt under the revolving line of credit

as of december 31 , 2019 and december 31 , 2018 , the company had no outstanding debt under the revolving line of credit . draws on the line of credit are made based on the borrowing capacity one week in arrears . as of december 31 , 2019 the company had a borrowing capacity of $ 3.6 million based on the company 's collateralized assets . the company 's total liquidity as of december 31 , 2019 , was $ 33.8 million which included cash and cash equivalents of $ 30.2 million . common stock the holders of common stock are entitled one vote for each share held and to receive dividends whenever funds are legally available and when declared by the board of directors subject to the prior rights of holders of all classes of stock having priority rights as dividends and certain conditions of our agreement with our primary lender . no dividends have been declared or paid as of december 31 , 2019 . 2019 equity financing – common stock and series b convertible preferred stock as disclosed in note 10 , on august 7 , 2019 , the company entered into a securities purchase agreement with certain institutional and other accredited investors , whereby it , in a private placement , agreed to issue and sell to the investors an aggregate of 6,585,000 shares of the company 's common stock , $ 0.001 par value per share , at a price of $ 2.05 per share and 5,610,121 shares of the company 's series b convertible preferred stock , $ 0.001 par value per share which are convertible into shares of the company 's common stock , at a price of $ 2.05 per share . the series b preferred stock , which is a common stock equivalent but non-voting and with a blocker on conversion if the holder would exceed a specified threshold of voting security ownership , is convertible into common stock on a one-for-one basis , subject to adjustment for events such as stock splits , combinations and the like as provided in the purchase agreement . the series b convertible preferred stock is reported in the stockholders ' equity section of the balance sheet . 31 the company

performance fees —performance fees earned on the performance of blackstone 's hedge fund structures ( “incentive fees” ) are recognized based on fund performance during the period , subject to the achievement of minimum return levels , or high water marks , in accordance with the respective terms set out in each hedge fund 's governing agreements . accrued but unpaid incentive fees charged directly to investors in blackstone 's offshore hedge funds as of the reporting date are recorded within due from affiliates in the consolidated statements of financial condition . accrued but unpaid incentive fees on onshore funds as of the reporting date are reflected in investments in the consolidated statements of financial condition . incentive fees are realized at the end of a measurement period , typically annually . once realized , such fees are not subject to clawback . in certain fund structures , specifically in private equity , real estate and certain credit-focused funds ( “carry funds” ) , performance fees ( “carried interest” ) are allocated to the general partner based on cumulative fund performance to date , subject to a preferred return to limited partners . at the end of each reporting period , the partnership calculates the carried interest that would be due to the partnership for each fund , pursuant to the fund agreements , as if the fair value of the underlying investments were realized as of such date , irrespective of whether such amounts have been realized . as the fair value of underlying investments varies between reporting periods , it is necessary to make adjustments to amounts recorded as carried interest to reflect either ( a ) positive performance resulting in an increase in the carried interest allocated to the general partner or ( b ) negative performance that would cause the amount due to the partnership to be less than the amount previously recognized as revenue , resulting in a negative adjustment to carried interest allocated to the general partner . in each scenario , it is necessary to calculate the carried interest on cumulative results compared to the carried interest 147 the blackstone group l.p. notes to consolidated financial statements ( all dollars are in thousands , except unit and per unit data , except where noted ) recorded to date and make the required positive or negative adjustments . the partnership ceases to record negative carried interest allocations once previously recognized carried interest allocations for such fund have been fully reversed . the partnership is not obligated to pay guaranteed returns or hurdles , and therefore , can not have negative carried interest over the life of a fund . accrued but unpaid carried interest as of the reporting date is reflected in investments in the consolidated statements of financial condition . carried interest is realized when an underlying investment is profitably disposed of and the fund 's cumulative returns are in excess of the preferred return . carried interest is subject to clawback to the extent that the carried interest actually distributed to date exceeds the amount due to blackstone based on cumulative results . as such , the accrual for potential repayment of previously received carried interest , which is a component of due to affiliates , represents all amounts previously distributed to blackstone holdings and non-controlling interest holders that would need to be repaid to the blackstone funds if the blackstone carry funds were to be liquidated based on the current fair value of the underlying funds ' investments as of the reporting date . generally , the actual clawback liability does not become realized until the end of a fund 's life or one year after a realized loss is incurred , depending on the terms of the fund . investment income ( loss ) —investment income ( loss ) represents the unrealized and realized gains and losses on the partnership 's principal investments , including its investments in blackstone funds that are not consolidated , its equity method investments , and other principal investments . investment income ( loss ) is realized when the partnership redeems all or a portion of its investment or when the partnership receives cash income , such as dividends or distributions , from its non-consolidated funds . unrealized investment income ( loss ) results from changes in the fair value of the underlying investment as well as the reversal of unrealized gain ( loss ) at the time an investment is realized . interest and dividend revenue —interest and dividend revenue comprises primarily interest and dividend income earned on principal investments held by blackstone . other revenue —other revenue consists of miscellaneous income and foreign exchange gains and losses arising on transactions denominated in currencies other than u.s. dollars . fair value of financial instruments gaap establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value . market price observability is affected by a number of factors , including the type of financial instrument , the characteristics specific to the financial instrument and the state of the marketplace , including the existence and transparency of transactions between market participants . financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value . financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination of fair values , as follows : level i—quoted prices are available in active markets for identical financial instruments as of the reporting date . the type of financial instruments in level i include listed equities , listed derivatives and mutual funds with quoted prices . the partnership does not adjust the quoted price for these investments , even in situations where blackstone holds a large position and a sale could reasonably impact the quoted price . story_separator_special_tag in addition , we , and our common unitholders , could be taxed on any such restructuring . the nature of any such restructuring would depend on the precise provisions of the legislation that was ultimately enacted , as well as the particular facts and circumstances of blackstone 's operations at the time any such legislation were to take effect , making the task of predicting the amount of additional tax highly speculative . on february 22 , 2012 , the obama administration announced its “framework” of key elements to change the u.s. federal income tax rules for businesses . few specifics were included , and it is unclear what any actual legislation would provide , when it would be proposed or what its prospects for enactment would be . several parts of the framework , if enacted , could adversely affect us . first , the framework would reduce the deductibility of interest for corporations in some manner not specified . a reduction in interest deductions could increase our tax rate and thereby reduce cash available for distribution to investors or for other uses by us . such a reduction could also increase the effective cost of financing by companies in which we invest , which could reduce the value of our carried interest in respect of such companies . the framework would also reduce the top marginal tax rate on corporations from 35 % to 28 % . such a change could increase the effective cost of financing such investments , which could again reduce the value of our carried interest . the framework suggests some entities currently treated as partnerships for tax purposes should be subject to an entity-level income tax similar to the corporate income tax . if such a proposal caused us to be subject to additional entity-level taxes , it could reduce cash available for distribution to investors or for other uses by us . finally , the framework reiterates the president 's support for treatment of carried interest as ordinary income , as provided in the president 's revenue proposal for 2013 described above . because the framework did not include specifics , its effect on us is unclear . economic income blackstone uses economic income ( “ei” ) as a key measure of value creation , a benchmark of its performance and in making resource deployment and compensation decisions across its five segments . ei represents segment net income before taxes excluding transaction-related charges . transaction-related charges 74 arise from blackstone 's initial public offering ( “ipo” ) and long-term retention programs outside of annual deferred compensation and other corporate actions , including acquisitions . transaction-related charges include equity-based compensation charges , the amortization of intangible assets and contingent consideration associated with acquisitions . ei presents revenues and expenses on a basis that deconsolidates the investment funds we manage . prior to june 30 , 2012 , ei had been called economic net income . the renaming of this measure did not change any of the previously reported amounts . economic net income ( “eni” ) now represents ei adjusted to include current period taxes . taxes represent the current tax provision ( benefit ) calculated on income ( loss ) before provision for taxes . ( see note 20 . “segment reporting” in the “notes to consolidated financial statements” in part ii . item 8. financial statements and supplementary data . ) distributable earnings distributable earnings , which is derived from our segment reported results , is a supplemental measure to assess performance and amounts available for distributions to blackstone unitholders , including blackstone personnel and others who are limited partners of the blackstone holdings partnerships . distributable earnings , which is a non-gaap measure , is intended to show the amount of net realized earnings without the effects of the consolidation of the blackstone funds . distributable earnings is derived from and reconciled to , but not equivalent to , its most directly comparable gaap measure of income ( loss ) before provision for taxes . see “—liquidity and capital resources—liquidity and capital resources” below for our discussion of distributable earnings . distributable earnings , which is a component of economic net income , is the sum across all segments of : ( a ) total management and advisory fees , ( b ) interest and dividend revenue , ( c ) other revenue , ( d ) realized performance fees , and ( e ) realized investment income ( loss ) ; less ( a ) compensation , ( b ) realized performance fee compensation , ( c ) other operating expenses and ( d ) taxes and payables under the tax receivable agreement . fee related earnings blackstone uses fee related earnings ( “fre” ) , which is derived from our segment reported results , as a measure to highlight earnings from operations excluding : ( a ) the income related to performance fees and related performance fee compensation costs , ( b ) income earned from blackstone 's investments in the blackstone funds , and ( c ) realized and unrealized gains ( losses ) from other investments except for such gains ( losses ) from blackstone 's treasury cash management strategies . management uses fre as a measure to assess whether recurring revenue from our businesses is sufficient to adequately cover all of our operating expenses and generate profits . fre equals contractual fee revenues , investment income from blackstone 's treasury cash management strategies and interest income , less ( a ) compensation expenses ( which includes amortization of non-ipo and non-acquisition-related equity-based awards , but excludes amortization of ipo and acquisition-related equity-based awards , carried interest and incentive fee compensation ) and ( b ) other operating expenses . see “—liquidity and capital resources—liquidity and capital resources” below for our discussion of fee related earnings . operating metrics the alternative asset management business is a complex business that is primarily based on managing third

the notes contain customary covenants and financial restrictions that , among other things , limit blackstone holdings finance co. l.l.c . and the guarantors ' ability , subject to certain exceptions , to incur indebtedness secured by liens on voting stock or profit participating equity interests of their subsidiaries or merge , consolidate or sell , transfer or lease assets . the notes also contain customary events of default . all or a portion of the notes may be redeemed at our option , in whole or in part , at any time and from time to time , prior to their stated maturity , at the make-whole redemption price set forth in the notes . if a change of control repurchase event occurs , the notes are subject to repurchase at the repurchase price as set forth in the notes . in january 2008 , the board of directors of our general partner , blackstone group management l.l.c. , authorized the repurchase of up to $ 500 million of our common units and blackstone holdings partnership units . under this unit repurchase program , units may be repurchased from time to time in open market transactions , in privately negotiated transactions or otherwise . the timing and the actual number of blackstone common units and blackstone holdings partnership units repurchased will depend on a variety of factors , including legal requirements , price and economic and market conditions . this unit repurchase program may be suspended or discontinued at any time and does not have a specified expiration date . during the year ended december 31 , 2012 , no units were repurchased . as of december 31 , 2012 , the amount remaining under this program available for repurchases was $ 335.8 million . distributions distributable earnings , which is derived from blackstone 's segment reported results , is a supplemental measure to assess performance and amounts available for distributions to blackstone unitholders , including 114 blackstone personnel and others who are limited partners of the blackstone holdings partnerships . distributable earnings is intended to show the amount of net realized earnings without the effects of the consolidation of the blackstone funds . distributable earnings , which is a component of economic net income , is the sum across all segments of : ( a ) total management and advisory fees , ( b ) interest and dividend

because the methodology is based upon historical experience and trends , current economic data , as well as management 's judgment , factors may arise that result in different estimations . adversely different conditions or assumptions could lead to increases in the allowance . in addition , various regulatory agencies periodically review the allowance for loan losses . such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination . the allowance is an estimate , and ultimate losses may vary from management 's estimate . changes in the estimate are recorded in the results of operations in the period in which they become known , along with provisions for estimated losses incurred during that period . premises and equipment premises and equipment are stated at cost less accumulated depreciation . depreciation for financial reporting purposes is calculated on the straight-line method over the estimated useful lives of assets . expenditures for major additions and improvements are capitalized while the costs of current maintenance and repairs are charged to operating expenses . the estimated useful lives of premises and improvements range from 5 to 40 years . for furniture , fixtures and equipment , the estimated useful lives range from 3 to 20 years . - 83 - notes to consolidated financial statements – ( continued ) goodwill and other identifiable intangible assets the corporation allocated the cost of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition . other intangible assets identified in acquisitions primarily consist of wealth management advisory contracts . the value attributed to other intangible assets was based on the time period over which they are expected to generate economic benefits . the excess of the purchase price for acquisitions over the fair value of the net assets acquired , including other intangible assets , was recorded as goodwill . goodwill is not amortized but is tested for impairment at the reporting unit level , defined as the segment level , at least annually in the fourth quarter or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred . in assessing impairment , the corporation has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount . if , after assessing the totality of such events or circumstances , we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount , then we would not be required to perform a two-step impairment test . the corporation has not opted to perform this qualitative analysis . goodwill is tested for impairment using the two-step quantitative impairment analysis described below . the first step ( “ step 1 ” ) of the quantitative impairment analysis requires a comparison of each reporting unit 's fair value to its carrying value to identify potential impairment . the second step ( “ step 2 ” ) of the analysis is necessary only if a reporting unit 's carrying amount exceeds its fair value . step 2 is a more detailed analysis , which involves measuring the excess of the fair value of the reporting unit , as determined in step 1 , over the aggregate fair value of the individual assets , liabilities , and identifiable intangibles as if the reporting unit was being acquired in a business combination . goodwill impairment exists when a reporting unit 's carrying value of goodwill exceeds its implied fair value . significant judgment is applied when goodwill is assessed for impairment . this judgment includes , but may not be limited to , the selection of appropriate discount rates , the identification of relevant market comparables and the development of cash flow projections . the selection and weighting of the various fair value techniques may result in a higher or lower fair value . judgment is applied in determining the weightings that are most representative of fair value . other intangible assets with definite lives are tested for impairment whenever events or circumstances occur that indicate that the carrying amount may not be recoverable . if applicable , the corporation tests each of the intangibles by comparing the carrying value of the intangible asset to the sum of undiscounted cash flows expected to be generated by the asset . if the carrying amount of the asset exceeded its undiscounted cash flows , then an impairment loss would be recognized for the amount by which the carrying amount exceeds its fair value . impairment of long - lived assets other than goodwill long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the the carrying amount may not be fully recoverable . if impairment is determined to exist , any related impairment loss is calculated based on fair value . impairment losses on assets to be disposed of , if any , are based on the estimated proceeds to be received , less costs of disposal . property acquired through foreclosure or repossession property acquired through foreclosure or repossession is carried at the lower of cost or fair value less estimated costs to sell . fair value of such assets is determined based on independent appraisals and other relevant factors . any write-down to fair value at the time of foreclosure or repossession is charged to the allowance for loan losses . a valuation allowance is maintained for declines in market value and for estimated selling expenses . increases to the valuation allowance , expenses associated with ownership of these properties , and gains and losses from their sale are included in foreclosed property costs . story_separator_special_tag the level of the provision in 2015 reflects management 's assessment of loss exposure , including a continuation of a relatively low level of charge-offs , a shift towards a higher concentration of residential and consumer loans in both delinquencies and nonaccrual loans , as well as loan loss allocations commensurate with growth in the loan portfolio balances . - 37 - for 2015 , wealth management revenues totaled $ 35.4 million , up by $ 2.0 million , or 6 % , from 2014 , reflecting an increase in asset-based revenues due to the august 2015 acquisition of halsey . mortgage banking revenues amounted to $ 9.9 million in 2015 , up by $ 2.7 million , or 38 % , from 2014 , due to increased residential mortgage loan sales activity . loan related derivative income totaled $ 2.4 million in 2015 , up by $ 1.3 million , or 115 % , from 2014 , due to a higher level of commercial borrower interest rate swaps transactions executed during the year . salaries and employee benefit costs totaled $ 63.0 million for 2015 , up by $ 4.5 million , or 8 % , from 2014 , reflecting changes in staffing levels in our wealth management and mortgage banking business lines , costs attributable to halsey since the acquisition date and higher defined pension costs . income tax expense amounted to $ 20.9 million for 2015 , up by $ 1.9 million from 2014 . the effective tax rate for 2015 was 32.4 % , compared to 31.8 % for 2014 . results of operations segment reporting washington trust manages its operations through two business segments , commercial banking and wealth management services . activity not related to the segments , including activity related to the investment securities portfolio , wholesale funding matters and administrative units are considered corporate . the corporate unit also includes the net gain on sale of business line , income from boli and the residual impact of methodology allocations such as funds transfer pricing offsets . methodologies used to allocate income and expenses to business lines are periodically reviewed and revised . see note 19 to the consolidated financial statements for additional disclosure related to business segments . the following table presents a summarized statement of operations for the commercial banking business segment : replace_table_token_6_th comparison of 2016 with 2015 the commercial banking segment reported net income of $ 32.3 million in 2016 , an increase of $ 1.1 million , or 4 % , from 2015 . net interest income for this operating segment increased by $ 6.5 million , or 8 % , from 2015 , reflecting growth in loans , a higher level of commercial loan prepayment fee income and a favorable shift in the mix of deposits to lower cost categories . the loan loss provision charged to earnings amounted to $ 5.7 million in 2016 , compared to $ 1.1 million for 2015 . the increase in the loan loss provision largely reflected additional loss exposure allocated to one nonaccrual commercial mortgage relationship . noninterest income derived from the commercial banking segment totaled $ 24.8 million for 2016 , up by $ 4.2 million , or 20 % , from 2015 , reflecting increased mortgage banking revenues and loan related derivative income . commercial banking noninterest expenses for 2016 , increased by $ 3.4 million , or 6 % , from 2015 , largely due to increases in salaries and employee benefit costs . - 38 - comparison of 2015 with 2014 the commercial banking segment reported net income of $ 31.2 million in 2015 , an increase of $ 3.6 million , or 13 % , from 2014 . net interest income for this operating segment increased by $ 4.3 million , or 5 % , from 2014 , primarily due to a favorable shift in the mix of deposits to lower cost categories . the provision for loan losses totaled $ 1.1 million , down by $ 800 thousand from 2014 , reflecting management 's assessment of loss exposure and credit quality trends . noninterest income derived from the commercial banking segment totaled $ 20.6 million for 2015 , up by $ 3.0 million , or 17 % , from 2014 . the increase in noninterest income was due to higher mortgage banking revenues and loan related derivative income , which was partially offset by a decrease in merchant processing fee revenue , due to the sale of this business line in march 2014. the decrease in merchant processing fee revenue corresponded to a decline in merchant processing costs included in this operating segment 's noninterest expenses . commercial banking noninterest expenses for 2015 , increased by $ 2.7 million , or 5 % , from 2014 , with increases in salaries and employee benefits costs , outsourced services and occupancy costs associated with a de novo branch opened in 2015 , partially offset by lower merchant processing costs . the following table presents a summarized statement of operations for the wealth management services business segment : replace_table_token_7_th comparison of 2016 with 2015 the wealth management services segment reported 2016 net income of $ 6.6 million , an increase of $ 1.9 million , or 39 % , from 2015 . noninterest income derived from the wealth management services segment was $ 37.6 million in 2016 , up by $ 2.2 million , or 6 % , compared to 2015 . this increase was largely due to the acquisition of halsey on august 1 , 2015. noninterest expenses for the wealth management services segment totaled $ 27.2 million for 2016 , up modestly from 2015 . the noninterest expense comparison for this segment was impacted by a $ 898 thousand benefit resulting from the reduction of a contingent consideration liability in 2016 and the recognition of $ 989 thousand of acquisition related expenses in 2015. see additional discussion in the “ noninterest expense ” below

the alco manages the corporation 's interest rate risk using income simulation to measure interest rate risk inherent in the corporation 's on-balance sheet and off-balance sheet financial instruments at a given point in time by showing the effect of interest rate shifts on net interest income over a 12-month horizon , the 13- to 24-month horizon and a 60-month horizon . the simulations assume that the size and general composition of the corporation 's balance sheet remain static over the simulation horizons , with the exception of certain deposit mix shifts from low-cost core savings to higher-cost time deposits in selected interest rate scenarios . additionally , the simulations take into account the specific repricing , maturity , call options , and prepayment characteristics of differing financial instruments that may vary under different interest rate scenarios . the characteristics of financial instrument classes are reviewed periodically by the alco to ensure their accuracy and consistency . the alco reviews simulation results to determine whether the corporation 's exposure to a decline in net interest income remains within established tolerance levels over the simulation horizons and to develop appropriate strategies to manage this exposure . as of december 31 , 2016 and december 31 , 2015 , net interest income simulations indicated that exposure to changing interest rates over the simulation horizons remained within tolerance levels established by the corporation . the corporation defines maximum unfavorable net interest income exposure to be a change of no more than 5 % in net interest income over the first 12 months , no more than 10 % over the second 12 months , and no more than 10 % over the full 60-month simulation horizon . all changes are measured in comparison to the projected net interest income that would result from an “ unchanged ” rate scenario where both interest rates and the composition of the corporation 's balance sheet remain stable for a 60-month period . in addition to measuring the change in net interest income as compared to an unchanged interest rate scenario , the alco also measures the trend of both net interest income and net interest margin over a 60-month horizon to ensure the stability and adequacy of this source of earnings in different interest rate scenarios . the alco regularly reviews a wide variety of interest rate shift scenario results to evaluate interest risk exposure , including scenarios showing the effect of steepening or flattening changes in the yield curve of up to 500 basis points as well

subscription placement is the majority of our point of care laboratory transactions while outright sales to customers are the majority of both point of care imaging diagnostic transactions and the sale of pharmaceuticals and vaccines . for outright sales of products , revenue is recognized when control of the promised product or service is transferred to our customers , in an amount that reflects the consideration the company expects to be entitled to in exchange for those products or services ( the transaction price ) . taxes assessed by governmental authorities and collected from the customer are excluded from our revenue recognition . a performance obligation is a promise in a contract to transfer a distinct product or service to a customer and is the unit of account under asc 606. for instruments , consumables and most software licenses sold by the company , control transfers to the customer at a point in time . to indicate the transfer of control , the company must have a present right to payment , legal title must have passed to the customer , the customer must have the significant risks and rewards of ownership and where acceptance is not a formality , the customer must have accepted the product or service . heska 's principal terms of sale are fob shipping point , or equivalent , and , as such , we primarily transfer control and record revenue for product sales upon shipment . if a performance obligation to the customer with respect to a sales transaction remains unfulfilled following shipment ( typically owed installation or acceptance by the customer ) , revenue recognition for that performance obligation is deferred until such commitments have been fulfilled . for extended warranty and service plans , control transfers to the customer over the term of the arrangement . revenue for extended warranties and service is recognized based upon the period of time elapsed under the arrangement . our revenue under subscription agreements relates to otl arrangements or stl arrangements . determination of an otl or stl is primarily determined as a result of the length of the contract as compared to the estimated useful life of the instrument , among other factors . leases are outside of the scope of asc 606 and are therefore accounted for in accordance with asc 842 , leases . a stl would result in earlier recognition of instrument revenue as compared to an otl , which is generally upon installation of the instruments . the cash collected under both arrangements is over the term of the contract . the cost of the customer-leased instruments is removed from inventory and recognized in the consolidated statements of income . instrument lease revenue for otl agreements is recognized on a straight-line basis over the life of the lease , and the costs of customer-leased instruments are recorded within property and equipment in the accompanying consolidated balance sheets and depreciated over the instrument 's estimated useful life . the depreciation expense is reflected in cost of revenue in the accompanying consolidated statements of income . the otls - 64 - heska corporation and subsidiaries notes to consolidated financial statements - ( continued ) and stls are not cancellable until after an initial term . otls may include a minimum utilization rather than a minimum supply credit . for contracts with multiple performance obligations , the company allocates the contracts ' transaction price for each performance obligation on a relative standalone selling price basis using our best estimate of the standalone selling price of each distinct product or service in the contract . the primary method used to estimate the standalone selling price is the price observed in standalone sales to customers of a prior period . changes in these values can impact the amount of consideration allocated to each component of the contract . when prices in standalone sales are not available , we may use a cost-plus margin approach . allocation of the transaction price is determined at the contracts ' inception . the company does not adjust the transaction price for the effects of a significant financing component when the period between the transfer of the promised good or service to the customer and payment for that good or service by the customer is expected to be one year or less . this allocation approach also applies to contracts for which a portion of the contract relates to a lease component . to the extent the transaction price includes variable consideration , such as future payments based on consumable usage over time , we apply judgment to determine if the variable consideration should be constrained . as the variable consideration is highly susceptible to factors outside of the company 's influence , and the potential values contain a broad range of possible outcomes given all potential amounts of consumption that could occur , it is likely that a significant revenue reversal would occur should the variable consideration be estimated at an amount greater than the minimum stated amount until such a time as the uncertainty is resolved . we generate revenue within our ovp segment through contract manufacturing agreements with customers . the timing of revenue recognition of our customer contracts are generally recognized upon shipment or acceptance by our customer , under the same guidelines noted above for other outright product sales . heska assessed the over-time criteria within asc 606 and concluded that while products within this segment have no alternative use to heska , as heska is contractually prohibited to redirect the product to other customers , heska does not have right to payment for performance to date . therefore , point in time revenue recognition has been determined to be appropriate . revenue generated from licensing arrangements is recognized based on the underlying terms of the contract . recording revenue from the sale of products involves the use of estimates and management 's judgment . story_separator_special_tag general and administrative expenses increased 68 % to $ 24.8 million in 2018 , as compared to $ 14.8 million in 2017 . the increase was driven by a $ 7.0 million settlement accrual and related legal expenses , a $ 1.4 million increase in stock-based compensation , a $ 0.6 million increase in compensation and benefits , a $ 0.5 million increase in legal fees and a $ 0.5 million increase in consulting fees . interest and other expense ( income ) , net interest and other expense ( income ) , net , was expense of $ 2.9 million in 2019 , compared to income of $ 13 thousand in 2018 and income of $ 150 thousand in 2017 . the increase in other expense in 2019 was primarily driven by interest expense as a result of the notes . the decrease in other income in 2018 , compared to 2017 , was primarily driven by an increase in net foreign currency losses , and an increase in interest expense , partially offset by an increase in interest income and other gains . income tax ( benefit ) expense in 2019 , we had total income tax benefit of $ 1.4 million compared to a total income tax benefit in 2018 of $ 2.1 million and total income tax expense of $ 8.9 million in 2017 . see `` part ii , item 8. financial statements and supplementary data , note 5. income taxes `` in the accompanying notes to the consolidated financial statements for additional information regarding our income taxes . net ( loss ) income attributable to heska corporation net loss attributable to heska corporation was $ 1.5 million in 2019 , compared to net income attributable to heska corporation of $ 5.9 million in 2018 and net income attributable to heska corporation of $ 10.0 million in 2017 . the difference between this line item and `` net ( loss ) income after equity in losses of unconsolidated affiliates `` is the net income or loss attributable to our minority interest in our french subsidiary , which we purchased in february 2019. the difference between these line items was a gain of $ 0.3 million for 2019 . there was no difference between these line items in 2018 , and a gain of $ 0.5 million in 2017 . non-gaap financial measures in addition to financial measures presented on the basis of accounting principles generally accepted in the u.s. ( “ u.s . gaap ” ) , we also present fourth quarter and full year 2019 operating income , operating margin , net income attributable to heska , earnings per diluted share , adjusted ebitda , adjusted ebitda margin , and the effective tax rate , excluding acquisition and other one-time charges , which are non-gaap measures . we also present fourth quarter and full year 2018 operating income , operating margin , net income attributable to heska , earnings per diluted share , adjusted ebitda , adjusted ebitda margin , and the effective tax rate , excluding tcpa settlement , which are non-gaap measures . these measures should be viewed as a supplement to ( not substitute for ) our results of operations presented under u.s. gaap . the non-gaap financial measures presented may not be comparable to similarly titled measures of other companies because they may not calculate their measures in the same manner . our management has included these measures to assist in comparing performance from period to period on a consistent basis . - 42 - the following tables reconcile our adjusted non-gaap financial measures to our most directly comparable as-reported financial measures calculated in accordance with gaap ( in thousands , except per share amounts ) : replace_table_token_6_th ( 1 ) to exclude the effect of one-time charges of $ 0.7 million in the fourth quarter and for the full year 2019 incurred as part of the expected acquisition of scil animal care company gmbh . ( 2 ) to exclude $ 0.2 million and $ 7.4 million in the fourth quarter of 2018 and for the full year 2018 , respectively , due to the agreement in principle to settle the complaint filed against the company for $ 6.75 million , approximately $ 0.6 million of legal costs incurred in relation to the settlement negotiation , and other one-time costs . ( 3 ) to exclude the effect of one-time benefit of $ 0.3 million for the fourth quarter of 2019 related to the insurance recovery of cyber incident and a net charge of $ 0.3 million for the full year of 2019 related to the costs associated with the cyber incident . in addition , this excludes $ 0.2 million and $ 7.4 million in the fourth quarter of 2018 and for the full year 2018 , respectively , as noted above . ( 4 ) adjusted ebitda margin is calculated as the ratio of adjusted ebitda to revenue . - 43 - replace_table_token_7_th ( 1 ) to exclude the effect of one-time charges of $ 0.7 million in the fourth quarter and for the full year 2019 incurred as part of the expected acquisition of scil animal care company gmbh . ( 2 ) to exclude the effect of a one-time benefit of $ 0.3 million for the fourth quarter of 2019 of insurance recovery relating to the cyber incident disclosed in the third quarter 2019 , and a net charge of $ 0.3 million for the full year of 2019 related to the net loss after insurance recovery associated with the cyber incident . in addition , this also excludes $ 0.2 million and $ 7.4 million in the fourth quarter of 2018 and for the full year 2018 , respectively , due to the agreement in principle to settle the complaint filed against the company for $ 6.75 million , approximately $ 0.6 million of legal costs incurred in relation to the settlement negotiation ,

this was partially offset by $ 1.2 million increase in cash used for the optomed real estate asset acquisition ; and $ 0.9 million increase in acquired cash from the acquisition of cvm . net cash used in investing activities was $ 12.2 million in 2018 , compared to net cash used in investing activities of $ 17.2 million in 2017 , a decrease of approximately $ 5.0 million . the decrease in cash used for investing activities was mainly driven by the 2017 purchase of the heska imaging minority for $ 13.8 million , compared to the 2018 investments made in unconsolidated affiliates for $ 8.1 million and 2018 intangible asset acquisition for $ 2.8 million ( cash portion ) . additionally , we had a $ 2.1 million decrease in cash used for purchases of property and equipment . net cash provided by financing activities was $ 74.3 million in 2019 , compared to net cash provided by financing activities of $ 2.6 million in 2018 , an increase of approximately $ 71.6 million . the change was driven primarily by an $ 86.3 million increase in proceeds from the convertible notes offering ( see note 16. convertible notes and credit facility in our consolidated financial statements included in item 8 of this form 10-k ) . the increase in proceeds from the notes was partially offset by a $ 6.0 million decrease in net borrowings as a result of the repayment in full of our credit facility ; $ 3.2 million of cash used to pay debt issuance costs ; and $ 2.2 million decrease in proceeds from issuance of common stock , net of distributions . net cash provided by financing activities was $ 2.6 million in 2018 , compared to net cash provided by financing activities of $ 5.6 million in 2017 , a decrease of approximately $ 2.9

upon the customer 's request for finished goods inventory , the inventory is shipped to the customer if the inventory was stored off-site , or transferred from the segregated part of the customer 's facility for consumption or use by the customer . the company recognizes revenue upon such shipment or transfer . the company does not earn a fee for such arrangements . the company from time to time may ship finished goods from its facilities , which is also the same point that title passes under the terms of the purchase order , and invoice the customer at the end of the calendar month . this is done only in special circumstances to accommodate a specific customer . further , from f-11 sigmatron international , inc. and subsidiaries notes to consolidated financial statements - continued april 30 , 2013 and 2012 note b - summary of significant accounting policies - continued revenue recognition - continued time to time customers request the company hold finished goods after they have been invoiced to consolidate finished goods for shipping purposes . the company generally provides a 90 day warranty for workmanship only and does not have any installation , acceptance or sales incentives ( although the company has negotiated longer warranty terms in certain instances ) . the company assembles and tests assemblies based on customers ' specifications . historically , the amount of returns for workmanship issues has been de minimis under the company 's standard or extended warranties . shipping and handling costs the company records shipping and handling costs as selling and administrative expenses . customers are typically invoiced for shipping costs . shipping and handling costs were not material to the financial statements for fiscal years 2013 or 2012. fair value measurements fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs . the company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows : level 1 : observable inputs such as quoted prices in active markets ; level 2 : inputs , other than quoted prices in active markets , that are observable either directly or indirectly ; and level 3 : unobservable inputs in which there is little or no market data , which require the reporting entity to develop its own assumptions . fair value of financial instruments the company 's financial instruments include cash and cash equivalents , receivables , accounts payable and accrued expenses which approximate fair value at april 30 , 2013 , due to their short-term nature . the carrying amounts of the company 's debt obligations approximate fair value based on future payments discounted at current interest rates for similar obligations or interest rates which fluctuate with the market . f-12 sigmatron international , inc. and subsidiaries notes to consolidated financial statements - continued april 30 , 2013 and 2012 note b - summary of significant accounting policies - continued fair-value of financial instruments - continued the company measured the net assets included in the spitfire acquisition under the fair value standard ( primarily using level 3 measurement inputs ) including the contingent consideration . the company currently does not have any other non-financial assets and non-financial liabilities that are required to be measured at fair value on a recurring basis . goodwill and other intangible assets goodwill represents the purchase price in excess of the fair value of assets acquired in business combinations . the company assesses goodwill for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment . the company is permitted the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of any reporting unit is less than its corresponding carrying value . if , after assessing the totality of events and circumstances , the company concludes that it is not more likely than not that the fair value of any reporting unit is less than its corresponding carrying value then the company is not required to take further action . however , if the company concludes otherwise , then it is required to perform a quantitative impairment test , including computing the fair value of the reporting unit and comparing that value to its carrying value . if the fair value is less than its carrying value , a second step of the test is required to determine if recorded goodwill is impaired . the company also has the option to bypass the qualitative assessment for goodwill in any period and proceed directly to performing the quantitative impairment test . the company will be able to resume performing the qualitative assessment in any subsequent period . the company performed its annual goodwill impairment test as of february 1 , 2013 and determined that no impairment existed as of the date of the impairment test . impairment of long-lived assets the company reviews long-lived assets , including amortizable intangible assets for impairment . property , machinery and equipment and finite life intangible assets are reviewed whenever events or changes in circumstances occur that indicate possible impairment . if events or changes in circumstances occur that indicate possible impairment , the company 's impairment review is based on an undiscounted cash flow analysis at the lowest level at which cash flows of the long-lived assets are largely independent of other groups of its assets and liabilities . this analysis requires management judgment with respect to changes in technology , the continued success of product lines , and future volume , revenue and expense growth rates . story_separator_special_tag gross profit increased to $ 19,925,646 , or 10.0 % of net sales , in fiscal year 2013 compared to $ 15,254,541 , or 9.7 % of net sales , in the prior fiscal year . the increase in gross profit for fiscal year 2013 was primarily the result of gross profits earned on sales to customers due to the spitfire acquisition , as well as increased sales revenue from our existing customers . the company has carefully managed its cost structure and has begun to achieve economies of scale integrating spitfire into sigmatron . the increase in gross profit 22 in fiscal year 2013 was partially offset by relocation expenses of approximately $ 399,000 for the tijuana , mexico move , and a foreign currency loss of $ 359,149 compared to a foreign currency gain of $ 133,979 in the prior fiscal year . selling and administrative expenses increased in fiscal year 2013 to $ 18,358,354 , or 9.3 % of net sales , compared to $ 12,611,673 , or 8.0 % of net sales , in fiscal year 2012 or an increase of $ 5,746,681. of the increase noted above , for the fiscal year ended april 30 , 2013 , $ 4,469,106 was attributable to salaries and other administrative expenses for the spitfire operations and $ 803,006 was transaction costs for the spitfire transaction . other increases in selling and administrative expenses for the fiscal year ended april 30 , 2013 , were due to increases in commissions , freight out , computer maintenance , insurance and amortization expense . the increase in the foregoing selling and administrative expenses were partially offset by a decrease in bonus expense , depreciation and paper and supply expenses . interest expense decreased to $ 832,126 in fiscal year 2013 compared to $ 1,025,325 in fiscal year 2012. the interest expense decreased primarily due to the decreased borrowings under the company 's banking arrangements and capital lease obligations . interest expense for fiscal year 2014 may increase if interest rates or borrowings , or both , increase during fiscal year 2014. in fiscal year 2013 , income tax expense was $ 321,363 compared to $ 522,171 in income tax expense in fiscal year 2012. the effective tax rate for the years ended april 30 , 2013 and 2012 was 39.5 % and 31.5 % , respectively . the increase in the effective tax rate for the year ended april 30 , 2013 is due to the tax impact of additional profit from the company 's u.s. entities and a dividend payment from its wholly-owned trading company , sigmatron international trading co. the company reported net income of $ 492,961 in fiscal year 2013 compared to a net income of $ 1,134,324 for fiscal year 2012. basic and diluted earnings per share for fiscal year 2013 were $ 0.13 and $ 0.12 , respectively , compared to basic and diluted earnings per share of $ 0.29 for the year ended april 30 , 2012. story_separator_special_tag transactions discussed above was $ 806,882. the company had two other capital leases not discussed above , one of which was paid in full in august 2011 and the other was paid in full in november 2011. the total net book value of the equipment under these other leases at april 30 , 2013 was $ 475,979. in september 2010 , the company entered into a real estate lease agreement in union city , ca , to rent 116,993 square feet of manufacturing and office space . under the terms of the lease agreement , the company receives incentives over the life of the lease , which extends through march 2021. the amount of the deferred rent income recorded for fiscal year 2013 was $ 2,140. in addition , the landlord provided the company tenant incentives of $ 418,000 , which are being amortized over the life of the lease . on may 2012 , the company entered into a lease agreement in tijuana , mx , to rent 112,000 square feet of manufacturing and office space . under the terms of the lease agreement , the company receives incentives over the life of the lease , which extends through november 2018. the amount of the deferred rent expense recorded for fiscal year 2013 was $ 362,796. on may 31 , 2012 , the company completed the acquisition of spitfire , an oem of electronic controls , with a focus on the major appliance industry . the acquisition added two manufacturing operations in locations that augment the company 's footprint and add spitfire 's design capabilities which allows the company to offer design service for the first time in specific markets . in conjunction with the spitfire acquisition , the company recorded goodwill and other intangible assets of $ 3,222,899 and $ 6,142,000 , respectively . the company provides funds for salaries , wages , overhead and capital expenditure items as necessary to operate its wholly-owned mexican , vietnam and chinese subsidiaries and the taiwan international procurement office . the company provides funding , as needed , in u.s. dollars , which are exchanged for pesos , dong , renminbi , and new taiwan dollars as applicable . the fluctuation of currencies from time to time , without an equal or greater increase in inflation , could have a material impact on the financial results of the company . the impact of currency fluctuation for the fiscal year ended april 30 , 2013 resulted in a foreign currency loss of approximately $ 359,000. in fiscal year 2013 , the company 's u.s. operations paid approximately $ 36,920,000 to its foreign subsidiaries for services provided . in fiscal year 2013 , the company 's wholly-owned trading company , sigmatron international trading co. , was liquidated . the company received a distribution of approximately $ 180,000 as a result of this liquidation . in fiscal year 2012 , the company received a distribution of previously paid taxed earnings of

the company renegotiated its financial covenants during the quarter ended october 31 , 2012 with wells fargo and extended the credit facility through september 30 , 2014. as of april 30 , 2013 , the company again amended its credit agreement and renegotiated two of the financial covenants required by the terms of the company 's senior secured credit facility . at april 30 , 2013 , the company was in compliance with its amended financial covenants . as of april 30 , 2013 , there was an $ 18,500,000 outstanding balance and $ 11,500,000 of unused availability under the credit facility . the company entered into a mortgage agreement on january 8 , 2010 , in the amount of $ 2,500,000 , with wells fargo to refinance the property that serves as the company 's corporate headquarters and its illinois manufacturing facility . the company repaid the prior bank of america mortgage , which equaled $ 2,565,413 , as of january 8 , 2010 , using proceeds from the wells fargo mortgage and senior secured credit facility . the wells fargo note bears interest at a fixed rate of 6.42 % per year and is amortized over a sixty month period . a final payment of approximately $ 2,000,000 is due on or before january 8 , 2015. the outstanding balance as of april 30 , 2013 was $ 2,175,013. on january 19 , 2010 , the company entered into a leasing transaction with wells fargo equipment finance , inc. to refinance $ 1,287,407 of equipment . the term of the lease financing agreement extended to january 18 , 2012 with monthly payments of $ 55,872 and a fixed interest rate of 4.29 % . this lease financing arrangement was paid in full as of january 31 , 2012. the net book value of the equipment was $ 1,210,226 at april 30 , 2013. on august 20 , 2010 and october 26 , 2010 , the company entered into two capital leasing transactions ( a lease finance agreement and a sale leaseback agreement ) with wells fargo equipment finance , inc. , to purchase equipment totaling $ 1,150,582. the term of the lease finance agreement , with an initial principal amount of $ 315,252 , extends to september 2016 with monthly payments of $ 4,973 and a fixed interest rate of 4.28 % . the term of the sale leaseback agreement , with an initial

our responsibility is to express opinions on these financial statements and on the company 's internal control over financial reporting based on our integrated audits . we conducted our audits in accordance with the standards of the public company accounting oversight board ( united states ) . those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects . our audits of the financial statements included examining , on a test basis , evidence supporting the amounts and disclosures in the financial statements , assessing the accounting principles used and significant estimates made by management , and evaluating the overall financial statement presentation . our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting , assessing the risk that a material weakness exists , and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk . our audits also included performing such other procedures as we considered necessary in the circumstances . we believe that our audits provide a reasonable basis for our opinions . a company 's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles . a company 's internal control over financial reporting includes those policies and procedures that ( i ) pertain to the maintenance of records that , in reasonable detail , accurately and fairly reflect the transactions and dispositions of the assets of the company ; ( ii ) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles , and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company ; and ( iii ) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition , use , or disposition of the company 's assets that could have a material effect on the financial statements . 91 because of its inherent limitations , internal control over financial reporting may not prevent or detect misstatements . also , projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions , or that the degree of compliance with the policies or procedures may deteriorate . pricewaterhousecoopers llp dallas , texas march 26 , 2012 92 replace_table_token_35_th the accompanying notes are an integral part of these consolidated financial statements . 93 southside bancshares , inc. and subsidiaries consolidated statements of income replace_table_token_36_th the accompanying notes are an integral part of these consolidated financial statements . 94 replace_table_token_37_th the accompanying notes are an integral part of these consolidated financial statements . 95 southside bancshares , inc. and subsidiaries consolidated statements of cash flow ( in thousands ) replace_table_token_38_th ( continued ) 96 southside bancshares , inc. and subsidiaries consolidated statements of cash flow ( continued ) ( in thousands ) replace_table_token_39_th the accompanying notes are an integral part of these consolidated financial statements . 97 notes to financial statements southside bancshares , inc. and subsidiaries 1. summary of significant accounting and reporting policies the significant accounting and reporting policies of southside bancshares , inc. ( the `` company `` ) , and its wholly-owned subsidiaries , southside delaware financial corporation , southside bank ( “ southside bank ” ) , and our nonbank subsidiaries , are summarized below . organization and basis of presentation . the consolidated financial statements include the accounts of southside bancshares , inc. , southside delaware financial corporation , southside bank , sfg finance , llc ( formerly southside financial group ) and the nonbank subsidiaries . on july 15 , 2011 , southside bank acquired the remaining 50 % interest in sfg increasing our ownership to 100 % . the purchase price was $ 4.8 million and resulted in a decrease to shareholders ' equity of approximately $ 2.8 million and the elimination of the noncontrolling interest . sfg is consolidated in our financial statements and this purchase will not limit or change our ability to allocate capital . in addition , during the second quarter southside securities , inc. , which is a wholly-owned subsidiary of southside bancshares , inc. , began doing business as a broker-dealer . effective february 14 , 2012 , southside bank became a direct wholly-owned subsidiary of southside bancshares , inc. as a result of the merger of southside delaware financial corporation with and into southside bancshares , inc. we offer a full range of financial services to commercial , industrial , financial and individual customers . all significant intercompany accounts and transactions are eliminated in consolidation . the preparation of these consolidated financial statements in conformity with u.s. generally accepted accounting principles ( “ gaap ” ) requires the use of management 's estimates . these estimates are subjective in nature and involve matters of judgment . actual amounts could differ from these estimates . we determine if we have a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity ( vie ) under accounting principles generally accepted in the united states . voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses , the right to receive residual returns and the right to make decisions about the entity 's activities . we consolidate voting interest entities in which we have all , or at least a majority of , the voting interest . story_separator_special_tag noninterest expense decreased slightly primarily due to a decrease in fdic insurance and other expense which was offset by an increase in salaries and employee benefits due to our overall growth and expansion . earnings per diluted share decreased $ 0.31 , or 11.6 % , to $ 2.37 for the year ended december 31 , 2010 , from $ 2.68 for the same period in 2009. financial condition our total assets increased $ 304.1 million , or 10.1 % , to $ 3.30 billion at december 31 , 2011 from $ 3.00 billion at december 31 , 2010. this increase was attributable to an increase in our mortgage-backed securities and , to a lesser extent , loan growth . our securities portfolio increased by $ 349.0 million , or 21.0 % , to $ 2.01 billion compared to $ 1.66 billion at december 31 , 2010. at december 31 , 2011 , loans were $ 1.09 billion compared to $ 1.08 billion at december 31 , 2010. the increase in our securities was comprised entirely of mortgage-backed and related securities . the increase in loans was funded by increases in deposits . our nonperforming assets at december 31 , 2011 decreased to $ 13.2 million , and represented 0.40 % of total assets , compared to $ 17.7 million , or 0.59 % of total assets at december 31 , 2010. nonaccruing loans decreased $ 4.2 million , to $ 10.3 million and the ratio of nonaccruing loans to total loans decreased to 0.95 % at december 31 , 2011 compared to $ 14.5 million and 1.35 % at december 31 , 2010. other real estate owned ( “ oreo ” ) increased to $ 453,000 at december 31 , 2011 from $ 220,000 at december 31 , 2010. accruing loans past due more than 90 days at december 31 , 2011 decreased to $ 5,000 compared to $ 7,000 at december 31 , 2010. repossessed assets decreased to $ 322,000 at december 31 , 2011 from $ 638,000 at december 31 , 2010. restructured performing loans at december 31 , 2011 decreased to $ 2.1 million compared to $ 2.3 million at december 31 , 2010. our deposits increased $ 187.2 million to $ 2.32 billion at december 31 , 2011 from $ 2.13 billion at december 31 , 2010. the increase in our deposits during 2011 was primarily due to an increase in deposits from branch expansion and increased market penetration , and to a lesser extent , an increase in public fund deposits . during 2011 , our public fund deposits increased $ 63.2 million . during 2011 brokered deposits increased $ 2.5 million . our deposits , net of brokered deposits , increased $ 184.8 million . fhlb advances increased $ 60.0 million to $ 622.5 million at december 31 , 2011 , from $ 562.6 million at december 31 , 2010. short-term fhlb advances increased $ 172.7 million to $ 361.8 million at december 31 , 2011 from $ 189.1 million at december 31 , 2010. long-term fhlb advances decreased $ 112.8 million to $ 260.7 million at december 31 , 2011 from $ 373.5 million at december 31 , 2010. during 2010 and 2011 we entered into the option to purchase , between one and a half and two years forward from the advance commitment date $ 200 million par in long-term advance commitments from fhlb at the fhlb rates on the date option was purchased . other borrowings at december 31 , 2011 and 2010 totaled $ 63.5 million and $ 66.8 million , respectively , and at december 31 , 2011 consisted of $ 3.2 million of short-term borrowings and $ 60.3 million of long-term debt . assets under management in our trust department increased slightly during 2011 and were approximately $ 718.5 million at december 31 , 2011 compared to $ 718 million at december 31 , 2010 . 41 shareholders ' equity at december 31 , 2011 totaled $ 258.9 million compared to $ 214.5 million at december 31 , 2010. the increase primarily reflects the net income of $ 39.1 million recorded for the year ended december 31 , 2011 , the common stock issued of $ 1.5 million as a result of our dividend reinvestment and incentive stock option plans and the increase in the accumulated other comprehensive income of $ 21.0 million , which were partially offset by the payment of cash dividends to our shareholders of $ 14.7 million and the purchase of a noncontrolling interest in sfg of $ 2.8 million . the increase in accumulated other comprehensive income is comprised of an increase of $ 26.5 million , net of tax , in the unrealized gain on securities , net of reclassification adjustment and a decrease of $ 5.4 million , net of tax , related to the change in the unfunded status of our defined benefit plan . see “ note 4 – comprehensive income ( loss ) ” to our consolidated financial statements included in this report . our market areas to date , have not experienced the level of downturn in the economy and real estate prices that some of the harder hit areas of the country have experienced . however , we have experienced weakening conditions associated with the real estate led downturn . many economists predict growth for the economy during 2012 , however we are well aware that any economic recovery could be uneven . we can not predict whether current economic conditions will improve , remain the same or decline . key financial indicators management follows include , but are not limited to , numerous interest rate sensitivity and interest rate risk indicators , credit risk , operations risk , liquidity risk , capital risk , regulatory risk , competition risk , yield curve risk , u.s. agency mortgage-backed securities prepayment risk , and economic risk indicators . balance sheet strategy we utilize wholesale funding and

management believes , as of december 31 , 2011 , that we meet all capital adequacy requirements to which we are subject . 77 in addition , for a depository institution to be considered “ well capitalized ” under the regulatory framework for prompt corrective action , its tier 1 and total capital ratios must be at least 6.0 % and 10.0 % on a risk-adjusted basis , respectively and its leverage ratio must be at least 5.0 % . replace_table_token_31_th ( 1 ) refers to quarterly average assets as calculated by bank regulatory agencies . 78 the table below summarizes our key equity ratios for the years ended december 31 , 2011 , 2010 and 2009 : replace_table_token_32_th accounting pronouncements see “ note 1 – summary of significant accounting and reporting policies ” to our consolidated financial statements included in this report . effects of inflation our consolidated financial statements , and their related notes , have been prepared in accordance with gaap that require the measurement of financial position and operating results in terms of historical dollars , without considering the change in the relative purchasing power of money over time and due to inflation . the impact of inflation is reflected in the increased cost of our operations . unlike many industrial companies , nearly all of our assets and liabilities are monetary . as a result , interest rates have a greater impact on our performance than do the effects of general levels of inflation . interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services . inflation can affect the amount of money customers have for deposits , as well as ability to repay loans . < font style= '' display : inline ; font-family : times

the stock options were issued at the grant date fair value for a contractual life of 10 years and vest over four years . as permitted by sab 107 , due to the company 's insufficient history of option activity , management utilized the simplified approach to estimate the options ' expected term , which represents the period of time that options granted are expected to be outstanding . expected volatility was determined through the average of a peer group of public companies . the company estimated the forfeiture rate at the time of grant and will revise it , if necessary , in subsequent periods if actual forfeitures differ from those estimates . the company recognizes compensation costs only for those equity awards expected to vest . the risk-free rate for periods within the contractual life of the option is based on the u.s. treasury yield in effect at the time of grant . the company has never declared or paid dividends and has no plans to do so in the foreseeable future . the company did not grant stock options in 2012. the following weighted-average assumptions were utilized in the calculation of the fair value of the stock options : expected life 6.25 years weighted average volatility 33 % forfeiture rate 13 % weighted average risk-free interest rate 1.31 % expected dividend rate - the fair value of stock options granted estimated on the date of grant using the black-scholes option valuation model was $ 307,000 . the recognized compensation expense associated with these grants in 2013 was $ 76,000 . f-11 a summary of the company 's stock option activity and related information is as follows : replace_table_token_8_th a summary of the status of the company 's non-vested stock options at december 31 and changes during the year is as follows : replace_table_token_9_th at december 31 , 2013 , there was $ 290,000 of total unrecognized compensation cost related to non-vested stock option-based compensation arrangements granted under the equity incentive plan . that cost is expected to be recognized in future years as follows : replace_table_token_10_th the recognized compensation cost is as follows : replace_table_token_11_th f-12 stock grants in 2013 and 2012 , the company granted 30,000 and 20,799 shares , respectively , of common stock under the equity incentive plan to its three independent directors in accordance with agreements for service on the board . the fair value of the stock at the time of grant was $ 5.00 and $ 4.94 per share for a total value of $ 150,000 and $ 103,000 which the company recognized in general and administrative expense in 2013 and 2012 , respectively . in 2011 , the company granted 125,000 shares of stock under the equity incentive plan to a key employee which are subject to declining repurchase rights by the company at $ 0.0001 per share should the employee terminate employment or upon other related circumstances prior to june 30 , 2015. the fair value of the stock at the time of grant was $ 2.20 per share for a total value of $ 275,000 . after the repurchase rights had expired on 62,500 shares , the company terminated the remaining stock grant agreement in december 2012 and issued a new stock grant for 62,500 shares of which 2,500 shares were vested immediately . the new stock grant is subject to declining repurchase rights by the company on 60,000 shares at $ 0.0001 per share should the employee terminate employment or upon other related circumstances prior to september 30 , 2016. the company recognized general and administrative compensation expense of $ 31,000 and $ 96,000 in 2013 and 2012 , respectively , and $ 202,000 for the period from inception ( january 23 , 2008 ) to december 31 , 2013. the remaining cost is reflected as a contra-equity balance against additional paid in capital and is expected to be recognized in future years as follows : replace_table_token_12_th consultant stock plan on may 2 , 2013 , the shareholders approved the 2013 consultant stock plan ( the consultant plan ) which provides for the granting of shares of common stock to consultants who provide services related to capital raising , investor relations , and making a market in or promoting the company 's securities . the company 's officers , employees , and board members are not entitled to receive grants from the consultant plan . the compensation committee of the board of directors is authorized to administer the consultant plan and establish the grant terms . the number of shares reserved for issuance under the consultant plan on the date of adoption of may 2 , 2013 totaled 75,000 shares . the consultant plan provides for quarterly increases in the available number of authorized shares equal to the lesser of 1 % of any new shares issued by the company during the quarter immediately prior to the adjustment date or such lesser amount as the board of directors shall determine . the company granted 11,250 shares from the consultant plan to a consultant for 2013 services . the fair value of the stock at the time of grant was $ 9.12 per share for a total value of $ 102,000 which the company recognized in general and administrative expense in 2013. activity under the consultant plan in 2013 is as follows : reserved but unissued shares under the consultant plan at may 2 , 2013 75,000 increases in the number of authorized shares under the plan 287 stock grants ( 11,250 ) stock grant forfeitures - reserved but unissued shares under the consultant plan at december 31 , 2013 64,037 f-13 warrants in conjunction with the ipo in 2012 , the company granted warrants to mdb to purchase 345,000 common stock shares story_separator_special_tag certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of our control . as a result , they are subject to an inherent degree of uncertainty . in applying these policies , our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates . those estimates are based on our historical operations , our future business plans and projected financial results , the terms of existing contracts , our observance of trends in the industry , information provided by our customers and information available from other outside sources , as appropriate . see note 2 to our unaudited condensed financial statements for a more complete description of our significant accounting policies . development stage enterprise . the company is a development stage company as defined in financial accounting standards board ( fasb ) accounting standards codification ( asc ) 915 , development stage entities . the company is devoting substantially all of its present efforts to design and develop new technologies in combustion systems and its planned principal operations have not yet commenced . the company has not generated any significant revenues from operations and has no assurance of any future revenues . all losses accumulated since january 23 , 2008 have been considered as part of the company 's development stage activities . 20 revenue recognition . the company recognizes revenue on co-development agreements using the percentage of completion method . under this method , the completion percentage is determined by dividing costs incurred to date by total estimated project costs . since our projects will require technological development to complete , which by its nature is difficult to predict , the actual cost required to complete contracted work may vary from estimates . estimated project costs are revised regularly which can alter the reported level of project profitability . any estimated project losses are recognized in the current reporting period . customer billings are recorded when cash receipts are probable and in accordance with the underlying co-development contract . if billings exceed recognized revenue , the difference is recorded as a current liability , while any recognized revenues exceeding billings are recorded as a current asset . recognized revenues are subject to revisions as the contract progresses to completion and actual revenue and cost become certain . revisions in revenue estimates are reflected in the period in which the facts that give rise to the revision become known . cost of revenue . cost of co-development revenue includes both direct and allocated indirect costs of completing the scope of work of co-development agreements . direct costs include labor , materials and other costs incurred directly in fulfilling co-development agreements . indirect costs include labor , rent , depreciation and other costs associated with operating the company . due to the nature of the work involved , the cost of co-development projects may fluctuate substantially from period to period . research and development . the cost of research and development is expensed as incurred . research and development costs consist of salaries , benefits , share based compensation , consulting fees , rent , utilities , depreciation , and consumables . stock-based compensation . the costs of all employee stock options , as well as other equity-based compensation arrangements , are reflected in the financial statements based on the estimated fair value of the awards on the grant date . that cost is recognized over the period during which an employee is required to provide service in exchange for the award . stock compensation for stock granted to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued , whichever is more reliably measured . fair value of financial instruments . fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date . assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable . the categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement . the company 's financial instruments primarily consist of cash and cash equivalents , accounts payable and accrued expenses . as of the balance sheet dates , the estimated fair values of the financial instruments were not materially different from their carrying values as presented on the balance sheets . this is primarily attributed to the short maturities of these instruments . the company did not identify any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value . results of operations comparison of the years ending december 31 , 2013 and 2012 revenue , cost of revenue , and gross profit . the company reported $ 93,000 of revenue resulted from a solid fuel burner co-development project with covanta energy corporation , a waste-to-energy service company and subsidiary of covanta holding corporation . the gross profit of the project was immaterial . the company had no revenues during the year ended december 31 , 2012. operating expenses . operating expenses increased by $ 1,091,000 to $ 5,301,000 in 2013 compared to 2012. the company increased its research and development expenses by $ 667,000 to $ 1,851,000 for 2013. r & d expenses rose due primarily to the addition of personnel hired as a result of increased research activities . in addition to the $ 334,000 increase in compensation expense to $ 1,000,000 , the increase to r & d expenses included a $ 271,000 increase

year-end expenditures , services and compensation paid with common stock of $ 175,000 , share based compensation from the company 's equity incentive plan of $ 135,000 , and other non-cash expenses of $ 116,000. investing activities for 2013 and 2012 resulted in cash outflows of $ 1,081,000 and $ 868,000 , respectively . development of capitalized patents and other intangible assets for 2013 and 2012 resulted in cash outflows of $ 845,000 and $ 531,000 , respectively . acquisition of fixed assets for 2013 and 2012 resulted in cash outflows of $ 236,000 and $ 337,000 , respectively , and related primarily to research and development equipment . financing activities for 2013 resulted in $ 39,000 of cash inflows from the exercise of a warrant to purchase 17,409 common shares of stock at $ 2.20 per share . financing activities for 2012 resulted in $ 11,153,000 of cash inflows related primarily to net cash generated from the ipo of $ 11,201,000 offset by the extinguishment of all debt totaling $ 48,000 from the ipo proceeds . off-balance sheet transactions we do not have any off-balance sheet transactions . trends , events and uncertainties claim by perkins coie llp our former legal advisors , perkins coie llp , previously advised us in march 2012 that they believe twb investment partnership ii , l.p. , a party related to perkins coie llp , has the right to acquire 25,250 shares of our common stock at $ 0.02 per share pursuant to an engagement letter dated december 4 , 2007. we denied the claim since , among other defenses , we believe we entered into a full settlement of all amounts owed to perkins coie llp in november 2011. there has been no further communication with perkins coie llp regarding the matter since march

policy fees represent a non-refundable application fee for insurance coverage , which are intended to reimburse us for the costs incurred to underwrite the policy . policy fees are recognized on the effective date of the insurance policy . commission and brokerage income is recognized on a pro-rata basis over the respective terms of the contracts . ( j ) deferred acquisition costs deferred acquisition costs ( “ dac ” ) represent those costs that are incremental and directly related to the successful acquisition of new or renewal of existing insurance contracts . the company defers incremental costs that result directly from , and are essential to , the acquisition or renewal of an insurance contract . such dac generally include agent or broker commissions , premium taxes , medical and inspection fees that would not have been incurred if the insurance contract had not been acquired or renewed . each cost is analyzed to assess whether it is fully deferrable . the company also defers a portion of the employee total compensation and payroll-related fringe benefits directly related to time spent performing specific acquisition or renewal activities , including costs associated with the time spent on underwriting , policy issuance and processing , and sales force contract selling . 45 federated national holding company and subsidiaries notes to consolidated financial statements ( continued ) december 31 , 2015 the acquisition costs are deferred and amortized over the period in which the related premiums written are earned , generally 12 months . it is grouped consistent with the manner in which the insurance contracts are acquired , serviced and measured for profitability and is reviewed for recoverability based on the profitability of the underlying insurance contracts . investment income is anticipated in assessing the recoverability of dac . the company assesses the recoverability of dac on an annual basis or more frequently if circumstances indicate impairment may have occurred . ( k ) property and equipment property and equipment is stated at cost , net of accumulated depreciation and amortization . depreciation is calculated using a straight-line method over the estimated useful lives , ranging from 3 to 15 years . repairs and maintenance are charged to expense as incurred . the company accounts for internal-use software development costs in accordance with accounting guidelines which state that software costs , including internal payroll costs , incurred in connection with the development or acquisition of software for internal use is charged to expense as incurred until the project enters the application development phase . costs incurred in the application development phase are capitalized and are depreciated using the straight-line method over an estimated useful life of 5 years , beginning when the software is ready for use . ( l ) losses and loss adjustment expenses the reserves for loss and loss adjustment expense ( “ lae ” ) represent management 's best estimate of the ultimate cost of all reported and unreported losses incurred through the balance sheet date . such liabilities are determined based upon our assessment of claims pending and the development of prior years ' loss liability . these amounts include liabilities based upon individual case estimates for reported losses and lae 's and estimates of such amounts that are incurred but not yet reported ( “ ibnr ” ) . changes in the estimated liability are charged or credited to operations as the losses and lae 's are settled . the estimates of the liability for loss and lae reserves are subject to the effect of trends in claims severity and frequency and are continually reviewed . as part of this process , we review historical data and consider various factors , including known and anticipated legal developments , inflation and economic conditions . as experience develops and other data become available , these estimates are revised , as required , resulting in increases or decreases to the existing liability for loss and loss adjustment expense reserves . adjustments are reflected in results of operations in the period in which they are made and the liabilities may deviate substantially from prior estimates . ( m ) income taxes income taxes are accounted for under the asset and liability method . deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases , and operating loss , capital loss and tax-credit carryforwards . 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 . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income or expense in the period that includes the enactment date . ( n ) share-based compensation the company accounts for share-based compensation based on the estimated grant date fair value . the company grants awards with service only conditions and generally amortizes them on a straight-line over the requisite service period of the award , which is the vesting term . the fair value of the restricted stock grants is determined based on the closing market price on the date of grant . non-employee directors are treated as employees for accounting purposes . 46 federated national holding company and subsidiaries notes to consolidated financial statements ( continued ) december 31 , 2015 ( o ) basic and diluted net income per share basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares , while diluted net income per share is computed by dividing net income availableto common shareholders by the weighted average number of such common shares and dilutive share equivalents result from the assumed exercise of employee stock options and vesting of restricted common stock and are calculated using the treasury stock method . story_separator_special_tag these techniques include detailed statistical analyses of past claims reporting , settlement activity , claims frequency , internal loss experience , changes in pricing or coverages and severity data when sufficient information exists to lend statistical credibility to the analyses . more subjective techniques are used when statistical data is insufficient or unavailable . these liabilities also reflect implicit or explicit assumptions regarding the potential effects of future inflation , judicial decisions , changes in laws and recent trends in such factors , as well as a number of actuarial assumptions that vary across our reinsurance and insurance subsidiaries and across lines of business . this data is analyzed by line of business , coverage , accident year or underwriting year and reinsurance contract type , as appropriate . our loss reserve review processes use actuarial methods that vary by operating subsidiary and line of business and produce point estimates for each class of business . the actuarial methods used include the following methods : · reported loss development method : a reported loss development pattern is calculated based on historical loss development data , and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year , as appropriate , to ultimate levels ; · paid development method : a paid loss development pattern is calculated based on historical paid loss development data , and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year , as appropriate , to ultimate levels ; · expected loss ratio method : expected loss ratios are applied to premiums earned , based on historical company experience , or historical insurance industry results when company experience is deemed not to be sufficient ; and · bornhuetter-ferguson method : the results from the expected loss ratio method are essentially blended with either the reported loss development method or the paid development method . the primary actuarial assumptions used by insurance companies include the following : · expected loss ratios represent management 's expectation of losses , in relation to earned premium , at the time business is written , before any actual claims experience has emerged . this expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider . expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes , loss cost trends and known changes in the type of risks underwritten . for certain longer-tailed reinsurance business that are typically lower frequency , high severity classes , expected loss ratios are often used for the last several accident years or underwriting years , as appropriate . · rate of loss cost inflation ( or deflation ) represents management 's expectation of the inflation associated with the costs we may incur in the future to settle claims . expected loss cost inflation is particularly important for longer-tailed classes · reported and paid loss emergence patterns represent management 's expectation of how losses will be reported and ultimately paid in the future based on the historical emergence patterns of reported and paid losses and are derived from past experience of our subsidiaries , modified for current trends . these emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value . in the absence of sufficiently credible internally-derived historical information , each of the above actuarial assumptions may also incorporate data from the insurance industries as a whole , or peer companies writing substantially similar coverages . data from external sources may be used to set expectations , as well as assumptions regarding loss frequency or severity relative to an exposure unit or claim , among other actuarial parameters . assumptions regarding the application or composition of peer group or industry reserving parameters require substantial judgment . 31 loss frequency and severity loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described above . loss frequency is a measure of the number of claims per unit of insured exposure , and loss severity is a measure of the average size of claims . factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic conditions or weather patterns . factors affecting loss severity include changes in policy limits , retentions , rate of inflation and judicial interpretations . another factor affecting estimates of loss frequency and severity is the loss reporting lag , which is the period of time between the occurrence of a loss and the date the loss is reported to our insurance companies . the length of the loss reporting lag affects their ability to accurately predict loss frequency ( loss frequencies are more predictable for lines with short reporting lags ) , as well as the amount of reserves needed for ibnr . if the actual level of loss frequency and severity is higher or lower than expected , the ultimate losses will be different than management 's estimates . prior year development our insurance companies continually evaluate the potential for changes , both favorable and unfavorable , in their estimates of their loss and lae liabilities and use the results of these evaluations to adjust both recorded liabilities and underwriting criteria . with respect to liabilities for unpaid loss and lae established in prior years , these liabilities are periodically analyzed and their expected ultimate cost adjusted , where necessary , to reflect favorable or unfavorable development in loss experience and new information , including , for certain catastrophe events , revised industry estimates of the magnitude of a catastrophe . adjustments to previously recorded liabilities for unpaid loss and lae , both favorable and unfavorable , are reflected in our financial results in the periods in which these adjustments are made and are referred to

we maintain a portfolio of marketable investments with varying maturities and a substantial amount of cash and cash equivalents intended to provide adequate cash flows for such payments . critical accounting policies the preparation of consolidated financial statements in conformity with gaap requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes . future events and their effects can not be determined with absolute certainty . therefore , the determination of estimates requires the exercise of judgment . actual results inevitably will differ from those estimates , and such differences may be material to the financial statements . we believe our most critical accounting estimates inherent in the preparation of our financial statements are : ( i ) fair value measurements of our investments , ( ii ) accounting for investments , ( iii ) premium and unearned premium calculation , ( iv ) reinsurance contracts , ( v ) the amount and recoverability of amortization of deferred acquisition costs ( “ dac ” ) , ( vi ) reserve for loss and losses adjustment expenses and ( vii ) income taxes . the accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation . to the extent actual experience differs from the assumptions used , our financial condition , results of operations , and cash flows would be affected . fair value the fair value is the price that would be received to sell an asset or paid to transfer a liability between market participants in the principal market or in the most advantageous market when no principal market exists . adjustments to transaction prices or quoted market prices may be required in illiquid or disorderly markets in order to estimate fair value . alternative valuation techniques may be appropriate under the circumstances to determine the value that would be received to sell an asset or paid to transfer a liability in an orderly transaction . market participants are assumed to be independent , knowledgeable , able and willing to transact an exchange and not acting under duress . our nonperformance or credit risk is considered in determining the fair value of liabilities . considerable judgment may be required in interpreting market

at december 31 , 2014 , other assets included notes receivable totaling $ 4.3 million , with interest rates ranging from 0 % to 12 % , and maturities from 2015 to 2016. with respect to the balance at both december 31 , 2015 and 2014 , $ 2.5 million was from an affiliated unconsolidated joint venture . deferred costs . at december 31 , 2015 and 2014 , unamortized debt issue costs of $ 2.6 million and $ 3.1 million , respectively , are included in other assets on the consolidated balance sheets . the costs are primarily amortized to interest expense using the straight line method , which approximates the effective interest method . other assets . in addition to notes receivable and deferred costs described above , other assets include assets related to mortgage servicing rights , deposits , pre-acquisition costs for land and prepaid expenses for our insurance programs and other business related items . 55 warranty reserves . we use subcontractors for nearly all aspects of home construction . although our subcontractors are generally required to repair and replace any product or labor defects , we are , during applicable warranty periods , ultimately responsible to the homeowner for making such repairs . as such , we record warranty reserves to cover our exposure to the costs for materials and labor not expected to be covered by our subcontractors to the extent they relate to warranty-type claims . warranty reserves are established by charging cost of sales and crediting a warranty reserve for each home closed . the amounts charged are estimated by management to be adequate to cover expected warranty-related costs described above under the company 's warranty programs . reserves are recorded for warranties under the following warranty programs : home builder 's limited warranty ( “ hblw ” ) ; and 30 , 15 or 10-year transferable structural warranty , depending on sales date and state . the warranty reserves for the hblw are established as a percentage of average sales price and adjusted based on historical payment patterns determined , generally , by geographic area and recent trends . factors that are given consideration in determining the hblw reserves include : ( 1 ) the historical range of amounts paid per average sales price on a home ; ( 2 ) type and mix of amenity packages added to the home ; ( 3 ) any warranty expenditures not considered to be normal and recurring ; ( 4 ) timing of payments ; ( 5 ) improvements in quality of construction expected to impact future warranty expenditures ; and ( 6 ) conditions that may affect certain projects and require a different percentage of average sales price for those specific projects . changes in estimates for warranties occur due to changes in the historical payment experience and differences between the actual payment pattern experienced during the period and the historical payment pattern used in our evaluation of the warranty reserve balance at the end of each quarter . actual future warranty costs could differ from our current estimated amount . our warranty reserves for our transferable structural warranty programs are established on a per-unit basis . while the structural warranty reserve is recorded as each house closes , the sufficiency of the structural warranty per unit charge and total reserve is re-evaluated on an annual basis , with the assistance of an actuary , using our own historical data and trends , industry-wide historical data and trends , and other project specific factors . the reserves are also evaluated quarterly and adjusted if we encounter activity that is inconsistent with the historical experience used in the annual analysis . these reserves are subject to variability due to uncertainties regarding structural defect claims for products we build , the markets in which we build , claim settlement history , insurance and legal interpretations , among other factors . while we believe that our warranty reserves are sufficient to cover our projected costs , there can be no assurances that historical data and trends will accurately predict our actual warranty costs . at december 31 , 2015 and 2014 , warranty reserves of $ 14.3 million and $ 12.7 million , respectively , are included in other liabilities on the consolidated balance sheets . self-insurance reserves . self-insurance reserves are made for estimated liabilities associated with employee health care , workers ' compensation , and general liability insurance . for 2015 , our self-insurance limit for employee health care was $ 250,000 per claim per year , with stop loss insurance covering amounts in excess of $ 250,000 . our workers ' compensation claims are insured by a third party and carry a deductible of $ 250,000 per claim , except for workers compensation claims made in the state of ohio where the company is self-insured . our self-insurance limit for ohio workers ' compensation is $ 500,000 per claim , with stop loss insurance covering all amounts in excess of this limit . the reserves related to employee health care and workers ' compensation are based on historical experience and open case reserves . our general liability claims are insured by a third party . the company generally has a $ 7.5 million completed operations/construction defect deductible per occurrence by region and a $ 22.0 million deductible in the aggregate , with a $ 500,000 deductible for all other types of claims . the company records a reserve for general liability claims falling below the company 's deductible . the reserve estimate is based on an actuarial evaluation of our past history of general liability claims , other industry specific factors and specific event analysis . at december 31 , 2015 and 2014 , self-insurance reserves of $ 1.6 million and $ 1.3 million , respectively , are included in other liabilities on the consolidated balance sheets . story_separator_special_tag the improvement in the gross margin of our homebuilding operations was primarily due to a $ 37.9 million improvement in housing gross margin compared to 2014 and a $ 3.8 million improvement in gross margin from strategic land sales made throughout 2015 . we believe the increased sales prices in 2015 were driven primarily by pricing leverage in select locations and submarkets and shifts in both product and community mix . we sell a variety of home types in various communities and markets , each of which yields a different gross margin . as a result , housing gross margin may fluctuate up or down depending on the mix of communities delivering homes in any given year . the pricing improvements were partially offset by higher average lot and construction costs related to cost increases associated with homebuilding industry conditions and normal supply and demand dynamics . in 2015 , we were able to pass a majority of the higher construction costs to our homebuyers in the form of higher sales prices . however , we can not provide any assurance that our ability to pass such cost increases to our homebuyers through higher sales prices will continue and we do not expect sales prices to increase at the same rate in 2016. selling , general and administrative expense increased $ 18.3 million in 2015 , but improved as a percentage of revenue to 13.3 % in 2015 compared to 14.0 % in 2014 . selling expense increased $ 14.0 million to $ 95.1 million from $ 81.1 million in 2014 and remained flat as a percentage of revenue at 6.7 % for 2015 and 2014 . variable selling expense for sales commissions contributed $ 9.9 million to the increase due to the increase in the number of homes delivered and the higher average sales price , $ 3.4 million of which related to costs associated with our austin and dallas/fort worth , texas markets . the increase in selling expense was 28 also attributable to a $ 4.1 million increase in non-variable selling expense related to expenses associated with our sales offices and models , $ 1.5 million of which related to costs associated with our sales offices and models in our austin and dallas/fort worth markets , in addition to the impact of costs associated with the 17 % increase in our community count in 2015 compared to 2014. general and administrative expense increased $ 4.4 million , from $ 88.8 million in 2014 to $ 93.2 million in 2015 but improved as a percentage of revenue from 7.3 % in 2014 to 6.6 % in 2015 . this dollar increase was primarily due to a $ 1.5 million increase in land related expenses compared to prior year due to the growth in our land position , a $ 1.5 million increase related to our austin and dallas/fort worth markets , a $ 0.9 million increase in share based incentive compensation expense associated with our improved financial performance and a $ 0.5 million increase in payroll-related expense ( as our employee count increased 11 % from a year ago ) . we continue to focus on cost control and reducing our selling , general and administrative expense . outlook we believe that u.s. housing markets will generally experience modest improvement in 2016 , similar to the increased level of new homes sales we experienced in 2015 , as a result of continued positive trends in unemployment and low interest rates . we remain focused on increasing our profitability by generating additional revenue and improving overhead operating leverage , continuing to expand our market share , and investing in attractive land and or new market opportunities . we believe that our geographic footprint and opportunities for growth in our current markets , particularly our newer texas markets and our new minneapolis/st . paul market , combined with the significant number of well-located communities that we opened in 2015 , will position us to sustain the positive momentum of our business and further improve our profitability and results in 2016 . we expect to continue to emphasize the following strategic business objectives in 2016 : profitably growing our presence in our existing markets , including opening new communities ; reviewing new markets for investment opportunities ; maintaining a strong balance sheet ; and emphasizing customer service , product quality and design , and premier locations . consistent with these objectives , we took a number of steps in 2015 to position the company for continued improvement in 2016 and beyond , including investing $ 232.7 million in land acquisitions and $ 205.1 million in land development in 2015 to help grow our presence in our existing markets , as well as acquiring a privately-held homebuilder in minneapolis/st . paul , minnesota in the fourth quarter of 2015. we currently estimate that we will spend approximately $ 425 million to $ 475 million on land purchases and land development in 2016 . however , land transactions are subject to a number of factors , including our financial condition and market conditions , as well as satisfaction of various conditions related to specific properties . we will continue to monitor market conditions and our ongoing pace of home sales and deliveries and we will adjust our land spending accordingly . we ended 2015 with more than 22,400 lots under control , which represents a 5.8 year supply of lots based on 2015 homes delivered , including certain lots that we anticipate selling to third parties . this represents an 8 % increase from our approximately 20,700 lots under control at the end of 2014 . we also opened 62 communities and closed 37 communities in 2015 , ending the year with a total of 175 communities . in 2016 , we expect our average community count will increase by 5 - 10 % from our average community count of 160 communities for 2015 . going forward , we believe our abilities to

however , during 2014 , we experienced a 2 % decrease in new contracts in our midwest region , from 1,364 in 2013 to 1,336 in 2014 and backlog decreased 7 % from 545 homes at december 31 , 2013 to 505 homes at december 31 , 2014. we believe the declines in new contracts and backlog units were attributable to the opening of certain new communities later in the year than we anticipated , and the closing of certain communities that made significant contributions to the strong pace of new contracts in 2013. additionally , comparing new contracts levels for 2014 with 2013 was challenging as a result of our strong level of new contracts in 2013 , which represented a 19 % increase compared to 2012. during the twelve months ended december 31 , 2014 , we opened 13 communities in our midwest region compared to 21 during 2013. our monthly absorption rate in our midwest region was 1.8 per community in both 2014 and 2013. southern region . for the twelve months ended december 31 , 2014 , homebuilding revenue in our southern region increased $ 96.5 million , from $ 324.4 million in 2013 to $ 420.9 million in 2014. this 30 % increase in homebuilding revenue was the result of a 14 % increase in the average sales price of homes delivered ( $ 38,000 per home delivered ) , a 13 % increase in the number of homes delivered ( 150 units ) and a $ 5.1 million increase in land sales revenue . operating income in our southern region increased $ 10.6 million , from $ 23.7 million in 2013 to $ 34.3 million in 2014. the increase in operating income was primarily the result of a $ 20.4 million increase in our gross margin in 2014 , offset , in part , by a $ 9.8 million increase in selling , general , and administrative expense . our southern region experienced a gross margin percentage of 19.4 % for 2014 compared to 18.8 % for 2013. the improvement in our gross margin percentage when compared to 2013 was primarily reflective of the revenue improvements described above , partially offset by a $ 0.7 million decrease in profit from the sale of land and higher lot and construction costs related to both the mix of homes delivered and cost increases in labor and materials associated with housing market conditions and normal supply and demand dynamics . selling , general and administrative expense increased $ 9.8 million from $ 37.3 million in 2013 to $

investments with less than a 20 % interest are accounted for using the cost method . use of estimates the preparation of financial statements in accordance with accounting principles generally accepted in the united states of america requires management to use judgment and make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . the level of uncertainty in estimates and assumptions increases with the length of time until the underlying transactions are completed . as such , the most significant uncertainty in the company 's assumptions and estimates involved in preparing the financial statements includes pension and other retiree benefit cost assumptions , stock-based compensation , asset impairments , uncertain tax positions , tax valuation allowances , legal and other contingency reserves and charges related to u.s. tax reform ( see note 11 , income taxes ) . additionally , the company uses available market information and other valuation methodologies in assessing the fair value of financial instruments and retirement plan assets . judgment is required in interpreting market data to develop the estimates of fair value and , accordingly , changes in assumptions or the estimation methodologies may affect the fair value estimates . actual results could ultimately differ from those estimates . revenue recognition the company 's revenue contracts represent a single performance obligation to sell its products to trade customers . sales are recorded at the time control of the products is transferred to trade customers , in an amount that reflects the consideration the company expects to be entitled to in exchange for the products . control is the ability of trade customers to direct the “ use of ” and “ obtain ” the benefit from our products . in evaluating the timing of the transfer of control of products to trade customers , the company considers several control indicators , including significant risks and rewards of products , the company 's right to payment and the legal title of the products . based on the assessment of control indicators , sales are generally recognized when products are delivered to trade customers . net sales reflect the transaction prices for contracts , which include units shipped at selling list prices reduced by variable consideration . variable consideration includes expected sales returns and the cost of current and continuing promotional programs . current promotional programs primarily include product listing allowances and co-operative advertising arrangements . continuing promotional programs are predominantly consumer coupons and volume-based sales incentive arrangements . the cost of promotional programs is estimated using the expected value method considering all reasonably available information , including the company 's historical experience and its current expectations , and is reflected in the transaction price when sales are recorded . adjustments to the cost of promotional programs in subsequent periods are generally not material , as the company 's promotional programs are typically of short duration , thereby reducing the uncertainty inherent in such estimates . sales returns are generally accepted at the company 's discretion and are not material to the company 's consolidated financial statements . the company 's contracts with trade customers do not have significant financing components or non-cash consideration and the company does not have unbilled revenue or significant amounts of prepayments from customers . the company records net sales excluding taxes collected on its sales to its trade customers . shipping and handling activities are accounted for as contract fulfillment costs and classified as selling , general and administrative expenses . 72 colgate-palmolive company notes to consolidated financial statements ( continued ) ( dollars in millions except share and per share amounts ) shipping and handling costs shipping and handling costs are classified as selling , general and administrative expenses and were $ 1,255 , $ 1,183 and $ 1,140 for the years ended december 31 , 2018 , 2017 and 2016 , respectively . marketing costs the company markets its products through advertising and other promotional activities . advertising costs are included in selling , general and administrative expenses and are expensed as incurred . certain consumer and trade promotional programs , such as consumer coupons , are recorded as a reduction of sales . cash and cash equivalents the company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents . inventories the cost of approximately 75 % of inventories is determined using the first-in , first-out ( “ fifo ” ) method , which is stated at the lower of cost or net realizable value . the cost of all other inventories , in the u.s. and mexico , is determined using the last-in , first-out ( “ lifo ” ) method , which is stated at the lower of cost or market . property , plant and equipment land , buildings and machinery and equipment are stated at cost . depreciation is provided , primarily using the straight-line method , over estimated useful lives ranging from 3 to 15 years for machinery and equipment and up to 40 years for buildings . depreciation attributable to manufacturing operations is included in cost of sales . the remaining component of depreciation is included in selling , general and administrative expenses . goodwill and other intangibles goodwill and indefinite life intangible assets , such as the company 's global brands , are subject to impairment tests at least annually . these tests were performed and did not result in an impairment charge . other intangible assets with finite lives , such as local brands and trademarks , customer relationships and non-compete agreements , are amortized over their estimated useful lives , generally ranging from 5 to 40 years . story_separator_special_tag as reflected in the table below , the non-gaap effective income tax rate was 24.2 % in 2018 , 29.5 % in 2017 and 31.3 % in 2016 . the decrease in the non-gaap effective income tax rate in 2018 as compared to 2017 is primarily due to the enactment of the tcja , as discussed in more detail below . the decrease in the non-gaap effective income tax rate in 2017 as compared to 2016 is primarily due to the inclusion of excess tax benefits from stock-based compensation in the provision for income taxes , as discussed in more detail below . replace_table_token_11_th replace_table_token_12_th replace_table_token_13_th _ ( 1 ) the income tax effect on non-gaap items is calculated based upon the tax laws and statutory income tax rates applicable in the tax jurisdiction ( s ) of the underlying non-gaap adjustment . ( 2 ) the impact of non-gaap items on the company 's effective tax rate represents the difference in the effective tax rate calculated with and without the non-gaap adjustment on income before income taxes and provision for income taxes . 28 ( dollars in millions except per share amounts ) on december 22 , 2017 , the tcja was enacted , which , among other things , lowered the u.s. corporate income tax rate to 21 % from 35 % and established a modified territorial system requiring a mandatory deemed repatriation tax on undistributed earnings of foreign subsidiaries . beginning in 2018 , the tcja also requires a minimum tax on certain earnings generated by foreign subsidiaries while providing for tax-free repatriation of such earnings through a 100 % dividends-received deduction . the company 's effective income tax rate in 2017 included a provisional charge of $ 275 , recorded in the fourth quarter of 2017 , based on its initial analysis of the tcja using information and estimates available as of february 15 , 2018 , the date on which the company filed its annual report on form 10-k for the year ended december 31 , 2017. during 2018 , the company finalized its assessment of the impact of the tcja and recognized an additional tax expense of $ 80 reflecting the impact of transition tax guidance issued by the u.s. treasury and the update of certain estimates and calculations based on information available through the end of 2018. any further guidance issued after december 31 , 2018 may have an impact to the company 's provision for income tax in the period such guidance is effective . the effective income tax rate in 2018 and 2017 also included $ 12 and $ 47 , respectively , of stock compensation excess tax benefits in the provision for income taxes as a result of the adoption of asu no . 2016-09 , “ compensation–stock compensation ( topic 718 ) : improvements to employee share-based payment accounting ” effective january 1 , 2017. see note 11 , income taxes to the consolidated financial statements , for additional details . the effective income tax rate in 2016 included a $ 210 u.s. income tax benefit principally related to changes in venezuela 's foreign exchange regime implemented in march 2016. in order to fully utilize the $ 210 tax benefit in 2016 , the company repatriated an incremental $ 1,500 of earnings of foreign subsidiaries it previously considered indefinitely reinvested outside of the u.s. , and accordingly , recorded a tax charge of $ 210. the company had taken a tax position in a foreign jurisdiction since 2002 that was challenged by the local tax authorities . in 2016 , the supreme court in the foreign jurisdiction decided the matter in the company 's favor for the years 2002 through 2005. also in 2016 , the administrative court in the foreign jurisdiction decided the matter in the company 's favor for the years 2008 through 2011 by acknowledging the supreme court 's ruling for the years 2002 through 2005 , which eliminated the possibility of future appeals . as a result , the company recorded a tax benefit of $ 30 , including interest , in 2016. in march 2018 , the lower courts ruled in the company 's favor for the years 2006 , 2007 and 2012 through 2014. the deadline for the local tax authorities to appeal has now passed , and the company considers all outstanding disputes on this matter resolved . as a result , the company recorded an additional tax benefit of $ 15 , including interest . the effective income tax rate in all years benefited from tax planning associated with the company 's global business initiatives . the company expects its effective income tax rate in 2019 to be in the range of 25.5 % to 26.5 % both on a gaap basis and excluding charges related to the global growth and efficiency program . net income attributable to colgate-palmolive company and earnings per share , diluted net income attributable to colgate-palmolive company was $ 2,400 , or $ 2.75 per share on a diluted basis , in 2018 compared to $ 2,024 , or $ 2.28 per share on a diluted basis , in 2017 and $ 2,441 , or $ 2.72 per share on a diluted basis , in 2016 . in 2018 , 2017 and 2016 , net income attributable to colgate-palmolive company included aftertax charges related to the global growth and efficiency program . in 2018 and 2017 , net income attributable to colgate-palmolive company also included charges related to u.s. tax reform . in 2018 , net income attributable to colgate-palmolive company also included a benefit from a foreign tax matter . in 2016 , net income attributable to colgate-palmolive company also included charges for a litigation matter , a gain on sale of land in mexico and benefits from tax matters . 29 ( dollars in millions except per share amounts ) excluding the items described above in all years , as applicable , net income

the company continues to focus its capital spending on projects that are expected to yield high aftertax returns . 43 ( dollars in millions except per share amounts ) financing activities used $ 2,679 of cash during 2018 compared to $ 2,450 and $ 2,233 during 2017 and 2016 , respectively . the increase in cash used in 2018 as compared to 2017 was primarily due to higher net payments on debt and lower proceeds from the exercise of stock options . the increase in cash used in 2017 as compared to 2016 was primarily due to lower net proceeds from the issuance of debt and higher purchases of treasury shares . long-term debt , including the current portion , decreased to $ 6,354 as of december 31 , 2018 , as compared to $ 6,566 as of december 31 , 2017 and total debt decreased to $ 6,366 as of december 31 , 2018 as compared to $ 6,577 as of december 31 , 2017 . the company 's debt issuances support its capital structure strategy objectives of funding its business and growth initiatives while minimizing its risk-adjusted cost of capital . during the fourth quarter of 2017 , the company issued $ 400 of five -year notes at a fixed rate of 2.25 % . during the third quarter of 2017 , the company issued $ 500 of thirty -year notes at a fixed rate of 3.70 % . the debt issuances in 2017 were under the company 's shelf registration statement . proceeds from the debt issuances in 2017 were used for general corporate purposes , which included the retirement of commercial paper borrowings . at december 31 , 2018 , the company had access to unused domestic and foreign lines of credit of $ 3,023 ( including under the facility discussed below ) and could also issue medium-term notes pursuant to an effective shelf registration statement . in november 2018 , the company amended and restated its five-year revolving credit facility , on substantially similar terms , for a five-year term expiring november 2023 and increasing the facility 's capacity to $ 2,650 . commitment fees related to the credit facility are not material . domestic and foreign commercial paper outstanding was $ 534

sales of our other products ( green power produced from renewable sources , recovered paper , wood chips and other wood related products ) are recognized when the products are delivered and are included in “ cost of sales , excluding depreciation , amortization and distribution costs ” in our consolidated statements of operations . net ( loss ) income per share we calculate basic net ( loss ) income per share attributable to resolute forest products inc. common shareholders by dividing our net ( loss ) income by the weighted-average number of outstanding common shares . we calculate diluted net income per share attributable to resolute forest products inc. common shareholders by dividing our net income by the weighted-average number of outstanding common shares , as adjusted for the incremental shares attributable to the dilutive effects of potentially dilutive securities ( such as stock options , rsus and dsus ) . the incremental shares are calculated using the treasury stock method ( stock options , rsus and dsus ) . to calculate diluted net loss per share attributable to resolute forest products inc. common shareholders , no adjustments to our basic weighted-average number of outstanding common shares are made , since the impact of potentially dilutive securities ( such as stock options , rsus and dsus ) would be antidilutive . translation the functional currency of the majority of our operations is the u.s. dollar . however , some of these operations maintain their books and records in their local currency in accordance with certain statutory requirements . non-monetary assets and liabilities of these operations and the related income and expense items such as depreciation and amortization are remeasured into u.s. dollars using historical exchange rates . remaining assets and liabilities are remeasured into u.s. dollars using the exchange rates as of the balance sheet date . remaining income and expense items are remeasured into u.s. dollars using an average exchange rate for the period . gains and losses from foreign currency transactions and from remeasurement of the balance sheet are reported as “ other ( expense ) income , net ” in our consolidated statements of operations . the functional currency of all other operations is their local currency . assets and liabilities of these operations are translated into u.s. dollars at the exchange rates in effect as of the balance sheet dates . income and expense items are translated at average daily or monthly exchange rates for the period . the resulting translation gains or losses are recognized as a component of equity in “ accumulated other comprehensive loss . ” distribution costs distribution costs represent costs associated with handling finished goods and shipping products to customers . such costs are included in “ distribution costs ” in our consolidated statements of operations . 76 resolute forest products inc. notes to consolidated financial statements note 3. acquisition of fibrek inc. on may 2 , 2012 , in connection with an offer to purchase all of the issued and outstanding shares of fibrek inc. ( “ fibrek ” ) , a producer and marketer of virgin and recycled kraft pulp operating three mills , we acquired a controlling interest in fibrek and began consolidating its results of operations , financial position and cash flows in our consolidated financial statements . our acquisition of fibrek was achieved in stages . in connection with the offer , between april 11 , 2012 and april 25 , 2012 , we acquired approximately 48.8 % of the then outstanding fibrek shares . on may 2 , 2012 ( the “ acquisition date ” ) , we acquired additional shares of fibrek , after which we owned a controlling interest in fibrek ( approximately 50.1 % of the then outstanding fibrek shares ) and fibrek became a consolidated subsidiary . after may 2 , 2012 , we acquired additional shares of fibrek and , as of may 17 , 2012 , the offer expiry date , we owned approximately 74.6 % of the then outstanding fibrek shares . on july 31 , 2012 , we completed the second step transaction for the remaining 25.4 % of the outstanding fibrek shares . as aggregate consideration for all of the fibrek shares we purchased , we distributed approximately 3.3 million shares of our common stock and cdn $ 63 million ( $ 63 million , based on the exchange rates in effect on each of the dates we acquired the shares of fibrek ) in cash . see note 16 , “ commitments and contingencies , ” for additional information . the following summarizes the fair value as of the acquisition date of all of the consideration transferred through may 2 , 2012 to acquire our controlling interest in fibrek : replace_table_token_39_th the acquisition-date fair value of our common stock issued as part of the consideration transferred for fibrek was determined based on the closing market price of our common stock on the acquisition date . the total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our estimates of their fair values on the acquisition date . 77 resolute forest products inc. notes to consolidated financial statements the following summarizes our allocation of the purchase price to the fair value of assets acquired and liabilities assumed : replace_table_token_40_th the fair value of the consideration transferred plus the fair value of the noncontrolling interest approximated the fair value of the net assets acquired . therefore , no goodwill or gain was recognized at the acquisition date . the acquisition-date fair value of the noncontrolling interest in fibrek was determined based on the market price we paid for fibrek 's common stock on the acquisition date . upon acquisition , we identified amortizable intangible assets related to energy contracts , which had a weighted-average amortization period of approximately 23 years . the fair value of the amortizable intangible assets was determined based on the discounted cash flow method . story_separator_special_tag the drop in manufacturing costs reflects : our asset optimization and mill restructuring initiatives and external power sales from cogeneration facilities ( $ 13 million ) ; more efficient fiber usage , lower usage of coating chemicals , as well as lower chip and recovered paper costs ( $ 12 million ) ; 32 a non-cash obsolescence provision for slow-moving spare parts taken in 2012 ( $ 10 million ) ; and a favorable power adjustment ( $ 4 million ) ; offset in part by : higher maintenance costs ( $ 14 million ) ; higher log costs in the province of québec ( $ 9 million ) , including : higher stumpage fees , most of which was lumber market-price related , and other costs associated with the comprehensive modification of the forest tenure system in the province ; and higher wood costs in the u.s. southeast due to wet weather ( $ 7 million ) . closure costs , impairment and other related charges were $ 33 million in the fourth quarter of 2013 , reflecting costs and charges related to the extended market-related outage at the remaining paper machine in fort frances and the impairment of the u.s. recycling assets . by comparison , we recorded $ 87 million in the same period in 2012 for costs , impairment and charges related to the idling of the mersey newsprint mill , the idling of a pulp and a paper machine at our fort frances mill and the idling of a paper machine at our laurentide mill . net loss variance analysis net loss in the fourth quarter of 2013 was $ 3 million , compared to a net loss of $ 45 million in the year ago period , a narrowing of $ 42 million . the change to operating income is described above . interest expense was $ 12 million , or $ 3 million lower , as a result of the refinancing of our senior secured notes in the second quarter . the change in the canadian dollar compared to the end of the third quarter led to a $ 15 million foreign exchange loss on the translation of canadian dollar net monetary assets , compared to a loss of $ 4 million in the fourth quarter of 2012. we recorded a $ 22 million income tax benefit on a loss before taxes of $ 24 million in the fourth quarter of 2013 , compared to a $ 29 million benefit on a loss before taxes of $ 73 million in the same period of 2012. the fourth quarter 2013 income tax benefit reflected a favorable adjustment to valuation allowances of $ 10 million , as well as a decrease in certain state-related deferred income tax liabilities . the fourth quarter 2012 income tax benefit reflected a favorable net adjustment for valuation allowances of $ 9 million , mainly as a result of an internal reorganization of our u.s. fibrek subsidiaries . 2012 vs. 2011 operating ( loss ) income variance analysis 33 sales sales decreased by $ 253 million in 2012 , or 5.3 % , to $ 4,503 million , led by a $ 509 million decline in volume across all grades and a net $ 12 million reduction in pricing , as more fully described in the segment variance analysis below . the decline was partly offset with the inclusion of fibrek sales ( $ 268 million ) . in light of challenging market conditions , the non-fibrek volume decline reflects additional market downtime and our ongoing efforts to focus production in our most cost-effective mills , and drive better efficiency by restructuring and reducing labor costs . this fits into our strategy of managing production and inventory levels , selling only profitable tons , and maintaining world-class operational standards . cost of sales , excluding depreciation , amortization and distribution costs cos improved by $ 96 million in 2012 compared to 2011 , or $ 59 million net of fibrek and the volume effects . cos was favorably influenced by the slightly weaker canadian dollar compared to the u.s. dollar ( $ 24 million ) and a net reduction in manufacturing costs ( $ 37 million ) , including : lower costs for energy ( $ 44 million ) as a result of favorable pricing and our energy saving initiatives ; lower labor and pension costs ( $ 34 million ) ; favorable recovered paper pricing ( $ 21 million ) ; the idling of the mersey facility in june ( $ 18 million ) ; other operational cost improvements ( $ 17 million ) ; and favorable inventory adjustment as a result of increasing market prices for lumber products ( $ 6 million ) . these favorable effects to cos were offset by costs associated with the start-up of closed mills and our capacity reduction initiatives ( $ 25 million ) ; higher log costs ( $ 23 million ) , including stumpage fees ; and increased coating and chemicals costs ( $ 17 million ) . compared to 2011 , segment cos was also unfavorably affected by the loss of power sales income as a result of our sale of ach limited partnership , or “ ach ” , in 2011 ( $ 19 million ) , by non-cash inventory obsolescence charges for slow-moving spare parts ( $ 15 million ) over the course of the year , offset by the benefit of a 2010 nier program rebate recorded in 2011 ( $ 8 million ) . we joined the northern industrial electricity rate program , or “ nier program ” , during the second quarter of 2011 , retroactive to the program 's april 1 , 2010 , start date . under the program , we earned rebates on electricity purchased and consumed by our northern ontario pulp and paper mills , subject to certain conditions . these rebates , which effectively reduce our energy costs ,

cash used in financing activities cash used in financing activities was $ 96 million lower than in 2011 , to $ 297 million , mainly as a result lower debt payments ( $ 156 million ) . in 2011 , we redeemed $ 264 million of senior secured notes and a $ 90 million promissory note , partly with the proceeds of ach . in 2012 , we redeemed $ 85 million of senior secured notes and we repaid fibrek 's debt ( $ 112 million ) . the year over year variance was unfavorably affected by purchases of our shares of common stock ( $ 67 million ) and higher payments for the acquisition of noncontrolling interests ( $ 12 million ) with the acquisition of fibrek in 2012 , compared to the acquisition of the noncontrolling interest in augusta newsprint company in 2011 . 2012 also reflects the favorable effects of lower dividends and distribution to noncontrolling interests ( $ 16 million ) . 2014 expectations in 2014 , we anticipate that we may use cash on hand to : make capital expenditures for compliance and maintenance of business activities of between $ 135 million and $ 160 million , plus between $ 75 million and $ 125 million for value-creating projects . we may consider other strategic opportunities , with a particular focus on those that reduce our cost position , improve our product diversification , provide synergies or allow us to expand into future growth markets . subject to market conditions , repurchase up to the remaining $ 33 million authorized for share repurchases under our existing $ 100 million repurchase program . credit rating risk although the abl credit facility does not include any provision that would require material changes in payment schedules or terminations as a result of a credit rating downgrade , we believe our access to capital markets at a reasonable cost is determined in large part by credit quality . a credit rating downgrade could impact our ability to access capital markets . replace_table_token_25_th 55 subject to other factors affecting the credit markets as a whole , we believe our current ratings should provide a significant degree of flexibility in obtaining funds on competitive terms . these security ratings reflect the views of the rating agencies only . an explanation of the significance of these ratings can be obtained from each rating agency . the ratings are

of the company 's special voting stock , par value $ 0.001 ( the `` special voting stock `` ) entitling the purchaser of series a preferred stock to elect one member of the company 's board of directors for aggregate net proceeds to the company of approximately $ 25,300 ( the `` transaction `` ) . on january 3 , 2020 , the company entered into an exclusive option and license agreement ( the `` beigene agreement `` ) with beigene , ltd. ( `` beigene `` ) for the clinical development and commercialization of dkn-01 , the company 's anti-dickkopf-1 ( dkk1 ) antibody , in asia ( excluding japan ) , australia , and new zealand . the company retains exclusive rights for the development , manufacturing , and commercialization of dkn-01 for the rest of the world . pursuant to the beigene agreement , the company received an upfront cash payment of $ 3,000 from beigene in exchange for granting beigene an option to an exclusive license to develop and commercialize dkn-01 in asia ( excluding japan ) , australia , and new zealand , and will be eligible to receive an additional payment upon beigene 's exercise of the option . additionally , the company is eligible to receive additional payments based upon the achievement of certain development , regulatory , and sales milestones as well as tiered royalties on any product sales of dkn-01 in the licensed territory . the company believes that its cash and cash equivalents of $ 3,891 as of december 31 , 2019 , together with the $ 25,300 in net proceeds from the january 2020 private placement and the $ 3,000 upfront cash payment received from beigene , will be sufficient to fund its operating expenses for at least the next 12 months from issuance of these financial statements . in addition , the company will seek additional funding through public or private equity financings or government programs and will seek funding or development program cost-sharing through collaboration agreements or licenses with larger pharmaceutical or biotechnology companies . if the company does not obtain additional funding or development program cost-sharing , or exceeds its current spending forecasts or fails to receive the research and development tax incentive payment , the company has the ability and would be forced to : delay , reduce or eliminate certain clinical trials or research and development programs , reduce or eliminate discretionary operating expenses , and delay company and pipeline expansion , any of which would adversely affect its business prospects . the inability to obtain funding , as and when needed , would have a negative impact on the company 's financial condition and ability to pursue its business strategies . 2. summary of significant accounting policies principles of consolidation the accompanying consolidated financial statements include the accounts of the company and its wholly owned subsidiaries . all intercompany accounts and transactions are eliminated upon consolidation . f-8 leap therapeutics , inc. and subsidiaries notes to consolidated financial statements ( continued ) ( amounts in thousands , except share and per share amounts ) 2. summary of significant accounting policies ( continued ) use of estimates the presentation of consolidated financial statements in conformity with accounting principles generally accepted in the united states of america ( `` gaap `` ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates . cash and cash equivalents the company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents . research and development expense research and development costs are expensed as incurred . research and development expenses include personnel costs associated with research and development activities , including noncash share-based compensation and costs for third-party contractors to perform research , conduct clinical trials and manufacture drug supplies and materials . the company accrues for costs incurred by external service providers , including contract research organizations and clinical investigators , based on its estimates of service performed and costs incurred . these estimates include the level of services performed by the third parties , patient enrollment in clinical trials , administrative costs incurred by the third parties , and other indicators of the services completed . based on the timing of amounts invoiced by service providers , the company may also record payments made to those providers as prepaid expenses that will be recognized as expense in future periods as the related services are rendered . research and development incentive income and receivable the company recognizes other income from australian research and development incentives when there is reasonable assurance that the income will be received , the relevant expenditure has been incurred , and the consideration can be reliably measured . the research and development incentive is one of the key elements of the australian government 's support for australia 's innovation system and is supported by legislative law primarily in the form of the australian income tax assessment act 1997 as long as eligibility criteria are met . management has assessed the company 's research and development activities and expenditures to determine which activities and expenditures are likely to be eligible under the research and development incentive regime described above . at each period end management estimates the refundable tax offset available to the company based on available information at the time . story_separator_special_tag jobs act we are an `` emerging growth company `` , or egc , as defined in the jumpstart our business startups act of 2012 ( the `` jobs act `` ) . the jobs act , permits an `` emerging growth company `` such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies . we may elect to use the extended transition period for complying with new or revised accounting standards under section 102 ( b ) ( 1 ) of the jobs act . this election would allow us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies . as a result of this election , our financial statements may not be comparable to companies that comply with public company effective dates . we may take advantage of these reporting exemptions until we are no longer an emerging growth company , which in certain circumstances could be for up to five years . we will remain an `` emerging growth company `` until the earliest of ( a ) the last day of the first fiscal year in which our annual gross revenues exceed $ 1.07 billion , ( b ) the date that we become a `` large accelerated filer `` as defined in rule 12b-2 under the securities exchange act of 1934 , as amended , or the exchange act , which would occur if the market value of our shares that are held by non-affiliates exceeds $ 700 million as of the last business day of our most recently completed second fiscal quarter , ( c ) the date on which we have issued more than $ 1.0 billion in nonconvertible debt during the preceding three-year period and ( d ) the last day of our 2022 fiscal year containing the fifth anniversary of the date on which shares of our common stock became publicly traded in the u.s. as of december 31 , 2019 , we remain an egc . 73 results of operations comparison of the years ended december 31 , 2019 and 2018 the following tables summarize our results of operations for the years ended december 31 , 2019 and 2018 : replace_table_token_3_th research and development expenses replace_table_token_4_th research and development expenses were $ 24.4 million for the year ended december 31 , 2019 , compared to $ 21.8 million for the year ended december 31 , 2018. the increase of $ 2.6 million was primarily due to a $ 3.5 million increase in clinical trial costs due to an increase in patient enrollment , a $ 0.7 million increase in payroll and other related expenses due to an increase in headcount in our full time research and development employees and a $ 0.3 million increase in stock based compensation expense due to new stock options and restricted stock units granted to employees during the year ended december 31 , 2019. these increases were partially offset by a $ 1.5 million decrease in manufacturing costs related to clinical trial material due to timing of manufacturing campaigns and a $ 0.5 million decrease in consulting fees associated with research and development activities during the year ended december 31 , 2019 as compared to the year ended december 31 , 2018. general and administrative expenses general and administrative expenses were $ 9.1 million for the year ended december 31 , 2019 , compared to $ 8.9 million for the year ended december 31 , 2018. the increase of $ 0.2 million was due 74 to a $ 0.3 million increase in stock based compensation expense due to new stock options and restricted stock units granted to employees during the year ended december 31 , 2019. this increase was partially offset by a $ 0.1 million decrease in payroll and other related expenses . interest income we recorded interest income of $ 0.3 million and $ 0.4 million , respectively , for the years ended december 31 , 2019 and 2018. the decrease in interest income is primarily due to a higher average cash balance during the year ended december 31 , 2018 as compared to 2019. australian research and development incentives we recorded r & d incentive income of $ 0.1 million and $ 0.8 million for the years ended december 31 , 2019 and 2018 , respectively , based upon the applicable percentage of eligible research and development activities under the australian incentive program , net of our australia tax liability , which expenses included the cost of manufacturing of clinical trial material . we perform certain supporting research and development activity outside of australia when there are no australian facilities that support the activity ( `` overseas research and development activities `` ) . in october 2017 , the commonwealth of australia issued us a favorable ruling on our overseas research and development activities , considering such activities to be eligible research and development activities under the australian incentive program . during the year ended december 31 , 2019 , we received $ 0.8 million of research and development tax incentive payments from the commonwealth of australia as a result of the 2018 research and development activities . during the year ended december 31 , 2018 , we received $ 0.8 million of research and development tax incentive payments from the commonwealth of australia as a result of the 2017 research and development activities . the remaining r & d incentive receivable has been recorded as `` research and development incentive receivable `` in the consolidated balance sheets . foreign currency gains ( loss ) we recorded foreign currency gains ( losses ) of 0.1 million and ( $ 0.8 ) million , respectively , for the years ended december 31 , 2019 and 2018. the increase in foreign currency gains is

net cash provided by financing activities for the year ended december 31 , 2019 consisted of $ 12.3 million in proceeds from the issuance of common stock in connection with the 2019 public offering , net of underwriter commissions and discounts , $ 1.9 million in proceeds from the issuance of common stock under our distribution agreement with raymond james & associates , inc. and $ 1.0 million in proceeds from the issuance of common stock under the distribution agreement 76 with lincoln park capital . these increases were partially offset by payments of $ 0.4 million for deferred offering costs . net cash provided by financing activities for the year ended december 31 , 2018 consisted of $ 15.0 million in proceeds from the issuance of common stock in connection with the march 2018 public offering , net of underwriter commissions and discounts , and $ 1.2 million in proceeds from the exercise of common stock warrants , partially offset by payments of $ 0.3 million for deferred offering costs . capital requirements we expect our expenses to increase substantially in connection with our ongoing activities , particularly as we advance the preclinical activities and clinical trials of our product candidates in development . in addition , we expect to incur additional costs associated with operating as a public company . our expenses will also increase as we : pursue the clinical development of our most advanced product candidate , dkn-01 ; seek to identify and develop additional product candidates ; maintain , expand and protect our intellectual property portfolio ; expand our operational , financial and management systems and increase personnel , including personnel to support our clinical development , manufacturing and commercialization efforts and our operations as a public company ; and increase our product liability and clinical trial insurance coverage as we initiate our clinical trials and commercialization efforts . additional funding may not be available at the time needed on commercially reasonable terms , if at all . contractual obligations and commitments the following table summarizes our contractual obligations as of december 31 , 2019 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods : replace_table_token_6_th < ! -- end of user-specified tagged

in addition , we recognize the financial statement effect of a tax position only when management believes that it is more likely than not , that based on the technical merits , the position will be sustained upon examination . we do not provide for deferred u.s. income taxes for that portion of undistributed earnings of foreign subsidiaries that are indefinitely reinvested in foreign operations . we classify interest and penalties associated with uncertain tax positions as income tax expense . asset retirement obligations : we have material legal obligations to remove and dismantle long‑lived assets and to restore land or the seabed at certain exploration and production locations . we initially recognize a liability for the fair value of legally required asset retirement obligations in the period in which the retirement obligations are incurred , and capitalize the associated asset retirement costs as part of the carrying amount of the long‑lived assets . in subsequent periods , the liability is accreted , and the asset is depreciated over the useful life of the related asset . fair value is determined by applying a credit adjusted risk-free rate to the undiscounted expected future abandonment expenditures , which represent level 3 inputs in the fair value hierarchy defined under fair value measurements below . retirement plans : we recognize the funded status of defined benefit postretirement plans in the consolidated balance sheet . the funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation . we recognize the net changes in the funded status of these plans in the year in which such changes occur . prior service costs and actuarial gains and losses in excess of 10 % of the greater of the benefit obligation or the market value of assets are amortized over the average remaining service period of active employees . derivatives : we utilize derivative instruments for financial risk management activities . in these activities , we may use futures , forwards , options and swaps , individually or in combination , to mitigate our exposure to fluctuations in prices of crude oil and natural gas , as well as changes in interest and foreign currency exchange rates . all derivative instruments are recorded at fair value in our consolidated balance sheet . our policy for recognizing the changes in fair value of derivatives varies based on the designation of the derivative . the changes in fair value of derivatives that are not designated as hedges are recognized currently in earnings . derivatives may be designated as hedges of expected future cash flows or forecasted transactions ( cash flow hedges ) or hedges of firm commitments ( fair value hedges ) . the effective portion of changes in fair value of derivatives that are designated as cash flow hedges is recorded as a component of other comprehensive income ( loss ) while the ineffective portion of the changes in fair value is recorded currently in earnings . amounts included in accumulated other comprehensive income ( loss ) for cash flow hedges are reclassified into earnings in the same period that the hedged item is recognized in earnings . changes in fair value of derivatives designated as fair value hedges are recognized currently in earnings . the change in fair value of the related hedged commitment is recorded as an adjustment to its carrying amount and recognized currently in earnings . fair value measurements : we use various valuation approaches in determining fair value for financial instruments , including the market and income approaches . our fair value measurements also include non-performance risk and time value of money considerations . counterparty credit is considered for receivable balances , and our credit is considered for accrued liabilities . we also record certain nonfinancial assets and liabilities at fair value when required by gaap . these fair value measurements are recorded in connection with business combinations , qualifying nonmonetary exchanges , the initial recognition of asset retirement obligations and any impairment of long‑lived assets , equity method investments or goodwill . we determine fair value in accordance with the fair value measurements accounting standard which established a hierarchy for the inputs used to measure fair value based on the source of the inputs , which generally range from quoted prices for identical instruments in a principal trading market ( level 1 ) to estimates determined using related market data ( level 3 ) , including discounted cash flows and other unobservable data . measurements derived indirectly from observable inputs or from quoted prices from markets that are less liquid are considered level 2. when level 1 inputs are available within a 58 hess corporation and consolidated subsidiaries notes to consolidated financial statements ( continued ) particular market , those inputs are selected for determination of fair value over level 2 or 3 inputs in the same market . multiple inputs may be used to measure fair value ; however , the level of fair value for each physical derivative and financial asset or liability is based on the lowest significant input level within this fair value hierarchy . details on the methods and assumptions used to determine the fair values are as follows : fair value measurements based on level 1 inputs : measurements that are most observable are based on quoted prices of identical instruments obtained from the principal markets in which they are traded . closing prices are both readily available and representative of fair value . market transactions occur with sufficient frequency and volume to assure liquidity . fair value measurements based on level 2 inputs : measurements derived indirectly from observable inputs or from quoted prices from markets that are less liquid are considered level 2. measurements based on level 2 inputs include over-the-counter derivative instruments that are priced on an exchange traded curve , but have contractual terms that are not identical to exchange traded contracts . story_separator_special_tag comparison of five‑year shareholder returns years ended december 31 , 20 holders at february 19 , 2016 , there were 4,441 stockholders ( based on the number of holders of record ) who owned a total of 315,240,299 shares of common stock . dividends in 2015 and 2014 , cash dividends on common stock totaled $ 1.00 per share ( $ 0.25 per quarter ) . in 2013 , cash dividends declared on common stock totaled $ 0.70 per share ( $ 0.10 per share for the first two quarters and $ 0.25 per share commencing in the third quarter of 2013 ) . share repurchase activities our share repurchase activities for the year ended december 31 , 2015 , were as follows : 2015 total number of shares purchased ( a ) ( b ) average price paid per share ( a ) total number of shares purchased as part of publicly announced plans or programs maximum approximate dollar value of shares that may yet be purchased under the plans or programs ( c ) ( in millions ) january 116,250 $ 69.65 116,250 $ 1,233 february 88,765 74.64 88,765 1,226 march 46,110 74.45 15,560 1,225 april — — — 1,225 may — — — 1,225 june 293,005 68.26 293,005 1,205 july 407,000 61.85 407,000 1,180 august 429,312 56.40 429,312 1,156 september 98,167 57.19 98,167 1,150 october — — — 1,150 november — — — 1,150 december — — — 1,150 total for 2015 ( d ) 1,478,609 $ 63.00 1,448,059 ( a ) repurchased in open‑market transactions . the average price paid per share was inclusive of transaction fees . ( b ) includes 30,550 common shares repurchased at a price of $ 74.58 per common share on the open market , which were subsequently granted to directors in accordance with the non-employee directors ' stock award plan . ( c ) in march 2013 , we announced that our board of directors approved a stock repurchase program that authorized the purchase of common stock up to a value of $ 4.0 billion . in may 2014 , the share repurchase program was increased to $ 6.5 billion . ( d ) since initiation of the buyback program in august 2013 , total shares repurchased through december 31 , 2015 amounted to 64.1 million at a total cost of $ 5.4 billion ( including transaction fees ) for an average cost per share of $ 83.45 . 21 equity compensation plans following is information related to our equity compensation plans at december 31 , 2015. plan category number of securities to be issued upon exercise of outstanding options , warrants and rights * weighted average exercise price of outstanding options , warrants and rights number of securities remaining available for future issuance under equity compensation plans ( excluding securities reflected in column * ) equity compensation plans approved by security holders 6,911,378 ( a ) $ 67.77 14,241,000 ( b ) equity compensation plans not approved by security holders ( c ) — — — ( a ) this amount includes 6,911,378 shares of common stock issuable upon exercise of outstanding stock options . this amount excludes 820,090 performance share units ( psu ) for which the number of shares of common stock to be issued may range from 0 % to 200 % , based on our total shareholder return ( tsr ) relative to the tsr of a predetermined group of peer companies over a three‑year performance period ending december 31 of the year prior to settlement of the grant . in addition , this amount also excludes 2,819,470 shares of common stock issued as restricted stock pursuant to our equity compensation plans . ( b ) these securities may be awarded as stock options , restricted stock , performance share units or other awards permitted under our equity compensation plan . ( c ) we have a non-employee director 's stock award plan pursuant to which each non-employee director annually receives approximately $ 175,000 in value of our common stock . these awards are made from shares we have purchased in the open market . see note 11 , share‑based compensation in the notes to the consolidated financial statements for further discussion of our equity compensation plans . 22 i tem 6. selected financial data the following is a five‑year summary of selected financial data that should be read in conjunction with both our consolidated financial statements and accompanying notes , and item 7. management 's discussion and analysis of financial condition and results of operations included elsewhere in this annual report : replace_table_token_12_th * includes noncontrolling interests associated with both continuing and discontinued operations . ( a ) includes noncash charges of $ 1,483 million relating to write off all goodwill associated with our e & p operating segment . ( b ) includes after‑tax income of $ 1,589 million relating to net gains on asset sales and income from the partial liquidation of last‑in , first‑out ( lifo ) inventories , partially offset by after‑tax charges totaling $ 580 million for dry hole expenses , charges associated with termination of lease contracts , severance and other exit costs , income tax restructuring charges and other charges . ( c ) includes after‑tax income of $ 4,060 million relating to net gains on asset sales , denmark 's enacted changes to the hydrocarbon income tax law and income from the partial liquidation of lifo inventories , partially offset by after‑tax charges totaling $ 900 million for asset impairments , dry hole expenses , severance and other exit costs , income tax charges , refinery shutdown costs , and other charges . ( d ) includes after‑tax income of $ 661 million relating to gains on asset sales and income from the partial liquidation of lifo inventories , partially offset by after‑tax charges totaling $ 634 million for asset impairments , dry hole expenses , income taxes and other charges . ( e ) includes

in 2015 , we paid $ 142 million for the purchase and settlement of common shares under our $ 6.5 billion board authorized stock repurchase plan ( 2014 : $ 3,715 million ; 2013 : $ 1,493 million ) . total common stock dividends paid were $ 287 million in 2015 ( 2014 : $ 303 million ; 2013 : $ 235 million ) . we received net proceeds from the exercise of stock options , including related income tax benefits of $ 12 million in 2015 ( 2014 : $ 182 million ; 2013 : $ 128 million ) . future capital requirements and resources at december 31 , 2015 , we had $ 2.7 billion in cash and cash equivalents , including $ 0.4 billion held outside of the u.s. which we have the ability to repatriate without triggering a u.s. cash tax liability , and total liquidity including available committed credit facilities of approximately $ 7.4 billion . oil and gas production in 2016 is forecast to be in the range of 330,000 to 350,000 boepd compared with 375,000 boepd in 2015 , and we have reduced our 2016 e & p capital and exploratory expenditure budget to approximately $ 2.4 billion , down 40 % from 2015. capital expenditures from our bakken midstream joint venture are expected to be approximately $ 340 million in 2016. forward strip crude oil prices for 2016 are below average prices for 2015 , and as a result , we forecast a significant net loss and a net operating cash flow deficit ( including capital expenditures ) in 2016. in february 2016 , we issued 28,750,000 shares of common stock and depositary shares representing 575,000 shares of 8 % series a mandatory convertible preferred stock , par value $ 1 , with a liquidation preference of $ 1,000 per share of convertible preferred stock , for total net proceeds of approximately $ 1.6 billion . we expect to fund our net operating cash flow deficit ( including capital expenditures ) for the full year of 2016 with cash on hand . due to the low commodity price environment , we may take other steps to improve our financial position by further reducing our planned capital program and other cash outlays , accessing other sources of liquidity by issuing debt and equity securities , and or pursuing further asset sales . see note 23 , subsequent events in the notes to the consolidated financial statements . < p

as of december 31 , 2011 , assets measured at fair value on a nonrecurring basis are summarized below : level 3 impairment loss recorded ( $ 000 omitted ) cost-basis investments 1,167 2,685 the carrying amount of certain cost-basis investments exceeded their fair value and an impairment charge of $ 2.7 million was recorded in investment and other gains ( losses ) – net in 2011. the valuations were based on the values of the underlying assets of the investee . note 6 investment income . income from investments and gross realized investment and other gains and losses follow : replace_table_token_25_th f-15 proceeds from the sales of investments available-for-sale were $ 134.8 million , $ 292.0 million and $ 280.9 million for the years ended december 31 , 2012 , 2011 and 2010 , respectively . expenses assignable to investment income were insignificant . there were no significant investments at december 31 , 2012 that did not produce income during the year . in 2012 , investment and other gains ( losses ) – net included realized gains of $ 8.0 million from the sale of debt and investments available-for-sale and sale of fixed assets , partially offset by realized losses of $ 0.8 million for the impairment of cost-basis investments . in 2011 , investment and other gains ( losses ) – net included realized gains of $ 10.7 million from the sale of debt and investments available-for-sale , partially offset by realized losses of $ 3.5 million for the impairment of cost-basis investments and $ 4.3 million from a loss on a third-party loan guarantee obligation . in 2010 , investment and other gains ( losses ) – net included realized gains of $ 11.8 million from the sale of debt and investments available-for-sale , $ 6.3 million primarily from a transfer of the rights to internally developed software , $ 1.2 million from the sale of interests in subsidiaries and $ 3.0 million from the sale of real estate . note 7 income taxes . the income tax provision consists of the following : replace_table_token_26_th f-16 the following reconciles federal income taxes computed at the statutory rate with income taxes as reported . replace_table_token_27_th ( 1 ) calculated using income ( loss ) before taxes and after noncontrolling interests . deferred income taxes at december 31 , 2012 and 2011 were as follows : replace_table_token_28_th f-17 net deferred tax assets for u.s. federal tax paying components totaled approximately $ 7.6 million and net deferred tax liabilities for foreign tax paying components totaled approximately $ 2.7 million . during 2008 , the company recorded valuation allowances against u.s. deferred tax assets , net of definite-lived deferred tax liabilities , for which realization could not be assured based on a more-likely-than-not standard . the company retained that valuation allowance for all subsequent periods through december 31 , 2011 principally due to the company 's cumulative three-year operating loss history as of the end of each period . the company routinely evaluates the extent to which the valuation allowance may be reversed . during 2012 , the company utilized approximately $ 87.2 million of u.s. federal net operating loss carry forwards ( nol ) . remaining nols will begin to expire in 2030 , if not utilized . during 2012 , the company released approximately $ 72.6 million of its valuation allowance , $ 36.6 million of which is included in the company 's deferred tax benefit . the company is routinely subject to income tax examinations by u.s. federal , international and state and local tax authorities . the company is currently under examination by the internal revenue service for calendar years 2005 through 2008. the company also is involved in routine examinations by state and local tax jurisdictions for calendar years 2007 and 2008. the company expects no material adjustment from any examination . note 8 goodwill and acquired intangibles . a summary of goodwill follows : replace_table_token_29_th amortization expense for acquired intangibles was $ 1.7 million , $ 1.5 million and $ 1.1 million in 2012 , 2011 and 2010 , respectively . accumulated amortization of intangibles was $ 27.5 million and $ 25.8 million at december 31 , 2012 and 2011 , respectively . in each of the years 2013 through 2017 , amortization expense is expected to be less than $ 1.7 million . f-18 note 9 equity investees . certain summarized aggregate financial information for equity investees ( in which the company typically owns 20 % through 50 % of the equity ) follows : replace_table_token_30_th net premium revenues from policies issued by equity investees were approximately $ 6.0 million , $ 6.4 million and $ 6.9 million in 2012 , 2011 and 2010 , respectively . earnings related to equity investees were $ 4.3 million , $ 1.7 million and $ 2.4 million in 2012 , 2011 and 2010 , respectively . these amounts are included in title insurance – direct operations in the consolidated statements of operations and comprehensive earnings ( loss ) . goodwill related to equity investees was $ 9.1 million and $ 12.1 million at december 31 , 2012 and 2011 , respectively , and these balances are included in investments in investees in the consolidated balance sheets . equity investments , including the related goodwill balances , are reviewed for impairment annually and upon the occurrence of an event indicating an impairment may have occurred . note 10 notes payable , convertible senior notes and line of credit . a summary of notes payable follows : replace_table_token_31_th ( 1 ) average interest rates were 3.07 % and 3.49 % at december 31 , 2012 and 2011 , respectively . story_separator_special_tag the slight increase in agent retention in 2011 was attributable to a shift in geographic mix of revenues from independent agents , as relatively more revenues were realized in states with lower remittance rates , thus lowering the overall average remittance rate . the fluctuations in 2010 were also affected by the uneven recovery of real estate markets across the nation ; those states with higher agency retention percentages experienced a disproportionate increase in transaction activity in 2009. we began the process of vetting our network of independent agencies several years ago with the emphasis on managing for quality and profitability . since fourth quarter 2008 , our average annual remittance rate per independent agency has increased more than 95 percent while we have reduced the number of independent agencies in our network by approximately 40 percent . further , the policy loss ratio of our current independent agency network for the year ended december 31 , 2012 is less than one-third of its level in the comparable 2008 period . selected cost ratios ( by segment ) . the following table shows employee costs and other operating expenses as a percentage of related title insurance and mortgage services operating revenues . replace_table_token_10_th these two categories of expenses are discussed below in terms of year-to-year monetary changes . employee costs . our employee costs and certain other operating expenses are sensitive to inflation . employee costs for the combined business segments increased $ 72.6 million , or 15.5 % , in 2012 and $ 2.3 million , or 0.5 % , in 2011. the number of persons we employed at december 31 , 2012 , 2011 and 2010 was approximately 6,300 , 5,600 and 5,700 , respectively . in 2012 , we increased our employee headcount company-wide by approximately 691 , or 12.3 % including acquisitions . the increase in headcount was largely driven by new mortgage services contracts ( see discussion below ) . employee costs were also influenced by increased contract labor for the aforementioned mortgage services contracts as well as higher incentive compensation expense driven by the improvement in pretax earnings before noncontrolling interest . 20 in 2011 , we reduced our employee headcount company-wide by approximately 240 , or 4.2 % excluding acquisitions . this decrease was partially offset by the acquisition of pmh financial in 2011 , which added approximately 100 employees . employee costs were also influenced by increased incentive compensation expense driven by the improvement in pretax earnings before noncontrolling interest . in 2010 , we reduced our employee headcount company-wide by 130 , or 2.2 % , excluding the effects of divestitures . in 2010 , employee costs were reduced primarily due to the sale and deconsolidation of several subsidiaries , partially offset by increases in state unemployment tax rates in certain states . in our mortgage services segment , total employee costs as a percentage of operating revenue fell to 61.1 % from 62.9 % in 2011. actual costs increased $ 30.5 million , or 39.1 % , in 2012 , primarily due to increases in staffing requirements to support new contracts awarded in late 2011 and early 2012. in 2011 , actual costs increased $ 4.4 million , or 5.9 % , primarily due to increases in staffing driven by increased demand for our loan modification services . other operating expenses . other operating expenses include costs that are fixed in nature , costs that follow , to varying degrees , changes in transaction volumes and revenues and costs that fluctuate independently of revenues . costs that are fixed in nature include attorney fees , equipment rental , insurance , professional fees , rent and other occupancy expenses , repairs and maintenance , technology costs , telephone and title plant rent . costs that follow , to varying degrees , changes in transaction volumes and revenues include fee attorney splits , bad debt expenses , certain mortgage services expenses , copy supplies , delivery fees , outside search fees , postage , premium taxes and title plant expenses . costs that fluctuate independently of revenues include auto expenses , general supplies , litigation defense and settlement costs , promotion costs and travel . in 2012 , other operating expenses for the combined business segments increased $ 30.3 million , or 11.8 % . costs fixed in nature increased $ 3.6 million , or 3.1 % , in 2012 , primarily due to increases in audit , accounting and technology costs , partially offset by decreases in rent and other occupancy expenses . costs that follow , to varying degrees , changes in transaction volumes and revenues increased $ 13.3 million , or 13.9 % , in 2012 due to increases in outside search fees , bad debt expense and premium taxes . these increases were partially offset by decreases in certain mortgage service expenses . costs that fluctuate independently of revenues increased $ 13.4 million , or 30.3 % , in 2012 due primarily to litigation-related expenses . in 2011 , other operating expenses for the combined business segments decreased $ 17.1 million , or 6.2 % . costs fixed in nature decreased $ 3.6 million , or 3.0 % , primarily due to decreases in rent and other occupancy expenses related to office closures and a decrease in telephone expenses . these reductions were offset primarily by an increase in professional fees primarily due to the outsourcing of our internal audit function . costs that follow , to varying degrees , changes in transaction volumes and revenues decreased $ 6.6 million , or 6.4 % , in 2011 due to decreases in bad debt expense , fee attorney splits and title plant expenses . these decreases were offset by increases in premium taxes and postage . costs that fluctuate independently of revenues decreased $ 6.9 million , or 13.6 % , in 2011 due to litigation and other expense reductions and were partially offset by an increase in travel

we expect to collect these receivables during the first quarter 2013. our business is labor intensive , although we continue to make progress in automating our services , which allows us to more easily adjust staffing levels as order volumes fluctuate . there are typically delays between changes in market conditions and changes in staffing levels ; therefore , employee costs do not change at the same rate as revenues change . cash payments on title claims in 2012 , 2011 and 2010 were $ 124.0 million , $ 134.3 million and $ 158.3 million , respectively . claim payments made , net of insurance recoveries , during 2012 , 2011 , and 2010 include $ 28.8 million , $ 34.9 million and $ 32.8 million , respectively , on large title claims . as these losses are paid and newly reported prior policy year claims begin to decline , we expect the overall amount of cash paid on title claims to continue to decline . the insurance regulators of the states in which our underwriters are domiciled require our statutory premium reserves to be fully funded , segregated and invested in high-quality securities and short-term investments . as of december 31 , 2012 , cash and investments funding the statutory premium reserve aggregated $ 456.6 million and our statutory estimate of claims that may be reported in the future totaled $ 382.4 million . in addition to this restricted cash and investments , we had unrestricted cash and investments ( excluding equity method investments ) of $ 147.1 million , which are available for underwriter operations , including claims payments . investing activities cash from investing activities was generated principally by proceeds from investments matured and sold in the amounts of $ 181.9 million , $ 339.7 million and $ 328.5 million in 2012 , 2011 and 2010 , respectively . we used cash for the purchases of investments in the amounts of $ 207.7 million , $ 336.1 million and $ 303.5 million in 2012 , 2011 and 2010 , respectively . the cash from sales and maturities not reinvested in prior years was used principally to fund operations . capital expenditures were $ 16.8 million , $ 17.7 million , and $ 16.3 million in 2012 , 2011 , and 2010 , respectively . we maintain investment in capital expenditures at a level that enables us to implement technologies for increasing our operational and back-office efficiencies . notwithstanding this , we also continue to aggressively manage cash flow and , therefore , overall

these inputs are classified into the following hierarchy : level 1 inputs – quoted prices ( unadjusted ) in active markets for identical assets that the reporting entity has the ability to access at the measurement date ; level 2 inputs – inputs other than quoted prices included within level 1 that are observable for the asset , either directly or indirectly ; and level 3 inputs – unobservable inputs for the assets . the following tables present the company 's investment securities ( including , if applicable , those classified on the company 's balance sheet as cash equivalents ) that are measured at fair value on a recurring basis as of december 31 , 2015 and 2014 : replace_table_token_15_th 83 notes to the financial statements u.s. treasury , u.s. or state government agency-backed securities , corporate debt securities and municipal bonds are valued based on various observable inputs such as benchmark yields , reported trades , broker/dealer quotes , benchmark securities and bids . investment securities , all classified as available-for-sale , consisted of the following as of december 31 , 2015 : replace_table_token_16_th the company 's investment securities as of december 31 , 2015 , will reach maturity between january 2016 and july 2026 , with a weighted-average maturity date in february 2017. there were no investment securities held at december 31 , 2014. note 5 - propert y an d equipment property and equipment consists of the following : replace_table_token_17_th during the years ended december 31 , 2015 , 2014 , and 2013 , the company recorded $ 1.2 million , $ 0.7 million and $ 0.6 million of depreciation expense , respectively . 84 notes to the financial statements note 6 - accrued expenses and other current liabilities accrued expenses and other liabilities consist of the following : replace_table_token_18_th note 7 - deferred manufacturing costs at december 31 , 2014 , the company had deferred manufacturing costs of $ 0.3 million and a credit against future manufacturing costs of $ 0.2 million , pursuant to a service agreement with a third party manufacturer . the deferred manufacturing cost was amortized as manufacturing batches of cell therapy products were produced and the credit was recognized monthly over the term of the agreement . in september 2015 , the company and the third party manufacturer agreed to amend the service agreement , pursuant to which both parties were released from all prior obligations except for a 30 -day transition period during which the third party would continue to manufacture batches in process , not to exceed three batches . as a result of the amendment to the agreement , and the release of its obligations , the company reversed the remaining deferred manufacturing costs and credit against future manufacturing costs , resulting in a decrease of $ 0.3 million in research and development expenses for the year ended december 31 , 2015. note 8 - common stock , preferred stock and warrants common stock as of december 31 , 2015 and 2014 , the company had 200,000,000 authorized shares of common stock with a par value of $ 0.01 per share . exercise of common warrants in march 2014 , the company issued 393,523 shares of its common stock for $ 200,700 , or $ 0.51 per share in connection with the exercise of warrants expiring in march 2014. in december 2014 , the company issued 117,001 shares of common stock for $ 49,001 , or $ 0.42 per share in connection with the exercise of warrants expiring in 2015. in december 2015 , the company issued 355,361 shares of its common stock to the texas treasury safekeeping trust company ( a transferee of the office of the governor - economic development and tourism ) , pursuant to the cashless exercise provision of a warrant to purchase shares of the company 's common stock issued to the state of texas on september 27 , 2007. the company did not receive any cash or other consideration . initial public offering on december 17 , 2014 , the company commenced its initial public offering ( ipo ) pursuant to a registration statement on form s-1 ( file no . 333- 200328 ) that was declared effective by the sec on december 17 , 2014 and that registered an aggregate of 7,350,000 shares of the company 's common stock for sale to the public at a price of $ 19.00 per share . in addition , at the closing of the ipo on december 23 , 2014 , the underwriters exercised their over-allotment option to purchase 1,102,500 additional shares of the company 's common stock at a price to the public of $ 19.00 per share , for an aggregate offering price of $ 160.6 million . the net offering proceeds to the company , after deducting underwriting discounts , commissions and offering costs , were approximately $ 146.3 million . 85 notes to the financial statements treasury stock in december 2014 , in connection with the restructuring of the license agreement with ariad pharmaceuticals , inc. ( ariad ) , the company repurchased from ariad 677,463 shares of its common stock valued at approximately $ 5.1 million . see note 11. preferred stock as of december 2015 and 2014 , the company had 10,000,000 authorized shares of preferred stock . there were no shares of preferred stock issued or outstanding at december 31 , 2015 and 2014. the company had two series of convertible redeemable preferred stock issued and outstanding as of december 31 , 2013 : series a convertible redeemable preferred stock ( series a ) and series b convertible redeemable preferred stock ( series b ) , each with a par value of $ 0.01 . the shares of series a were issued between march 2009 and november 2011 at a price of $ 3.00 per share . the shares of series b were issued between november 2011 and january 2014 at a price of $ 4.625 story_separator_special_tag the license transaction was valued on the date of the transaction and the note was discounted to fair market value at a 10 % rate . this resulted in license expense of $ 43.2 million , repurchase of our common stock for $ 5.1 million , and interest expense of $ 1.7 million . we have recorded the returned shares of common stock as treasury stock . for more information , see note 11 to the financial statements included herein . general and administrative expenses general and administrative expenses were $ 4.3 million and $ 2.0 million for the years ended december 31 , 2014 and 2013 , respectively . the increase of $ 2.3 million in 2014 in general and administrative expenses was due to our overall growth and public company related costs , including an increase in personnel , legal and accounting expenses and costs related to facilities , insurance and travel . other income ( expense ) other expense was $ 26.1 million and $ 47,000 for the years ended december 31 , 2014 and 2013 , respectively . the increase in other expense is primarily due to the change in fair value of warrant liability of $ 24.4 million and imputed interest expense from the ariad license restructuring of $ 1.7 million . in connection with the august 2014 issuance of series c convertible preferred stock , bellicum issued warrants to purchase 6,559,598 shares of series c convertible preferred stock with an exercise price of $ 6.00 per share which were convertible into 3,858,549 common shares . the fair value of the warrants on the date of issuance of $ 9.4 million , as determined using the black-scholes option-pricing model , was recorded as a warrant liability . the series c warrants were revalued both at september 30 , 2014 to $ 10.6 million , and again revalued at the time of exercise in december 2014 to $ 33.8 million . the increase in the calculated fair value from the issuance date to the remeasurement dates resulted in non-cash expense of $ 24.4 million in 2014. as all the warrants were either exercised or expired in december 2014 , there will be no future charges in connection with the warrants . liquidity and capital resources sources of liquidity we are a clinical stage biopharmaceutical company with a limited operating history . to date , we have financed our operations primarily through equity and debt financings and grants . we have not generated any revenue from the sale of any products . as of december 31 , 2015 , we had cash , cash equivalents and investment securities of $ 150.4 million . cash in excess of immediate requirements is invested in accordance with our investment policy , primarily with a view to liquidity and capital preservation . on february 12 , 2013 , we received $ 3.5 million of cash proceeds through the issuance of promissory notes , bearing interest at 0.21 % per annum from february 12 , 2013 through july 31 , 2013. on july 31 , 2013 , in connection with the issuance of series b convertible preferred stock , we repaid the notes with 757,497 shares of series b convertible preferred stock at a conversion price of $ 4.625 per share . the converted balances consisted of $ 3.5 million of principal and $ 3,426 of outstanding interest payable . in the first quarter of 2014 , we issued 1,582,705 shares of our series b convertible preferred stock for net proceeds of $ 7.3 million , and received $ 0.2 million pursuant to the exercise of common warrants . in august 2014 , we completed a private placement of 10,091,743 shares of series c convertible preferred stock and warrants to purchase up to 6,559,598 shares of series c convertible preferred stock and received gross proceeds of $ 55.0 million , resulting in net proceeds of $ 51.5 million . the warrants had an exercise price of $ 6.00 per share . the warrants provided for automatic termination upon the date immediately following the date of effectiveness of our registration statement on form s-1 in connection with our initial public offering . as a result , substantially all of such warrants were exercised in december 2014. we received gross proceeds of approximately $ 39.1 million from the exercise of warrants , resulting in net proceeds of $ 38.4 million . see note 8 to the financial statements included herein . in december 2014 , we completed our initial public offering of shares of our common stock which resulted in aggregate gross proceeds to us of approximately $ 160.6 million and net offering proceeds to us of approximately $ 146.3 million , after deducting underwriting discounts and commissions and offering costs . also in conjunction with our initial public offering , $ 3.4 million of accrued series b dividends were paid , of which $ 0.2 million was paid in cash and the remainder was paid by issuance of 168,199 shares of our common stock . in conjunction with the initial public offering , substantially all of the common warrants were exercised resulting in additional proceeds of $ 49,001. also in conjunction with the initial public offering , $ 3.4 million of accrued series b dividends were paid , of which $ 0.2 million was paid in cash and the remainder was paid by issuance of 168,199 shares of common stock . on january 15 , 2016 , we filed a shelf registration statement on form s-3 ( file no . 333-209012 ) , or the shelf registration statement , to enable us to sell securities from time to time as described in the prospectus in one or more offerings up to a total aggregate offering price of $ 150,000,000. the sec declared the shelf registration statement effective on february 1 , 2016 . 66 on march 10 , 2016 , or the closing date , we entered into a loan and security agreement

net cash provided by financing activities for the year ended december 31 , 2014 was $ 238.5 million , which was derived from approximately $ 146.3 million in net proceeds from our december 2014 initial public offering , $ 101.5 million from the issuance of convertible preferred stock and the exercise of warrants , offset by $ 3.5 million of issuance costs , proceeds from the exercise of common warrants other than in our initial public offering of $ 0.3 million , payment of $ 5.1 million for repurchase of stock held by ariad , payments totaling $ 0.2 million for series b dividends , and proceeds from the line of credit of $ 0.4 million , which were offset by payments on the line of credit of $ 1.2 million . see note 8 to the audited financial statements included herein . net cash provided by financing activities for the year ended december 31 , 2013 was $ 17.5 million , which was derived from proceeds from issuance of preferred stock of $ 13.7 million , proceeds from notes payable of $ 3.5 million and proceeds from the line of credit of $ 0.6 million , offset by payments on the line of credit of $ 0.2 million . contractual obligations our contractual obligations as of december 31 , 2015 were as follows : replace_table_token_8_th ( 1 ) license agreements - we have entered into several license agreements under which we obtained rights to certain intellectual property . under the agreements , we could be obligated for payments upon successful completion of clinical and regulatory milestones regarding the products covered by this license . the obligations listed in the table above represent estimates of when the milestones will be achieved . we can not assure that the timing of the milestones will be completed when estimated or at all . see note 12 to the financial statements included herein . ( 2 ) operating lease agreements - the amounts above are comprised of two five-year lease agreements . the first lease will expire on january 31 , 2020 and the second lease expires on august 31 , 2020. see note 12 to the financial statements included herein . < table cellpadding= '' 0 ''

in the accompanying consolidated financial statements , estimates are used for , but not limited to , determining the fair value of tangible and intangible assets and liabilities acquired in business combinations , the fair value of warrant liabilities , stock-based compensation , allowance for inventory obsolescence , allowance for doubtful accounts , contingent liabilities , the fair value and depreciable lives of long-lived tangible and intangible assets , and deferred taxes and the associated valuation allowance . actual results could differ from those estimates . foreign currency the functional currency of our international subsidiaries has been designated as the u.s. dollar . foreign currency transaction gains and losses , excluding gains and losses on intercompany balances where there is no current intent to settle such amounts in the foreseeable future , are included in the determination of net loss . unless otherwise noted , all references to “ $ ” or “ dollar ” refer to the u.s. dollar . cash and cash equivalents the company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents . the company maintains cash and cash equivalents in a financial institution that at times exceeds federally insured limits . management believes that the company 's credit risk exposure is mitigated by the financial strength of the banking institution in which the deposits are held . as of december 31 , 2018 , the company had cash and cash equivalents of approximately $ 14.3 million in u.s. bank accounts which were not fully insured by the federal deposit insurance corporation . allowance for uncollectible accounts receivable an allowance for uncollectible accounts receivable is estimated based on historical experience , credit quality , age of the accounts receivable balances , and economic conditions that may affect a customer 's ability to pay . the allowance for uncollectible accounts receivable was zero as of december 31 , 2018 and 2017 , respectively . inventory inventory is stated at the lower of cost or net realizable value , using the average cost method . inventory as of december 31 , 2018 and 2017 was comprised of raw materials for the manufacture of vazalore . the company regularly reviews inventory quantities on hand and assesses the need for an allowance for obsolescence . the allowance for obsolete inventory was approximately $ 1,003,000 and $ 320,000 as of december 30 , 2018 and 2017 , respectively . vendor deposits periodically the company makes deposits to vendors to secure a place in the vendor 's schedule for operational requirements . the vendor deposit balance was $ 8,500 and $ 715,603 at december 31 , 2018 and 2017 , respectively . fair value of financial instruments all financial instruments classified as current assets and liabilities are carried at cost , which approximates fair value , because of the short-term maturities of those instruments . the fair value of the term loan approximates its face value of $ 7,500,000 based on the company 's current financial condition and on the variable nature of the term loan 's interest feature as compared to current rates . for disclosures concerning fair value measurements , see note 9. property and equipment property and equipment are stated at cost less accumulated depreciation . the company capitalizes additions that have a tangible future economic life . maintenance and repairs that do not improve or extend the lives of property and equipment are charged to operations as incurred . depreciation expense is computed using the straight-line method over the estimated useful lives of each class of depreciable assets . management reviews property and equipment for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable . if there is an indication of impairment , management prepares an estimate of future cash flows ( undiscounted and without interest charges ) expected to result from the use of the asset and its eventual disposition . if these cash flows are less than the carrying amount of the asset , an impairment loss is recognized to write down the asset to its estimated fair value . f-9 intangible assets and goodwill intangible assets were acquired as part of the merger and consist of definite-lived trademarks with an estimated useful life of seven years , an indefinite-lived intangible asset for acquired in-process research and development ( “ ipr & d ” ) and goodwill ( see note 4 ) . management evaluates indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable , and at least on an annual basis on october 31 of each year , by comparing the fair value of the asset to its carrying amount . if the carrying amount of the intangible asset exceeds its fair value , an impairment loss would be recognized in the amount of such excess . the company recognized an impairment loss in the fourth quarter of 2017 of approximately $ 2.3 million for the full carrying value of its ipr & d and trademark intangible assets . see note 5 for a discussion of the company 's impairment analysis . goodwill is not amortized , but is subject to periodic review for impairment . goodwill is reviewed annually , as of october 31 , and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might not be recoverable . management performs its review of goodwill on its one reporting unit . as described further below in this note 3 , the company adopted accounting standards update 2017-04 , intangibles-goodwill and other - simplifying the test for goodwill impairment , effective january 1 , 2017. the adoption resulted in an update to the company 's accounting policy for goodwill impairment . story_separator_special_tag the company has categorized all investments recorded at fair value based upon the level of judgment associated with the inputs used to measure their fair value . hierarchical levels , directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities , are as follows : ● level 1 : quoted prices in active markets for identical assets or liabilities that the organization has the ability to access at the reporting date . 47 ● level 2 : inputs other than quoted prices included in level 1 , which are either observable or that can be derived from or corroborated by observable data as of the reporting date . ● level 3 : inputs include those that are significant to the fair value of the asset or liability and are generally less observable from objective resources and reflect the reporting entity 's assumptions about the assumptions market participants would use in pricing the asset or liability . the company 's financial instruments ( cash and cash equivalents , receivables , accounts payable and accrued liabilities ) are carried in the consolidated balance sheet at cost , which reasonably approximates fair value based on their short-term nature . the company 's warrant liabilities are recorded at fair value , with changes in fair value being reflected in the statements of operations for the period of change . the fair value of the term loan approximates its face value of $ 7,500,000 based on the company 's current financial condition and on the variable nature of term loan 's interest feature as compared to current rates . research and development expenses costs incurred in connection with research and development activities are expensed as incurred . research and development expenses consist of direct and indirect costs associated with specific projects , manufacturing activities , and include fees paid to various entities that perform research related services for the company . stock -based compensation the company recognizes expense in the consolidated statements of operations for the fair value of all stock-based compensation to key employees , nonemployee directors and advisors , generally in the form of stock options and stock awards . the company uses the black-scholes option valuation model to estimate the fair value of stock options on the grant date . compensation cost is amortized on a straight-line basis over the vesting period for each respective award . the company adopted new accounting guidance , effective january 1 , 2017 , with respect to stock-based compensation and related income tax aspects , and now accounts for forfeitures as they occur rather than using an estimated forfeiture rate . the adoption did not have a material impact on our consolidated financial statements . adopted accounting guidance for a discussion of significant accounting guidance recently adopted or unadopted accounting guidance that has the potential of being significant , see note 3 of the notes to consolidated financial statements included elsewhere herein . r esults of operations r evenue total revenues were approximately $ 0.8 million for the years ended december 31 , 2018 and 2017. all the revenue recognized in 2018 and approximately $ 0.6 million of the revenue recognized in 2017 is attributable to work performed under an award of a national institutes of health grant , along with previously deferred revenue recognized upon the completion of effort . operating expenses total operating expenses were approximately $ 11.7 million during the year ended december 31 , 2018 , a 30 % decrease from operating expenses of approximately $ 16.6 million during the year ended december 31 , 2017. operating expenses for the years ended december 31 , 2018 and 2017 were as follows : replace_table_token_1_th 48 research and development expenses research and development expenses totaled approximately $ 3.9 million in the year ended december 31 , 2018 compared to $ 4.2 million in the prior year , a decrease of approximately $ 0.2 million . the expenses in both periods included continued product development and manufacturing activities for vazalore . general and administrative expenses general and administrative expenses totaled approximately $ 7.8 million in the year ended december 31 , 2018 compared to approximately $ 10.2 million in the prior year , a decrease of approximately $ 2.4 million primarily attributable to public offering costs of $ 1.5 million allocated to the derivative warrants issued in connection with the june 2017 equity offering , lower compensation expense of $ 1.1 million , lower professional fees of $ 0.2 million , partially offset by prelaunch marketing spend in the 2018 period of $ 0.4 million . impairment charges in the fourth quarter of fiscal year 2017 , the company recognized impairment charges related to its intangible assets ( trademarks and in-process research and development ) acquired from dipexium , in connection with a change in operational strategy related to its locilex assets . we did not recognize any impairment charges in 2018. other income ( expense ) , net other income ( expense ) , net totaled approximately $ 11.9 million of net income for the year ended december 31 , 2018 compared to $ 0.4 million of net expense in the prior year . the change is largely attributable to the change in fair value of warrant liability of $ 12.1 million of other income . impact of the tax cuts and jobs act of 2017 on december 22 , 2017 , the president of the united states signed into law the tax cuts and jobs act of 2017 ( the “ tax act ” ) which included significant changes to the existing income tax laws for domestic corporations . key features of the tax act effective in 2018 include : ● reduction of the corporate tax rate from 35 % to 21 % ; ● elimination of the alternative minimum tax ; ● changes in the deductibility of certain aspects of executive compensation ; ● changes in the deductibility of certain entertainment and recreation

in december 2018 , we entered into the purchase agreement with certain accredited investors in connection with the private placement , which closed on february 20 , 2019. based on our expected operating cash requirements and capital expenditures , we believe the company 's cash on hand at december 31 , 2018 , along with the proceeds from the private placement , is adequate to fund operations for at least twelve months from the date of filing of this form 10-k. we have not generated any revenue from the sale of products , have generated minimal revenue from licensing activities , and have incurred losses in each year since we commenced operations . as of december 31 , 2018 , we had an accumulated deficit of approximately $ 66.4 million . we expect to continue to incur significant expenses and increasing operating losses for the foreseeable future as we continue the development and commercialization of vazalore and our other product candidates . even if we do generate revenues , we may never achieve profitability , and even if we do achieve profitability in the future , we may not be able to sustain profitability in subsequent periods . our prior losses , combined with expected future losses , have had and will continue to have an adverse effect on our stockholders ' equity and working capital . if we are unable to achieve and sustain profitability , the market value of our common stock will likely decline . because of the numerous risks and uncertainties associated with developing biopharmaceutical products , we are unable to predict the extent of any future losses or when , if ever , we will become profitable . 50 we anticipate that we will need to obtain substantial additional financing in the future , in addition to the proceeds from the private placement , to fund our future operations . we may obtain additional financing through public or private equity offerings , debt financings ( including related-party financings ) , a credit facility or strategic collaborations . on august 9 , 2017 , we entered into a loan and security agreement with svb that provides for a term loan facility . under the term loan facility , the company borrowed an initial amount of $ 7.5 million , and had the right to borrow an additional $ 7.5 million on or before december 31 , 2018 under certain conditions ; those conditions were not met prior to december 31 , 2018. additional financing may not be available to us when we

hosted services are recognized as saas revenue over time as customers consume the services or ratably over the term of the subscription , commencing upon provisioning of the service . vcpp partners license on-premises software from vmware on a monthly basis under a usage-based model . generally , contracts with vcpp partners include cancellation rights . revenue recognition is based on fees associated with reported license consumption by the vcpp partners and includes estimates for the period when consumption information has not been made available . subscription license sales of the company 's software platform offering provides customers with a term-based license to its platform , which includes , among other items , open-source software , support , enhancements , upgrades and compatibility to certified systems , all of which are offered on an if-and-when available basis . subscription revenue is recognized ratably over the contract term beginning on the date that the company 's platform is made available to the customer . subscription sales also include offerings sold on a perpetual and term basis where licenses provide customers with access to and the right to utilize the threat intelligence capabilities and ongoing support . vmware considers the software license and access to critical threat intelligence capabilities to be a single performance obligation . subscription revenue is recognized ratably over the contract term beginning on the date the software is delivered to the customer . subscription licenses sold on a term-basis are generally over a one - or three-year duration and invoiced to the customers either upfront , annually , quarterly or monthly . services revenue vmware 's services revenue generally consists of software maintenance and support and professional services . software maintenance and support offerings entitle customers to receive major and minor product upgrades , on a when-and-if-available basis , and technical support . maintenance and support services are comprised of multiple performance obligations including updates , upgrades to licenses and technical support . while separate performance obligations are identified within maintenance and support services , the underlying performance obligations generally have a consistent continuous pattern of transfer to a customer during the term of a contract . maintenance and support services revenue is recognized ratably over the contract duration . professional services include design , implementation , training and consulting services . professional services performed by vmware represent distinct performance obligations as they do not modify or customize licenses sold . these services are not highly interdependent or highly interrelated to licenses sold such that a customer would not be able to use the licenses without the professional services . revenue from fixed fee professional services engagements is recognized based on progress made toward the total project effort , which can be reasonably estimated . as a practical expedient , vmware recognizes revenue from professional services engagements invoiced on a time and materials basis as the hours are incurred based on vmware 's right to invoice amounts for performance completed to date . contracts with multiple performance obligations vmware enters into revenue contracts with multiple performance obligations in which a customer may purchase combinations of licenses , maintenance and support , subscriptions , hosted services , training , consulting services , and rights to future products and services . for contracts with multiple performance obligations , vmware allocates total transaction value to the identified underlying performance obligations based on relative standalone selling price ( “ ssp ” ) . vmware typically estimates ssp of services based on observable transactions when the services are sold on a standalone basis and those prices fall within a reasonable range . vmware utilizes the residual approach to estimate ssp for products or services sold to customers due to highly variable pricing . rebates and marketing development funds rebates , which are offered to certain channel partners and represent a form of variable consideration , are accounted for as a reduction to the transaction price on eligible contracts . 67 vmware , inc. notes to consolidated financial statements ( continued ) rebates are determined based on eligible sales during the quarter or based on actual achievement to quarterly target sales . the reduction of the aggregate transaction price against eligible contracts is allocated to the applicable performance obligations . the difference between the estimated rebates recognized and the actual amounts paid has not been material to date . certain channel partners are also reimbursed for direct costs related to marketing or other services that are defined under the terms of the marketing development programs . estimated reimbursements for marketing development funds are accounted for as consideration payable to a customer , reducing the transaction price of the underlying contracts . the most likely amount method is used to estimate the marketing fund reimbursements at the end of the quarter and the reduction of transaction price is allocated to the applicable performance obligations . the difference between the estimated reimbursement and the actual amount paid to channel partners has not been material to date . returns reserves with limited exceptions , vmware 's return policy does not allow product returns for a refund . vmware estimates and records reserves for product returns at the time of sale based on historical return rates . amounts are recorded as a reduction of revenue or unearned revenue . returns reserves were not material for all periods presented . deferred commissions sales commissions , including the employer portion of payroll taxes , earned by vmware 's sales force are considered incremental and recoverable costs of obtaining a contract , and are deferred and generally amortized on a straight-line basis over the expected period of benefit . the expected period of benefit is generally determined using the contract term or underlying technology life , if renewals are expected and the renewal commissions are not commensurate with the initial commissions . sales commissions related to software maintenance and support renewals are deferred and amortized on a straight-line basis over the contractual renewal period . story_separator_special_tag our future effective tax rate may be affected by such factors as changes in tax laws , changes in our business or statutory rates , changing interpretation of existing laws or regulations , the impact of accounting for stock-based compensation and the recognition of excess tax benefits or tax deficiencies within the income tax provision or benefit in the period in which they occur , the impact of accounting for business combinations , our acquisition of pivotal , which was accounted for as a common control transaction , shifts in the amount of earnings in the u.s. compared with other regions in the world and overall levels of income before tax , changes in our international organization , as well as the expiration of statute of limitations and settlements of audits . our relationship with dell the information provided below includes a summary of transactions with dell and dell 's consolidated subsidiaries ( collectively , “ dell ” ) . transactions with dell we engaged with dell in the following ongoing related party transactions , which resulted in revenue and receipts , and unearned revenue for us : pursuant to oem and reseller arrangements , dell integrates or bundles our products and services with dell 's products and sells them to end users . dell also acts as a distributor , purchasing our standalone products and services for resale to end-user customers through vmware-authorized resellers . revenue under these arrangements is presented net of related marketing development funds and rebates paid to dell . in addition , we provide professional services to end users based upon contractual agreements with dell . dell purchases products and services from us for its internal use . from time to time , we and dell enter into agreements to collaborate on technology projects , and dell pays us for services or reimburses us for costs incurred by us , in connection with such projects . during the years ended january 29 , 2021 , january 31 , 2020 and february 1 , 2019 , revenue from dell accounted for 35 % , 31 % and 25 % of our consolidated revenue , respectively . during the years ended january 29 , 2021 , january 31 , 2020 and february 1 , 2019 , revenue recognized on transactions where dell acted as an oem accounted for 12 % , 12 % and 13 % of revenue from dell , respectively , or 4 % , 4 % and 3 % of our consolidated revenue , respectively . dell purchases our products and services directly from us , as well as through our channel partners . information about our revenue and receipts , and unearned revenue from such arrangements , for the periods presented consisted of the following ( table in millions ) : replace_table_token_17_th sales through dell as a distributor , which is included in reseller revenue , continues to grow rapidly . customer deposits resulting from transactions with dell were $ 214 million and $ 194 million as of january 29 , 2021 and january 31 , 2020 , respectively . we engaged with dell in the following ongoing related party transactions , which resulted in costs to us : we purchase and lease products and purchase services from dell . from time to time , we and dell enter into agreements to collaborate on technology projects , and we pay dell for services provided to us by dell related to such projects . in certain geographic regions where we do not have an established legal entity , we contract with dell subsidiaries for support services and support from dell personnel who are managed by us . the costs incurred by dell on our behalf related to these employees are charged to us with a mark-up intended to approximate costs that would have been incurred had we contracted for such services with an unrelated third party . these costs are included as expenses on our consolidated statements of income and primarily include salaries , benefits , travel and occupancy expenses . dell also 47 incurs certain administrative costs on our behalf in the u.s. that are recorded as expenses on our consolidated statements of income . in certain geographic regions , dell files a consolidated indirect tax return , which includes value added taxes and other indirect taxes collected by us from our customers . we remit the indirect taxes to dell , and dell remits the tax payment to the foreign governments on our behalf . from time to time , we invoice end users on behalf of dell for certain services rendered by dell . cash related to these services is collected from the end user by us and remitted to dell . from time to time , we enter into agency arrangements with dell that enable us to sell our subscriptions and services , leveraging the dell enterprise relationships and end customer contracts . information about our payments for such arrangements during the periods presented consisted of the following ( table in millions ) : replace_table_token_18_th ( 1 ) amount includes indirect taxes that were remitted to dell during the periods presented . we also purchase dell products through dell 's channel partners . purchases of dell products through dell 's channel partners were not significant during the periods presented . from time to time , we and dell also enter into joint marketing , sales , branding and product development arrangements , for which both parties may incur costs . during the fourth quarter of fiscal 2020 , we entered into an arrangement with dell to transfer approximately 250 professional services employees from dell to us . these employees are experienced in providing professional services that deliver our technology and this transfer centralizes these resources within our company in order to serve our customers more efficiently and effectively . the transfer was substantially completed during the fourth quarter of fiscal 2020 and did not have a material impact to the

billion during fiscal 2021 compared to fiscal 2020 , primarily driven by a decrease in cash used in business combinations . financing activities cash used in financing activities increased by $ 250 million during fiscal 2021 compared to fiscal 2020. the increase was driven primarily by the repayment of the $ 1.5 billion term loan during fiscal 2021 , as well as the redemption of the $ 1.3 billion unsecured senior note due august 21 , 2020. these activities were partially offset by the net cash proceeds received from the issuance of long-term debt of $ 2.0 billion during fiscal 2021 , as well as the cash payment for the acquisition of pivotal during fiscal 2020 and a decrease of $ 389 million in repurchases of shares of our class a common stock during fiscal 2021. unsecured senior notes the following table summarizes the principal on our two series of unsecured senior notes issued august 21 , 2017 and our three series of unsecured senior notes issued april 7 , 2020 ( collectively , the “ senior notes ” ) as of january 29 , 2021 ( amounts in millions ) : replace_table_token_22_th 50 interest on the senior notes issued on april 7 , 2020 is payable semiannually in arrears , on may 15 and november 15 of each year , beginning november 15 , 2020. the interest rate on each note issued on april 7 , 2020 is subject to adjustment based on certain rating events . interest on the senior notes issued on august 21 , 2017 is payable semiannually in arrears , on february 21 and august 21 of each year . during the years ended january 29 , 2021 , january 31 , 2020 and february 1 , 2019 , $ 114 million , $ 122 million and $ 122 million , respectively , was paid for interest related to the senior notes . the senior notes also

foreclosed real estate physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtain upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed-in-lieu of foreclosure or through a similar legal agreement . properties acquired through foreclosure , or by deed-in-lieu of foreclosure , are recorded at their fair value less estimated costs to sell . fair value is typically determined based on evaluations by third parties . costs incurred in connection with preparing the foreclosed real estate for disposition are capitalized to the extent that they enhance the overall fair value of the property . any write-downs on the asset 's fair value less costs to sell at the date of acquisition are charged to the allowance for loan losses . subsequent write downs and expenses of foreclosed real estate are included as a valuation allowance and recorded in noninterest expense . goodwill and intangible assets goodwill represents the excess cost of an acquisition over the fair value of the net assets acquired . goodwill is not amortized , but is evaluated annually for impairment . intangible assets , such as customer relationships , are amortized over their useful lives , generally 15 years . 66 `` `` mortgage servicing rights originated mortgage servicing rights are recorded at their fair value at the time of transfer of the related loans and are amortized in proportion to , and over the period of , estimated net servicing income or loss . the carrying value of the originated mortgage servicing rights is periodically evaluated for impairment or between annual evaluations under certain circumstances . stock-based compensation compensation costs related to share-based payment transactions are recognized based on the grant-date fair value of the stock-based compensation issued . compensation costs are recognized over the period that an employee provides service in exchange for the award . compensation costs related to the employee stock ownership plan are dependent upon the average stock price and the shares committed to be released to plan participants through the period in which income is reported . retirement benefits the company has a non-contributory defined benefit pension plan that covered substantially all employees . on may 14 , 2012 , the company informed its employees of its decision to freeze participation and benefit accruals under the plan , primarily to reduce some of the volatility in earnings that can accompany the maintenance of a defined benefit plan . the plan was frozen on june 30 , 2012. compensation earned by employees up to june 30 , 2012 is used for purposes of calculating benefits under the plan but there will be no future benefit accruals after this date . participants as of june 30 , 2012 will continue to earn vesting credit with respect to their frozen accrued benefits as they continue to work . pension expense under these plans is charged to current operations and consists of several components of net pension cost based on various actuarial assumptions regarding future experience under the plans . gains and losses , prior service costs and credits , and any remaining transition amounts that have not yet been recognized through net periodic benefit cost are recognized in accumulated other comprehensive loss , net of tax effects , until they are amortized as a component of net periodic cost . plan assets and obligations are measured as of the company 's statement of condition date . the company has unfunded deferred compensation and supplemental executive retirement plans for selected current and former employees and officers that provide benefits that can not be paid from a qualified retirement plan due to internal revenue code restrictions . these plans are nonqualified under the internal revenue code , and assets used to fund benefit payments are not segregated from other assets of the company , therefore , in general , a participant 's or beneficiary 's claim to benefits under these plans is as a general creditor . the bank sponsors an employee stock ownership plan ( `` esop `` ) covering substantially all full time employees . the cost of shares issued to the esop but not committed to be released to the participants is presented in the consolidated statement of condition as a reduction of shareholders ' equity . esop shares are released to the participants proportionately as the loan is repaid . the company records esop compensation expense based on the shares committed to be released and allocated to the participant 's accounts multiplied by the average share price of the company 's stock over the period . dividends related to unallocated shares are recorded as compensation expense . derivative financial instruments derivatives are recorded on the statement of condition as assets and liabilities measured at their fair value . the accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting . the company currently has one interest rate swap , which has been determined to be a cash flow hedge . the fair value of cash-flow hedging instruments ( `` cash flow hedge `` ) is recorded in either other assets or other liabilities . on an ongoing basis , the statement of condition is adjusted to reflect the then current fair value of the cash flow hedge . the related gains or losses are reported in other comprehensive income ( loss ) and are subsequently reclassified into earnings , as a yield adjustment in the same period in which the related interest on the hedged item ( primarily a variable-rate debt obligation ) affect earnings . to the extent that the cash flow hedge is not effective , the ineffective portion of the cash flow hedge is immediately recognized as interest expense . story_separator_special_tag on borrowings . the reduction in interest expense on time deposits was the result of maturing long term and higher rate certificates of deposit being replaced by shorter term certificates of deposits at lower current market rates as customers opted to retain shorter term investments given the uncertain interest rate environment . as a result , rates paid on average time deposits decreased from 0.87 % in 2014 to 0.75 % in 2015. the reduction in interest expense on borrowings was result of t he significant drop in average rates paid on borrowings , the majority of this component being fhlbny borrowings . this drop was the result of matured long term and higher rate fhlbny advances replaced in 2015 by shorter term advances at current lower market rates . provision for loan losses we establish a provision for loan losses , which is charged to operations , at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio . in evaluating the level of the allowance for loan losses , management considers historical loss experience , the types and amount of loans in the loan portfolio , adverse situations that may affect a borrower 's ability to repay , estimated value of any underlying collateral , and prevailing economic conditions . this evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change . the provision for loan losses represents management 's estimate of the amount necessary to maintain the allowance for loan losses at an adequate level . the company recorded a provision for loan losses of $ 1.3 million as compared to $ 1.2 million recorded in the prior year . this year-over-year increase reflects increased levels of net charge-offs in 2015 as the company recorded $ 993,000 in net charge-offs in 2015 as compared to $ 897,000 in net charge-offs in 2014. the $ 96,000 increase in net charge-offs resided primarily in commercial real estate and industrial loans . the ratio of net charge-offs to average loans stayed constant at 0.25 % in 2015 and 2014. further increasing the need for increased provision for loan losses in 2015 as compared with the previous year was the 11.1 % increase in gross loan balances between december 31 , 2014 and december 31 , 2015 . 41 `` `` noninterest income the company 's noninterest income is primarily comprised of fees on deposit account balances and transactions , loan servicing , commissions and net gains or losses on sales of securities , loans , and foreclosed real estate . the following table sets forth certain information on noninterest income for the years indicated . replace_table_token_7_th n oninterest income for the year ended december 31 , 2015 increased $ 413,000 , or 11.0 % , to $ 4.2 million as compared to the same prior year period . this increase was driven by the increase in other charges , commissions and fees of $ 257,000 during the year ended december 31 , 2015 as compared to the year ended december 31 , 2014. the commissions of the insurance agency were responsible for $ 151,000 of this increase . earnings on bank owned life insurance also increased $ 93,000 during the year ended december 31 , 2015 as compared to the comparable prior year due to the collection of a death benefit related to a former employee . additionally , net gains from the sale of investment securities increased by $ 112,000 in 2015 as compared to the previous year . noninterest expense the following table sets forth certain information on noninterest expense for the years indicated . replace_table_token_8_th noninterest expense for 2015 increased $ 1.9 million , or 12.1 % , to $ 17.6 million from $ 15.7 million for the prior year . higher noninterest expenses largely reflect investments related to the company 's continued efforts to expand brand awareness and drive business activities in the syracuse market . specifically , the increase was due in part to higher personnel expenses ( up $ 892,000 ) resulting from the expansion of the company 's staffing levels in a number of areas , including the staffing of the company 's new downtown syracuse business banking office for the entirety of 2015. the office opened in the third of quarter 2014. personnel expenses in 2015 also included incentive payments that were related to the company 's successful conversion in october of 2014 and increases in health care and retirement plan costs . contributing further to the year-over-year increases in noninterest expenses was a $ 314,000 increase in building occupancy expense related to the full-year occupancy of the new office location in the syracuse market , extensive refurbishments of certain existing locations and general increases in property taxes . in addition , noninterest expenses in 2015 were affected by an increase of $ 236,000 in professional and other services , due in large part to extensive staff training and development initiatives undertaken during the year . finally , other noninterest expenses increased year-over-year by $ 389,000 due to non-recurring servicing recourse charges related to loans sold to an investor in prior years and transaction costs associated with increased deposit activity from credit unions and municipal customers utilizing the promontory interfinancial network 's fdic-insured deposit placement services . 42 `` `` income tax expense in 2015 , the company reported income tax expense of $ 1.1 million compared with $ 1.2 million in 2014. this decrease was due to a decrease in the effective tax rate from 29.2 % in 2014 to 26.8 % in 2015 , partially offset by increased pretax income in 2015 as compared to the previous year . the decrease in the effective tax rate was due to a higher proportion of nontaxable income to total income in 2015. these nontaxable income items included the sales of certain investments that utilized available ( but previously reserved for ) capital

debt investment securities : us treasury , agencies and gses $ - - $ 5,908 1.85 % $ 1,952 2.23 % state and political subdivisions 206 1.05 % 3,512 2.00 % 12,883 3.31 % corporate - - 228 4.46 % 2,273 5.13 % total $ 206 1.05 % $ 9,648 1.97 % $ 17,108 3.43 % mortgage-backed securities : residential mortgage-backed -us agency $ - - $ - - $ 677 1.87 % collateralized mortgage obligations-us agency - - - - 2,914 3.16 < td nowrap= '' nowrap '' style= '' width : 1 % ; vertical-align : bottom ; border-bottom : # 000000 2px solid ; text-align : left ; background-color : # d4d4d4 ''

he received his md in 2000 from university of medicine and dentistry-new jersey medical school . 39 dr. arnold 55 dr. lee arnold joined us a chief scientific officer in july 2014 upon the completion of the merger with assembly pharmaceuticals . at assembly pharmaceuticals , he served as chief scientific officer since may 2014. dr. arnold has an exceptionally broad research background ranging from synthetic and medicinal chemistry , structure-based drug design , biochemistry and biophysics , drug metabolism , to preclinical efficacy , safety , toxicology , process r & d , and ind-enabling studies . with pharma experience from syntex , pfizer , basf/abbott bioresearch , and osi pharmaceuticals , he brings a history of over 27 years of industry contributions in molecularly-targeted small-molecule drug discovery in oncology , immunology and infectious disease . from july 2009 to april 2014 , dr. arnold was chief scientific officer for coferon , inc. dr. arnold led the creation , refinement , and deployment of an unprecedented self-assembling drug molecule platform to deliver larger , more potent and selective drugs into cells in parts . during his career , dr. arnold has played a direct role in delivering 7 innovative drug candidates into development for oncology . one of his inventions , tarceva , is the first orally-active kinase inhibitor demonstrated to improve survival in lung and pancreatic carcinoma patients . since 2007 he has also been a visiting professor at the state university of new york at stony brook and a member of the institute of chemical biology and drug discovery . dr. arnold is recognized in drug discovery through his inventorship on over sixty-five patent filings , more than thirty peer-reviewed publications , and numerous conference presentations . executive compensation components of our executive compensation program the principal components of our executive compensation program are base salary , annual bonus , and long-term incentives . our compensation committee believes that each component of executive compensation must be evaluated and determined with reference to competitive market data , individual and corporate performance , our recruiting and retention goals , internal equity and consistency , and other information we deem relevant . we believe that in the biopharmaceutical industry stock option and or other equity awards are a primary motivator in attracting and retaining executives , in addition to salary and cash incentive bonuses . the components of our compensation package are set forth below . base salary we provide base salaries for our named executive officers to compensate them for their services rendered during the fiscal year . base salaries for our named executive officers have been established based on their position and scope of responsibilities , their prior experience and training , and competitive market compensation data we review for similar positions in our industry . base salaries are reviewed periodically and may be increased for merit reasons based on the executive 's performance , for retention reasons or if the base salary is not competitive to salaries paid by comparative companies for similar positions . additionally , we may adjust base salaries throughout the year for promotions or other changes in the scope or breadth of an executive 's role or responsibilities . annual incentive bonus a significant element of the cash compensation of our named executive officers is an annual performance-based cash bonus . a named executive officer 's target bonus is generally set as a percentage of base salary to reward strong performance and retain his employment in a competitive labor market . in the case of drs . ellison , lopatin and arnold , and messrs. small and barrett , their employment agreements , effective through 2014 , provided an annual bonus of up to 50 % and 30 % of their base salary , respectively . their current employment agreements provide for bonus opportunities of 50 % , 30 % , 30 % , 50 % and 50 % , respectively . bonuses are based on the achievement of significant company goals , including research and clinical development , financial , business development and operational milestones , with specific goals tailored to the executive officer 's area of responsibility . the performance goals generally are determined by our compensation committee in the first quarter of the calendar year but the bonuses are determined at the time bonuses are paid . additionally , the board or the compensation committee may increase or decrease an executive 's bonus payment ( above or below the target ) based on its assessment of the company 's and an executive 's individual performance during a given year . for 2014 , annual bonuses were based on achievement of company goals related to development of our hbv and microbiome therapy programs , financial operations/investor relations , strategic planning , business development/commercialization , and corporate governance . in addition , our compensation committee determined that t he performance of the named executive officers should be evaluated in three distinct time periods – pre-merger , merger period , and post-merger , reflecting the types of activities associated with each of these periods . each officer 's potential bonus was weighted differently for each set of goals , depending on his respective area of responsibility . for the business and financial executive positions , the compensation committee believed no bonuses should be awarded for the pre-merger period because the activities and performance during that time period were recognized at the time of the merger ; for the merger and post-merger periods , these executives were generally considered to have met their goals . story_separator_special_tag identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming , expensive and uncertain process that takes years to complete , and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales . in addition , our product candidates , if approved , may not achieve commercial success . our commercial revenues , if any , will be derived from sales of medicines that we do not expect to be commercially available for many years , if at all . accordingly , we will need to continue to rely on additional financing to achieve our business objectives . adequate additional financing may not be available to us on acceptable terms , or at all . until such time , if ever , as we can generate substantial product revenues , we expect to finance our cash needs through a combination of equity offerings , debt financings , collaborations , strategic alliances and licensing arrangements . we do not have any committed external source of funds . to the extent that we raise additional capital through the sale of equity or convertible debt securities , the ownership interest of our stockholders will be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders . debt financing , if available , may involve agreements that include covenants limiting or restricting our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends . if we raise funds through additional collaborations , strategic alliances or licensing arrangements with third parties , we may have to relinquish valuable rights to our technologies , future revenue streams , research programs or product candidates or to grant licenses on terms that may not be favorable to us . if we are unable to raise additional funds through equity or debt financings when needed , we may be required to delay , limit , reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves . recent accounting pronouncements in may 2014 , the financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) 2014-09 , revenue from contracts with customers ( topic 606 ) . the asu provides for a single comprehensive model for use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance . the accounting standard is effective for interim and annual periods beginning after december 15 , 2016 with no early adoption permitted . we are currently in the process of evaluating the impact of the guidance on our financial position , results of operation , and cash flows . in june 2014 , the fasb issued asu 2014-10 , development stage entities ( topic 915 ) : elimination of certain financial reporting requirements , including an amendment to variable interest entities guidance in topic 810 , consolidation . the amendments in this update remove the definition of a development stage entity from the master glossary of the accounting standards codification , thereby removing the financial reporting distinction between development stage entities and other reporting entities from gaap . in addition , the amendments eliminate the requirements for development stage entities to ( 1 ) present inception-to-date information in the statements of income , cash flows and shareholder equity , ( 2 ) label the financial statements as those of a development stage entity , ( 3 ) disclose a description of the development stage activities in which the entity is engaged , and ( 4 ) disclose in the first year in which the entity is no longer a development stage entity that in prior years it had been in the development stage . a public entity is required to apply the amendments for annual reporting periods beginning after december 15 , 2014 , and interim periods therein . an entity should apply the amendments retrospectively for all comparative periods presented . early adoption is permitted . we adopted this guidance in the second quarter of 2014. adoption of this standard did not have a material impact on our financial position , statement of operations , or statement of cash flows . 33 in june 2014 , the fasb issued asu 2014-12 , compensation-stock compensation ( topic 718 ) . the asu clarifies how entities should treat performance targets that can be achieved after the requisite service period of a share-based payment award . the accounting standard is effective for interim and annual periods beginning after december 15 , 2015. we are currently in the process of evaluating the impact of the guidance on our financial position , results of operation , and cash flows . the fasb has 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 . the guidance , which is effective for annual reporting periods ending after december 15 , 2016 , with early adoption permitted , extends the responsibility for performing the going-concern assessment to management and contains guidance on how to perform a going-concern assessment and when going-concern disclosures would be required under gaap . we are currently evaluating the impact of this asu on our consolidated financial statements . cautionary statement we operate in a highly competitive environment that involves a number of risks , some of which are beyond our control . the following statement highlights some of these risks . for more detail , see “ item 1a . risk factors ” . statements contained in this form 10-k that are not historical facts , are or might constitute forward-looking statements under the safe harbor provisions of the private securities litigation reform act of 1995. although we believe the

accordingly , we will need to obtain substantial additional funding in connection with our continuing operations . if we are unable to raise capital when needed or on attractive terms , we would be forced to delay , reduce or eliminate our research and development programs or future commercialization efforts . we monitor our cash needs and the status of the capital markets on a continuous basis . from time to time , we opportunistically raise capital and have done so numerous times since our initial public offering by issuing equity securities , most recently in october 2014. we expect to continue to raise capital when and as needed and at the time and in the manner most advantageous to the company . we expect that our existing cash , cash equivalents and marketable securities , will enable us to fund our operating expenses and capital expenditure requirements until at least the second quarter of 2016. our future capital requirements will depend on many factors , including : the scope , progress , results and costs of drug discovery , preclinical development , laboratory testing and future clinical trials for our product candidates ; the extent to which we acquire or in-license other medicines and technologies ; the costs , timing and outcome of regulatory review of our product candidates ; < td

4.1.2 guarantee agreement , dated as of march 30 , 2007 , between cathay general bancorp and lasalle bank national association . previously filed with the securities and exchange commission on march 1 , 2013 , as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2012 and incorporated herein by reference . 4.1.3 form of capital securities of cathay capital trust iii ( included within exhibit 4.1.1 ) . 4.2 warrant to purchase up to 1,846,374 shares of common stock , issued on december 5 , 2008. previously filed with the securities and exchange commission on march 3 , 2014 as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2013 and incorporated herein by reference . 4.2.1 warrant agreement , dated as of december 4 , 2013. previously filed with the securities and exchange commission on december 4 , 2013 , as an exhibit to the bancorp 's registration statement on form 8-a and incorporated herein by reference . 4.2.2 form of warrant ( included within exhibit 4.2.1 ) . 10.1 form of indemnity agreements between the bancorp and its directors and certain officers . previously filed with the securities and exchange commission on february 28 , 2012 , as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2011 and incorporated herein by reference . 87 10.2 cathay bank employee stock ownership plan , as amended and restated effective december 22 , 2015. previously filed with the securities and exchange commission on march 1 , 2018 , as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2017 , and incorporated herein by reference . * * 10.2.1 amendment no . 1 to the cathay bank employee stock ownership plan , as amended and restated effective december 22 , 2015. previously filed with the securities and exchange commission on march 1 , 2018 , as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2017 , and incorporated herein by reference . * * 10.2.2 amendment no . 2 to the cathay bank employee stock ownership plan , as amended and restated effective december 22 , 2015. previously filed with the securities and exchange commission on march 1 , 2018 , as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2017 , and incorporated herein by reference . * * 10.2.3 amendment no . 3 to the cathay bank employee stock ownership plan , as amended and restated effective december 22 , 2015. previously filed with the securities and exchange commission on august 9 , 2018 , as an exhibit to the bancorp 's quarterly report on form 10-q for the quarter ended june 30 , 2018 , and incorporated herein by reference . * * 10.3 dividend reinvestment plan and stock purchase plan ( amended and restated ) of the bancorp . previously filed with the securities and exchange commission on july 27 , 2015 , as an exhibit to registration statement no . 333-205888 , and incorporated herein by reference . 10.4 cathay bank bonus deferral agreement ( amended and restated ) . previously filed with the securities and exchange commission on march 1 , 2013 , as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2012 and incorporated herein by reference . * * 10.5 cathay general bancorp 2005 incentive plan . previously filed with the securities and exchange commission on march 1 , 2013 , as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2012 and incorporated herein by reference . * * 10.5.1 form of cathay general bancorp 2005 incentive plan stock option agreement ( nonstatutory ) . previously filed with the securities and exchange commission on march 1 , 2013 , as an exhibit to the bancorp 's annual report on form 10-k for the year ended december 31 , 2012 and incorporated herein by reference . * * 10.5.2 form of cathay general bancorp 2005 incentive plan stock option agreement ( nonstatutory ) ( nonemployee director ) . previously filed with the securities and exchange commission on march 1 , 2013 , as an exhibit to bancorp 's annual report on form 10-k for the year ended december 31 , 2012 and incorporated herein by reference . * * 10.5.3 form of cathay general bancorp 2005 incentive plan restricted stock unit agreement ( performance shares – eps ) , used to award performance-based restricted stock units . previously filed with the securities and exchange commission on december 24 , 2013 , as an exhibit to the bancorp 's current report on form 8-k and incorporated herein by reference . * * 88 10.5.4 form of cathay general bancorp 2005 incentive plan restricted stock unit agreement ( performance shares – tsr ) , used to award performance-based restricted stock units . previously filed with the securities and exchange commission on december 24 , 2013 , as an exhibit to the bancorp 's current report on form 8-k and incorporated herein by reference . * * 10.5.5 form of cathay general bancorp 2005 incentive restricted stock unit agreement ( clawback rider ) , used in connection with award of performance-based restricted stock units . previously filed with the securities and exchange commission on december 24 , 2013 , as an exhibit to the bancorp 's current report on form 8-k , and incorporated herein by reference . * * 10.5.6 executive officer annual cash bonus program under the company 's 2005 incentive plan . story_separator_special_tag % for 2017 , and 27.7 % for 2016. the enactment of the 2017 tax cuts and jobs act reduced the corporate tax rate to 21 % for 2018 from 35 % in 2017. the effective tax rate for 2018 includes alternative energy , low-income housing and other tax credits totaling $ 34.5 million . the effective tax rate for 2017 included $ 23.4 million additional income tax expense related to the reevaluation of the company 's deferred tax assets resulting from the enactment of the 2017 tax cuts and jobs act , in addition to alternative energy tax credits , low-income housing and other tax credits totaling $ 20.7 million recognized in 2017 , and $ 37.9 million recognized in 2016. our tax returns are open for audits by the internal revenue service back to 2015 and by the california franchise tax board back to 2014. from time to time , there may be differences of opinion with respect to the tax treatment accorded transactions . when , and if , such differences occur , and the related tax effects become probable and estimable , such amounts will be recognized . 53 financial condition total assets were $ 16.8 billion at december 31 , 2018 , an increase of $ 1.2 billion , or 7.7 % , from $ 15.6 billion at december 31 , 2017 , primarily due to an increase of $ 1.1 billion in gross loans , excluding loans held for sale , offset by a decrease of $ 66.0 million in securities available for sale and equity securities . investment securities investment securities were $ 1.2 billion and represented 7.4 % of total assets at december 31 , 2018 , compared with $ 1.3 billion and 8.5 % of total assets at december 31 , 2017. the following table summarizes the carrying value of our portfolio of securities for each of the past two years : replace_table_token_5_th asc topic 320 requires an entity to assess whether it has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery . if either of these conditions is met , an entity must recognize an other-than-temporary impairment ( “ otti ” ) to its investment securities . if an entity does not intend to sell the debt security and will not be required to sell the debt security , the entity must consider whether it will recover the amortized cost basis of the security . if the present value of expected cash flows is less than the amortized cost basis of the security , otti shall be considered to have occurred . otti is then separated into the amount of the total impairment related to credit losses and the amount of the total impairment related to all other factors . an entity determines the impairment related to credit losses by comparing the present value of cash flows expected to be collected from the security with the amortized cost basis of the security . otti related to the credit loss is thereafter recognized in earnings . otti related to all other factors is recognized in other comprehensive income . otti not related to the credit loss for a held-to-maturity security should be recognized separately in a new category of other comprehensive income and amortized over the remaining life of the debt security as an increase in the carrying value of the security only when the entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its remaining amortized cost basis . the company has both the ability and the intent to hold and it is not more likely than not that the company will be required to sell those securities with unrealized losses before recovery of their amortized cost basis . the temporarily impaired securities represented 84.9 % of the fair value of investment securities as of december 31 , 2018. unrealized losses for securities with unrealized losses for less than twelve months represented 0.35 % , and securities with unrealized losses for twelve months or more represented 2.85 % , of the historical cost of these securities as of december 31 , 2018. unrealized losses on these securities generally resulted from increases in interest rates or spreads subsequent to the date that these securities were purchased . at december 31 , 2018 , 14 issues of securities had unrealized losses for 12 months or longer and 90 issues of securities had unrealized losses of less than 12 months . total unrealized losses of $ 27.0 million at december 31 , 2018 , were primarily caused by increases in interest rates or the widening of credit and liquidity spreads since the dates of acquisition . the contractual terms of those investments do not permit the issuers to settle the security at a price less than the amortized cost of the investment . 54 at december 31 , 2018 , management believed the impairment was temporary and , accordingly , no impairment loss on debt securities has been recognized in our consolidated statements of operations . the company expects to recover the amortized cost basis of its debt securities and has no intent to sell and believes it is more likely than not that it will not be required to sell available-for-sale debt securities that have declined below their cost before their anticipated recovery . the tables below show the fair value and unrealized losses of the temporarily impaired securities in our investment securities portfolio as of december 31 , 2018 , and december 31 , 2017 : replace_table_token_6_th replace_table_token_7_th 55 the scheduled maturities and taxable-equivalent yields by security type are presented in the following table : securities portfolio maturity distribution and yield analysis : as of december 31 , 2018 after one after five one year year to years to over ten or less five years

the terms of our junior subordinated notes also limit our ability to pay dividends . if we are not current in our payment of dividends on our junior subordinated notes , we may not pay dividends on our common stock . substantially all of the revenues of the company available for payment of dividends derive from amounts paid to it by the bank . the bank paid dividends to the bancorp totaling $ 127.8 million during 2018 , $ 208.2 million during 2017 , and $ 113.4 million during 2016. in october 2017 , far east national bank paid a dividend of $ 57.0 million to the bancorp . the federal reserve board issued federal reserve supervision and regulation letter sr-09-4 that states that bank holding companies are expected to inform and consult with the federal reserve supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid . under california state banking law , the bank may not without regulatory approval pay a cash dividend which exceeds the lesser of the bank 's retained earnings or its net income for the last three fiscal years , less any cash distributions made during that period . under this regulation , the amount of retained earnings available for cash dividends to the company immediately after december 31 , 2018 , was restricted to approximately $ 189.0 million . risk elements of the loan portfolio non-performing assets non-performing assets include loans past due 90 days or more and still accruing interest , non-accrual loans , and oreo . our policy is to place loans on non-accrual status if interest and principal or either interest or principal is past due 90 days or more , or in cases where management deems the full collection of principal and interest unlikely . after a loan is placed on non-accrual status , any previously accrued but unpaid interest is reversed and charged against current income and subsequent payments received are generally first applied towards the outstanding principal balance of the loan . depending on the circumstances , management may elect to continue the accrual of interest on certain past due loans if partial payment is

000-25727 ) ) . 23 consent of independent registered public accounting firm . 24 powers of attorney . 31.1 rule 13a-14 ( a ) /15d-14 ( a ) certifications of ceo . 31.2 rule 13a-14 ( a ) /15d-14 ( a ) certifications of cfo . 32 section 1350 certifications . 101 interactive data files pursuant to rule 405 of regulation s-t. * * * management contract or compensatory plan , contract or arrangement required to be filed as an exhibit to this annual report on form 10-k. * * in accordance with rule 406t of regulation s-t , the xbrl related information in exhibit 101 to this annual report on form 10-k is deemed not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the securities act of 1933 , as amended , is deemed not filed for purposes of section 18 of the securities and exchange act of 1934 , as amended , and otherwise is not subject to liability under those sections . 35 signatures pursuant to the requirements of section 13 or 15 ( d ) of the securities exchange act of 1934 , the registrant has duly caused this report to be signed on its behalf by the undersigned , thereunto duly authorized on march 2 , 201 6 . ikonics corporation by william c. ulland william c. ulland , chairman , chief executive officer and president pursuant to the requirements of the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on march 2 , 201 6 . william c. ulland william c. ulland , chairman , chief executive officer and president ( principal executive officer ) jon gerlach jon gerlach , chief financial officer and vice president of finance ( principal financial and accounting officer ) rondi erickson * director h. leigh severance * director gerald w. simonson * director lockwood carlson * director david o. harris * director ernest m. harper jr. * director darrell b. lee * director * william c. ulland , by signing his name hereto , does hereby sign this document on behalf of each of the above named directors of the registrant pursuant to powers of attorney duly executed by such persons . william c. ulland william c. ulland , attorney-in-fact 36 index to exhibits exhibit description page 3.1 restated articles of incorporation of company , as amended incorporated by reference 3.2 by-laws of the company , as amended . incorporated by reference 4 specimen of common stock certificate incorporated by reference 10.1 ikonics corporation 1995 stock incentive plan , as amended incorporated by reference 10.2 confidentiality agreement , dated march 11 , 2013 , between the company and joseph r. nerges incorporated by reference 14 code of ethics incorporated by reference 23 consent of independent registered public accounting firm filed electronically 24 powers of attorney filed electronically 31.1 rule 13a-14 ( a ) /15d-14 ( a ) certifications of ceo filed electronically 31.2 rule 13a-14 ( a ) /15d-14 ( a ) certifications of cfo filed electronically 32 section 1350 certifications filed electronically 101 interactive data files pursuant to rule 405 of regulation s-t filed electronically 37 story_separator_special_tag the following management discussion and analysis focuses on those factors that had a material effect on the company 's financial results of operations and financial condition during 201 5 and 201 4 and should be read in connection with the company 's audited financial statements and notes thereto for the years ended december 31 , 201 5 and 201 4 , included herein . critical accounting policies and estimates the company prepares its financial statements in conformity with accounting principles generally accepted in the united states of america . therefore , the company is required to make certain estimates , judgments and assumptions that the company believes are reasonable based upon the information available . these estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented . the accounting policies and estimates which ikonics believes are the most critical to aid in fully understanding and evaluating its reported financial results include the following : trade receivables . the company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer 's current credit worthiness , as determined by review of the current credit information . the company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified . while such credit losses have historically been within expectations and the provisions established , the company can not guarantee that it will continue to experience the same collection history that has occurred in the past . the general payment terms are net 30-45 days for domestic customers and net 30-90 days for foreign customers . a small percentage of the trade receivables balance is denominated in a foreign currency with no concentration in any given country . at the end of each reporting period , the company analyzes the receivable balance for customers paying in a foreign currency . these balances are adjusted to each quarter or year-end spot rate . the company also maintains a 12 provision based upon historical experience and any specifically identified issues for any customer related returns , refunds or credits . inventories . inventories are valued at the lower of cost or market value using the last in , first out ( lifo ) method . the company monitors its inventory for obsolescence and records reductions from cost when required . story_separator_special_tag international activity the company markets its products in numerous countries in various regions of the world , including north america , europe , latin america , and asia . the company 's 201 5 foreign sales of $ 4.9 million were approximately 2 7 . 9 % of total sales , compared to the 201 4 foreign sales of $ 5 . 3 million , which were 28.4 % of total sales . the company experienced a decrease in foreign sales across all geographic regions in 201 5 due to poor general econom ic conditions in europe and a strong u.s. dollar . the company 's foreign transactions are primarily negotiated , invoiced and paid in u.s. dollars , though a portion is transacted in euros . ikonics has not implemented an economic hedging strategy to reduce the risk of foreign currency translation exposures , which management does not believe to be significant based on the scope and geographic diversity of the company 's foreign operations as of december 31 , 201 5 . furthermore , the impact of foreign exchange on the company 's balance sheet and operating results was not material in either 201 5 or 201 4 . future outlook ikonics has spent on average approximately 4 % of annual sales in research and development and has made capital expenditures related to its dtx and ams programs . the company plans to maintain its efforts in this area to expedite internal product development as well as to form technological alliances with outside experts to commercialize new product opportunities . the company continues to make progress on its ams business initiative . the company has entered into agreements with major aerospace companies a long with working on smaller development programs to determine the feasibility of using its unique technologies in the production of military and commercial aircraft . progress is being made on a number of these in-house feasibility projects , and the company believes that several of these could lead to ongoing business . in anticipation of this business , the company is expanding its ams capacity and patent applications . the company is also continuing to pursue dtx related business initiatives . in addition to making efforts towards growing the inkjet technology business , the company offers a range of products for creating texture surfaces and has introduced a fluid for use in prototyping . the company is currently working on production improvements to enhance its customer offerings . the company has been awarded european , japanese and united states patents on its dtx technologies . the company has modified its dtx technology to enter the market for prototyping and 3d printing . domestically , both the domestic and ikonics imaging units remain profitable in mature markets and require aggressive strategies to grow market share . although there will be challenges , the company believes these businesses will continue to grow and prosper . in addition to its traditional emphasis on domestic markets , the company will continue efforts to grow its business internationally by attempting to develop new markets and expanding market share where it has already established a presence . however , the strong u.s. dollar made this challenging during 2015 , and the company anticipates continued strength of the u.s. dollar in the near term . in addition to the $ 3.5 million building expansion to accommodate the ams division and the implementation of a new erp system , other future activities undertaken to expand the company 's business may include acquisitions , building improvements , equipment additions , new product development and marketing opportunities . 16 off-balance sheet arrangements the company has no off-balance sheet arrangements . recent accounting pronouncements in may 2014 , the financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) no . 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 in a way that depicts the transfer of 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 . in august 2015 , the fasb issued asu 2015-14 , revenue from contracts with customers : deferral of the effective date , which defers the adoption of asu 2014-09 to annual reporting periods beginning after december 15 , 2017 , including interim reporting periods within that reporting period . earlier application is permitted only as of annual reporting periods beginning after december 15 , 2016 , including interim reporting periods within that reporting period . the company is currently evaluating the effect that adopting this new accounting guidance will have on its condensed statements of operations , cash flows and financial position . in 2014 , the fasb issued asu no . 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 , intended to define management 's responsibility to evaluate whether there is substantial doubt about an organization 's ability to continue as a going concern and to provide related footnote disclosures . asu 2014-15 is effective for the company in the year ended december 31 , 2016 , and interim periods beginning march 31 , 2017 , with early application permitted . the company does not anticipate a material impact to the financial statements once implemented . in 2015 , the fasb issued asu no . 2015-11 , inventory ( topic 330 ) related to simplifying the measurement of inventory which applies to all inventory except inventory that is measured using last-in , first-out ( lifo ) or the retail inventory method . inventory measured using first-in , first-out ( fifo ) or average cost is covered by the new amendments . inventory within the scope of the new guidance should be

the remaining capital expenditures were mainly for upgrades to improve ams production and process capabilities and costs associated with mandatory elevator upgrades . also during 2015 , the company incurred $ 53 ,000 in patent application costs that the company records as an asset and amortizes upon successful completion of the application process . during 2014 , investing activities used $ 731,000. purchases of property and equipment were $ 434,000 , mainly for improvements to ams equipment , mandatory elevator upgrades , two forklifts and two vehicles . the company realized $ 62,000 in proceeds from the sale of land and two vehicles . also during 2014 , the company incurred $ 57,000 in patent application costs that the company records as an asset and amortizes upon successful completion of the application process . the company also invested $ 2.7 million in 18 fully insured certificates of deposit during 2014. eighteen certificates of deposit totaling $ 2.4 million matured during 2014. in 2014 , the company received $ 4 6 ,000 from financing activities from the issuance of 6 , 083 shares of common stock from the exercise of stock options . there were no exercises of stock options in 2015 , resulting in no cash from or used for financing activities . a bank line of credit exists provid es for borrowings of up to $ 2,050,000 and expires on may 31 , 2017. the line of credit is collateralized by the company 's assets and bears interest at 1.8 percentage points over the 30-day libor rate . the company did not utilize this line of credit during 2015 or 2014 and there were no borrowings outstanding as of

finally , the company was not able to complete the registration of shares within the thirty day timeframe mandated in the amended agreement . on march 25 , 2008 the company received a waiver from the lender ( a ) waiving compliance with the lockbox account requirement through march 14 , 2008 , ( b ) waiving compliance with the borrowing base requirement in so far as it related exclusively to the defective displays inadvertently included in inventory , and ( c ) extending the period for filing a registration statement for certain shares held or to be issued to the lender until april 29 , 2008. the company established a lockbox account by march 14 , 2008 and filed a registration statement with the sec on april 29 , 2008 . 35 effective march 25 , 2008 , the company amended the warrant issuance agreement ( “ amended warrant agreement ” ) with moriah . in connection with such amendment , the company issued a waiver fee in the form of a warrant to purchase an additional 250,000 shares of its common stock at a price of $ 1.50 expiring march 25 , 2013. the company determined the fair value of the 1,000,000 warrants to be $ 729 thousand of which $ 168 thousand was expensed immediately and $ 561 thousand was amortized to interest expense over the life of the loan . the following assumptions were used to determine the fair value of the warrants : dividend yield of 0 % ; risk free interest rates of 2.61 % and 2.96 % ; expected volatility of 90.9 % and 92.3 % ; and expected contractual term of 5 years . the company and moriah entered into amendment no . 3 to the loan and security agreement dated august 20 , 2008 ( the “ amendment no . 3 ” ) . pursuant to amendment no . 3 , the company issued moriah an amended and restated revolving loan note ( the “ amended note ” ) and the maturity date was extended to august 7 , 2009. the company paid moriah $ 85 thousand in servicing fees which were amortized to interest expense over the life of the agreement . pursuant to amendment no . 3 , the following changes were made to the loan : the maximum amount the company can borrow was increased to $ 3 million ; the borrowing base calculation was modified to increase eligible foreign accounts receivable to 80 % and increased the eligible inventory to the lesser of 70 % or $ 800 thousand ; and financial covenants were added . the company issued moriah a warrant , which expires on august 7 , 2013 , to purchase up to 370,000 shares of the company 's common stock at an exercise price of $ 1.30 per share . the company determined the fair value of the warrants to be approximately $ 154 thousand which was recorded as a deferred debt issuance cost . the following assumptions were used to determine the fair value of the warrants : dividend yield of 0 % ; risk free interest rates of 3.16 % ; expected volatility of 87.7 % ; and expected contractual term of 5 years . the deferred debt issuance costs were amortized to interest expense over the life of the loan . pursuant to amendment no . 3 , the company and moriah , also , entered into an amended and restated securities issuance agreement . the company issued 485,000 shares of unregistered common stock valued at approximately $ 340 thousand which was recorded as a deferred debt issuance cost and was amortized to interest expense over the life of the agreement . in addition , the holders of the amended 8 % notes and the investors in the purchase agreement ( see note 10 – shareholders ' equity ) consented to the amended note and received a total of 144,000 shares of unregistered common stock valued at approximately $ 101 thousand which was recorded as waiver fees and expensed to interest expense . pursuant to amendment no . 3 , the company and moriah entered into an amendment to registration rights agreement ( the “ amended registration rights agreement ” ) . the company agreed to use its best efforts to file a registration statement to register the 485,000 shares of the company 's common stock issued pursuant to the amended and restated securities issuance agreement and the shares of common stock issuable upon exercise of the warrant , provided that the company is permitted to do so under applicable securities rules and regulations and after certain other registration statements that the company was obligated to file on behalf of selling shareholders have been declared effective . 8 % amended senior secured convertible notes on july 23 , 2007 , the company entered into amended agreements with the note holders of the original notes issued july 21 , 2006 and march 28 , 2007 and agreed to issue each holder an 8 % amended senior secured convertible note ( “ amended note ” ) in the principal amount equal to the principal amount outstanding as of july 23 , 2007 which was in total approximately $ 6.0 million . the significant changes to the amended notes include the following : · the due dates have been changed from july 23 , 2007 and january 21 , 2008 to december 21 , 2008 ; · the annual interest rate has been changed from 6 % to 8 % ; · the amended notes are convertible into 8,407,612 shares of the company 's common stock . story_separator_special_tag million to a total of approximately $ 23.8 million for the year ended december 31 , 2009 from approximately $ 18.7 million for the year ended december 31 , 2008 , representing an increase of 27 % . the increase in revenue was due to increased customer demand . for the year ended december 31 , 2009 , product revenue increased approximately $ 4.0 million as compared to the year ended december 31 , 2008. the 26 % increase was due to higher customer demand and product availability for our oled displays and z800s . for the year ended december 31 , 2009 , contract revenue increased 34 % or approximately $ 1.0 million as compared to the year ended december 31 , 2008. the increase was a result of an increase in the research and development projects in 2009 as compared to 2008. cost of goods sold cost of goods sold includes direct and indirect costs associated with production . cost of goods sold for the year ended december 31 , 2009 was approximately $ 10.2 million as compared to approximately $ 10.7 million for the year ended december 31 , 2008 , a decrease of approximately $ 0.5 million . cost of goods sold as a percentage of revenues improved to 43 % for the year ended december 31 , 2009 from 57 % for the year ended december 31 , 2008. cost of goods is comprised primarily of material and labor cost with the labor portion of cost of goods mostly fixed . improved manufacturing yield and lower royalty expense resulted in a lower cost of goods sold . the following table outlines product , contract and total gross profit and related gross margins for the years ended december 31 , 2009 and 2008 ( dollars in thousands ) : replace_table_token_5_th the gross profit for the year ended december 31 , 2009 was approximately $ 13.6 million as compared to approximately $ 8.1 million for the year ended december 31 , 2008 , an increase of $ 5.6 million . gross margin was 57 % for the year ended december 31 , 2009 up from 43 % for the year ended december 31 , 2008. the increase was mainly attributable to our increase in product gross margin of 18 % offset by a reduction in the contract gross margin of 4 % . the product gross profit for the year ended december 31 , 2009 was approximately $ 11.9 million as compared to approximately $ 6.6 million for the year ended december 31 , 2008 , an increase of $ 5.3 million . product gross margin was 60 % for the year ended december 31 , 2009 , up from 42 % for the year ended december 31 , 2008. the increase was attributed to the fuller utilization of our fixed production overhead due to improved yields and a reduction in royalty expense . see note 12 of the consolidated financial statements - commitments and contingencies for further discussion on the royalty expense . the contract gross profit for the year ended december 31 , 2009 was approximately $ 1.7 million as compared to approximately $ 1.4 million for the year ended december 31 , 2008 , an increase of $ 0.3 million . contract gross margin was 43 % for the year ended december 31 , 2009 , down from 47 % for the year ended december 31 , 2008. the contract gross margin is dependent upon the mix of internal versus external third party costs , with the external third party costs causing a lower gross margin and reducing the contract gross profit . research and development expenses research and development expenses include salaries , development materials and other costs specifically allocated to the development of new microdisplay products , oled materials and subsystems . research and development expenses for the year ended december 31 , 2009 were relatively unchanged at approximately $ 2.0 million as compared to approximately $ 2.1 million for the year ended december 31 , 2008 , a decrease of approximately $ 0.1 million . the decrease was primarily due to an increase in the allocation of research and development resources and expenses related to contracts to cost of goods sold and a reduction of expense due to the streamlining of the research and development effort in the subsystems area offset by an increase in internal product development costs . selling , general and administrative expenses selling , general and administrative expenses consist principally of salaries , fees for professional services including legal fees , as well as other marketing and administrative expenses . selling , general and administrative expenses for the year ended december 31 , 2009 were approximately $ 6.9 million as compared to approximately $ 6.3 million for the year ended december 31 , 2008 , an increase of approximately $ 0.6 million . the increase is primarily related to an increase in personnel costs , shareholder related costs , professional fees and tradeshow costs offset by a decrease in reserve for allowance for bad debts and rent expense . other ( expense ) income other income ( expense ) , net consists primarily of interest income earned on investments , interest expense related to the secured debt , and income from the licensing of intangible assets . 22 for the year ended december 31 , 2009 , interest expense was approximately $ 466 thousand as compared to approximately $ 2.0 million for the year ended december 31 , 2008. for the year ended december 31 , 2009 , the interest expense associated with debt was approximately $ 63 thousand , loan fees associated with the new line of credit were approximately $ 13 thousand , interest on liquidated damages expense related to registration payment arrangements was approximately $ 28 thousand and the amortization of the deferred costs associated with the debt was approximately $ 362 thousand . interest expense for the year ended december 31 , 2008

we did not draw on our credit facility in 2010. the credit facility contains the customary representations and warranties as well as affirmative and negative covenants . we were in compliance with all debt covenants as of december 31 , 2010. as we have reported , our business continues to experience revenue growth . this trend , if it continues , may result in higher accounts receivable levels and may require increased production and or higher inventory levels . we anticipate that our cash needs to fund these requirements as well as other operating or investing cash requirements over the next twelve months will be less than our current cash on hand and the cash we anticipate generating from operations . we anticipate that we will not require additional funds over the next twelve months other than perhaps for discretionary capital spending . if unanticipated events arise during the next twelve months , we believe we can raise sufficient funds . however , if we are unable to obtain sufficient funds , we may have to reduce the size of our organization and or be forced to reduce and or curtail our production and operations , all of which could have a material adverse impact on our business prospects . 23 contractual obligations the following chart describes the outstanding contractual obligations of emagin as of december 31 , 2010 ( in thousands ) : replace_table_token_6_th ( a ) the majority of purchase orders outstanding contain no cancellation fees except for minor re-stocking fees . effect of recently issued accounting pronouncements see note 3 of the consolidated financial statements in item 8 for a full description of recent accounting pronouncements , including the expected dates of adoption and estimated effects on results of operations and financial

( 28 ) 10.26b limited liability company agreement of mhi/carlyle hotel lessee program i , l.l.c . dated april 26 , 2007 . ( 28 ) 10.26c program agreement for mhi/carlyle hotel investment program i , l.l.c . and mhi/carlyle hotel lessee program i , l.l.c . dated april 26 , 2007 . ( 28 ) 10.27 agreement to purchase hotel dated may 25 , 2007 between mcz/centrum florida vi owner , l.l.c . and mhi hollywood llc . ( 16 ) 10.28 purchase agreement between sotherly hotels inc. and vantampa plaza hotel , inc. dated july 16 , 2007 . ( 18 ) 10.29 promissory note dated august 2 , 2007 made by savannah hotel associates l.l.c . , to the order of mony life insurance company . ( 19 ) 10.30 assumption and consent agreement by and among hampton hotel associates llc , us bank national association and hampton redevelopment and housing authority dated april 24 , 2008 . ( 29 ) 10.31 loan agreement between hampton redevelopment and housing authority and olde hampton hotel associates dated december 1 , 1998 . ( 29 ) 10.32 $ 7,430,000 hampton redevelopment and housing authority first mortgage revenue refunding bonds ( olde hampton hotel associates project ) series 1998a . ( 29 ) 10.33 indenture of trust between hampton redevelopment and housing authority and crestar bank dated december 1 , 1998 . ( 29 ) 10.34 promissory note by mhi hotel investments holdings , llc , dated february 9 , 2009 . ( 30 ) 10.35 guaranty by sotherly hotels inc. , dated february 9 , 2009 . ( 30 ) 10.36 securities purchase agreement , dated as of april 18 , 2011 , by and between the company , essex illiquid , llc and richmond hill capital partners , lp . ( 3 ) 10.37 registration rights agreement , dated april 18 , 2011 , by and between the company , essex illiquid , llc and richmond hill capital partners , lp . ( 3 ) 10.38 note agreement , dated as of april 18 , 2011 , by and between the company and essex high income joint investment vehicle , llc . ( 3 ) 10.39 amendment no . 1 , dated december 21 , 2011 , to note agreement , dated april 18 , 2011 , by and among the company and essex equity high income joint investment vehicle , llc . ( 4 ) 75 exhibits 10.40 amendment no . 2 , dated june 15 , 2012 , to note agreement , dated april 18 , 2011 , by and between the company and essex equity high income joint investment vehicle , llc . ( 32 ) 10.41 agreement , waiver and consent by preferred stockholders , dated june 15 , 2012 , by and among the company , essex illiquid , llc , and richmond hill capital partners , lp . ( 32 ) 10.42 sotherly hotels inc. 2013 long-term incentive plan . ( 38 ) * 10.43 warrant redemption agreement , dated october 23 , 2013 , by and among sotherly hotels inc. , essex illiquid , llc , and richmond hill capital partners , lp . ( 36 ) 10.44 general partnership interest sale and purchase agreement between boston resources limited and sotherly-houston gp llc , dated as of november 13 , 2013 . ( 39 ) 10.45 exchange agreement between mhi hotels , l.l.c . and sotherly hotels lp , dated as of november 13 , 2013 . ( 39 ) 10.46 warrant redemption agreement , dated december 23 , 2013 , by and among sotherly hotels inc. , essex illiquid , llc , and richmond hill capital partners , lp . ( 40 ) 10.47 purchase agreement between sotherly hotels inc. and csc georgian terrace limited partnership dated january 13 , 2014 . ( 41 ) 10.48 note agreement by and between sotherly hotels lp , richmond hill capital partners , lp and essex equity joint investment vehicle , llc dated march 26 , 2014 . ( 42 ) 10.49 guaranty by sotherly hotels inc. dated march 26 , 2014 . ( 42 ) 10.50 pledge agreement by sotherly hotels lp and mhi gp llc , acknowledged by philadelphia hotel associates lp , dated march 26 , 2014 . ( 42 ) 10.51 sales agency agreement , dated july 9 , 2014 , among sotherly hotels inc. , sotherly hotels lp and sandler o'neill & partners , l.p. ( 44 ) 10.52 master agreement by and among sotherly hotels inc. , sotherly hotels lp , mhi hospitality trs , llc and mhi hotels services llc . ( 46 ) 16.2 letter from pbmares , llp , dated april 14 , 2014 . ( 43 ) 21.1 list of subsidiaries of sotherly hotels inc. 21.2 list of subsidiaries of sotherly hotels lp . 23.1 consent of pbmares , llp . 23.2 consent of grant thornton llp . 23.3 consent of pbmares , llp . 23.4 consent of grant thornton llp . 31.1 certification of chief executive officer pursuant to exchange act rule 13 ( a ) -14 and 15 ( d ) -14 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.2 certification of chief financial officer pursuant to exchange act rule 13 ( a ) -14 and 15 ( d ) -14 , as adopted , pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.3 certification of chief executive officer pursuant to exchange act rule 13 ( a ) -14 and 15 ( d ) -14 , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.4 certification of chief financial officer pursuant to exchange act rule 13 ( a ) -14 and 15 ( d ) -14 , as adopted , pursuant to section 302 of the sarbanes-oxley act of 2002 . 76 exhibits 32.1 certification of chief executive officer pursuant to 18 u.s.c . story_separator_special_tag net loss for the year ended december 31 , 2013 decreased approximately $ 0.9 million , or 17.3 % , to approximately $ 4.5 million compared to net loss of approximately $ 5.4 million for the year ended december 31 , 2012 as a result of the operating results discussed above . story_separator_special_tag ratio . on june 28 , 2013 , we entered into an agreement with townebank to extend the maturity of the mortgage on the crowne plaza hampton marina in hampton , virginia . pursuant to the agreement , we reduced the outstanding indebtedness by approximately $ 1.1 million . on august 2 , 2013 , we used approximately $ 2.7 million of the net proceeds of a new mortgage on the doubletree by hilton raleigh brownstone-university to make a special distribution by the operating partnership to the company to redeem 2,460 shares of preferred stock . the remainder of the proceeds were used to pay transaction costs and for working capital . on september 30 , 2013 , the operating partnership issued 8.0 % senior unsecured notes in the aggregate amount of $ 27.6 million . the proceeds were used to redeem the remaining outstanding shares of preferred stock for an aggregate redemption price of approximately $ 10.7 million , pay accrued and unpaid cash dividends , pay transaction costs and for working capital . on october 23 , 2013 and december 23 , 2013 , we redeemed the essex warrant , in two separate transactions , corresponding to an aggregate of 1,900,000 issuable warrant shares for an aggregate cash redemption price of approximately $ 7.2 million . concurrently with the redemptions on october 23 , 2013 and december 23 , 2013 , the operating partnership redeemed an aggregate of 1,900,000 issuable warrant units , as defined in the warrant to purchase partnership units agreement , for an aggregate cash redemption price of $ 7.2 million . on november 13 , 2013 , we borrowed $ 21.5 million in conjunction with the purchase of the crowne plaza houston downtown . on december 30 , 2013 , we paid approximately $ 3.5 million and extinguished the balance of the loan with the carlyle affiliate lender . capital expenditures we anticipate that our need for recurring capital expenditures for the replacement and refurbishment of furniture , fixtures and equipment over the next 12 to 24 months will be at historical norms for our properties and the industry . historically , we have aimed to maintain overall capital expenditures , except for those required by our franchisors as a condition to a franchise license or license renewal , at 4.0 % of gross revenue . in addition , during 2015 we expect capital expenditures of $ 2.2 million related to the rebranding of the crowne plaza jacksonville as the doubletree by hilton jacksonville riverfront in september 2015. we also anticipate capital expenditures during 2015 of approximately $ 1.6 million in 2015 , at our property in houston , texas other than for the recurring replacement of furniture , fixtures and equipment . we anticipate capital expenditures during 2015 of approximately $ 2.9 million for the georgian terrace other than for the recurring replacement of furniture , fixtures and equipment related to a guestroom renovation . lastly , we anticipate additional capital expenditures during 2015 of approximately $ 4.5 million related to the rebranding of the holiday inn laurel as the doubletree by hilton laurel in october 2015 . 56 given our desire to proceed with the renovation activities at our properties in jacksonville , florida ; houston , texas ; atlanta , georgia , and laurel , maryland , we aim to restrict all other capital expenditures to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensors that are necessary to maintain our brand affiliations . we anticipate that capital expenditures for the replacement and refurbishment of furniture , fixtures and equipment that are not related to these renovation activities to total 4.00 % of gross revenues in 2015. we expect capital expenditures for the recurring replacement or refurbishment of furniture , fixtures and equipment at our properties will be funded by our replacement reserve accounts , other than costs that we incur to make capital improvements required by our franchisors . reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures with respect to all of our hotels . we currently deposit an amount equal to 4.0 % of gross revenue for the hilton savannah desoto , the hilton wilmington riverside , the crowne plaza hampton marina , the doubletree by hilton raleigh brownstone-university , the sheraton louisville riverside , the crowne plaza houston downtown and the georgian terrace as well as 4.0 % of room revenues for the doubletree by hilton philadelphia airport on a monthly basis . liquidity and capital resources as of december 31 , 2014 , we had cash and cash equivalents of approximately $ 23.3 million , of which approximately $ 6.6 million was in restricted reserve accounts for capital improvements , real estate tax and insurance escrows . we expect that our cash on hand combined with our cash flow from our hotels should be adequate to fund continuing operations , recurring capital expenditures for the refurbishment and replacement of furniture , fixtures and equipment , and monthly and quarterly scheduled payments of principal and interest ( excluding any balloon payments due upon maturity of the indentures or mortgage debt ) . on march 26 , 2014 , we borrowed $ 19.0 million from richmond hill capital partners , lp and essex equity joint investment vehicle , llc and used the net proceeds to fund a portion of the acquisition of the georgian terrace . on march 27 , 2014 , we borrowed $ 41.5 million in conjunction with the purchase of the georgian terrace , of which $ 1.5 million was contributed to a restricted reserve .

on june 27 , 2014 , we entered into an agreement with townebank to extend the maturity of the mortgage on the crowne plaza hampton marina in hampton , virginia , until june 30 , 2016. pursuant to those terms , we reduced the mortgage balance by $ 0.8 million . on november 21 , 2014 , we closed on a 7 % unsecured note offering for approximately $ 25.3 million . the net proceeds of approximately $ 23.7 million were used to repay the $ 19.0 million bridge loan , with the remainder to be used for general corporate purposes . on november 24 , 2014 , we repaid the $ 19.0 million bridge loan . on december 19 , 2014 , we secured $ 3.0 million additional proceeds on our mortgage loan on the crowne plaza jacksonville riverfront property as part of an earn-out pursuant to the terms of the previously disclosed loan agreement . the following narrative discusses our sources and uses of cash for the year ended december 31 , 2013. operating activities . our principal source of cash to meet our operating requirements , including distributions to unit holders of the operating partnership and stockholders of the company as well as debt service ( excluding debt maturities ) , is the operations of our hotels . cash flow provided by operating activities for the year ended december 31 , 2013 was approximately $ 9.6 million . cash on hand and the net cash provided by operations was adequate to fund our operating requirements , monthly and quarterly scheduled payments of principal and interest ( excluding any balloon payments due upon maturity of a debt ) and the payment of dividends ( distributions ) to the stockholders of the company ( the unitholders of the operating partnership ) in accordance with federal income tax laws which require us to make annual distributions , as “qualifying distributions” , to the company 's stockholders of at least 90.0 % of its reit taxable income ( determined without regard to the dividends-paid deduction and by excluding its net capital gains , and reduced by certain non-cash items ) . investing activities . in november 2013 , we spent approximately $ 30.7 million to purchase the crowne plaza houston downtown . during 2013 , we spent approximately $ 4.9 million on capital expenditures at our properties , of which approximately $ 2.4 million related to the routine replacement of furniture , fixtures and equipment , and approximately $ 2.5 million related to renovations of our properties in philadelphia , pennsylvania and jacksonville , florida . we also contributed approximately $ 2.2 million in reserves required by the lenders of the crowne plaza hampton marina , doubletree by hilton raleigh brownestone – university , hilton wilmington riverside , hilton savannah desoto , hilton philadelphia airport and sheraton louisville riverside according to the provisions of the loan agreements . we also received reimbursement from those reserves of approximately $ 1.7 million for capital expenditures related to those properties . on december 27 , 2013 , the joint venture entity that owns the crowne plaza hollywood beach entered into a credit and security agreement and other loan documents with bank of america , n.a . to refinance the mortgage on that property . subsequent to the refinance , we received a distribution of approximately $

sheets replace_table_token_92_th see the combined notes to consolidated financial statements 181 exelon generation company , llc and subsidiary companies consolidated balance sheets replace_table_token_93_th see the combined notes to consolidated financial statements 182 exelon generation company , llc and subsidiary companies consolidated statements of changes in member 's equity replace_table_token_94_th see the combined notes to consolidated financial statements 183 commonwealth edison company and subsidiary companies consolidated statements of operations and comprehensive income replace_table_token_95_th see the combined notes to consolidated financial statements 184 commonwealth edison company and subsidiary companies consolidated statements of cash flows replace_table_token_96_th see the combined notes to consolidated financial statements 185 commonwealth edison company and subsidiary companies consolidated balance sheets replace_table_token_97_th see the combined notes to consolidated financial statements 186 commonwealth edison company and subsidiary companies consolidated balance sheets replace_table_token_98_th see the combined notes to consolidated financial statements 187 commonwealth edison company and subsidiary companies consolidated statements of changes in shareholders ' equity replace_table_token_99_th see the combined notes to consolidated financial statements 188 peco energy company and subsidiary companies consolidated statements of operations and comprehensive income replace_table_token_100_th see the combined notes to consolidated financial statements 189 peco energy company and subsidiary companies consolidated statements of cash flows replace_table_token_101_th see the combined notes to consolidated financial statements 190 peco energy company and subsidiary companies consolidated balance sheets replace_table_token_102_th see the combined notes to consolidated financial statements 191 peco energy company and subsidiary companies consolidated balance sheets replace_table_token_103_th see the combined notes to consolidated financial statements 192 peco energy company and subsidiary companies consolidated statements of changes in stockholders ' equity replace_table_token_104_th see the combined notes to consolidated financial statements 193 combined notes to consolidated financial statements ( dollars in millions , except per share data unless otherwise noted ) 1. significant accounting policies ( exelon , generation , comed and peco ) description of business ( exelon , generation , comed and peco ) exelon is a utility services holding company engaged , through its subsidiaries , in the generation and energy delivery businesses discussed below . the generation business consists of the electric generating facilities , the wholesale energy marketing operations and competitive retail supply operations of generation . the energy delivery businesses include the purchase and regulated retail sale of electricity and the provision of transmission and distribution services by comed in northern illinois , including the city of chicago , and by peco in southeastern pennsylvania , including the city of philadelphia , and the purchase and regulated retail sale of natural gas and the provision of distribution services by peco in the pennsylvania counties surrounding the city of philadelphia . basis of presentation ( exelon , generation , comed and peco ) this is a combined annual report of exelon , generation , comed and peco . the notes to the consolidated financial statements apply to exelon , generation , comed and peco as indicated parenthetically next to each corresponding disclosure . through its business services subsidiary , bsc , exelon provides its subsidiaries with a variety of support services at cost , including legal , human resources , financial , information technology and supply management services . the costs of bsc , including support services , are directly charged or allocated to the applicable subsidiaries using a cost-causative allocation method . corporate governance-type costs that can not be directly assigned are allocated based on a modified massachusetts formula , which is a method that utilizes a combination of gross revenues , total assets and direct labor costs for the allocation base . the results of exelon 's corporate operations are presented as “other” within the consolidated financial statements and include intercompany eliminations unless otherwise disclosed . exelon owns 100 % of all of its significant consolidated subsidiaries , either directly or indirectly , except for comed , of which exelon owns more than 99 % , and peco , of which exelon owns 100 % of the common stock but none of peco 's preferred securities . exelon has reflected the third-party interests in comed , which totaled less than $ 1 million at december 31 , 2011 and december 31 , 2010 , as equity and peco 's preferred securities as preferred securities of subsidiary in its consolidated financial statements . generation owns 100 % of all of its significant consolidated subsidiaries , either directly or indirectly , except for exelon shc , inc. , of which generation owns 99 % and the remaining 1 % is indirectly owned by exelon , which is eliminated in exelon 's consolidated financial statements ; and certain exelon wind projects , of which generation holds a majority interest ranging from 94 % to 99 % , and which is included in noncontrolling interest on exelon 's and generation 's consolidated balance sheets . comed owns 100 % of all of its significant consolidated subsidiaries , either directly or indirectly , except for riteline illinois , llc of which comed owns 75 % and 12.5 % is indirectly owned by exelon , which is eliminated in exelon 's consolidated financial statements . exelon and comed have reflected the third-party interests of 12.5 % and 25 % , respectively , in riteline illinois , llc , which both totaled less than $ 1 million at december 31 , 2011 , as equity . exelon 's consolidated financial statements include the accounts of entities in which exelon has a controlling financial interest , other than certain financing trusts of comed and peco , and generation 's and peco 's proportionate interests in jointly owned electric utility property , after the elimination of 194 combined notes to consolidated financial statements— ( continued ) ( dollarsin millions , except per share data unless otherwise noted ) intercompany transactions . story_separator_special_tag a controlling financial interest is evidenced by either a voting interest greater than 50 % or the results of a model that identifies exelon or one of its subsidiaries as the primary beneficiary of a vie . investments and joint ventures in which exelon does not have a controlling financial interest and certain financing trusts of comed and peco are accounted for under the equity or cost method of accounting . each of generation 's , comed 's and peco 's consolidated financial statements includes the accounts of their subsidiaries . all intercompany transactions have been eliminated . use of estimates ( exelon , generation , comed and peco ) the accompanying consolidated financial statements have been prepared in accordance with gaap for annual financial statements and in accordance with the instructions to form 10-k and regulation s-x promulgated by the sec . the preparation of financial statements of each of the registrants in conformity with gaap requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes . areas in which significant estimates have been made include , but are not limited to , the accounting for nuclear decommissioning costs and other aros , pension and other postretirement benefits , the application of purchase accounting , inventory reserves , allowance for uncollectible accounts , goodwill and asset impairments , derivative instruments , fixed asset depreciation , environmental costs , taxes and unbilled energy revenues . actual results could differ from those estimates . reclassifications ( exelon , comed and peco ) certain prior year amounts in exelon 's , generation 's , comed 's and peco 's consolidated balance sheets have been reclassified between line items for comparative purposes . the reclassifications did not affect net income or cash flows from operating activities of the registrants . accounting for the effects of regulation ( exelon , comed and peco ) exelon , comed and peco apply the authoritative guidance for accounting for certain types of regulations , which requires comed and peco to record in their consolidated financial statements the effects of cost-based rate regulation for entities with regulated operations that meet the following criteria : 1 ) rates are established or approved by a third-party regulator ; ( 2 ) rates are designed to recover the entities ' cost of providing services or products ; and ( 3 ) there is a reasonable expectation that rates are set at levels that will recover the entities ' costs from customers . exelon , comed and peco account for their regulated operations in accordance with regulatory and legislative guidance from the regulatory authorities having jurisdiction , principally the icc and the papuc , respectively , under state public utility laws and the ferc under various federal laws . regulatory assets and liabilities are amortized and the related expense is recognized in the consolidated statements of operations consistent with the recovery or refund included in customer rates . exelon believes that it is probable that its currently recorded regulatory assets and liabilities will be recovered and settled , respectively , in future rates . however , exelon , comed and peco continue to evaluate their respective abilities to apply the authoritative guidance for accounting for certain types of regulation , including consideration of current events in their respective regulatory and political environments . if a separable portion of comed 's or peco 's business was no longer able to meet the criteria discussed above , exelon , comed and peco would be required to eliminate from their consolidated financial statements the effects of regulation for that portion , which could have a material impact on their results of operations and financial positions . see note 2—regulatory matters for additional information . 195 combined notes to consolidated financial statements— ( continued ) ( dollars in millions , except per share data unless otherwise noted ) variable interest entities ( exelon , generation , comed and peco ) under the applicable authoritative guidance , a vie is a legal entity that possesses any of the following characteristics : an insufficient amount of equity at risk to finance its activities , equity owners who do not have the power to direct the significant activities of the entity ( or have voting rights that are disproportionate to their ownership interest ) or who do not receive expected losses or returns significant to the vie . companies are required to consolidate a vie if they are its primary beneficiary . generation generation 's wholesale operations include the physical delivery and marketing of power obtained through its generating capacity , and long- , intermediate- and short-term contracts . generation also has contracts to purchase fuel supplies for nuclear and fossil generation . these contracts and generation 's membership in neil are discussed in further detail in note 18—commitments and contingencies . generation has evaluated these contracts and its membership with neil and determined that either it has no variable interest in an entity or , where generation does have a variable interest in an entity , it is not the primary beneficiary and , therefore , consolidation is not required . for contracts where generation has a variable interest , generation has considered which interest holder has the power to direct the activities that most significantly affect the economic performance of the vie and thus is considered the primary beneficiary and is required to consolidate the entity . the primary beneficiary must also have exposure to significant losses or the right to receive significant benefits from the vie . in general , the most significant activity of the vies is the operation and maintenance of the facilities . facilities represent power plants story_separator_special_tag peco general peco operates in a single business segment and its operations consist of the purchase and regulated retail sale of electricity and the provision of distribution and transmission services in southeastern pennsylvania including the city of philadelphia , and the purchase and regulated retail sale

cash flows from operating activities a discussion of items pertinent to peco 's cash flows from operating activities is set forth under “cash flows from operating activities” in “exelon corporation—liquidity and capital resources” of this form 10-k. cash flows from investing activities a discussion of items pertinent to peco 's cash flows from investing activities is set forth under “cash flows from investing activities” in “exelon corporation—liquidity and capital resources” of this form 10-k. 164 cash flows from financing activities a discussion of items pertinent to peco 's cash flows from financing activities is set forth under “cash flows from financing activities” in “exelon corporation—liquidity and capital resources” of this form 10-k. credit matters a discussion of credit matters pertinent to peco is set forth under “credit matters” in “exelon corporation—liquidity and capital resources” of this form 10-k. contractual obligations and off-balance sheet arrangements a discussion of peco 's contractual obligations , commercial commitments and off-balance sheet arrangements is set forth under “contractual obligations and off-balance sheet arrangements” in “exelon corporation—liquidity and capital resources” of this form 10-k. critical accounting policies and estimates see exelon , generation , comed and peco—critical accounting policies and estimates above for a discussion of peco 's critical accounting policies and estimates . new accounting pronouncements see note 1 of the combined notes to consolidated financial statements for information regarding new accounting pronouncements . item

there are no segment managers who are held accountable for operations and operating results below the consolidated unit level . accordingly , the company is considered to be in a single reportable segment and operating unit structure . the following table presents revenue by service type ( in thousands ) : replace_table_token_16_th deferred revenue ( contract liabilities ) . deferred revenue represents amounts contractually billed to customers or payments received from customers for which revenue has not yet been recognized . deferred revenue that is expected to be recognized as revenue within one year is recorded as short-term deferred revenue and the remaining portion is recorded as long-term deferred revenue . the company has determined that its contracts generally do not include a significant financing component . the primary purpose of the company 's invoicing terms is to provide customers with simplified and predictable ways of purchasing its solutions , not to receive financing from customers or to provide customers with financing . examples of such terms include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period . cost of revenue . cost of revenue consists primarily of compensation and related expenses , including salaries , benefits and performance-based compensation for employees who maintain the counter threat platform and provide support services to customers , as well as perform other critical functions . other expenses include depreciation of equipment and costs associated with maintenance agreements for hardware provided to customers as part of their subscription-based solutions . in addition , cost of revenue includes amortization of technology licensing fees , fees paid to contractors who supplement or support solutions offerings , maintenance fees and overhead allocations . research and development costs . research and development costs are expensed as incurred . research and development expenses include compensation and related expenses for the continued development of solutions offerings , including a portion of expenses related to the threat research team , which focuses on the identification of system vulnerabilities , data forensics and malware analysis and product management . in addition , expenses related to the development and prototype of new solutions offerings also are included in research and development costs , as well as allocated overhead . the company 's solutions offerings have generally been developed internally . sales and marketing . sales and marketing expense includes compensation and related expenses , including salaries , benefits , and performance-based compensation , including sales commissions and related expenses for sales and marketing personnel , marketing and advertising programs , including lead generation , customer advocacy events , other brand-building expenses and allocated overhead . advertising costs are expensed as incurred and were $ 13.3 million , $ 12.6 million and $ 14.7 million for the fiscal years ended january 31 , 2020 , february 1 , 2019 and february 2 , 2018 , respectively . general , and administrative . general and administrative expense primarily includes the costs of human resources and recruiting , finance and accounting , legal support , management information systems and information security systems , facilities management and other administrative functions , offset by allocations of information technology and facilities costs to other functions . software development costs . qualifying software costs developed for internal use are capitalized when application development begins , it is probable that the project will be completed , and the software will be used as intended . in order to expedite delivery of the company 's security solutions , the application stage typically commences before the preliminary development stage is completed . accordingly , no significant software development costs have been capitalized during any period presented . the company capitalizes development costs incurred for software and applications to be sold , leased or otherwise marketed after technological feasibility of the software or application is established . under the company 's current practice of developing new software , the technological feasibility of the underlying software or application is not established until substantially all product development and testing is complete , which generally includes the development of a working model . software development costs that have been capitalized to date have been insignificant . 75 secureworks corp. notes to consolidated financial statements ( continued ) income taxes . current income tax expense is the amount of income taxes expected to be payable for the current year . deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations in the period that includes the enactment date . the company calculates a provision for income taxes using the asset and liability method , under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes . the company accounts for the tax impact of including global intangible low tax income ( “ gilti ” ) in u.s. taxable income as a period cost . the company provides valuation allowances for deferred tax assets , where appropriate . in assessing the need for a valuation allowance , secureworks considers all available evidence for each jurisdiction , including past operating results , estimates of future taxable income , and the feasibility of ongoing tax planning strategies . in the event secureworks determines all or part of the net deferred tax assets are not realizable in the future , it will make an adjustment to the valuation allowance that would be charged to earnings in the period such determination is made . story_separator_special_tag our managed security contracts typically range from one to three years and , as of january 31 , 2020 , averaged approximately two years in duration . the revenue and any related costs for these deliverables are recognized ratably over the contract term , beginning on the date on which service is made available to customers . professional services customers typically purchase solutions pursuant to customized contracts that are shorter in duration . in general , these contracts have terms of less than one year . professional services consist primarily of fixed-fee and retainer-based contracts . revenue from these engagements is recognized under the proportional performance method of accounting . revenue from time and materials-based contracts is recognized as costs are incurred at amounts represented by the agreed-upon billing rates . the fees we charge for our solutions vary based on a number of factors , including the solutions selected , the number of customer devices covered by the selected solutions , and the level of management we provide for the solutions . in fiscal 2020 , approximately 76 % of our revenue was derived from subscription-based arrangements , attributable to managed security solutions , while approximately 24 % was derived from professional services engagements . as we respond to the evolving needs of our customers , the relative mix of subscription-based solutions and professional services we provide our customers may fluctuate . international revenue , which we define as revenue contracted through non-u.s. entities , represented approximately 25 % , 22 % and 16 % of our total net revenue in fiscal 2020 , fiscal 2019 and fiscal 2018 , respectively . although our international customers are located primarily in the united kingdom , japan and canada , we provide managed security solutions to customers across 52 countries as of january 31 , 2020 . over all of the periods presented in this report , our pricing strategy for our various offerings was relatively consistent , and accordingly did not significantly affect our revenue growth . however , we may adjust our pricing to remain competitive and support our strategic initiatives . during the second quarter of fiscal 2019 , a significant portion of our contract with bank of america , n.a . , a large customer , was amended and extended for two more years . during the term of the extended contract , the mix of services is different from the mix in prior periods , with higher gross margin , although the total value of services is lower than in prior periods . gross margin we operate in a challenging business environment , where the complexity and number of cyber attacks are constantly increasing . accordingly , initiatives to drive the efficiency of our counter threat platform and the continued training and development of our employees are critical to our long-term success . gross margin has been and will continue to be affected by these factors as well as others , including the mix of solutions sold , the mix between large and small customers , timing of revenue recognition and the extent to which we expand our counter threat operations centers . cost of revenue consists primarily of personnel expenses , including salaries , benefits and performance-based compensation for employees who maintain our counter threat platform and provide solutions to our customers , as well as perform other critical functions . also included in cost of revenue are amortization of equipment and costs associated with hardware utilized as part of providing subscription services , amortization of technology licensing fees , amortization of intangible assets , fees paid to contractors who supplement or support our solutions , maintenance fees and overhead allocations . as our business grows , the cost of revenue associated with our solutions may fluctuate . we operate in a high-growth industry and have experienced significant revenue growth since our inception . we continue to invest in initiatives to drive the efficiency of our business to increase gross margin as a percentage of total revenue . however , as we balance revenue growth and efficiency initiatives , gross margin as a percentage of total revenue may fluctuate from period to period . 54 operating costs and expenses our operating costs and expenses consist of research and development expenses , sales and marketing expenses and general and administrative expenses . research and development , or r & d , expenses . research and development expenses include compensation and related expenses for the continued development of our solutions offerings , including a portion of expenses related to our threat research team , which focuses on the identification of system vulnerabilities , data forensics and malware analysis . r & d expenses also encompass expenses related to the development of prototypes of new solutions offerings and allocated overhead . our customer solutions have generally been developed internally . we operate in a competitive and highly technical industry . therefore , to maintain and extend our technology leadership , we intend to continue to invest in our r & d efforts by hiring more personnel to enhance our existing security solutions and to add complementary solutions . sales and marketing , or s & m , expenses . sales and marketing expenses include salaries , sales commissions and performance-based compensation benefits and related expenses for our s & m personnel , travel and entertainment , marketing and advertising programs ( including lead generation ) , customer advocacy events , and other brand-building expenses , as well as allocated overhead . as we continue to grow our business , both domestically and internationally , we will invest in our sales capability , which will increase our sales and marketing expenses in absolute dollars . general and administrative , or g & a , expenses . general and administrative expenses include primarily the costs of human resources and recruiting , finance and accounting , legal support , information management and information security systems , facilities management , corporate development

investing activities — cash used in investing activities totaled $ 12.6 million and $ 10.2 million in fiscal 2020 and fiscal 2019 , respectively . for the periods presented , investing activities consisted primarily of capital expenditures for property and equipment to support our data center and facility infrastructure , as well as certain capitalized costs related to the development of our new security software application . financing activities — cash used in financing activities was $ 14.0 million and $ 18.9 million in fiscal 2020 and fiscal 2019 , respectively . the usage in fiscal 2020 reflected employee tax withholding payments of $ 8.5 million associated with the vesting of stock compensation grants and our repurchase of $ 6.4 million of our class a common stock pursuant to our stock repurchase program re-authorized during fiscal 2020 and payment of a long-term financing arrangement of $ 0.5 million , which was partially offset by proceeds of $ 1.3 million from stock options exercised during fiscal 2020. the usage in fiscal 2019 reflected our repurchase of $ 13.5 million of our class a common stock pursuant to our stock repurchase program authorized during fiscal 2019 , payments of long-term financing arrangements of $ 3.2 million , including related 59 party obligations with a dell subsidiary of $ 2.2 million , and employee tax withholding payments of $ 2.2 million associated with the vesting of stock compensation grants . for information about our stock repurchase program , see “ notes to consolidated financial statements — note 9 —stockholders ' equity ” in our consolidated financial statements included in this report . contractual cash obligations contractual cash obligations are summarized in the following table : replace_table_token_10_th ( 1 ) other reflects purchase obligations of annual maintenance services for hardware systems for internal use financed from a related party . see also “ notes to consolidated financial statements— note 13 —related party transactions ” in our consolidated financial statements included in this report . for information about leases and purchase obligations , see “ notes to consolidated financial statements < span

§ indicates management contract or compensatory plan or arrangement . item 16. form 10-k summary not applicable . 36 signatures pursuant to the requirements of section 13 or 15 ( d ) of the securities exchange act of 1934 , the registrant has duly caused this report to be signed on its behalf by the undersigned , thereunto duly authorized . circor international , inc. by : scott a. buckhout scott a. buckhout president and chief executive officer date : february 21 , 2017 pursuant to the requirements of the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated . signature title date scott a. buckhout president and chief executive officer ( principal executive officer ) february 21 , 2017 scott a. buckhout rajeev bhalla executive vice president , chief financial officer ( principal financial officer ) february 21 , 2017 rajeev bhalla david f. mullen vice president and corporate controller ( principal accounting officer ) february 21 , 2017 david f. mullen david f. dietz chairman of the board of directors february 21 , 2017 david f. dietz helmuth ludwig director february 21 , 2017 helmuth ludwig douglas m. hayes director february 21 , 2017 douglas m. hayes john a. o'donnell director february 21 , 2017 john a. o'donnell peter m. wilver director february 21 , 2017 peter m. wilver 37 report of independent registered public accounting firm to the board of directors and shareholders of circor international , inc. in our opinion , the accompanying consolidated balance sheets as of december 31 , 2016 and 2015 and the related consolidated statements of income , comprehensive ( loss ) income , shareholders ' equity and cash flows for the years then ended present fairly , in all material respects , the financial position of circor international , inc. and its subsidiaries at december 31 , 2016 and 2015 , and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the united states of america . in addition , in our opinion , the financial statement schedule as of and for the years ended december 31 , 2016 and 2015 listed in the index appearing under item 15 ( a ) ( 2 ) presents fairly , in all material respects , the information set forth therein when read in conjunction with the related consolidated financial statements . also in our opinion , the company maintained , in all material respects , effective internal control over financial reporting as of december 31 , 2016 , based on criteria established in internal control - integrated framework ( 2013 ) issued by the committee of sponsoring organizations of the treadway commission ( coso ) . the company 's management is responsible for these financial statements and financial statement schedule , for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting , included in management 's report on internal control over financial reporting appearing under item 9a . our responsibility is to express opinions on these financial statements , on the financial statement schedule and on the company 's internal control over financial reporting based on our integrated audits . we conducted our audits in accordance with the standards of the public company accounting oversight board ( united states ) . those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects . our audits of the financial statements included examining , on a test basis , evidence supporting the amounts and disclosures in the financial statements , assessing the accounting principles used and significant estimates made by management , and evaluating the overall financial statement presentation . our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting , assessing the risk that a material weakness exists , and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk . our audits also included performing such other procedures as we considered necessary in the circumstances . we believe that our audits provide a reasonable basis for our opinions . a company 's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles . a company 's internal control over financial reporting includes those policies and procedures that ( i ) pertain to the maintenance of records that , in reasonable detail , accurately and fairly reflect the transactions and dispositions of the assets of the company ; ( ii ) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles , and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company ; and ( iii ) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition , use , or disposition of the company 's assets that could have a material effect on the financial statements . because of its inherent limitations , internal control over financial reporting may not prevent or detect misstatements . story_separator_special_tag these restructuring charges and other special charges are described in further detail in note 4 , special and restructuring charges , net . in relation to our schroedahl acquisition we recorded $ 6.8 million of intangible asset amortization during 2015. this amortization is recorded within selling , general , and administrative expenses . also during 2015 , we also recorded $ 2.5 million of plant , property , and equipment and intangible impairments related to our brazil business . these impairment charges are included in the impairment charge line on our consolidated statement of operations . 25 in 2014 , the company recorded $ 20.7 million of special and restructuring charges , net . in our statement of operations , these charges are recorded in costs of revenue ( $ 8.0 million ) and special and restructuring costs , net ( $ 12.7 million ) . these costs , primarily related to our simplification efforts and acquisitions . the amount recorded in costs of revenues relates to inventory charges associated with the exit of non-strategic product lines . these restructuring charges and other special charges are described in further detail in note 4 , special and restructuring charges , net . in 2014 , we also recorded $ 0.7 million impairment charges for certain aerospace & defense trade name intangible assets that had no future usage . these impairment charges are included in the impairment charge line on our consolidated statement of income ( loss ) . interest expense , net interest expense increased $ 0.2 million to $ 2.8 million for 2015 . this change in interest expense was primarily due to higher outstanding debt balances during the period related to our 2015 schroedahl acquisition . other expense ( income ) , net other expense was $ 0.9 million for 2015 compared to other income of $ 1.2 million in 2014 . the difference of $ 2.1 million was primarily due to foreign currency fluctuations . comprehensive ( loss ) income comprehensive ( loss ) income changed by $ 34.7 million from comprehensive income of $ 12.5 million as of december 31 , 2014 to comprehensive loss of $ 22.2 million as of december 31 , 2015 , primarily driven by $ 40.5 million decrease in net income and an increase of $ 1.1 million in unfavorable foreign currency balance sheet remeasurements . these unfavorable foreign currency balance sheet remeasurements were driven by the weakening of the brazilian real ( $ 5.4 million ) , canadian dollar ( $ 1.4 million ) and uk pound ( $ 0.4 million ) offset by strengthening of the euro ( $ 6.2 million ) against the u.s. dollar . provision for income taxes the effective tax rate was 56 % for the year ended december 31 , 2015 compared to 20 % for the same period of 2014 . the primary drivers of the higher 2015 tax rate was an increase in foreign losses from brazil with no tax benefit ( +38 % ) , a 2014 valuation allowance benefit related to us foreign tax credits ( +9 % ) , and charges for a foreign tax audit that was settled in 2015 ( +5 % ) . this was partially offset by lower taxed foreign earnings in 2015 ( -9 % ) , as well as a 2015 valuation allowance benefit for certain state net operating losses ( -7 % ) . story_separator_special_tag december 31 , 2014 substantially all of which was held in foreign bank accounts . the cash and cash equivalents located at our foreign subsidiaries may not be repatriated to the united states or other jurisdictions without significant tax implications . we believe that our u.s. based subsidiaries , in the aggregate , will generate positive operating cash flows and in addition we may utilize our 2014 credit agreement for u.s. based cash needs . the following table summarizes our significant contractual obligations and commercial commitments at december 31 , 2016 that affect our liquidity : replace_table_token_13_th 28 in accordance with the authoritative guidance for accounting for uncertainty in income taxes , as of december 31 , 2016 , we had unrecognized tax benefits of $ 3.0 million , including $ 0.2 million of accrued interest . the company expects the unrecognized tax benefits to change over the next 12 months if certain tax matters ultimately settle with the applicable taxing jurisdiction during this timeframe , or if the applicable statute of limitations lapses . the impact of the amount of such changes to previously recorded uncertain tax positions could range from zero to $ 1.0 million . the interest on certain of our other debt balances , with scheduled repayment dates between 2017 and 2019 and interest rates ranging between 1.59 % and 4 % , have been included in the `` interest payments on debt `` line within the contractual cash obligations schedule . our commercial contract commitments primarily relate to open purchase orders of $ 66.8 million , $ 3.2 million of which extend to 2018 and beyond . in fiscal years 2016 and 2015 , we contributed $ 1.0 million and $ 1.6 million to our qualified defined benefit pension plan , respectively . in addition , we made $ 0.4 million in payments to our nonqualified supplemental plan for both 2016 and 2015 . in connection with a lump sum cash payout option to terminated and vested pension plan participants , during q4 2016 we incurred a $ 4.5 million non-cash settlement charge which has been recorded within the special and restructuring charges , net line item . in addition , we made $ 1.5 million and $ 2.9 million in payments to our 401 ( k ) savings plan for 2016 and 2015 , respectively . in 2017 , we expect to make plan contributions totaling $ 2.0 million , consisting of $ 1.6 million in contributions to our qualified plan and payments of $ 0.4 million for our nonqualified plan .

the 2014 credit agreement contains covenants that require , among other items , maintenance of certain financial ratios and also limits our ability to : enter into secured and unsecured borrowing arrangements ; issue dividends to shareholders ; acquire and dispose of businesses ; invest in capital equipment ; transfer assets among domestic and international entities ; participate in certain higher yielding long-term investment vehicles ; and issue additional shares of our stock which limits our ability to borrow under the credit facility . the two primary financial covenants are leverage ratio and interest coverage ratio . we were in compliance with all financial covenants related to our existing debt obligations at december 31 , 2016 and we believe it is likely that we will continue to meet such covenants in the next twelve months from date of financial statements . the ratio of current assets to current liabilities was 3.1 :1 at december 31 , 2016 compared to 2.6 :1 at december 31 , 2015 . as of december 31 , 2016 , cash and cash equivalents totaled $ 58.3 million , substantially all of which was held in foreign bank accounts . this compares to $ 54.5 million of cash and cash equivalents as of december 31 , 2015 substantially all of which was also held in foreign bank accounts . the cash and cash equivalents located at our foreign subsidiaries may not be repatriated to the united states or other jurisdictions without significant tax implications . we believe that our u.s. based subsidiaries , in the aggregate , will generate positive operating cash flows and in addition we may utilize our 2014 credit agreement for u.s. based cash needs . 27 in 2017 , we expect to generate positive cash flow from operating activities sufficient to support our capital expenditures and pay dividends of approximately $ 2.5 million based on our current dividend practice of paying $ 0.15 per share annually . based on our expected cash flows from operations and contractually available borrowings under our credit facility , we expect to have sufficient liquidity to fund working capital needs and future growth over at least the next twelve months from date of filing the 2016 financial statements . we continue to search for strategic acquisitions . a larger acquisition may require additional borrowings and or the issuance of our common stock . cash flow activities for the year ended december 31 , 2015 compared to the year

our compensation committee and our board of directors also believe that performance of our executive officers may be improved by paying a substantial portion of each executive officer 's cash compensation as an annual bonus . our compensation committee and our board of directors currently limit the annual base salaries of our executive officers and utilize changes in annual cash bonus amounts as the primary mechanism for effecting annual compensation adjustments for our executive officers . the primary factor considered by our compensation committee and our board of directors when determining discretionary compensation for our executive officers is the historical cash and equity compensation paid to each executive officer and to our other executive officers with similar responsibilities . however , our compensation committee and our board of directors also consider , among other things , the executive officer 's : accomplishments during the year ; ability to identify areas for our improvement and to achieve benefits from those improvements ; 82 quality of decisions made ; ability to lead employees both in routine activities and in special projects ; change in performance as compared to the prior year ; perceived potential for future development and for assuming additional or alternative duties in the future ; background , training , education and experience ; and specific areas of expertise and value to us , and the likelihood that we could find a suitable replacement on a timely and cost effective basis . in addition to the consideration of the various factors described in the preceding paragraphs , our compensation committee and our board of directors consider available compensation data for public companies that are engaged in businesses similar to our business or that possess size or other characteristics that are similar to us . none of the company 's direct competitors are public companies and therefore the company does not have access to the compensation practices and amounts of those companies . consequently , in order to obtain a general understanding of current trends in compensation practices and ranges of amounts being awarded by other public companies , we compiled and reviewed comparative data gleaned from public filings regarding compensation paid by a group of public companies in the following industries : specialty retail ; hotels , restaurants and leisure ; food retail ; and food and staples retailing industries . 1 because the primary factor considered by our compensation committee and our board of directors is the historical compensation paid to each individual executive officer and to other executives with similar responsibilities , our compensation committee and our board of directors believe that our compensation philosophy with respect to our executive officers helps limit incentives for management to take excessive risk for short-term benefit . details of 2013 compensation process in september 2013 , ms. gilmore , the chair of our compensation committee , met with mr. barry portnoy , our ( non-employee ) managing director , mr. adam portnoy , president and chief executive officer of rmr , and the chairs of the compensation committees of the other public companies for which rmr provides services . rmr provides management services to us , commonwealth reit , government properties income trust , hospitality properties trust , select income reit , senior housing properties trust and five star quality care , inc. the purposes of this meeting were , among other things , to discuss compensation philosophy regarding potential share grants to be made by us and to consider the compensation payable to our director of internal audit ( who provides services to us and to other companies to which rmr provides management services ) , as well as to consider the allocation of internal audit and related services costs among us and other companies to which rmr provides such services . at a compensation committee meeting in november 2013 , our compensation committee conducted a review of executive and employee compensation and considered recommendations arising from the september 2013 meeting , recommendations provided by management and other factors such as : ( i ) the amount of cash compensation historically paid to each executive officer ; ( ii ) the amounts and value of historical share awards made to each executive officer ; ( iii ) the amounts of cash compensation 1 this group of public companies was comprised of advance auto parts , inc. ; autozone , inc. ; brinker international , inc. ; casey 's general stores , inc. ; cracker barrel old country store , inc. ; darden restaurants , inc. ; genuine parts company ; jack in the box inc. ; office depot , inc. ; officemax incorporated ; staples , inc. ; starbucks corporation ; susser holdings corporation ; the pantry , inc. ; wendy 's international , inc. ; and yum ! brands , inc. 83 and share awards paid to persons with similar levels of responsibility ; ( iv ) the then current market prices of our common shares ; ( v ) the performance of each executive officer during 2013 ; ( vi ) each executive officer 's expected future contributions to us ; ( vii ) each executive officer 's relative mix of cash and noncash compensation ; ( viii ) the comparative data about executive compensation trends and amounts that we assembled ; and ( ix ) our financial position and operating performance in the past year and our perceived future prospects . our compensation committee did not engage a compensation consultant to participate in the determination or recommendation of the amounts or form of compensation for our executive officers . messrs. o'brien , rebholz and young participated in parts of the compensation committee meeting with regard to consideration of compensation generally and to our other officers , but they left that meeting and did not participate in the compensation committee 's determination and recommendation of their compensation . story_separator_special_tag 58 year ended december 31 , 2012 compared to december 31 , 2011 the following table presents changes in our operating results for the year ended december 31 , 2012 , as compared with the year ended december 31 , 2011. replace_table_token_14_th same site results comparisons as part of the discussion and analysis of our operating results we sometimes refer to increases and decreases in results on a same site basis . for purposes of these comparisons , we include a location in the following same site comparisons only if we ( or a franchisee of ours for purposes only of the rent and royalty revenues results ) continuously operated it from january 1 , 2011 , through december 31 , 2012. we do not exclude locations from the same site comparisons as a result of expansions in their size or changes in the services offered . we excluded from the same site comparisons the two travel centers and two convenience stores we operate for a joint venture in which we own a 40 % interest because we account for this investment using the equity method of accounting and , therefore , the related revenues and expenses are not included in the respective line items in our consolidated results 59 of operations . two company operated travel centers were excluded from this same site comparison because they were temporarily closed during significant portions of 2011 as a result of flooding . replace_table_token_15_th ( 1 ) includes fuel volume , gross margin , revenues and expenses of locations that were company operated during the entirety of each of the periods presented . revenues . revenues for 2012 , were $ 7,995,724 , which represented an increase from 2011 , of $ 106,867 , or 1.4 % , primarily related to an increase in nonfuel revenue . fuel revenues for 2012 , were $ 6,636,297 , an increase of $ 32,968 , or 0.5 % , compared to 2011. this increase was principally the result of increases in fuel prices and fuel sales at travel centers we acquired during 2011 and 2012. these increases were partially offset by decreases in same site fuel sales volume and also offset by decreases in gallons sold to franchisees . the decreased level of sales volume to franchisees resulted from the sublease renewals entered in the second half of 2012 , which increased our rent revenue but eliminated the requirement that these subtenants purchase diesel fuel from us . the table below shows the changes in fuel revenues between periods that resulted from price and volume changes : replace_table_token_16_th 60 on a same site basis , fuel sales volume for our company operated locations decreased by 82,492 gallons , or 4.2 % , during 2012 , compared to 2011. we believe that improved fuel efficiency of heavy truck engines and other fuel conservation efforts by trucking customers , capital projects that required us to take certain diesel dispensers temporarily out of service during the year , and our decision to avoid certain lower margin fuel sales contributed to decreased same site fuel sales volume despite the slight and slow improvement in the u.s. economy generally and the trucking industry specifically . nonfuel revenues for 2012 , were $ 1,344,755 , an increase of $ 73,670 , or 5.8 % , compared to 2011. the majority of the change between years related to those sites we operated continuously since january 1 , 2011. on a same site basis for our company operated sites , nonfuel revenues increased by $ 39,469 , or 3.2 % , during 2012 , compared to 2011. we believe the same site nonfuel revenue increase reflects increased customer spending due to increased customer traffic , certain price increases we have instituted as a result of increased prices we paid for nonfuel inventory purchases and the effects of certain of our capital investments and marketing initiatives . the increase in nonfuel revenues was also the result of sales at the travel centers we acquired or opened during 2011 and 2012. rent and royalty revenues for 2012 , were $ 14,672 , an increase of $ 229 , or 1.6 % , compared to the same period in 2011. rent and royalties increased as a result of increased nonfuel revenues at our franchisee locations , the addition of four franchisee locations since the beginning of 2011 and increased rents at six sites currently subleased to franchisees that became effective during the second half of 2012. these increases were partially offset by our acquisitions during 2011 and 2012 of five franchisee locations and the operations of the businesses of franchisees at four locations that had been subleased from us . cost of goods sold ( excluding depreciation ) . cost of goods sold for 2012 , was $ 6,909,724 , an increase of $ 59,685 , or 0.9 % , compared to 2011. fuel cost of goods sold for 2012 was $ 6,310,250 , an increase of $ 8,303 , or 0.1 % , compared to 2011. this increase in fuel cost of goods sold resulted from the increase in fuel prices that was partially offset by the decrease in fuel sales volumes . the fuel gross margin per gallon of $ 0.167 on a same site basis for 2012 increased $ 0.017 per gallon , primarily as a result of our decision to avoid certain lower margin sales . nonfuel cost of goods sold for 2012 , was $ 599,474 , an increase of $ 51,382 , or 9.4 % , compared to 2011. nonfuel cost of goods sold increased due to the nonfuel sales increases noted above , combined with increases in product unit costs . nonfuel gross margin for 2012 , was $ 745,281 , compared to $ 722,993 during 2011. nonfuel gross margin was 55.4 % and 56.9 % of nonfuel revenues during 2012 and 2011 , respectively . the nonfuel gross margin percentage decreased primarily as a result of a shift

these uses of cash were partially offset by our operating profit and the $ 76,754 of proceeds from our sales to hpt of improvements to the properties leased from hpt ; $ 8,598 of these proceeds related to improvements at the sites that did not qualify for operating lease treatment under the sale-leaseback accounting guidance and are therefore classified as cash from financing activities . during the year ended december 31 , 2011 , we had net cash inflows from operating activities of $ 30,141 , cash outflows from investing activities of $ 86,798 , and cash inflows from financing activities of $ 49,547. during 2011 , our cash balance decreased primarily as a result of our travel center acquisitions , our other capital investments and an increase in our working capital investment . these decreases were partially offset by the $ 53,135 of net proceeds from our common share offering , $ 69,122 of proceeds from our sale to hpt of improvements to the properties leased from hpt and our cash from operations . our business requires substantial amounts of working capital , including cash liquidity , and our working capital requirements are especially large because of the level and volatility of fuel prices which has existed in the past several years and which we expect will continue . further , our growth strategy of selectively acquiring additional properties and businesses requires us to expend substantial additional capital . although we had a cash balance of $ 85,657 on december 31 , 2013 , and generated net income and net cash from operating activities in 2013 , there can be no assurances that we will generate future profits or positive cash flows or that we will be able to obtain additional financing to fund and grow our business . on march 17 , 2014 , we filed a form 12b-25 with the sec indicating that we were unable to file this annual report within the time period prescribed by the exchange act due to unanticipated delays encountered in connection with our accounting for income taxes as well as general delays encountered in connection with the completion of our accounting processes and procedures . on may 13 , 2014 , we filed a second form 12b-25 indicating that as a result of the delay in

specifically , with respect to periods after the final lump sum payouts to participants in december 2013 , each employee who would have qualified for a serp accrual for that period receives a cash payment equal to such employee 's annual accrued benefit at age 65 that would have been calculated for that period under the serp ( had it not been terminated ) multiplied by a present value factor reflecting the employee 's life expectancy and current age and the discount rate used by the company in its financial statements at the beginning of the year . the serp make-whole payment is paid at the end of the year in which the benefit is earned or early in the following year , or upon termination of employment , if earlier . messrs. katz , capogrossi and girgla received serp make-whole payments in january 2021 with respect to the 2020 fiscal year . potential change in control and other post employment payments none of our named executive officers has an employment or other agreement with the company that provides for potential severance or other post-termination payments . loral severance policy for corporate officers severance payments for our named executive officers , as of december 31 , 2020 , were governed by the loral space & communications inc. severance policy for corporate officers ( amended and restated as of august 4 , 2011 ) . this policy provides for potential severance benefits for the named executive officers following the termination of an eligible officer 's employment by the company without cause , including termination without cause in connection with or in contemplation of a corporate event ( defined to include , among other things , a change of control of loral or the closing or cessation or reduction in the scope of operations , in whole or in part , of loral 's corporate headquarters ) , in each case , subject to the execution of a release of claims in favor of the company . pursuant to this policy , in the event of termination without cause , messrs. katz and capogrossi will be entitled to cash severance payments aggregating to the sum of ( x ) twelve months ' pay ( defined as base salary plus average annual incentive bonus compensation paid over the last two years of employment ) and ( y ) twelve months ' base salary . if such termination is in connection with a corporate event , the entire payment will be made in a lump sum within twenty days of termination and will not be subject to mitigation for subsequent employment . to the extent that such termination is not in connection with a corporate event , payment will be made in installments as follows . the terminated officer will receive an initial lump sum payment within twenty days of termination , not subject to mitigation , equal to the greater of ( a ) six months ' pay and ( b ) the sum of three months ' pay plus two weeks ' base salary for every year of service with the company plus one twelfth of two weeks ' base salary for every month of service with the company in excess of his full years of service with the company . if the officer is unemployed after six months ( or if the officer is employed at a rate of pay that is less than his rate of pay immediately prior to termination ) , the remainder of his cash severance ( the “ remainder ” ) will be paid in biweekly installments over eighteen months beginning on the six-month anniversary of termination , with the first thirteen payments , if any , aggregating to the lesser of six months ' pay and such remainder , and the next twenty-six payments , if any , aggregating to the lesser of one year 's base salary and the excess of the remainder over six months ' pay . for terminations not in connection with a corporate event , the remainder is subject to reduction by any amount of compensation then being received by the officer from other employment ( including self-employment ) . pursuant to this policy , in the event of termination without cause in connection with or in contemplation of a corporate event , mr. girgla will be entitled to cash severance payments aggregating to the sum of six months ' pay plus two weeks ' pay for every year of service with the company plus one twelfth of two weeks ' pay for every month of service with the company in excess of his full years of service with the company , and the entire payment will be made in a lump sum within twenty days of termination and will not be subject to mitigation for subsequent employment . if such termination is not in connection with a corporate event , mr. girgla will be entitled to cash severance payments aggregating to the sum of six months ' pay plus two weeks ' base salary for every year of service with the company plus one twelfth of two weeks ' base salary for every month of service with the company in excess of his full years of service with the company , and payment will be made in installments as follows . mr. girgla will receive an initial lump sum payment within twenty days of termination , not subject to mitigation , equal to the sum of three months ' pay plus two weeks ' base salary for every year of service with the company plus one twelfth of two weeks ' base salary for every month of service with the company in excess of the officer 's full years of service with the company . story_separator_special_tag ​ interest and investment income ​ ​ ​ ​ ​ ​ ​ year ended december 31 , ​ 2020 2019 ​ ( in thousands ) interest and investment income $ 1,050 ​ $ 5,727 ​ interest and investment income decreased by $ 4.7 million for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 due to the lower cash balance resulting primarily from payment of cash dividends of $ 170.1 million and $ 46.4 million in may 2020 and december 2020 , respectively , and lower interest rates earned on the cash balance during the year 2020 as compared to 2019 . ​ other expense ​ ​ ​ ​ ​ ​ ​ year ended december 31 , ​ 2020 2019 ​ ( in thousands ) other expense $ 10,898 ​ $ 4,586 ​ ​ for the years ended december 31 , 2020 and 2019 , other expense includes transaction related expenses of $ 10.2 million and $ 4.0 million , respectively . ​ ​ ​ ​ 57 income tax provision ​ ​ ​ ​ ​ ​ ​ year ended december 31 , ​ 2020 2019 ​ ( in thousands ) income tax provision $ ( 12,886 ) ​ $ ( 6,153 ) ​ for 2020 , we recorded a current and deferred tax provision of $ 1.5 million and $ 11.4 million , respectively , resulting in a total tax provision of $ 12.9 million . for 2019 , we recorded a current and deferred tax provision of $ 3.2 million and $ 3.0 million , respectively , resulting in a total tax provision of $ 6.2 million . our income tax provision for 2020 includes a current and deferred tax benefit of $ 1.6 million and $ 1.0 million , respectively , from the covid-19 acts . ​ the deferred tax provision for each period included the impact of equity in net income of affiliates in our consolidated statement of operations . after utilization of our nol carryforwards and allowable tax credits , federal income tax on global intangible low-taxed income ( “ gilti ” ) from telesat was zero . furthermore , since our deferred tax assets related to the investment in telesat will be realized from the future recognition of gilti , the federal portion of these deferred tax assets are valued at zero . ​ during 2021 , the statute of limitations for assessment of additional tax will expire with regard to certain uncertain tax positions ( “ utps ” ) , potentially resulting in a $ 19.1 million reduction to our income tax provision . ​ to the extent that profitability from operations is not sufficient to realize the benefit from our remaining net deferred tax assets , we would generate sufficient taxable income from the appreciated value of our telesat investment , subject to the provisions of the transaction agreement , in order to prevent federal net operating losses from expiring and realize the benefit of all remaining deferred tax assets . ​ see critical accounting matters — taxation below for discussion of our accounting method for income taxes . ​ equity in net income of affiliates ​ ​ ​ ​ ​ ​ ​ ​ ​ year ended december 31 , ​ ​ 2020 2019 ​ ​ ( in thousands ) telesat ​ $ 116,716 ​ $ 101,403 ​ the following is a reconciliation of the changes in our investment in telesat for the years ended december 31 , 2020 and 2019 : replace_table_token_4_th ​ ​ ​ ​ 58 as of december 31 , 2020 , we held a 62.6 % economic interest and a 32.6 % voting interest in telesat . loral 's equity in net income of telesat is based on our proportionate share of telesat 's results in accordance with u.s. gaap and in u.s. dollars . the amortization of telesat fair value adjustments applicable to the loral skynet assets and liabilities acquired by telesat in 2007 is proportionately eliminated in determining our share of the net income or loss of telesat . our equity in net income or loss of telesat also reflects amortization of profits eliminated , to the extent of our economic interest in telesat , on satellites we constructed for telesat while we owned ssl and on loral 's sale to telesat in april 2011 of its portion of the payload on the viasat-1 satellite and related assets . ​ summary financial information for telesat in accordance with u.s. gaap in canadian dollars and u.s. dollars for the years ended and as of december 31 , 2020 and 2019 follows ( in thousands ) : replace_table_token_5_th ​ replace_table_token_6_th ​ telesat 's revenue decreased by $ 74 million for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 due primarily to the reduction of service for a north american dth customer , lower revenue from enterprise services due to the completion of the non-cash amortization of a significant financing component of an agreement , lower revenue associated with short-term services provided to other satellite operators , and , to a lesser extent , the impact of the covid-19 pandemic on certain enterprise customers and lower consulting revenues . the foreign exchange rate change decreased telesat 's revenue by approximately $ 3.0 million for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 . ​ 59 telesat 's operating expenses decreased by $ 4.9 million for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 primarily due to lower expenses related to development of the telesat lightspeed constellation , net of amounts to be reimbursed under a grant from the canadian government , lower consultancy related expenses and lower employee bonuses , partially offset by higher wages related to hiring of additional employees primarily to support the telesat lightspeed program , lower capitalized engineering costs , higher

net cash provided by operating activities from discontinued operations was $ 1.8 million for the year ended december 31 , 2019 attributable to a tax indemnification recovery related to the ssl sale . net cash used in financing activities net cash used in financing activities was $ 216.5 million for the year ended december 31 , 2020 attributable to the payment of cash dividends of $ 170.1 million and $ 46.4 million to common shareholders in may 2020 and december 2020 , respectively . ​ 67 off-balance sheet arrangements we do not have any off-balance sheet arrangements , as defined by the rules and regulations of the sec , that have or are reasonably likely to have a material effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources . as a result , we are not materially exposed to any financing , liquidity , market or credit risk that could arise if we had engaged in these arrangements . other loral 's operating cash flows for 2020 and 2019 included contributions of approximately $ 2.0 million and $ 1.0 million , respectively , to the qualified pension plan and for other post-retirement benefits . affiliate matters loral has made certain investments in joint ventures in the satellite services business that are accounted for under the equity method of accounting ( see note 5 to the financial statements for further information on affiliate matters ) . commitments and contingencies our business and operations are subject to a number of significant risks , the most significant of which are summarized in item 1a — risk factors and also in note 13 to the financial statements . ​ item

we do not use derivative instruments for trading or speculative purposes . our objective in managing exposure to market risk is to limit the impact on cash flows . to qualify for hedge accounting , our interest rate swaps must effectively reduce the risk exposure that they are designed to hedge . in addition , at inception of a qualifying cash flow hedging relationship , the underlying transaction or transactions must be , and be expected to remain , probable of occurring in accordance with our related assertions . all of our hedges are cash flow hedges . we recognize all derivative instruments , including embedded derivatives required to be bifurcated , as assets or liabilities at their fair value in the consolidated balance sheets . changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings . for derivatives designated in qualifying cash flow hedging relationships , the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income ( loss ) , whereas the change in fair value of the ineffective portion is recognized in earnings . gains 60 and losses are reclassified from accumulated other comprehensive income into earnings once the underlying hedged transaction is recognized in earnings . federal income taxes - we intend at all times to qualify as a reit under sections 856 through 860 of the internal revenue code of 1986 , as amended . we record income tax expense or benefit with respect to one of our subsidiaries which is taxed as a taxable reit subsidiary ( “ trs ” ) under provisions similar to those applicable to regular corporations . aside from such income taxes which may be applicable to the taxable income in the trs , we will not be subject to u.s. federal income tax , provided that we continue to qualify as a reit and make distributions to stockholders at least equal to or in excess of 90 % our taxable income . accordingly , no provision for federal income taxes has been made in the consolidated financial statements , except for the provision on the taxable income of the trs , which is included in our consolidated statements of income under the caption , “ income tax benefit ( expense ) of taxable reit subsidiary . ” our failure to continue to qualify under the applicable reit qualification rules and regulations would have a material adverse impact on our financial position , results of operations and cash flows . earnings and profits , which determine the taxability of dividends to stockholders , differ from net income reported for financial reporting purposes due primarily to differences in the basis of assets , estimated useful lives used to compute depreciation expense , gains on sales of real estate , non-cash compensation expense and recognition of commitment fees . our tax returns filed for years beginning in 2013 are subject to examination by taxing authorities . we classify interest and penalties related to uncertain tax positions , if any , in our consolidated financial statements as a component of income tax expense . segment disclosures - we are in the business of owning and financing health care properties . we are managed as one segment , rather than multiple segments , for internal purposes and for internal decision making . reclassifications - we have reclassified , for all periods presented , certain loan commitment fees paid by our borrowers , which were previously accounted for as deferred revenues on our consolidated balance sheet at december 31 , 2015. the fees are included in our consolidated balance sheets as a reduction of the related loan receivable balance . the effect has been to reduce total assets and total liabilities by $ 1,317,000 on our consolidated balance sheet as of december 31 , 2015. see note 15 for a description of recent accounting pronouncements which require reclassification of items previously presented . within comprehensive income we have reclassified certain balances without impacting total other comprehensive income or comprehensive income . where necessary to conform the presentation of prior periods to the current period , we have reclassified certain additional balances . new accounting pronouncements - for a review of recent accounting pronouncements pertinent to our operations and management 's judgment as to the impact that the eventual adoption of these pronouncements will have on our financial position and results of operation , see note 15. note 2. real estate as of december 31 , 2016 , we owned 197 health care real estate properties located in 32 states and consisting of 125 senior housing communities , 67 skilled nursing facilities , 3 hospitals and 2 medical office buildings . our senior housing properties include assisted living facilities , senior living campuses , independent living facilities , and entrance-fee communities . these investments ( excluding our corporate office of $ 1,175,000 ) consisted of properties with an original cost of approximately $ 2,471,679,000 , rented under triple-net leases to 27 lessees . acquisitions and new leases of real estate during the year ended december 31 , 2016 , we announced the following real estate investments and commitments as described below ( dollars in thousands ) : replace_table_token_34_th 61 the ensign group on april 1 , 2016 , we purchased eight skilled nursing facilities in texas totaling 931 beds for $ 118,500,000 in cash . the facilities were owned and operated by nhi 's existing tenant , legend healthcare ( “ legend ” ) , and we accounted for the purchase as an asset acquisition . concurrent with the acquisition , we amended in-place leases covering the nine existing skilled nursing facilities we leased to legend , extending their provisions to the new facilities . story_separator_special_tag the joint venture was structured to comply with the provisions of ridea . the september 30 , 2016 agreement provided for nhi 's redemption of bickford 's 15 % interest in the real estate underlying the joint venture ( propco ) for a distribution to bickford of $ 25,100,000 , before the offset by bickford of $ 8,100,000 payable to nhi in acquisition of our non-controlling 85 % interest in senior housing operations ( opco ) , which nhi had carried on its balance sheet as an equity-method investment through september 30 , 2016. the remaining distribution of $ 10,546,000 related to the transaction was settled , along with the final operational accounting , in november 2016 . 30 nhi 's gain of $ 1,657,000 from the sale of opco was calculated on the difference between the proceeds of $ 8,100,000 and the carrying amount of our equity-method investment of $ 6,443,000. no gain or loss was recognized on our acquisition of bickford 's 15 % interest in propco , which had previously been consolidated . rather , bickford 's non-controlling interest was de-recognized , and the difference between the fair value of nhi 's cost allocated to the redemption and the carrying amount for bickford 's non-controlling interest was recorded as an adjustment to equity through capital in excess of par . see investment highlights below for a discussion of new investments with bickford during 2016. provisions governing details of the unwinding reach to our various arrangements with bickford and include but are not limited to the following : for the 32 stabilized facilities previously owned by the joint venture , forward annual contractual rent is unchanged at $ 26,454,000 plus annual escalators of 3 % for the five additional facilities under development owned by nhi , of which one opened in july 2016 , two opened in october 2016 , and two are planned to open in the first half of 2017 , funded amounts will be added to the lease basis during construction and up to the first six months after opening ; thereafter , base rent will be charged to bickford at a 9 % annual rate . once the facilities are stabilized , as defined in the lease agreement , rent will be reset to fair market value . future development projects between the parties will be funded through a construction loan at 9 % annual interest . nhi has a purchase option at stabilization , whereby rent will be set based on our total investment with a floor of 9.55 % on nhi 's total investment . on current and future development projects , bickford as the operator will be entitled to incentive payments based on the achievement of predetermined operational milestones , the funding of which will increase the investment base for determining the lease payment to nhi . the income statements for opco include the operating results of 32 same-store properties and 5 properties under development or lease-up . for accounting purposes , we are required to expense the pre-opening expenses and operating losses of newly-developed properties . unaudited summarized income statements for opco are presented below ( in thousands ) : replace_table_token_13_th the net loss in opco for 2016 is primarily attributable to $ 619,000 in depreciation expense and $ 645,000 in excess expenses over revenues from the pre-opening and lease-up of three newly-constructed facilities opened during 2016 . 31 investment highlights since january 1 , 2016 , we have made or announced the following real estate and note investments ( $ in thousands ) : replace_table_token_14_th senior living communities on november 8 , 2016 , we acquired evergreen woods , a 299-unit entrance-fee community in connecticut , for $ 74,000,000 in cash , inclusive of a $ 3,708,000 regulatory deposit . the facility was added to our existing master lease with senior living at the existing lease rate of 6.77 % , subject to 4 % escalation in january 2017 and 2018 and 3 % annually thereafter with an initial term of 13 years , plus renewal options . because evergreen woods was previously owner-operated , we accounted for our purchase of the property as an asset acquisition . as part of this transaction , we allocated $ 7,724,000 of the purchase price to the relative fair value of the land and $ 62,568,000 to the relative fair value of building and improvements . in march 2016 , we extended mezzanine loans of $ 12,000,000 and $ 2,000,000 to affiliates of senior living to partially fund construction of a 186-unit senior living campus on daniel island in north carolina . the loans , which are payable monthly , bear interest at 10 % per annum and mature in march 2021. the loans , having a total balance of $ 10,778,000 at december 31 , 2016 , are in addition to the $ 15,000,000 revolving line of credit we provided senior living in connection with our 2014 lease of 8 retirement communities . chancellor on august 31 , 2016 , we acquired two facilities consisting of a senior living campus and a memory-care facility in mcminnville , oregon , for $ 36,650,000 in cash inclusive of closing costs of $ 150,000. we leased the facilities to chancellor health care for an initial lease term of 15 years , with renewal options , at an initial annual lease rate of 7.5 % plus annual escalators . because the facilities were owner-occupied , the acquisition was accounted for as an asset purchase . senior living management on august 3 , 2016 , we entered into an agreement to furnish through its corporate entity and affiliates our current tenant , senior living management ( “ slm ” ) , inc. , with loans of up to $ 24,500,000 to facilitate slm 's acquisition of five senior housing facilities that it currently operates . the loans consist of two notes under a master credit agreement , include both a mortgage and a corporate loan ,

we sold additional shares under our atm program beginning in august 2016 to provide ratable equity funding for our third quarter investments and in anticipation of our evergreen acquisition announced november 3 , 2016. we obtained an weighted average price for shares sold of $ 80.51 , in issuing 680,976 common shares , resulting in net proceeds of $ 54,001,000. the use of funds from our atm and the sales of ltc common stock effected a rebalancing of our leverage in response to our year-to-date acquisitions and keeps our options flexible for further expansion . we continue to explore various other funding sources including bank term loans , convertible debt , traditional equity placement , unsecured bonds and senior notes , debt private placement and secured government agency financing . we view our atm program as an effective way to match-fund our smaller acquisitions by exercising control over the timing and size of transactions and achieving a more favorable cost of capital as compared to larger follow-on offerings . we expect that borrowings on our revolving credit facility , borrowings on term loans , liquidation of our marketable securities and our atm program will allow us to continue to make real estate investments during 2017. we intend to use the net proceeds from the atm program for general corporate purposes , which may include future acquisitions and repayment of indebtedness , including borrowings under our credit facility . the atm offerings have been made pursuant to a prospectus supplement dated february 17 , 2015 and a related prospectus dated march 18 , 2014 , which constitute a part of nhi 's effective shelf registration statement that was previously filed with the securities and exchange commission . we expect to file a new registration statement and commence a new atm program in first quarter 2017. to mitigate our exposure to interest rate risk , we have entered into the following interest rate swap contracts on three of our term loans as of december 31 , 2016 ( dollars in thousands ) : replace_table_token_19_th < font

deferred revenue for such services arises from payments received from customers for services not yet performed . on occasion , the company receives advances from customers that are amortized against future customer payments pursuant to the underlying agreements . such advances are classified in the consolidated balance sheets as either a current or long-term liability dependent upon when the company estimates the corresponding amortization to occur . freight —the company records shipping and handling fees it charges to its customers as revenue and related costs as cost of goods sold . f-11 osi systems , inc. and subsidiaries notes to consolidated financial statements— ( continued ) for the three years ended june 30 , 2013 research and development costs —research and development costs are those costs related to the development of a new product , process or service , or significant improvement to an existing product , process or service . such costs are charged to operations as incurred . stock-based compensation —stock-based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as expense over the employee 's requisite service period for all stock-based awards granted or modified . certain shares of restricted stock vest based on the achievement of pre-established performance goals . the company amortizes the fair value of performance-based shares over the requisite service period for each separate vesting tranche of the award . see note 7 to the consolidated financial statements . impairment , restructuring and other charges —the company consolidates processes and facilities of its subsidiaries to better align with demand by its customers and thereby improve its operational efficiencies . the associated charges , and other non-recurring charges and impairment of assets , are recognized as impairment , restructuring and other charges in the consolidated financial statements . see note 5 for additional information about these restructuring charges . concentrations of credit risk —financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash , cash equivalents , marketable securities and accounts receivable . the company restricts investments in cash equivalents to financial institutions with high credit standing . credit risk on accounts receivable is minimized as a result of the large and diverse nature of the company 's worldwide customer base . as of june 30 , 2013 , one customer accounted for 16 % of accounts receivable ; while no individual customer accounted for more than 10 % of accounts receivable as of june 30 , 2012. during fiscal 2012 , one customer accounted for 12 % of revenues ; while no individual customer accounted for more than 10 % of revenues for the years ended june 30 , 2011 or 2013. the company performs ongoing credit evaluations of its customers ' financial condition and maintains allowances for potential credit losses . foreign currency translation —the company transacts business in various foreign currencies . in countries where the functional currency of the underlying operations has been determined to be the local country 's currency , revenues and expenses of operations outside the united states are translated into united states dollars using average exchange rates while assets and liabilities of operations outside the united states are translated into united states dollars using year-end exchange rates . the effects of foreign currency translation adjustments are included in stockholders ' equity as a component of accumulated other comprehensive income in the accompanying consolidated balance sheets . transaction gains and losses , which were included in our consolidated statement of operations , amounted to a gain ( loss ) of approximately $ ( 2.0 ) million , $ 0.4 million and $ 1.8 million for the fiscal years ended june 30 , 2011 , 2012 and 2013 , respectively . business combinations —during the normal course of business the company makes acquisitions . in the event that an individual acquisition ( or an aggregate of acquisitions ) is material , appropriate disclosure of such acquisition activity is provided . the acquisition method of accounting for business combinations requires us to use significant estimates and assumptions , including fair value estimates , as of the business combination date and to refine those estimates as necessary during the measurement period ( defined as the period , not to exceed one year , in which we may adjust the provisional amounts recognized for a business combination ) in a manner that is generally similar to the previous purchase method of accounting . f-12 osi systems , inc. and subsidiaries notes to consolidated financial statements— ( continued ) for the three years ended june 30 , 2013 under the acquisition method of accounting we recognize separately from goodwill the identifiable assets acquired , the liabilities assumed , and any noncontrolling interests in an acquiree , generally at the acquisition date fair value . we measure goodwill as of the acquisition date as the excess of consideration transferred , which we also measure at fair value , over the net of the acquisition date amounts of the identifiable assets acquired and liabilities assumed . costs that we incur to complete the business combination such as investment banking , legal and other professional fees are not considered part of consideration and we charge them to general and administrative expense as they are incurred . under the acquisition method we also account for acquired company restructuring activities that we initiate separately from the business combination . should the initial accounting for a business combination be incomplete by the end of a reporting period that falls within the measurement period , we report provisional amounts in our financial statements . during the measurement period , we adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that , if known , would have affected the measurement of the amounts recognized as of that date and we record those adjustments to our financial statements . story_separator_special_tag of this amount , $ 2.4 million was recorded within our healthcare division , $ 5.0 million was recorded within our security division , and $ 0.6 million was recorded within our optoelectronics and manufacturing division . during fiscal 2012 , we incurred $ 1.4 million of restructuring and other charges primarily related to headcount reductions and facility consolidation . of this 49 amount , $ 0.2 million was recorded within our healthcare division , $ 0.3 million was recorded within our security division , and $ 0.9 million was recorded within our corporate holding company segment . we anticipate further costs will be incurred in fiscal 2014 within our healthcare division related to the move to a new building that will serve as our primary north american manufacturing facility and division headquarters . fiscal 2012 compared with fiscal 2011. during fiscal 2012 , we incurred $ 1.4 million of restructuring and other charges primarily related to headcount reductions and facility consolidation . of this amount , $ 0.2 million was recorded within our healthcare division , $ 0.3 million was recorded within our security division , and $ 0.9 million was recorded within our corporate holding company segment . during fiscal 2011 , we incurred total restructuring and other charges of $ 3.4 million with $ 2.2 million related to headcount reductions and $ 1.2 million related to a debt restructuring charge from the early termination of a credit facility which was replaced with a new credit facility . interest expense and other income , net interest expense and other income , net includes interest expense related to our credit facility and other debt , the impact of foreign currency forward contracts that were not treated as cash flow hedges and other non-operating expense and income items . fiscal 2013 compared with fiscal 2012. in fiscal 2013 , our interest expense and other income , net was $ 5.0 million , compared to $ 4.0 million in fiscal 2012. this $ 1.0 million increase was due to increased borrowings under our revolving credit facility to fund the investment in the mexican turnkey services program , higher utilization of the letters-of-credit facility and the new mortgage debt associated with the acquisition of a building . this was partially offset by a gain related to the performance of foreign currency forward contracts , which were not treated as cash flow hedges . fiscal 2012 compared with fiscal 2011. in fiscal 2012 , our interest expense and other income , net was $ 4 million , compared to $ 1.1 million in fiscal 2011. this $ 2.9 million increase was primarily due to higher utilization of the letters-of-credit facility and a loss related to the performance of a foreign currency forward contract , which was not treated as a cash flow hedge , partially offset by lower levels of outstanding debt during fiscal 2012. provision for income taxes the effective tax rate for a particular period varies depending on a number of factors including ( i ) the mix of income earned in various tax jurisdictions , each of which applies a unique range of income tax rates and income tax credits , ( ii ) changes in previously established valuation allowances for deferred tax assets ( changes are based upon our current analysis of the likelihood that these deferred tax assets will be realized ) , ( iii ) the level of non-deductible expenses and ( iv ) tax holidays granted to certain of our international subsidiaries . fiscal 2013 compared with fiscal 2012. in fiscal 2013 , our income tax expense was $ 25.3 million , compared to an income tax expense of $ 16.4 million for fiscal 2012 , resulting in an effective tax of 36.4 % in fiscal 2013 and 26.5 % in fiscal 2012. included within the fiscal 2013 expense was a non-cash tax charge of $ 6.8 million as a result of electing to accelerate the tax depreciation of certain fixed assets related to our turnkey screening solutions program in mexico . this election resulted in cash tax savings of approximately $ 26 million in fiscal 2013 ; however , portions of the tax bases of the underlying assets were forfeited resulting in a non-cash tax charge in the year the election was made . excluding the impact of this charge , our effective tax rate for fiscal 2013 would have been 26.6 % . a similar election may be made in future years . fiscal 2012 compared with fiscal 2011. in fiscal 2012 , our income tax expense was $ 16.4 million , compared to an income tax expense of $ 13.3 million for fiscal 2011. the effective income tax rate for fiscal 2012 50 decreased to 26.5 % , from 28.5 % for fiscal 2011. in fiscal 2012 , the effective tax rate was reduced by 2.3 % from the one-time utilization of a tax loss carry-forward that had previously been offset by a valuation allowance . liquidity and capital resources over the past several years we have financed our business primarily through cash flow from operations and by utilizing our credit facilities . cash and cash equivalents totaled $ 34.7 million at june 30 , 2013 , a decrease of $ 56.8 million , or 62 % , from $ 91.5 million at june 30 , 2012. during the twelve months ended june 30 , 2013 , we utilized cash on-hand and drew down on our revolving credit facility mainly to fund the fulfillment of our turnkey screening solutions program in mexico . the changes in our working capital and cash and cash equivalent balances are described below . replace_table_token_11_th working capital during fiscal 2013 , working capital decreased as we utilized cash on-hand and drew down on our revolving credit facility to fund capital spending in preparation of our turnkey screening solutions program in mexico and partially for the purchase of a new building to serve as the headquarters and as a

stock repurchase program our board of directors authorized a stock repurchase program under which we may repurchase up to 4,000,000 shares of our common stock . during fiscal 2013 , we repurchased 200,732 shares under this program . as of june 30 , 2013 , 1,385,040 shares were available for additional repurchase under the program . during fiscal 2012 , we repurchased 67,037 shares under this program . upon repurchase , the shares are restored to the status of authorized but unissued shares and we record them as a reduction in the number of shares of common stock issued and outstanding in our consolidated financial statements . off balance sheet arrangements as of june 30 , 2013 , we had no off balance sheet arrangements , as defined in item 303 ( a ) ( 4 ) of regulation s-k , other than those previously disclosed . 53 new accounting pronouncements for information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements , see note 1 to the consolidated financial statements . related-party transactions in 1994 , we , together with an unrelated company , formed ecil-rapiscan security products limited , a joint venture organized under the laws of india . we own a 36 % interest in the joint venture , our chairman and chief executive officer owns a 10.5 % interest , and our executive vice president and the president of our security division owns a 4.5 % ownership interest . our initial investment was $ 0.1 million . for the years ended june 30 , 2011 , 2012 and 2013 , our equity earnings in the joint venture amounted to $ 0.6 million , $ 0.4 million and $ 0.1 million , respectively . we , our chairman and chief executive officer and our executive vice president and the president of our security division collectively control less than 50 % of the board of directors voting power in the joint venture . as a result , we account for the investment under the equity method of accounting . the joint venture was formed for the purpose of the manufacture , assembly , service and testing of security and inspection systems and other products . some of our subsidiaries are suppliers to the joint venture , which in turn manufactures and sells the resulting products . sales

as a result , shipping fee revenues received is recognized when control of the goods transfer to the customer and is recorded as net sales . shipping and handling costs incurred by tjx are included in cost of sales , including buying and occupancy costs . tjx disaggregates revenue by operating segment , see note h—segment information . deferred gift card revenue proceeds from the sale of gift cards as well as the value of store cards issued to customers as a result of a return or exchange are deferred until the customers use the cards to acquire merchandise , as tjx does not fulfill its performance obligation until the gift card has been redeemed . while gift cards have an indefinite life , substantially all are redeemed in the first year of issuance . f-9 the following table presents deferred gift card revenue activity : replace_table_token_23_th tjx recognized $ 1.1 billion in gift card revenue in fiscal 2021 and $ 1.6 billion in each of fiscal 2020 and fiscal 2019. the decrease in fiscal 2021 in both deferred revenue and revenue recognized versus the prior year reflects the impact of lower customer traffic and temporary store and e-commerce closures due to the covid-19 pandemic . gift cards are combined in one homogeneous pool and are not separately identifiable . as such , the revenue recognized consists of gift cards that were part of the deferred revenue balance at the beginning of the period as well as gift cards that were issued during the period . based on historical experience , the company estimates the amount of gift cards and store cards that will not be redeemed ( referred to as breakage ) and , to the extent allowed by local law , these amounts are amortized into income over the estimated redemption period . revenue recognized from breakage was $ 14 million in fiscal 2021 , $ 20 million in fiscal 2020 and $ 21 million in fiscal 2019. sales return reserve the company 's products are generally sold with a right of return and the company may provide other credits or incentives , which are accounted for as variable consideration when estimating the amount of revenue to recognize . the company has elected to apply the portfolio practical expedient . the company estimates the variable consideration using the expected value method when calculating the returns reserve because the difference in applying it to the individual contract would not differ materially . returns are estimated based on historical experience and are required to be established and presented at the gross sales value with an asset established for the estimated value of the merchandise returned separate from the refund liability . liabilities for return allowances are included in “ accrued expenses and other current liabilities ” and the estimated value of the merchandise to be returned is included in “ prepaid expenses and other current assets ” on our consolidated balance sheets . consolidated statements of income classifications cost of sales , including buying and occupancy costs , includes the cost of merchandise sold including foreign currency gains and losses on merchandise purchases denominated in other currencies ; gains and losses on inventory and fuel-related derivative contracts ; asset retirement obligation costs ; divisional occupancy costs ( including real estate taxes , utility and maintenance costs and fixed asset depreciation ) ; the costs of operating distribution centers ; payroll , benefits and travel costs directly associated with buying inventory ; and systems costs related to the buying and tracking of inventory . selling , general and administrative expenses include store payroll and benefit costs ; communication costs ; credit and check expenses ; advertising ; administrative and field management payroll , benefits and travel costs ; corporate administrative costs and depreciation ; gains and losses on non-inventory related foreign currency exchange contracts ; and other miscellaneous income and expense items . cash and cash equivalents tjx generally considers highly liquid investments with a maturity of 90 days or less at the date of purchase to be cash equivalents . if applicable , investments with maturities greater than 90 days but less than one year at the date of purchase are included in short-term investments . these investments are classified as trading securities and are stated at fair value . investments are classified as either short - or long-term based on their original maturities . tjx 's investments are primarily high-grade commercial paper , institutional money market funds and time deposits with major banks . as of january 30 , 2021 , tjx 's cash and cash equivalents held outside the u.s. were $ 1.2 billion , of which $ 0.8 billion was held in countries where tjx has the intention to reinvest any undistributed earnings indefinitely . f-10 merchandise inventories inventories are stated at the lower of cost or market . tjx uses the retail method for valuing inventories at all of its businesses , except t.k . maxx in australia which is immaterial . the businesses that utilize the retail method have some inventory that is initially valued at cost before the retail method is applied as that inventory has not been fully processed for sale ( e.g . inventory in transit and unprocessed inventory in our distribution centers ) . under the retail method , tjx utilizes a permanent markdown strategy and lowers the cost value of the inventory that is subject to markdown at the time the retail prices are lowered in the stores . tjx records inventory at the time title transfers , which is typically at the time when inventory is shipped . as a result , merchandise inventories on tjx 's consolidated balance sheets include in-transit inventory of $ 1.2 billion at january 30 , 2021 and $ 0.8 billion at february 1 , 2020. comparable amounts were reflected in accounts payable at those dates . story_separator_special_tag selling , general and administrative expenses sg & a expenses were $ 7 billion , or 21.8 % of net sales for fiscal 2021 , compared to $ 7.5 billion , or 17.9 % of net sales for fiscal 2020. the increase in sg & a expenses as a percentage of net sales for fiscal 2021 was primarily driven by store payroll and store supply costs which negatively impacted the expense ratio by 2.7 percentage points . these costs were primarily covid-related , including incremental store payroll investments to allow for enhanced cleaning and monitoring capacity , discretionary appreciation bonuses , and personal protective equipment for our associates . these incremental costs were partially offset by expense savings , including lower advertising and travel spend , as well as other variable store costs such as credit processing fees , which were lower as a result of the temporary store closures due to the covid-19 pandemic . we also paid certain associates during the temporary store closures , which was partially offset by $ 434 million from government programs available in the u.s. , canada , the u.k. and various other jurisdictions . 30 story_separator_special_tag store expense savings . the reduction in payroll reflects approximately $ 171 million for fiscal 2021 from government programs as described in the impacts of the covid-19 pandemic section above . in addition , a significant portion of our occupancy costs are fixed . as a result , while our occupancy costs were comparable to last year , they negatively impacted segment margin by approximately 2.2 percentage points , primarily due to the lower sales volume . during the third quarter of fiscal 2020 , marmaxx made online shopping available at www.marshalls.com , along with www.tjmaxx.com , which was launched previously . our u.s. e-commerce businesses , which represented approximately 3 % of marmaxx 's net sales for both fiscal 2021 and fiscal 2020 , did not have a significant impact on year-over-year segment margin comparisons . along with our stores , we temporarily closed our online businesses for a portion of fiscal 2021 as a result of the covid-19 pandemic . 32 homegoods replace_table_token_9_th net sales net sales for homegoods decreased 4 % for fiscal 2021 as compared to last year . the decrease in net sales was primarily due to the temporary closures of all stores as a result of the covid-19 pandemic . the stores were closed for approximately 20 % of fiscal 2021. in addition , the decrease in net sales was due to lower customer traffic , partially offset by an increase in the average basket . open-only comp store sales were up 13 % for fiscal 2021. segment profit segment profit was $ 510 million for fiscal 2021 , a decrease of $ 171 million , compared to a segment profit of $ 681 million for fiscal 2020. the decrease was primarily driven by a reduction in sales due to temporary store closures and increased store and distribution payroll costs , including incremental covid-19 costs . the decline in segment profit was partially offset by improved merchandise margin , lower advertising and travel spend and other variable store expense savings . merchandise margin reflects strong mark-on and favorable markdowns net of increased freight costs . the increase in payroll includes a reduction of approximately $ 46 million for fiscal 2021 from government programs as described in the impacts of the covid-19 pandemic section above . during the fourth quarter of fiscal 2021 , we announced our plan to make online shopping available on www.homegoods.com in late fiscal 2022 . 33 foreign segments tjx canada replace_table_token_10_th net sales net sales for tjx canada decreased 30 % for fiscal 2021 compared to last year . the decrease in net sales was primarily due to temporary store closures , closed for approximately 29 % of fiscal 2021 , as a result of the covid-19 pandemic . in addition , net sales decreased due to lower customer traffic , partially offset by an increase in the average basket . open-only comp store sales were down 8 % for fiscal 2021. segment profit segment profit was $ 124 million for fiscal 2021 , a decrease of $ 392 million , compared to a segment profit of $ 516 million for fiscal 2020. the decrease was primarily driven by a reduction in sales due to the temporary store closures , including incremental covid-19 costs . the decline in segment profit was partially offset by improved merchandise margin , a reduction in store payroll while the stores were closed , lower advertising and travel spend and other variable store expense savings . merchandise margin reflects strong mark-on net of increased markdowns and freight . the reduction in payroll reflects approximately $ 148 million for fiscal 2021 from government programs as described in the impacts of the covid-19 pandemic secti on above . in addition , a significant portion of our occupancy costs are fixed . as a result , while our occupancy costs were comparable to last year , they negatively impacted segment margin by approximately 3.8 percentage points , primarily due to the lower sales volume . 34 tjx international replace_table_token_11_th net sales net sales for tjx international decreased 32 % for fiscal 2021 compared to last year . the decrease in net sales was primarily due to the temporary store closures , closed for approximately 36 % of fiscal 2021 , as a result of the covid-19 pandemic . in addition , net sales decreased due to lower customer traffic , partially offset by an increase in the average basket . open-only comp store sales were down 2 % for fiscal 2021. e-commerce sales were approximately 5 % of tjx international 's net sales for fiscal 2021 and 3 % for fiscal 2020. along with our stores , we temporarily closed our online business for a portion of fiscal 2021 , due to the covid-19 pandemic . once reopened during the second quarter of fiscal

these measures of performance should not be considered an alternative to net income or cash flows from operating activities as an indicator of our performance or as a measure of liquidity . due to the temporary closing of all of our stores as a result of the covid-19 pandemic , our historical definition of comp store sales is not applicable for the reported periods . in order to provide a performance indicator for our stores as they reopen , since the second quarter of fiscal 2021 we have been temporarily reporting a new sales measure , open-only comp store sales . open-only comp store sales includes stores initially classified as comp stores at the beginning of fiscal 2021 that have had to temporarily close due to the covid-19 pandemic . this measure reports the sales increase or decrease of these stores for the days the stores were open in the current period against sales for the same days in the prior year . presented below is selected financial information related to our business segments . 31 u.s. segments marmaxx replace_table_token_8_th net sales net sales for marmaxx decreased 25 % for fiscal 2021 as compared to last year . the decrease in net sales was primarily due to the temporary closures of all stores as a result of the covid-19 pandemic . the stores were closed for approximately 20 % of fiscal 2021. in addition , the decrease in net sales was due to lower customer traffic , partially offset by an increase in the average basket . open-only comp store sales were down 7 % for fiscal 2021. home fashions outperformed apparel for fiscal 2021. segment profit segment profit was $ 0.9 billion for fiscal 2021 , a decrease of $ 2.6 billion , compared to a segment profit of $ 3.5 billion for fiscal 2020. the decrease was primarily driven by a reduction in sales from the temporary store closures . this decrease reflects increased markdowns on merchandise primarily taken in the first half of fiscal 2021 due to the covid-19 pandemic as well as increased freight costs , partially offset by stronger mark-on . in addition , segment profit declined as a result of our reduced buying activity and lower inventory levels resulting in higher buying and distribution costs in fiscal 2021 as compared to last year , and as a result of incremental covid-19 costs . the decline in segment profit was partially offset by lower advertising and travel spend , a reduction in store payroll while the stores were closed and other variable

the remaining leases provide for minimum lease payments as detailed in the table below . the partnership has a perpetual right of first refusal with respect to these leases and license and intends to continue renewing the leases as has been its practice . the partnership entered into a 10 - year rail yard switching and maintenance agreement with a third party , watco companies , llc ( “ watco ” ) , on december 1 , 2011. under the agreement , watco provides rail-switching services at the partnership 's rail yard . the partnership 's rail yard is constructed on land leased by watco from rock springs grazing association and on land by which watco holds an easement from anadarko land corp ; the rock springs grazing association land lease is renewable every 5 years for a total period of 30 years , while the anadarko land corp. easement lease is perpetual . the partnership has an option agreement with watco to assign these leases to the partnership at any time during the land lease term . an immaterial annual rental is paid under the easement and lease . the partnership entered into two track lease agreements , collectively , not to exceed 10 years with union pacific for certain rail tracks used in connection with the rail yard . as of december 31 , 2018 , the total minimum contractual rental commitments under the partnership 's various operating leases , including renewal periods , are as follows : replace_table_token_37_th 82 ciner corp typically enters into operating lease contracts with various lessors for railcars to transport product to customer locations and warehouses . rail car leases under these contractual commitments range for periods from one to ten years . ciner corp 's obligation related to these rail car leases are $ 11.1 million in 2019 , $ 8.5 million in 2020 , $ 6.0 million in 2021 , $ 3.8 million in 2022 , $ 1.4 million in 2023 and $ 4.7 million in 2024 and thereafter . total lease expense allocated to the partnership from ciner corp was approximately $ 13.9 million , $ 14.6 million and $ 14.5 million for the years ended december 31 , 2018 , 2017 and 2016 , respectively , and is recorded in cost of products sold . purchase commitments we have physical and financial natural gas supply contracts to mitigate volatility in the price of natural gas . as of december 31 , 2018 , these contracts totaled approximately $ 56.0 million for the purchase of a portion of our natural gas requirements over approximately the next five years . the supply purchase agreements have specific commitments of $ 21.3 million in 2019 , $ 15.8 million in 2020 , $ 10.0 million in 2021 , $ 5.0 million in 2022 and $ 3.9 million in 2023 . we have a separate contract that expires in 2021 and renews annually thereafter , for transportation of natural gas with an average annual cost of approximately $ 3.8 million per year . legal proceedings from time to time we are party to various claims and legal proceedings related to our business . although the outcome of these proceedings can not be predicted with certainty , management does not currently expect any of the legal proceedings we are involved in to have a material effect on our business , financial condition and results of operations . we can not predict the nature of any future claims or proceedings , nor the ultimate size or outcome of existing claims and legal proceedings and whether any damages resulting from them will be covered by insurance . litigation settlement on february 2 , 2016 , amended on january 3 , 2017 , ciner wyoming filed suit against rock springs royalty company , llc ( “ rsrc ” ) in the third judicial district court in sweetwater county , wyoming , case no . c-16-77-l , seeking , among other things , to recover approximately $ 32 million in royalty overpayments . the royalty payments arose under our license with rsrc , an affiliate of anardarko petroleum corporation , to mine sodium minerals from lands located in sweetwater county , wyoming ( “ license ” ) . the license sets the applicable royalty rate based on a most favored nation clause , where either the royalty rate is set at the same royalty rate we pay to other licensors in sweetwater county for sodium minerals , or , if certain conditions are met , the royalty rate is set by the rate paid by a third party to anadarko petroleum corporation under a separate license . in the lawsuit , we claim that rsrc has , for at least the last ten years , been charging an arbitrarily high royalty rate in contradiction of the license terms . in addition , we sought a modification of the expiration term of the license land-lease between ciner wyoming and rsrc to those terms granted to other licensors in accordance with the most favored nation clause . on june 28 , 2018 , rsrc and ciner wyoming signed a settlement agreement and release ( the “ settlement agreement ” ) which among other things ( i ) required rsrc to pay ciner wyoming $ 27.5 million which was received on july 2 , 2018 , and ( ii ) concurrently amended selected sections of the license land-lease including among other things , ( a ) extension of the term of the license agreement to july 18 , 2061 and for so long thereafter as ciner wyoming continuously conducts operations to mine and remove sodium minerals from the licensed premises in commercial quantities ; and ( b ) revises the production royalty rate for each sale of sodium mineral products produced from ore extracted from the licensed premises at the royalty rate of eight percent ( 8 % ) of the net sales of such sodium mineral products . story_separator_special_tag during the twelve months ended december 31 , 2017 , we incurred a $ 1.6 million asset impairment charge relating to certain assets , which became obsolete as a result of energy sourcing initiatives at our wyoming facility . gross profit . gross profit remained flat at $ 113.5 million for the year ended december 31 , 2017 , compared to the year ended december 31 , 2016. operating income . as a result of the foregoing , operating income decreased slightly by 0.4 % to $ 89.5 million for the twelve months ended december 31 , 2017 , compared to $ 89.9 million for the twelve months ended december 31 , 2016. net income . as a result of the foregoing , net income increased slightly by 0.1 % to $ 86.4 million for the twelve months ended december 31 , 2017 , compared to $ 86.3 million for the twelve months ended december 31 , 2016. liquidity and capital resources sources of liquidity include cash generated from operations and borrowings under credit facilities and capital calls from partners . we use cash and require liquidity primarily to finance and maintain our operations , fund capital expenditures for our property , plant and equipment , make cash distributions to holders of our partnership interests , pay the expenses of our general partner and satisfy obligations arising from our indebtedness . our ability to meet these liquidity requirements will depend on our ability to generate cash flow from operations . our sources of liquidity include : cash generated from our operations ; approximately $ 126.0 million ( $ 225.0 million , less $ 99.0 million outstanding ) is available for borrowing and undrawn under the ciner wyoming credit facility as of december 31 , 2018 , subject to availability ; during the twelve months ended december 31 , 2018 , we had borrowings of $ 104.0 million under the ciner wyoming credit facility , offset by repayments of $ 143.0 million as well as $ 11.4 million of repayments on other long-term debt ; and 54 $ 10.0 million available for borrowing under the ciner resources credit facility as of december 31 , 2018 , subject to availability . we expect our ongoing working capital and capital expenditures to be funded by cash generated from operations and borrowings under the ciner wyoming credit facility . we are currently considering plans to increase maintenance and expansion capital expenditures at our wyoming facility to both adequately maintain the physical assets and to increase our operating income and operational capacity needs at the wyoming facility . the amount , timing and classification of any such capital expenditures could affect the amount of cash that is available to be distributed to our unitholders . in addition , we are subject to business and operational risks that could adversely affect our cash flow and access to borrowings under the ciner resources credit facility and the ciner wyoming credit facility . our ability to satisfy debt service obligations , to fund planned capital expenditures and to make acquisitions will depend upon our future operating performance , which , in turn , will be affected by prevailing economic conditions , our business and other factors , some of which are beyond our control . in addition , we are subject to business and operational risks that could adversely affect our cash flow and access to borrowings under the ciner resources credit facility and the ciner wyoming credit facility . our ability to satisfy debt service obligations , to fund planned capital expenditures and to make acquisitions will depend upon our future operating performance , which , in turn , will be affected by prevailing economic conditions , our business and other factors , some of which are beyond our control . on january 31 , 2019 , the partnership declared a cash distribution approved by the board of directors of our general partner . the cash distribution for the fourth quarter of 2018 of $ 0.567 per unit was paid on february 28 , 2019 to unitholders of record on february 11 , 2019 . see part ii , item 8 , financial statements and supplementary data - note 3 , “ net income per unit and cash distribution ” , for more information . we intend to pay a quarterly distribution to unitholders of record , to the extent we have sufficient cash from our operations after establishment of cash reserves , funding of any acquisitions and expansion capital expenditures and payment of fees and expenses , including payments to our general partner and its affiliates . capital requirements working capital is the amount by which current assets exceed current liabilities . our working capital requirements have been , and will continue to be , primarily driven by changes in accounts receivable and accounts payable , which generally fluctuate with changes in volumes , contract terms and market prices of soda ash in the normal course of our business . other factors impacting changes in accounts receivable and accounts payable could include the timing of collections from customers and payments to suppliers , as well as the level of spending for maintenance and growth capital expenditures . a material adverse change in operations or available financing under the ciner resources credit facility and the ciner wyoming credit facility could impact our ability to fund our requirements for liquidity and capital resources . historically , we have not made working capital borrowings to finance our operations . as of december 31 , 2018 , we had a working capital balance of $ 76.9 million as compared to a working capital balance of $ 127.7 million as of december 31 , 2017 . the decrease in our working capital balance was primarily due to a decrease in due-from affiliates , as a result of payments made to the partnership by cidt . proceeds from due from affiliates were used to reduce debt during the year ended december 31

the amounts include physical and financial natural gas hedge commitments , as well as , purchase obligations under a contract for the transportation of gas , which may be cancelled by either upon 12 months ' advance written notice to the other party . ( 2 ) long-term debt interest payments set forth in the table above are based on our contractual rates , or in the case of variable interest rate obligations , the weighted average interest rates as of december 31 , 2018 . ( 3 ) minimum contractual rental commitments of various operating leases , including renewal periods . not included in the table above are the operating lease contracts that ciner corp , typically enters into with various lessors for railcars to transport product to customer locations and warehouses . rail car leases under these contractual commitments range for periods from one to ten years . ciner corp 's obligation related to these rail car leases are $ 11.1 million in 2019 , $ 8.5 million in 2020 , $ 6.0 million in 2021 , $ 3.8 million in 2022 , $ 1.4 million in 2023 and $ 4.7 million in 2024 and thereafter . ( 4 ) asset retirement obligations are the liability for the present value of cost we estimate we will incur to retire certain assets . the amount reported in the contractual obligations table above , represents the undiscounted estimated cost to retire such assets . the estimated average timing of these obligations is in excess of thirty years . impact of inflation although the impact of inflation has slowed in recent years , it is still a factor in the u.s. economy and may increase our cost to acquire or replace properties , plant and equipment . inflation may also increase our costs of labor and supplies . to the extent permitted by competition , regulation and existing agreements , we pass along increased costs to our customers in the form of higher selling prices , and we expect to continue this practice . off-balance sheet arrangements see part ii , item 8 , financial statements and supplementary data - note 14 , commitments and contingencies - “ off-balance-sheet arrangements ” , for more information regarding our off-balance-sheet arrangements .

section 16 ( a ) beneficial ownership reporting compliance section 16 ( a ) of the exchange act requires our directors and officers , and persons who own more than 10 % of our common stock , to file initial reports of ownership and reports of changes in ownership ( forms 3 , 4 , and 5 ) of common stock with the sec . officers , directors and greater than 10 % stockholders are required by sec regulation to furnish us with copies of all such forms that they file . to our knowledge , based solely on our review of the copies of such reports received by us and on written representations by certain reporting persons that no reports on form 5 were required , we believe that during the fiscal year ended december 31 , 2016 , all section 16 ( a ) filing requirements applicable to our officers , directors and 10 % stockholders were complied with in a timely manner . 56 item 11. executive compensation compensation discussion and analysis the compensation committee oversees our compensation programs for executives and all employees . the compensation committee understands that for the company and its stockholders to achieve long-term success , the compensation programs need to attract , retain , develop and motivate a strong leadership team . as a result , our executive compensation programs are designed to pay for performance , enable talent attraction , retain top talent and closely align the interests of our executives with those of our stockholders . all decisions with respect to the compensation of our chief executive officer are determined and approved either solely by the compensation committee or together with other independent directors , as directed by the board . all decisions with respect to non-ceo executive compensation , incentive-compensation and equity based plans are first approved by the compensation committee and then submitted , together with the compensation committee 's recommendation , to the members of the board for final approval . this compensation discussion and analysis provides important information on our executive compensation programs and explains the compensation decisions made during 2016 by the compensation committee for our named executive officers ( “ neos ” ) . in fiscal year 2016 , we had the following neos : · peter h. nielsen , chairman of the board , chief executive officer ; chief financial officer and president ; and · ulrich w. mueller , ph.d. , chief operating officer and secretary compensation philosophy our primary objective with respect to executive compensation is to design a reward system that will align executive compensation with our overall business strategies and attract and retain highly qualified executives . we intend to stay competitive in the marketplace with companies of comparable size , industry and complexity . our compensation philosophy for executives is guided by the following principles : · goal-oriented pay for performance . in making compensation decisions , we consider annual and long-term company performance and assess compensation of our executive officers in relation to companies of comparable size , industry and complexity , taking the performance of the company and such other companies into consideration at the individual and corporate levels . · reviewed annually . the compensation committee annually reviews compensation levels to ensure we remain competitive and continue to attract , retain and motivate top-tier talent . · alignment with stockholder interests . our compensation is intended to closely align the interests of our neos with those of our stockholders in an effort to create long-term stockholder value . in developing our compensation philosophy , the compensation committee has considered the most recent stockholder advisory vote on executive compensation in which an overwhelmingly positive percentage of the votes cast were in favor of our executive compensation . the compensation committee is continuously mindful of stockholders ' views on executive compensation and remains focused on ensuring proper alignment with stockholder interests . our compensation philosophy rewards demonstrated performance and encourages behavior that is in the long-term best interests of the company and its stockholders . 57 elements and mix of our 2016 compensation program the following elements made up the fiscal year 2016 compensation program for our neos : element form of compensation purpose , basis and performance criteria base salary cash · base salary is intended to provide a market competitive level of fixed compensation in recognition of responsibilities , skills , capabilities , experience and leadership . · base salary is not generally performance based , but reflective of competencies and experience . annual performance incentive awards ( considered “ at-risk ” compensation ) cash · annual cash performance incentive awards are intended to motivate and reward performance achievement . · payments are discretionary and approved annually by the compensation committee . long-term incentive awards ( considered “ at-risk ” compensation ) stock options · long-term incentive awards are intended to recognize and reward the achievement of long-term corporate goals and objectives , recognize promotions , motivate retention of our leadership talent and align executives ' interests with our stockholders . · the compensation committee determines the amount of long-term incentive awards to be granted to each executive officer . the compensation committee also may make isolated awards to recognize promotions , new hires or individual performance achievements . · in 2016 , the long-term incentive awards included time-vested equity awards that vest over a four-year period . · the compensation committee provides time-vested long-term incentives ( i ) to build a consistent ownership stake and retention incentive , ( ii ) to create a meaningful tie to the company 's relative long-term stockholder returns and ( iii ) to motivate consistent improvement over a longer-term horizon . story_separator_special_tag the technology value consists of $ 0.8 million in cash paid to md anderson , plus 3.1 million shares of common stock granted to md anderson valued at $ 2.4 million less $ 0.7 million for impairment expense taken in december of 2011 and june of 2012. this value is being amortized over a 15-year period from november 7 , 2007 , the date that the technology license became effective . long-lived assets are reviewed for events of changes in circumstances which indicate that their carrying value may not be recoverable . approximately $ 0.2 million will be amortized per year for each future year for the current value of the technology licenses acquired until approximately 2022. as of december 31 , 2015 other assets totaled $ 1.1 million , comprised of $ 2.5 million in value acquiring our technology licenses and our intellectual property , less accumulated amortization of $ 1.4 million . research and development costs — costs and expenses that can be clearly identified as research and development are charged to expense as incurred . advance payments , including nonrefundable amounts , for goods or services that will be used or rendered for future research and development activities are deferred and capitalized . such amounts will be recognized as an expense as the related goods are delivered or the related services are performed . if the goods will not be delivered , or services will not be rendered , then the capitalized advance payment is charged to expense . the company estimates its clinical trial expense accrual each period based on a cost per patient calculation which is derived from estimated start-up costs , clinical trial costs based on the number of patients and length of the study and clinical study report costs . these services are performed by the company 's third-party clinical research organizations , laboratories and clinical investigative sites . the expense accrual is recorded in research and development expense each period . amounts that have been prepaid in advance of work performed are recorded in other current assets . 48 for the year ended december 31 , 2016 , we had $ 5.5 million of costs classified as research and development expense . for the year ended december 31 , 2015 , we had $ 3.0 million of costs classified as research and development expense . research and development – related party expense has been consolidated with research and development expense on our financial statements beginning in 2015 as md anderson is no longer a greater than 5 % stockholder in the company . for the year ended december 31 , 2014 , we had $ 1.6 million of costs classified as research and development expense and $ 0.2 million of related party research and development expense . stock-based compensation — the company has accounted for stock-based compensation under the provisions of gaap . the provisions require us to record an expense associated with the fair value of stock-based compensation . we currently use the black-scholes option valuation model to calculate stock based compensation at the date of grant . option pricing models require the input of highly subjective assumptions , including the expected price volatility . changes in these assumptions can materially affect the fair value estimate . recent accounting pronouncements — from time to time , new accounting pronouncements are issued by the financial accounting standards board that are adopted by the company as of the specified effective date . if not discussed , management believes that the impact of recently issued standards , which are not yet effective , will not have a material impact on the company 's consolidated financial statements upon adoption . in may 2014 , the fasb issued accounting standards update no . 2014-09 , revenue from contracts with customers . the new standard provides comprehensive guidance for recognizing revenue as goods or services are delivered to the customer in an amount that is expected to be earned from those same goods or services . asu 2014-09 was scheduled to be effective for annual reporting periods beginning after december 15 , 2016 , and early adoption was not permitted . in august 2015 , the fasb issued asu no . 2015-14 , “ revenue from contracts with customers : deferral of effective date ” , which defers the effective date of asu 2014-09 by one year . asu 2014-19 is now effective for annual periods after december 15 , 2017 including interim periods within that reporting period . early application is permitted only for annual periods beginning after december 15 , 2016 , including interim periods within that reporting period and allows for adoption using a full retrospective method , or a modified retrospective method . we currently anticipate adopting this standard on its effective date under the full retrospective method of adoption . we have not experienced significant issues in our implementation process and we do not anticipate any if we begin to generate revenues from the drug candidates the company currently has under development . in august 2014 , the fasb issued accounting standards update no . 2014-15 , disclosure of uncertainties about an entity 's ability to continue as a going concern . the new standard requires management to perform interim and annual assessments as to the entity 's ability to continue as a going concern and provides related disclosure guidance . asu 2014-15 is effective for reporting periods ending after december 15 , 2016 , with early adoption permitted . the company adopted this pronouncement for the year ended december 31 , 2016 and analyzed its operations . the company has determined that it has enough cash on hand to meet obligations and fund operations for at least the next 12 months from the report date included herein and does not have going concern uncertainty . in february 2016 , the fasb issued accounting standards update no . 2016-02 , leases . the new standard establishes a right-of-use ( “ rou ”

2014 registered direct offering on january 15 , 2014 , we entered into a securities purchase agreement , as amended , with certain investors , pursuant to which we agreed to sell an aggregate of 5.0 million shares of our common stock and warrants to purchase a total of 2.5 million shares of our common stock to such certain investors for gross proceeds of approximately $ 15.0 million under the 2014 shelf registration statement ( the “ 2014 registered direct offering ” ) . the 2014 registered direct offering closed on january 21 , 2014. the net proceeds to the company from the 2014 registered direct offering , after deducting the placement agent 's fees and expenses , our estimated offering expenses , and excluding any potential future proceeds from the exercise of the warrants issued in the offering , were approximately $ 13.8 million . “ at the market ” offering on june 24 , 2015 , we entered into the sales agreement with cantor fitzgerald , as sales agent , pursuant to which we may offer and sell , from time to time , through cantor fitzgerald shares of our common stock . sales of shares of common stock under the sales agreement will be made pursuant to the 2017 shelf registration statement and a related prospectus filed with the sec on january 10 , 2017 , for an aggregate offering price of up to $ 25.0 million . under the sales agreement , cantor fitzgerald may sell shares by any method deemed to be an “ at the market ” offering as defined in rule 415 under the securities act . we will pay cantor fitzgerald a commission of 3.4 % of the aggregate gross proceeds from each sale of shares under the sales agreement and have agreed to provide cantor fitzgerald with customary indemnification and contribution rights . we have also agreed to reimburse cantor fitzgerald for certain specified expenses . pursuant to the securities purchase agreement described below , we are subject to certain restrictions on our ability to offer and sell shares of our common stock under the sales agreement . as of december 31 , 2016 , we have not offered or sold any shares of common stock under the sales agreement . 2016 registered direct offering < p style= '' font : 10pt times new roman , times , serif ; margin : 0 ; text-indent :

research and development costs r & d costs are expensed as incurred and include primarily salaries , benefits and other staff-related costs ; facilities and overhead costs ; clinical trial and related clinical manufacturing costs ; contract services and other outside costs ; information systems ' costs and amortization of acquired technology used in r & d with alternative future uses . r & d expenses also include costs and cost recoveries associated with third-party r & d arrangements such as with k-a , including upfront fees and milestones paid to third parties in connection with technologies which had not reached technological feasibility and did not have an alternative future use . net payment or reimbursement of r & d costs is recognized when the obligations are incurred or as we become entitled to the cost recovery . see story_separator_special_tag the following management 's discussion and analysis ( md & a ) is intended to assist the reader in understanding amgen 's business . md & a is provided as a supplement to , and should be read in conjunction with , our consolidated financial statements and accompanying notes . our results of operations discussed in md & a are presented in conformity with accounting principles generally accepted in the united states ( gaap ) . amgen operates in one business segment : human therapeutics . therefore , our results of operations are discussed on a consolidated basis . forward-looking statements this report and other documents we file with the sec contain forward-looking statements that are based on current expectations , estimates , forecasts and projections about us , our future performance , our business , our beliefs and our management 's assumptions . in addition , we , or others on our behalf , may make forward-looking statements in press releases or written statements , or in our communications and discussions with investors and analysts in the normal course of business through meetings , webcasts , phone calls and conference calls . such words as “ expect , ” “ anticipate , ” “ outlook , ” “ could , ” “ target , ” “ project , ” “ intend , ” “ plan , ” “ believe , ” “ seek , ” “ estimate , ” “ should , ” “ may , ” “ assume , ” and “ continue , ” as well as variations of such words and similar expressions are intended to identify such forward-looking statements . these statements are not guarantees of future performance and they involve certain risks , uncertainties and assumptions that are difficult to predict . we describe our respective risks , uncertainties and assumptions that could affect the outcome or results of operations in item 1a . risk factors . we have based our forward-looking statements on our management 's beliefs and assumptions based on information available to our management at the time the statements are made . we caution you that actual outcomes and results may differ materially from what is expressed , implied or forecast by our forward-looking statements . reference is made in particular to forward-looking statements regarding product sales , regulatory activities , clinical trial results , reimbursement , expenses , earnings per share ( eps ) , liquidity and capital resources , trends and planned dividends , stock repurchases and restructuring plans . except as required under the federal securities laws and the rules and regulations of the sec , we do not have any intention or obligation to update publicly any forward-looking statements after the distribution of this report , whether as a result of new information , future events , changes in assumptions or otherwise . overview amgen is committed to unlocking the potential of biology for patients suffering from serious illnesses by discovering , developing , manufacturing and delivering innovative human therapeutics . this approach begins by using tools like advanced human genetics to unravel the complexities of disease and understand the fundamentals of human biology . amgen focuses on areas of high unmet medical need and leverages its biologics manufacturing expertise to strive for solutions that improve health outcomes and dramatically improve people 's lives . a biotechnology pioneer since 1980 , amgen has grown to be one of the world 's leading independent biotechnology companies , has reached millions of patients around the world and is developing a pipeline of medicines with breakaway potential . our principal products include neulasta ® , neupogen ® , enbrel , xgeva ® , prolia ® , epogen ® , aranesp ® and sensipar ® /mimpara ® . for additional information about our products , see part i , item 1. business—marketing , distribution and selected marketed products . our strategy for long-term growth continues to focus on discovery and development of innovative medicines to address serious illnesses , development of branded biosimilars , global expansion , next-generation manufacturing of high quality biologics , development of improved biologic drug delivery systems and return of capital to shareholders . in 2014 , we advanced our strategy . revenues increased 7 % driven by strong performance across the portfolio . product sales grew 5 % in the united states and 11 % in the rest of the world ( row ) . we continued returning capital to shareholders through the payment of dividends and through stock repurchases . we paid dividends of $ 0.61 per share of common stock in each of the four quarters of 2014 , representing a 30 % increase over the quarterly dividend paid in each of the four quarters of 2013. in december 2014 , we declared a dividend of $ 0.79 per share of common stock , payable in march 2015 , representing a 30 % increase over the quarterly dividend paid in 2014. in october 2014 , our board of directors approvedan increase in our stock repurchase authorization that resulted in a total of $ 4.0 billion available under that program . story_separator_special_tag sg & a expenses also include costs and cost recoveries associated with marketing and promotion efforts under certain collaboration arrangements . net payment or reimbursement of sg & a costs is recognized when the obligations are incurred or we become entitled to the cost recovery . the decrease in sg & a expense for 2014 was driven primarily by the expiration of the enbrel profit share in october 2013 , which reduced expenses by $ 818 million . that decline was offset partially by the addition of $ 183 million as a result of the onyx acquisition , an additional $ 129 million accrual for the bpd fee as the final regulations accelerated the expense recognition criteria for the fee obligation by one year and increased commercial expenses of $ 109 million in preparation for new product launches . historically , under our enbrel collaboration agreement , we paid pfizer a percentage of annual gross profits on our enbrel sales in the united states and canada on a scale that increased with gross profits . the enbrel co-promotion term expired on october 31 , 2013 , and we are required to pay pfizer residual royalties on a declining percentage of net enbrel sales in the united states and canada . the royalty percentage was 12 % through october 31 , 2014 , declining to 11 % through october 31 , 2015 and 10 % through october 31 , 2016. the increase in sg & a expense for 2013 was driven primarily by the addition of onyx of $ 276 million , of which $ 215 million was acquisition-related . included in these costs are advisory , legal and regulatory costs , and compensation-related payments . the compensation payments include cash payments for accelerated vesting of equity awards as part of the acquisition that were previously granted under the onyx equity award programs which would not have otherwise vested . sg & a also increased by $ 98 million related primarily to favorable changes in 2012 to the estimated bpd fee . other other operating expenses for 2014 included certain charges related to our restructuring plan , primarily separation costs of $ 377 million . it also included a $ 46 million write-off of a non-key ipr & d program acquired in a prior year business combination . other operating expenses for 2013 included $ 113 million of adjustments to our estimated contingent consideration liability related to the biovex group , inc. ( biovex ) business combination , certain charges related to our other cost savings initiatives of $ 71 million , which included severance expenses , and $ 12 million of other charges related primarily to legal proceedings . other operating expenses for 2012 included charges of $ 175 million related to our other cost savings initiatives , which included severance and expenses associated with abandoning leased facilities , legal charges of $ 64 million and other operating expenses of $ 56 million , comprised primarily of adjustments to our estimated contingent consideration liability related to the biovex business combination . non-operating expenses/income and provision for income taxes non-operating expenses/income and provision for income taxes were as follows ( dollar amounts in millions ) : replace_table_token_17_th 50 interest expense , net the increase in interest expense , net in 2014 was due primarily to a higher average balance of debt outstanding offset partially by lower average borrowing rates compared with 2013. the decrease in interest expense , net in 2013 compared with 2012 was due primarily to the decrease in non-cash interest resulting from the settlement of our 0.375 % 2013 convertible notes in february 2013 offset partially by increases resulting from the higher average balance of other outstanding debt and financing fees paid in association with the acquisition of onyx . interest and other income , net the increase in interest and other income , net for 2014 compared with 2013 was due primarily to interest earned as a result of a higher average balance of cash and investments offset partially by a reduction in income realized from the sale of investments recognized in 2014. the decrease in interest and other income , net for 2013 compared with 2012 was due primarily to a reduction in income from the sale of investments recognized in 2013. income taxes the increase in our effective tax rate for 2014 compared with 2013 was due primarily to two significant events that occurred during 2013. first , the settlement of our examination with the internal revenue service ( irs ) for the years ended december 31 , 2007 , 2008 and 2009 , in which we agreed to certain adjustments proposed by the irs and remeasured our unrecognized tax benefits ( utbs ) accordingly , resulting in a benefit of approximately $ 185 million . second , because the american taxpayer relief act of 2012 was not enacted until 2013 , certain provisions of the act benefiting the company 's 2012 federal taxes , including the retroactive extension of the r & d tax credit for 2012 , were not recognized in the company 's 2012 financial results and instead are reflected in the company 's 2013 financial results . therefore , our effective tax rate for 2013 included an additional $ 70 million benefit for the full-year 2012 r & d tax credit . the increase was offset partially by the favorable tax impact of changes in the jurisdictional mix of income and expenses due primarily to higher domestic acquisition-related expenses and restructuring costs in 2014. the decrease in our effective rate for 2013 compared with 2012 was due primarily to three significant events occurring in 2013 : ( i ) we settled our examination with the irs for the years ended december 31 , 2007 , 2008 and 2009 , as discussed above ; ( ii ) costs associated with the acquisition of onyx , which resulted in a tax benefit of approximately $ 180 million ; and ( iii ) the

54 the following table represents our contractual obligations aggregated by type ( in millions ) : replace_table_token_20_th ( 1 ) long-term debt obligations include future interest payments which are included in our financing arrangements at the fixed contractual coupon rates . to achieve a desired mix of fixed and floating interest rate debt , we enter into interest rate swap contracts that effectively convert a fixed rate interest coupon for certain of our debt issuances to a floating libor-based coupon over the life of the respective note . we used an interest rate forward curve at december 31 , 2014 , in computing net amounts to be paid or received under our interest rate swap contracts which resulted in an aggregate net increase in future interest payments of $ 272 million . see part iv—note 14 , financing arrangements , to the consolidated financial statements for further discussion of our interest swap contracts . ( 2 ) long-term debt obligations include future interest payments under our term loan at libor-based variable rates of interest . we used an interest rate forward curve at december 31 , 2014 , in computing interest payments on this debt obligation . see part iv—note 14 , financing arrangements , to the consolidated financial statements for further discussion of this debt obligation . ( 3 ) long-term debt obligations include contractual interest payments and principal repayment of our foreign denominated debt obligations . in order to hedge our exposure to foreign currency exchange rate risk associated with certain of our pound sterling and euro denominated long-term debt , we entered into cross-currency swap contracts that effectively convert interest payments and principal repayment on this debt from euros/pounds sterling to u.s. dollars . for purposes of this table , we used the contracted exchange rates in the cross-currency swap contracts to compute the net amounts of future interest payments and principal repayments on this debt . see part iv—note 17 , derivative instruments , to the consolidated financial statements for further discussion of our cross-currency swap contracts . ( 4 ) interest payments and the repayment of principal on our 4.375 % 2018 euro notes were translated into u.s. dollars at the foreign currency exchange rate in effect at december 31 , 2014. see part iv—note 14 , financing arrangements , to the consolidated financial statements for further discussion of our long-term debt obligations . ( 5 )

such factors include , but are not limited to : the results of clinical testing and trial activities of the company 's product candidates ; the ability to obtain regulatory approval to market the company 's products ; ability to manufacture successfully ; competition from products manufactured and sold or being developed by other companies ; the price of , and demand for , company products ; the company 's ability to negotiate favorable licensing or other manufacturing and marketing agreements for its products ; and the company 's ability to raise capital to support its operations . note 3 — summary of significant accounting policies : use of estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states of america requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period . actual results could differ from those estimates . basis of consolidation the consolidated financial statements include the accounts of the company and cormedix europe gmbh , a wholly owned subsidiary . all significant intercompany accounts and transactions have been eliminated in consolidation . financial instruments financial instruments that potentially subject the company to concentrations of credit risk consist principally of cash and cash equivalents and short-term investments . the company maintains its cash and cash equivalents in bank deposit and other interest bearing accounts , the balances of which , at times , may exceed federally insured limits . f-8 cormedix inc. and subsidiary notes to consolidated financial statements the appropriate classification of marketable securities is determined at the time of purchase and reevaluated as of each balance sheet date . investments in marketable debt and equity securities classified as available-for-sale are reported at fair value . fair value is determined using quoted market prices in active markets for identical assets or liabilities or quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities . changes in fair value that are considered temporary are reported net of tax in other comprehensive income ( loss ) . realized gains and losses , amortization of premiums and discounts and interest and dividends earned are included in income ( expense ) . for declines in the fair value of equity securities that are considered other-than-temporary , impairment losses are charged to other ( income ) expense , net . the company considers available evidence in evaluating potential impairments of its investments , including the duration and extent to which fair value is less than cost . there were no deemed permanent impairments at december 31 , 2017 or 2016. the company 's marketable securities are highly liquid and consist of u.s. government agency securities , high-grade corporate obligations and commercial paper with original maturities of more than 90 days . as of december 31 , 2017 and 2016 , all of the company 's investments had contractual maturities which were less than one year . the following table summarizes the amortized cost , unrealized gains and losses and the fair value at december 31 , 2017 and 2016 : replace_table_token_10_th fair value measurements the company 's financial instruments recorded in the consolidated balance sheets include cash and cash equivalents , accounts receivable , investment securities , accounts payable and accrued expenses . the carrying value of certain financial instruments , primarily cash and cash equivalents , accounts receivable , accounts payable , and accrued expenses approximate their estimated fair values based upon the short-term nature of their maturity dates . the company categorizes its financial instruments into a three-level fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value , which is set out below . the fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets ( level 1 ) and the lowest priority to unobservable inputs ( level 3 ) . if the inputs used to measure fair value fall within different levels of the hierarchy , the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument . ● level 1 inputs—observable inputs that reflect quoted prices ( unadjusted ) for identical assets or liabilities in active markets . f-9 cormedix inc. and subsidiary notes to consolidated financial statements ● level 2 inputs— significant other observable inputs ( e.g . , quoted prices for similar items in active markets , quoted prices for identical or similar items in markets that are not active , inputs other than quoted prices that are observable such as interest rate and yield curves , and market-corroborated inputs ) . ● level 3 inputs—unobservable inputs for the asset or liability , which are supported by little or no market activity and are valued based on management 's estimates of assumptions that market participants would use in pricing the asset or liability . the following table provides the carrying value and fair value of the company 's financial assets measured at fair value as of december 31 , 2017 and 2016 : replace_table_token_11_th foreign currency translation and transactions the consolidated financial statements are presented in u.s. dollars ( usd ) , the reporting currency of the company . for the financial statements of the company 's foreign subsidiary , whose functional currency is the euro , foreign currency asset and liability amounts , if any , are translated into usd at end-of-period exchange rates . foreign currency income and expenses are translated at average exchange rates in effect during the year . translation gains and losses are included in other comprehensive loss . the company had foreign currency translation gains of $ 4,144 and $ 8,029 in 2017 and 2016 , respectively . story_separator_special_tag while our significant accounting policies are more fully described in note 3 to our financial statements included with this report , we believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating our reported financial results and affect the more significant judgments and estimates that we use in the preparation of our financial statements . 43 stock-based compensation we account for stock options according to the financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) no . 718 , “ compensation — stock compensation ” ( “ asc 718 ” ) . share-based compensation cost is measured at grant date , based on the estimated fair value of the award using a black-scholes option pricing model for options with service or performance based conditions and a monte carlo option pricing model for options with market vesting conditions . stock-based compensation cost is recognized as expense , over the employee 's requisite service period on a straight-line basis . we account for stock options granted to non-employees on a fair value basis using the black-scholes option pricing model in accordance with asc 718 and asc no . 505-50 , “ equity-based payments to non-employees ” ( “ asc 505 ” ) . the non-cash charge to operations for non-employee options with time based vesting provisions is based on the fair value of the options remeasured each reporting period and amortized to expense over the related vesting period . the non-cash charge to operations for non-employee options with performance based vesting provisions is recorded when the achievement of the performance condition is probable and remeasured each reporting period until the performance condition is achieved . valuations incorporate several variables , including expected term , expected volatility , expected dividend yield and a risk-free interest rate . we estimate the expected term of the options granted based on anticipated exercises in future periods . in 2016 , the expected stock price volatility for our stock options was calculated based on the historical volatility since the initial public offering of our common stock in march 2010 , weighted between the period pre and post ce mark approval in the european union . beginning january 1 , 2017 , the expected stock price volatility for the company 's stock options is calculated based on the historical volatility since the initial public offering of the company 's common stock in march 2010. the expected dividend yield reflects our current and expected future policy for dividends on our common stock . to determine the risk-free interest rate , we utilize the u.s. treasury yield curve in effect at the time of grant with a term consistent with the expected term of our awards which is 5 years for employees and 10 years for non-employees . revenue recognition we recognize revenue in accordance with sec sab no . 101 , “ revenue recognition in financial statements ” ( “ sab 101 ” ) , as amended by sab no . 104 , “ revenue recognition ” ( “ sab 104 ” ) and fasb asc 605 , “ revenue recognition ” ( “ asc 605 ” ) . our product neutrolin received its ce mark in europe in july 2013 and shipment of product to the dialysis centers began in december 2013. in accordance with sab 101 and sab 104 , we recognize revenue from product sales when the following four revenue recognition criteria are met : persuasive evidence of an arrangement exists , delivery has occurred , the selling price is fixed or determinable , and collectability is reasonably assured . we recognize revenue upon shipment of product to the dialysis centers because the four revenue recognition criteria are met at that time . for an upfront payment related to an exclusive distribution agreement , we record it as deferred revenue and recognize revenue on a straight-line basis over the contractual term of the agreement in october 2015 , we shipped product with less than 75 % of its remaining shelf life to a customer and issued a guarantee that any product shipped with less than 75 % of its shelf life remaining would be replaced by us if the customer was not able to sell the product before it expired . as a result of this warranty , we may have an additional performance obligation ( i.e . accept returned product and deliver new product to the customer ) if the customer is unable to sell the short-dated product . due to limited sales experience with the customer , we were unable to estimate the amount of the warranty obligation that may be incurred as a result of this shipment . therefore , we deferred the revenue and related cost of sales associated with the original shipment of this product . since we will be unable to resell the expired product if returned by the customer , the deferred revenue and related cost of sales is presented net as “ deferred revenue ” on the consolidated balance sheet . during the year ended december 31 , 2014 , we entered into a distribution agreement with wonik corporation , a south korean company , to market , sell and distribute neutrolin for hemodialysis and oncolytic patients upon receipt of regulatory approval in korea . upon execution of the agreement , wonik paid to us a non-refundable $ 50,000 payment and will pay an additional $ 50,000 upon receipt of the product registration necessary to sell neutrolin in the republic of korea . revenue associated with the non-refundable up-front payment under this arrangement is deferred and recognized as revenue on a straight-line basis over the contractual term of our agreement . 44 inventory valuation we engage third parties to manufacture and package inventory held for sale and warehouse such goods until packaged for final distribution and sale . inventories are stated at the lower of cost or net realizable value with cost

in comparison to the same period in 2016 , we generated $ 6,229,000 from the sale of our common stock in our at-the-market program , and $ 863,000 from the exercise of stock options . funding requirements and liquidity our total cash on hand and short-term investments as of december 31 , 2017 was $ 12.0 million , excluding restricted cash of $ 0.2 million , compared with $ 20.2 million at december 31 , 2016. in addition , at december 31 , 2017 we have approximately $ 17.9 million available under our current at-the-market program . at december 31 , 2017 , we also had approximately $ 26.0 million available under our current shelf registration for the issuance of equity , debt or equity-linked securities unrelated to the current atm program which program will expire on april 16 , 2018. on march 9 , 2018 , we entered into a new agreement with b. riley fbr , inc. for the sale of up to $ 14.1 million of our common stock , subject to the effectiveness of the registration statement for such offering , which we filed on march 9 , 2018. the new atm program is expected to become effective upon the expiration of the current atm program ; in no event will the two atm programs run concurrently . we may utilize our atm program , if conditions allow , to support our ongoing phase 3 clinical trial for neutrolin in hemodialysis catheters in the u.s. because our business has not currently generated positive operating cash flow , we will need to raise additional capital in order to continue to fund our research and development activities , as well as to fund operations generally , even after accounting for the sale of our common stock under our current and new atm programs . our continued operations and specifically the completion of our ongoing lock-it-100 clinical trial for neutrolin in the u.s. , which was initiated in december 2015 , will depend on our ability to raise sufficient additional funds through various potential sources , such as equity , debt financings , and or strategic relationships . a second phase 3 clinical trial is currently required for approval , for which funds in addition to the ongoing hemodialysis phase 3 clinical trial will be required . we can provide no assurances that financing or strategic relationships will be available on acceptable terms , or at all , that may enable us to complete our phase 3 clinical trial program . < font style= '' font-family : times new

the lease term was extended three months past the original lease term in exchange for the three-month lease abatement . on april 16 , 2020 , the company entered into a loan with midfirst bank as the lender in an aggregate principal amount of $ 1,447,400 pursuant to the paycheck protection program ( the “ ppp ” ) under the coronavirus aid , relief , and economic security ( cares ) act . this loan program provided paycheck protection for our employees from the economic impact to our business due to the covid-19 virus , which was seen most by the decline in our publishing division 's sales due to the closure of many retail outlets across the country , and in our ubam division 's school and library and book fair sales due to the closure of many schools nation-wide . the company determined the ppp loan was no longer needed and therefore repaid the loan in full on may 12 , 2020. on may 19 , 2020 , the board of directors of edc approved a $ 0.06 dividend that will be paid to shareholders of record on tuesday , june 2 , 2020 . 40 story_separator_special_tag this management 's discussion and analysis of financial condition and results of operations contains a discussion of our business , including a general overview of our segments , our results of operations , our liquidity and capital resources , and our quantitative and qualitative disclosures about market risk . the following discussion contains forward-looking statements that reflect our future plans , estimates , beliefs and expected performance . the forward-looking statements are dependent upon events , risks and uncertainties that may be outside our control . our actual results could differ materially from those discussed in these forward-looking statements . see “ cautionary remarks regarding forward-looking statements ” in the front of this annual report on form 10-k. management summary we are the exclusive united states trade co-publisher of usborne children 's books and the owner of kane miller . we operate two separate segments ; ubam and publishing , to sell our usborne and kane miller children 's books . these two segments each have their own customer base . the publishing segment markets its products on a wholesale basis to various retail accounts . the ubam segment markets its products through a network of independent sales consultants using a combination of home shows , social media platform events ( called “ online parties ” ) and book fairs . all other supporting administrative activities are recognized as other expenses outside of our two segments . other expenses are primarily compensation of our office , warehouse and sales support staff as well as the cost of operating and maintaining our corporate office and distribution facility . 7 ubam division our ubam division uses a multi-level direct selling platform to market books through independent sales representatives ( “ consultants ” ) located throughout the united states . the customer base of ubam consists of individual purchasers , as well as schools and public libraries . revenues are primarily generated through book showings in individual homes , on social media collaboration platforms , through book fairs with school and public libraries and other events . this past fiscal year continued with a significant shift toward internet sales via social media platform events , such as facebook parties . an important factor in the continued growth of the ubam division is the addition of new sales consultants and the retention of existing consultants . current active consultants ( defined as those with sales during the past six months ) often recruit new sales consultants . ubam makes it easy to recruit by providing sign-up kits for which new consultants can earn rewards including discounted books and cash based on exceeding certain sales criteria . in addition , our ubam division provides our consultants with an extensive operational handbook , valuable training and an individual website they can customize and use to operate their business . consultants fy 20 20 fy 201 9 new consultants added during fiscal year 22,600 21,500 active consultants at end of fiscal year 29,600 31,800 our ubam division 's multi-level marketing platform presently has eight levels of sales representatives : ● consultants ● team leaders ● advanced leaders ● senior leaders ● executive leaders ● senior executive leaders ● directors ● senior directors upon signing up , sales representatives begin as “ consultants ” . consultants receive “ weekly commissions ” from each sale they make ; the commission rate they receive on each sale is determined by the marketing program under which the sale is made . in addition , consultants receive a monthly sales bonus once their sales reach an established monthly goal . consultants who recruit other consultants become “ team leaders ” . upon reaching this team leader level , consultants become eligible to receive “ monthly override payments ” which are calculated on sales made from their downline “ central group ” of recruits . team leaders that recruit and promote other team leaders , and meet other established criteria , are eligible to become “ advanced leaders ” . once advanced leaders promote a second level consultant , add additional recruits and meet other established criteria , they become “ senior leaders ” , “ executive leaders ” , “ senior executive leaders ” , “ directors or “ senior directors ” . one-time bonus payments are made to consultants at each promotion level . executive leaders and higher receive an additional monthly override payment based upon the sales of their downline groups . directors and higher receive an additional bonus payment if they promote an advanced leader to a senior leader from their central group . story_separator_special_tag awards subject to performance conditions are attributed separately for each vesting tranche of the award and are recognized ratably from the service inception date to the vesting date for each tranche . forfeitures are recognized when they occur . the restricted share awards granted under the 2019 long-term incentive plan ( “ 2019 lti plan ” ) contain both service and performance conditions . the company recognizes share compensation expense only for the portion of the restricted share awards that are considered probable of vesting . shares are considered granted , and the service inception date begins , when a mutual understanding of the key terms and conditions between the company and the employees have been established . the fair value of these awards are determined based on the closing price of the shares on the grant date . the probability of restricted share awards granted with future performance conditions is evaluated at each reporting period and compensation expense is adjusted based on the probability assessment . for certain awards that provide discretion to adjust the allocation of the restricted shares , the service-inception date for such awards could precede the grant date as a mutual understanding of the key terms and conditions between the company and the employees has not yet been established . for awards in which the service-inception date precedes the grant date , compensation cost is accrued beginning on the service-inception date . the company estimates the award 's fair value on each subsequent reporting date , until the grant date , based on the closing market price of the company 's common stock . on the grant date , the award 's fair value is fixed , subject to the remaining performance conditions , and the cumulative amount of previously recognized compensation expense is adjusted to the fair value at the grant date . during fiscal years 2020 and 2019 , the company recognized $ 0.7 million and $ 0.4 million , respectively , of compensation expense associated with the shares granted . revenue recognition sales associated with product orders are recognized and recorded when products are shipped . products are shipped fob shipping point . ubam 's sales are generally paid at the time the product is ordered . sales which have been paid for but not shipped are classified as deferred revenue on the balance sheet . sales associated with consignment inventory are recognized when reported and payment associated with the sale has been remitted . transportation revenue represents the amount billed to the customer for shipping the product and is recorded when the product is shipped . estimated allowances for sales returns are recorded as sales are recognized . management uses a moving average calculation to estimate the allowance for sales returns . we are not responsible for product damaged in transit . damaged returns are primarily received from the retail stores of our publishing division . those damages occur in the stores , not in shipping to the stores , and we typically do not offer credit for damaged returns . it is industry practice to accept non-damaged returns from retail customers . management has estimated and included a reserve for sales returns of $ 0.2 million for the fiscal years ended february 29 , 2020 and february 28 , 2019. allowance for doubtful accounts we maintain an allowance for estimated losses resulting from the inability of our customers to make required payments and a reserve for vendor share markdowns ( collectively “ allowance for doubtful accounts ” ) . an estimate of uncollectible amounts is made by management based upon historical bad debts , current customer receivable balances , age of customer receivable balances , customers ' financial conditions and current economic trends . management has estimated an allowance for doubtful accounts of $ 0.2 million and $ 0.3 million as of february 29 , 2020 and february 28 , 2019 , respectively . included within this allowance is $ 0.1 million of reserve for vendor discounts to sell remaining inventory as of february 29 , 2020 and february 28 , 2019. inventory our inventory contains over 2,000 titles , each with different rates of sale depending upon the nature and popularity of the title . almost all of our product line is saleable as the books are not topical in nature and remain current in content today as well as in the future . most of our products are printed in china , europe , singapore , india , malaysia and dubai resulting in a four to six-month lead-time to have a title printed and delivered to us . 15 certain inventory is maintained in a noncurrent classification . management continually estimates and calculates the amount of noncurrent inventory . noncurrent inventory arises due to occasional purchases of titles in quantities in excess of what will be sold within the normal operating cycle , due to minimum order requirements of our suppliers . noncurrent inventory was estimated by management using the current year turnover ratio by title . all inventory in excess of 2½ years of anticipated sales is classified as noncurrent inventory . noncurrent inventory balances prior to valuation allowances were $ 1.2 million and $ 0.9 million at february 29 , 2020 and february 28 , 2019 , respectively . consultants that meet certain eligibility requirements may request and receive inventory on consignment . we believe allowing our consultants to have consignment inventory greatly increases their ability to be successful in making effective presentations at home shows , book fairs and other events ; and having consignment inventory leads to additional sales opportunities . approximately 12 % of our active consultants maintained consignment inventory at the end of fiscal year 2020. consignment inventory is stated at cost , less an estimated reserve for consignment inventory that is not expected to be sold or returned to the company . the total cost of inventory on consignment with consultants was $ 1.5 million at february 29 , 2020 and

we have a loan agreement with midfirst bank ( “ the bank ” ) including term loan # 1 comprised of tranche a of $ 11.5 million and tranche b of $ 4.3 million , both with the maturity date of december 1 , 2025. tranche a has a fixed interest rate of 4.23 % and interest is payable monthly . the loan agreement also includes term loan # 2 in the amount of $ 3.0 million , which is secured by a warehouse and land with the maturity date of june 28 , 2021 , and a $ 15.0 million revolving loan ( “ line of credit ” ) through august 15 , 2020. on june 15 , 2018 , the company executed the eighth amendment loan agreement with the bank which extended the termination date until august 15 , 2019 , reduced the interest rate pricing grid for all floating rate borrowings covered by the loan agreement , released the personal guaranty of randall w. white and carol white , along with other covenant restrictions being lessened . the amendment also included an adjustment to the adjusted funded debt to ebitda ratio for covenant compliance . < p

translation of foreign currencies : for foreign operations , asset and liability accounts are translated at current exchange rates ; income and expenses are translated using weighted average exchange rates for the reporting period . resulting translation adjustments , as well as translation gains and losses from certain intercompany transactions considered permanent in nature , are reported in accumulated other comprehensive ( loss ) income , a separate component of stockholders ' equity . gains and losses arising from transactions and translation of period-end balances denominated in currencies other than the functional currency are included in other expense , net . business combinations : business combinations are accounted for at fair value . acquisition costs are expensed as incurred and recorded in selling , general and administrative expenses ; previously held equity interests are valued at fair value upon the acquisition of a controlling interest ; in-process research and development ( “ ipr & d ” ) is recorded at fair value as an intangible asset at the acquisition date ; restructuring costs associated with a business combination are expensed subsequent to the acquisition date ; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date affect income tax expense . measurement period adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date . all changes that do not qualify as measurement period adjustments are also included in current period earnings . the accounting for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business , and the allocation of those cash flows to identifiable intangible assets , in determining the estimated fair value for assets acquired and liabilities assumed . the fair values assigned to tangible and intangible assets acquired and liabilities assumed , including contingent consideration , are based on management 's estimates and assumptions , as well as other information compiled by management , including valuations that utilize customary valuation procedures and techniques . if the actual results differ from the estimates and judgments used in these estimates , the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill , require acceleration of the amortization expense of finite-lived intangible assets , or the recognition of additional consideration which would be expensed . goodwill and other intangible assets : the company 's intangible assets consist of ( i ) goodwill , which is not being amortized ; ( ii ) indefinite lived intangibles , which consist of a trade name that is not subject to amortization ; and ( iii ) amortizing intangibles , which consist of patents , trade names and trademarks , licenses , customer relationships , and purchased technologies , which are being amortized over their estimated useful lives . the process of testing goodwill for impairment involves the determination of the fair value of the applicable reporting units . the test consists of a two-step process . the first step is the comparison of the fair value to the carrying value of the 63 notes to consolidated financial statements — ( continued ) reporting unit to determine if the carrying value exceeds the fair value . the second step measures the amount of an impairment loss , and is only performed if the carrying value exceeds the fair value of the reporting unit . this annual impairment assessment is performed by the company on the later of january 1 or the first day of each fiscal year . this same impairment test will be performed at other times during the course of the year , should an event occur which suggests that the recoverability of goodwill should be reconsidered . non-amortizing intangibles are also subject to an annual impairment test . the impairment test consists of a comparison of the fair value of the non-amortizing intangible asset with its carrying amount . if the carrying amount of a non-amortizing intangible asset exceeds its fair value , an impairment loss in an amount equal to that excess is recognized . in addition , the company evaluates the remaining useful life of its non-amortizing intangible assets at least annually to determine whether events or circumstances continue to support an indefinite useful life . if events or circumstances indicate that the useful lives of non-amortizing intangible assets are no longer indefinite , the assets will be tested for impairment . these intangible assets will then be amortized prospectively over their estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortization . amortizing intangible assets are reviewed for impairment when indicators of impairment are present . when a potential impairment has been identified , forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation . if such cash flows are less than such carrying amounts , long-lived assets , including such intangibles , are written down to their respective fair values . see note 12 below for additional details . stock-based compensation : the company accounts for stock-based compensation expense based on estimated grant date fair value , generally using the black-scholes option-pricing model . the fair value is recognized , net of estimated forfeitures , as expense in the consolidated financial statements over the requisite service period . the determination of fair value and the timing of expense using option pricing models such as the black-scholes model require the input of highly subjective assumptions , including the expected term and the expected price volatility of the underlying stock . the company estimates the expected term assumption based on historical experience . story_separator_special_tag discontinued operations as part of our continuing efforts to focus on higher growth opportunities , we have discontinued certain businesses . when the discontinued operations represented a strategic shift that will have a major effect on our operations and financial statements , we accounted for these businesses as discontinued operations and accordingly , have presented the results of operations and related cash flows as discontinued operations . any business deemed to be a discontinued operation prior to the adoption of accounting standards update 2014-08 , reporting discontinued operations and disclosures of disposals of components of an entity ( `` asu 2014-08 `` ) , continues to be reported as a discontinued operation , and the results of operations and related cash flows are presented as discontinued operations for all periods presented . any remaining assets and liabilities of these businesses have been presented separately , and are reflected within assets and liabilities from discontinued operations in the accompanying condensed consolidated balance sheets as of january 1 , 2017 and january 3 , 2016 . 33 in may 2014 , our management approved the shutdown of our microarray-based diagnostic testing laboratory in the united states , which had been reported within our diagnostics segment . we determined that , with the lack of adequate reimbursement from health care payers , the microarray-based diagnostic testing laboratory in the united states would need significant investment in its operations to reduce costs in order to effectively compete in the market . the shutdown of the microarray-based diagnostic testing laboratory in the united states resulted in a $ 0.1 million net pre-tax gain primarily related to the disposal of fixed assets , which was partially offset by the sale of a building in fiscal year 2014. in august 1999 , we sold the assets of our technical service business . we recorded pre-tax losses of $ 1.8 million in fiscal year 2016 , $ 0.03 million in fiscal year 2015 and $ 0.2 million in fiscal year 2014 for a contingency related to this business . these losses were recognized as a loss on disposition of discontinued operations before income taxes . during fiscal year 2016 , we settled various commitments related to the divestiture of other discontinued operations and recognized a pre-tax loss of $ 1.1 million . this loss was recognized as a loss on disposition of discontinued operations before income taxes . during fiscal year 2016 , we sold perkinelmer labs , inc. for cash consideration of $ 20.0 million , recognizing a pre-tax gain of $ 7.1 million . the sale generated a capital loss for tax purposes of $ 7.3 million , which resulted in an income tax benefit of $ 2.5 million that was recognized as a discrete benefit during the second quarter of 2016. perkinelmer labs , inc. was a component of our diagnostics segment . the pre-tax gain recognized in fiscal year 2016 is included in interest and other expense , net in the condensed consolidated statement of operations . the divestiture of perkinelmer labs , inc. has not been classified as a discontinued operation in this form 10-k because the disposition does not represent a strategic shift that will have a major effect on our operations and financial statements . during fiscal year 2016 , we entered into a letter of intent to contribute certain assets to an academic institution in the united kingdom . we recognized a pre-tax loss of $ 1.6 million related to the write-off of assets in the second quarter of 2016 which is included in interest and other expense , net in the condensed consolidated statement of operations . in december 2016 , we entered into a master purchase and sale agreement ( the “ agreement ” ) with varian medical systems , inc. ( the “ purchaser ” ) , under which we agreed to sell to the purchaser all of the outstanding equity interests in our wholly owned indirect subsidiaries perkinelmer medical holdings , inc. and dexela limited , together with certain assets relating to the business of designing , manufacturing and marketing flat panel x-ray detectors , and related software , accessories and ancillary products , to x-ray system manufacturers ( the “ medical imaging business ” ) , for cash consideration of approximately $ 276.0 million and the purchaser 's assumption of specified liabilities relating to the medical imaging business ( collectively , the “ transaction ” ) . the medical imaging business has been reported in the diagnostics segment . the agreement contemplates that the purchaser will finance the transaction through a debt financing and that , except as determined otherwise by the purchaser , the closing will occur no earlier than april 2017. however , the closing of the transaction is not conditioned upon the receipt of any such financing . the transaction is subject to customary closing conditions , including the expiration of specified antitrust waiting periods . the agreement contains certain termination rights and provides that under specified circumstances , upon termination of the agreement , the purchaser will be required to pay us a termination fee of up to $ 22.1 million . the sale of the medical imaging business represents a strategic shift that will have a major effect on our operations and financial statements . accordingly , we classified the assets and liabilities related to the medical imaging business as assets and liabilities of discontinued operations in our consolidated balance sheets and its results of operations are classified as income from discontinued operations in our consolidated statements of operations . the summary pre-tax operating results of the discontinued operations , which include the periods prior to disposition and a $ 1.0 million pre-tax restructuring charge related to workforce reductions in the microarray-based diagnostic testing laboratory in the united states during fiscal year 2014 , were as follows during the three fiscal years ended : replace_table_token_13_th 34 we recorded a tax provision of $ 4.3 million , $ 11.5 million and

this compares to repurchases of 1.4 million shares of our common stock , including 98,269 shares of our common stock pursuant to our equity incentive plans , for a total cost of $ 65.5 million , including commissions , for fiscal year 2014 . this use of cash in fiscal year 2015 was partially offset by proceeds from the issuance of common stock under stock plans of $ 14.9 million . this compares to proceeds from the issuance of common stock under stock plans of $ 24.5 million in fiscal year 2014 . during fiscal year 2015 , borrowings from our senior unsecured revolving credit facility totaled $ 451.0 million , which was more than offset by debt payments of $ 485.0 million . this compares to borrowings from our senior unsecured revolving credit facility of $ 475.0 million , which was partially offset by debt payments of $ 356.0 million in fiscal year 2014 . we paid $ 31.6 million in dividends during both fiscal years 2015 and 2014 . during fiscal year 2015 , we made net payments of $ 1.1 million on other credit facilities primarily for lease payments for our financing lease obligations , as described below under financing lease obligations , as compared to $ 12.7 million during fiscal year 2014 . during fiscal year 2015 , we also received $ 18.7 million for the settlement of forward foreign exchange contracts related to intercompany loans utilized to finance our acquisitions . we also made $ 0.1 million in payments for acquisition-related contingent consideration during fiscal year 2015 , as compared to $ 0.9 million during fiscal year 2014 . borrowing arrangements senior unsecured revolving credit facility . on august 11 , 2016 , we terminated our previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with a five year term and an expansion of borrowing capacity from $ 700.0 million to $ 1.0 billion . the new senior unsecured revolving credit facility provides for $ 1.0 billion of revolving loans and has an initial maturity of august 11 , 2021 . as of january 1 , 2017 , undrawn letters of credit in the aggregate amount of $ 11.4 million were treated as issued and outstanding when calculating the borrowing availability under the new senior unsecured revolving credit facility . as of

for multi-element arrangements comprised only of software products and related services , the company allocates a portion of the total arrangement consideration to the undelivered elements , primarily support agreements and professional services , using vendor-specific objective evidence 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 . the company reviews the separate sales of the undelivered elements on a regular basis and updates when appropriate , its vsoe of fair value for such elements to ensure that it reflects recent pricing experience . if the company can not objectively determine the vsoe of the fair value of any undelivered software element , revenue is deferred until all elements are delivered and services have been performed , or until fair value can objectively be determined for any remaining undelivered elements . however , if the only undelivered element is maintenance and support , the entire arrangement fee is recognized over the service period . 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 . the company 's products are distributed through its direct sales force and indirect distribution channels through alliances with resellers . revenue arrangements with resellers are recognized on a sell-in basis ; that is , when the company delivers the product to the reseller . the company records consideration given to a reseller as a reduction of revenue to the extent the company has recorded revenue from the reseller . with limited exceptions , the company 's return policy does not allow product returns for a refund . returns have been insignificant to date . in addition , the company has a history of successfully collecting receivables from the resellers . commission expense the company recognizes commission expense related to the renewal of maintenance contracts at the time an order is booked . as a result , commission expense can be recognized in full even though the related revenue may not be fully recognized . base commission expense on product revenue and corresponding new maintenance contracts is recognized in the same period as related product revenue , typically upon shipment . uncollected deferred product revenue because of netscout 's revenue recognition policies , there are circumstances for which the company does not recognize revenue relating to sales transactions that have been billed , but the related account receivable has not been collected . while the receivable represents an enforceable obligation , for balance sheet presentation purposes , the company has not recognized the deferred revenue or the related account receivable and no amounts appear in the consolidated balance sheets for such transactions . the aggregate amount of unrecognized accounts receivable and deferred revenue was $ 2.0 million and $ 2.0 million at march 31 , 2016 and 2015 , respectively . concentration of credit risk financial instruments that potentially subject us to concentration of credit risk consist primarily of investments , trade accounts receivable and accounts payable . our cash , cash equivalents , and marketable securities are placed with financial institutions with high credit standings . at march 31 , 2016 , the company had one direct customer which accounted for more than 10 % of the accounts receivable balance , while no indirect channel partner accounted for more than 10 % of the accounts receivable balance . at march 31 , 2015 , the company had one direct customer which accounted for more than 10 % of the accounts receivable balance , while no indirect channel partner accounted for more than 10 % of the accounts receivable balance . f-10 netscout systems , inc. notes to consolidated financial statements— ( continued ) note 2 – summary of significant accounting policies ( continued ) during the fiscal year ended march 31 , 2016 , one direct customer accounted for more than 10 % of total revenue , while no indirect channel partner accounted for more than 10 % of total revenue . during the fiscal year ended march 31 , 2015 , two direct customers accounted for more than 10 % of total revenue , while no indirect channel partner accounted for more than 10 % of total revenue . during the fiscal year ended march 31 , 2014 , one direct customer accounted for more than 10 % of total revenue , while no indirect channel partner accounted for more than 10 % of total revenue . as disclosed parenthetically within the company 's consolidated balance sheet , the company has a receivable from danaher in the amount of $ 44.2 million that represents a concentration of credit risk at march 31 , 2016 . historically , the company has not experienced any significant failure of its customers to meet their payment obligations nor does the company anticipate material non-performance by its customers in the future ; accordingly , the company does not require collateral from its customers . however , if the company 's assumptions are incorrect , there could be an adverse impact on its allowance for doubtful accounts . trade receivable valuations accounts receivable are stated at their net realizable value . story_separator_special_tag the 115 % , or $ 156.9 million , increase in total sales and marketing expenses was primarily due to a $ 146.2 million increase as a result of the incremental costs from the operations related to the transaction . in addition , in the legacy netscout business there was a $ 3.8 million increase in commission expense , a $ 2.5 million increase in deal related compensation expense , a $ 2.0 million increase in events , $ 1.8 million increase for the netscout user conference , a $ 1.5 million increase in employee related expense items resulting in part from increased headcount as well as increase compensation related items and a $ 1.3 million increase in advertising expenses . these expenses were partially offset by a $ 1.2 million decrease in recruiting expenses and an $ 863 thousand decrease in travel expenses for the fiscal year ended march 31 , 2016 as compared to the fiscal year ended march 31 , 2015 . average headcount in sales and marketing was 930 and 374 for the fiscal years ended march 31 , 2016 and 2015 , respectively . general and administrative . general and administrative expenses consist primarily of personnel expenses for executive , financial , legal and human resource employees , overhead and other corporate expenditures . the 149 % , or $ 70.4 million , increase in general and administrative expenses was primarily due to a $ 48.8 million increase as a result of the incremental costs from the operations related to the transaction , a $ 14.8 million increase in business development expenses , a $ 2.5 million increase in legal expenses , a $ 1.9 million increase in accounting services , a $ 1.8 million thousand increase in employee related expenses as a result of increased compensation related expenses . average headcount in general and administrative was 282 and 123 for the fiscal years ended march 31 , 2016 and 2015 , respectively . amortization of acquired intangible assets . amortization of acquired intangible assets consists primarily of amortization of customer relationships , trademark and tradenames , and leasehold interest related to the acquisitions of the communications business , onpath technologies , inc. ( onpath ) , accanto , simena , llc ( simena ) , fox replay bv ( replay ) , psytechnics , ltd ( psytechnics ) and network general . the 866 % , or $ 29.0 million , increase in amortization of acquired intangible assets was due to a $ 27.9 million increase in amortization associated with the transaction , as well as a $ 1.2 million increase in the legacy netscout business related to acceleration of the amortization of certain intangibles . overall , we believe there is the potential to improve operating margin modestly in the fiscal year ending march 31 , 2017 above reported levels for fiscal year 2016 . 39 interest and other expense , net interest and other expense , net includes interest earned on our cash , cash equivalents and marketable securities , interest expense and other non-operating gains or losses . replace_table_token_11_th the 281 % , or $ 5.1 million , increase in interest and other expense , net was due to a $ 5.5 million increase in interest expense due to amounts drawn down on the credit facility entered into on july 14 , 2015 , as well as a $ 1.0 million increase as a result of the incremental costs from operations related to the transaction . these were partially offset by a $ 1.2 million decrease in foreign currency expense and a $ 246 thousand increased interest income received on investments . income tax expense the annual effective tax rate for fiscal year 2016 is 12.5 % , compared to an annual effective tax rate of 35.6 % for fiscal year 2015 . generally , the effective tax rate differs from statutory tax rate due to the impact of the domestic production activities deduction , research and development credit , the impact of state taxes and income generated in jurisdictions that have a different tax rate than the u.s. statutory rate . the effective tax rate for the fiscal year ended march 31 , 2016 is lower than the comparable prior year period primarily related to a decrease in profit before taxes due to transaction related expenses recorded in the year , an increase in research and development credits attributable to acquired companies and a change in the jurisdictional mix of earnings . replace_table_token_12_th 40 comparison of years ended march 31 , 2015 and 2014 revenue during the fiscal year ended march 31 , 2015 , two direct customers accounted for more than 10 % of total revenue , while no indirect channel partner accounted for more than 10 % of total revenue . during the fiscal year ended march 31 , 2014 , one direct customer accounted for more than 10 % of our total revenue , while no indirect channel partner accounted for more than 10 % of total revenue . replace_table_token_13_th product . the 16 % , or $ 38.6 million , increase in product revenue was primarily due to a $ 26.8 million increase in revenue from our service provider sector , an $ 7.5 million increase in revenue from our general enterprise sector and a $ 4.3 million increase in revenue from our government enterprise sector . service . the 11 % , or $ 18.4 million , increase in service revenue was primarily due to a $ 13.4 million increase in revenue from new maintenance contracts and renewals from a growing support base , a $ 4.6 million increase in premium support contracts and a $ 328 thousand increase in revenue from training . total revenue by geography is as follows : replace_table_token_14_th united states revenues increase d 15 % , or $ 45.0 million , primarily as a result of an increase in our service provider sector . the 13 % , or $

replace_table_token_21_th cash provided by investing activities increased by $ 81.3 million to $ 25.1 million during the fiscal year ended march 31 , 2016 , compared to $ 56.2 million of cash used in investing activities during the fiscal year ended march 31 , 2015 . cash used for investing activities was $ 56.2 million during the fiscal year ended march 31 , 2015 , compared to $ 76.6 million of cash used for investing activities during the fiscal year ended march 31 , 2014 . there was a $ 27.7 million increase in cash inflow related to cash acquired as part of the acquisition of the communication business . net cash inflows relating to the purchase and sales of marketable securities was up $ 61.9 million during the fiscal year ended march 31 , 2016 relating to the amount of investments held at each respective balance sheet date , from an outflow of $ 43.3 million during the fiscal year ended march 31 , 2015 to an inflow of $ 18.6 million during the fiscal year ended march 31 , 2016. net cash outflows relating to the purchase and sales of marketable securities was down $ 19.3 million during the fiscal year ended march 31 , 2015 when compared to fiscal year ended march 31 , 2014 relating to the amount of investments held at each respective balance sheet date , from an outflow of $ 62.6 million during the fiscal year ended march 31 , 2014 to an outflow of $ 43.3 million during the fiscal year ended march 31 , 2015. our investments in property and equipment consist primarily of computer equipment , demonstration units , office equipment and facility improvements . we plan to continue to invest in capital expenditures to support our infrastructure in our fiscal year 2017. purchases of intangible assets increased by $ 3.8 million during the fiscal year ended march 31 , 2016 as compared to the fiscal year ended march 31 , 2015. during fiscal year ended march 31 , 2016 , we made an agreement to acquire a technology license for $ 3.7 million . net cash used in financing activities . replace_table_token_22_th

if the company terminates dr. durrant ' s employment for any reason other than “ cause ” , or if dr. durrant resigns for “ good reason ” ( each as defined in the agreement ) , dr. durrant will receive twelve months of base salary then in effect and the amount of the actual bonus earned by dr. durrant under the agreement for the year prior to the year of termination , pro-rated based on the portion of the year dr. durrant was employed by the company during the year of termination . the agreement additionally provides that if dr. durrant resigns for good reason or the company or its successor terminates his employment within the three month period prior to and the 12 month period following a change in control ( as defined in the agreement ) , the company must pay or cause its successor to pay dr. durrant a lump sum cash payment equal to two times ( a ) his annual salary as of the day before his resignation or termination plus ( b ) the aggregate bonus received by dr. durrant for the year preceding the change in control or , if no bonus had been received , at minimum 50 % of the target bonus . in addition , upon such a resignation or termination , all outstanding stock options held by dr. durrant will immediately vest and become exercisable . engagement agreement with mr. tousley mr. tousley is serving as interim chief financial officer pursuant to an engagement agreement between himself and the company , or the engagement agreement . the engagement agreement expired in accordance with its terms in november 2016 , but mr. tousley continues to perform services in accordance with the original terms . under the engagement agreement as currently being performed , we pay mr. tousley at a rate of $ 225 per hour and reimburse him for all travel and out of pocket expenses incurred in connection therewith . mr. tousley 's services may be discontinued at any time without penalty . 2012 equity incentive plan on september 13 , 2016 , the board approved an amendment to our 2012 equity plan to increase the number of shares of our common stock available for issuance under the 2012 equity plan by 3,000,000 shares and to increase the annual maximum aggregate number of shares subject to stock option awards that may be granted to any one person under the equity plan from 125,000 to 1,100,000. director compensation pursuant to our director compensation program , each member of our board of directors during 2016 who was not our employee was eligible to receive an annual cash retainer and annual equity compensation . the annual cash retainer amounts payable to our eligible directors during 2016 were as follows : · board of directors member : $ 40,000 ; · audit committee member : $ 10,000 ; · audit committee chair : $ 20,000 ; 80 · compensation committee member : $ 6,000 ; · compensation committee chair : $ 12,000 ; · nominating and corporate governance committee member : $ 4,000 ; and · nominating and corporate governance committee chair : $ 8,000 . the equity compensation component of our directors compensation program during 2016 provided that newly appointed directors would be granted an initial option to purchase 100,000 shares of our common stock and continuing directors are eligible to receive an annual option to purchase 50,000 shares of our common stock . initial stock option grants are granted as soon as reasonably practicable following appointment to the board and vest ratably over 36 months of continuous service following the date on which the director is appointed to our board of directors . the following table shows for the fiscal year ended december 31 , 2016 certain information with respect to the compensation of our non-employee directors : replace_table_token_10_th ( 1 ) mr. moradi resigned from the board of directors upon emergence from bankruptcy on june 30 , 2016 . ( 2 ) the amounts in this column reflect retainers earned under the board of directors compensation program for fiscal year 2016 . ( 3 ) the amounts in this column represent the aggregate grant date fair value of option awards to purchase 100,000 shares of our common stock granted to each director on september 13 , 2016 , computed in accordance with fasb asc topic 718. see note 10 of the notes to our consolidated financial statements included elsewhere in this annual report on form 10‑k for a discussion of all assumptions made by us in determining the grant date fair value of our equity awards . as of december 31 , 2016 , messrs. morris , barliant , chappell and friedberg held outstanding options to purchase 100,000 shares of our common stock . mr. moradi held no options to purchase shares of common stock . ( 4 ) on june 30 , 2016 ronald barliant and david moradi were granted 93,786 shares of common stock each related to their service during bankruptcy proceedings . the closing market price on june 30 , 2016 was $ 4.49 per share . the amounts in this column represent the aggregate grant date fair value of such stock awards , computed in accordance with fasb asc topic 718 . 81 item 12. security ownership of certain beneficial owners and management and related stockholder matters security ownership information the following table presents information regarding beneficial ownership of our common stock as of march 7 , 2017 by : · each stockholder or group of stockholders known by us to be the beneficial owner of more than 5 % of our common stock ; · each of our directors ; · each of our named executive officers ; and · all of our current directors and executive officers as a group . story_separator_special_tag no such expense was incurred in 2016. reorganization items , net increased $ 8.2 million in 2016 , from zero for the year ended december 31 , 2015 to $ 8.2 million for the year ended december 31 , 2016 due to the amounts incurred related to the plan , including legal fees of $ 4.9 million , $ 1.2 million in other professional fees , $ 0.7 million related to the fair value of common shares issue to our ceo and two directors for their service in bankruptcy , $ 1.1 million in legal and other costs related to the debtor-in-possession financing , $ 0.5 million related to the beneficial conversion expense recognized in connection with the debtor-in-possession financing , offset by a net gain on the termination of the south san francisco lease of $ 0.2 million . interest expense of $ 0.8 million recognized for the year ended december 31 , 2015 was related to the loan and security agreement with midcap financial sbic lp that was entered into by the company in september 2012. the loan was paid off in the fourth quarter of 2015. interest expense of $ 131,000 recognized for the year ended december 31 , 2016 is comprised of $ 46,000 related to the debtor-in-possession financing entered into on april 1 , 2016 , $ 61,000 related to the promissory notes issued to certain vendors in accordance with the plan and $ 24,000 related to interest and loan issuance costs related to the december term loan ( as defined below ) . other income ( expense ) , net for the year ended december 31 , 2016 primarily consisted of foreign currency gains related to the payment of bankruptcy liabilities in foreign currencies . other income ( expense ) , net for the year ended december 31 , 2015 primarily consisted of foreign currency gains and losses and realized gains and losses on the sale of investments . 66 income taxes as of december 31 , 2016 , we had net operating loss carryforwards of approximately $ 146.8 million to offset future federal income taxes which expire in the years 2021 through 2036 , and approximately $ 137.0 million that may offset future state income taxes which expire in the years 2017 through 2036. 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 utilized . at december 31 , 2016 , we recorded a 100 % valuation allowance against our deferred tax assets of approximately $ 64.2 million , as at that time our management believed it was uncertain that they would be fully realized . if we determine in the future that we will be able to realize all or a portion of our deferred tax assets , an adjustment to our valuation allowance would increase net income in the period in which we make such a determination . story_separator_special_tag style= `` font-family : 'times new roman ' , times , serif ; font-size : 10pt `` > our ability to re-list our common stock on a national securities exchange , whether through a new listing or by completing a strategic transaction ; · our ability to establish and maintain development partnering arrangements and any associated funding ; · the emergence of competing products or technologies and other adverse market developments ; · the costs of maintaining , expanding , and protecting our intellectual property portfolio , including potential litigation costs and liabilities ; · the resources we devote to marketing , and , if approved , commercializing our product candidates ; · the scope , progress , expansion and costs of manufacturing our product candidates ; and · the costs associated with being a public company . we are pursuing efforts to raise additional capital from a number of sources , including , but not limited to , the sale of equity or debt securities , strategic collaborations , and licensing of our product candidates . additional funding may not be available to us on a timely basis or at acceptable terms , if at all . our ability to access capital when needed is not assured and , if not achieved on a timely basis , would materially harm our business , financial condition and results of operations . if adequate funds are not available , we may be required to delay , reduce the scope of , or eliminate one or more of our development programs . we may also be required to sell or license to others our technologies , product candidates , or development programs that we would have preferred to develop and commercialize ourselves and on less than favorable terms , if at all . if in the best interests of our stockholders , we may also find it appropriate to enter into a strategic transaction that could result in , among other things , a sale , merger , consolidation or business combination . if management is unsuccessful in efforts to raise additional capital , based on our current levels of operating expenses , our current capital will not be sufficient to fund our operations for the next twelve months . these conditions raise substantial doubt about our ability to continue as a going concern . 68 on january 13 , 2016 , our common stock was suspended from the nasdaq global market and began trading on the over-the-counter market under the ticker symbol kbioq . on january 26 , 2016 , nasdaq filed a form 25 with the securities and exchange commission to complete the delisting of our common stock , and the delisting was effective on february 5 , 2016. on june 30 , 2016 , upon emergence

net cash used in financing activities was $ 3.5 million for the year ended december 31 , 2015 related to an increase in restricted cash of $ 8.3 million associated with notes payable , $ 3.4 million related to payments on our borrowings obligations , offset by $ 8.2 million in proceeds from the issuance of common stock . in connection with our emergence from bankruptcy , we closed an $ 11 million financing that provided the funds required to enable our exit from chapter 11 as well as to fund our current working capital needs . we also closed on a $ 3.0 million term loan in december 2016 ( the “ december term loan ” ) , providing additional working capital . however , we will require substantial additional capital to continue as a going concern and to support our business efforts , including obtaining regulatory approvals for benznidazole or other product candidates , clinical trials and other studies , and , if approved , the commercialization of our product candidates . the amount of capital we will require and the timing of our need for additional capital will depend on many factors , including : · the availability of a 505 ( b ) ( 2 ) development pathway for the potential approval by fda of benznidazole ; · the type , number , timing , progress , costs , and results of the product candidate development programs that we are pursuing or may choose to pursue in the future ; · the scope , progress , expansion , costs , and results of our pre-clinical and clinical trials ; · the timing of and costs involved in obtaining regulatory approvals ; · the success , progress , timing and costs of our efforts to evaluate or consummate various strategic alternatives if in the best interests of our stockholders ; · < div

the relief-from-royalty method is dependent of a number of significant management assumptions , including estimates of revenues , royalty rates and discount rates . in 2014 and 2013 , there were no triggering events or changes in circumstances that would have required a review other than as of our annual test date . based on the results of our measurement as of october 31 , 2014 , the fair value of the banjo trade name was greater than 40 % in excess of carrying value . amortization of intangible assets was $ 43.2 million , $ 44.3 million and $ 41.5 million in 2014 , 2013 and 2012 , respectively . based on intangible asset balances as of december 31 , 2014 , amortization expense is expected to approximate $ 40.4 million in 2015 , $ 38.5 million in 2016 , $ 29.8 million in 2017 , $ 18.9 million in 2018 and $ 14.9 million in 2019 . 5. borrowings borrowings at december 31 , 2014 and 2013 consisted of the following : replace_table_token_35_th on june 27 , 2011 the company and certain of its subsidiaries entered into a credit agreement ( the “ credit agreement ” ) , as borrowers with bank of america , n.a . , as administrative agent , swing line lender and an issuer of letters of credit , and other 39 lenders party thereto which provided for a new revolving credit facility ( the “ revolving facility ” ) . the revolving facility replaced the company 's previous $ 600.0 million credit facility , which expired in december 2011. the revolving facility is in an aggregate principal amount of $ 700.0 million with a maturity date of june 27 , 2016 . up to $ 75.0 million of the revolving facility is available for the issuance of letters of credit . additionally , up to $ 25.0 million of the revolving facility is available to the company for swing line loans , available on a same-day basis . proceeds of the revolving facility are available for working capital and other general corporate purposes , including refinancing existing debt of the company and its subsidiaries . the company may request increases in the lending commitments under the credit agreement , but the aggregate lending commitments may not exceed $ 950.0 million . the company has the right , subject to certain conditions set forth in the credit agreement , to designate certain foreign subsidiaries of the company as borrowers under the credit agreement . in connection with any such designation , the company is required to guarantee the obligations of any such subsidiaries under the credit agreement . under the credit agreement , fast & fluid management europe b.v. , ( “ fme ” ) and idex uk ltd. ( “ idex uk ” ) were approved by the lenders as designated borrowers . at december 31 , 2014 , fme and idex uk had no borrowings under the revolving facility . borrowings under the revolving facility bear interest , at either an alternate base rate or an adjusted libor rate plus , in each case , an applicable margin . such applicable margin is based on the company 's senior , unsecured , long-term debt rating and can range from .875 % to 1.70 % . based on the company 's credit rating at december 31 , 2014 , the applicable margin was 1.05 % . interest is payable ( a ) in the case of base rate loans , quarterly , and ( b ) in the case of libor rate loans , on the maturity date of the borrowing , or quarterly from the effective date for borrowings exceeding three months . an annual revolving facility fee , also based on the company 's credit rating , is currently 20 basis points and is payable quarterly . the credit agreement contains affirmative and negative covenants that the company believes are usual and customary for senior unsecured credit agreements , including a financial covenant requiring a maximum leverage ratio of a 3.25 to 1.0 , which is the ratio of the company 's consolidated total debt to its consolidated ebitda , each as defined in the credit agreement . the credit agreement also contains customary events of default ( subject to grace periods , as appropriate ) including among others : nonpayment of principal , interest or fees ; breach of the representations or warranties in any material respect ; breach of the financial , affirmative or negative covenants ; payment default on , or acceleration of , other material indebtedness ; bankruptcy or insolvency ; material judgments entered against the company or any of its subsidiaries ; certain specified events under the employee retirement income security act of 1974 , as amended ; certain changes in control of the company ; and the invalidity or unenforceability of the credit agreement or other documents associated with the credit agreement . at december 31 , 2014 , $ 115.0 million was outstanding under the revolving facility , with $ 7.4 million of outstanding letters of credit , resulting in net available borrowing capacity under the revolving facility at december 31 , 2014 of approximately $ 577.6 million . on june 9 , 2010 the company completed a private placement of 81.0 million aggregate principal amount of 2.58 % series 2010 senior euro notes due june 9 , 2015 ( “ 2.58 % senior euro notes ” ) pursuant to a master note purchase agreement , dated june 9 , 2010 ( the “ purchase agreement ” ) . the purchase agreement provides for the issuance of additional series of notes in the future , provided that the aggregate principal amount outstanding under the agreement at any time does not exceed $ 750.0 million . story_separator_special_tag the sales increase within our band-it group was driven by general strength in the oil and gas applications market and large automotive blanket orders for new vehicle platforms in north america . sales within our fire suppression group increased as a result of orders for fire suppression trailers at power production facilities , project orders in china , and a stable core business in north america and western europe . sales within our rescue group increased as a result of robust demand for our rescue tools within the north american and european markets . operating income and operating margin of $ 102.7 million and 23.1 % , respectively , were higher than the $ 96.1 million and 22.0 % recorded in 2012 , primarily due to the impact of the $ 8.3 million of restructuring charges recorded in 2012 , as well as volume leverage , partially offset by mix across businesses . liquidity and capital resources operating activities cash flows from operating activities decreased $ 33.6 million , or 8.4 % , to $ 368.0 million in 2014 , primarily due to higher investments in working capital , partially offset by an increase in net income and accrued expenses . at december 31 , 2014 , working capital was $ 663.8 million and the company 's current ratio was 2.61 to 1 . at december 31 , 2014 , the company 's cash and cash equivalents totaled $ 509.1 million , of which $ 403.5 million was held outside of the united states . investing activities cash flow used in investing activities increased $ 4.1 million , or 6.0 % to $ 72.3 million in 2014 , primarily as a result of higher capital expenditures , partially offset by lower cash paid for acquisitions . cash flows from operations were more than adequate to fund capital expenditures of $ 48.0 million and $ 31.5 million in 2014 and 2013 , respectively . capital expenditures were generally for machinery and equipment that improved productivity , although a portion was for business system technology , replacement of equipment , and construction of new facilities . management believes that the company has ample capacity in its plants and equipment to meet demand increases for future growth in the intermediate term . the company acquired aegis flow technologies ( `` aegis `` ) in april 2014 for cash consideration of $ 25.4 million , and ftl seals technology , ltd ( `` ftl `` ) in march 2013 for cash consideration of $ 34.5 million ( £23.1 million ) . the entire purchase price for both acquisitions was funded with borrowings under the company 's bank credit facility . financing activities story_separator_special_tag financial covenants under these debt instruments require a minimum interest coverage ratio of 3.0 to 1 and a maximum leverage ratio of 3.25 to 1. at december 31 , 2014 , the company was in compliance with both of these financial covenants , as the company 's interest coverage ratio was 12.72 to 1 and the leverage ratio was 1.69 to 1. there are no financial covenants relating to the 4.5 % senior notes or 4.2 % senior notes ; however , both are subject to cross-default provisions . on november 6 , 2014 the company 's board of directors approved an increase of $ 400.0 million in the authorized level for repurchases of common stock . repurchases under the program will be funded with future cash flow generation . during 2014 , the company purchased a total of 3.0 million shares at a cost of $ 222.5 million , of which $ 2.6 million was settled in january 2015 , compared to 2.9 million shares purchased at a cost of $ 167.5 million in 2013 . as of december 31 , 2014 , there was $ 545 million of repurchase authorization remaining . the company believes current cash , cash from operations and cash available under the revolving facility will be sufficient to meet its operating cash requirements , planned capital expenditures , interest and principal payments on all borrowings , pension and postretirement funding requirements , authorized share repurchases and annual dividend payments to holders of the company 's common stock for the next twelve months . additionally , in the event that suitable businesses are 20 available for acquisition on acceptable terms , the company may obtain all or a portion of the financing for these acquisitions through the incurrence of additional borrowings . as of december 31 , 2014 , $ 115.0 million was outstanding under the revolving facility , with $ 7.4 million of outstanding letters of credit , resulting in net available borrowing capacity under the revolving facility at december 31 , 2014 of approximately $ 577.6 million . contractual obligations our contractual obligations include pension and postretirement medical benefit plans , rental payments under operating leases , payments under capital leases , and other long-term obligations arising in the ordinary course of business . there are no identifiable events or uncertainties , including the lowering of our credit rating , which would accelerate payment or maturity of any of these commitments or obligations . the following table summarizes our significant contractual obligations and commercial commitments at december 31 , 2014 , and the future periods in which such obligations are expected to be settled in cash . in addition , the table reflects the timing of principal and interest payments on outstanding borrowings . additional detail regarding these obligations is provided in the notes to consolidated financial statements in part ii , item 8 , “ financial statements and supplementary data . ” replace_table_token_18_th ( 1 ) includes interest payments based on contractual terms and current interest rates for variable debt . ( 2 ) consists primarily of tangible personal property leases . ( 3 ) consists primarily of inventory commitments . ( 4 ) comprises liabilities recorded on the balance sheet of $ 956.3 million , and obligations not recorded on the balance

as of december 31 , 2014 , the company included the outstanding balance of the 2.58 % senior euro notes , $ 98.5 million , within current liabilities on the consolidated balance sheet as the maturity date is within twelve months and the company expects to repay the principal balance using cash on the balance sheet . on december 6 , 2010 , the company completed a public offering of $ 300.0 million 4.5 % senior notes due december 15 , 2020 ( “ 4.5 % senior notes ” ) . the net proceeds from the offering of approximately $ 295.7 million , after deducting a $ 1.6 million issuance discount , a $ 1.9 million underwriting commission and $ 0.8 million offering expenses , were used to repay $ 250.0 million of outstanding bank indebtedness , with the balance used for general corporate purposes . the 4.5 % senior notes bear interest at a rate of 4.5 % per annum , which is payable semi-annually in arrears on each june 15 and december 15. the company may redeem all or a portion of the 4.5 % senior notes at any time prior to maturity at the redemption prices set forth in the note indenture governing the 4.5 % senior notes . the company may issue additional debt from time to time pursuant to the indenture . the indenture and 4.5 % senior notes contain covenants that limit the company 's ability to , among other things , incur certain liens securing indebtedness , engage in certain sale-leaseback transactions , and enter into certain consolidations , mergers , conveyances , transfers or leases of all or substantially all the company 's assets . the terms of the 4.5 % senior notes also require the company to make an offer to repurchase the 4.5 % senior notes upon a change of control triggering event ( as defined in the indenture ) at a price equal to 101 % of their principal amount plus accrued and unpaid interest , if any . on december 9 , 2011 , the company completed a public offering of $ 350.0 million 4.2 % senior notes due december 15 , 2021 ( “ 4.2 % senior notes ” ) . the net proceeds from the offering of approximately $ 346.2 million , after deducting a $ 0.9 million issuance discount , a $ 2.3 million underwriting commission and $ 0.6 million offering expenses , were used to repay $ 306.0 million of outstanding bank indebtedness , with the balance used for general corporate purposes . the 4.2 % senior notes bear

a significant component of the company 's revenue , net interest earned on financial assets and liabilities , is excluded from the scope of topic 606. first commonwealth generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed ; charged either on a periodic basis or based on activity . because performance obligations are satisfied as services are rendered and the transaction prices are fixed , the company has made no significant judgments in applying the revenue guidance prescribed in topic 606 that affect the determination of the amount and timing of revenue from contracts with customers . note 2— acquisition santander branch acquisition on september 6 , 2019 , the company 's banking subsidiary , first commonwealth bank , completed its acquisition of 14 full service branches from santander bank n.a . ( `` santander `` ) receiving $ 329.5 million in cash . this acquisition further expands the company 's market into state college , lock haven , williamsport and lewisburg , pennsylvania and included the purchase of $ 100.0 million in loans and $ 471.4 million in deposits . 58 the table below summarizes the final purchase price allocation and the net assets acquired ( at fair value ) and consideration received in connection with the santander acquisition ( dollars in thousands ) : replace_table_token_34_th the goodwill of $ 29.1 million arising from the acquisition represents the value of synergies and economies of scale expected from combining the operations of the company with the branches acquired from santander . the goodwill for this transaction is expected to be deducted over a 15-year period for income tax purposes . the company determined that this acquisition constitutes a business combination as defined in fasb asc topic 805 , “ business combinations . ” accordingly , as of the date of the acquisition , the company recorded the assets acquired and liabilities assumed at fair value . the company determined fair values in accordance with the guidance provided in fasb asc topic 820 , “ fair value measurements and disclosures . ” acquired loans were recorded at fair value with no carryover of the related allowance for loan losses . at the date of acquisition , none of the loans were accounted for under the guidance of asc topic 310-30 , “ receivables-loans and debt securities acquired with deteriorated credit quality . ” the fair value of acquired loans and certificate of deposits is established by discounting the expected future cash flows with a market discount rate for like maturities and risk instruments . the $ 100.0 million fair value of acquired loans is the result of $ 101.2 million in loans acquired from santander and the recognition of a net combined yield and credit mark adjustment of $ 1.2 million . the $ 471.4 million fair value of acquired deposits is the result of $ 471.0 million in deposits acquired and the recognition of a yield mark adjustment of $ 0.4 million on the certificate of deposits . a $ 5.6 million core deposit intangible was recognized for core deposits acquired . costs related to the acquisition totaled $ 3.7 million . these amounts were expensed as incurred and are recorded as a merger and acquisition related expense in the consolidated statements of income . as a result of the full integration of the operations of the santander branches , it is not practicable to determine revenue or net income included in the company 's operating results relating to santander since the date of acquisition as santander 's results can not be separately identified . garfield acquisition corporation on may 1 , 2018 , the company completed its acquisition of garfield acquisition corporation ( `` garfield `` ) and its banking subsidiary , foundation bank , for consideration of $ 17.4 million in cash and 2.7 million shares of the company 's common stock . through the acquisition , the company obtained five full-service banking offices which are operating under the first commonwealth name . this acquisition expands the company 's presence into the cincinnati , ohio market and added $ 184.5 million in loans and $ 141.3 million in deposits to the company 's balance sheet . 59 the table below summarizes the final purchase price allocation and the net assets acquired ( at fair value ) and consideration transferred in connection with the garfield acquisition ( dollars in thousands ) : replace_table_token_35_th the goodwill of $ 19.0 million arising from the acquisition represents the value of synergies and economies of scale expected from combining the operations of the company with garfield acquisition corporation . the company determined that this acquisition constitutes a business combination as defined in fasb asc topic 805 , “ business combinations . ” accordingly , as of the date of the acquisition , the company recorded the assets acquired and liabilities assumed at fair value . the company determined fair values in accordance with the guidance provided in fasb asc topic 820 , “ fair value measurements and disclosures . ” acquired loans were recorded at fair value with no carryover of the related allowance for loan losses . fair value is established by discounting the expected future cash flows with a market discount rate for like maturities and risk instruments . at the date of acquisition , none of the loans were accounted for under the guidance of asc topic 310-30 , “ receivables-loans and debt securities acquired with deteriorated credit quality . ” the $ 184.5 million fair value of acquired loans is the result of $ 183.7 million in net loans acquired from garfield , the recognition of a net combined yield and credit mark adjustment of $ 4.3 million and the $ 5.1 million reversal of garfield 's allowance as well as prior fair value marks recorded by garfield . story_separator_special_tag loan growth in 2019 was impacted by $ 100.0 million in loans acquired as part of the santander branch acquisition , including $ 7.1 million in commercial , financial , agricultural and other , $ 71.8 million in residential real estate , $ 9.2 million in commercial real estate and $ 11.8 million in loans to individuals . during 2019 , approximately $ 243.8 million in investment securities were sold , called or matured . some of these securities were higher yielding securities in comparison to the total portfolio yield and , as such , their replacement contributed to the decrease in the yield earned on the portfolio . in total , $ 11.0 million in agency securities , $ 121.3 million in mortgage-backed securities , $ 6.0 million in corporate securities and $ 0.4 million in municipal securities were purchased in 2019 to help replace runoff from the portfolio while maintaining a reduced risk profile . first commonwealth 's total liabilities increased $ 400.2 million , or 6 % , in 2019 . deposits increased $ 779.6 million , or 13 % , including $ 471.4 million in deposits obtained as part of the acquisition of 14 santander branches . short-term borrowings decreased $ 520.0 million , or 72 % , primarily due to the $ 329.5 million in cash received as a result of the santander acquisition and long-term debt increased $ 49.1 million , or 27 % , primarily due to extending the maturity on some fhlb borrowings . total shareholders ' equity increased $ 80.3 million in 2019 . growth in shareholders ' equity was a result of net income of $ 105.3 million and a $ 16.9 million increase in accumulated other comprehensive income , partially offset by $ 39.4 million in dividends declared and $ 6.3 million in stock repurchases . loan portfolio following is a summary of our loan portfolio as of december 31 : replace_table_token_12_th the loan portfolio totaled $ 6.2 billion as of december 31 , 2019 , reflecting growth of $ 415.0 million , or 7 % , compared to december 31 , 2018 . all categories experienced loan growth , except for commercial real estate . commercial , financial , agricultural and other loans increased $ 103.4 million , or 9 % , largely due to growth in direct lending in pennsylvania and ohio . real estate construction loans increased $ 90.1 million , or 25 % , with $ 69.3 million resulting from growth in commercial construction projects primarily in pennsylvania and ohio and $ 20.8 million due to growth in consumer construction . residential real estate loans increased $ 119.0 million , or 8 % , due to growth in our mortgage banking area as well as $ 71.8 million in mortgage loans acquired from santander . growth in the loans to individuals category of $ 108.6 million , or 18 % , was largely due to growth in indirect auto loans . commercial real estate loans decreased $ 6.0 million , or less than 1 % , as a result of growth in this category being offset by runoff and prepayments . the majority of our loan portfolio is with borrowers located in pennsylvania . the company expanded into the ohio market area with the opening of a loan production office in cleveland , ohio in 2013 , the acquisition of first community bank of columbus , ohio in the fourth quarter of 2015 , the purchase of 13 firstmerit bank , na branches in northern ohio in december 2016 , the acquisition of dcb financial of columbus , ohio in may 2017 and the acquisition of garfield in cincinnati , ohio in may 2018. as of december 31 , 2019 and 2018 , there were no concentrations of loans relating to any industry in excess of 10 % of total loans . as of december 31 , 2019 , criticized loans ( i.e . , loans designated oaem , substandard , impaired or doubtful ) decreased $ 26.6 million , or 21 % , from december 31 , 2018 . criticized loans totaled $ 100.6 million at december 31 , 2019 and represented 2 % of the total loan portfolio . additionally , delinquencies on accruing loans increased $ 3.1 million , or 30 % , at december 31 , 2019 35 compared to december 31 , 2018 . as of december 31 , 2019 , nonaccrual loans increased $ 1.4 million , or 6 % , compared to december 31 , 2018 . final loan maturities and rate sensitivities of the loan portfolio excluding consumer installment and mortgage loans at december 31 , 2019 were as follows : replace_table_token_13_th ( a ) the maturity of real estate construction loans include term commitments that follow the construction period . loans with these term commitments will be moved to the commercial real estate category when the construction phase of the project is completed . first commonwealth has a legal lending limit of $ 137.1 million to any one borrower or closely related group of borrowers , but has established lower thresholds for credit risk management . nonperforming loans nonperforming loans include nonaccrual loans and restructured loans . nonaccrual loans represent loans on which interest accruals have been discontinued . restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of the deteriorating financial position of the borrower under terms not available in the market . we discontinue interest accruals on a loan when , based on current information and events , it is probable that we will be unable to fully collect principal or interest due according to the contractual terms of the loan . consumer loans are placed in nonaccrual status at 150 days past due . other types of loans are typically placed in nonaccrual status when there is evidence of a significantly weakened financial condition or principal and interest is

as of december 31 , 2019 , our maximum borrowing capacity under this program was $ 1.2 billion and as of that date there was $ 4.2 million outstanding . we also participate in a reciprocal program which allows our depositors to receive expanded fdic coverage by placing multiple certificates of deposit at other cdars member banks . as of december 31 , 2019 , our outstanding certificates of deposits from this program have an average weighted rate of 1.06 % and an average original term of 332 days . we also have available unused federal funds lines with six correspondent banks . these lines have an aggregate commitment of $ 205.0 million and there were no amounts outstanding as of december 31 , 2019 . in addition , we have available unused repo lines with three correspondent banks . these lines have an aggregate commitment of $ 535.5 million with no outstanding balance as of december 31 , 2019. the liquidity needs of first commonwealth on an unconsolidated basis ( the `` parent company '' ) consist primarily of operating expenses , debt service payments and dividend payments to our stockholders , which totaled $ 47.7 million for the year ended december 31 , 2019 , as well as any cash necessary to repurchase our shares , which totaled $ 6.3 million for the year ended december 31 , 2019 . the primary source of liquidity for the parent company is dividends from subsidiaries . the parent company had $ 72.2 million in junior subordinated debentures and cash and interest-bearing deposits of $ 22.9 million at december 31 , 2019 . at the end of 2019 , the parent company had a $ 20.0 million short-term , unsecured revolving line of credit with another

the three levels of the fair value hierarchy are as follows : · level 1 — unadjusted quoted prices in active markets for identical assets or liabilities · level 2 — inputs other than quoted prices that are observable for the asset or liability either directly or indirectly ; and , · level 3 — inputs that are not based on observable market data . replace_table_token_29_th replace_table_token_30_th 4. capitalized acquisition costs the company had the following activity related to capitalized acquisition costs : capitalized acquisition costs amount balance , december 31 , 2012 $ 55,173,564 additions — balance , december 31 , 2013 $ 55,173,564 the company 's restricted cash balance of $ 30,477 at december 31 , 2013 represents cash in escrow related to land acquisitions closed during january 2014 . 70 the following table presents costs incurred for exploration and evaluation activities for the years ended december 31 , 2013 and 2012 : replace_table_token_31_th properties acquired from anglogold , alaska pursuant to an asset purchase and sale and indemnity agreement dated june 30 , 2006 , as amended on july 26 , 2007 ( the “anglogold agreement” ) , among the company , anglogold ashanti ( u.s.a. ) exploration inc. ( “anglogold” ) and th alaska , the company acquired all of anglogold 's interest in a portfolio of seven mineral exploration projects in alaska and referred to as the livengood , chisna , gilles , coffee dome , west pogo , blackshell , and caribou properties ( the “sale properties” ) in exchange for a cash payment of $ 50,000 on august 4 , 2006 , and the issuance of 5,997,295 common shares , representing approximately 19.99 % of the company 's issued shares following the closing of the acquisition and two private placement financings raising an aggregate of c $ 11,479,348 . anglogold has the right to maintain its percentage equity interest in the company , on an ongoing basis , provided that such right will terminate if anglogold 's interest falls below 10 % at any time after january 1 , 2009. as further consideration for the transfer of the sale properties , the company granted to anglogold a 90 day right of first offer with respect to the sale properties and any additional mineral properties in alaska in which the company acquires an interest and which interest the company proposes to farm out or otherwise dispose of . if anglogold 's equity interest in the company is reduced to less than 10 % , then this right of first offer will terminate . details of the livengood property ( being the only sale property still held by the company — see note 11 ) are as follows : livengood property : the livengood property is located in the tintina gold belt approximately 113 kilometers ( 70 miles ) north of fairbanks , alaska . the property consists of land leased from the alaska mental health trust , a number of smaller private mineral leases , alaska state mining claims purchased or located by the company and patented ground held by the company . details of the leases are as follows : a ) a lease of the alaska mental health trust mineral rights having a term beginning july 1 , 2004 and extending 19 years until june 30 , 2023 , subject to further extensions beyond june 30 , 2023 by either commercial production or payment of an advance minimum royalty equal to 125 % of the amount paid in year 19 and diligent pursuit of development . the lease requires minimum work expenditures and advance minimum royalties which escalate annually with inflation . a net smelter return ( “nsr” ) production royalty of between 2.5 % and 5.0 % ( depending upon the price of gold ) is payable to the lessor with respect to the lands subject to this lease . in addition , an nsr production royalty of l % is payable to the lessor with respect to the unpatented federal mining claims subject to the lease described in b ) below and an nsr production royalty of between 0.5 % and 1.0 % ( depending upon the price of gold ) is payable to the lessor with respect to the lands acquired by the company in december 2011. as of december 31 , 2013 the company has paid $ 1,326,363 from the inception of this lease . b ) a lease of federal unpatented lode mining claims having an initial term of ten years commencing on april 21 , 2003 and continuing for so long thereafter as advance minimum royalties are paid and mining related activities , including exploration , continue on the property or on adjacent properties controlled by the company . the lease 71 requires an advance minimum royalty of $ 50,000 on or before each anniversary date ( all of which minimum royalties are recoverable from production royalties ) . an nsr production royalty of between 2 % and 3 % ( depending on the price of gold ) is payable to the lessors . the company may purchase 1 % of the royalty for $ 1,000,000 . as of december 31 , 2013 , the company has paid $ 480,000 from the inception of this lease . c ) a lease of patented lode claims having an initial term of ten years commencing january 18 , 2007 , and continuing for so long thereafter as advance minimum royalties are paid . the lease requires an advance minimum royalty of $ 20,000 on or before each anniversary date through january 18 , 2017 and $ 25,000 on or before each subsequent anniversary ( all of which minimum royalties are recoverable from production royalties ) . an nsr production royalty of 3 % is payable to the lessors . story_separator_special_tag other items amounted to a gain of $ 2,815,860 during the period ended december 31 , 2011 compared to a gain of $ 480,901 in year ended may 31 , 2011. the increased gain in the period ended december 31 , 2011 resulted from an unrealized gain of $ 2,300,000 on the revaluation of a derivative liability at december 31 , 2011. there was no derivative liability during the year ended may 31 , 2011 . 49 discontinued operations and transfer of the nevada and other alaska business under the arrangement on august 26 , 2010 , the company completed an arrangement under a plan of arrangement ( the “arrangement” ) pursuant to which it transferred its other existing alaska ( other than the livengood gold project ) and nevada assets to a new public company , corvus . under the arrangement , each shareholder of the company received one corvus common share for every two ith common shares held as at the effective date of the arrangement as a return of capital and exchanged each existing common share of ith for a new common share of ith . the “new” ith common shares are identical in every respect ( other than cusip number ) to the “old” ith common shares . ith has transferred its wholly-owned subsidiaries , raven gold alaska inc. ( “raven gold” ) , incorporated in alaska , and corvus gold nevada inc. ( formerly “talon gold nevada inc.” ) , incorporated in nevada to corvus . as a result of the arrangement , there was an effective spin-out by ith of certain of its mineral properties , being chisna , west pogo , terra and lms in alaska , and north bullfrog in nevada ( together the “nevada and other alaska business” ) , to corvus . the company did not realize any gain or loss on the transfer of the nevada and other alaska business , which was comprised of a working capital contribution of $ 3,168,825 and the nevada and other alaska business assets and liabilities as at the effective date of the arrangement . costs of the arrangement , comprised principally of legal and regulatory expense , off-set by property facilitation payments and interest from payments made in connection with the chisna spin-out property , amounted to a net expense of $ 148,940 and $ 496,638 during the fiscal years ended december 31 , 2011 and may 31 , 2011 , respectively . the arrangement was approved by a favorable vote of ith 's shareholders at a special meeting held on august 12 , 2010. the following table shows the results related to discontinued operations for the year ended may 31 , 2011. replace_table_token_19_th the transfer of the assets is summarized in the table below : august 25 , 2010 story_separator_special_tag annual minimum royalty payments ) . off-balance sheet arrangements the company does not have any off balance sheet arrangements . 52 critical accounting policies mineral properties and exploration and evaluation expenditures the company 's mineral project is currently in the exploration and evaluation phase . mineral property acquisition costs are capitalized when incurred . mineral property exploration costs are expensed as incurred . at such time that the company determines that a mineral property can be economically developed , subsequent mineral property expenses will be capitalized during the development of such property . the company assesses interests in exploration properties for impairment when facts and circumstances suggest that the carrying amount of an asset may exceed its recoverable amount . impairment analysis includes assessment of the following circumstances : a significant decrease in the market price of a long-lived asset or asset group ; a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition ; a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group , including an adverse action or assessment by a regulator ; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group ; 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 or asset group ; a current expectation that , more likely than not , a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life . the term more likely than not refers to a level of likelihood that is more than 50 % . the company 's assessment of impairment related to its capitalized acquisition costs at december 31 , 2013 was based on estimated undiscounted future cash flows expected to result from the use and eventual disposition of these assets . the assessment took into account the company 's expectation for the price of gold as well as the probability of achieving certain opportunities to enhance the economics of the livengood gold project as set out in the company 's feasibility study issued in september 2013. based on this assessment , no impairments were recorded at december 31 , 2013. derivative derivative financial liabilities include the company 's future contingent payment valued using estimated future gold prices . derivatives are initially recognized at their fair value on the date the derivative contract is entered into and are subsequently re-measured at their fair value at each reporting period with changes in the fair value recognized in profit and loss . stock-based compensation the company follows the provisions of financial accounting standards board ( “fasb” ) accounting standards codification section 718 “compensation - stock compensation” , which establishes accounting for equity based compensation awards to be accounted for using the fair value method . the company uses the black-scholes option pricing model to determine the

as part of the company 's reduced spending plan , ith reduced its full-time staff by approximately 30 % effective january 1 , 2014. the company will require significant additional financing to continue its operations ( including general and administrative expenses ) in connection with post-feasibility study activities at the livengood gold project and the development of any mine that may be determined to be built at the livengood gold project , and there is no assurance that the company will be able to obtain the additional financing required on acceptable terms , if at all . in addition , any significant delays in the issuance of required permits for the ongoing work at the livengood gold project , or unexpected results in connection with the ongoing work , could result in the company being required to raise additional funds to advance permitting efforts . the company 's review of its financing options includes pursuing a future strategic alliance to assist in further development , permitting and future construction costs . despite the company 's success to date in raising significant equity financing to fund its operations , there is 51 significant uncertainty that the company will be able to secure any additional financing in the current or future equity markets . see “risk factors — we will require additional financing to fund exploration and , if warranted , development and production . failure to obtain additional financing could have a material adverse effect on our financial condition and results of operation and could cast uncertainty on our ability to continue as a going concern.” the quantity of funds to be raised and the terms of any proposed equity financing that may be undertaken will be negotiated by management as opportunities to raise funds arise . specific plans related to the use of proceeds will be devised once financing has been completed and management knows what funds will be available for these purposes . due to this uncertainty , if the company is unable to secure additional financing , it may be required to reduce all discretionary activities at livengood to preserve its working capital to fund anticipated non-discretionary expenditures beyond the 2014 fiscal year . other than cash held by its subsidiaries for their immediate operating needs in alaska and colorado , all of the company 's cash reserves are on deposit with a major canadian chartered bank . the company does not believe that the credit , liquidity or market

the functions performed by the nominating and governance committee include : · recommending to the board of directors , individuals for appointment or election as directors ; · recommending to the board of directors individuals for appointment to vacancies on any committee of the board of directors ; · recommending to the board of directors regarding any changes to the size of the board of directors or any committee ; · reporting to the board of directors on a regular basis ; and · performing any other duties or responsibilities expressly delegated to the committee by the board of directors relating to board or committee members . candidates for director should have certain minimum qualifications , including the ability to understand basic financial statements , being over 21 years of age , having relevant business experience ( taking into account the business experience of the other directors ) , and having high moral character . the committee retains the right to modify these minimum qualifications from time to time . in evaluating an incumbent director whose term of office is set to expire , the nominating and governance committee reviews such director 's overall service to the company during such director 's term , including the number of meetings attended , level of participation , quality of performance , and any transactions with the company engaged in by such director during his term . 79 when selecting a new director nominee , the committee first determines whether the nominee must be independent for nasdaq purposes or whether the candidate must qualify as an “audit committee financial expert.” the committee then uses its network of contacts to compile a list of potential candidates , but may also engage , if it deems appropriate , a professional search firm to assist in the identification of qualified director candidates . the committee also will consider nominees recommended by our stockholders . the nominating and governance committee does not distinguish between nominees recommended by our stockholders and those recommended by other parties . the committee evaluates the suitability of potential nominees , taking into account the current board composition , including expertise , diversity and the balance of inside and independent directors . the nominating and governance committee endeavors to establish a diversity of background and experience in a number of areas of core competency , including business judgment , management , accounting , finance , knowledge of our industry , strategic vision , research and development and other areas relevant to our business . in considering any person recommended by one of our stockholders , the committee will look for the same qualifications that it looks for in any other person that it is considering for a position on the board of directors . the nominating and governance committee operates under a formal charter that governs its duties and standards of performance . a copy of the charter is available on our website at www.heatbio.com . science and technology committee our science and technology committee is comprised of dr. monahan , and dr. prendergast , each of whom is deemed to be independent in accordance with the nasdaq definition of independence . this committee is responsible for examining our direction with respect to our research and development and our technology initiatives . the science and technology committee operates pursuant to a written charter adopted by the board of directors , which is available on the company 's website at www.heatbio.com . the charter describes the nature and scope of responsibilities of the science and technology committee . strategic planning committee our strategic planning committee is comprised of dr. monahan , mr. smith , and dr. prendergast , each of whom is deemed to be independent in accordance with the nasdaq definition of independence . this committee oversees our strategic planning process , aids in identifying and evaluating corporate development opportunities and developing criteria to use in evaluating potential strategic opportunities . the strategic planning committee operates pursuant to a written charter adopted by the board of directors , which is available on the company 's website at www.heatbio.com . the charter describes the nature and scope of responsibilities of the strategic planning committee . board leadership structure mr. wolf , the company 's chief executive officer , also serves as chairman of the board . we have a separate , independent lead director . although we do not have a formal policy addressing the topic , we believe that when the chairman of the board is an employee of the company or otherwise not independent , it is important to have a separate lead director , who is an independent director . dr. prendergast serves as the lead director . in that role , he presides over the board 's executive sessions , during which our independent directors meet without management , and he serves as the principle liaison between management and the independent directors of the board . the lead director also : · confers with the chairman of the board regarding board meeting agenda ; · chairs meetings of the independent directors including , where appropriate , setting the agenda and briefing the chairman of the board on issues discussed during the meeting ; · oversees the annual performance evaluation of the ceo ; · consults with the nominating and governance committee and the chairman of the board regarding assignment of board members to various committees ; and · performs such other functions as the board may require . 80 we believe the combination of mr. wolf as our chairman of the board and an independent director as our lead director is an effective structure for our company . the division of duties and the additional avenues of communication between the board and our management associated with this structure provide the basis for the proper functioning of our board and its oversight of management . story_separator_special_tag we do not expect the adoption of this guidance will have a material impact on our consolidated financial statements or related footnote disclosures . 66 in april 2015 , the fasb issued asu no . 2015-03 , interest - imputation of interest ( subtopic 835-30 ) : simplifying the presentation of debt issuance costs ( asu 2015-03 ) . asu 2015-03 revises subtopic 835-30 to require that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability , consistent with the presentation of debt discounts . prior to the amendments , debt issuance costs were presented as a deferred charge ( i.e . , an asset ) on the balance sheet . the asu provides examples illustrating the balance sheet presentation of notes net of their related discounts and debt issuance costs . further , the amendments require the amortization of debt issuance costs to be reported as interest expense . similarly , debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt . the amendments are effective for public business entities for fiscal years beginning after december 15 , 2015 , and interim periods within those fiscal years . the adoption of asu 2015-03 on january 1 , 2016 resulted in the reclassification of $ 22,707 from non-current assets to an offset to long-term debt as of december 31 , 2015. there was no debt at december 31 , 2016. in august 2014 , fasb issued asu no . 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” ) . the amendments in asu 2014-15 are intended to define management 's responsibility to evaluate whether there is substantial doubt about an organization 's ability to continue as a going concern and to provide related footnote disclosures if there is substantial doubt about its ability to continue as a going concern . the pronouncement is effective for annual periods ending after december 15 , 2016 with early adoption permitted . the company adopted this standard in 2016. the impact of the adoption of the standard is included in note 2 to our consolidated financial statements . in may 2014 , the fasb issued asu no . 2014-09 , revenue from contracts with customers ( asu 2014-09 ) , which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers . the asu will replace most existing revenue recognition guidance in u.s. gaap when it becomes effective . in july 2015 , the fasb voted to defer the effective date of the new standard until fiscal years beginning after december 15 , 2017 with early application permitted for fiscal years beginning after december 15 , 2016. with the deferral , the new standard is effective for the company on january 1 , 2018 , with early adoption permitted one year prior . the standard permits the use of either the retrospective or cumulative effect transition method . due to limited sales , we have evaluated our contracts and have concluded that the impact of adopting the standard will have no material impact on our consolidated financial statements and related disclosures . results of operations year ended december 31 , 2016 and 2015 revenues for the year ended december 31 , 2016 , we recognized $ 341,643 in research funding revenue pursuant to our exclusive license agreement with shattuck labs , inc. ( “shattuck” ) pursuant to which shattuck acquired the rights to take over the research and development of certain preclinical assets . this revenue was for research and development services , which include labor and supplies , provided to shattuck . there was no revenue for the year ended december 31 , 2015. prior to 2015 , revenues were comprised of grant awards . we continue our efforts to secure future non-dilutive grant funding to subsidize ongoing research and development costs . operating expenses total operating expenses for the year ended december 31 , 2016 decreased 36 % to $ 13.4 million compared to $ 21.0 million for the year ended december 31 , 2015. operating expenses are primarily comprised of research and development and general and administrative expenses . for the year ended december 31 , 2016 , research and development expenses were $ 9.3 million and general and administrative expenses were $ 4.1 million as compared to research and development expenses of $ 16.7 million and general and administrative expenses of approximately $ 4.3 million for the year ended december 31 , 2015. for the year ended december 31 , 2016 , research and development expenses represented approximately 69 % of operating expenses and general and administrative expenses represented approximately 31 % of operating expenses . for the year ended december 31 , 2015 , research and development expenses represented approximately 79 % of operating expenses and general and administrative expenses represented approximately 21 % of operating expenses . 67 research and development expense research and development expenses decreased by 44 % to $ 9.3 million for the year ended december 31 , 2016 compared to $ 16.7 million for the year ended december 31 , 2015 as we have focused our resources primarily on our two nmibc and nsclc trials . the $ 7.4 million decrease consists of the following : · $ 6.4 million decrease in clinical program expenses of which approximately $ 5.1 million of the decrease is related to hs-110 and approximately $ 1.8 million of the decrease is related to hs-410 due to reductions in chemistry manufacturing and control ( “cmc” ) activities and trial enrollment costs , offset by a $ 0.3 million increase in cmc expenses for compact ™ and $ 0.2 million increase for lab supplies and other costs ; ·

to meet our financing needs , we are considering multiple alternatives , including , but not limited to , current and additional equity financings , which we expect will include sales of common stock through the fbr sales agreement , debt financings and or funding from partnerships or collaborations . there can be no assurance that we will be able to meet the requirements for use of the fbr sales agreement , especially in light of the fact that we are subject to the smaller reporting company requirements , or to complete any such transactions on acceptable terms or otherwise . even if we meet the requirements to use the fbr sales agreement , we may not raise enough money through the use of the fbr sales agreement and may sell securities through any one of the methods mentioned above at various times or at the same time as we use the fbr sales agreement . if we are unable to obtain the necessary capital , we will scale back our operations , license or sell our assets , seek to be acquired by another entity and or cease operations . we are continually evaluating various cost-saving measures in light of our cash requirements in order to focus our resources on our product candidates and in april 2016 , we implemented a cost-savings plan and focused corporate strategy involving reductions in headcount and reduction in cost structure to scale the organization appropriately for its current goals . we may take additional action to reduce our immediate cash expenditures , including re-visiting our headcount , offering vendors equity in lieu of the cash due to them and otherwise limiting our other research expenses , in order to direct our resources primarily to enable the completion of our phase 2 clinical trial of hs-410 for the treatment of non-muscle invasive bladder cancer ( nmibc ) and to advance the phase 2 trial evaluating hs-110 in combination with nivolumab , a bristol-myers squibb pd-1 checkpoint inhibitor , for the treatment of non-small cell lung cancer ( nsclc ) . as of december 31 , 2016 , we had $ 7.8 million in cash and cash equivalents . cash flows operating activities . the use of cash in all periods resulted primarily from our net losses adjusted for non-cash charges and changes in the components of working capital . the significant decrease in cash used in operating activities for the year ended december 31 , 2016

as the last day of each billing cycle rarely coincides with the end of the reporting period for usage-based services such as postpaid wireless , we estimate service revenues earned but not yet billed . our estimates are based upon historical usage , and we adjust these estimates during the period in which actual usage is determinable , typically in the following reporting period . revenue from prepaid wireless service , which is collected in advance , is not recognized upon billing or cash receipt , but rather is deferred until the service is provided . wireless handset revenue and the related activation revenue are recognized when the products are delivered to and accepted by the customer , as this is considered to be a separate earnings process from the sale of wireless services . wireless equipment costs are also recognized upon handset sale and are generally in excess of the related handset and activation revenue . revenue from termination fees are recognized when collection is deemed reasonably assured . it services and hardware — professional services , including product installations , are recognized as the service is provided . maintenance services on telephony equipment are deferred and recognized ratably over the term of the underlying customer contract , generally one to four years . equipment revenue is recognized upon the completion of our contractual obligations , such as shipment , delivery , installation , or customer acceptance . installation service revenue is generally recognized when installation is complete . the revenue recognition guidance in asc 605 is applied . we have vendor specific evidence of selling price for installation services , as we sell these services on a standalone basis . 72 form 10-k part ii cincinnati bell inc. the company is a reseller of it and telephony equipment . for these transactions , we consider the gross versus net revenue recording criteria of asc 605. based on this criteria , these equipment revenues and associated costs have generally been recorded on a gross basis , rather than recording the revenues net of the associated costs . vendor rebates are earned on certain equipment sales . if the rebate is earned and the amount is determinable , we recognize the rebate as an offset to cost of products sold . data center colocation — data center colocation rentals are generally billed monthly in advance and some contracts have escalating payments over the non-cancellable term of the contract . if rents escalate without the lessee gaining access to or control over additional leased space or power , and the lessee takes possession of , or controls the physical use of the property ( including all contractually committed power ) at the beginning of the lease term , the rental payments by the lessee are recognized as revenue on a straight-line basis over the term of the lease . if rents escalate because the lessee gains access to and control over additional leased space or power , revenue is recognized in proportion to the additional space or power in the years that the lessee has control over the use of the additional space or power . the excess of revenue recognized over amounts contractually due is recognized in other current and noncurrent assets in the accompanying consolidated balance sheets . some of our leases are structured on a full-service gross basis in which the customer pays a fixed amount for both colocation rental and power . other leases provide that the customer will be billed for power based upon actual usage which is separately metered . in both cases , this revenue is presented on a gross basis in the accompanying consolidated statements of operations . power is generally billed one month in arrears and an estimate of this revenue is accrued in the month that the associated costs are incurred . we generally are not entitled to reimbursements for real estate taxes , insurance or other operating expenses . revenue is recognized for services or products that are deemed separate units of accounting . when a customer makes an advance payment which is not deemed a separate unit of accounting , deferred revenue is recorded . this revenue is recognized ratably over the expected term of the customer relationship , unless the pattern of service suggests otherwise . certain customer contracts require specified levels of service or performance . if we fail to meet these service levels , our customers may be eligible to receive credits on their contractual billings . these credits are recognized against revenue when an event occurs that gives rise to such credits . advertising expenses — costs related to advertising are expensed as incurred . advertising costs were $ 16.6 million , $ 18.4 million , and $ 22.0 million in 2012 , 2011 , and 2010 , respectively . legal expenses — in the normal course of business , the company is involved in various claims and legal proceedings . legal costs incurred in connection with loss contingencies are expensed as incurred . legal claim accruals are recorded once determined to be both probable and estimable . income , operating , and regulatory taxes income taxes — the company and its subsidiaries file income tax returns in the u.s. federal jurisdiction as well as various foreign , state and local jurisdictions . the provision for income taxes is based upon income in the consolidated financial statements , rather than amounts reported on the income tax return . the income tax provision consists of an amount for taxes currently payable and an amount for tax consequences deferred to future periods . deferred investment tax credits are amortized as a reduction of the provision for income taxes over the estimated useful lives of the related property , plant and equipment . deferred income taxes are provided for temporary differences between financial statement and income tax assets and liabilities . deferred income taxes are recalculated annually at rates then in effect . story_separator_special_tag assets placed in service in connection with the expansion of our fioptics network drove the higher depreciation expense . restructuring charges were $ 3.5 million in 2012 compared to $ 7.7 million in the prior year . the company continues to manage and reduce the legacy cost structure of this business . employee separation costs amounted to $ 3.2 million and $ 3.5 million in 2012 and 2011 , respectively , while lease abandonment costs were $ 0.3 million in 2012 and $ 2.5 million in 2011 . contract termination costs were $ 1.7 million in 2011 but none were incurred in 2012. during 2011 , curtailment losses of $ 4.2 million were recognized from the reduction of future pension benefits for certain bargained employees , and a gain of $ 8.4 million was recognized from the sale of substantially all of the assets associated with our home security monitoring business . during 2012 , the segment recognized a gain on sale of assets of $ 1.8 million primarily from the sale of copper cabling that was no longer in use . 33 form 10-k part ii cincinnati bell inc. asset impairments of $ 0.5 million in 2012 relate primarily to the write-off of an out-of-territory fiber network . the impairment losses in 2011 of $ 1.0 million were related to abandoned leasehold improvements on vacated office space and the write-down to fair value of certain assets that were held for sale . capital expenditures capital expenditures are incurred to maintain the wireline network , expand the company 's fioptics product suite , and upgrade its dsl network . capital expenditures were $ 114.2 million in 2012 , an increase of $ 1.6 million compared to 2011 . as of december 31 , 2012 , the company 's fioptics service passed 205,000 homes and businesses , representing approximately 26 % of the greater cincinnati market . the company intends to expand its fioptics footprint over the next few years . 2011 compared to 2010 revenues voice local service revenue was $ 280.3 million in 2011 , a decrease of 10 % compared to the prior period . the decrease in revenue was driven by access line loss from the prior year . access lines decreased by 52,800 , or 8 % compared to 2010 . data revenue was $ 291.5 million in 2011 , up $ 8.2 million compared to the same period in 2010 . revenue from fioptics high-speed internet service increased to $ 15.8 million in 2011 , up from $ 10.2 million in the prior year . as of december 31 , 2011 , the company had 39,300 high-speed internet fioptics subscribers , which is an increase of 12,100 subscribers , or 44 % , from the december 31 , 2010 total of 27,200 subscribers . these increases were primarily offset by lower dsl revenue resulting from a 5 % decline in subscribers from 2010. long distance and voip revenue was $ 111.3 million in 2011 , an increase of $ 6.9 million , or 7 % , compared to 2010 . the increase was primarily attributable to an increase in voip and audio conferencing services provided to additional subscribers . this increase was partially offset by a $ 4.1 million decrease in long distance residential revenue . as of december 31 , 2011 , long distance subscriber lines were 447,400 , a 7 % decline from 2010 . entertainment revenue was $ 26.6 million in 2011 , up $ 9.9 million , or 59 % , compared to 2010 . fioptics entertainment subscribers totaled 39,600 at december 31 , 2011 , an increase of 41 % compared to december 31 , 2010 . the increase in entertainment subscribers is related to expansions of the fioptics network and high customer demand . other revenue was $ 22.4 million for 2011 , down $ 3.8 million from 2010 . the sale of the company 's home security monitoring business decreased revenues by $ 2.1 million in 2011. fewer wire installation jobs also contributed to lower revenues compared to the prior year . costs and expenses cost of services and products was $ 270.0 million , an increase of $ 13.2 million , or 5 % , compared to 2010 . payroll related costs and contract services were up $ 6.6 million and $ 2.7 million , respectively , primarily due to overtime associated with the start-up of fioptics iptv , as well as higher volumes of repair work resulting from record rainfall in our operating territory . network costs also increased by $ 6.0 million in 2011 compared to 2010 as a result of growth in audio conferencing , voip , and fioptics services . sg & a expenses were $ 126.7 million , a decrease of $ 13.4 million , or 10 % , compared to 2010. payroll and other employee related costs were down $ 10.1 million due to lower headcount . contract services and advertising costs were down $ 2.8 million and $ 1.5 million , respectively , compared to 2010 . partially offsetting these favorable variances were higher legal and consulting costs and non-employee commissions in 2011 . depreciation and amortization was $ 102.4 million in 2011 , down $ 1.5 million compared to 2010 . restructuring charges in 2011 were $ 7.7 million , a decrease of $ 0.5 million compared to 2010. employee separation costs were $ 3.5 million in 2011 and $ 4.9 million in 2010 . lease abandonment costs were $ 2.5 million and $ 3.3 million in 2011 and 2010 , respectively . contract termination costs were $ 1.7 million in 2011 , with no such costs incurred in the prior year . in 2011 , curtailment losses of $ 4.2 million were recognized from the reduction of future pension benefits for certain bargained employees . the sale of substantially all the assets associated with our home security business in 2011 resulted in a gain of $ 8.4 million

during 2010 , the company issued $ 2.1 billion of debt consisting of $ 625 million of 8 3 / 4 % senior subordinated notes due 2018 , a $ 760 million secured term loan credit facility due 2017 , and $ 775 million of 8 3 / 8 % senior notes due 2020. the net proceeds from these borrowings were used to redeem the $ 560 million of outstanding 8 3 / 8 % senior subordinated notes due 2014 , repay the company 's previous credit facility of $ 204.3 million , fund the acquisition of cyrus networks , repay the secured term loan facility totaling $ 756.2 million and to pay debt issuance fees and expenses . the company paid $ 42.6 million of debt issuance costs related to the various issuances of these instruments in 2010. also , during 2010 , the company repaid $ 85.9 million of borrowings under the receivables facility , repurchased approximately 4 million shares of common stock for $ 10.0 million , and paid $ 10.4 million of preferred stock dividends . future operating trends wireline the company expects to increase revenues from its fioptics suite of products , high speed data transmission , managed voice and data , cloud computing and professional services . fioptics is a fiber-based product offering that provides one of the fastest internet speeds in the company 's operating territory , as well as entertainment and voice services . at year end 2012 , the company passed and can provide fioptics service to 205,000 homes and businesses , or approximately 26 % of greater cincinnati , and had 55,100 entertainment , 56,800 high-speed internet , and 40,800 voice fioptics customers . the penetration rate of this product is approximately 28 % of the total units that have been passed with the fioptics network . management plans to continue its investment in fioptics and expects to pass an additional 72,000 units by year end 2013 . 44 form 10-k part ii cincinnati bell inc. wireline legacy products with declining future revenues include local voice , dsl , and long distance . in 2012 , wireline suffered a 7 % loss of ilec access lines and a 7 % loss of long distance subscribers as additional customers elected to use wireless communication in lieu of the traditional local service , purchased service from other providers , or service was disconnected due to non-payment . dsl subscribers decreased from 218,000 in 2011 to 202,600 in 2012 and are projected to continue to decline as customers switch to higher speed services ,

as the corporation has not elected to subsequently measure any class of servicing assets under the fair value measurement method , the corporation follows the amortization method . msrs are amortized in proportion to and over the period of estimated net servicing income , and assessed for impairment at each reporting date . msrs are carried at the lower of the initial capitalized amount , net of accumulated amortization , or estimated fair value , on the consolidated balance sheets . the corporation periodically evaluates its msrs asset for impairment . impairment is assessed based on fair value at each reporting date using estimated prepayment speeds of the underlying mortgage loans serviced and stratifications based on the risk characteristics of the underlying loans ( predominantly loan type and note interest rate ) . as mortgage interest rates fall , prepayment speeds are usually faster and the value of the msrs asset generally decreases , requiring additional valuation reserve . conversely , as mortgage interest rates rise , prepayment speeds are usually slower and the value of the msrs asset generally increases , requiring less valuation reserve . a valuation allowance is established , through a charge to earnings , to the extent the amortized cost of the msrs exceeds the estimated fair value by stratification . if it is later determined that all or a portion of the temporary impairment no longer exists for a stratification , the valuation is reduced through a recovery to earnings . an other-than-temporary impairment ( i.e . , recoverability is considered remote when considering interest rates and loan pay off activity ) is recognized as a write-down of the msrs asset and the related valuation allowance ( to the extent a valuation allowance is available ) and then against earnings . a direct write-down permanently reduces the carrying value of the msrs asset and valuation allowance , precluding subsequent recoveries . see note 5 for additional information on msrs . income taxes amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws . deferred income taxes , which arise principally from temporary differences between the amounts reported in the financial statements and the tax bases of assets and liabilities , are included in the amounts provided for income taxes . in assessing the realizability of dtas , management considers whether it is more likely than not that some portion or all of the dtas will not be realized . the ultimate realization of dtas is dependent upon the generation of 90 future taxable income and tax planning strategies which will create taxable income during the periods in which those temporary differences become deductible . management considers the scheduled reversal of deferred tax liabilities , the amount of taxes paid in available carryback years , projected future taxable income , and , if necessary , tax planning strategies in making this assessment . the corporation files a consolidated federal income tax return and separate or combined state income tax returns . accordingly , amounts equal to tax benefits of those subsidiaries having taxable federal or state losses or credits are offset by other subsidiaries that incur federal or state tax liabilities . it is the corporation 's policy to provide for uncertainty in income taxes as a part of income tax expense based upon management 's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities . at december 31 , 2020 and 2019 , the corporation believes it has appropriately accounted for any unrecognized tax benefits . to the extent the corporation prevails in matters for which a liability for an unrecognized tax benefit was established or is required to pay amounts in excess of the liability established , the corporation 's effective tax rate in a given financial statement period may be impacted . see note 13 for additional information on income taxes . derivative and hedging activities derivative instruments , including derivative instruments embedded in other contracts , are carried at fair value on the consolidated balance sheets with changes in the fair value recorded to earnings or accumulated other comprehensive income , as appropriate . on the date the derivative contract is entered into , the corporation designates the derivative as a fair value hedge ( i.e . , a hedge of the fair value of a recognized asset or liability ) , a cash flow hedge ( i.e . , a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability ) , or a free-standing derivative instrument . for a derivative designated as a fair value hedge , the changes in the fair value of the derivative instrument and the changes in the fair value of the hedged asset or liability are recognized in current period earnings as an increase or decrease to the carrying value of the hedged item on the balance sheet and in the related income statement account . amounts within accumulated other comprehensive income are reclassified into earnings in the period the hedged item affects earnings . for a derivative designated as a free-standing derivative instrument , changes in fair value are reported in current period earnings . the free-standing derivative instruments included : interest rate risk management , commodity hedging , and foreign currency exchange solutions . the corporation is exposed to counterparty credit risk , which is the risk that counterparties to the derivative contracts do not perform as expected . if a counterparty fails to perform , our counterparty credit risk is equal to the amount reported as a derivative asset on our balance sheet . the corporation uses master netting arrangements to mitigate counterparty credit risk in derivative transactions . story_separator_special_tag , private mortgage insurance ) of 80 % . the residential mortgage portfolio is focused primarily in the corporation 's three-state branch footprint , with approximately 88 % of the outstanding loan balances in the corporation 's branch footprint at december 31 , 2020. the majority of the on balance sheet residential mortgage portfolio consists of libor or constant maturity treasury based , hybrid , adjustable rate mortgage loans with initial fixed-rate terms of 3 , 5 , 7 , or 10 years . the rates on these mortgages adjust based upon the movement in the underlying index which is then added to a margin and rounded to the nearest 0.125 % . that result is then subjected to any periodic caps to produce the borrower 's interest rate for the coming term . in 2014 , the financial stability oversight council and financial stability board raised concerns about the reliability and robustness of libor and called for the development of alternative interest rate benchmarks . the arrc , through authority from the federal reserve , have selected the sofr as the alternative rate and developed a paced transition plan which addresses the risk that libor may not exist beyond the end of 2021. there are still many components of this plan which have not been 54 fully decided or implemented in the industry . as a result , the corporation is reaching out to certain borrowers offering an opportunity to refinance or modify their loans to avoid uncertainty around the libor transition . performing borrowers can modify or refinance to a fixed interest rate or an adjustable rate mortgage tied to the one-year treasury adjusted to a constant maturity of one-year with an appropriate margin . this provides the bank and borrower with greater certainty around the loan structure . the corporation generally retains certain fixed-rate residential real estate mortgages in its loan portfolio , including retail and private banking jumbo mortgages and cra-related mortgages . as part of management 's historical practice of originating and servicing residential mortgage loans , generally the corporation 's 30 year , agency conforming , fixed-rate residential real estate mortgage loans have been sold in the secondary market with servicing rights retained . subject to management 's analysis of the current interest rate environment , among other market factors , the corporation may choose to retain 30 year mortgage loan production on its balance sheet . see section loans for additional information on loans . the corporation 's underwriting and risk-based pricing guidelines for residential mortgage loans include minimum borrower fico score and maximum ltv of the property securing the loan . residential mortgage products generally are underwritten using fhlmc and fnma secondary marketing guidelines . home equity : home equity consists of both home equity lines of credit and closed-end home equity loans . the corporation 's credit risk monitoring guidelines for home equity is based on an ongoing review of loan delinquency status , as well as a quarterly review of fico score deterioration and property devaluation . the corporation does not routinely obtain appraisals on performing loans to update ltv ratios after origination ; however , the corporation monitors the local housing markets by reviewing the various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring process . for junior lien home equity loans , the corporation is unable to track the performance of the first lien loan if it does not own or service the first lien loan . however , the corporation obtains a refreshed fico score on a quarterly basis and monitors this as part of its assessment of the home equity portfolio . the corporation 's underwriting and risk-based pricing guidelines for home equity lines and loans consist of a combination of both borrower fico score and the original cumulative ltv against the property securing the loan . during the second quarter of 2020 , in the volatile economic environment , the corporation reduced its exposure by reducing its maximum ltv on home equity lines of credit from 90 % to 80 % , among other changes , while maintaining the minimum acceptable fico score at 670. the corporation 's current home equity line of credit offering is priced based on floating rate indices and generally allows 10 years of interest-only payments followed by a 20-year amortization of the outstanding balance . during the third quarter of 2020 , based upon an analysis of market conditions and uncertainty around the timing and scope of the anticipated economic recovery , the corporation temporarily suspended new applications for home equity lines of credit . the corporation has significantly curtailed its offerings of fixed-rate , closed-end home equity loans . the loans in the corporation 's portfolio generally have an original term of 20 years with principal and interest payments required . see section loans for additional information on loans . other consumer : other consumer consists of student loans , short-term personal installment loans , and credit cards . the corporation had $ 118 million and $ 136 million of student loans at december 31 , 2020 and december 31 , 2019 , respectively , the majority of which are government guaranteed . as a result of the covid-19 pandemic and the passage of the cares act , government guaranteed student loans had been placed on an administrative forbearance through september 30 , 2020. subsequently , on august 8 , 2020 , president trump directed the secretary of education to continue to suspend loan payments , stop collections , and waive interest on u.s. department of education held federal student loans through december 31 , 2020. on december 4 , 2020 , the relief measures were extended through january 31 , 2021 , and on january 20 , 2021 , president biden extended the federal student loan relief through september 30 , 2021. credit risk for non-government guaranteed student loans , short-term personal installment loans , and credit cards is

equity issuances by the parent company ; the corporation has filed a shelf registration statement with the sec under which the parent company may , from time to time , offer shares of the corporation 's common stock in connection with acquisitions of businesses , assets , or securities of other companies . other issuances by the parent company ; the corporation also has filed a universal shelf registration statement with the sec , under which the parent company may offer the following securities , either separately or in units : debt securities , preferred stock , depositary shares , common stock , and warrants . bank issuances ; the bank may also issue institutional cds , network transaction deposits , and brokered cds . global bank note program issuances ; the bank has implemented the program pursuant to which it may from time to time offer up to $ 2.0 billion aggregate principal amount of its unsecured senior and subordinated notes . in august 2018 , the bank issued $ 300 million of senior notes , due august 2021 , and callable july 2021. credit ratings relate to the corporation 's ability to issue debt securities and the cost to borrow money , and should not be viewed as an indication of future stock performance or a recommendation to buy , sell , or hold securities . adverse changes in these factors could result in a negative change in credit ratings and impact not only the ability to raise funds in the capital markets but also the cost of these funds . the credit ratings of the parent company and the bank at december 31 , 2020 are displayed below : table 26 credit ratings moody 's s & p < span style= '' color : # 000000 ; font-family : 'times new

fair value of financial instruments asc 820 , fair value measurement ( “ asc 820 ” ) , establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data ( observable inputs ) and the company 's own assumptions ( unobservable inputs ) . observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the company . unobservable inputs are inputs that reflect the company 's assumptions about the inputs that market participants would use in pricing the asset or liability , and are developed based on the best information available in the circumstances . asc 820 identifies fair value as the exchange price , or exit price , representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants . as a basis for considering market participant assumptions in fair value measurements , asc 820 establishes a three‑tier fair value hierarchy that distinguishes between the following : · level 1 inputs are quoted prices ( unadjusted ) in active markets for identical assets or liabilities ; · level 2 inputs are inputs other than quoted prices included within level 1 that are observable for the asset or liability , either directly or indirectly ; and 113 · level 3 inputs are unobservable inputs that reflect the company 's own assumptions about the assumptions market participants would use in pricing the asset or liability . financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement . to the extent that the valuation is based on models or inputs that are less observable or unobservable in the market , the determination of fair value requires more judgment . accordingly , the degree of judgment exercised by the company in determining fair value is greatest for instruments categorized in level 3. a financial instrument 's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement . there were no level 3 assets or liabilities as of december 31 , 2019 or 2018. the carrying values reported in the company 's balance sheets for cash and cash equivalents , restricted cash , accounts receivable , accounts payable , and accrued expenses are reasonable estimates of their fair values due to the short‑term nature of these items . property and equipment property and equipment are stated at cost . maintenance and repairs are charged to expense as incurred . additions , improvements and replacements are capitalized . depreciation of property and equipment is provided for by the straight‑line method over the estimated useful lives of the related assets . the estimated useful lives of property and equipment are as follows : description estimated useful life computer software and equipment 3 years office equipment and furniture 5 years laboratory equipment 5 years leasehold improvements lesser of the estimated useful life or term of the lease construction-in-progress reflects property and equipment yet to be placed in service . impairment of long‑lived assets long‑lived assets consist of property and equipment . long‑lived assets to be held and used are tested for recoverability whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable . if the sum of the estimated future undiscounted cash flows expected to result from the use and eventual disposition of an asset is less than the carrying amount of the asset group , an impairment loss is recognized . measurement of an impairment loss is based on the fair value of the asset group . the company has not recorded any impairment losses on long‑lived assets for the years ended december 31 , 2019 and 2018. research and development research and development expenses are comprised of costs incurred in performing research and development activities , including salaries and benefits , facilities costs , overhead costs , depreciation , contract services and other related costs . research and development costs are expensed to operations as the related obligation is incurred . the company has entered into various research and development contracts with research institutions , clinical research organizations , clinical manufacturing organizations and other companies . these agreements are generally cancelable , and related payments are recorded as research and development expenses as incurred . payments for these activities are based on the terms of the individual agreements , which may differ from the pattern of costs incurred , and are reflected on the balance sheet as prepaid or accrued expenses . the company records accruals for estimated ongoing research costs . when evaluating the adequacy of the accrued liabilities , the company analyzes progress of the studies , including the phase or completion of events , invoices received and contracted costs . significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period . actual results could differ from the company 's estimates . the company 's historical accrual estimates have not been materially different from the actual costs . 114 convertible preferred stock the company has applied the guidance in asc 480‑10‑s99‑3a , sec staff announcement : classification and measurement of redeemable securities and has therefore classified the series a‑1 , series a‑2 and series b convertible preferred stock ( note 10 ) as mezzanine equity . story_separator_special_tag to the extent that 99 there are material differences between these estimates and actual results , our financial condition or operating results would be affected . we base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances , and we evaluate these estimates on an ongoing basis . while our significant accounting policies are described in more detail in the notes to our financial statements appearing in this annual report on form 10-k , we believe the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements . research and development as part of the process of preparing our financial statements , we are required to estimate our accrued research and development expenses . this process involves reviewing open contracts and purchase orders , communicating with our personnel to identify services that have been performed on our behalf , and estimating the level of service performed and the associated costs incurred for the services when we have not yet been invoiced or otherwise notified of the actual costs . the majority of our service providers invoice us in arrears for services performed , on a pre‑determined schedule or when contractual milestones are met ; however , some require advanced payments . we make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time . examples of estimated accrued research and development expenses include fees paid to : · cros in connection with performing research and development services on our behalf ; · investigative sites or other providers in connection with clinical studies ; · vendors in connection with preclinical development activities ; and · vendors related to product manufacturing , development , and distribution of clinical supplies . we base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple cros that conduct and manage clinical studies on our behalf . the financial terms of these agreements are subject to negotiation , vary from contract to contract and may result in uneven payment flows . there may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense . payments under some of these contracts depend on factors such as the successful enrollment of patients and the completion of clinical study milestones . in accruing service fees , we estimate the time period over which services will be performed , enrollment of patients , number of sites activated and level of effort to be expended in each period . if the actual timing of the performance of services or the level of effort varies from our estimate , we adjust the accrual or amount of prepaid expenses accordingly . although we do not expect our estimates to be materially different from amounts actually incurred , our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting expenses that are too high or too low in any particular period . to date , we have not made any material adjustments to our prior estimates of accrued or prepaid research and development expenses . stock‑based compensation we measure stock‑based awards granted to our directors and employees at fair value on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period , which is generally the vesting period of the respective award . generally , we issue stock options and restricted stock with only service‑based vesting conditions and record the expense for these awards using the straight‑line method . we have historically granted stock options with exercise prices equivalent to the fair value of our common stock as of the date of grant . the fair value of our common stock is determined based on the quoted market price of our common stock . prior to our ipo , the estimates in determining our stock‑based compensation valuations were highly complex and subjective , and since our stock was not publicly traded , our board of directors estimated the fair value of our common stock at various dates , with input from management , considering our then most recently available third-party valuations of common stock 100 and its assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant . the grant date fair value of our options is determined using the black‑scholes option‑pricing model . the expected term of our options has been determined utilizing the “ simplified method ” for awards that qualify as “ plain‑vanilla ” options . the historical volatility of share values of publicly traded companies within the biotechnology industry are used as a surrogate for the expected volatility of our common stock . the risk‑free interest rate is determined by reference to the u.s. treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award . expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future . jobs act under section 107 ( b ) of the jumpstart our business startups act of 2012 , or the jobs act , an “ emerging growth company ” can delay the adoption of new or revised accounting standards until such time as those standards would apply to private companies . we intend to avail of this exemption . there are other exemptions and reduced reporting requirements provided by the jobs act that we are currently evaluating . for example , as an “ emerging growth

outlook based on our research and development plans and our timing expectations related to the progress of our programs , we expect that our cash and cash equivalents as of december 31 , 2019 , when combined with the proceeds received from our follow-on offering discussed above , will be sufficient to fund our operations for at least the next 12 months . we have based this estimate on assumptions that may prove to be wrong , and we could utilize our available capital resources sooner than we currently expect . we do not expect to generate revenue from product sales unless and until we successfully complete clinical development and obtain regulatory approval for a product candidate , which we expect will take a number of years and the outcome of which is uncertain , or enter into collaborative agreements with third parties , the timing of which is largely beyond our control and may never occur . we will continue to require additional capital to develop our product candidates and fund operations for the foreseeable future , which we may obtain through one or more equity offerings , debt financings , or other third-party funding , including potential strategic alliances and licensing or collaboration arrangements . we may , however , be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all , including as a result of covid-19 . our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our current product candidates , or any additional product candidates , if developed . the amount and timing of our future funding requirements will depend on many factors , including the effects of covid-19 , our ability to successfully enroll subjects in a timely way for the clinical studies and the pace and results of our preclinical and clinical development efforts . we can not assure you that we will ever be profitable or generate positive cash flow from operating activities . cash flows the following table summarizes our sources and uses of cash for each of the periods presented ( in thousands ) : replace_table_token_3_th operating activities during the year ended december 31 , 2019 , our cash used in operating activities was primarily due to our net loss of $ 57.4 million , partially offset by non‑cash charges of $ 9.5 million , consisting primarily of $ 9.0 million in stock‑based 98 compensation and $ 0.5 million in depreciation and amortization . net cash used in changes in our operating

( 5 ) for fiscal year 2019 the amount of $ 9,434 includes $ 3,636 payout for unused vacation and $ 5,797 relates to the company 's matching contributions to the 401 ( k ) plan . for fiscal year 2019 the amount of $ 4,450 relates to the company 's matching contributions to the 401 ( k ) plan . ( 6 ) mr. phebus joined the company on january 15 , 2018 to serve as the company 's vice president of engineering . mr. phebus resigned from his position as vice president of engineering effective november 30 , 2018 . ( 7 ) for fiscal 2019 the amount $ 37,590 includes $ 32,185 for relocation expenses and $ 5,405 for unused vacation payout . for fiscal year 2018 the amount of $ 17,815 is relocation expenses in accordance with mr. phebus ' employment agreement . ( 8 ) dr. mekhiche resigned from his position as executive vice president , engineering and operations effective august 8 , 2017 . ( 9 ) for fiscal year 2018 the amount of $ 33,712 includes $ 31,612 payout for unused vacation and $ 2,100 relates to the company 's matching contributions to the 401 ( k ) plan . for fiscal year 2017 the amount of $ 20,086 includes $ 12,886 payout for unused vacation and $ 7,200 relates to the company 's matching contributions to the 401 ( k ) plan . employment agreements george h. kirby iii - president , chief executive officer and director under an agreement entered into on december 29 , 2014 , mr. kirby was entitled to an initial annual base salary of $ 360,000 subject to adjustment upon annual review by our board of directors , was subsequently increased to $ 381,600 on may 1 , 2016 and to $ 391,140 on may 1 , 2018. mr. kirby is also eligible to earn discretionary incentive bonuses and incentive compensation . the company also reimbursed mr. kirby for his eligible relocation costs . upon the termination of his employment other than for cause , other than as a result of a change of control , or if he terminates his employment for good reason ( as such terms are defined in his employment agreement ) , mr. kirby has the right to receive severance payments . if such termination occurs , mr. kirby will receive twelve months of his base salary then in effect . pursuant to this agreement , mr. kirby is prohibited from competing with us and soliciting our customers , prospective customers or employees during the term of his employment and for a period of one year after the termination or expiration of his employment . 58 matthew t. shafer - vice president , chief financial officer and treasurer on august 23 , 2016 , and in connection with his hiring by the company , mr. shafer entered into an employment agreement with the company , to be effective on september 7 , 2016 ( the “ shafer employment agreement ” ) . under the shafer employment agreement , mr. shafer was entitled to an initial annual base salary of $ 220,000 subject to adjustment upon annual review by the company 's board of directors , was subsequently increased to $ 250,000 on october 18 , 2017 and to $ 253,125 on may 1 , 2018. mr. shafer is also eligible to earn discretionary incentive bonuses and incentive compensation . he is also entitled to participate in all company employee benefit plans . upon the termination of his employment other than for cause , or if he terminates his employment for good reason ( as such terms are defined in the shafer employment agreement ) , mr. shafer has the right to receive severance payments . if such termination occurs before the end of six months of service , he receives no severance . if such termination occurs after completing six months of service , mr. shafer will receive six months of his base salary . pursuant to this agreement , mr. shafer is also subject to covenants regarding confidentiality , non-competition and non-solicitation during and after the term of his employment . 59 stock option and other compensation plans 2006 stock incentive plan our 2006 stock incentive plan was adopted by our board of directors on december 7 , 2006 , was approved by our stockholders on january 12 , 2007 and became effective on april 24 , 2007. the 2006 stock incentive plan provides for the grant of incentive stock options , non-statutory stock options , restricted stock awards and other stock-unit awards . on october 2 , 2009 , an amendment to the 2006 stock incentive plan was approved , increasing the aggregate number of shares authorized for issuance by 42,500 shares to 82,661 shares . in 2010 , our board of directors approved amending and restating the 2006 stock incentive plan to make certain adjustments , including imposing minimum performance periods for performance awards and minimum vesting periods for time-based awards , a requirement that we obtain stockholder approval prior to certain option and stock appreciation right repricing actions , and limiting the situations in which vesting periods may be waived or accelerated . this amendment and restatement did not require the approval of our stockholders . on october 2 , 2013 , a further amendment to the 2006 stock incentive plan was approved by our stockholders , increasing the aggregate number of shares authorized for issuance by an additional 40,000 shares to 122,661. our employees , officers , directors , consultants and advisors are eligible to receive awards under our 2006 stock incentive plan ; however , incentive stock options may only be granted to our employees . the maximum number of shares of common stock with respect to which awards may be granted to any participant under our 2006 stock incentive plan is 10,000 per calendar year . story_separator_special_tag if we are unable to obtain commercial relationships or cost-sharing arrangements , we may be forced to curtail our development expenses and scope to reduce our overall expenses . we recently narrowed our development focus to the pb3 to drive toward commercialization of that product and to reduce our overall expenses . the following table provides information regarding the breakdown of our revenues by customer for fiscal years 2019 and 2018 : replace_table_token_2_th we currently focus our sales and marketing efforts on parts of north america , europe , south america and asia . the following table shows the percentage of our revenues by geographical location of our customers for fiscal 2019 and 2018 : replace_table_token_3_th foreign exchange loss we transact business in various countries and have exposure to fluctuations in foreign currency exchange rates . foreign exchange gains and losses arise in the translation of foreign-denominated assets and liabilities , which may result in realized and unrealized gains or losses from exchange rate fluctuations . since we conduct our business in us dollars and our functional currency is the us dollar , our main foreign exchange exposure , if any , results from changes in the exchange rate between the us dollar and the british pounds sterling , the euro and the australian dollar . due to the macroeconomic pressures in certain european countries , foreign exchange rates may become more volatile in the future . 43 we maintain cash accounts that are denominated in british pounds sterling , euros and australian dollars . these foreign denominated accounts had a balance of $ 0.7 million as of april 30 , 2019 and $ 1.0 million as of april 30 , 2018 , compared to our total cash , cash equivalents , and restricted cash balances of $ 17.2 million as of april 30 , 2019 and $ 12.3 million as of april 30 , 2018. these foreign currency balances are translated at each month end to our functional currency , the us dollar , and any resulting gain or loss is recognized in our results of operations . in addition , a portion of our operations is conducted through our subsidiaries in countries other than the united states , specifically ocean power technologies ltd. in the united kingdom , the functional currency of which is the british pound sterling , and ocean power technologies ( australasia ) pty ltd. in australia , the functional currency of which is the australian dollar . both of these subsidiaries have foreign exchange exposure that results from changes in the exchange rate between their functional currency and other foreign currencies in which they conduct business . we currently do not hedge our exchange rate exposure . however , we assess the anticipated foreign currency working capital requirements and capital asset acquisitions of our foreign operations and attempt to maintain a portion of our cash and cash equivalents denominated in foreign currencies sufficient to satisfy these anticipated requirements . we also assess the need and cost to utilize financial instruments to hedge currency exposures on an ongoing basis and may hedge against exchange rate exposure in the future . results of operations this section should be read in conjunction with the discussion below under “ - liquidity and capital resources . ” fiscal years ended april 30 , 2019 and 2018 the following table contains selected statement of operations information , which serves as the basis of the discussion of our results of operations for the years ended april 30 , 2019 and 2018 : replace_table_token_4_th 44 revenues revenues for the fiscal years ended april 30 , 2019 and 2018 were approximately $ 0.6 million and $ 0.5 million , respectively . the increase of approximately $ 0.1 million or 24 % over 2018 was attributable to more new contracts signed and started at the end of fiscal year 2018 and beginning of fiscal year 2019 relating to eni , pmo , egp , and the u.s. navy sbir grant . the mes and onr contracts were completed in the first half of fiscal 2018. cost of revenues cost of revenues consists primarily of incurred material , labor and manufacturing overhead expenses , such as engineering expense , equipment depreciation and maintenance and facility related expenses , and includes the cost of powerbuoy® parts and services supplied by third-party suppliers . cost of revenues also includes powerbuoy® system delivery and deployment expenses and may include anticipated losses at completion on certain contracts . cost of revenues for the fiscal years ended april 30 , 2019 and 2018 were approximately $ 1.3 million and $ 0.8 million , respectively . the increase of approximately $ 0.5 million , or 71 % , over 2018 mostly due to higher upfront spending and material costs on the new customer contracts in fiscal 2019 as compared to the same period in the fiscal 2018. during fiscal 2018 , all of projects were completed in the first half of the year and spending on the new customer contracts commenced in the fourth quarter , 2018. engineering and product development costs our engineering and product development costs consist of salaries and other personnel-related costs and the costs of products , materials and outside services used in our product development and unfunded research activities . our engineering and product development costs relate primarily to our efforts to increase the power output and reliability of our powerbuoy® system , and the development of new products , product applications and complementary technologies . we expense all our engineering and product development costs as incurred . engineering and product development costs during the fiscal year ended april 30 , 2019 were $ 5.0 million as compared to $ 4.3 million for fiscal year 2018. the increase of $ 0.7 million , or 15 % , is due to higher spending on new products being developed , pb3 powerbuoy® builds for future customer contracts , and higher personnel costs as compared to the same period

we expect to devote substantial resources to continue our development efforts for our powerbuoys® and to expand our sales , marketing and manufacturing programs associated with the planned commercialization of the powerbuoys® . our future capital requirements will depend on a number of factors , including but not limited to : ● our ability to commercialize our powerbuoys® , and achieve and sustain profitability ; ● our continued development of our proprietary technologies , and expected continued use of cash from operating activities unless or until we achieve positive cash flow from the commercialization of our products and services ; ● our ability to obtain additional funding , as and if needed which will be subject to a number of factors , including market conditions , and our operating performance ; ● our estimates regarding expenses , future revenues and capital requirements ; ● the adequacy of our cash balances and our need for additional financings ; ● our ability to develop and manufacture a commercially viable powerbuoy® product ; ● our ability to successfully develop and market new products , such as a hybrid powerbuoy® or subsea battery solutions ; ● that we will be successful in our efforts to commercialize our powerbuoy® or the timetable upon which commercialization can be achieved , if at all ; ● our ability to identify and penetrate markets for our powerbuoys® and our wave energy technology ; ● < td style= '' font :

if a loan was on nonaccrual status at the time of the tdr , the loan will remain on nonaccrual status following the modification and may be returned to accrual status based on the policy for returning loans to accrual status as noted above . as of december 31 , 2016 and 2015 , the corporation had $ 5.83 million and $ 5.34 million , respectively , of loans classified as tdrs . allowance for loan losses : the allowance for loan losses is established through charges to earnings in the form of a provision for loan losses . loan losses are charged against the allowance for loan losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral , if collateral dependent , when : · management believes that the collectibility of the principal is unlikely regardless of delinquency status . · the loan is a consumer loan and is 120 days past due . · the loan is a non-consumer loan and is 180 days past due , unless the loan is well secured and recovery is probable . · the borrower is in bankruptcy , unless the debt has been reaffirmed , is well secured and recovery is probable . subsequent recoveries , if any , are credited to the allowance . the allowance represents an amount that , in management 's judgment , will be adequate to absorb probable losses inherent in the loan portfolio . management 's judgment in determining the level of the allowance is based on evaluations of the collectibility of loans while taking into consideration such factors as trends in delinquencies and charge-offs , changes in the nature and volume of the loan portfolio , current economic conditions that may affect a borrower 's ability to repay and the value of collateral , overall portfolio quality and review of specific potential losses . this evaluation is inherently subjective , as it requires estimates that are susceptible to significant revision as more information becomes available . the evaluation also considers the following risk characteristics of each loan portfolio : · real estate residential mortgage loans carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral . · real estate construction loans carry risks that the project will not be finished according to schedule , the project will not be finished according to budget and the value of the collateral may , at any point in time , be less than the principal amount of the loan . construction loans also bear the risk that the general contractor , who may or may not be a loan customer , may be unable to finish the construction project as planned because of financial pressure unrelated to the project . · commercial , financial and agricultural loans carry risks associated with the successful operation of a business or a real estate project , in addition to other risks associated with the ownership of real estate , because the repayment of these loans may be dependent upon the profitability and cash flows of the business or project . in addition , there is risk associated with the value of collateral other than real estate which may depreciate over time and can not be appraised with as much precision . · consumer loans carry risks associated with the continued credit-worthiness of the borrower and the value of the collateral ( e.g . , rapidly-depreciating assets such as automobiles ) , or lack thereof . consumer loans 77 are more likely than real estate loans to be immediately adversely affected by job loss , divorce , illness or personal bankruptcy . · equity lines of credit carry risks associated with the continued credit-worthiness of the borrower and changes in the value of the collateral . · consumer finance loans carry risks associated with the continued credit-worthiness of borrowers who may be unable to meet the credit standards imposed by most traditional automobile financing sources and the value of rapidly-depreciating collateral . the allowance consists of specific and general components . the specific component relates to loans that are classified as impaired , and is established when the discounted cash flows ( or collateral value or observable market price ) of the impaired loan is lower than the carrying value of that loan . for collateral dependent loans , an updated appraisal will be ordered if a current one is not on file . appraisals are performed by independent third-party appraisers with relevant industry experience . adjustments to the appraised value may be made based on recent sales of similar properties or general market conditions when appropriate . the general component covers non-classified loans and those loans classified as substandard or special mention that are not impaired . the general component is based on historical loss experience adjusted for qualitative factors , such as current economic conditions , including current home sales and foreclosures , unemployment rates and retail sales . relative to non-classified loans , non-impaired classified loans are assigned a higher allowance factor which increases with the severity of classification . the characteristics of the loan ratings are as follows : · pass rated loans are to persons or business entities with an acceptable financial condition , appropriate collateral margins , appropriate cash flow to service the existing loan , and an appropriate leverage ratio . the borrower has paid all obligations as agreed and it is expected that this type of payment history will continue . when necessary , acceptable personal guarantors support the loan . · special mention loans have a specifically identified weakness in the borrower 's operations and in the borrower 's ability to generate positive cash flow on a sustained basis . the borrower 's recent payment history may be characterized by late payments . the corporation 's risk exposure is mitigated by collateral supporting the loan . story_separator_special_tag as a result , yields on loans and investments acquired from cvb increased and the cost of certificates of deposit decreased , the benefits of which were partially offset by the ( 1 ) amortization of the core deposit intangible and ( 2 ) higher depreciation expense associated with the buildings acquired in the cvb merger . the aggregate net accretion attributable to these fair value accounting adjustments was $ 1.2 million , net of taxes for the year ended december 31 , 2016 , compared to $ 1.3 million , net of taxes for the year ended december 31 , 2015 . 33 the retail banking segment 's nonperforming assets were $ 4.4 million at december 31 , 2016 , compared to $ 7.1 million at december 31 , 2015. nonperforming assets at december 31 , 2016 included $ 4.2 million in nonaccrual loans , compared to $ 6.2 million at december 31 , 2015 , and $ 195,000 in oreo , compared to $ 942,000 at december 31 , 2015. the decrease in nonaccrual loans during 2016 was primarily due to loan payoffs and transfers to oreo . the oreo decrease during 2016 was primarily due to the sale of several oreo properties and a shorter holding period for properties transferred to oreo during 2016. management believes the current level of the allowance for loan losses is adequate to absorb probable losses inherent in the loan portfolio , based on the relevant history of charge-offs and recoveries , current economic conditions , overall portfolio quality , review of specific criticized loans and other factors analyzed by management . if loan concentrations within the bank 's loan portfolio result in higher credit risk or if economic conditions decline , a higher loan loss allowance may be warranted in future periods , which may require a provision for loan losses . mortgage banking : the mortgage banking segment reported net income of $ 1.7 million for the year ended december 31 , 2016 , compared to $ 677,000 for the year ended december 31 , 2015. the improvement in net income of the mortgage banking segment for 2016 resulted from an increase in the volume of mortgage loans originated and sold during 2016 , compared to 2015. loan volume increased due to successful strategic initiatives and benefited from favorable housing markets for both resale and new construction , as well as favorable interest rates . the higher loan volume resulted in higher gains on sales of loans and higher ancillary loan origination fees . these revenue increases were partially offset by higher employee compensation and loan production expenses , as well as costs associated with the mortgage banking segment 's expansion into chesapeake , virginia and the outer banks of north carolina , which began in the fourth quarter of 2016. loan origination volume for the year ended december 31 , 2016 increased to $ 674.3 million from $ 549.3 million for the year ended december 31 , 2015. the amount of loan originations during 2016 for refinancings and home purchases were $ 152.7 million and $ 521.6 million , respectively , compared to $ 104.4 million and $ 444.9 million , respectively , during 2015. consumer finance : the consumer finance segment reported net income of $ 4.5 million for the year ended december 31 , 2016 , compared to $ 7.2 million for the year ended december 31 , 2015. the decline in net income for 2016 , compared to 2015 , was principally due to an increase in the provision for loan losses from $ 15.5 million in 2015 to $ 18.0 million in 2016 because of higher net charge-offs , as discussed below , and loan growth . partially offsetting the effect of the higher provision for loan losses was the effect on net interest income of the $ 13.7 million increase in average loans during 2016 , as compared to 2015. the increase in average loans was attributable to the purchase of a consumer finance loan portfolio at the end of the second quarter of 2015 , along with organic loan growth during 2016. c & f finance has implemented a scorecard model that is providing underwriting efficiencies and generating more competitive pricing , which , along with personnel additions in certain major markets , led to an increase in loan originations during 2016. the results of the consumer finance segment included an increase of $ 2.6 million in the provision for loan losses from 2015 to 2016. the net charge-off ratio for 2016 was 5.59 percent , compared to 5.50 percent for 2015. loans charged off increased during 2016 because of economic and competitive factors affecting non-prime consumer finance customers . the allowance for loan losses to total loans increased to 8.40 percent at december 31 , 2016 , compared to 8.21 percent at december 31 , 2015. management believes that the current allowance for loan losses is adequate to absorb probable losses in the loan portfolio . if factors influencing the consumer finance segment result in a higher net charge-off ratio in the future , c & f finance company may need to increase the level of its allowance for loan losses , which could negatively affect future earnings . other and eliminations : the other segment , which principally includes the corporation 's holding company operations and wealth management subsidiary , reported an aggregate net loss of $ 975,000 for the year ended december 31 , 2016 , compared to a net loss of $ 955,000 for the year ended december 31 , 2015. the higher loss during 2016 was due to lower earnings at the corporation 's wealth management subsidiary due to stock market volatility during 2016 , as well as costs associated with the wealth management subsidiary 's addition of a new wealth management group in williamsburg , virginia . we expect the addition of this wealth management group will increase revenue in future periods . other segments also included

capital resources the assessment of capital adequacy depends on such factors as asset quality , liquidity , earnings performance , and changing competitive conditions and economic forces . we regularly review the adequacy of the corporation 's capital . we maintain a structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses . while we will continue to look for opportunities to invest capital in profitable growth , share purchases are another tool that facilitates improving shareholder return , as measured by roe and earnings per share . changes to the regulatory capital framework that were approved in july 2013 by the federal banking agencies ( the basel iii final rule ) began applying to the corporation and the bank on january 1 , 2015 subject to limited phase-in periods . in addition to the primary indicators relied on by bank regulators in measuring capital position prior to 2015 ( i.e. , tier 1 capital , total risk-based capital and leverage ratios ) , banking regulators now measure the common equity tier 1 capital ( cet1 ) ratio when evaluating an institution 's capital position . refer to item 1 . “ business ” under the heading “ regulation and supervision ” for an overview of the basel iii final rules . the corporation 's cet1 to total risk-weighted assets ratio was 10.5 percent at december 31 , 2016 , compared with 11.2 percent at december 31 , 2015. the corporation 's tier 1 capital to risk-weighted assets ratio was 12.6 percent at december 31 , 2016 , compared with 13.7 percent at december 31 , 2015. the total capital to risk-weighted assets ratio was 13.9 percent at december 31 , 2016 , compared with 65 15.0 percent at december 31 , 2015. the tier 1 leverage ratio was 10.3 percent at december 31 , 2016 , compared with 10.0 percent at december 31 , 2015. these ratios are in excess of the mandated minimum requirements . these ratios include the trust preferred securities issued by the corporation in december 2007 and july 2005 , as well as issued by cvbk in 2003 and assumed by the corporation in march 2014. in addition to the regulatory risk-based capital amounts presented above , the corporation and the bank must maintain a capital conservation buffer of additional total capital and cet1 as required by the basel iii final rule . the buffer began applying to the corporation and the

for those subsidiaries whose functional currency is not the u.s. dollar , assets and liabilities are translated into u.s. dollars equivalents at the exchange rate in effect on the balance sheet date and revenues and expenses are translated into u.s. dollars using the average exchange rate over the period . resulting currency translation adjustments are recorded in accumulated other comprehensive loss in the consolidated balance sheet . the company recorded net gains resulting from foreign exchange translation of $ 3.6 million for the fiscal year ended september 30 , 2020 , net losses resulting from foreign exchange translation of $ 3.5 million for the fiscal year ended september 30 , 2019 , and net losses resulting from foreign exchange translation of $ 0.7 million for the fiscal year ended september 30 , 2018. use of estimates the preparation of financial statements in conformity with gaap requires management to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenue , expenses , deferred taxes , and related disclosure of contingent assets and liabilities . on an ongoing basis , management reviews its estimates based upon currently available information . actual results could differ materially from those estimates . these estimates include , but are not limited to , assessing the collectability of accounts receivable , estimation of the value of stock-based compensation awards , fair value of assets and liabilities acquired , impairment of goodwill , useful lives of intangible assets , standalone selling price related to revenue recognition , contingent consideration , and income taxes . reclassifications certain reclassifications have been made to prior year presentation to conform to the current year presentation . prior to fiscal 2020 , the company had included its product management costs in selling and marketing expenses . due to certain personnel and functional responsibility changes in this function , the company has reclassified these costs to research and development expenses . to conform to the current period 's presentation , prior year 's financials have been reclassified accordingly . the company has determined that this reclassification was not material to previously reported financial statements . product management costs were $ 3.0 million , $ 2.9 million , and $ 2.4 million in fiscal years 2020 , 2019 , and 2018 , respectively . revenue recognition the company recognizes revenue in accordance with fasb asc topic 606 , revenue from contracts with customers , and its related amendments ( collectively known as “ asc 606 ” ) . asc 606 outlines a single comprehensive model to use in accounting for revenue arising from contracts with customers . the core principle , involving a five-step process , of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services . the company generates revenue primarily from the delivery of licenses and related services to customers ( for both on premise and transactional software as a service ( “ saas ” ) products ) , as well as the delivery of hardware and professional services . revenue is measured based on consideration specified in a contract with a customer . the company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer which may be at a point in time or over time . see note 2 of the consolidated financial statements for additional details . contract assets and liabilities the company recognizes revenue when control of the license is transferred to the customer . the company records a contract asset when the revenue is recognized prior to the date payments become due . contract assets that are expected to be paid within one year are recorded in current assets on the consolidated balance sheets . all other contract assets are recorded in other non-current assets in the consolidated balance sheet . contract liabilities consist of deferred revenue . when the performance obligation is expected to be fulfilled within one year , the deferred revenue is recorded in current liabilities in the consolidated balance sheet . when the performance obligation is expected to be fulfilled beyond one year , the deferred revenue is recorded in non-current liabilities in the consolidated balance sheet . the company reports net contract asset or liability positions on a customer-by-customer basis at the end of each reporting period . contract costs the company incurs incremental costs to obtain a contract , consisting primarily of sales commissions incurred only if a contract is obtained . when the commission rate for a customer renewal is not commensurate with the commission rate for a new contract , the commission is capitalized if expected to be recovered . such costs are capitalized and amortized using a portfolio approach consistent with the pattern of transfer of the good or service to which the asset relates . contract costs are recorded in other current and non-current assets in the consolidated balance sheets . f-9 net income ( loss ) per share the company calculates net income ( loss ) per share in accordance with fasb asc topic 260 , earnings per share . basic net income ( loss ) per share is based on the weighted-average number of common shares outstanding during the period . diluted net income ( loss ) per share also gives effect to all potentially dilutive securities outstanding during the period , such as restricted stock units ( “ rsus ” ) , stock options , and employee stock purchase plan ( `` espp `` ) shares , if dilutive . story_separator_special_tag 29 research and development expenses research and development expenses include payroll , employee benefits , stock-based compensation , third-party contractor expenses , and other headcount-related costs associated with software engineering and mobile image capture science . research and development expenses increased $ 3.8 million , or 21 % , to $ 21.9 million in 2019 compared to $ 18.1 million in 2018. as a percentage of revenue , research and development expenses decreased to 26 % in 2019 from 29 % in 2018. the increase in research and development expenses is primarily due to additional research and development costs associated with the a2ia acquisition of $ 2.5 million and higher personnel-related costs of $ 0.7 million resulting from our increased headcount in 2019 compared to 2018. general and administrative expenses general and administrative expenses include payroll , employee benefits , stock-based compensation , and other headcount-related costs associated with finance , legal , administration and information technology functions , as well as third-party legal , accounting , and other administrative costs . general and administrative expenses increased $ 2.8 million , or 16 % , to $ 19.9 million in 2019 compared to $ 17.1 million in 2018. as a percentage of revenue , general and administrative expenses decreased to 23 % in 2019 from 27 % in 2018. the increase in general and administrative expenses is primarily due to additional general and administrative costs associated with the a2ia acquisition of $ 1.8 million , higher personnel-related costs of $ 1.5 million resulting from our increased headcount in 2019 compared to 2018 , third-party costs associated with our strategic process of $ 1.2 million , and higher litigation costs of $ 0.8 million in 2019 compared to 2018 , partially offset by a decrease in executive transition costs of $ 1.5 million in 2019 compared to 2018 and a $ 1.0 million insurance settlement received in 2019. acquisition-related costs and expenses acquisition-related costs and expenses include amortization of intangible assets , expenses recorded due to changes in the fair value of contingent consideration , stock-based compensation , and other costs associated with acquisitions . acquisition-related costs and expenses decreased $ 0.7 million , or 8 % , to $ 7.6 million in 2019 compared to $ 8.2 million in 2018. as a percentage of revenue , acquisition-related costs and expenses decreased to 9 % in 2019 from 13 % in 2018. the decrease in acquisition-related costs and expenses is primarily due to a decrease in expenses associated with changes in the fair value of acquisition-related contingent consideration of $ 1.6 million in 2019 compared to 2018 , $ 1.1 million of legal and other integration costs associated with the icar and a2ia acquisitions which both occurred in 2018 , and $ 1.0 million of executive separation costs associated with the a2ia acquisition which was incurred in 2018. these decreases are partially offset by an increase expense related to the amortization of intangible assets associated with the a2ia acquisition of $ 3.0 million in 2019 compared to 2018. restructuring costs restructuring costs consist of employee severance obligations and other related costs . restructuring costs were $ 3.1 million in 2019 and related to the restructuring plan implemented in june 2019. other income ( expense ) , net other income ( expense ) , net includes interest income net of amortization and net realized gains or losses on our marketable securities portfolio , foreign currency transactional gains or losses , and interest expense . other income ( expense ) , net increased $ 1.5 million , to a net income of $ 0.6 million in 2019 compared to a net expense of $ 0.9 million in 2018 , primarily due to a $ 1.3 million foreign currency exchange remeasurement loss on the euro for the acquisition of a2ia in 2018 as well as higher interest income earned on our cash balances in 2019 compared to 2018. income tax benefit ( provision ) the income tax benefit for 2019 was $ 3.3 million compared to an income tax provision of $ 3.1 million in 2018. the income tax benefit for 2019 is primarily due to changes in our deferred tax benefit of $ 3.2 million related to excess tax benefits from the exercise of stock options , as well as additional research and development credits associated with the provision to return true-up . the income tax provision for 2018 is primarily due to $ 4.9 million of tax expense related to the revaluation of our u.s. deferred tax assets and liabilities as a result of the enactment of the tax cuts and jobs act of 2017 ( the “ tax cuts and jobs act ” ) . the impact of the tax cuts and jobs act reduced the federal corporate tax rate from 35 % to 21 % . this expense was partially offset by an income tax benefit related to our net loss before income taxes for the year ( see note 8 in the consolidated financial statements ) . story_separator_special_tag roman ' , sans-serif ; font-size:10pt ; font-weight:400 ; line-height:120 % `` > on december 13 , 2019 , our board of directors authorized and approved a share repurchase program for up to $ 10.0 million of the currently outstanding shares of our common stock . the share repurchase program will expire december 16 , 2020. the purchases under the share repurchase program may be made from time to time in the open market , through block trades , 10b5-1 trading plans , privately negotiated transactions or otherwise , in each case , in accordance with applicable laws , rules , and regulations . the timing and actual number of the shares repurchased will depend on a variety of factors including price , market conditions and corporate and regulatory requirements . we intend to fund the share repurchases from cash on hand . the share repurchase program does not commit us to repurchase shares of our common stock and it may

rights agreement on october 23 , 2018 , we entered into the rights agreement and issued a dividend of one preferred share purchase right ( a “ right ” ) for each share of common stock payable on november 2 , 2018 to the stockholders of record of such shares on that date . each right entitles the registered holder , under certain circumstances , to purchase from us one one-thousandth of a share of series b junior preferred stock , par value $ 0.001 per share ( the “ preferred shares ” ) , of the company , at a price of $ 35.00 per one one-thousandth of a preferred share represented by a right , subject to adjustment . the description and terms of the rights are set forth in the rights agreement . the rights are not exercisable until the distribution date ( as defined in the rights agreement ) . until a right is exercised , the holder thereof , as such , will have no rights as a stockholder of the company , including , without limitation , the right to vote or to receive dividends . at any time prior to the time any person becomes an acquiring person ( each , as defined in the rights agreement ) , the board may redeem the rights in whole , but not in part , at a price of $ 0.0001 per right ( the “ redemption price ” ) . the redemption of the rights may be made effective at such time , on such basis and with such conditions as the board in its sole discretion may establish . immediately upon any redemption of the rights , the right to exercise the rights will terminate and the only right of the holders of rights will be to receive the redemption price . the rights will expire on the earlier of ( i ) the close of business on october 22 , 2021 , ( ii ) the time at which the rights are redeemed , and ( iii ) the time at which the rights are exchanged . 31 share repurchase program < span style= '' color : # 000000 ; font-family : 'times new

the board of directors concluded that a relationship with a shareholder of the company in and of itself does not impair messrs. bateman , rubin and svider 's independent judgment in connection with their duties and responsibilities as directors of the company . the board also determined that mr. colligan , who serves as a director of an entity that sells products to the company , is independent . as a result , all members of our board of directors other than mr. austrian , due to his ceo position , have been determined to be independent directors . this determination by our board of directors is based upon an individual evaluation of each of our directors , his or her employment or board of directors affiliations , and a determination that the independent director has no business relationship with our company other than his or her service on our board of directors . none of our directors serves as an executive officer of a charitable organization to which we made contributions during 2011. board of directors ' role in risk oversight our board of directors has an active role in overseeing management of the company 's risks , directly and through its committees . the board oversees a formal enterprise-wide approach to risk management , designed to support the achievement of organizational objectives , including strategic objectives , to improve long-term organizational performance and enhance shareholder value . a fundamental part of risk management is not only understanding the risks a company faces and what steps management is taking to manage those risks , but also understanding what level of risk is appropriate for the company . the involvement of the full board of directors in setting the company 's business strategy is a key part of its assessment of management 's appetite for risk and also a determination of what constitutes an appropriate level of risk for the company . the full board of directors participates in an annual enterprise risk management assessment , which is led by the company 's chief compliance officer . in the company 's continuing risk assessment process , risk is assessed quarterly by a steering committee ( the “steering committee” ) , comprised of members of management representing our business units and corporate staff . this steering committee focuses on identifying and evaluating company-wide risks in four primary areas : financial risk , legal/compliance risk , operational/strategic risk and compensation risk . this company-wide risk portfolio is then presented to and evaluated by the operating committee , made up of our chief executive officer , executive vice president & chief financial officer , business unit presidents , executive vice president & chief marketing officer , executive vice president & chief merchandising officer , executive vice president of human resources , and our executive vice president & general counsel 46 ( collectively , the “operating committee” ) . the operating committee membership was expanded to include the executive vice president & chief marketing officer and executive vice president & chief merchandising officer positions in order to further strengthen the risk oversight function in these areas of the company 's business . the findings are then presented to the board of directors . in addition to the presentation made to the full board of directors at least once a year , the audit committee receives quarterly updates on certain risk areas the board has identified for focus and the independent directors periodically discuss risk management during executive sessions without management present . while the board of directors has the ultimate oversight responsibility for the risk management process , various committees of the board of directors also have responsibility for risk management . in particular , the audit committee focuses on assessing and mitigating financial risk , including internal controls , and receives an annual risk assessment report from the company 's internal auditors . as part of its annual executive compensation review in setting executive compensation , the compensation committee reviews the company 's management of executive compensation and retention risks and strives to create incentives that encourage a level of risk-taking behavior consistent with the company 's business strategy . the audit and compensation committees annually have a joint meeting to review incentive compensation plans for a risk assessment . the corporate governance and nominating committee assists the board in fulfilling its oversight responsibilities with respect to the management of risks associated with board organization , membership and structure , succession planning for our directors and named executive officers ( “neos” ) , and corporate governance . from time to time the company may engage in purchase and sale transactions for office products with bc partners or its portfolio companies . these transactions are conducted on an arms length basis and are not material to bc partners . audit committee the company has a separately-designated standing audit committee composed of the following members : thomas j. colligan who is the chair of the audit committee , brenda j. gaines , myra m. hart , and kathleen mason . all members of the audit committee have been determined by the board of directors to be independent directors and financially literate . in addition , our board of directors has determined that the following members of our audit committee qualify as “audit committee financial experts” within the meaning of the applicable regulations of the sec : thomas j. colligan , brenda j. gaines and kathleen mason . section 16 ( a ) beneficial ownership reporting compliance section 16 ( a ) of the securities exchange act of 1934 requires our directors , executive officers and persons who own more than 10 % of office depot 's common stock to file reports of their holdings and transactions of office depot common stock with the sec and the nyse . story_separator_special_tag on february 17 , 2012 , the company announced commencement of a cash tender offer to purchase up to $ 250.0 million aggregate principal amount of its outstanding 6.25 % senior notes due 2013. the tender offer is scheduled to expire at midnight , new york city time , on march 16 , 2012 , unless extended or earlier terminated . on february 24 , 2012 , the company , together with certain of its european subsidiaries , as borrowers and certain of its domestic subsidiaries as guarantors , entered into an amendment ( the “amendment” ) to the amended credit agreement with the lenders party thereto , jpmorgan chase bank , n.a . , london branch , as european administrative agent and european collateral agent , jpmorgan chase bank , n.a . , as administrative agent and 28 us collateral agent , bank of america , n.a . , as syndication agent and citibank , n.a . and wells fargo bank , n.a . , as documentation agents . the amendment amends the amended credit agreement to provide the company flexibility with regard to certain restrictive covenants in any possible future refinancings and other transactions . in addition , the amendment releases one of the company 's subsidiaries from its guarantee obligations under the amended credit agreement . the foregoing description of the amendment which describes the primary changes to the amended credit agreement , does not purport to be complete and is subject to and qualified in its entirety by reference to the full text of the amendment , which is filed as an exhibit to this form 10-k. also on february 24 , 2012 , the company entered into a two-year committed factoring arrangement that allows us to sell certain foreign trade receivables to a third party which provides up to approximately $ 75 million additional liquidity , depending on the level of eligible receivables and currency exchange rates . as of february 27 , 2012 , no trade receivables had been sold under this agreement . story_separator_special_tag style= `` border-collapse : collapse `` width= `` 100 % `` > ( 3 ) the present value of these obligations are included on our consolidated balance sheets . see note e of the notes to consolidated financial statements for additional information about our capital lease obligations . ( 4 ) the operating lease obligations presented reflect future minimum lease payments due under the non-cancelable portions of our leases as of december 31 , 2011. our operating lease obligations are described in note g of the notes to consolidated financial statements . in the table above , sublease income is distributed by period . ( 5 ) purchase obligations include all commitments to purchase goods or services of either a fixed or minimum quantity that are enforceable and legally binding on us that meet any of the following criteria : ( 1 ) they are non-cancelable , ( 2 ) we would incur a penalty if the agreement was cancelled , or ( 3 ) we must make specified minimum payments even if we do not take delivery of the contracted products or services . if the obligation is non-cancelable , the entire value of the contract is included in the table . if the obligation is cancelable , but we would incur a penalty if cancelled , the dollar amount of the penalty is included as a purchase obligation . if we can unilaterally terminate the agreement simply by providing a certain number of days notice or by paying a termination fee , we have included the amount of the termination fee or the amount that would be paid over the “notice period.” as of december 31 , 2011 , purchase obligations include television , radio and newspaper advertising , sports sponsorship commitments , telephone services , certain fixed assets and software licenses and service and maintenance contracts for information technology . contracts that can be unilaterally terminated without a penalty have not been included . ( 6 ) our consolidated balance sheet as of december 31 , 2011 includes $ 452 million classified as “deferred income taxes and other long-term liabilities.” this caption primarily consists of our net long-term deferred income taxes , the unfunded portion of our pension plan , deferred lease credits , liabilities under our deferred compensation plans , and accruals for uncertain tax positions . these liabilities have been excluded from the above table as the timing and or the amount of any cash payment is uncertain . see note f of the notes to consolidated financial statements for additional information regarding our deferred tax positions and accruals for uncertain tax positions and note h for a discussion of our employee benefit plans , including the pension plan and the deferred compensation plan . in addition to the above , we have outstanding letters of credit totaling $ 111.4 million at december 31 , 2011. critical accounting policies our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states of america . preparation of these statements requires management to make judgments and estimates . some accounting policies have a significant impact on amounts reported in these financial statements . a summary of significant accounting policies can be found in note a of the notes to consolidated financial statements . we have also identified certain accounting policies that we consider critical to understanding our business and our results of operations and we have provided below additional information on those policies . vendor arrangements — our inventory purchases from vendors are generally under arrangements that automatically renew until cancelled with periodic updates or annual negotiated agreements . many of these arrangements require the vendors to make payments to us or provide credits to be used against purchases if and when certain conditions are met . we generally refer to these arrangements as “vendor programs , ” and they typically fall into two broad categories , with some underlying

we placed $ 9 million of restricted cash on deposit in 2011 relating to an advance received on a dispute that was settled in january 2012. financing activities net cash used in financing activities totaled $ 99 million and $ 31 million in 2011 and 2010 , compared to a source of cash of $ 173 million in 2009. the use of cash in 2011 included the cash dividends paid on our convertible preferred stock of approximately $ 37 million , repayments of long and short term borrowings of $ 69 million , and $ 10 million in fees related to the amended credit agreement . the dividend on our convertible preferred stock for the fourth quarter of 2011 was paid in-kind in january 2012. the sources of cash in 2011 included proceeds from issuance of borrowings of $ 10 million , as well as an advance of $ 9 million was received relating to a dispute associated with a prior year acquisition in europe . a final settlement of this dispute was reached in january 2012 ; see note r of notes to consolidated financial statements for additional discussion . the use of cash in 2010 resulted from the cash dividends paid on our convertible preferred stock of approximately $ 28 million and $ 22 million to acquire certain noncontrolling interests . the 2010 period included short-term borrowings under the facility offset by payments of approximately $ 30 million . the source of cash in 2009 resulted from our issuance of redeemable preferred stock during the second quarter , partially offset by repayments of borrowing on our asset based credit facility and capital lease payments . the company has evaluated , and expects to continue to evaluate , possible refinancings and other transactions . such transactions may be material and may involve cash , the company 's securities or the assumption of additional indebtedness . off-balance sheet arrangements as of december 31 , 2011 , we had no off-balance sheet arrangements other than operating leases which are included in the table below . contractual obligations the following table summarizes our contractual cash obligations at december 31 , 2011 , and the effect such obligations are expected to have on liquidity and cash flow in future periods : replace_table_token_20_th 30 ( 1 ) long-term debt obligations consist primarily of our $ 400 million senior notes and the associated contractual interest payments . also included in this amount are the expected payments ( principal and interest ) on certain long-term debt obligations . ( 2 ) short-term borrowings consist of amounts outstanding under the amended credit agreement and subsidiary lines of credit . < table border= '' 0 '' cellpadding= '' 0 '' cellspacing= '' 0 ''

historically , the company 's allowance for doubtful accounts has been minimal primarily because a significant portion of its sales has been to the u.s. government or with respect to its satellite service commercial business , the company bills and collects in advance . unbilled receivables consist of costs and fees earned and billable on contract completion or other specified events . unbilled receivables are generally expected to be billed and collected within one year . concentration of risk financial instruments that potentially subject the company to significant concentrations of credit risk consist primarily of cash equivalents and trade accounts receivable which are generally not collateralized . the company limits its exposure to credit loss by placing its cash equivalents with high credit quality financial institutions and investing in high quality short-term debt instruments . the company establishes customer credit policies related to its accounts receivable based on historical collection experiences within the various markets in which the company operates , historical past due amounts and any specific information that the company becomes aware of such as bankruptcy or liquidity issues of customers . revenues from the u.s. government comprised 24.5 % , 30.3 % and 36.0 % of total revenues for fiscal years 2011 , 2010 and 2009 , respectively . billed accounts receivable to the u.s. government as of april 1 , 2011 and april 2 , 2010 were 35.3 % and 28.7 % , respectively , of total billed receivables . in addition , none of the company 's commercial customers comprised 10.0 % or more of total revenues for fiscal years 2011 and 2010. in fiscal year 2009 one commercial customer comprised 10.3 % of total revenues and as of april 3 , 2009 represented 9.8 % of total billed receivables . the company 's five largest contracts generated approximately 21.2 % , 25.4 % and 34.8 % of the company 's total revenues for the fiscal years ended april 1 , 2011 , april 2 , 2010 and april 3 , 2009 , respectively . the company relies on a limited number of contract manufacturers to produce its products . inventory inventory is valued at the lower of cost or market , cost being determined by the weighted average cost method . property , equipment and satellites equipment , computers and software , furniture and fixtures , the company 's satellite under construction and related gateway and networking equipment under construction are recorded at cost , net of accumulated depreciation . the company computes depreciation using the straight-line method over the estimated useful lives of the assets ranging from two to twenty-four years . leasehold improvements are capitalized and amortized using the straight-line method over the shorter of the lease term or the life of the improvement . additions to property , f-7 viasat , inc. notes to consolidated financial statements — ( continued ) equipment and satellites , together with major renewals and betterments , are capitalized . maintenance , repairs and minor renewals and betterments are charged to expense . when assets are sold or otherwise disposed of , the cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is recognized in operations . satellite construction costs , including launch services and insurance , are generally procured under long-term contracts that provide for payments over the contract periods and are capitalized as incurred . the company is also constructing gateway facilities and network operations systems to support the satellite under construction and these construction costs are capitalized as incurred . interest expense is capitalized on the carrying value of the satellite , related gateway and networking equipment and other assets during the construction period , in accordance with the authoritative guidance for the capitalization of interest ( asc 835-20 ) . with respect to viasat-1 ( the company 's high-capacity satellite ) , related gateway and networking equipment and other assets currently under construction , the company capitalized $ 28.3 million and $ 8.8 million of interest expense during the fiscal years ended april 1 , 2011 and april 2 , 2010 , respectively . as a result of the acquisition of wildblue on december 15 , 2009 ( see note 9 ) , the company acquired the wildblue-1 satellite ( which was placed into service in march 2007 ) , an exclusive prepaid lifetime capital lease of ka-band capacity over the continental united states on telesat canada 's anik f2 satellite ( which was placed into service in april 2005 ) and related gateway and networking equipment on both satellites . the acquired assets also included the indoor and outdoor customer premise equipment ( cpe ) units leased to subscribers under wildblue 's retail leasing program . the company depreciates the satellites , gateway and networking equipment , cpe units and related installation costs over their estimated useful lives . the total cost and accumulated depreciation of cpe units included in property and equipment , net as of april 1 , 2011 was $ 61.6 million and $ 19.2 million , respectively . the total cost and accumulated depreciation of cpe units included in property and equipment , net as of april 2 , 2010 was $ 41.5 million and $ 4.2 million , respectively . occasionally , the company may enter into capital lease arrangements for various machinery , equipment , computer-related equipment , software , furniture or fixtures . as of april 1 , 2011 , assets under capital leases totaled approximately $ 3.1 million and there was an immaterial amount of accumulated amortization . the company had no material capital lease arrangements as of april 2 , 2010. the company records amortization of assets leased under capital lease arrangements within depreciation expense . goodwill and intangible assets the authoritative guidance for business combinations ( asc 805 ) requires that all business combinations be accounted for using the purchase method . story_separator_special_tag for additional information , see “risk factors — our business could be adversely affected by a negative audit by the u.s. government” in part i , item 1a of this report . 42 service revenues replace_table_token_4_th service revenues increased from $ 104.0 million to $ 278.3 million during fiscal year 2011 when compared to fiscal year 2010 primarily due to our acquisition of wildblue in december 2009 , which contributed an increase in service revenues of $ 152.8 million in fiscal year 2011 when compared to fiscal year 2010. the remaining service revenue increases were primarily driven by growth in government satellite communication systems and mobile broadband services of $ 16.0 million . cost of product revenues replace_table_token_5_th cost of product revenues decreased from $ 408.5 million to $ 389.9 million during fiscal year 2011 when compared to fiscal year 2010. on a constant margin basis the decreased revenues caused a $ 38.6 million reduction in cost of product revenues . this decrease was offset by an increase in cost of product revenues of $ 8.5 million due to an additional program forward loss in our government systems segment for a government satellite communication program recorded in the first quarter of fiscal year 2011 , as discussed below , and an additional increase in cost of product revenues of $ 11.5 million mainly as a result of product cost increases from lower margin development programs in our consumer broadband , information assurance and next-generation tactical datalink product areas . cost of product revenues may fluctuate in future periods depending on the mix of products sold , competition , new product introduction costs and other factors . in june 2010 , we performed extensive integration testing of numerous system components that had been separately developed as part of a government satellite communication program . as a result of this testing and subsequent internal reviews and analyses , we determined that significant additional rework was required in order to complete the program requirements and specifications and to prepare for a scheduled customer test in our fiscal second quarter . this additional rework and engineering effort resulted in a substantial increase in estimated labor and material costs to complete the program . accordingly , during the first quarter of fiscal year 2011 , we recorded an additional forward loss of $ 8.5 million related to this estimate of program costs . while we believe the additional forward loss is adequate to cover known risks to date and that steps taken to improve the program performance will be effective , the program is ongoing and our efforts and the end results must be satisfactory to the customer . we believe that our estimate of costs to complete the program is appropriate based on known information , however , additional future losses could be required . cost of service revenues replace_table_token_6_th cost of service revenues increased from $ 66.8 million to $ 160.6 million during fiscal year 2011 when compared to fiscal year 2010 primarily due to our acquisition of wildblue in december 2009 , which contributed to an increase of approximately $ 83.9 million . the remainder of the cost of service revenues growth was due to an $ 11.5 million increase 43 from our government satellite communication systems and mobile broadband services driven by service revenues increases . during the fourth quarter of fiscal year 2011 , we also recorded a benefit to cost of service revenues of $ 5.2 million related to a wildblue satellite capacity contract liability acquired and release of future payment liabilities related thereto . cost of service revenues may fluctuate in future periods depending on the mix of services provided , competition , new service introduction costs and other factors . selling , general and administrative expenses replace_table_token_7_th the increase in selling , general and administrative ( sg & a ) expenses of $ 31.4 million during fiscal year 2011 compared to fiscal prior year 2010 was primarily due to our acquisition of wildblue , which contributed an additional $ 30.0 million in sg & a expenses , including $ 8.7 million in transaction-related expenses incurred in connection with the acquisition . our other sg & a expenses increased $ 10.7 million primarily due to additional support costs resulting from growth in our business . sg & a expenses consist primarily of personnel costs and expenses for business development , marketing and sales , bid and proposal , facilities , finance , contract administration and general management . independent research and development replace_table_token_8_th the increase in ir & d expenses of approximately $ 1.4 million reflects a year-over-year increase in our commercial networks segment of $ 2.7 million principally related to next-generation satellite communication systems , offset by a decrease in our government systems segment of approximately $ 1.6 million primarily due to next-generation military satellite communication systems development programs . amortization of acquired intangible assets we amortize our acquired intangible assets from prior acquisitions over their estimated useful lives ranging from eight months to ten years . the increase in amortization of approximately $ 9.9 million in fiscal year 2011 when compared to last fiscal year was the result of our acquisition of wildblue in december 2009 , which contributed an increase of $ 9.2 million , and our acquisition of stonewood in july 2010 , which contributed an increase of $ 1.6 million . these increases were slightly offset by a decrease in amortization as certain acquired technology and other intangibles in our commercial networks and government systems segments became fully amortized during 44 fiscal year 2011. current and expected amortization expense for acquired intangible assets for each of the following periods is as follows : replace_table_token_9_th interest income the decrease in interest income of $ 0.3 million year-over-year was primarily due to lower interest rates on our investments and lower average invested cash balances during fiscal year 2011 when compared to fiscal year 2010. interest expense the decrease in interest expense of $ 4.2 million

on march 1 , 2011 , loral entered into agreements with telesat canada pursuant to which loral assigned to telesat canada and telesat canada assumed from loral all of loral 's rights and obligations with respect to the canadian beams on viasat-1 . in november 2008 , we entered into a launch services agreement with arianespace to procure launch services for viasat-1 at a cost estimated to be $ 107.8 million , depending on the mass of the satellite at launch . in march 2009 , we substituted ils international launch services , inc. ( ils ) for arianespace as the primary provider of launch services for viasat-1 and , accordingly , we entered into a contract for launch services with ils to procure launch services for viasat-1 at an estimated cost of approximately $ 80.0 million , subject to certain adjustments , resulting in a net savings of approximately $ 20.0 million . on may 7 , 2009 , we entered into an amended and restated launch services agreement with arianespace whereby arianespace has agreed to perform certain launch services to maintain the launch capability for viasat-1 , should the need arise , or for launch services of a future viasat satellite launch prior to december 2015. this amendment and restatement also provides for certain cost adjustments depending on fluctuations in foreign currencies , mass of the satellite launched and launch period timing . the projected total cost of the viasat-1 project , including the satellite , launch , insurance and related gateway infrastructure , through in-service of the satellite is estimated to be approximately $ 400.0 million , excluding capitalized interest , and will depend on the timing of the gateway infrastructure roll-out , among other things . however , we anticipate capitalizing certain amounts of interest expense related to our outstanding borrowings in connection with our capital projects under construction , such as construction of viasat-1 and other assets . we continually evaluate alternative strategies that would limit our total required investment . we believe we have adequate sources of funding for the project , which includes our cash on hand , the cash we expect to generate from 53 < div align= '' left '' style= '' margin-left : 0 % ;