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these procedures also included , among others ( i ) evaluating management 's assessment of the realizability of deferred tax assets on a jurisdictional basis ; ( ii ) evaluating management 's estimates of future taxable income ; ( iii ) evaluating management 's application of relevant income tax law ; and ( iv ) testing the completeness and accuracy of the underlying data used in management 's assessment . f-3 evaluating management 's estimates of future taxable income involved evaluating whether the estimates were reasonable considering ( i ) the current and past performance of the respective entity and ( ii ) whether the estimates were consistent with evidence obtained in other areas of the audit . professionals with specialized skill and knowledge were used to assist in evaluating the application of relevant income tax law . pricewaterhousecoopers llp pricewaterhousecoopers llp columbus , ohio february 8 , 2021 we have served as the company 's auditor since 2005. f-4 mettler-toledo international inc. consolidated statements of operations for the years ended december 31 ( in thousands , except share data ) replace_table_token_10_th the accompanying notes are an integral part of these consolidated financial statements . f-5 mettler-toledo international inc. consolidated statements of comprehensive income for the years ended december 31 ( in thousands , except share data ) replace_table_token_11_th the accompanying notes are an integral part of these consolidated financial statements . f-6 mettler-toledo international inc. consolidated balance sheets as of december 31 ( in thousands , except share data ) replace_table_token_12_th the accompanying notes are an integral part of these consolidated financial statements . f-7 mettler-toledo international inc. consolidated statements of shareholders ' equity for the years ended december 31 ( in thousands , except share data ) replace_table_token_13_th the accompanying notes are an integral part of these consolidated financial statements . f-8 mettler-toledo international inc. consolidated statements of cash flows for the years ended december 31 ( in thousands ) replace_table_token_14_th the accompanying notes are an integral part of these consolidated financial statements . f-9 mettler-toledo international inc. notes to the consolidated financial statements - ( continued ) ( in thousands , except share data , unless otherwise stated ) 1. business description and basis of presentation mettler-toledo international inc. ( “ mettler-toledo ” or the “ company ” ) is a leading global supplier of precision instruments and services . the company manufactures weighing instruments for use in laboratory , industrial , packaging , logistics , and food retailing applications . the company also manufactures several related analytical instruments and provides automated chemistry solutions used in drug and chemical compound discovery and development . in addition , the company manufactures metal detection and other end-of-line inspection systems used in production and packaging and provides solutions for use in certain process analytics applications . the company 's primary manufacturing facilities are located in china , switzerland , the united states , germany , the united kingdom , and mexico . the company 's principal executive offices are located in columbus , ohio and greifensee , switzerland . the consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the united states of america ( “ u.s . gaap ” ) and include all entities in which the company has control , which are its wholly owned subsidiaries . the preparation of financial statements in conformity with u.s. gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , as well as disclosure of contingent assets and liabilities at the date of the financial statements , and the reported amounts of revenues and expenses during the reporting periods . actual results may differ from those estimates due to uncertainty around the magnitude and duration of the covid-19 pandemic , as well as other factors . a discussion of the company 's critical accounting policies is included in management 's discussion and analysis of financial condition and results of operations and the notes to the consolidated financial statements included within this filing . all intercompany transactions and balances have been eliminated . 2. summary of significant accounting policies cash and cash equivalents cash and cash equivalents include highly liquid investments with original maturity dates of three months or less . the carrying value of these cash equivalents approximates fair value . trade accounts receivable trade accounts receivable are recorded at the invoiced amount and do not bear interest . the allowance for expected credit losses represents the company 's best estimate based on current and historical information , and reasonable and supportable forecasts of future events and circumstances . inventories inventories are valued at the lower of cost or net realizable value . cost , which includes direct materials , labor , and overhead , is generally determined using the first in , first out ( fifo ) method . the estimated net realizable value is based on assumptions for future demand and related pricing . adjustments to the cost basis of the company 's inventory are made for excess and obsolete items based on usage , expected future orders , and technological obsolescence . if actual market conditions are less favorable than those projected by management , reductions in the value of inventory may be required . f-10 mettler-toledo international inc. notes to the consolidated financial statements - ( continued ) ( in thousands , except share data , unless otherwise stated ) long-lived assets a ) property , plant , and equipment property , plant , and equipment are stated at cost less accumulated depreciation . repair and maintenance costs are charged to expense as incurred . the company capitalizes certain direct costs related to the acquisition and development of internal-use computer software . externally purchased software is capitalized when we obtain legal ownership and is amortized over its useful life ranging from three to five years . story_separator_special_tag both net sales and net sales to external customers in u.s. dollars increased 1 % in 2020 and 3 % in 2019 , and in local currencies increased 2 % in 2020 and 5 % in 2019. the increase in local currency growth in net sales to external customers during 2020 includes growth in laboratory-related products , especially pipettes and automated chemistry , offset in part by a decline in industrial-related products due to reduced customer demand related to covid-19 . segment profit increased $ 6.4 million in our other segment during 2020 , compared to a decrease of $ 6.8 million during 2019. the increase in segment profit during 2020 primarily includes increased sales volume and benefits from our temporary cost savings measures . story_separator_special_tag style= `` color : # 000000 ; font-family : 'times new roman ' , sans-serif ; font-size:12pt ; font-weight:400 ; line-height:120 % `` > we have a $ 1.1 billion credit agreement ( the “ credit agreement ” ) , which has $ 602.5 million of availability remaining as of december 31 , 2020. the credit agreement is provided by a group of financial institutions and has a maturity date of june 15 , 2023. it is a revolving credit facility and is not subject to any scheduled principal payments prior to maturity . the obligations under the credit agreement are unsecured . borrowings under the credit agreement bear interest at current market rates plus a margin based on our consolidated leverage ratio , which was set at libor plus 87.5 basis points as of june 15 , 2018. we must also pay facility fees that are tied to our leverage ratio . the credit agreement contains covenants as further described in note 10 of our consolidated financial statements , with which we were in compliance as of december 31 , 2020. other local arrangements in april 2018 , two of our non-u.s. pension plans issued loans totaling $ 39.6 million ( swiss franc 38 million ) to a wholly owned subsidiary of the company . the loans have the same terms and conditions which include an interest rate of swiss franc libor plus 87.5 basis points . the loans were renewed for one year in april 2020. contractual obligations the following summarizes certain of our contractual obligations at december 31 , 2020 and the effect such obligations are expected to have on our liquidity and cash flows in future periods . we do not have significant outstanding letters of credit or other financial commitments . replace_table_token_9_th ( 1 ) in addition to the above table , we also have liabilities for pension and post-retirement funding and income taxes ( and transition tax liabilities of $ 43 million related to the tax cuts and jobs act ) . however , we can not determine the timing or the amounts for income taxes or the timing and amounts beyond 2021 for pension and post-retirement funding . we have purchase commitments for materials , supplies , services , and fixed assets in the normal course of business . due to the proprietary nature of many of our materials and processes , certain supply contracts contain penalty provisions . we do not expect potential payments under these provisions to materially affect our results of operations or financial condition . this conclusion is based upon reasonably likely outcomes derived by reference to historical experience and current business plans . 41 share repurchase program in november 2020 , the company 's board of directors authorized an additional $ 2.5 billion to the share repurchase program which has $ 3.1 billion of remaining availability as of december 31 , 2020. the share repurchases are expected to be funded from cash generated from operating activities , borrowings , and cash balances . repurchases will be made through open market transactions , and the amount and timing of purchases will depend on business and market conditions , the stock price , trading restrictions , the level of acquisition activity , and other factors . we have purchased 29.4 million common shares since the inception of the program in 2004 through december 31 , 2020 , at a total cost of $ 5.9 billion . during the years ended december 31 , 2020 and 2019 , we spent $ 775 million in both years on the repurchase of 815,652 shares and 1,094,648 shares at an average price per share of $ 950.14 and $ 707.97 , respectively . we reissued 162,176 shares and 298,002 shares held in treasury for the exercise of stock options and restricted stock units during 2020 and 2019 , respectively . off-balance sheet arrangements currently , we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition , changes in financial condition , revenues or expenses , results of operations , liquidity , capital expenditures , or capital resources . effect of currency on results of operations our earnings are affected by changing exchange rates . we are particularly sensitive to changes in the exchange rates between the swiss franc , euro , chinese renminbi , and u.s. dollar . we have more swiss franc expenses than we do swiss franc sales because we develop and manufacture products in switzerland that we sell globally and have a number of corporate functions located in switzerland . when the swiss franc strengthens against our other trading currencies , particularly the u.s. dollar and euro , our earnings go down . we also have significantly more sales in the euro than we do expenses . when the euro weakens against the u.s. dollar and swiss franc , our earnings also go down . we estimate a 1 % strengthening of the swiss franc against the euro would reduce our earnings before tax by approximately $ 1.6 million to $ 1.8 million annually . we also conduct business throughout the world , including asia pacific , the united kingdom ,

million of cash and cash equivalents . changes in exchange rates between the currencies in which we generate cash flow and the currencies in which our borrowings are denominated affect our liquidity . in addition , because we borrow in a variety of currencies , our debt balances fluctuate due to changes in exchange rates . further , we do not have any downgrade triggers from rating agencies that would accelerate the maturity dates of our debt . we were in compliance with our debt covenants at december 31 , 2020. we currently believe that cash flows from operating activities , together with liquidity available under our credit agreement , local working capital facilities , and cash balances , will be sufficient to fund currently anticipated working capital needs and capital spending requirements for at least the foreseeable future . senior notes the senior notes listed above are senior unsecured obligations and interest is payable semi-annually . the senior notes each contain customary affirmative and negative covenants as further described in note 10 of our consolidated financial statements . in december 2020 , we entered into an agreement to issue and sell eur 125 million of 15-year 1.06 % euro senior notes ( `` 1.06 % euro senior notes '' ) . the terms of the euro senior notes are consistent with the previous euro senior notes as described in note 10 to the consolidated financial statements . the company also entered into a forward contract to receive $ 152.1 million at the time of issuing the 1.06 % 40 euro senior notes in march 2021. the proceeds will be used to repay outstanding amounts on the company 's credit facility and fund operational expenses . credit agreement < span

of all the solar cells available for the mass market , we believe our solar cells have the highest conversion efficiency , a measurement of the amount of sunlight converted by the solar cell into electricity . we were originally incorporated in california in 1985 and subsequently reincorporated in delaware during 2005 in connection with our initial public offering . in november 2011 , our stockholders approved the reclassification of all outstanding former class a common stock and class b common stock into a single class of common stock listed on the nasdaq global select market under the symbol `` spwr `` . in fiscal 2011 , we became a majority owned subsidiary of total energies nouvelles activités usa , formerly known as total gas & power usa , sas ( `` total `` ) , a subsidiary of total s.a . ( `` total s.a. `` ) . segments overview we manage resource allocations and measure performance among three regional segments : ( i ) the americas segment , ( ii ) the emea segment , and ( iii ) the apac segment . the americas segment includes both north and south america . the emea segment includes european countries , as well as the middle east and africa . the apac segment includes all asia-pacific countries . unit of power when referring to our solar power systems , our facilities ' manufacturing capacity , and total sales , the unit of electricity in watts for kilowatts ( `` kw `` ) , megawatts ( `` mw `` ) , and gigawatts ( `` gw `` ) is direct current ( `` dc `` ) . levelized cost of energy ( `` lcoe `` ) lcoe is a measure used to evaluate the life-cycle energy cost and life-cycle energy production of an energy producing system . it allows alternative technologies to be compared when different scales of operation , investment , or operating time periods exist . the lcoe equation captures capital costs and ongoing system-related costs , along with the amount of electricity produced , and converts them into a common metric . key drivers for lcoe reduction for photovoltaic products include panel efficiency , capacity factors , reliable system performance , and the life of the system . customer cost of electricity ( `` ccoe `` ) our customers are focused on reducing their overall cost of energy by intelligently integrating solar and other distributed generation , energy efficiency , energy management , and energy storage systems with their existing utility-provided energy . ccoe is a measure used to evaluate a customer 's overall cost of energy , taking into account the cost impact of each individual generation source ( including the utility ) , energy storage systems , and energy management systems . the ccoe metric allows a customer to compare different portfolios of generation sources , energy storage , and energy management , and to tailor towards optimization . the ccoe equation includes capital costs and ongoing operating costs , along with the amount of electricity produced , stored , saved , or re-sold , and converts all of these variables into a common metric . seasonal trends our business is subject to industry-specific seasonal fluctuations including changes in weather patterns and economic incentives , among others . sales have historically reflected these seasonal trends with the largest percentage of total revenues realized during the last two calendar quarters of a fiscal year . the construction of solar power systems or installation of solar power products and related revenue may decline during cold winter months . in the united states , many customers make purchasing decisions towards the end of the year in order to take advantage of tax credits or for other budgetary reasons . fiscal years we have a 52-to-53-week fiscal year that ends on the sunday closest to december 31. accordingly , every fifth or sixth year will be a 53-week fiscal year . fiscal 2013 , 2012 , and 2011 were 52-week fiscal years . fiscal 2013 ended on 47 december 29 , 2013 , fiscal 2012 ended on december 30 , 2012 , and fiscal 2011 ended on january 1 , 2012 . fiscal 2014 will end on december 28 , 2014. components of results of operations the following section describes certain line items in our consolidated statements of operations : revenue we recognize revenue from the following activities and transactions within our regional segments : solar power products : the sale of panels and balance of system components , primarily to dealers , system integrators and distributors , in some cases on a multi-year , firm commitment basis . solar power systems : the design , manufacture , and sale of high-performance rooftop and ground-mounted solar power systems under construction and development agreements . residential leases : revenue recognized on systems under lease agreements with residential customers for terms of up to 20 years . other : revenue related to our solar power services and solutions , such as post-installation systems monitoring and maintenance in connection with construction contracts and commercial power purchase agreements . cost of revenue our cost of revenue fluctuates from period to period due to the mix of projects completed and recognized as revenue , in particular between construction contracts and large-scale development projects involving real estate . the cost of solar panels is the single largest cost element in our cost of revenue . our cost of solar panels consists primarily of : ( i ) polysilicon , silicon ingots and wafers used in the production of solar cells ; ( ii ) solar cells from our auo sunpower sdn.bhd . story_separator_special_tag since valuations are based on quoted prices that are readily and regularly available in an active market , valuation of these products does not entail a significant degree of judgment . financial assets utilizing level 1 inputs include money market funds . level 2 — measurements are inputs that are observable for assets or liabilities , either directly or indirectly , other than quoted prices included within level 1. financial assets utilizing level 2 inputs include foreign currency option contracts , forward exchange contracts and convertible debenture derivatives . the selection of a particular technique to value a derivative depends upon the contractual term of , and specific risks inherent with , the instrument as well as the availability of pricing information in the market . we generally use similar techniques to value similar instruments . valuation techniques utilize a variety of inputs , including contractual terms , market prices , yield curves , credit curves and measures of volatility . for derivatives that trade in liquid markets , such as generic forward and option contracts , inputs can generally be verified and selections do not involve significant management judgment . level 3 — prices or valuations that require management inputs that are both significant to the fair value measurement and unobservable we did not have any assets and liabilities measured at fair value on a recurring basis requiring level 3 inputs . valuation of certain convertible debt convertible debt instruments that may be settled in cash upon conversion require recognition of both the liability and equity components in our consolidated financial statements . the debt component is required to be recognized at the fair value of a similar debt instrument that does not have an associated equity component . the equity component is recognized as the difference between the proceeds from the issuance of the convertible debt and the fair value of the liability , after adjusting for the deferred tax impact . the accounting guidance also requires an accretion of the resulting debt discount over the expected life of the convertible debt . accounting for income taxes our global operations involve manufacturing , research and development , and selling and project development activities . profit from non-u.s. activities is subject to local country taxation , but not subject to u.s. tax until repatriated to the united states . it is our intention to indefinitely reinvest these earnings outside the united states . we record a valuation allowance to reduce our u.s. and french deferred tax assets to the amount that is more likely than not to be realized . in assessing the need for a valuation allowance , we consider historical levels of income , expectations and risks associated with the estimates of future taxable income and ongoing prudent and feasible tax planning strategies . in the event we determine that we would be able to realize additional deferred tax assets in the future in excess of the net recorded amount , or if we subsequently determine that realization of an amount previously recorded is unlikely , we would record an adjustment to the deferred tax asset valuation allowance , which would change income tax in the period of adjustment . as of december 29 , 2013 , we believe there is insufficient evidence to realize additional deferred tax assets , although it is possible that a reversal of the valuation allowance , which could be material , could occur in a future period . the calculation of tax liabilities involves dealing with uncertainties in the application of complex global tax regulations . we recognize potential liabilities for anticipated tax audit issues in the united states and other tax jurisdictions based on our estimate of whether , and the extent to which , additional taxes will be due . if payment of these amounts ultimately proves to be unnecessary , the reversal of the liabilities would result in tax benefits being recognized in the period in which we determine the liabilities are no longer necessary . if the estimate of tax liabilities proves to be less than the ultimate tax assessment , a further charge to expense would result . we accrue interest and penalties on tax contingencies which are classified as `` provision for income taxes `` in our consolidated statements of operations and are not considered material . pursuant to the tax sharing agreement with cypress , our former parent company , we are obligated to indemnify cypress upon current utilization of carryforward tax attributes generated while we were part of the cypress consolidated or 53 combined group . further , to the extent cypress experiences any tax examination assessments attributable to our operations while part of the cypress consolidated or combined group , cypress will require an indemnification from us for those aspects of the assessment that relate to our operations . see also `` item 1a : risk factors `` including `` risks related to our operations : our agreements with cypress semiconductor corporation ( `` cypress `` ) require us to indemnify cypress for certain tax liabilities . these indemnification obligations and related contractual restrictions may limit our ability to pursue certain business initiatives . `` in addition , foreign exchange gains ( losses ) may result from estimated tax liabilities which are expected to be realized in currencies other than the u.s. dollar . outlook we are focused on reducing the cost of our solar panels and systems and are working with our suppliers and partners along all steps of the value chain to reduce costs by improving manufacturing technologies and expanding economies of scale . we continue to emphasize improvement of our solar cell efficiency and lcoe performance through enhancement of our existing products , development of new products and reduction of manufacturing cost and complexity in conjunction with our overall cost-control strategies . in fiscal 2013 we announced the completion of the first commercial deployment of our sunpower c-7 tracker technology currently operating under a power purchase agreement and commercially

concurrent with the issuance of the 4.50 % debentures , we entered into privately negotiated convertible debenture hedge transactions and warrant transactions which represent a call spread overlay with respect to the 4.50 % debentures ( the `` cso2015 '' ) , assuming full performance of the counterparties and 4.50 % warrants strike prices in excess of the conversion price of the 4.50 % debentures . please see `` risks related to our debt and equity securities : conversion of our outstanding 0.75 % debentures , 4.75 % debentures , our warrants related to our outstanding 4.50 % and 64 4.75 % debentures , and future substantial issuances or dispositions of our common stock or other securities , could dilute ownership and earnings per share or cause the market price of our stock to decrease. `` in `` part i. item 1a : risk factors '' . as of both december 29 , 2013 and december 30 , 2012 , an aggregate principal amount of $ 230.0 million of the 4.75 % senior convertible debentures due 2014 ( `` 4.75 % debentures '' ) remain issued and outstanding . interest on the 4.75 % debentures is payable on april 15 and october 15 of each year . holders of the 4.75 % debentures are able to exercise their right to convert the debentures at any time into shares of our common stock at a conversion price equal to $ 26.40 per share . the applicable conversion rate may adjust in certain circumstances , including upon a fundamental change , as defined in the indenture governing the 4.75 % debentures . if not earlier converted , the 4.75 % debentures mature on april 15 , 2014. holders may also require us to repurchase all or a portion of their 4.75 % debentures upon a fundamental change at a cash repurchase price equal to 100 % of the principal amount plus accrued and unpaid interest . in the event of certain events of default , such as our failure to make certain payments or perform or observe certain obligations thereunder , wells fargo , the trustee , or holders of a specified amount of then-outstanding 4.75 % debentures will have the right to declare all amounts then outstanding due and payable . concurrently with the issuance of the 4.75 % debentures , we entered into certain convertible debenture hedge transactions ( the `` 4.75 % bond hedge '' ) and warrant transactions ( the `` 4.75 % warrants '' ) with affiliates of certain of the underwriters of

our managing trustees are also directors , officers and controlling shareholders ( through abp trust ( formerly known as reit management & research trust ) ) of the rmr group inc. , or rmr inc. substantially all of the business of rmr inc. is conducted by its majority owned subsidiary , the rmr group llc , or rmr llc , which is the manager of us , aic and sir . each of our trustees is a director of aic and one of our independent trustees is also an independent trustee of sir . see notes 6 and 11 for a further discussion of our investments in aic and sir . we periodically evaluate our equity method investments for possible indicators of other than temporary impairment whenever events or changes in circumstances indicate the carrying amount of the investment might not be recoverable . these indicators may include the length of time and the extent to which the market value of our investment is below our carrying value , the financial condition of our investees , our intent and ability to be a long term holder of the investment and other considerations . if the decline in fair value is judged to be other than temporary , we record an impairment charge to adjust the basis of the investment to its estimated fair value . we recorded a $ 203,297 loss on impairment of our sir investment in 2015. see note 11 for more information on this impairment . available for sale securities . as of december 31 , 2015 , we own ed 1,214,225 common shares of rmr inc. this investment is accounted for as available for sale securities and recorded at fair value based on its quoted market price at the end of each reporting period . the unrealized gains ( losses ) on our investment in available for sale securities is recorded as a component of cumulative other comprehensive income ( loss ) in shareholders ' equity . see notes 6 and 9 for further information regarding our investment in rmr inc. we evaluate our investments in available for sale securities to determine if a decline in the fair value below our carrying value is other than temporary . we consider the severity and the duration of the decline , and our ability and intent to hold the investment until recovery when making this assessment . if a decline in fair value is determined to be other than temporary , an impairment loss equal to the difference between the investment 's carrying value and its fair value is recognized in earnings . f - 8 gov ernment properties income trust notes to consolidated financial statements ( dollars in thousands , except per share amounts ) real estate properties . we record our properties at cost and provide depreciation on real estate investments on a straight line basis over estimated useful lives generally ranging from 7 to 40 years . in some circumstances , we engage independent real estate appraisal firms to provide market information and evaluations which are relevant to our purchase price allocations and determinations of useful lives ; however , we are ultimately responsible for the purchase price allocations and determinations of useful lives . we allocate the purchase prices of our properties to land , building and improvements based on determinations of the fair values of these assets assuming the properties are vacant . we determine the fair value of each property using methods similar to those used by independent appraisers . for properties qualifying as acquired businesses under accounting standards codification 805 , business combinations , we allocate a portion of the purchase price of our properties to above market and below market leases based on the present value ( using an interest rate which reflects the risks associated with acquired in place leases at the time each property was acquired by us ) of the difference , if any , between ( i ) the contractual amounts to be paid pursuant to the acquired in place leases and ( ii ) our estimates of fair market lease rates for the corresponding leases , measured over a period equal to the terms of the respective leases . we allocate a portion of the purchase price to acquired in place leases and tenant relationships based upon market estimates to lease up the property based on the leases in place at the time of purchase . we allocate this aggregate value between acquired in place lease values and tenant relationships based on our evaluation of the specific characteristics of each tenant 's lease . however , we have not separated the value of tenant relationships from the value of acquired in place leases because such value and related amortization expense is immaterial to the accompanying consolidated financial statements . in making these allocations , we consider factors such as estimated carrying costs during the expected lease up periods , including real estate taxes , insurance and other operating income and expenses and costs , such as leasing commissions , legal and other related expenses , to execute similar leases in current market conditions at the time a property was acquired by us . if the value of tenant relationships becomes material in the future , we may separately allocate those amounts and amortize the allocated amounts over the estimated life of the relationships . we amortize capitalized above market lease values ( included in acquired in place real estate leases in our consolidated balance sheets ) and below market lease values ( presented as assumed real estate lease obligations in our consolidated balance sheets ) as a reduction or increase , respectively , to rental income over the terms of the associated leases . such amortization resulted in net decreases to rental income of $ 1,155 , $ 868 , and $ 1,123 during the years ended december 31 , 2015 , 2014 and 2013 , respectively . story_separator_special_tag the increase in dividend income is a result of dividends received from our investment in rmr inc. in december 2015. interest income . the decrease in interest and other income is primarily the result of a lower a mount of investable cash in 2015 compared to 2014 . interest expense . the increase in interest expense reflects higher average outstanding debt balances and higher weighted average interest rate s on those borrowings during 2015 compared to 2014 . gain ( loss ) on early extinguishment of debt . we recorded a $ 34 gain on earl y extinguishment of debt in 2015 in connection with the repayment of a mo rtgage note . we recorded a $ 1,307 loss on earl y extinguishment of debt in 2014 in connection with our debt refinancing activities . loss on distribution to common shareholders of rmr inc. common shares . we recorded a $ 12,368 loss on the distribution of rmr inc. shares we distributed to our shareholders in december 2015 , which represents the difference between our carrying value and the fair value of the rmr inc. shares on the distribution date . loss on issuance of shares by sir . loss on issuance of shares by sir is a result of the issuance of common share s by sir during the 2015 and 2014 periods at prices below our then per share carrying value of our sir common shares . loss on impairment of sir investment . we recorded a $ 20 3,297 loss on impairment in 2015 to reduce the carrying value of our sir investment to its estimated fair value . 55 income tax expense . the de crease in income tax expense reflects lower operating income in certain jurisdictions in 2015 compared to 2014 . equity in earnings of investees . equity in earnings of investees primarily represents our proportionate share of earnings from our investments in sir and aic . income ( loss ) from discontinued operations . income ( loss ) from discontinued operations reflects operating results of two properties ( two buildings ) sold during 2014 , and one property ( one building ) included in discontinued operations and held for sale as of december 31 , 2015. income ( loss ) from discontinued operations for 2014 includes a $ 2,344 increase in the carrying value of one property ( one building ) included in discontinued operations and a $ 774 gain from the sale of one property ( one building ) included in discontinued operations . net income ( loss ) . w e experienced a net loss in 2015 compared to ne t income in 2014 as a result of the changes noted above . 56 year ended december 31 , 2014 , compared to year ended december 31 , 2013 replace_table_token_13_th ( 1 ) comparable properties consist of 63 properties ( 79 buildings ) we owned on december 31 , 2014 and which we owned continuously since january 1 , 2013 , and exclude properties classified as discontinued operations . ( 2 ) acquired properties consist of nine properties ( 13 buildings ) and five properties ( eight buildings ) , which five properties are included in the previously referenced nine properties , we owned on december 31 , 2014 and december 31 , 2013 , respectively , and which we acquired during the period from january 1 , 2013 to december 31 , 2014 . ( 3 ) see footnote ( 4 ) on page 5 3 for the definition of noi . ( 4 ) see footnote ( 5 ) on page 5 4 for the definition of ffo and normalized ffo . we refer to the 63 properties ( 79 buildings ) we owned on december 31 , 2014 and which we have owned continuously since january 1 , 2013 , excluding one property ( one building ) classified as discontinued operati ons , as comparable properties . we refer to the nine properties ( 13 buildings ) we owned as of december 31 , 2014 , which we acquired during the period from january 1 , 2013 to december 31 , 2014 , as acquired properties . our consolidated statement of income for the year ended december 31 , 2014 includes the operating results of five acquired properties ( eight buildings ) for the entire year and four acquired properties 57 ( five buildings ) for less than the entire year , as we acquired those five properties ( eight buildings ) prior to january 1 , 2014 and we acquired those four properties ( five buildings ) during 2014 . our consolidated statement of comprehensive income ( loss ) for the year ended december 31 , 2013 includes the operating results of five acquired properties ( eight buildings ) for less than the entire year , as those properties were acquired during 201 3 . references to changes in the income and expense categories below relate to the comparison of consolidated results for the year ended december 31 , 201 4 , compared to the year ended december 31 , 201 3 . rental income . the increase in rental income reflects the effects of acquired properties and an increase in rental income for comparable properties . rental income increased $ 11,240 from properties acquired after december 31 , 2013 and $ 10,502 from properties acquired during 2013. rental income for comparable properties increased $ 2,379 due primarily to higher average occupancy during 2014. rental income includes non-cash straight line rent adjustments totaling $ 4,501 in 2014 and $ 2,739 in 2013 and amortization of acquired leases and assumed lease obligations totaling ( $ 868 ) in 2014 and ( $ 1,123 ) in 2013. real estate taxes . the increase in real estate taxes reflects the effects of acquired properties and an increase in real estate taxes for comparable properties . real estate taxes increased $ 815 from properties acquire d after december 31 , 2013

we also pay a facility fee on the total amount of lending commitments under our unsecured revolving credit facility , which was 25 basis points per annum at december 31 , 2015. both the interest rate premium and the facility fee are subject to adjustment based upon changes to our credit ratings . we can borrow and repay and re - borrow funds available under our unsecured revolving credit facility until maturity , and no principal repayment is due until maturity . as of december 31 , 2015 , the annual interest rate payable on borrowings under our unsecured r evolving credit facility was 1.6 % . as of december 31 , 2015 and february 16 , 2016 , we had $ 117,000 and $ 221 , 000 , respectively , outstanding and $ 633 , 000 and $ 529,000 , respectively , available to borrow under our unsecured revolving credit facility . our $ 750,000 revolving credit facility is governed by a credit agreement with a syndicate of institutional lenders , which also governs our two unsecured term loans : · our $ 300,000 unsecured term loan , which matures on march 31 , 2020 , is prepayab le without penalty at any time . we are required to pay interest at libor plus a premium , which was 140 basis points per annum at december 31 , 2015 on t he amount outstanding under our $ 300,000 term loan . the interest rate premium is subject to adjustment based upon changes to our credit ratings . as of december 31 , 2015 , the annual interest rate for the amount outstanding under our $ 300,000 term loan was 1 . 8 % . · our $ 250,000 unsecured term loan , which matures on march 31 , 2 022 , is prepayable at any time . if our $ 250,000 term loan is repaid prior to november 21 , 2016 , a prepayment premium of 1.0 % of the amount repaid would be payable . subsequent to november 21 , 2016 , no prepayment premium would be payable .

the bank of greene county also may satisfy the qtl test by qualifying as a “ domestic building and loan association ” as defined in the internal revenue code . under the irs dbla test , the bank must meet the business operations test and the 60 % of assets test . the business operations test requires that the federal savings association 's business consists primarily of acquiring the savings of the public ( 75 % of its deposits , withdrawable shares , and other obligations must be held by the general public ) and investing in loans ( more than 75 % of its gross income consists of interest on loans and government obligations and various other specified types of operating income that federal savings associations ordinarily earn ) . for the 60 % of assets test , the bank must maintain at least 60 % of its total in “ qualified investments ” as of the close of the taxable year or , at the option of the taxpayer , may be computed on the basis of the average assets outstanding during the taxable year . 52 index a savings association that fails the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions . during the year ended june 30 , 2017 , the bank of greene county opted to utilize the hola qtl test and satisfied the requirements of this test for the entire 12-month period . during the year ended june 30 , 2018 , the bank of greene county switched from the hola qtl test to the irs dbla test and satisfied the requirements of this test at and for the year ended june 30 , 2018. 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 the reported amounts of revenues and expenses during the reporting period . actual results could materially differ from those estimates . material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the assessment of other-than-temporary security impairment . while management uses available information to recognize losses on loans , future additions to the allowance for loan losses ( the “ allowance ” ) may be necessary , based on changes in economic conditions , asset quality or other factors . in addition , various regulatory authorities , as an integral part of their examination process , periodically review the allowance . such authorities may require the company to recognize additions to the allowance based on their judgments of information available to them at the time of their examination . greene county bancorp , inc. makes an assessment to determine whether there have been any events or economic circumstances to indicate that a security on which there is an unrealized loss is impaired on an other-than-temporary basis . the company considers many factors including the severity and duration of the impairment ; the intent and ability of the company to hold the security for a period of time sufficient for a recovery in value ; recent events specific to the issuer or industry ; and for debt securities , intent to sell the security , whether it is more likely than not we will be required to sell the security before recovery , whether loss is expected , external credit ratings and recent downgrades . securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value through earnings . cash and cash equivalents cash and cash equivalents include cash on hand , amounts due from banks , interest-bearing deposits at other financial institutions , investments ( with original maturity of three months or less ) , and overnight federal funds sold . the amounts of interest-bearing deposits included as cash equivalents at june 30 , 2018 and 2017 were $ 16.7 million and $ 6.1 million , respectively . securities greene county bancorp , inc. has classified its investments in debt and equity securities as either available-for-sale or held-to-maturity . available-for-sale securities are reported at fair value , with net unrealized gains and losses reflected in the accumulated other comprehensive income ( loss ) component of shareholders ' equity , net of applicable income taxes . held-to-maturity securities are those debt securities which management has the intent the ability to hold to maturity and are reported at amortized cost . the company does not have trading securities in its portfolio . realized gains or losses on security transactions are reported in earnings and computed using the specific identification cost basis . fair values of securities are based on quoted market prices , where available . valuation of securities is further described in note 16 , fair value measurements and fair value of financial instruments . amortization of bond premiums and accretion of bond discounts are amortized over the expected life of the securities using the interest method . when the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis , an assessment is made as to whether other-than-temporary impairment ( “ otti ” ) is present . the company considers numerous factors when determining whether a potential otti exists and the period over which the debt security is expected to recover . story_separator_special_tag 201 - totals $ 12,024 100.0 % $ 11,022 100.0 % $ 9,485 100.0 % $ 8,142 100.0 % $ 7,419 100.0 % 32 index premises and equipment premises and equipment amounted to $ 13.3 million at june 30 , 2018 and $ 13.6 million at june 30 , 2017. purchases totaled $ 324,000 during the year ended june 30 , 2018 , consisting primarily of building improvements and equipment for new branches located in copake and woodstock , new york . depreciation for the year ended june 30 , 2018 totaled $ 635,000. there were no disposals of premise and equipment during the fiscal year ended june 30 , 2018. other assets other assets , consisting primarily of accrued interest receivable , foreclosed real estate and prepaid expenses , totaled $ 7.7 million at june 30 , 2018 , compared to $ 8.6 million at june 30 , 2017 , a decrease of $ 887,000. this decrease was due to a $ 1.8 million decrease in income taxes receivable , and a $ 680,000 decrease in foreclosed real estate . income taxes receivable decreased as a result of the lower tax payments made during the year as a result of the application of the prior year tax refund to the current year income taxes due . this decrease was partially offset by an increase in prepaid expenses of $ 382,000 , accrued interest receivable of $ 1.0 million , and deferred taxes of $ 156,000. the increase in accrued interest receivable was the result of the growth in interest-earning assets during the year ended june 30 , 2018. real estate acquired as a result of foreclosure , or in-substance foreclosure , is classified as foreclosed real estate ( “ fre ” ) until such time as it is sold . when real estate is classified as fre , it is recorded at its fair value , less estimated costs of disposal establishing a new cost basis . upon transfer to fre , if the value of the property is less than the loan , less any related specific loan loss provisions , the difference is charged against the allowance for loan losses . any subsequent write-down of fre is charged against earnings . fre totaled $ 799,000 at june 30 , 2017 and consisted of two commercial real estate properties . four new properties were added to fre , and four properties were sold during the year ended june 30 , 2018. this activity resulted in recognizing net gains totaling $ 41,000 during the period . fre totaled $ 119,000 at june 30 , 2018 , and consisted of two residential real estate properties . deposits total deposits increased to $ 1.0 billion at june 30 , 2018 from $ 859.5 million at june 30 , 2017 , an increase of $ 165.7 million , or 19.3 % . this increase was partially the result of a $ 96.6 million increase in municipal deposits at greene county commercial bank , primarily from continued growth in new account relationships as well as tax collection . now deposits increased $ 128.6 million , or 32.7 % , money market deposits increased $ 13.9 million , or 11.6 % , savings deposits increased $ 18.8 million , or 9.5 % and noninterest-bearing deposits increased $ 6.8 million , or 7.1 % when comparing june 30 , 2018 and 2017. these increases were partially offset by a decrease in certificates of deposit of $ 2.4 million , or 4.5 % , when comparing june 30 , 2018 and 2017. included within certificates of deposits at june 30 , 2018 and 2017 were $ 15.0 million , in brokered certificates of deposit . replace_table_token_12_th the amount of certificates of deposit by time remaining to maturity as of june 30 , 2018 is set forth in part ii , item 8 financial statements and supplemental data , note 6 , deposits of this report . borrowings total borrowings from the federal home loan bank of new york ( “ fhlb ” ) decreased $ 11.4 million to $ 18.2 million at june 30 , 2018 compared to $ 29.6 million at june 30 , 2017. the company had no overnight advances at june 30 , 2018. overnight advances totaled $ 6.9 million at june 30 , 2017. long-term borrowings decreased $ 4.5 million to $ 18.2 million at june 30 , 2018 from $ 22.7 million at june 30 , 2017. the company 's borrowing agreements are discussed further within part ii , item 8 financial statements and supplemental data , note 7 borrowings of this report . 33 index the table below details additional information related to short-term and long-term borrowings for the years ended june 30 , replace_table_token_13_th other liabilities other liabilities , consisting primarily of accrued liabilities , totaled $ 11.9 million at june 30 , 2018 , compared to $ 9.7 million at june 30 , 2017 , an increase of $ 2.2 million . this increase was due primarily to increased accrued expenses for various employee benefit plans , including short-term and long-term incentive plans , and supplemental executive retirement plan . for further information regarding these changes , see part ii , item 8 financial statements and supplemental data , note 9 employee benefits plans and note 10 stock based compensation of this report . shareholders ' equity shareholders ' equity increased to $ 96.2 million at june 30 , 2018 from $ 83.5 million at june 30 , 2017 , as net income of $ 14.4 million was partially offset by dividends declared and paid of $ 1.5 million , and a $ 631,000 increase in accumulated other comprehensive loss , net of income taxes . other changes in equity , an increase of $ 160,000 , was the result of options exercised with the company 's 2008 stock option plan . at june 30 , 2018 , there were no remaining options to be exercised with the

based upon greene county bancorp , inc. 's experience and its current pricing strategy , management believes that a significant portion of such deposits will remain with greene county bancorp , inc. the company has an irrevocable letter of credit reimbursement agreement with the fhlb , whereby upon the bank of greene county 's request , on behalf of greene county commercial bank , an irrevocable letter of credit is issued to secure municipal transactional deposit accounts . these letters of credit are secured by residential and commercial real estate mortgage loans . the amount of funds available to the company through the fhlb line of credit is reduced by any letters of credit outstanding . at june 30 , 2018 , there were $ 40.0 million of municipal letters of credit outstanding . capital resources . at june 30 , 2018 and 2017 , the bank of greene county and greene county commercial bank exceeded all of their regulatory capital requirements , as illustrated in part ii , item 8 financial statements and supplementary data note 17. regulatory matters of this report . shareholders ' equity represented 8.4 % and 8.5 % of total consolidated assets at june 30 , 2018 and 2017 , respectively . impact of inflation and changing prices the consolidated financial statements of greene county bancorp , inc. and notes thereto , presented elsewhere herein , have been prepared in accordance with u.s. generally accepted accounting principles , which 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 greene county bancorp , inc. 's operations . unlike most industrial companies , nearly all the assets and liabilities of greene county bancorp , inc. are monetary . as a result , interest rates have a greater impact on greene county bancorp , inc. 's 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 . impact of recent accounting pronouncements recent accounting pronouncements which may impact the company 's

during the year ended december 31 , 2020 , the company sold 1,128,608 shares of its common stock as part of its at-the-market ( `` atm `` ) sales agreement with cantor fitzgerald & co. for proceeds of $ 2.3 million , net of issuance costs . approximately $ 32.3 million remains available for sale under this facility . see note 11 for further detail . the company expects it will require additional capital to sustain its operations and make the investments it needs to execute its strategic plan , including the commercialization of triferic ( dialysate ) and triferic avnu in dialysis , generating additional data for triferic in dialysis , developing fpc for iron deficiency anemia in patients undergoing home infusion and for progressing our pipeline development program of new indications for its fpc platform . if the company is unable to generate sufficient revenue from sales of its commercial products and from partnerships , the company will need to obtain additional equity or debt financing . if the company attempts to obtain additional debt or equity financing , the company can not assume that such financing will be available on favorable terms , if at all . in addition , the company is subject to certain covenants and cure provisions under its loan agreement with innovatus . as of the date of this report , the company believes that it will either be able to satisfy such covenants or , in the event of a breached covenant , exercise cure provisions to avoid an event of default . if rockwell is unable to avoid an event of default , any required repayments could have an adverse effect on its liquidity ( see note 15 for further detail ) . f-9 the covid-19 pandemic and resulting domestic and global disruptions have adversely affected rockwell 's business and operations , including , but not limited to , its sales and marketing efforts and our research and development activities , and the operations of third parties upon whom the company relies . quarantines , shelter-in-place , executive and similar government orders and the recent surge in infections domestically may negatively impact rockwell 's sales and marketing activities , particularly if its sales representatives are unable to interact with current and potential customers to the same extent as before onset of the covid-19 pandemic . the company 's international business development activities may also be negatively impacted by covid-19 , especially with the recent surge in infections and resulting quarantines or shelter-in-place orders . the covid-19 pandemic , the domestic and international surge in infections and resulting global disruptions have caused significant volatility in financial and credit markets . rockwell has utilized a range of financing methods to fund its operations in the past ; however , current conditions in the financial and credit markets may limit the availability of funding , refinancing or increase the cost of funding . due to the rapidly evolving nature of the global situation , it is not possible to predict the extent to which these conditions could adversely affect the company 's liquidity and capital resources in the future . note 3. summary of significant accounting policies basis of presentation the accompanying consolidated financial statements include the accounts of the company and its wholly-owned subsidiaries , rockwell transportation , inc. and rockwell medical india private limited . rockwell medical india private limited was formed in 2017 for the purpose of conducting certain commercial activities in india . all intercompany balances and transactions have been eliminated in consolidation . certain reclassifications have been made to the 2019 financial statements and notes to conform to the 2020 presentation . revenue recognition the company recognizes revenue under accounting standards codification ( “ asc ” ) 606 , revenue from contracts with customers . the core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services . the following five steps are applied to achieve that core principle : step 1 : identify the contract with the customer step 2 : identify the performance obligations in the contract step 3 : determine the transaction price step 4 : allocate the transaction price to the performance obligations in the contract step 5 : recognize revenue when the company satisfies a performance obligation taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction , that are collected by us from a customer , are excluded from revenue . shipping and handling costs associated with outbound freight related to contracts with customers are accounted for as a fulfillment cost and are included in cost of sales when control of the goods transfers to the customer . nature of goods and services the following is a description of principal activities from which the company generates its revenue . product sales – the company accounts for individual products and services separately if they are distinct ( i.e . , if a product or service is separately identifiable from other items and if a customer can benefit from it on its own or with other resources that are readily available to the customer ) . the consideration , including any discounts , is allocated between separate products and services based on their stand-alone selling prices . the stand-alone selling prices are determined based on the cost plus margin approach . drug and dialysis concentrate products are sold directly to dialysis clinics and to wholesale distributors in both domestic and international markets . story_separator_special_tag for the years ended december 31 , 2020 and 2019 , there were no impairments of long-lived assets . goodwill and intangible assets goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired . intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date . we do not amortize goodwill and intangible assets with indefinite useful lives . we review goodwill and indefinite-lived intangible assets at least annually for possible impairment . goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit or the indefinite-lived intangible assets below their carrying values . intangible assets with definite lives are amortized over their estimated useful lives . intangible assets subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable . definite-lived intangible assets consist of our license fees related to the technology , intellectual property and marketing rights for triferic covered under certain issued patents have been capitalized and are being amortized over the life of the related patents which is generally 17 years . 57 deferred revenue in october of 2014 , the company entered into a 10-year distribution agreement with baxter and received an upfront fee of $ 20 million . the upfront fee was recorded as deferred revenue and is being recognized based on the proportion of product shipments to baxter in each period , compared with total expected sales volume over the term of the distribution agreement . the company recognized revenue of approximately $ 2.0 million and $ 2.1 million related to the baxter agreement for each of the years ended december 31 , 2020 and 2019 , respectively . in 2016 , the company entered into a distribution and license agreement with wanbang ( the `` wanbang agreement `` ) and received an upfront fee of $ 4.0 million . the upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term . the company recognized revenue of approximately $ 0.2 million and $ 0.3 million for the years ended december 31 , 2020 and 2019 , respectively . deferred revenue related to the wanbang agreement totaled $ 2.7 million and $ 2.9 million for the years ended december 31 , 2020 and 2019 , respectively . on january 14 , 2020 , the company entered into license and supply agreements with sun pharma ( the `` sun pharma agreements `` ) , for the rights to commercialize triferic ( dialysate ) ( ferric pyrophosphate citrate ) in india . under the terms of the sun pharma agreements , sun pharma will be the exclusive development and commercialization partner for triferic ( dialysate ) in india , and the company will supply the product to sun pharma . in consideration for the license , the company received an upfront fee of $ 0.1 million , and will be eligible for milestone payments and royalties on net sales . a joint alliance committee , comprised of members from the company and sun pharma , will guide the development and execution for triferic ( dialysate ) in india . sun pharma will be responsible for all clinical and regulatory approval , as well as commercialization activities . the upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term . the company recognized revenue of approximately $ 10,000 during the year ended december 31 , 2020. deferred revenue related to the sun pharma agreement totaled $ 90,000 as of december 31 , 2020. on september 7 , 2020 , the company entered into a license and supply agreements with jeil pharma ( the `` jeil pharma agreements `` ) , for the rights to commercialize triferic ( dialysate ) ( ferric pyrophosphate citrate ) in south korea . under the terms of the jeil pharma agreements , jeil pharma will be the exclusive development and commercialization partner for triferic ( dialysate ) in south korea , and the company will supply the product to jeil pharma . in consideration for the license , the company received an upfront fee of $ 0.2 million , and will be eligible for milestone payments and royalties on net sales . a joint alliance committee , comprised of members from the company and jeil pharma , will guide the development and execution for triferic ( dialysate ) in south korea . jeil pharma will be responsible for all clinical and regulatory approval , as well as commercialization activities . the upfront fee was recorded as deferred revenue and is being recognized as revenue based on the agreement term . the company recognized revenue of $ 2,500 during the year ended december 31 , 2020. deferred revenue related to the jeil pharma agreement totaled $ 197,500 as of december 31 , 2020. stock-based compensation the company expenses stock-based compensation to employees over the requisite service period based on the estimated grant-date fair value of the awards . for stock-based compensation awards to non-employees , the company re-measures the fair value of the non-employee awards at each reporting period prior to vesting and finally at the vesting date of the award . changes in the estimated fair value of these non-employee awards are recognized as compensation expense in the period of change . the company estimates the fair value of stock option grants using the black-scholes option pricing model , and the assumptions used in calculating the fair value of stock-based awards represent management 's best estimates and involve inherent uncertainties and the application of management 's judgment . for the years ended december 31 , 2020 and 2019 , the company recorded stock-based compensation expense on its options granted under the company 's equity compensation plans to its directors

these accounting principles require us to make estimates , judgments and assumptions that affect the reported amounts of revenues , expenses , assets , liabilities , and contingencies . all significant estimates , judgments and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and updated when necessary . actual results could differ from these estimates . changes in estimates are reflected in our financial statements in the period of change based upon on‑going actual experience , trends , or subsequent realization depending on the nature and predictability of the estimates and contingencies . interim changes in estimates are generally applied prospectively within annual periods . certain accounting estimates , including those concerning revenue recognition , allowance for doubtful accounts , inventory reserves , share based compensation , impairments of long‑lived assets , and accounting for income taxes , are considered to be critical in evaluating and understanding our financial results because they involve inherently uncertain matters and their application requires the most difficult and complex judgments and estimates . these are described below . for further information on our accounting policies , see note 3 to our consolidated financial statements . revenue recognition the company recognizes revenue under accounting standards codification ( “ asc ” ) 606 , revenue from contracts with customers . the core principle of the new revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services . the following five steps are applied to achieve that core principle : step 1 : identify the contract with the customer < span style= '' color : # 000000 ; font-family : 'times new

such estimates are inherently imprecise since many assumptions utilized in the cash flow projections are subject to revision in the future . currency translation the functional currency for each entity included in these consolidated financial statements that is domiciled outside of the united states is generally the applicable local currency . assets and liabilities of each foreign entity are translated into u.s. dollars at the exchange rate in effect on the balance sheet date . net revenue and expenses are translated at the average rate in effect during the period . unrealized translation gains and losses are recorded as a cumulative translation adjustment , which is included in other comprehensive income or loss , which is a component of accumulated other comprehensive income or loss included in stockholders ' equity . foreign currency transactions denominated in a currency other than an entity 's functional currency are remeasured into the functional currency with any resulting gains and losses included in income , except for gains and losses arising on intercompany foreign currency transactions that are of a long-term investment nature . the aggregate foreign exchange gains ( losses ) included in selling , general and administrative expenses amount to $ 6,372 , $ 17,314 , and $ ( 625 ) for the years ended february 1 , 2015 , february 2 , 2014 , and february 3 , 2013 , respectively . fair value of financial instruments the company 's financial instruments consist of cash and cash equivalents , accounts receivable , trade accounts payable , accrued liabilities , and other liabilities . unless otherwise noted , it is management 's opinion that the company is not exposed to significant interest , currency or credit risks arising from these financial instruments . all foreign exchange gains or losses are 45 recorded in the consolidated statements of operations under selling , general and administrative expenses . the fair value of these financial instruments approximates their carrying value , unless otherwise noted . concentration of credit risk the company is not exposed to significant credit risk on its cash and cash equivalents and accounts receivable . cash and cash equivalents are held with high quality financial institutions . accounts receivable are primarily from wholesale accounts and for landlord lease inducements . the company does not require collateral to support the accounts receivable ; however , in certain circumstances , the company may require parties to provide payment for goods prior to delivery of the goods . the accounts receivable are net of an allowance for doubtful accounts , which is established based on management 's assessment of the credit risk of the underlying accounts . stock-based compensation the company accounts for stock-based compensation using the fair value method . the fair value of awards granted is estimated at the date of grant and recognized as employee compensation expense on a straight-line basis over the requisite service period with the offsetting credit to additional paid-in capital . for awards with service and or performance conditions , the amount of compensation expense recognized is based on the number of awards expected to vest and is adjusted to reflect those awards that do ultimately vest . for awards with performance conditions , the company recognizes the compensation expense if and when the company concludes that it is probable that the performance condition will be achieved . the company reassesses the probability of achieving the performance condition at each reporting date . the fair value of the restricted shares , performance-based restricted stock units , and restricted stock units is based on the closing price of the company 's common stock on the award date . earnings per share earnings per share is calculated using the weighted-average number of common shares outstanding during the period . diluted earnings per share is calculated by dividing net income available to common stockholders for the period by the diluted weighted-average number of common shares outstanding during the period . diluted earnings per share reflects the potential dilution from common shares issuable through stock options , performance-based restricted stock units that have satisfied their performance factor , and restricted stock units using the treasury stock method . contingencies in the ordinary course of business , we are involved in legal proceedings regarding contractual and employment relationships and a variety of other matters . we record contingent liabilities resulting from claims against us , when a loss is assessed to be probable and the amount of the loss is reasonably estimable . use of estimates the preparation of financial statements in conformity with generally accepted accounting principles in the united states requires management 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 amounts of net revenue and expenses during the reporting period . recently issued accounting standards in may 2014 , the fasb issued asc topic 606 , revenue from contracts with customers ( `` asc 606 `` ) , which supersedes the revenue recognition requirements in asc topic 605 revenue recognition , including most industry-specific revenue recognition guidance throughout the industry topics of the codification . this guidance requires that an entity recognize 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 , and expands the related disclosure requirements . this guidance will be effective for the company beginning in its first quarter of fiscal 2017. the company is currently evaluating the impact that this new guidance may have on its consolidated financial statements . in june 2014 , the fasb amended asc topic 718 , compensation - stock compensation ( `` asc 718 `` ) for share-based payments in which the terms of the award provide that a performance target can be achieved after the requisite service period . story_separator_special_tag the decrease in gross margin was partially offset by a decrease in expenses related to our product and supply chain departments , relative to the increase in net revenue , and by leverage on fixed costs , such as depreciation and occupancy costs , which together contributed to an increase in gross margin of 20 basis points . 25 selling , general and administrative expenses selling , general and administrative expenses increased $ 62.3 million , or 16 % , to $ 448.7 million in fiscal 2013 from $ 386.4 million in fiscal 2012 . the increase in selling , general and administrative expenses was principally comprised of : an increase in employee costs of $ 25.3 million as we experience growth in labor hours associated with new and existing corporate-owned stores , outlets , showrooms and other , as well as an increase in wages as we invest in our employees ; an increase in variable store costs of $ 9.5 million from new and existing corporate-owned stores , outlets , showrooms and other ; an increase in variable costs such as distribution costs , credit card fees and packaging related to our direct to consumer segment of $ 7.3 million as a result of increased sales volume ; an increase in administrative costs related to our direct to consumer segment of $ 5.3 million associated with the growth in this channel and increased head count to support it ; an increase in head office employee costs of $ 5.7 million from increased head count in order to position us for long-term growth , partially offset by decreased management incentive-based compensation and stock-based compensation ; an increase in other head office costs of $ 17.5 million as a result of the overall growth of our business and investment in strategic initiatives and projects ; and an increase in other costs , including occupancy costs and depreciation not included in cost of goods sold , of $ 9.6 million as a result of the expansion of our business and in order to position us for long-term growth . the increase in selling , general and administrative expenses was partially offset by a $ 17.9 million increase in net foreign exchange gains which were primarily from our canadian operating entity . as a percentage of net revenue , selling , general and administrative expenses remained unchanged at 28.2 % in both fiscal 2013 and fiscal 2012 . income from operations income from operations increased $ 14.9 million , or 4 % , to $ 391.4 million in fiscal 2013 from $ 376.4 million in fiscal 2012 . the increase was a result of increased gross profit of $ 77.2 million , partially offset by increased selling , general and administrative costs of $ 62.3 million . the increase in selling , general and administrative costs was primarily driven by the increase in our business , as seen in our net revenue increases . on a segment basis , we determine income from operations without taking into account our general corporate expenses . we have reviewed our general corporate expenses and determined some costs previously classified as general corporate are direct segment expenses . accordingly , all prior year comparable information has been reclassified to conform to the current year classification . income from operations before general corporate expenses for fiscal 2013 and fiscal 2012 are expressed in dollar amounts as well as percentages , presented as a percentage of net revenue of their respective operating segments below . replace_table_token_14_th corporate-owned stores . income from operations from our corporate-owned stores segment decreased $ 1.3 million , or less than 1 % , to $ 372.3 million for fiscal 2013 from $ 373.6 million for fiscal 2012 primarily due to an increase in selling , general and administrative expenses related to employee costs as well as operating expenses associated with new stores and a $ 17.5 million charge related to the pull-back of black luon pants , which was partially offset by an increase of $ 38.3 million in gross profit . income from operations as a percentage of corporate-owned stores net revenue decreased by 400 basis points 26 primarily from a decrease in gross margin due to a lower mix of higher margin core items related to the pull-back of black luon pants . direct to consumer . income from operations from our direct to consumer segment increased $ 24.9 million , or 29 % , to $ 110.0 million in fiscal 2013 from $ 85.1 million in fiscal 2012 due to increased sales through our e-commerce websites , with gross profit increasing $ 36.3 million over fiscal 2012 . income from operations as a percentage of direct to consumer net revenue decreased by 140 basis points in fiscal 2013 compared to fiscal 2012 . other . income from operations from our other segment decreased $ 5.8 million , or 29 % , to $ 14.0 million in fiscal 2013 from $ 19.8 million in fiscal 2012 . we continue to employ our other segment strategy to increase interest in our product in markets we have not otherwise entered with corporate-owned stores . general corporate expense . general corporate expenses increased $ 2.8 million , or 3 % , to $ 104.9 million in fiscal 2013 from $ 102.1 million in fiscal 2012 . this increase was primarily due to an increase in expenses related to our head office growth of $ 27.3 million , which was largely related to the growth of our information technology and human resources departments as well as the overall growth of our business , and increased professional fees related to investment in strategic initiatives and projects . increased depreciation and amortization expense of $ 3.3 million also contributed to the increase in general corporate expense . the increase in general corporate expense was partially offset by an increase of $ 17.9 million in net foreign exchange gains which were primarily from our canadian operating entity as

our cash from operations may be negatively impacted by a decrease in demand for our products as well as the other factors described in `` item 1a . risk factors '' . in addition , we may make discretionary capital improvements with respect to our stores , distribution facilities , headquarters , or other systems , which we would expect to fund through the use of cash , issuance of debt or equity securities or other external financing sources to the extent we were unable to fund such capital expenditures out of our cash and cash equivalents and cash generated from operations . 30 revolving credit facility on november 22 , 2013 , we entered into unsecured demand revolving credit facilities with hsbc bank canada and bank of america , n.a. , canada branch , which replaced our 2007 credit facility . the credit facilities provide us with available borrowings in a total amount of $ 15.0 million . borrowings under the credit facilities must be repaid in full on demand and are available by way of u.s. or canadian denominated advances , letters of credit or depository bills . advances denominated in u.s. dollars bear interest on the outstanding balance at a rate equal to u.s. libor plus 100 basis points or the u.s. prime rate , at our option . advances denominated in canadian dollars bear interest on the outstanding balance at a rate equal to the cdor rate plus 100 basis points or the canadian prime rate , at our option . borrowings drawn down under standby letters of credit bear a fee of 100 basis points and borrowings drawn down under commercial letters of credit bear the banks ' standard pricing . we are also required to pay a quarterly commitment fee of 10 basis points on the unused portion of the facility . our wholly-owned subsidiary , lululemon usa inc. , has provided a guarantee to the bank counter-parties under the facilities . the revolving credit facilities are unsecured , with a negative pledge on assets subject to permitted encumbrances , and no financial covenants . these facilities were renewed for a one year period in november 2014. as of february 1 , 2015 , aside from letters of credit of $ 0.6 million , we had no other borrowings outstanding under these credit facilities . contractual obligations and commitments leases . we lease certain store and other retail locations , distribution centers , offices , and equipment under non-cancelable operating leases . our leases generally have initial

the company recognizes the tax benefit of an uncertain tax position only if it is more likely than not the position will be sustainable upon examination by the taxing authority , including resolution of any related appeals or litigation processes . this evaluation is based on all available evidence and assumes that the tax authorities have full knowledge of all relevant information concerning the tax position . the tax benefit recognized is measured as the largest amount of benefit which is more likely than not ( greater than 50 % likely ) to be realized upon ultimate settlement with the taxing authority . the company recognizes interest accrued and penalties related to unrecognized tax benefits in income tax expense . the company makes adjustments to these reserves in accordance with the income tax guidance when facts and circumstances change , 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 from the amounts recorded , such differences may affect the provision for income taxes in the period in which such determination is made and could have a material impact on the company 's financial condition and operating results . stock-based compensation the company measures and recognizes compensation expense for all stock-based awards , including stock options , restricted stock awards , restricted stock units ( rsus ) granted to employees , directors , and non-employees , and stock purchase rights granted under the employee stock purchase plan ( espp rights ) to employees , based on the estimated fair value of the awards on the date of grant . the fair value of each stock option granted and espp right is estimated using the black-scholes option-pricing model . the determination of the grant-date fair value using an option-pricing model is affected by the estimated fair value of the company 's common stock as well as assumptions regarding a number of other complex and subjective variables . these variables include expected stock price volatility over an expected term , actual and projected employee stock option exercise behaviors , the risk-free interest rate for an expected term , and expected dividends . the fair value of each rsu is based on the fair value of the company 's common stock on the date of grant . stock-based compensation is generally recognized on a straight-line basis over the requisite service period . the company also grants certain awards that have performance-based vesting conditions . stock-based compensation expense for such awards is recognized using an accelerated attribution method from the time it is deemed probable that the vesting condition will be met through the time the service-based vesting condition has been achieved . if an award contains a provision whereby vesting is accelerated upon a change in control , the company recognizes stock-based compensation expense on a straight-line basis , as a change in control is considered to be outside of the company 's control and is not considered probable until it occurs . forfeitures are accounted for in the period in which they occur . net loss per share attributable to class a and class b common stockholders basic and diluted net loss per share attributable to common stockholders is computed in conformity with the two-class method required for participating securities . prior to the automatic conversion of all of its redeemable convertible preferred stock outstanding into class b common stock upon the completion of the ipo , the company considered all series of its redeemable convertible preferred stock and unvested common stock to be participating securities as the holders of such stock have the right to receive nonforfeitable dividends on a pari passu basis in the event that a dividend is paid on common stock . under the two-class method , the net loss attributable to common stockholders is not allocated to the redeemable convertible preferred stock as the preferred stockholders do not have a contractual obligation to share in the company 's losses . basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period . diluted net loss per share is computed by giving effect to all potentially dilutive common stock equivalents to the extent they are dilutive . for purposes of this calculation , redeemable convertible preferred stock , stock options , restricted stock awards , rsus , espp , early exercised stock options , and common stock warrants are considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive for all periods presented . 85 the rights , including the liquidation and dividend rights , of the holders of class a and class b common stock are identical , except with respect to voting , converting , and transfer rights . as the liquidation and dividend rights are identical , the undistributed earnings are allocated on a proportionate basis to each class of common stock and the resulting basic and diluted net loss per share attributable to common stockholders are , therefore , the same for both class a and class b common stock on both individual and combined basis . cash and cash equivalents the company considers all highly liquid investments with original or remaining maturities of three months or less when purchased to be cash equivalents . restricted cash restricted cash primarily consists of collateralized letters of credit established in connection with lease agreements for the company 's facilities . restricted cash is included in current assets for leases that expire within one year and is included in non-current assets for leases that expire more than one year from the balance sheet date . investments the company 's investments in marketable debt securities have been classified and accounted for as available-for-sale and are recorded at estimated fair value . story_separator_special_tag our professional services revenue is recognized over time based on input measures , including time and materials costs incurred relative to total costs , with consideration given to output measures , such as contract deliverables , when applicable . other revenue consists of fees from customer training delivered on-site or through publicly available classes . allocation of overhead costs overhead costs that are not substantially dedicated for use by a specific functional group are allocated based on headcount . such costs include costs associated with office facilities , depreciation of property and equipment , and information technology ( it ) related personnel and other expenses , such as software and subscription services . cost of revenue cost of revenue consists of cost of product revenue and cost of professional services and other revenue . cost of revenue also includes allocated overhead costs . 50 tabl e of contents cost of product revenue . cost of product revenue consists primarily of ( i ) third-party cloud infrastructure expenses incurred in connection with our customers ' use of our platform and the deployment and maintenance of our platform on public clouds , including different regional deployments , and ( ii ) personnel-related costs associated with customer support and maintaining service availability and security of our platform , including salaries , benefits , bonuses , and stock-based compensation . we periodically receive credits from third-party cloud providers that are recorded as a reduction to the third-party cloud infrastructure expenses . cost of product revenue also includes amortization of internal-use software development costs , amortization of acquired developed technology intangible assets , and expenses associated with software and subscription services dedicated for use by our customer support team and our engineering team responsible for maintaining our platform . cost of professional services and other revenue . cost of professional services and other revenue consists primarily of personnel-related costs associated with our professional services and training departments , including salaries , benefits , bonuses , and stock-based compensation , and costs of contracted third-party partners and software tools . we intend to continue to invest additional resources in our platform infrastructure and our customer support and professional services organizations to support the growth of our business . some of these investments , including certain support costs and costs of expanding our business internationally , are incurred in advance of generating revenue , and either the failure to generate anticipated revenue or fluctuations in the timing of revenue could affect our gross margin from period to period . operating expenses our operating expenses consist of sales and marketing , research and development , and general and administrative expenses . personnel costs are the most significant component of operating expenses and consist of salaries , benefits , bonuses , stock-based compensation , and sales commissions . operating expenses also include allocated overhead costs . sales and marketing sales and marketing expenses consist primarily of personnel-related expenses associated with our sales and marketing staff , including salaries , benefits , bonuses , and stock-based compensation . sales and marketing expenses also include draws and sales commissions paid to our sales force and referral fees paid to independent third parties , including amortization of deferred commissions . prior to the fiscal year ended january 31 , 2021 , we primarily amortized sales commissions over a period of benefit that we determined to be five years as they were earned on new customer or expansion of existing customer contracts . as a result of modifications to our sales compensation plan during the fiscal year ended january 31 , 2021 , we now expense a portion of these sales commissions in the period earned , as they are earned based on the rate of our customers ' consumption of our platform , which we expect will accelerate our sales and marketing expenses in the near term . the remaining portion of the sales commissions is earned upon origination of the new customer or customer expansion contract and is deferred and amortized over the period of benefit , which we determined to be five years . sales and marketing expenses also include advertising costs and other expenses associated with our marketing and business development programs , including summit , our annual user conference , offset by proceeds from such conferences and programs . in addition , sales and marketing expenses are comprised of travel-related expenses , software and subscription services dedicated for use by our sales and marketing organizations , and outside services contracted for sales and marketing purposes . we expect that our sales and marketing expenses will increase in absolute dollars and continue to be our largest operating expense for the foreseeable future as we grow our business . however , we expect that our sales and marketing expenses will decrease as a percentage of our revenue over time . research and development research and development expenses consist primarily of personnel-related expenses associated with our research and development staff , including salaries , benefits , bonuses , and stock-based compensation . research and development expenses also include contractor or professional services fees , third-party cloud infrastructure expenses incurred in developing our platform , and computer equipment , software , and subscription services dedicated for use by our research and development organization . we expect that our research and development expenses will increase in absolute dollars as our business grows , particularly as we incur additional costs related to continued investments in our platform . however , we expect that our research and development expenses will decrease as a percentage of our revenue over time . in addition , research and development expenses that qualify as internal-use software development costs are capitalized , the amount of which may fluctuate significantly from period to period . 51 tabl e of contents general and administrative general and administrative expenses consist primarily of personnel-related expenses for our finance , legal , human resources , facilities , and administrative personnel , including salaries , benefits

the main drivers of the changes in operating assets and liabilities , net of the effect of an acquisition , were a $ 312.9 million increase in deferred revenue , resulting primarily from increased prepaid capacity arrangements ; a $ 58.3 million increase in accrued expenses and other liabilities due to increased headcount , growth in our business , and employee contributions under the 2020 espp ; and a $ 116.3 million increase in accounts receivable due to growth of our business and timing of collections , partially offset by ( i ) a $ 62.3 million increase in prepaid expenses and other assets , primarily driven by increased prepaid insurance as a result of becoming a public company , increased interest income receivables resulting from the increase in our investments , and increased prepaid third-party infrastructure expenses ; ( ii ) a $ 51.4 million increase in deferred commissions earned on bookings ; and ( iii ) a $ 31.3 million decrease in operating lease liabilities due to payments related to our operating lease obligations . 62 tabl e of contents for the fiscal year ended january 31 , 2020 , net cash used in operating activities was $ 176.6 million , primarily consisting of our net loss of $ 348.5 million , adjusted for non-cash charges of $ 122.6 million , and net cash inflows of $ 49.3 million provided by changes in our operating assets and liabilities , net of effect of acquisitions . the main drivers of the changes in operating assets and liabilities , net of effect of acquisitions , were a $ 223.0 million increase in deferred revenue , resulting primarily from increased prepaid capacity arrangements , a $ 35.0 million increase in accrued expenses and other liabilities due to increased headcount and growth in our business , and a $ 1.1 million increase in accounts payable . these amounts were partially offset by a $ 116.9 million increase in accounts receivable due to an increase in sales , a $ 68.6 million increase in deferred commissions earned on bookings , a $ 10.8 million increase in prepaid expenses and other assets , primarily driven by prepaid software and subscription services and deposits for our leased facilities , and a $ 13.5 million decrease in operating lease liabilities due to payments related to our operating lease obligations . < span style= '' color : # 000000 ; font-family : 'times new

we evaluated management 's analysis , and letters from internal and external legal counsel , as appropriate , regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order to assess management 's assertion that amounts are probable of recovery or a future reduction in rates . deloitte & touche llp kansas city , missouri february 26 , 2021 we have served as the company 's auditor since 2002 . 67 report of independent registered public accounting firm to the shareholder and the board of directors of evergy metro , inc. opinion on the financial statements we have audited the accompanying consolidated balance sheets of evergy metro , inc. and subsidiaries ( the `` company `` ) as of december 31 , 2020 and 2019 , the related consolidated statements of comprehensive income , changes in equity , and cash flows , for each of the three years in the period ended december 31 , 2020 , and the related notes and the financial statement schedule listed in the index at item 15 ( 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 , 2020 and 2019 , and the results of its operations and its cash flows for each of the three years in the period ended december 31 , 2020 , 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 . critical audit matter the critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that ( 1 ) relates to accounts or disclosures that are material to the financial statements and ( 2 ) involved our especially challenging , subjective , or complex judgments . the communication of critical audit matters does not alter in any way our opinion on the financial statements , taken as a whole , and we are not , by communicating the critical audit matter below , providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates . rate matters and regulation - impact of rate regulation on the financial statements - refer to notes 1 and 5 to the financial statements critical audit matter description the company is subject to rate regulation by the kansas corporation commission and by the missouri public service commission ( collectively the `` commissions `` ) , which have jurisdiction with respect to the rates of electric distribution companies in kansas and missouri , respectively . management has determined it meets the requirements under accounting principles generally accepted in the united states of america to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation . accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures , such as property , plant , 68 and equipment , including asset retirements and abandonments ; regulatory assets and liabilities ; operating revenues ; operating and maintenance expense ; and depreciation expense . the company 's rates are subject to regulatory rate-setting processes and annual earnings oversight . rates are determined and approved in regulatory proceedings based on an analysis of the company 's costs to provide utility service and a return on , and recovery of , the company 's investment in the utility business . regulatory decisions can have an impact on the recovery of costs , the rate of return earned on investment , and the timing and amount of assets to be recovered by rates . the commissions ' regulation of rates is premised on the full recovery of prudently incurred costs and a reasonable rate of return on invested capital . story_separator_special_tag management regularly assesses whether regulatory assets and liabilities are probable of future recovery or refund by considering factors such as decisions by the mpsc , kcc or ferc in evergy 's rate case filings ; decisions in other regulatory proceedings , including decisions related to other companies that establish precedent on matters applicable to evergy ; and changes in laws and regulations . if recovery or refund of regulatory assets or liabilities is not approved by regulators or is no longer deemed probable , these regulatory assets or liabilities are recognized in the current period results of operations . evergy 's continued ability to meet the criteria for recording regulatory assets and liabilities may be affected in the future by restructuring and deregulation in the electric industry or changes in accounting rules . in the event that the criteria no longer applied to all or a portion of evergy 's operations , the related regulatory assets and liabilities would be written off unless an appropriate regulatory recovery mechanism were provided . additionally , these factors could result in an impairment on utility plant assets . see note 5 to the consolidated financial statements for additional information . impairments of assets and goodwill long-lived assets are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as prescribed under gaap . accounting rules require goodwill to be tested for impairment annually and when an event occurs indicating the possibility that an impairment exists . the goodwill impairment test consists of comparing the fair value of a reporting unit to its carrying amount , including goodwill , to identify potential impairment . in the event that the carrying amount exceeds the fair value of the reporting unit , an impairment loss is recognized for the difference between the carrying amount of the reporting unit and its fair value . evergy 's consolidated operations are considered one reporting unit for assessment of impairment , as management assesses financial performance and allocates resources on a consolidated basis . the annual impairment test for the $ 2,336.6 million of goodwill from the great plains energy and evergy kansas central merger was conducted as of may 1 , 2020. the fair value of the reporting unit substantially exceeded the carrying amount , including goodwill . as a result , there was no impairment of goodwill . the determination of fair value for the reporting unit consisted of two valuation techniques : an income approach consisting of a discounted cash flow analysis and a market approach consisting of a determination of reporting unit invested capital using a market multiple derived from the historical earnings before interest , income taxes , depreciation and amortization and market prices of the stock of peer companies . the results of the two techniques were evaluated and weighted to determine a point within the range that management considered representative of fair value for the reporting unit , which involves a significant amount of management judgment . the discounted cash flow analysis is most significantly impacted by two assumptions : estimated future cash flows and the discount rate applied to those cash flows . management determines the appropriate discount rate to be based on the reporting unit 's weighted average cost of capital ( wacc ) . the wacc takes into account both the return on equity authorized by the kcc and mpsc and after-tax cost of debt . estimated future cash flows are based on evergy 's internal business plan , which assumes the occurrence of certain events in the future , such as the outcome of future rate filings , future approved rates of return on equity , anticipated returns of and earnings on future capital investments , continued recovery of cost of service and the renewal of certain contracts . management also makes assumptions regarding the run rate of operations , maintenance and general and administrative costs based on the expected outcome of the aforementioned events . should the actual outcome of some or all of these assumptions differ significantly from the current assumptions , revisions to current cash flow assumptions could cause the fair 41 value of the evergy reporting unit under the income approach to be significantly different in future periods and could result in a future impairment charge to goodwill . the market approach analysis is most significantly impacted by management 's selection of relevant peer companies as well as the determination of an appropriate control premium to be added to the calculated invested capital of the reporting unit , as control premiums associated with a controlling interest are not reflected in the quoted market price of a single share of stock . management determines an appropriate control premium by using an average of control premiums for recent acquisitions in the industry . changes in results of peer companies , selection of different peer companies and future acquisitions with significantly different control premiums could result in a significantly different fair value of the evergy reporting unit . income taxes income taxes are accounted for using the asset/liability approach . deferred tax assets and liabilities are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities , applying enacted statutory tax rates in effect for the year in which the differences are expected to reverse . deferred investment tax credits are amortized ratably over the life of the related property . deferred tax assets are also recorded for net operating losses , capital losses and tax credit carryforwards . evergy is required to estimate the amount of taxes payable or refundable for the current year and the deferred tax liabilities and assets for future tax consequences of events reflected in evergy 's consolidated financial statements or tax returns . actual results could differ from these estimates for a variety of reasons including changes in income tax laws , enacted tax rates and results of audits by taxing

write-off of a regulatory asset for costs incurred during the jec lease extension in 2019 , a $ 6.0 million decrease related to maintenance outages at jec , la cygne unit 2 and lawrence energy center as well as lower employee headcount in 2020 ; partially offset by a $ 3.9 million asset write-off in 2020 ; partially offset by 55 a $ 22.8 million increase in voluntary severance expenses due to a $ 19.1 million increase related to evergy voluntary exit programs in 2020 and $ 3.7 million of voluntary severance expenses incurred in 2020 related to wolf creek voluntary exit programs . evergy kansas central depreciation and amortization evergy kansas central 's depreciation and amortization expense increased $ 9.3 million in 2020 , compared to 2019 , primarily driven by capital additions . evergy kansas central interest expense evergy kansas central 's interest expense decreased $ 9.4 million in 2020 , compared to 2019 , primarily driven by : an $ 11.9 million decrease due to lower commercial paper balances and weighted-average interest rates on short-term borrowings in 2020 ; and a $ 3.1 million net decrease due to the repayment of evergy kansas south 's $ 300.0 million of 6.70 % fmbs at maturity in june 2019 , which decreased interest expense by $ 9.2 million , partially offset by a $ 6.1 million increase due to the issuance of evergy kansas central 's $ 300.0 million of 3.25 % fmbs in august 2019 ; partially offset by a $ 6.6 million net increase due to the issuance of evergy kansas central 's $ 500.0 million of 3.45 % fmbs in april 2020 , which increased interest expense by $ 12.6 million , partially offset by a $ 6.0 million decrease due to the repayment of evergy kansas central 's $ 250.0 million of 5.10 % fmbs in may 2020. evergy kansas central income tax expense evergy kansas central 's income tax expense increased $ 103.7 million in 2020 , compared to 2019 , primarily driven by a $ 109.0 million net increase due to the revaluation of deferred income tax assets and liabilities in the second quarter of 2020 due to the

therefore , we continue to carry a valuation allowance against the related deferred tax assets . the effective income tax rate was different from the statutory u.s. federal income tax rate due to the following : replace_table_token_26_th due to changes in tax law , the research and development tax credit reflects $ 1.1 million of additional tax benefits relating to years prior to 2013. u.s. income taxes have not been provided on $ 75.6 million of undistributed earnings of foreign subsidiaries at december 31 , 2013 as these amounts are considered permanently invested . a liability could arise if our intention to permanently invest such earnings were to change and amounts are distributed by such subsidiaries or if such subsidiaries are ultimately disposed . it is not practicable to estimate the additional income taxes related to the hypothetical distribution of permanently invested earnings . we are a party to a tax sharing agreement with fmc technologies whereby we have agreed to indemnify fmc technologies for any additional tax liability resulting from jbt corporation businesses . as of december 31 , 2013 , we are not aware of any such additional tax liability . the following tax years remain subject to examination in the following significant jurisdictions : replace_table_token_27_th note 7. pension and postretirement and other benefit plans we sponsor qualified and nonqualified defined benefit pension plans that together cover many of our u.s. employees . the plans provide defined benefits based on years of service and final average salary . we also provide postretirement medical and life insurance benefits to some of our u.s. employees . the postretirement medical plan is contributory while the postretirement life insurance plan is noncontributory . foreign-based employees are eligible to participate in either jbt corporation-sponsored or government sponsored benefit plans to which we contribute . we also sponsor separate defined contribution plans that cover substantially all of our u.s. employees and some international employees . beginning in 2010 , the domestic defined benefit plans were frozen discontinuing new entrants and future benefit accruals for non-union participants . 48 the funded status of our pension and postretirement benefit plans , together with the associated balances recognized in our consolidated financial statements as of december 31 , 2013 and 2012 , were as follows : replace_table_token_28_th amounts recognized in accumulated other comprehensive loss at december 31 were as follows : replace_table_token_29_th the accumulated benefit obligation for all pension plans was $ 299.8 million and $ 325.6 million at december 31 , 2013 and 2012. key information for our plans with accumulated benefit obligation in excess of plan assets as of december 31 was as follows : replace_table_token_30_th 49 pension and other postretirement benefit costs ( income ) for the years ended december 31 were as follows : replace_table_token_31_th pre-tax changes in projected benefit obligations and plan assets recognized in other comprehensive income during 2013 were as follows : changes recognized in oci replace_table_token_32_th the company uses a corridor approach to recognize actuarial gains and losses that result from changes in the actuarial assumptions . the corridor approach defers all actuarial gains and losses resulting from changes in assumptions in other accumulated comprehensive income ( loss ) , such as those related to changes in the discount rate and differences between actual and assumed returns on plan assets . these unrecognized gains and losses are amortized when the net gains and losses exceed 10 % of the higher of the market-related value of the assets or the projected benefit obligation for each respective plan . the amortization is on a straight-line basis over the life expectancy of the plan 's participants for the frozen plans and the expected remaining service periods for the other plans . we expect to amortize $ 2.7 million of net actuarial loss and $ 0.1 million of prior service cost from accumulated other comprehensive income ( loss ) into net periodic benefit cost in 2014. the following weighted-average assumptions were used to determine the benefit obligations : weighted-average assumption to determine benefit obligation replace_table_token_33_th the following weighted-average assumptions were used to determine net periodic benefit cost : replace_table_token_34_th the estimate of expected rate of return on plan assets is based primarily on the historical performance of plan assets , current market conditions and long-term growth expectations . assumed health care cost trend rates for future periods will not have an effect on the amounts reported for the postretirement health care plan as our benefit obligation under the plan was fully capped at the 2002 benefit level . 50 plan assets our pension investment strategy balances the requirements to generate returns using higher-returning assets , such as equity securities , with the need to control risk in the pension plan with less volatile assets , such as fixed-income securities . risks include , among others , the likelihood of the pension plans being underfunded , thereby increasing their dependence on company contributions . the assets are managed by professional investment firms and performance is evaluated against specific benchmarks . our target asset allocations and actual allocation as of december 31 , 2013 and 2012 were as follows : replace_table_token_35_th our actual pension plans ' asset holdings by category and level within the fair value hierarchy are presented in the following table : replace_table_token_36_th ( 1 ) includes funds that invest primarily in large cap equity securities . ( 2 ) includes small cap equity securities and funds that invest primarily in small cap equity securities . ( 3 ) includes u.s. government securities and funds that invest primarily in u.s. government bonds , including treasury inflation protected securities . ( 4 ) includes investment grade bonds , high yield bonds and mortgage-backed fixed income securities and funds that invest in such securities . story_separator_special_tag since the determination of the reserve requirement is based on management judgment rather than a formulaic approach , we are unable to quantify with a high level of precision the effect that a change in demand assumptions would have on management 's assessment of the excess and obsolete inventory reserve , although lower demand assumptions would generally result in an increase in excess and obsolete inventory . goodwill goodwill represents the excess of the cost of an acquired business over the amounts assigned to the identifiable net assets . goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis , or whenever an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount . we are required to make certain subjective and complex judgments in assessing whether an event that could indicate an impairment of goodwill has occurred , and must make assumptions and estimates to determine the fair value of our reporting units . we may assess qualitative factors to make this determination , or bypass such a qualitative assessment and proceed directly to testing goodwill for impairment using a two-step process . qualitative factors we may consider include , but are not limited to , macroeconomic conditions , industry conditions , the competitive environment , changes in the market for our products and services , regulatory and political developments and entity specific factors such as strategies and financial performance . if , after completing such assessment , it is determined more likely than not that the fair value of a reporting unit is less than its carrying value , we proceed to a two-step impairment test , whereby the first step is comparing the fair value of a reporting unit with its carrying amount , including goodwill . if the fair value of a reporting unit exceeds its carrying amount , goodwill of the reporting unit is considered not impaired and the second step of the test is not performed . the second step of the impairment test is performed when the carrying amount of the reporting unit exceeds the fair value , in this case , the implied fair value of the reporting unit goodwill is compared with the carrying amount of that goodwill . if the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill , an impairment loss is recognized in an amount equal to the excess . we completed our annual goodwill impairment test as of october 31 , 2013 using a qualitative assessment approach . as a result of the assessment of the qualitative factors , we have determined it is not necessary to perform the quantitative goodwill impairment test on any of our reporting units . 34 self-insurance reserves we purchase third-party insurance for workers ' compensation , automobile , product and general liability claims that exceed a certain level . we are responsible for the payment of claims below the limits of the applicable insurance coverage as well as claims under our self-insured healthcare plans . the obligations associated with the incurred losses are determined using actuarial estimates . these estimates are based on historical information along with certain assumptions about future events . changes in assumptions for medical costs , environmental hazards , and legal actions , as well as changes in actual experience could cause these estimates to change which could potentially be material to our results of operation and financial condition . in the fourth quarter of 2013 , we incurred unusually high healthcare claims which required the recognition of $ 1.7 million in higher self-insurance expenses . accounting for income taxes in determining our current income tax provision , we assess temporary differences resulting from differing treatments of items for tax and accounting purposes . these differences result in deferred tax assets and liabilities , which are recorded in our consolidated balance sheets . when we maintain deferred tax assets , we must assess the likelihood that these assets will be recovered through adjustments to future taxable income . to the extent we believe recovery is not likely , we establish a valuation allowance . we record an allowance reducing the asset to a value we believe will be recoverable based on our expectation of future taxable income . we believe the accounting estimate related to the valuation allowance is a critical accounting estimate because it is highly susceptible to change from period to period as it requires management to make assumptions about our future income over the lives of the deferred tax assets , and the impact of increasing or decreasing the valuation allowance is potentially material to our results of operations . forecasting future income requires us to use a significant amount of judgment . in estimating future income , we use our internal operating budgets and long-range planning projections . we develop our budgets and long-range projections based on recent results , trends , economic and industry forecasts influencing our segments ' performance , our backlog , planned timing of new product launches , and customer sales commitments . significant changes in the expected realizability of the net deferred tax assets would require that we adjust the valuation allowance , resulting in a change to net income . as of december 31 , 2013 , we estimated that it is not likely that we will realize income tax deductions for certain uncollectible receivables and , therefore , we have provided a valuation allowance against the related deferred tax assets . we have estimated that it is likely that we will generate future taxable income in the u.s. and most foreign jurisdictions , and have therefore not provided a valuation allowance against most of our deferred tax assets . defined benefit pension and other postretirement plans the measurement of pension and other postretirement plans ' costs require the use of assumptions for discount rates , investment returns ,

million due on february 21 , 2014 , and a second installment payment due at maturity on august 20 , 2014. the second loan was a brazilian real denominated loan in the amount of br7.9 million ( approximately $ 3.4 million ) that bears an annual interest rate of 5.5 % . the first payment on this loan is due on may 14 , 2014 , with equal monthly payments required for 24 months thereafter . our credit agreement and notes include restrictive covenants that , if not met , could lead to a renegotiation of our credit lines , requirement to repay our borrowings and or a significant increase in our cost of financing . at december 31 , 2013 , we were in compliance with all covenants of our contractual obligations as shown in the following table : replace_table_token_12_th ( 1 ) interest coverage ratio is a comparison of the trailing twelve months consolidated ebitda , defined as net income plus interest expense plus income tax expense plus depreciation and amortization plus non-cash expenses and extraordinary , unusual and non-recurring items , to trailing twelve months interest expense . ( 2 ) leverage ratio is a comparison of the total indebtedness , defined as total debt plus guarantees of indebtedness of others plus obligations under financial letters of credit issued against the credit facility , to the trailing twelve months consolidated ebitda , as defined above . < table border= '' 0 '' cellpadding= '' 0 '' cellspacing= '' 0 '' id= '' mtab7531 '' style= '' text-indent : 0px ; width : 100 % ;

the question related to the timing of income recognition and therefore the additional income recognized in 2008 and 2009 will result in a corresponding tax deduction and resulting refund in the following fiscal year . under the settlement the company paid an immaterial amount of interest to the irs related to the additional tax payment . the irs is currently auditing the company 's federal income tax returns for fiscal years 2010 and 2011 . 43 the company 's policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses . the company had no accrued penalties and or interest as of april 30 , 2013 and 2012 , respectively . revenue recognition revenues are generated principally from the sale of used vehicles , which in most cases includes a service contract and a payment protection plan product , and interest income and late fees earned on finance receivables . revenues are net of taxes collected from customers and remitted to government agencies . cost of vehicle sales include costs incurred by the company to prepare the vehicle for sale including license and title costs , gasoline , transport services and repairs . revenues from the sale of used vehicles are recognized when the sales contract is signed , the customer has taken possession of the vehicle and , if applicable , financing has been approved . revenues from the sale of service contracts are recognized ratably over the service contract period . service contract related expenses are included in cost of sales . payment protection plan revenues are initially deferred and then recognized to income using the “ rule of 78 's ” interest method over the life of the contract so that revenues are recognized in proportion to the amount of cancellation protection provided . payment protection plan revenues are included in sales and related losses are included in cost of sales as incurred . interest income is recognized on all active finance receivable accounts using the simple effective interest method . active accounts include all accounts except those that have been paid-off or charged-off . sales consist of the following for the years ended april 30 , 2013 , 2012 and 2011 : replace_table_token_15_th at april 30 , 2013 and 2012 , finance receivables more than 90 days past due were approximately $ 2.0 million and $ 656,000 , respectively . late fee revenues totaled approximately $ 2.0 million , $ 1.7 million and $ 1.7 million for the fiscal years ended 2013 , 2012 and 2011 , respectively . late fee revenue is recognized when collected and is reflected within interest and other income on the consolidated statements of operations . advertising costs advertising costs are expensed as incurred and consist principally of radio , television and print media marketing costs . advertising costs amounted to $ 4.1 million , $ 3.5 million and $ 3.4 million for the years ended april 30 , 2013 , 2012 and 2011 , respectively . employee benefit plans the company has 401 ( k ) plans for all of its employees meeting certain eligibility requirements . the plans provide for voluntary employee contributions and the company matches 50 % of employee contributions up to a maximum of 4 % of each employee 's compensation . the company contributed approximately $ 290,000 , $ 236,000 , and $ 201,000 to the plans for the years ended april 30 , 2013 , 2012 and 2011 , respectively . 44 the company offers employees the right to purchase common shares at a 15 % discount from market price under the 2006 employee stock purchase plan which was approved by shareholders in october 2006. the company takes a charge to earnings for the 15 % discount . amounts for fiscal years 2013 , 2012 and 2011 were not material . a total of 200,000 shares were registered and 167,537 remain available for issuance under this plan at april 30 , 2013. earnings per share basic earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period . diluted earnings per share are computed by dividing net income attributable to common stockholders by the average number of common shares outstanding during the period plus dilutive common stock equivalents . the calculation of diluted earnings per share takes into consideration the potentially dilutive effect of common stock equivalents , such as outstanding stock options and non-vested restricted stock , which if exercised or converted into common stock would then share in the earnings of the company . in computing diluted earnings per share , the company utilizes the treasury stock method and anti-dilutive securities are excluded . stock-based compensation the company recognizes the cost of employee services received in exchange for awards of equity instruments , such as stock options and restricted stock , based on the fair value of those awards at the date of grant over the requisite service period . the company uses the black scholes option pricing model to determine the fair value of stock option awards . the company may issue either new shares or treasury shares upon exercise of these awards . stock-based compensation plans , related expenses , and assumptions used in the black scholes option pricing model are more fully described in note k . treasury stock the company purchased 398,548 , 1,212,791 , and 848,900 shares of its common stock to be held as treasury stock for a total cost of $ 17.3 million , $ 39.4 million and $ 20.3 million during the years ended april 30 , 2013 , 2012 and 2011 , respectively . treasury stock may be used for issuances under the company 's stock-based compensation plans or for other general corporate purposes . recent accounting pronouncements goodwill . story_separator_special_tag in fiscal 2010 , the internal revenue service ( “ irs ” ) completed the examinations of the company 's income tax returns for fiscal years 2008 and 2009. as a result of the examinations , the irs questioned whether deferred payment protection plan ( “ ppp ” ) revenue associated with the sale of certain receivables are subject to the acceleration of advance payments provision of the internal revenue code and whether the company may deduct losses on the sale of the ppp receivables in excess of the income recognized on the underlying contracts . the issue was timing in nature and did not affect the overall tax provision , but affected the timing of required tax payments . in january 2013 , the company received approval for a negotiated settlement with the irs related to the examinations for income tax returns for fiscal years 2008 and 2009. the negotiated settlement resulted in additional taxable income and a resulting tax payment for the exam period . the question related to the timing of income recognition and therefore the additional income recognized in 2008 and 2009 will result in a corresponding tax deduction and resulting refund in the following fiscal year . under the settlement the company paid an immaterial amount of interest to the irs related to the additional tax payment . the irs is currently auditing the company 's federal income tax returns for fiscal years 2010 and 2011. the company 's policy is to recognize accrued interest related to unrecognized tax benefits in interest expense and penalties in operating expenses . the company had no accrued penalties and or interest as of april 30 , 2013. critical accounting estimates the preparation of financial statements in conformity with generally accepted accounting principles in the united states of america requires the company to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . actual results could differ from the company 's estimates . the company believes the most significant estimate made in the preparation of the consolidated financial statements in item 8 relates to the determination of its allowance for credit losses , which is discussed below . the company 's accounting policies are discussed in note b to the consolidated financial statements in item 8 . 29 the company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover estimated losses inherent in the portfolio at the balance sheet date in the collection of its finance receivables currently outstanding . at april 30 , 2013 , the weighted average total contract term was 29.3 months with 21.3 months remaining . the reserve amount in the allowance for credit losses at april 30 , 2013 , $ 75.3 million , was 21.5 % of the principal balance in finance receivables of $ 363.4 million , less unearned payment protection plan revenue of $ 12.9 million . based on the analysis discussed below and strong and consistent credit results the past several years , management reduced the allowance for credit losses at april 30 , 2012 to 21.5 % from 22.0 % at april 30 , 2011. the estimated reserve amount is the company 's anticipated future net charge-offs for losses incurred through the balance sheet date . the allowance takes into account historical credit loss experience ( both timing and severity of losses ) , with consideration given to recent credit loss trends and changes in contract characteristics ( i.e . , average amount financed , months outstanding at loss date , term and age of portfolio ) , delinquency levels , collateral values , economic conditions and underwriting and collection practices . the allowance for credit losses is reviewed at least quarterly by management with any changes reflected in current operations . the calculation of the allowance for credit losses uses the following primary factors : · the number of units repossessed or charged-off as a percentage of total units financed over specific historical periods of time . · the average net repossession and charge-off loss per unit during the last eighteen months , segregated by the number of months since the contract origination date , and adjusted for the expected future average net charge-off loss per unit . approximately 50 % of the charge-offs that will ultimately occur in the portfolio are expected to occur within 10-11 months following the balance sheet date . the average age of an account at charge-off date is 10.6 months . · the timing of repossession and charge-off losses relative to the date of sale ( i.e . , how long it takes for a repossession or charge-off to occur ) for repossessions and charge-offs occurring during the last eighteen months . a point estimate is produced by this analysis which is then supplemented by any positive or negative subjective factors to arrive at an overall reserve amount that management considers to be a reasonable estimate of losses inherent in the portfolio at the balance sheet date that will be realized via actual charge-offs in the future . although it is at least reasonably possible that events or circumstances could occur in the future that are not presently foreseen which could cause actual credit losses to be materially different from the recorded allowance for credit losses , the company believes that it has given appropriate consideration to all relevant factors and has made reasonable assumptions in determining the allowance for credit losses . periods of economic downturn do not necessarily lead to increased credit losses because the company provides basic affordable transportation to customers that , for the most part , do not have access to public transportation . the effectiveness of the execution of internal policies and procedures within the collections area has historically had a more significant effect on collection results

this is expected to result in gross margin percentages generally in the 42 % range in the near term with overall contract terms increasing due in part to competitive pressures , somewhat mitigated by software and operational changes which have been made to structure seasonal payments during income tax refund periods . in an effort to ensure an adequate supply of vehicles at appropriate prices , the company has increased the level of accountability for its purchasing agents including the establishment of sourcing and pricing guidelines . additionally , the company is expanding its purchasing territories to larger cities in close proximity to its dealerships and increasing its efforts to purchase vehicles from individuals at the dealership level as well as via the internet . the company believes that the amount of credit available for the sub-prime auto industry has increased recently and management expects the availability of consumer credit within the automotive industry to be higher over the near term when compared to recent history and that this will contribute to overall increases in demand for most , if not all , of the vehicles the company purchases for resale . increased competition resulting from availability of funding to the sub-prime auto industry has contributed to lower down payments and longer terms , which have had a negative effect on collection percentages , liquidity and credit losses when compared to prior periods . macro-economic factors can have an effect on credit losses and resulting liquidity . general inflation , particularly within staple items such as groceries and gasoline , as well as overall unemployment levels can have a significant effect on collection results and ultimately credit losses . the company has made improvements to its business processes within the last few years to strengthen controls and provide stronger infrastructure to support its collections efforts . the company anticipates that credit losses on a near term going-forward basis will be somewhat higher than historical ranges . significant negative macro-economic effects as well as competitive pressures could cause actual results to differ from the anticipated range . management continues to focus on improved execution at the dealership level , specifically as related to working individually with its customers concerning collection issues . the company has generally leased the majority of the properties where its dealerships are located . as of april 30 , 2013 , the company leased approximately 80 % of its dealership properties . the company expects to continue to lease the majority of the properties where its dealerships are located . 27 < div align= '' justify '' style= '' text-indent : 36pt ; display :

these reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable ( if no payments are required of the company ) for phs chargebacks , prompt pay discounts and certain distribution fees , or a current liability ( if a payment is required of us ) , for medicaid rebates , co-pay assistance and certain distribution fees . the accounts receivable from product sales represents receivables due from the company 's specialty distributor and specialty pharmacies in the u.s. as well as certain distributors in the eu , brazil , israel and the middle east ( collectively , “ customers ” ) . the company monitors the financial performance and creditworthiness of its customers so that it can properly assess and respond to changes in the customers ' credit profiles . the company provides reserves against trade receivables for estimated losses that may result from a customer 's inability to pay . amounts determined to be uncollectible are written-off against the established reserve . as of december 31 , 2018 , the credit profiles for the company 's customers are deemed to be in good standing and an allowance for doubtful accounts receivable is not considered necessary . further , no accounts receivable amounts related to government research contracts and other grants have historically been written off and , thus , an allowance for doubtful accounts receivable related to government research contracts and other grants is also not considered necessary . concentration of credit risk financial instruments which potentially subject the company to concentrations of credit risk consist of accounts receivable from customers and cash , cash equivalent and investments held at financial institutions . for the year ended december 31 , 2018 , the majority of the company 's accounts receivable arose from product sales in the u.s. and all customers have standard payment terms which generally require payment within 30 to 60 days . outside of the u.s. , the payment terms range between 60 and 120 days . three individual customers accounted for 42 % , 38 % and 18 % of net product revenues and 51 % , 28 % and 10 % of accounts receivable from product sales , respectively . as of december 31 , 2018 , the company believes that such customers are of high credit quality . f-8 as of december 31 , 2018 , the company 's cash equivalents and investments were concentrated at three financial institution s. t he company does not believe that there is significant risk of non-performance by the financial institution s . inventories inventories are stated at the lower of cost and net realizable value with cost determined on a first-in , first-out basis . the company capitalizes inventory costs associated with products following regulatory approval when future commercialization is considered probable and the future economic benefit is expected to be realized . exondys 51 inventory that may be used in clinical development programs is charged to research and development expense when the product enters the research and development process and no longer can be used for commercial purposes . the company periodically reviews its inventories for excess amounts or obsolescence and writes down obsolete or otherwise unmarketable inventory to its estimated net realizable value . additionally , though the company 's product is subject to strict quality control and monitoring which it performs throughout the manufacturing processes , certain batches or units of product may not meet quality specifications resulting in a charge to cost of sales . property and equipment property and equipment are initially recorded at cost , including the acquisition cost and all costs necessarily incurred to bring the asset to the location and working condition necessary for its intended use . the cost of normal , recurring or periodic repairs and maintenance activities related to property and equipment are expensed as incurred . the cost for planned major maintenance activities , including the related acquisition or construction of assets , is capitalized if the repair will result in future economic benefits . interest costs incurred during the construction period of major capital projects are capitalized until the asset is ready for its intended use , at which point the interest costs are amortized as depreciation expense over the life of the underlying asset . the company generally depreciates the cost of its property and equipment using the straight-line method over the estimated useful lives of the respective assets , which are summarized as follows : asset category useful lives lab equipment 5 years office equipment 5 years software and computer equipment 3 - 5 years leasehold improvements lesser of the useful life or the term of the respective lease land not depreciated building 30 years construction in progress not depreciated until put into service intangible assets the company 's intangible assets consist of in-licensed rights , patent costs , and software licenses , which are stated in the company 's consolidated balance sheets net of accumulated amortization and impairments , if applicable . the in-licensed rights relates to agreements with biomarin ( defined in note 3 ) and the university of western australia ( “ uwa ” ) . the in-licensed rights are being amortized on a straight-line basis over the remaining life of the related patent because the life of the related patent reflects the expected time period that the company will benefit from the in-licensed rights . patent costs consist primarily of external legal costs , filing fees incurred to file patent applications and renewal fees on proprietary technology developed or licensed by the company . patent costs associated with applying for a patent , being issued a patent and annual renewal fees are capitalized . costs to defend a patent and costs to invalidate a competitor 's patent or patent application are expensed as incurred . story_separator_special_tag other general and administrative expenses include an allocation of our facility costs and professional fees for legal , consulting and accounting services . -69- the following table summarizes our selling , general and administrative expenses by category for each of the periods indicated : replace_table_token_7_th * nm : not meaningful selling , general and administrative expenses for 2018 increased by $ 85.1 million , or 69 % , compared with 2017. this was primarily driven by the following : $ 34.2 million increase in professional services primarily due to continuing global expansion ; $ 35.1 million and $ 4.9 million increases in compensation and other personnel expenses and facility-related expenses , respectively , primarily due to an increase in headcount ; $ 16.1 million increase in stock-based compensation primarily due to increases in headcount and stock price , the achievement of a milestone related to the september 2016 restricted stock awards with performance conditions as well as the impact of revised forfeiture rate assumption for officers and members of our board of directors ( beginning on january 1 , 2018 , based on recent trending of employee turnover data , we began to apply different forfeiture rates to non-officer employees and directors and officers ) ; $ 3.5 million decrease in severance expense as a result of the termination of our former ceo in june 2017 ; and $ 5.1 million decrease in restructuring expenses primarily due to the relief of cease-use liabilities as a result of the termination of the rental agreement for our corvallis facility . selling , general and administrative expenses for 2017 increased by $ 38.9 million , or 46 % , compared with 2016. this was primarily driven by the following : $ 25.3 million increase in professional services driven by increased legal fees because of on-going litigations and global expansion ; $ 7.1 million and $ 1.2 million increases in compensation and other personnel expenses and facility-related expenses , respectively , primarily reflect an increase in headcount ; and $ 3.5 million increase in severance expense due to the resignation of our former ceo . -70- exondys 51 settlement and license charges as a result of the execution of the settlement and license agreements with biomarin in july 2017 , we recognized exondys 51 litigation and license charges of $ 28.4 million during 2017. amortization of in-licensed rights amortization of in-license rights relate to the agreements we entered into with biomarin and uwa in july 2017 and april 2011 , respectively . we recorded an in-licensed right asset of approximately $ 6.6 million as a result of the settlement and license agreements with biomarin . additionally , following the first sale of exondys 51 in september 2016 , we recorded an in-licensed right asset of $ 1.0 million related to the license agreement with uwa . both in-licensed rights are being amortized on a straight-line basis over the life of the patent from the first commercial sale of exondys 51. for the years ended december 31 , 2018 , 2017 and 2016 , we recorded amortization of in-licensed rights of approximately $ 0.9 million , $ 1.1 million and less than $ 0.1 million , respectively . interest expense and other , net interest expense and other , net , primarily consists of interest income on our cash , cash equivalents and investments , interest expense and rental income and loss . our cash equivalents and investments consist of money market funds , commercial paper , government and government agency debt securities and certificates of deposit . interest expense includes interest accrued on our convertible notes , term loan , revolving line of credit and a mortgage loan related to our corvallis , oregon property . rental income and loss is from leasing excess space in some of our facilities . interest expense and other , net for 2018 increased by $ 17.0 million compared with 2017. interest expense and other , net for 2017 increased by $ 1.5 million compared with 2016. for both 2018 and 2017 , the increase was primarily driven by an increase in interest expense incurred in connection with the $ 570.0 million convertible debt offering partially offset by interest income from higher balances of cash , cash equivalents and investments . gain from sale of priority review voucher in february 2017 , we entered into an agreement with gilead sciences , inc. ( “ gilead ” ) to sell our rare pediatric disease priority review voucher ( “ prv ” ) . we received the prv when exondys 51 was approved by the fda for the treatment of patients with dmd amenable to exon 51 skipping . following the early termination of the applicable waiting period under the hart-scott-rodino antitrust improvements act of 1976 , as amended , in march 2017 , we completed our sale of the prv to a subsidiary of gilead . pursuant to the agreement , the subsidiary of gilead paid us $ 125.0 million , which was recorded as a gain from sale of the prv as it did not have a carrying value at the time of the sale . income tax ( benefit ) expense income tax benefit for 2018 was approximately $ 0.7 million , which primarily reflected adjustments to estimated state income taxes in 2017. income tax expense for 2017 was approximately $ 2.1 million , which related to the alternative minimum tax related to the gain from the sale of the prv and estimated state income taxes . there was no income tax expense in 2016 . -71- liquidity and capital resources the following table summarizes our financial condition for each of the periods indicated : replace_table_token_8_th for the year ended december 31 , 2018 , our principal source of liquidity was from debt and equity financings and product sales from exondys 51. for the year ended december 31 , 2017 , our principal source of liquidity was from debt and equity financings , sale of the prv

cash used in investing activities increased by $ 191.7 million for 2018 compared with 2017 , primarily due to the following : $ 582.1 million increase in purchase of available-for-sale securities ; $ 49.2 million increase in purchase of property and equipment ; $ 125.0 million decrease in proceeds from sales of the prv ; and $ 10.7 million decrease in proceeds from maturity of a restricted investment . -73- the increases were partially offset by : $ 569.6 million increase in proceeds from maturity of available-for-sale securities ; and $ 6.0 million decrease in purchase of intangible assets . cash used in investing activities increased by $ 88.6 million for 2017 compared with 2016 , primarily due to the following : $ 394.1 million increase in purchase of available-for-sale securities ; $ 6.7 million increase in purchase of property and equipment ; and $ 7.7 million increase in purchase of intangible assets . the increases were partially offset by : $ 184.1 million increase in proceeds from maturity of available-for-sale securities ; $ 125.0 million from sales of the prv ; $ 10.7 million increase in proceeds from maturity of a restricted investment . financing activities . cash provided by financing activities decreased by $ 357.9 million for 2018 compared with 2017 , primarily driven by the following : $ 388.7 million decrease in proceeds from debt financings ; and $ 214.6 million increase in repayment of outstanding debts . the decreases were partially offset by : $ 159.5 million increase in proceeds from sales of common stock ; $ 50.9 million decrease in purchase of capped call options ; and < p style= '' margin-top:6pt ; margin-bottom:0pt ; font-weight : normal ; font-style : normal ; text-transform : none ; font-variant : normal ; font-family : 'times new

we recognized an impairment of $ 15.1 million to our retained interest in the oil and gas properties located on the north slope of alaska to reduce the carrying value to fair value , as a result of the sustained decline in oil prices . the balance of the impairment charge primarily relates to obsolete inventory within our rig technologies reportable segment . other-than-temporary impairment during the third quarter of 2015 , we determined the carrying value of our investment in cjes was other than temporarily impaired which resulted in an impairment charge of $ 180.6 million . the charge directly resulted from reduced activity levels driven by lower customer demand stemming from lower oil prices coupled with the further pricing concessions required by the highly competitive environment . see note 9—investments in unconsolidated affiliates . 61 provision for international operations during 2015 , we recognized $ 25.4 million related to assets and receivables impacted by the degradation of the overall country economy and financial situation in venezuela , which has been adversely affected by the downturn in oil prices , primarily comprised of a loss of $ 10.0 million related to the remeasurement of our net monetary assets denominated in local currency from the official exchange rate of 6.3 bolivares per us dollar to the simadi exchange rate which was 199 bolivares per us dollar as of september 30 , 2015 and $ 15.4 million related to the write-off of a receivable balance . the balance of this provision represents an obligation associated with the decision to exit a non-core business line in another country within the region of $ 22.9 million . note 4 assets held for sale and discontinued operations assets held for sale assets held for sale as of december 31 , 2017 and 2016 was $ 37.1 million and $ 76.7 million , respectively . these assets consisted primarily of our oil and gas holdings which are mainly in the horn river basin in western canada of $ 25.9 million and $ 65.0 million , respectively , as of the periods noted above and the operating results have been reflected in discontinued operations . the remainder represents assets that meet the criteria to be classified as assets held for sale , but do not represent a disposal of a component of an entity or a group of components of an entity representing a strategic shift that has or will have a major effect on the entity 's operations and financial results . the carrying value of our assets held for sale represents the lower of carrying value or fair value less costs to sell . we continue to market these properties at prices that are reasonable compared to current fair value . we have contracts with pipeline companies to pay specified fees based on committed volumes for gas transport and processing associated with these properties held for sale . at december 31 , 2017 , our undiscounted contractual commitments for these contracts approximated $ 11.2 million , and we had total liabilities of $ 8.5 million , $ 6.1 million of which were classified as current and are included in accrued liabilities . at december 31 , 2016 , our undiscounted contractual commitments for these contracts approximated $ 17.2 million , and we had total liabilities of $ 12.5 million , $ 5.5 million of which were classified as current and are included in accrued liabilities . the amounts at each balance sheet date represented our best estimate of the fair value of the excess capacity of the pipeline commitments calculated using a discounted cash flow model , when considering our disposal plan , current production levels , natural gas prices and expected utilization of the pipeline over the remaining contractual term . decreases in actual production or natural gas prices could result in future charges related to excess pipeline commitments . 62 discontinued operations the operating results from the assets discussed above for all periods presented are presented and accounted for as discontinued operations in the accompanying consolidated statements of income ( loss ) and the respective accompanying notes to the consolidated financial statements . our condensed statements of income ( loss ) from discontinued operations for each reportable segment were as follows : replace_table_token_25_th oil and gas ( 1 ) reflects operating revenues of our historical oil and gas reportable segment . ( 2 ) includes impairment charges of $ 35.3 million , $ 15.4 million and $ 51.0 million in 2017 , 2016 and 2015 , respectively , due to the deterioration of economic conditions in the natural gas market in western canada , partially offset by a gain related to our restructure of our future pipeline obligations . additionally , this line item includes a charge of $ 16.5 million related to the settlement of litigation during 2017 associated with our previously owned ramshorn international properties . rig technologies ( 3 ) reflects an impairment charge for a note receivable of $ 3.1 million remaining from the sale of one of our former canada subsidiaries that provided logistics services . additional discussion of our policy pertaining to the calculations of our annual impairment tests , including any impairment to goodwill , is set forth in note 2—summary of significant accounting policies . a further protraction of lower commodity prices or an inability to sell these assets in a timely manner could result in recognition of future impairment charges . 63 note 5 acquisitions 2017 acquisitions robotic drilling systems on september 5 , 2017 we paid approximately $ 50.7 million in cash , subject to customary closing adjustments , to acquire robotic drilling systems as ( “ rds ” ) , a provider of automated tubular and tool handling equipment for the onshore and offshore drilling markets based in stavanger , norway . story_separator_special_tag drilling solutions operating results decreased in 2016 compared to 2015 primarily due to a broad-based decline in revenue-producing activities as well as the continued decline in our directional drilling businesses due to generally lower drilling activity and intense competition driven by the low prices of oil and gas . rig technologies operating results decreased in 2016 compared to 2015 primarily due to fewer top drive and catwalk unit sales , which is driven by the low prices of oil and gas . other financial information earnings ( losses ) from unconsolidated affiliates earnings ( losses ) from unconsolidated affiliates represents our share of the net income ( loss ) , as adjusted for our basis differences , of our equity method investments , primarily composed of our investment in cjes . we accounted for our investment in cjes on a one-quarter lag through june 30 , 2016. on july 20 , 2016 , cjes voluntarily filed for protection under chapter 11 of the bankruptcy code . as a result , beginning in the third quarter of 2016 , we ceased accounting for our investment in cjes under the equity method of accounting . the year ended december 31 , 2016 includes our share of the net income ( loss ) of cjes from october 1 , 2015 through march 31 , 2016 , resulting in a loss of $ 221.9 million , inclusive of charges of $ 138.5 million representing our share of cjes 's fixed asset impairment charges for the period . as we wrote off the remaining carrying value of our investment in cjes during the second quarter of 2016 , we did not record our share of the earnings ( losses ) of cjes for the three months ended june 30 , 2016 as we are not contractually responsible for losses beyond our investment . the operating losses of cjes for the period noted above are primarily due to reduced activity levels resulting from the extended downturn in oil prices . interest expense interest expense for 2016 was $ 185.4 million , representing a marginal increase of $ 3.4 million , or 2 % , compared to 2015. during 2016 , we curtailed spending on major projects , which resulted in a reduction in the amount of capitalized interest recognized during the period of approximately $ 13.8 million . the reduction in capitalized interest for the year was partially offset by the benefit of lower interest expense incurred on our 6.15 % and 9.25 % senior notes of approximately $ 9.1 million . the average amounts outstanding under these senior notes were lower throughout 2016 due to the repurchases made in 2015 and early 2016 of approximately $ 10.8 million and $ 131.0 million , respectively . other , net other , net for 2016 was $ 44.2 million of expense , which was primarily comprised of net losses on sales and disposals of assets of approximately $ 14.8 million , legal and professional fees primarily incurred in connection with preserving our interests in cjes of $ 12.9 million , foreign currency exchange losses of $ 5.7 million and increases to litigation reserves of $ 3.9 million . other , net for 2015 was $ 39.2 million of income , which was primarily comprised of a net gain of $ 47.1 million related to the cjes merger , inclusive of a $ 102.2 million gross gain offset by transaction costs and post-closing adjustment , and net gains on sales and disposals of assets of approximately $ 2.3 million . these gains were partially offset by increases to litigation reserves of $ 8.2 million and foreign currency exchange losses of $ 0.4 million . income tax rate our worldwide effective tax rate during 2016 was 15.6 % compared to 22.9 % during 2015. the change was attributable to the effect of the geographic mix of pre-tax earnings ( losses ) , including greater losses in high-tax jurisdictions . the tax effect of impairments and our share of the net loss of cjes also contributed to the change . 33 discontinued operations our discontinued operations during 2016 and 2015 consisted of our historical wholly owned oil and gas businesses . income ( loss ) from discontinued operations during 2016 was a loss of $ 18.4 million compared to a loss of $ 42.8 during 2015. our net loss during 2016 was primarily due to a $ 15.4 million impairment charge due to the deterioration of economic conditions in the dry gas market in western canada . similarly , during 2015 we recognized impairment charges of $ 51.0 million on our oil and gas properties in western canada as well as a $ 3.1 million impairment charge for a note receivable remaining from the sale of one of our former canada subsidiaries that provided logistics services . additional discussion of our policy pertaining to the calculations of our annual impairment tests , including any impairment of goodwill , is set forth in critical accounting estimates below in this section and in note 2—summary of significant accounting policies in part ii , item 8.—financial statements and supplementary data . additional information relating to discontinued operations is provided in note 4—assets held for sale and discontinued operations in part ii , item 8.—financial statements and supplementary data . liquidity and capital resources story_separator_special_tag roman , times , serif ; font-size : 10pt ; `` > our interest coverage ratio was 2.4:1 as of december 31 , 2017 and 3.4:1 as of december 31 , 2016. the interest coverage ratio is a trailing 12-month quotient of the sum of operating revenues , direct costs , general administrative expenses and research and engineering expenses divided by interest expense . the interest coverage ratio is not a measure of operating performance or liquidity defined by u.s. gaap and may not be comparable to similarly titled measures presented by other companies . none of the above ratios give effect to the issuance of the senior notes

while there can be no assurances that we will be able to access these markets in the future , we believe that we will be able to access capital markets or otherwise obtain financing in order to satisfy any payment obligation that might arise upon maturity , exchange or purchase of our notes and our debt facilities and that any cash payment due , in addition to our other cash obligations , would not ultimately have a material adverse impact on our liquidity or financial position . the major u.s. credit rating agencies have downgraded our senior unsecured debt rating to non-investment grade . these and further ratings downgrades could adversely impact our ability to access debt markets in the future , increase the cost of future debt , and potentially require us to post letters of credit for certain obligations . see part 1a.—risk factors— a downgrade in our credit rating could negatively impact our cost of and ability to access capital markets or other financing sources . our gross debt to capital ratio was 0.58:1 as of december 31 , 2017 and 0.52:1 as of december 31 , 2016 , respectively . our net debt to capital ratio was 0.56:1 as december 31 , 2017 and 0.50:1 as of december 31 , 2016. the gross debt to capital ratio is calculated by dividing total debt by total capitalization ( total debt plus shareholders ' equity ) . the net debt to capital ratio is calculated by dividing net debt by net capitalization . net debt is defined as total debt minus the sum of cash and cash equivalents and short-term investments . net capitalization is defined as net debt plus shareholders ' equity . availability under the revolving credit facility is subject to a covenant not to exceed a net debt to capital ratio of 0.60:1. neither the gross debt to capital ratio nor the net debt to capital ratio is a measure of operating performance or liquidity defined by u.s. gaap and may not be comparable to similarly titled measures presented by other companies . < p style= '' margin:0pt ; font-family : times new

management fees are presented in the consolidated statements of operations net of the amortization of the deferred management rights proceeds discussed further in note 6. leases the company is a lessee of a 65.3 acre site in osceola county , florida on which the gaylord palms is located , a 10.0 acre site in grapevine , texas on which a portion of the gaylord texan is located , and office and other equipment . the company 's leases are discussed further in note 12 . 76 advertising costs advertising costs are expensed as incurred and were $ 38.4 million , $ 36.7 million , and $ 36.7 million for 2017 , 2016 and 2015 , respectively . stock-based compensation the company has stock-based employee compensation plans , which are described more fully in note 7. the company accounts for its stock-based compensation plan under the provisions of financial accounting standards board ( “fasb” ) accounting standards codification ( “asc” ) 718 , “ compensation – stock compensation .” preopening costs the company expenses the costs associated with start-up activities and organization costs associated with its development or reopening of hotels and significant attractions as incurred . the company 's preopening costs during 2017 primarily relate to a riverfront ballroom at gaylord national , which opened in may 2017 , and costs associated with our various entertainment segment projects . preopening costs during 2015 primarily relate to the ac hotel , which opened in april 2015. impairment of long-lived and other assets in accounting for the company 's long-lived and other assets ( including its notes receivable associated with the development of gaylord national ) , the company assesses its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets or asset group may not be recoverable . recoverability of long-lived assets that will continue to be used is measured by comparing the carrying amount of the asset or asset group to the related total future undiscounted net cash flows . if an asset or asset group 's carrying value is not recoverable through those cash flows , the asset group is considered to be impaired . the impairment is measured by the difference between the assets ' carrying amount and their fair value , which is estimated using discounted cash flow analyses that utilize comprehensive cash flow projections , as well as observable market data to the extent available . recoverability of the notes receivable associated with gaylord national is measured by comparing the carrying amount of the notes to the fair value of the notes . if the carrying value is greater than the fair value , the company then assesses if the decline in fair value is other than temporary . if the decline in fair value is deemed to be other than temporary , which is based on the company 's intent and ability to hold the notes receivable to maturity and whether it expects to receive all debt service payments due under the notes , then the notes receivable are impaired . see note 3 for further disclosure . during the fourth quarter of 2015 , the company elected to move forward with an expansion of the guest rooms and convention space at gaylord texan . this capital project replaced a previously contemplated expansion that the company began incurring design costs for during 2007 and had been subsequently put on hold . as the new project is substantially different from the previously contemplated project , the company incurred an impairment charge of $ 16.3 million during 2015 to write off the carrying value of the previously contemplated project , which is included in impairment and other charges on the accompanying consolidated statement of operations for 2015 . 77 income per share earnings per share is measured as basic earnings per share and diluted earnings per share . basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the year . diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding after considering the effect of conversion of dilutive instruments , calculated using the treasury stock method . net income per share amounts are calculated as follows for the years ended december 31 ( income and share amounts in thousands ) : replace_table_token_28_th accounting estimates the preparation of financial statements in conformity with accounting principles generally accepted in the united states 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 reported period . actual results could differ from those estimates . newly issued accounting standards in may 2014 , the fasb issued accounting standards update ( “asu” ) no . 2014-09 , “ revenue from contracts with customers , ” the core principle of which is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services . under this guidance , companies will need to use more judgment and make more estimates than under today 's guidance . these judgments may include identifying performance obligations in the contract , estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation . the asu is effective for the company in the first quarter of 2018 , and the company plans to adopt this standard at that time using the modified retrospective approach . story_separator_special_tag food and beverage expenses increased modestly in 2017 , as compared to 2016. other revenue increased at gaylord opryland during 2017 , as compared to 2016 , due primarily to increased holiday program-related revenue , partially offset by decreased attrition and cancellation fee collections . other hotel expenses increased in 2017 , as compared to 2016 , due primarily to increased sales and marketing costs and increased utility costs due to an increase in rates . depreciation and amortization increased during 2017 , as compared to 2016 , primarily as a result of rooms renovations in both 2017 and 2016 that resulted in increased depreciable asset levels in 2017 . 41 rooms revenue and revpar increased at gaylord opryland during 2016 , as compared to 2015 , as a result of an increase in occupancy and adr for both groups and transient business . these results were impacted by two separate completed rooms renovation projects that resulted in approximately 35,000 and 18,000 room nights out of service during 2016 and 2015 , respectively . the prior year was also impacted by a norovirus outbreak that occurred in january and february 2015 at the property , as well as a winter storm that occurred during february 2015. rooms expenses increased during 2016 , as compared to 2015 , primarily as a result of increased group commissions . the increase in food and beverage revenue at gaylord opryland during 2016 , as compared to 2015 , was primarily due to increased banquet revenues from corporate groups , as well as increased food and beverage outlet revenue . food and beverage expenses increased modestly in 2016 , as compared to 2015. other revenue increased at gaylord opryland during 2016 , as compared to 2015 , due primarily to increased attrition and cancellation fee collections , partially offset by the prior year including the receipt of $ 3.6 million in insurance proceeds related to the norovirus outbreak . other hotel expenses remained stable in 2016 , as compared to 2015. depreciation and amortization decreased slightly during 2016 , as compared to 2015. gaylord palms results . the results of gaylord palms for the years ended december 31 , 2017 , 2016 and 2015 are as follows ( in thousands , except percentages and performance metrics ) : replace_table_token_12_th rooms revenue and revpar increased at gaylord palms during 2017 , as compared to 2016 , as a result of an increase in transient occupancy and an increase in adr from both groups and transient rates . rooms expenses increased during 2017 , as compared to 2016 , due primarily to increased commission costs . the decrease in food and beverage revenue at gaylord palms during 2017 , as compared to 2016 , was primarily due to a decrease in banquets from group cancellations related to hurricane irma in september 2017. food and beverage expenses decreased in 2017 , as compared to 2016 , primarily as a result of a decrease in variable expenses related to the decrease in revenue . other hotel revenue at gaylord palms decreased during 2017 , as compared to 2016 , primarily due to decreased collection of attrition and cancellation fees . other hotel expenses decreased during 2017 , as compared to 2016 , due primarily to a decrease in sales and marketing costs . depreciation and amortization was stable during 2017 , as compared to 2016 . 42 rooms revenue and revpar increased at gaylord palms during 2016 , as compared to 2015 , as a result of an increase in occupancy and adr from both groups and transient business . rooms expenses remained stable during 2016 , as compared to 2015 , as increased variable expenses associated with the increase in occupancy were offset by improved labor margins . the increase in food and beverage revenue at gaylord palms during 2016 , as compared to 2015 , was primarily due to an increase in banquets . in addition , new and refurbished dining outlets were opened in the second quarter of 2016 , which led to increased food and beverage outlet revenue . food and beverage expenses increased in 2016 , as compared to 2015 , primarily as a result of the increase in variable expenses related to the increase in revenue , partially offset by improved labor margins . other hotel revenue at gaylord palms increased during 2016 , as compared to 2015 , primarily due to increased ancillary revenues , such as parking and resort fees related to the increase in occupancy , increased holiday programming revenue , and increased collection of attrition and cancellation fees . other hotel expenses increased during 2016 , as compared to 2015 , due primarily to an increase in sales and marketing expenses . depreciation and amortization increased slightly during 2016 , as compared to 2015. gaylord texan results . the results of gaylord texan for the years ended december 31 , 2017 , 2016 and 2015 are as follows ( in thousands , except percentages and performance metrics ) : replace_table_token_13_th rooms revenue and revpar decreased at gaylord texan during 2017 , as compared to 2016 , due primarily to decreased occupancy due to a decrease in group rooms , partially attributable to hurricane harvey in august 2017 , and decreased adr for both group and transient rates . rooms expenses increased during 2017 , as compared to 2016 , as decreased variable expenses associated with the decrease in occupancy were offset by increased group commissions . food and beverage revenue increased at gaylord texan during 2017 , as compared to 2016 , primarily due to an increase in both banquets and food and beverage outlet revenue . food and beverage expenses decreased slightly in 2017 , as compared to 2016 , as the increase in variable expenses related to the increase in revenue were offset by decreased food costs and beverage costs , as well as improved labor margin . other revenue at gaylord texan increased during 2017 ,

these net outflows were offset by cash flows provided by operations discussed above , resulting in our cash balance remaining virtually unchanged from 2016 to 2017. we currently plan to declare dividends of $ 3.40 per share in 2018 , payable in equal quarterly amounts , subject to future determinations as to the timing and amount by our board of directors . we anticipate investing in our operations during 2018 by spending between $ 180 million and $ 210 million in capital expenditures , which primarily includes ongoing maintenance capital of our current facilities , an expansion of the guest rooms and convention space at gaylord texan , and the construction of a luxury indoor/outdoor waterpark at gaylord opryland . we believe that our cash on hand and cash from operations will be adequate to fund our general short-term commitments , as well as : ( i ) normal operating expenses , ( ii ) interest expense on long-term debt obligations , ( iii ) capital lease and operating lease obligations , and ( iv ) declared dividends . if our existing cash and cash from operations were inadequate to fund such commitments , as well as capital expenditures , we could draw on our credit facility , subject to the satisfaction of covenants in the credit facility . our outstanding principal debt agreements , none of which mature prior to 2021 , are described below . based on current projections for compliance under our financial covenants contained in these agreements , we do not foresee a maturity issue prior to their scheduled maturity date . at december 31 , 2017 , we were in compliance with all covenants related to our outstanding debt . principal debt agreements credit facility . on may 11 , 2017 , we entered into a fifth amended and restated credit agreement ( the “amended credit agreement” ) among the company , as a guarantor , the operating partnership , as borrower , certain other subsidiaries of the company party thereto , as guarantors , certain subsidiaries of the company party thereto , as pledgors , the lenders party thereto and wells fargo bank , n.a. , as administrative agent , which amends and restates the company 's existing credit facility . in addition , on may 23 , 2017 , we entered into an

* 10.42 amendment to agreements and documents governing restricted stock units , dated december 1 , 2008 , between the company and jeffrey west , senior vice president and controller which was filed as exhibit 10.63 to the company 's annual report on form 10-k , which was filed on february 29 , 2008 and is incorporated herein by reference . * 10.43 amendment to agreements and documents governing restricted stock units , dated december 1 , 2008 , between the company and daniel n. gregoire , executive vice president , general counsel and secretary which was filed as exhibit 10.64 to the company 's annual report on form 10-k , which was filed on february 29 , 2008 and is incorporated herein by reference . 68 exhibit no . description of exhibit * 10.44 amendment to employment agreement , as amended and restated december 16 , 2008 , between the company and rene lerer , m.d , chief executive officer which was filed as exhibit 10.65 to the company 's annual report on form 10-k , which was filed on february 29 , 2008 and is incorporated herein by reference . * 10.45 amendment to agreements and documents governing restricted stock units , dated december 1 , 2008 , between the company and rene lerer , chief executive officer which was filed as exhibit 10.66 to the company 's annual report on form 10-k , which was filed on february 29 , 2008 and is incorporated herein by reference . * 10.46 form of stock option agreement , relating to options granted under the company 's 2008 management incentive plan , which was filed as exhibit 10.1 to the company 's current report on form 8-k , which was filed on may 4 , 2009 and is incorporated herein by reference . * 10.47 form of notice of march 2008 stock option grant , relating to options granted under the company 's 2008 management incentive plan , which was filed as exhibit 10.2 to the company 's current report on form 8-k , which was filed on may 4 , 2009 and is incorporated herein by reference . * 10.48 form of restricted stock unit agreement , relating to restricted stock units granted under the company 's 2008 management incentive plan , which was filed as exhibit 10.3 to the company 's current report on form 8-k , which was filed on may 4 , 2009 and is incorporated herein by reference . * 10.49 form of notice of restricted stock unit award , relating to restricted stock units granted under the company 's 2008 management incentive plan , which was filed as exhibit 10.4 to the company 's current report on form 8-k , which was filed on may 4 , 2009 and is incorporated herein by reference . * 10.50 employment agreement , dated july 28 , 2009 between karen s. rohan and magellan health services , inc. , which was filed as exhibit 10.1 to the company 's quarterly report on form 10-q for the quarterly period ended june 30 , 2009 , which was filed on july 31 , 2009 and is incorporated herein by reference . * 10.51 amendment to employment agreement , dated july 28 , 2009 between magellan health services , inc. and karen s. rohan , which was filed as exhibit 10.2 to the company 's quarterly report on form 10-q for the quarterly period ended june 30 , 2009 , which was filed on july 31 , 2009 and is incorporated herein by reference . * 10.52 form of stock option agreement , relating to options granted under the company 's 2008 management incentive plan , which was filed as exhibit 10.1 to the company 's current report on form 8-k , which was filed on march 5 , 2010 and is incorporated herein by reference . * 10.53 form of notice of march 2008 stock option grant , relating to options granted under the company 's 2008 management incentive plan , which was filed as exhibit 10.2 to the company 's current report on form 8-k , which was filed on march 5 , 2010 and is incorporated herein by reference . * 10.54 form of restricted stock unit agreement , relating to restricted stock units granted under the company 's 2008 management incentive plan , which was filed as exhibit 10.3 to the company 's current report on form 8-k , which was filed on march 5 , 2010 and is incorporated herein by reference . 69 exhibit no . description of exhibit * 10.55 magellan health services , inc. 2011 management incentive plan , effective as of may 18 , 2011 , which was filed as appendix a to the company 's definitive proxy statement , which was filed on april 8 , 2011 , and is incorporated herein by reference . * 10.56 magellan health services , inc. 2011 employee stock purchase plan , effective as of may 18 , 2011 , which was filed as appendix b to the company 's definitive proxy statement , which was filed on april 8 , 2011 , and is incorporated herein by reference . # 21 list of subsidiaries of the company . # 23 consent of independent registered public accounting firm . # 31.1 certification of chief executive officer pursuant to section 302 of the sarbanes-oxley act of 2002 . # 31.2 certification of chief financial officer pursuant to section 302 of the sarbanes-oxley act of 2002 . †32.1 certification of chief executive officer pursuant to section 906 of the sarbanes-oxley act of 2002 . †32.2 certification of chief financial officer pursuant to section 906 of the sarbanes-oxley act of 2002 . story_separator_special_tag however , a 56 percent decline in fair value of the health plan reporting unit , a 54 percent decline in 42 fair value of radiology benefits management , or a 20 percent decline in fair value of specialty pharmaceutical management would have caused the carrying values for these reporting units to be in excess of fair values , which would require the second step to be performed . the second step could have resulted in an impairment loss for goodwill . for medicaid administration , an 8 percent decline in fair value , or approximately $ 10 million , would have caused the carrying value to be in excess of its fair value as of october 1 , 2011. while there are numerous assumptions that impact the calculation of the fair value of this reporting unit , the most sensitive assumptions relate to the discount rate and the estimated future cash flows . a decline in fair value of approximately $ 10 million would occur upon either : ( 1 ) an increase of 0.85 basis points in the discount rate utilized to determine the present value of the projected net cash flows ; or ( 2 ) a decline of between 12 and 25 percent in estimated future cash flows , with the percentage decrease varying depending upon whether the cash flow decrease were to occur in the near term or the long term . such decline in the future cash flows could be the result of a loss of one or more significant customers without the generation of new business to offset such losses . a decline in the fair value could result in a carrying value for medicaid administration in excess of fair value , which would require the second step of goodwill testing to be performed . the second step could result in an impairment loss for goodwill . goodwill for each of the company 's reporting units is as follows ( in thousands ) : replace_table_token_9_th the changes in the carrying amount of goodwill for the years ended december 31 , 2010 and 2011 are reflected in the table below ( in thousands ) : 2010 2011 balance as of beginning of period $ 426,471 $ 426,939 adjustment related to acquisition of medicaid administration 468 — balance as of end of period $ 426,939 $ 426,939 stock compensation at december 31 , 2010 and 2011 , the company had equity-based employee incentive plans , which are described more fully in note 6— `` stockholders ' equity `` to the consolidated financial statements set forth elsewhere herein . the company recorded stock compensation expense of $ 15.1 million and $ 17.4 million for the years ended december 31 , 2010 and 2011 , respectively . the company recognizes substantially all of these compensation costs on a straight-line basis over the requisite service period , which is generally the vesting term of three years . the company estimates the fair value of substantially all stock options using the black-scholes-merton option pricing model that employs certain factors including expected volatility of stock price , expected life of the option , risk-free interest rate and expected dividend yield . for the years ended december 31 , 2009 , 2010 and 2011 , such volatility was based on the historical volatility of the company 's stock price . 43 the expected term of the option is based on historical employee stock option exercise behavior and the vesting terms of the respective option . risk-free interest rates are based on the u.s. treasury yield in effect at the time of grant . the company recognizes compensation expense for only the portion of options , restricted stock or restricted stock units that are expected to vest . therefore , estimated forfeiture rates are derived from historical employee termination behavior . the company 's estimated forfeiture rates for the years ended december 31 , 2009 , 2010 and 2011 were five percent , five percent , and four percent respectively . if the actual number of forfeitures differs from those estimated , additional adjustments to compensation expense may be required in future periods . if vesting of an award is conditioned upon the achievement of performance goals , compensation expense during the performance period is estimated using the most probable outcome of the performance goals , and adjusted as the expected outcome changes . income taxes the company files a consolidated federal income tax return for the company and its eighty-percent or more owned subsidiaries , and the company and its subsidiaries file income tax returns in various states and local jurisdictions . the company estimates income taxes for each of the jurisdictions in which it operates . this process involves estimating current tax exposures together with assessing temporary differences resulting from differing treatment of items for tax and book purposes . deferred tax assets and or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled . the company then assesses the likelihood that the deferred tax assets will be recovered from the reversal of temporary timing differences , the implementation of feasible and prudent tax planning strategies , and future taxable income . to the extent the company can not conclude that recovery is more likely than not , it establishes a valuation allowance . the effect of a change in tax rates on deferred taxes is recognized in income in the period that includes the enactment date . the company has federal net operating loss carryforwards ( `` nols `` ) as of december 31 , 2011 of $ 4.8 million available to reduce future federal taxable income . these nols , if not used , will expire in 2017 through 2019 and are subject to examination and adjustment by the internal revenue service ( `` irs `` ) . in addition ,

pursuant to this program , the company made open market purchases of 782,400 shares of the company 's common stock at an average price of $ 32.75 per share for an aggregate cost of $ 25.6 million ( excluding broker commissions ) during the period from august 17 , 2009 through december 31 , 2009. pursuant to this program , the company made open market purchases of 1,711,881 shares of the company 's common stock at an average price of $ 43.46 per share for an aggregate cost of $ 74.4 million ( excluding broker commissions ) during the period january 1 , 2010 through april 1 , 2010 , which was the date that the repurchase program was completed . on july 27 , 2010 the company 's board of directors approved a stock repurchase plan which authorized the company to purchase up to $ 350 million of its outstanding common stock through july 28 , 2012. on february 18 , 2011 , the company 's board of directors increased the stock repurchase program by an additional $ 100 million . stock repurchases under the program could be executed through open market repurchases , privately negotiated transactions , accelerated share repurchases or other means . the board of directors authorized management to execute stock repurchase transactions from time to time and in such amounts and via such methods as management deemed appropriate . the stock repurchase program could be limited or terminated at any time without prior notice . pursuant to this program , the company made open market purchases of 1,684,510 shares of the company 's common stock at an average price of $ 48.36 per share for an aggregate cost of $ 81.5 million ( excluding broker commissions ) during the period from november 3 , 2010 through december 31 , 2010. pursuant to this program , the company made open market purchases of 7,534,766 shares of the company 's common stock at an average price of $ 48.91 per share for an aggregate cost of $ 368.5 million ( excluding broker commissions ) during the period january 1 , 2011 through november 10 , 2011 , which was the date the repurchase program was completed . 57 on october 25 , 2011 the company 's board of directors approved a stock repurchase plan which authorizes the company to purchase up to $ 200 million of its outstanding common

these distributors are generally given business terms that allow them to return unsold inventory , receive credits for changes in selling prices , and participate in various cooperative marketing programs . our sales agreements generally provide customers with limited rights of return and warranty provisions . the timing of revenue recognition related to airbar modules depends upon how each sale is transacted - either point-of-sale or through distributors . we recognize revenue for airbar modules sold point-of-sale when we provide the promised product to the customer . because we generally use distributors to provide airbar and sensor modules to our customers , however , we analyze the terms of distributor agreements to determine when control passes from us to our distributors . for sales of airbar and sensor modules sold through distributors , revenues are recognized when our distributors obtain control over our products . control passes to our distributors when we have a present right to payment for products sold to distributors , the distributors have legal title to and physical possession of products purchased from us , and the distributors have significant risks and rewards of ownership of products purchased . distributors participate in various cooperative marketing and other incentive programs , and we maintain estimated accruals and allowances for these programs . if actual credits received by distributors under these programs were to deviate significantly from our estimates , which are based on historical experience , our revenue could be adversely affected . under u.s. gaap , companies may make reasonable aggregations and approximations of returns data to accurately estimate returns . our airbar returns and warranty experience to date has enabled us to make reasonable returns estimates , which are supported by the fact that our product sales involve homogenous transactions . the reserve for future sales returns is recorded as a reduction of our accounts receivable and revenue and was insignificant as of december 31 , 2019 and 2018. if the actual future returns were to deviate from the historical data on which the reserve had been established , our revenue could be adversely affected . the following table presents disaggregated revenues by market for the years ended december 31 , 2019 and 2018 ( dollars in thousands ) : replace_table_token_17_th f- 14 significant judgments our contracts with customers may include promises to transfer multiple products and services to a customer , particularly when one of our customers contracts with us for a product and related engineering services fees for customizing that product for our customer . determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment . judgment may also be required to determine the ssp for each distinct performance obligation identified , although we generally structure our contracts such that performance obligations and pricing for each performance obligation are specifically addressed . we currently have no outstanding contracts with multiple performance obligations ; however , we recently negotiated a contract that may include multiple performance obligations in the future . judgment is also required to determine when control of products passes from us to our distributors , as well as the amounts of product that may be returned to us . our products are sold with a right of return , and we may provide other credits or incentives to our customers , which could result in variability when determining the amount of revenue to recognize . at the end of each reporting period , we use product returns history and additional information that becomes available to estimate returns and credits . we do not recognize revenue if it is probable that a significant reversal of any incremental revenue would occur . finally , judgment is required to determine the amount of unbilled license fees at the end of each reporting period . contract balances timing of revenue recognition may differ from the timing of invoicing to customers . we record a receivable when we have an unconditional right to receive future payments from customers , and we record unearned deferred revenue when we receive prepayments or upfront payments for goods or services from our customers . the following table presents accounts receivable , unbilled revenues and deferred revenues as of december 31 , 2019 and 2018 ( dollars in thousands ) : december 31 , 2019 december 31 , 2018 accounts receivable and unbilled revenues $ 1,324 $ 1,830 deferred revenues 67 75 the timing of revenue recognition , billings and cash collections results in billed accounts receivable , unbilled revenues ( contract assets ) , and customer advances and deposits or deferred revenue ( contract liabilities ) on the consolidated balance sheets . generally , billing occurs subsequent to revenue recognition , resulting in contract assets ; contract assets are generally classified as current . the company sometimes receives advances or deposits from its customers before revenue is recognized , which are reported as contract liabilities and are generally classified as current . these assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period . f- 15 we do not anticipate impairment of our contract asset related to license fee revenues , given the creditworthiness of our customers whose invoices comprise the balance in that asset account . we will continue to monitor the timeliness of receipts from those customers , however , to assess whether the contract asset has been impaired . the allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance . we determine the allowance based on known troubled accounts , historical experience , and other currently available evidence . payment terms and conditions vary by the type of contract ; however , payments generally occur 30-60 days after invoicing for license fees and sensor modules to our resellers and distributors . story_separator_special_tag 23 results of operations we develop user interface and optical interactive touch and gesture solutions . since 2010 , under our licensing agreements , oems and tier 1 suppliers have sold approximately 73 million devices that use our technology . in december 2017 , we augmented our licensing business and started to manufacture and sell sensor modules that incorporate our technology . a summary of our financial results for the years ended december 31 , is as follows ( in thousands , except percentages ) : replace_table_token_8_th 24 revenues all of our sales for the years ended december 31 , 2019 and 2018 were to customers located in the united states , europe and asia . the following table presents revenues by market and nre for the years ended december 31 , 2019 and 2018 ( dollars in thousands ) : replace_table_token_9_th replace_table_token_10_th we have historically licensed our technology to oems , odm 's and tier 1 suppliers who embed it in their products based upon our custom designs and we charge these customers a non-recurring fee to offset our engineering costs . we sell a neonode branded consumer product , airbar and in october 2017 we added sales of embedded sensor modules to our business model . our sensor modules provide a hardware-based technology solution , which allows our customers a way to use our zforce air technology while forgoing the complex design and manufacturing phase associated with our licensing model . we now earn revenue from a combination of licensing plus selling our embedded sensor modules and airbar . during 2019 and 2018 we continued to focus our efforts on maintaining our current licensing customers and achieve design wins for new products both with current and future customers . we made investments enhancing the design of selected embedded sensor modules and setting-up partner networks for sales and distribution . as of december 31 , 2019 , we had entered into forty-two technology license agreements with global oems , odms and tier 1 suppliers and sixteen of our customers are currently shipping products . this compares with forty-one technology license agreements with global oems , odm 's and tier 1 suppliers as of december 31 , 2018. we expect to continue to earn license fees in future years and anticipate our customers will continue to release new products that embed our technology under a license agreement . license fees were the majority of our total revenue in the past three years and decreased by 25 % in 2019 as compared to 2018 , primarily due to a 87 % decrease in license fees earned from our e-reader customers and 27 % decrease in license fees earned from our printer customers partially offset by a 13 % increase in license fees from our automotive customers . in addition to license fees , a portion of our revenues is attributable embedded sensor modules which we began selling in october 2017. we are focusing our efforts on markets such as medical technology , industrial control systems and avionics . during 2017 , we entered into a u.s. distribution agreement with digi-key and they currently have a range of sensor modules and development kits for sale . we currently have supply agreements for sensor modules with three customers . we sold $ 560,000 and $ 227,000 of sensor modules in 2019 and 2018 , respectively . our revenues from license fees and sensor module sales may be negatively impacted in 2020 due to the outbreak of coronavirus ( covid-19 ) . many of our customers source their components from suppliers in china . uncertainty about the availability of these components , or the future demand for products due to a negative economic impact from the global spread of the coronavirus , may cause our customers to alter their purchasing decisions and reduce demand for their products , thereby adversely affecting our future results of operations . 25 non-recurring engineering fees ( “ nre ” ) decreased 66 % in 2019 as compared to 2018 due to a decline of new license customers and related nre design projects . in 2019 and 2018 , 0 % and 80 % of our total nre fees were earned from automotive projects . in 2019 , 62 % of total nre fees were earned from avionics compared to 0 % in 2018. we expect to continue to earn nre fees in 2020 and future years in all our three business areas . gross margin our combined total gross margin was 90 % in 2019 compared to 89 % in 2018. the slight increase in total gross margin in 2019 as compared to 2018 is primarily due to higher margin on sales of sensor modules which was partially offset by an increase in valuation reserves for slow moving and obsolete inventory and lower gross margins on our nre projects in 2019. in 2019 , we wrote down an advance payment for module components and reserved 100 % of airbar components bought from a producing partner . these two transactions amount to $ 0.3 million . license fees accounted for 90 % of total revenue in 2019 compared to 93 % in 2018 , with a 100 % gross margin . nre projects had a ( 53 ) % gross margin in 2019 compared to 21 % in 2018 mainly due to investment of time in customer projects in new markets . our cost of revenues includes the direct cost of production of certain customer prototypes , costs of engineering personnel , engineering consultants to complete the engineering design contracts and cost of goods sold for sensor modules includes fully burdened manufacturing costs , outsourced final assembly costs , and component costs of sensor modules . research and development product research and development ( “ r & d ” ) expenses for 2019 were 79 % of total revenue compared to 62 % in 2018. r & d in 2019 decreased 1 % compared to 2018 primarily currency related

accounts payable and accrued expenses increased approximately $ 41,000 as of december 31 , 2018 compared to december 31 , 2017. deferred revenue decreased approximately $ 0.9 million during 2018 mainly related to recognition of prepaid license fees from two customers during 2018. net cash used by financing activities during the year ended december 31 , 2019 of $ 0.5 million was mainly the result of principal payments on finance leases . net cash provided by financing activities during the year ended december 31 , 2018 was the result of net proceeds of approximately $ 4.6 million from the sale of our common stock . this increase was offset by principal payments on finance leases of $ 0.6 million . in the years ended december 31 , 2019 and 2018 , we purchased $ 89,000 and $ 236,000 , respectively of fixed assets , consisting primarily of leasing equipment and engineering equipment . on december 28 , 2018 , we entered into a securities purchase agreement with foreign investors as part of a non-brokered private placement pursuant to which we issued a total of 2,940,767 shares of common stock at $ 1.60 per share for a purchase price of $ 4.6 million in net proceeds . the common stock issued in the private placement was not registered for resale and we are not required under the securities purchase agreement to register the issued stock for resale . the purchasers in the private placement included neonode directors , ulf rosberg and andreas bunge , and members of management and certain employees of the company , including former chief executive officer hakan persson and former chief financial officer lars lindqvist . the neonode directors and members of management and employees individually purchased an aggregate of approximately $ 2 million of common stock as part of the private placement . in addition , major shareholder and now director peter lindell also purchased shares . mr. lindell and mr. rosberg are each a beneficial owner of approximately 18 % of neonode common

— 2,475 income tax benefit from exercise of stock options and warrants — — — — 2,088 — — — — 2,088 share-based compensation expense — — — — 742 — — — — 742 net income — — — — — 77,782 — — — 77,782 currency translation adjustment , net of tax — — — — — — ( 10,414 ) — — ( 10,414 ) repurchases of treasury stock — — — — — — — 1,360 ( 55,308 ) ( 55,308 ) balance at 12/31/2011 — $ — 38,291 $ 383 $ 147,649 $ 333,523 $ ( 13,463 ) 8,200 $ ( 152,720 ) $ 315,372 the accompanying notes are an integral part of these consolidated financial statements . f-6 first cash financial services , inc. consolidated statements of changes in stockholders ' equity continued ( in thousands ) preferred stock common stock additional paid-in capital retained earnings accum- ulated other compre- hensive income ( loss ) common stock held in treasury total stock- holders ' equity shares amount shares amount shares amount balance at 12/31/2009 — $ — 36,697 $ 367 $ 117,892 $ 198,083 $ ( 6,491 ) 6,840 $ ( 97,412 ) $ 212,439 shares issued under share-based com-pensation plan — — 1,305 13 — — — — — 13 exercise of stock options and warrants — — — — 17,292 — — — — 17,292 income tax benefit from exercise of stock options and warrants — — — — 6,154 — — — — 6,154 share-based compensation expense — — — — 1,006 — — — — 1,006 net income — — — — — 57,658 — — — 57,658 currency translation adjustment , net of tax — — — — — — 3,442 — — 3,442 repurchases of treasury stock — — — — — — — — — — balance at 12/31/2010 — $ — 38,002 $ 380 $ 142,344 $ 255,741 $ ( 3,049 ) 6,840 $ ( 97,412 ) $ 298,004 the accompanying notes are an integral part of these consolidated financial statements . f-7 first cash financial services , inc. consolidated statements of cash flows ( in thousands ) year ended december 31 , 2012 2011 2010 cash flow from operating activities : net income $ 80,359 $ 77,782 $ 57,658 adjustments to reconcile net income to net cash flow provided by operating activities : non-cash portion of credit loss provision 866 156 1,914 share-based compensation expense 1,300 742 1,006 depreciation and amortization expense 12,975 11,026 10,513 deferred income taxes 3,242 1,200 1,845 loss ( gain ) on disposition of consumer loan stores 966 ( 9,965 ) — changes in operating assets and liabilities , net of business combinations : pawn fees and service charges receivable ( 3,245 ) ( 697 ) ( 2,176 ) merchandise inventories ( 2,777 ) 445 ( 3,875 ) prepaid expenses and other assets 6,297 ( 4,076 ) 3,307 accounts payable and accrued expenses ( 1,135 ) ( 883 ) 6,966 income taxes payable , current ( 10,056 ) 4,645 ( 3,513 ) net cash flow provided by operating activities 88,792 80,375 73,645 cash flow from investing activities : pawn loan receivables ( 16,700 ) ( 5,092 ) ( 21,824 ) consumer loans ( 625 ) ( 116 ) ( 1,824 ) purchases of property and equipment ( 21,841 ) ( 28,974 ) ( 18,385 ) proceeds from disposition of consumer loan stores — 19,857 — acquisitions of pawn stores , net of cash acquired ( 120,738 ) ( 7,779 ) ( 5,663 ) net cash flow used in investing activities ( 159,904 ) ( 22,104 ) ( 47,696 ) cash flow from financing activities : change in line of credit , net 102,500 — — payments of notes payable ( 1,837 ) ( 1,851 ) ( 9,810 ) purchases of treasury stock ( 61,275 ) ( 55,308 ) — proceeds from exercise of share-based compensation awards 4,296 2,478 17,305 income tax benefit from exercise of stock options and warrants 5,841 2,088 6,154 net cash flow provided by ( used in ) financing activities 49,525 ( 52,593 ) 13,649 effect of exchange rates on cash 1,576 ( 2,622 ) 865 change in cash and cash equivalents ( 20,011 ) 3,056 40,463 cash and cash equivalents at beginning of the year 70,296 67,240 26,777 cash and cash equivalents at end of the year $ 50,285 $ 70,296 $ 67,240 the accompanying notes are an integral part of these consolidated financial statements . f-8 first cash financial services , inc. consolidated statements of cash flows continued ( in thousands ) year ended december 31 , 2012 2011 2010 supplemental disclosure of cash flow information : cash paid during the period for : interest $ 1,357 $ 145 $ 265 income taxes $ 38,810 $ 24,579 $ 22,336 supplemental disclosure of non-cash investing activity : non-cash transactions in connection with pawn loans settled through forfeitures of collateral transferred to inventories $ 100,572 $ 90,293 $ 98,134 supplemental disclosure of non-cash financing activity : notes payable issued in connection with pawn acquisitions $ 13,400 $ — $ 2,000 the accompanying notes are an integral part of these consolidated financial statements . f-9 first cash financial services , inc. notes to consolidated financial statements note 1 - organization and nature of the company first cash financial services , inc. , ( the “ company ” ) was incorporated in delaware . the company is engaged primarily in the operation of pawn stores , which lend money on the collateral of pledged personal property and retail previously owned merchandise acquired through pawn forfeitures and purchases directly from the general public . in addition to making short-term secured pawn loans , certain of the company 's pawn stores offer short-term consumer loans and credit services . the company also operates consumer loan stores that provide consumer loans , credit services , check cashing , and other related financial services . story_separator_special_tag administrative expenses , interest , taxes & income administrative expenses increased 11 % to $ 50,099,000 during fiscal 2012 , compared to $ 45,304,000 during fiscal 2011 , primarily due to the 20 % increase in the weighted-average store count and additional general management and supervisory compensation expenses and other support expenses required for such growth . as a percentage of revenue , administrative expenses decreased from 9 % in fiscal 2011 to 8 % in fiscal 2012 . interest expense increased to $ 1,488,000 during fiscal 2012 , compared to $ 135,000 for fiscal 2011 , reflecting increased borrowing levels under the existing credit facilities . for fiscal 2012 and 2011 , the company 's effective federal income tax rates were 33.9 % and 34.5 % , respectively . the decrease in the overall rate for 2012 relates primarily to the increased percentage of income being generated in mexico , where the company is not subject to state income taxes and also a benefit of approximately $ 778,000 related to foreign tax credits . income from continuing operations increased 15 % to $ 81,105,000 during fiscal 2012 compared to $ 70,523,000 during fiscal 2011 . including the results of discontinued operations , net income was $ 80,359,000 during fiscal 2012 , compared to $ 77,782,000 during fiscal 2011 . 33 twelve months ended december 31 , 2011 , compared to twelve months ended december 31 , 2010 . the following table details the components of revenue for the fiscal year ended december 31 , 2011 , as compared to the fiscal year ended december 31 , 2010 ( in thousands ) . constant currency results exclude the effects of foreign currency translation and are calculated by translating current-year results at prior-year average exchange rates . the average value of the mexican peso to the u.s. dollar increased from 12.6 to 1 in fiscal 2010 to 12.4 to 1 in the fiscal 2011. however , the end-of-period value of the mexican peso to the u.s. dollar decreased from 12.4 to 1 at december 31 , 2010 , to 14.0 to 1 at december 31 , 2011. as a result , the translated revenue results of the mexican operations into u.s. dollars were increased by this currency rate fluctuation , while the translated value of peso-denominated assets at december 31 , 2011 , was decreased . while the strengthening of the mexican peso positively affected the translated dollar-value of revenue , the offsetting cost of sales and operating expenses were inflated as well . the scrap jewelry generated in mexico is exported and sold in u.s. dollars , which did not contribute to the company 's peso-denominated earnings stream . replace_table_token_10_th domestic revenue accounted for approximately 46 % of the total revenue for fiscal 2011 , while international revenue ( from mexico ) accounted for 54 % of the total . 34 the following table details customer loans and inventories held by the company and active cso credit extensions from an independent third-party lender as of december 31 , 2011 , as compared to december 31 , 2010 ( in thousands ) . constant currency results exclude the effects of foreign currency translation and are calculated by translating current-year balances at the prior-year end-of-period exchange rate . replace_table_token_11_th ( 1 ) cso amounts outstanding are composed of the principal portion of active cso extensions of credit by an independent third-party lender , which are not included on the company 's balance sheet , net of the company 's estimated fair value of its liability under the letters of credit guaranteeing the extensions of credit . store operations the overall increase in year-over-year revenue of 23 % was due to a combination of significant same-store revenue growth and revenue from new and acquired pawn stores . same-store revenue grew by 14 % in mexico , while same-store revenue grew by 12 % in the united states . the same-store revenue growth is reflective of continued maturation of stores and increased consumer demand for pawn products . revenue generated by the stores opened or acquired since january 1 , 2010 , increased by $ 29,023,000 in mexico and $ 16,936,000 in the united states , compared to fiscal 2010. total merchandise sales increased by 28 % for fiscal 2011 , with 29 % growth in mexico and 26 % growth in the u.s. store-based retail sales increased by 26 % , primarily the result of a 31 % increase in retail sales in mexico , which reflected continued store maturation and an increased mix of consumer hard good ( primarily consumer electronics and power tools ) inventories . the 33 % increase in scrap jewelry sales reflected a 26 % increase in the weighted-average selling price per ounce of scrap gold , and a 2 % increase in the quantity of scrap gold sold . the total volume of gold scrap jewelry sold in fiscal 2011 was approximately 64,000 ounces at an average cost of $ 1,124 per ounce and the average selling price was $ 1,511 per ounce . the limited increase in scrap jewelry volume was related primarily to pawn operations in mexico , where the percentage of jewelry pawns and gold buying from customers has decreased as a percentage of the overall product mix compared to the prior year . as a result , scrap gold volumes decreased 4 % in mexico . the shift in inventory mix is the result of the company 's increased focus on hard good transactions ( electronics and appliances ) where there is less competition in mexico , as compared to jewelry lending and gold buying , where there is significantly greater competition . in the u.s. , scrap volume increased approximately 8 % , and scrap sales grew by 42 % , which was primarily due to the increased selling price of gold . 35 revenue from pawn loan fees increased 20 % , which was composed of an 18 % increase in

regulatory developments affecting the company 's consumer lending products may also impact profitability and liquidity ; such developments are discussed in greater detail in part i , item 1. the following table sets forth certain historical information with respect to the company 's sources and uses of cash and other key indicators of liquidity ( in thousands ) : replace_table_token_12_th net cash provided by operating activities increased $ 8,417,000 , or 10 % , from $ 80,375,000 for fiscal 2011 , to $ 88,792,000 for fiscal 2012 . the primary source of operating cash flows in both years was net income from operations . 37 cash flows from investing activities are utilized primarily to fund pawn store acquisitions , growth of pawn loans and purchases of property and equipment . the company paid $ 120,738,000 in cash related to acquisitions during fiscal 2012 , compared to $ 7,779,000 in fiscal 2011 . as a result , net cash used in investing activities increased $ 137,800,000 , or 623 % during fiscal 2012 , compared to fiscal 2011 . in addition , the company received $ 19,857,000 in investing cash flows from the sale of the illinois operations during fiscal 2011 . net cash provided by financing activities increased $ 102,118,000 primarily due to net borrowings of $ 102,500,000 on the unsecured credit facility during fiscal 2012 , offset by $ 61,275,000 which was used to repurchase the company 's common stock during fiscal 2012 . during fiscal 2011 , the company had no borrowings and repurchased $ 55,308,000 of its common stock . during fiscal 2012 , the company opened 62 new pawn stores and acquired 29 stores in mexico ; the company also opened six new pawn stores and acquired 46 stores in the united states . the purchase price of the january 2012 29 -store mexico acquisition was $ 46,863,000 and was paid in a combination of cash and a $ 4,900,000 note payable to the seller . the purchase price of the june 2012 24-store u.s. acquisition was $ 25,615,000 and was composed of $ 25,315,000 in cash paid at closing and an additional $ 300,000 paid in december 2012

these arrangements typically have terms ranging from several weeks to three years , with a majority having terms of one year or less . for arrangements that include multiple performance obligations , the transaction price is allocated to the identified performance obligations based on their relative standalone selling prices . for these contracts , the standalone selling prices are based on the company 's normal pricing practices when sold separately with consideration of market conditions and other factors , including customer demographics and geographic location . revenues for services engagements where the transfer of control occurs ratably over time are recognized on a straight-line basis over the term of the arrangement . revenues from time and material contracts are recognized based on hours as the services are provided . revenues from fixed price ad hoc services and consulting contracts are recognized over the contract term based on the ratio of the number of hours incurred for services provided during the period compared to the total estimated hours to be incurred over the entire arrangement ( hours-based ) . technology services offerings meet the over time criterion , as another party would not need to substantially re-perform the work already completed to satisfy the remaining obligations if the services were migrated . the majority of the company 's contracts within the research & development solutions segment are service contracts for clinical research that represent a single performance obligation . the company provides a significant integration service resulting in a combined output , which is clinical trial data that meets the relevant regulatory standards and can be used by the customer to progress to the next phase of a clinical trial or solicit approval of a treatment by the applicable regulatory body . the performance obligation is satisfied over time as the output is captured in data and documentation that is available for the customer to consume over the course of the arrangement and furthers progress of the clinical trial . the company recognizes revenue over time using a cost-based input method since there is no single output measure that would fairly depict the transfer of control over the life of the performance obligation . progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract . costs included in the measure of progress include direct labor and third-party costs ( such as payments to investigators and other pass through expenses for the company 's clinical monitors ) . this cost-based method of revenue recognition requires the company to make estimates of costs to complete its projects on an ongoing basis . significant judgment is required to evaluate 70 assumptions related to these estimates . the effect of revisions to estimates related to the transaction price or costs to complete a project are recorded in the period in which the estimate is revised . most contracts may be terminated upon 30 to 90 days notice by the customer ; however , in the event of termination , most contracts require payment for services rendered through the date of termination , as well as for subsequent services rendered to close out the contract . the majority of revenue in our contract sales & medical solutions segment is from contract sales to the biopharmaceutical industry and broader healthcare market and recognized over time using a single measure of progress dependent on the performance obligation . some of our contract sales & medical solutions contracts contain multiple performance obligations with distinct promises including recruiting , sales force automation and deployment of sales representatives . the company utilizes a single measure of progress for each performance obligation to recognize revenue , which includes deployment of sales representatives based on employee days worked ; recruiting based on candidates recruited ; sales force automation set-up based on hours worked ; and sales force automation hosting and maintenance based on usage . these services meet the over time criterion as the customer consumes the benefit as activities are performed and another party would not need to substantially re-perform the work already completed to satisfy the remaining obligations if the services were migrated to another party . variable consideration in some cases , contracts provide for variable consideration that is contingent upon the occurrence of uncertain future events , such as performance incentives ( including royalty payments or penalty clauses that can either increase or decrease the transaction price ) . variable consideration is estimated at the expected value or at the most likely amount depending on the type of consideration . estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved . the estimate of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of its anticipated performance and all information ( historical , current and forecasted ) that is reasonably available to the company and reevaluated each reporting period . reimbursed expenses the company includes reimbursed expenses in revenues and costs of revenue as the company is primarily responsible for fulfilling the promise to provide the specified service , including the integration of the related services into a combined output to the customer , which are inseparable from the integrated service . these costs include such items as payments to investigators and travel expenses for the company 's clinical monitors and sales representatives , over which the company has discretion in establishing prices . the company controls the good or service and has inventory risk on contractually reimbursable expenses , as sometimes the company is unable to obtain reimbursement from the customer for costs incurred . change orders changes in the scope of work are common , especially under long-term contracts , and generally result in a change in transaction price . story_separator_special_tag the preparation of our consolidated financial statements requires management 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 amounts of revenues and expenses during the period . our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances . we evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known . actual results may differ from those estimates . we believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements . revenue recognition the majority of the company 's contracts within the research & development solutions segment are service contracts for clinical research that represent a single performance obligation . the company provides a significant integration service resulting in a 56 combined output , which is clinical trial data that meets the relevant regulatory standards and can be used by the customer to progress to the next phase of a clinical trial or solicit approval of a treatment by the applicable regulatory body . the performance obligation is satisfied over time as the output is captured in data and documentation that is available for the customer to consume over the course of the arrangement and furthers progress of the clinical trial . the company recognizes revenue over time using a cost-based input method since there is no single output measure that would fairly depict the transfer of control over the life of the performance obligation . progress on the performance obligation is measured by the proportion of actual costs incurred to the total costs expected to complete the contract . costs included in the measure of progress include direct labor and third-party costs ( such as payments to investigators and other pass through expenses for the company 's clinical monitors ) . this cost-based method of revenue recognition requires the company to make estimates of costs to complete its projects on an ongoing basis . significant judgment is required to evaluate assumptions related to these estimates . the effect of revisions to estimates related to the transaction price or costs to complete a project are recorded in the period in which the estimate is revised . most contracts may be terminated upon 30 to 90 days notice by the customer ; however , in the event of termination , most contracts require payment for services rendered through the date of termination , as well as for subsequent services rendered to close out the contract . income taxes certain items of income and expense are not recognized on our income tax returns and financial statements in the same year , which creates timing differences . the income tax effect of these timing differences results in ( 1 ) deferred income tax assets that create a reduction in future income taxes and ( 2 ) deferred income tax liabilities that create an increase in future income taxes . recognition of deferred income tax assets is based on management 's belief that it is more likely than not that the income tax benefit associated with certain temporary differences , income tax operating loss and capital loss carryforwards and income tax credits , would be realized . we recorded a valuation allowance to reduce our deferred income tax assets for those deferred income tax items for which it was more likely than not that realization would not occur . we determined the amount of the valuation allowance based , in part , on our assessment of future taxable income and in light of our ongoing income tax strategies . if our estimate of future taxable income or tax strategies changes at any time in the future , we would record an adjustment to our valuation allowance . recording such an adjustment could have a material effect on our financial condition or results of operations . income tax expense is based on the distribution of profit before income tax among the various taxing jurisdictions in which we operate , adjusted as required by the income tax laws of each taxing jurisdiction . changes in the distribution of profits and losses among taxing jurisdictions may have a significant impact on our effective income tax rate . we do not consider the undistributed earnings of our foreign subsidiaries to be indefinitely reinvested outside of the united states . business combinations we use the acquisition method to account for business combinations , and accordingly , the identifiable assets acquired , the liabilities assumed and any non-controlling interest in the acquiree are recorded at their estimated fair values on the date of the acquisition . we use significant judgments , estimates and assumptions in determining the estimated fair value of assets acquired , liabilities assumed and non-controlling interest including expected future cash flows , discount rates that reflect the risk associated with the expected future cash flows and estimated useful lives . we have recorded and allocated to our reporting units the excess of the cost over the fair value of the net assets acquired , known as goodwill . the recoverability of the goodwill and indefinite-lived intangible assets are evaluated annually for impairment , or if and when events or circumstances indicate a possible impairment . we review the carrying values of other identifiable intangible assets if the facts and circumstances indicate a possible impairment . any future impairment could have a material adverse effect on our financial condition or results of operations . stock-based compensation we measure compensation cost for stock-based payment awards ( stock options and stock appreciation rights ) granted to employees and non-employee directors at fair value using the black-scholes-merton option-pricing model and for performance awards using the monte carlo simulation model . stock-based compensation expense includes stock-based awards granted to employees and non-employee

costs of revenue , exclusive of depreciation and amortization 2020 compared to 2019 technology & analytics solutions ' costs of revenue , exclusive of depreciation and amortization , were $ 2,900 million in 2020 , an increase of $ 237 million over 2019. this increase was comprised of constant currency increase of approximately $ 232 million , or 8.7 % , reflecting an increase in compensation and related expenses to support revenue growth . selling , general and administrative expenses 2 020 compared to 2019 technology & analytics solutions ' selling , general and administrative expenses increased $ 20 million in 2020 as compared to 2019. this increase was comprised of a constant currency increase of approximately $ 23 million , or 3.2 % , reflecting an increase in compensation and related expenses . research & development solutions replace_table_token_19_th backlog research & development solutions contracted backlog increased from $ 19.0 billion at december 31 , 2019 to $ 22.6 billion at december 31 , 2020 and we expect approximately $ 5.9 billion of this backlog to convert to revenue in the next 12 months . contracted backlog was $ 17.1 billion at december 31 , 2018 . 51 backlog represents , at a particular point in time , future revenues from work not yet completed or performed under signed contracts . once work begins on a project , revenues are recognized over the duration of the project . we believe that backlog is an indicator of future revenues but the timing of revenue will be affected by a number of factors , including the variable size and duration of projects , many of which are performed over several years , cancellations , and changes to the scope of work during the course of projects . projects that have been delayed remain in backlog , but the timing of the revenue generated may differ from the timing originally expected . additionally , projects may be terminated or delayed by the customer or delayed by regulatory authorities . in the event that a client cancels a contract , we typically would be entitled to receive payment for all services performed up to the cancellation date and subsequent client-authorized services related to winding down the canceled project . for more details regarding risks related to our backlog , see part i , item ia , “ risk factors—risks related to our business—the relationship of backlog to revenues varies over time. ” revenues 2020 compared to 2019 research & development solutions ' revenues were $ 5,760 million in 2020 , a decrease

depreciation is computed on a straight-line basis over the estimated useful lives of the related assets , ranging up to 40 years for premises and 10 years for equipment . maintenance and repairs are charged to operating expenses as incurred . the asset cost and accumulated depreciation are removed from the accounts for assets sold or retired and any resulting gain or loss is included in the determination of income . foreclosed real estate physical possession of residential real estate property collateralizing a residential mortgage loan occurs when legal title is obtained 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 . - 69 - 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 lists , are amortized over their useful lives , generally 15 years . 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 on an annual basis in accordance with a predetermined schedule . 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 changes in the fair value of a derivative depends on whether it has been designated and qualifies as part of a hedging relationship . the specific accounting treatment for increases and decreases in the value of derivatives depends upon the use of the specific derivatives . there are two primary types of interest rate derivatives that may be employed by the company : fair value hedge - as a result of interest rate fluctuations , fixed-rate assets and liabilities will appreciate or depreciate in fair value . story_separator_special_tag accordingly , a valuation allowance against the value of those deferred tax assets was established to reduce the net deferred tax asset related to new york income taxes to $ -0-. at december 31 , 2019 , the company had a valuation allowance of $ 136,000 established against the future projected benefits of deferred tax assets related to new york state income tax obligations . there were no valuation allowances against deferred tax assets at december 31 , 2018. pension obligations . pension and postretirement benefit plan liabilities and expenses are based upon actuarial assumptions of future events , including fair value of plan assets , interest rates , and the length of time the company will have to provide those benefits . the assumptions used by management are discussed in note 14 to the consolidated financial statements contained herein . evaluation of investment securities for other-than-temporary-impairment ( “ otti ” ) . the company carries all of its available-for-sale investments at fair value with any unrealized gains or losses reported net of tax as an adjustment to shareholders ' equity and included in accumulated other comprehensive income ( loss ) , except for the credit-related portion of debt security impairment losses and otti of equity securities which are charged to earnings . the company 's ability to fully realize the value of its investments in various securities , including corporate debt securities , is dependent on the underlying creditworthiness of the issuing organization . in evaluating the debt security ( both available-for-sale and held-to-maturity ) portfolio for other-than-temporary impairment losses , management considers ( 1 ) if we intend to sell the security before recovery of its amortized cost ; ( 2 ) if it is “ more likely than not ” we will be required to sell the security before recovery of its amortized cost basis ; or ( 3 ) if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis . when the fair value of a held-to-maturity or available-for-sale security is less than its amortized cost basis , an assessment is made as to whether otti is present . the company considers numerous factors when determining whether a potential otti exists and the period over which the debt security is expected to recover . the principal factors considered are ( 1 ) the length of time and the extent to which the fair value has been less than the amortized cost basis , ( 2 ) the financial condition of the issuer and ( guarantor , if any ) and adverse conditions specifically related to the security , industry or geographic area , ( 3 ) failure of the issuer of the security to make scheduled interest or principal payments , ( 4 ) any changes to the rating of the security by a rating agency , and ( 5 ) the presence of credit enhancements , if any , including the guarantee of the federal government or any of its agencies . evaluation of goodwill . management performs an annual evaluation of the company 's goodwill for possible impairment . based on the results of the 2019 evaluation , management has determined that the carrying value of goodwill is not impaired as of december 31 , 2019. the evaluation approach is described in note 10 of the consolidated financial statements contained herein . estimation of fair value . the estimation of fair value is significant to several of our assets ; including investment securities available-for-sale , interest rate derivative ( discussed in detail in note 22 of the consolidated financial statements ) , intangible assets , foreclosed real estate , and the value of loan collateral when valuing loans . these are all recorded at either fair value , or the lower of cost or fair value . fair values are determined based on third party sources , when available . furthermore , accounting principles generally accepted in the united states require disclosure of the fair value of financial instruments as a part of the notes to the consolidated financial statements . fair values on our available-for-sale securities may be influenced by a number of factors ; including market interest rates , prepayment speeds , discount rates , and the shape of yield curves . fair values for securities available-for-sale are obtained from an independent third party pricing service . where available , fair values are based on quoted prices on a nationally recognized securities exchange . if quoted prices are not available , fair values are measured using quoted market prices for similar benchmark securities . management made no adjustments to the fair value quotes that were provided by the pricing source . the fair values of foreclosed real estate and the underlying collateral value of impaired loans are typically determined based on evaluations by third parties , less estimated costs to sell . when necessary , appraisals are updated to reflect changes in market conditions . - 36 - recent events on december 23 , 2019 , the company announced that its board of directors had declared a cash dividend of $ 0.06 per common and preferred share , and a cash dividend of $ 0.06 per notional share for the issued common stock warrant . the dividend was payable on february 7 , 2020 to shareholders of record on january 17 , 2020. executive summary and results of operations the company reported net income of $ 4.3 million for 2019 , an increase of $ 245,000 , or 6.1 % , as compared to net income of $ 4.0 million for 2018. net income increased during 2019 , as compared to the previous year , due to an increase in net interest income before the provision for loan losses of $ 2.5 million and an increase in noninterest income of $ 1.1 million . these increases were partially offset by an increase in noninterest expense of $ 2.2 million , an increase in income

in addition to its operating expenses , the company is responsible for paying any dividends declared to its shareholders and making payments on its subordinated loans . the company may repurchase shares of its common stock . the company 's primary sources of funds are the proceeds it retained from the private placement , interest and dividends on securities and dividends received from the bank . the amount of dividends that the bank may declare and pay to the company in any calendar year , without prior regulatory approval , can not exceed net income for that year to date plus retained net income ( as defined ) for the preceding two calendar years . the company believes that this restriction will not have an impact on the company 's ability to meet its ongoing cash obligations . at december 31 , 2019 and 2018 , the company had cash and cash equivalents of $ 20.2 million and $ 26.3 million , respectively . the bank has a number of existing credit facilities available to it . at december 31 , 2019 , total credit available under the existing lines of credit was approximately $ 173.2 million at fhlbny , the frb , and two other correspondent banks . at december 31 , 2019 , the company had $ 93.1 million of the available lines of credit utilized , including encumbrances supporting the outstanding letters of credit , described above , on its existing lines of credit with the remainder of $ 80.1 million available . the asset liability management committee of the company is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity . as of december 31 , 2019 , management reported to the board of directors that the bank was in compliance with its liquidity policy guidelines . off-balance sheet arrangements the bank is also a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers . these financial instruments include commitments to extend credit and standby letters of credit . at december 31 , 2019 , the bank had $ 133.9 million in outstanding commitments to extend credit and standby letters of credit . see note 18 within the notes to consolidated financial statements contained

in evaluating long-lived assets for recoverability , the company uses its best estimate of future cash flows expected to result from the use of the related asset group and its eventual disposition . to the extent that estimated future undiscounted net cash flows attributable to the asset are less than its carrying value , an impairment loss is recognized equal to the difference between the carrying value of such asset and its fair value , considering external market participant assumptions . the company had no material impairment losses in fiscal 2016 and in fiscal 2015 . the company recorded impairment losses of $ 35.5 million in fiscal 2014 , within selling , general and administrative expenses . in determining future cash flows , the company takes various factors into account , including the effects of macroeconomic trends such as consumer spending , in-store capital investments , promotional cadence , the level of advertising and changes in merchandising strategy . since the determination of future cash flows is an estimate of future performance , there may be future impairments in the event that future cash flows do not meet expectations . 65 coach , inc. notes to consolidated financial statements ( continued ) business combinations in connection with an acquisition , the company records all assets acquired and liabilities assumed of the acquired business at their acquisition date fair value , including the recognition of contingent consideration at fair value on the acquisition date . these fair value determinations require judgment and may involve the use of significant estimates and assumptions , including assumptions with respect to future cash inflows and outflows , discount rates , asset lives , and market multiples , among other items . furthermore , the company may utilize or consider independent third-party valuation firms when necessary . refer to note 7 , `` acquisitions , `` for detailed disclosures related to our acquisitions . goodwill and other intangible assets upon acquisition , the company estimates and records the fair value of purchased intangible assets , which primarily consists of trademarks and trade names , customer relationships , lease rights and order backlog . the excess of the purchase consideration over the fair value of net assets acquired , both tangible and intangible , is recorded as goodwill . finite-lived intangible assets are amortized over their respective estimated useful lives and , along with other long-lived assets as noted above , are evaluated for impairment periodically whenever events or changes in circumstances indicate that their related carrying values may not be fully recoverable . estimates of fair value for finite-lived and indefinite-lived intangible assets are primarily determined using discounted cash flows and the relief from royalty method , respectively , with consideration of market comparisons and recent transactions . this approach uses significant estimates and assumptions , including projected future cash flows , discount rates and growth rates . goodwill and certain other intangible assets deemed to have indefinite useful lives , including trademarks and trade names , are not amortized , but are assessed for impairment at least annually . the company generally performs its annual goodwill and indefinite-lived intangible assets impairment analysis using a qualitative approach to determine whether it is more likely than not that the fair values of such assets are less than their respective carrying values . if , based on the results of the qualitative assessment , it is concluded that it is not more likely than not that the fair value of the asset exceeds its carrying value , a quantitative test is performed . the quantitative goodwill impairment test is a two-step process . the first step is to identify the existence of potential impairment by comparing the fair value of each reporting unit with its carrying value , including goodwill . if the fair value of a reporting unit exceeds its carrying value , the reporting unit 's goodwill is considered not to be impaired and performance of the second step of the quantitative goodwill impairment test is unnecessary . if the carrying value of a reporting unit exceeds its fair value , the second step of the goodwill impairment test is performed to measure the amount of impairment loss , if any . the second step of the goodwill impairment test compares the implied fair value of the reporting unit 's goodwill with the carrying value of that goodwill . if the carrying value of the reporting unit 's goodwill exceeds the implied fair value of that goodwill , an impairment loss is recognized in an amount equal to that excess . the implied fair value of goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination . in other words , the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value was the purchase price paid to acquire the reporting unit . determination of the fair value of a reporting unit and the fair value of individual assets and liabilities of a reporting unit is based on management 's assessment , considering independent third-party appraisals when necessary . furthermore , this determination is judgmental in nature and often involves the use of significant estimates and assumptions , including projected future cash flows , discount rates , growth rates , and determination of appropriate market comparables and recent transactions . these estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and the amount of any such charge . the company performs its annual impairment assessment of goodwill , including trademarks and trade names , during the fourth quarter of each fiscal year . the company determined that there was no impairment in fiscal 2016 , fiscal 2015 or fiscal 2014 . story_separator_special_tag the company , similar to some companies , includes certain transportation-related costs related to our distribution network in sg & a expenses rather than in cost of sales ; for this reason , our gross margins may not be comparable to that of entities that include all costs related to their distribution network in cost of sales . sg & a expenses increased 4.7 % or $ 107.2 million to $ 2.40 billion in fiscal 2016 as compared to $ 2.29 billion in fiscal 2015 . as a percentage of net sales , sg & a expenses decreased to 53.4 % during fiscal 2016 as compared to 54.6 % during fiscal 2015 . excluding non-gaap adjustments of $ 122.0 million in fiscal 2016 and $ 160.8 million in fiscal 2015 , as discussed in the `` gaap to non-gaap reconciliation `` herein , sg & a expenses increased 6.9 % or $ 146.0 million from fiscal 2015 ; and sg & a expenses as a percentage of net sales remained relatively flat at 50.7 % in fiscal 2016 compared to 50.8 % in fiscal 2015 . selling expenses were $ 1.57 billion , or 35.1 % of net sales , in fiscal 2016 compared to $ 1.53 billion , or 36.6 % of net sales , in fiscal 2015 . this $ 41.8 million increase is primarily due to a $ 47.3 million increase attributable to the stuart weitzman segment as well as increases in europe and mainland china to support growth in the business , partially offset by lower store-related costs in japan , asia ( excluding greater china ) and north america including decreased employee compensation costs and occupancy costs , as well as the impact of favorable foreign currency . excluding non-gaap charges of $ 4.1 million in fiscal 2015 , selling expenses were 36.5 % of net sales . advertising , marketing , and design costs were $ 285.7 million , or 6.4 % of net sales , in fiscal 2016 , compared to $ 246.8 million , or 5.9 % of net sales , during fiscal 2015 . this was primarily due to an increase of $ 25.4 million attributable to stuart weitzman , as well as higher costs for coach brand marketing and advertising-related events , including our first true new york fashion week show in the first quarter of fiscal 2016 , which increased by $ 17.9 million as compared to the same period prior year , partially offset by decreased employee-related costs . distribution and customer service expenses were $ 67.7 million , or 1.5 % of net sales in fiscal 2016 , relatively in-line with fiscal 2015 expenses of $ 69.6 million , or 1.7 % of net sales . administrative expenses were $ 469.9 million , or 10.5 % of net sales , in fiscal 2016 compared to $ 441.5 million , or 10.5 % of net sales , during fiscal 2015 . excluding non-gaap adjustments of $ 122.0 million in fiscal 2016 and $ 156.7 million in fiscal 2015 , administrative expenses were $ 347.9 million , or 7.7 % of net sales , in fiscal 2016 and $ 284.8 million , or 6.8 % of net sales , in fiscal 2015 . the increase is primarily due to the impact of stuart weitzman , contributing to $ 55.5 million of this increase , as well as increased coach brand information system costs and litigation costs , partially offset by lower coach brand occupancy costs . operating income operating income increased 5.7 % or $ 35.5 million to $ 653.5 million during fiscal 2016 as compared to $ 618.0 million in fiscal 2015 . operating margin decreased to 14.5 % as compared to 14.7 % in fiscal 2015 . excluding non-gaap adjustments of $ 123.1 million in fiscal 2016 and $ 170.5 million in fiscal 2015 , as discussed in the `` gaap to non-gaap reconciliation `` herein , operating income decreased 1.5 % or $ 11.9 million to $ 776.6 million from $ 788.5 million in fiscal 2015 ; and operating margin was 17.3 % , in fiscal 2016 as compared to 18.8 % in fiscal 2015 . 36 the following table presents operating income by reportable segment for fiscal 2016 compared to fiscal 2015 : replace_table_token_14_th ( 1 ) operating income in the other category , which is not a reportable segment , consists of coach brand sales generated in licensing and disposition channels . nm - not meaningful operating income for the coach brand decreased 0.3 % or $ 1.6 million to $ 621.0 million in fiscal 2016 . furthermore , operating margin for the coach brand remained flat at 15.0 % in fiscal 2016 when compared to fiscal 2015. excluding non-gaap adjustments , coach brand operating income totaled $ 728.4 million in fiscal 2016 , resulting in an operating margin of 17.6 % . this compared to coach brand operating income of $ 784.3 million in fiscal 2015 , or an operating margin of 18.9 % . north america operating income decreased 10.1 % or $ 83.2 million to $ 737.3 million in fiscal 2016 , reflecting the decrease in gross profit of $ 96.2 million which was partially offset by lower sg & a expenses of $ 13.0 million . the decrease in sg & a expenses was due to lower store-related costs , largely driven by net store closures , as well as decreased variable selling costs as a result of lower sales in north america stores , the internet business and the wholesale channel . operating margin decreased 250 basis points to 30.8 % in fiscal 2016 from 33.3 % during the same period in the prior year due to lower gross margin of 210 basis points and higher sg & a expense as a percentage of net sales of 40 basis points . international operating income increased 6.7 % or $ 32.1 million to $ 512.7 million in fiscal 2016 ,

accrued liabilities were a source of cash of $ 63.2 million in fiscal 2015 , primarily driven by increased payroll and incentive compensation accruals , as compared to source of cash of $ 14.1 million in fiscal 2014. net cash used in investing activities net cash used in investing activities was $ 612.9 million in fiscal 2015 compared to $ 707.7 million in fiscal 2014. the decrease in net cash used of $ 94.8 million was primarily due to the impact of net proceeds from maturing investments of $ 255.6 million in fiscal 2015 , compared to net cash used for purchase of investments of $ 397.1 million in fiscal 2014 , offset by an increase in net cash used of $ 515.8 million in cash used for acquisitions , related to the stuart weitzman acquisition in the fourth quarter of fiscal 2015 , as well as an increase in net cash used of $ 51.9 million related to increased investments in the hudson yards joint venture . net cash provided by ( used in ) financing activities net cash provided by financing activities was $ 389.3 million in fiscal 2015 as compared to a use of cash of $ 748.1 million in fiscal 2014. this increase of cash provided of $ 1,137.4 million was primarily due to the debt borrowings described in note 10 , `` debt '' , as well as the absence of cash used for share repurchases during fiscal 2015. the company received $ 896.7 million in proceeds from long term debt , net of discount , which was partially offset by net repayments of $ 140 million under the company 's amended and restated credit agreement during fiscal 2015 , compared to $ 140 million of net borrowings during fiscal 2014. furthermore , the company used $ 524.9 million for share repurchases in fiscal 2014 , compared to no stock repurchases occurring in fiscal 2015. working capital and capital expenditures as of july 2 , 2016 , in addition to our cash flows from operations , our sources of liquidity and capital resources were comprised of the following : replace_table_token_22_th < td

coso ) . accenture plc 's management is responsible for these consolidated financial statements , 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 annual report on internal control over financial reporting ( item 9a ) . our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company 's internal control over financial reporting 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 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 consolidated 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 ( 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 , the consolidated financial statements referred to above present fairly , in all material respects , the financial position of accenture plc and its subsidiaries as of august 31 , 2017 and 2016 , and the results of their operations and their cash flows for each of the years in the three-year period ended august 31 , 2017 , in conformity with u.s. generally accepted accounting principles . also in our opinion , accenture plc maintained , in all material respects , effective internal control over financial reporting as of august 31 , 2017 , based on criteria established in internal control - integrated framework issued by the committee of sponsoring organizations of the treadway commission ( coso ) . kpmg llp chicago , illinois october 26 , 2017 f- 2 accenture plc consolidated balance sheets august 31 , 2017 and 2016 ( in thousands of u.s. dollars , except share and per share amounts ) replace_table_token_12_th the accompanying notes are an integral part of these consolidated financial statements . f- 3 accenture plc consolidated income statements for the years ended august 31 , 2017 , 2016 and 2015 ( in thousands of u.s. dollars , except share and per share amounts ) replace_table_token_13_th the accompanying notes are an integral part of these consolidated financial statements . f- 4 accenture plc consolidated statements of comprehensive income for the years ended august 31 , 2017 , 2016 and 2015 ( in thousands of u.s. dollars ) replace_table_token_14_th the accompanying notes are an integral part of these consolidated financial statements . f- 5 accenture plc consolidated shareholders ' equity statements for the years ended august 31 , 2017 , 2016 and 2015 ( in thousands of u.s. dollars and share amounts ) ordinary shares class a ordinary shares class x ordinary shares restricted share units additional paid-in capital treasury shares accumulated other comprehensive loss total accenture plc shareholders ' equity noncontrolling interests total shareholders ' equity $ no . shares $ no . shares $ no . shares $ no . shares retained earnings balance as of august 31 , 2014 $ 57 40 $ 18 786,869 $ 1 28,057 $ 921,586 $ 3,347,392 $ ( 9,423,202 ) ( 158,410 ) $ 11,758,131 $ ( 871,948 ) $ 5,732,035 $ 553,302 $ 6,285,337 net income 3,053,581 3,053,581 220,208 3,273,789 other comprehensive income ( loss ) ( 540,024 ) ( 540,024 ) 10,160 ( 529,864 ) income tax benefit on share-based compensation plans 202,868 202,868 202,868 purchases of class a ordinary shares 112,476 ( 2,273,933 ) ( 25,449 ) ( 2,161,457 ) ( 112,476 ) ( 2,273,933 ) share-based compensation expense 634,195 46,134 680,329 680,329 purchases/redemptions of accenture holdings plc ordinary shares , accenture canada holdings inc. exchangeable shares and class x ordinary shares ( 4,722 ) ( 170,168 ) ( 170,168 ) ( 8,888 ) ( 179,056 ) issuances of class a ordinary shares : employee share programs 11,649 ( 575,979 ) 878,939 224,735 5,763 527,695 26,454 554,149 upon redemption of accenture holdings plc story_separator_special_tag we currently do not foresee any event that would require us to distribute any remaining undistributed earnings . for additional information , see note 9 ( income taxes ) to our consolidated financial statements under item 8 , “ financial statements and supplementary data . ” as a matter of course , we are regularly audited by various taxing authorities , and sometimes these audits result in proposed assessments where the ultimate resolution may result in us owing additional taxes . we establish tax liabilities or reduce tax assets for uncertain tax positions when , despite our belief that our tax return positions are appropriate and supportable under local tax law , we believe we may not succeed in realizing the tax benefit of certain positions if challenged . in evaluating a tax position , we determine whether it is more likely than not that the position will be sustained upon examination , including resolution of any related appeals or litigation processes , based on the technical merits of the position . our estimate of the ultimate tax liability contains assumptions based on past experiences , judgments about potential actions by taxing jurisdictions as well as judgments about the likely outcome of issues that have been raised by taxing jurisdictions . the tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement . we evaluate these uncertain tax positions each quarter and adjust the related tax liabilities or assets in light of changing facts and circumstances , such as the progress of a tax audit or the expiration of a statute of limitations . we believe the estimates and assumptions used to support our evaluation of uncertain tax positions are reasonable . however , final determinations of prior-year tax liabilities , either by settlement with tax authorities or expiration of statutes of limitations , could be materially different from estimates reflected in assets and liabilities and historical income tax provisions . the outcome of these final determinations could have a material effect on our income tax provision , net income , or cash flows in the period in which that determination is made . we believe our tax positions comply with applicable tax law and that we have adequately accounted for uncertain tax positions . revenues by segment/operating group our five reportable operating segments are our operating groups , which are communications , media & technology ; financial services ; health & public service ; products ; and resources . operating groups are managed on the basis of net revenues because our management believes net revenues are a better indicator of operating group performance than revenues . in addition to reporting net revenues by operating group , we also report net revenues by two types of work : consulting and outsourcing , which represent the services sold by our operating groups . consulting net revenues , which include strategy , management and technology consulting and systems integration , reflect a finite , distinct project or set of projects with a defined outcome and typically a defined set of specific deliverables . outsourcing net revenues typically reflect ongoing , repeatable services or capabilities provided to transition , run and or manage operations of client systems or business functions . from time to time , our operating groups work together to sell and implement certain contracts . the resulting revenues and costs from these contracts may be apportioned among the participating operating groups . generally , operating expenses for each operating group have similar characteristics and are subject to the same factors , pressures and challenges . however , the economic environment and its effects on the industries served by our operating groups affect revenues and operating expenses within our operating groups to differing degrees . the mix between consulting and outsourcing is not uniform among our operating groups . local currency fluctuations also tend to affect our operating groups differently , depending on the geographic concentrations and locations of their businesses . while we provide discussion about our results of operations below , we can not measure how much of our revenue growth in a particular period is attributable to changes in price or volume . management does not track standard measures of unit or rate volume . instead , our measures of volume and price are extremely complex , as each of our services contracts is unique , reflecting a customized mix of specific services that does not fit into standard comparability measurements . revenue for our services is a function of the nature of each service to be provided , the skills required and the outcome sought , as well as estimated cost , risk , contract terms and other factors . 33 results of operations for fiscal 2017 compared to fiscal 2016 net revenues ( by operating group , geographic region and type of work ) and reimbursements were as follows : replace_table_token_6_th _ n/m = not meaningful amounts in table may not total due to rounding . our business in the united states represented 45 % , 46 % and 43 % of our consolidated net revenues during fiscal 2017 , 2016 and 2015 , respectively . no other country individually comprised 10 % or more of our consolidated net revenues during these periods . net revenues we have changed the structure of our communications , media & technology operating group to reflect the continued convergence of the communications , media and entertainment industries , as well as the opportunity we are seeing in the software and platform sectors . the new structure includes the following industry groups : communications & media ( telecommunications , cable , broadcasting and content & publishing ) ; software & platforms ( internet & social and software ) ; and high tech ( network equipment providers , aerospace & defense , consumer technology , semiconductor , medical equipment and enterprise markets ) . the following net revenues commentary discusses

the repurchase program may be accelerated , suspended , delayed or discontinued at any time , without notice . for additional information , see note 13 ( material transactions affecting shareholders ' equity ) to our consolidated financial statements under item 8 , “ financial statements and supplementary data. ” subsequent developments see note 13 ( material transactions affecting shareholders ' equity ) to our consolidated financial statements under item 8 , “ financial statements and supplementary data. ” obligations and commitments as of august 31 , 2017 , we had the following obligations and commitments to make future payments under contracts , contractual obligations and commercial commitments : replace_table_token_11_th _ ( 1 ) the liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing and amount of cash outflows from future tax settlements can not be determined . for additional information , see note 9 ( income taxes ) to our consolidated financial statements under item 8 , “ financial statements and supplementary data. ” ( 2 ) amounts represent projected payments under certain unfunded retirement plans for former pre-incorporation partners . given these plans are unfunded , we pay these benefits directly . these plans were eliminated for active partners

included in 2009 fdic insurance assessments expense was a special fdic deposit insurance assessment amounting to $ 492 . in the second quarter of 2009 the fdic levied a special emergency assessment on all fdic insured financial institutions . the special assessment represented five basis points on the bank 's total assets , less tier i capital , as of june 30 , 2009. the special assessment was in addition to the normal second quarter 2009 assessment . other operating expense : for the year ended december 31 , 2011 , total other operating expenses amounted to $ 5,884 , compared with $ 5,533 in 2010 , representing an increase of $ 351 , or 6.3 % . the increase in 2011 other operating expenses was attributed to a wide variety of factors including the disposal of certain fixed assets amounting to approximately $ 80 in connection with the reconfiguration of the bank 's ellsworth campus , including a newly constructed branch office . the increase in 2011 other operating expenses was also attributed to higher levels of audit and regulatory examination fees , legal and professional fees , loan collection expenses , marketing costs , charitable contributions , and expenses associated with the implementation of a new fully integrated human resources management system . 84 for the year ended december 31 , 2010 , total other operating expenses amounted to $ 5,533 , compared with $ 5,701 in 2009 , representing a decline of $ 168 , or 2.9 % . this decline was principally attributed to a $ 281 write-down of certain non-marketable venture capital equity investment funds considered other-than-temporarily impaired ( “otti” ) recorded in 2009. the bank did not record any further otti on these investments during 2010. these investment funds , which generally qualify for community reinvestment act credit , represent socially responsible venture capital investments in small businesses throughout maine and new england . these write-downs principally reflected the impact current economic conditions have had on these funds . notable increases in other operating expenses during 2010 compared with 2009 included marketing expenses , software depreciation expense , and staff development expenses . notable declines included professional service fees , and loan collection and foreclosure expenses . income taxes for the year ended december 31 , 2011 , total income taxes amounted to $ 4,462 , compared with $ 4,132 in 2010 , representing an increase of $ 330 , or 8.0 % . for the year ended december 31 , 2010 , total income taxes amounted to $ 4,132 , compared with $ 3,992 in 2009 , representing an increase of $ 140 , or 3.5 % . the company 's 2011 effective income tax rate amounted to 28.8 % , compared with 27.9 % and 27.8 % in 2010 and 2009 , respectively . the income tax provisions for these periods were less than the expense that would result from applying the federal statutory rate of 35 % to income before income taxes , principally because of the impact of tax-exempt income from certain investment securities , loans and bank owned life insurance . fluctuations in the company 's effective tax rate are generally attributed to changes in the relationship between non-taxable income and non-deductible expense , and income before income taxes , during any given reporting period . impact of inflation and changing prices the consolidated financial statements and the accompanying notes to the consolidated financial statements presented elsewhere in this report have been prepared in accordance with u.s. generally accepted accounting principles , which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation . unlike many industrial companies , substantially all of the assets and virtually all of the liabilities of the company are monetary in nature . as a result , interest rates have a more significant impact on the company 's performance than the general level of inflation . over short periods of time , interest rates and the u.s. treasury yield curve may not necessarily move in the same direction or in the same magnitude as inflation . while the financial nature of the company 's consolidated balance sheets and statements of income is more clearly affected by changes in interest rates than by inflation , inflation does affect the company because as prices increase the money supply tends to increase , the size of loans requested tends to increase , total company assets increase , and interest rates are affected by inflationary expectations . in addition , operating expenses tend to increase without a corresponding increase in productivity . there is no precise method , however , to measure the effect of inflation on the company 's financial statements . accordingly , any examination or analysis of the financial statements should take into consideration the possible effects of inflation . 85 regulatory and economic policies the company 's business and earnings are affected by general and local economic conditions and by the monetary and fiscal policies of the united states government , its agencies and various other governmental regulatory authorities , among other things . the federal reserve board regulates the supply of money in order to influence general economic conditions . among the instruments of monetary policy historically available to the federal reserve board are ( i ) conducting open market operations in united states government obligations , ( ii ) changing the discount rate on financial institution borrowings , ( iii ) imposing or changing reserve requirements against financial institution deposits , and ( iv ) restricting certain borrowings and imposing or changing reserve requirements against certain borrowings by financial institutions and their affiliates . in addition , the federal reserve board has taken a variety of extraordinary actions during the current recession that have had a material expansionary effect on the money supply . story_separator_special_tag securities available for sale : securities available for sale represented 100 % of total securities at december 31 , 2011 and 2010. the designation of securities available for sale is made at the time of purchase , based upon management 's intent to hold the securities for an indefinite time ; however , these securities would be available for sale in response to changes in market interest rates , related changes in the securities ' prepayment risk , needs for liquidity , or changes in the availability of and yield on alternative investments . the securities available for sale portfolio is used for liquidity purposes while simultaneously producing earnings . securities classified as available for sale are reported at their fair value with unrealized gains or losses , net of taxes , excluded from earnings but shown separately as a component of shareholders ' equity . gains and losses on the sale of securities available for sale are determined using the specific-identification method and are shown separately in the consolidated statements of income . the following table summarizes the securities available for sale portfolio as of december 31 , 2011 and 2010 : replace_table_token_7_th replace_table_token_8_th obligations of u.s. government-sponsored enterprises : this category of securities represents promissory notes ( debt instruments ) issued by u.s. government-sponsored enterprises , such as fnma , fhlmc , fhlb , etc . all of these securities were credit rated aaa by all of the major credit rating agencies at december 31 , 2011 and 2010 . 46 at december 31 , 2011 , the amortized cost of obligations of u.s. government-sponsored enterprises totaled $ 1,000 , unchanged compared with december 31 , 2010. at december 31 , 2011 , the amortized cost of obligations of u.s. government enterprises comprised 0.3 % of the securities portfolio , unchanged compared with december 31 , 2010. at december 31 , 2011 , the bank 's weighted average yield on obligations of u.s. government-sponsored enterprises amounted to 2.50 % , unchanged compared with december 31 , 2010. mortgage-backed securities issued by u.s. government-sponsored enterprises : this category of securities represents mortgage backed securities issued and guaranteed by u.s. government-sponsored enterprises , specifically , fnma and fhlmc . these government-sponsored enterprises were placed under the conservatorship of the u.s. government on september 7 , 2008. in august of 2011 , standard and poor 's , a major credit rating agency , downgraded all debt issued and guaranteed by the united states from “aaa” to “aa+” . accordingly , all of these securities were credit rated “aa+” at december 31 , 2011. at december 31 , 2011 , the amortized cost of mortgage-backed securities issued by u.s. government-sponsored enterprises totaled $ 225,962 , compared with $ 217,319 at december 31 , 2010 , representing an increase of $ 8,643 , or 4.0 % . at december 31 , 2011 , the amortized cost of mortgage-backed securities issued by u.s. government enterprises comprised 60.9 % of the securities portfolio , compared with 60.8 % at december 31 , 2010. at december 31 , 2011 , the bank 's weighted average yield on mortgage-backed securities issued by u.s. government-sponsored enterprises amounted to 3.97 % compared with 4.39 % at december 31 , 2010. the decline in the weighted average yield was principally attributed to prevailing , historically low market yields during 2011 , with securities cash flows from the portfolio generally being replaced with securities having lower yields than the existing weighted average yield for this segment of the portfolio . mortgage-backed securities issued by u.s. government agencies : this category of securities represents mortgage-backed securities backed by the full faith and credit of the u.s. government , such as the government national mortgage association ( “gnma” ) . all of these securities were credit rated “aa+” at december 31 , 2011 and “aaa” at december 31 , 2010. at december 31 , 2011 , the total amortized cost of the bank 's mortgage-backed securities issued by u.s. government agencies totaled $ 72,585 , compared with $ 56,083 at december 31 , 2010 , representing an increase of $ 16,502 , or 29.4 % . at december 31 , 2011 , the amortized cost of mortgage-backed securities issued by u.s. government agencies comprised 19.6 % of the bank 's securities portfolio , compared with 15.7 % at december 31 , 2010. at december 31 , 2011 , the weighted average yield on mortgage-backed securities issued by u.s. government agencies amounted to 3.61 % , compared with 3.60 % at december 31 , 2010. mortgage-backed securities issued by private-label issuers : this category of securities represents mortgage-backed securities issued by banks , investment banks , and thrift institutions . typically , these securities are largely based on mortgages which exceed the conforming loan sizes required by agency securities . while private-label mortgage-backed securities are not guaranteed by any u.s. government agency , they are credit rated by the major rating agencies ( moody 's , standard & poor 's and fitch ) . 47 all of the bank 's mortgage-backed securities issued by private-label issuers carry various amounts of credit enhancement , and none are classified as sub-prime mortgage-backed security pools . these securities were purchased based on the underlying loan characteristics such as loan to value ratios , borrower credit scores , property type and location , and the level of credit enhancement . at december 31 , 2011 , the total amortized cost of the bank 's private-label mbs amounted to $ 13,504 , compared with $ 22,720 at december 31 , 2010 , representing a decline of $ 9,216 , or 40.6 % . this decline was principally attributed to principal pay downs on the underlying securities collateral throughout 2011 and , to a lesser extent , otti losses . at december 31 , 2011 , the amortized cost of mortgage-backed securities issued by private-label issuers comprised 3.6 % of the bank 's securities portfolio , compared with 6.4 %

as a result of the repurchase , the company accelerated the accretion of the $ 496 discount and recorded a total reduction in shareholders ' equity of $ 18,751 in the first quarter of 2010. additionally , the accelerated accretion of the discount was treated in a manner consistent with that for preferred dividends in reporting net income available to common shareholders in the company 's results of operations for 2010 , reducing diluted earnings per share by $ 0.13. on july 28 , 2010 , the company repurchased the warrant in its entirety for $ 250. the repurchase of the warrant did not have any effect on the company 's earnings or earnings per share . as a result of the warrant repurchase , the company has repurchased all securities issued to treasury under cpp . common stock offering : in december 2009 the company completed its offering of 800,000 shares of common stock to the public at $ 27.50 per share . the net proceeds from this offering , after deducting underwriting discounts and expenses amounted to $ 20,412. in january 2010 the company completed the closing of the underwriter 's exercise of its over-allotment option to purchase an additional 82,021 shares of the company 's common stock at a purchase price to the public of $ 27.50 per share . the company received total net proceeds from the offering , including the exercise of the over allotment option , after deducting underwriting discounts and expenses , amounting to $ 22,442. all of the net proceeds from this offering are treated as tier 1 capital for regulatory purposes . in february of 2010 , the company used $ 18,751 of the net proceeds from this offering to repurchase all of its preferred stock sold to treasury under the cpp . trends , events or uncertainties : there are no known trends , events or uncertainties , nor any recommendations by any regulatory authority , that are reasonably likely to have a material effect on the company 's capital resources , liquidity , or financial condition . stock repurchase plan : in august of 2008 , the company 's board of directors approved a program to repurchase up to 300,000 shares of the company 's common stock , or approximately 10.2 % of the shares then currently outstanding . the new stock repurchase program became effective as of august 21 , 2008 , and was authorized to continue for a period of up to twenty-four consecutive months . in august of 2010 , the company 's board of directors authorized the continuance of this program through august 19 , 2012. depending on market conditions and other factors , these purchases may be commenced or

, player roster updates to madden nfl 25 ) at no additional charge to the consumer . we do not have vendor-specific objective evidence of fair value ( “ vsoe ” ) for these unspecified updates , and thus , as required by u.s. gaap , we recognize revenue from the sale of these online-enabled games over the period we expect to offer the unspecified updates to the consumer ( “ estimated offering period ” ) . prior to july 1 , 2013 , for most sales we estimated the offering period to be six months and recognized revenue over this period in the month after delivery . during the three month ended june 30 , 2013 , we completed our annual evaluation of the estimated offering period and noted that generally , consumers are playing our games online over a larger period of time . based on this , we concluded that for physical software sales made after june 30 , 2013 , the estimated offering period should be increased to nine months , resulting in revenue being recognized over a longer period of time . the estimated offering period for digitally distributed software games is six months . other multiple-element arrangements in some of our multiple-element arrangements , we sell tangible products with software and or software-related offerings . these tangible products are generally either peripherals or ancillary collectors ' items , such as figurines and comic books . revenue for these arrangements is allocated to each separate unit of accounting for each deliverable using the relative selling prices of each deliverable in the arrangement based on the selling price hierarchy described below . if the arrangement contains more than one software deliverable , the arrangement consideration is allocated to the software deliverables as a group and then allocated to each software deliverable in accordance with asc 985-605. we determine the selling price for a tangible product deliverable based on the following selling price hierarchy : vsoe ( i.e . , the price we charge when the tangible product is sold separately ) if available , third-party evidence ( “ tpe ” ) of fair value ( i.e . , the price charged by others for similar tangible products ) if vsoe is not available , or our best estimate of selling price ( “ besp ” ) if neither vsoe nor tpe is available . in accordance with asc 605 , provided the other three revenue recognition criteria other than delivery have been met , we recognize revenue upon delivery to the customer as we have no further obligations . principal agent considerations in accordance with asc 605-45 , revenue recognition : principal agent considerations , we evaluate sales of our interactive software games via third party storefronts , including digital storefronts such as xbox live marketplace , sony psn , apple appstore , google play ) in order to determine whether or not we are acting as the principal or as an agent , which we consider in determining if revenue should be reported gross or net of fees retained by the storefront . key indicators that we evaluate in determining gross versus net treatment include but are not limited to the following : the party responsible for delivery/fulfillment of the product or service to the end consumer the party responsible for the billing , collection of fees and refunds to the consumer the storefront and terms of sale that govern the consumer 's purchase of the product or service the party that sets the pricing with the consumer and has credit risk 62 based on the evaluation of the above indicators , we have determined that we are generally acting as an agent and are not considered the primary obligor to consumers for our interactive software games distributed through third party digital storefronts . we therefore recognize revenue related to these arrangements on a net basis . sales returns and allowances and bad debt reserves we reduce revenue primarily for estimated future returns and price protection which may occur with our distributors and retailers ( “ channel partners ” ) . price protection represents our practice to provide our channel partners with a credit allowance to lower their wholesale price on a particular product in the channel . the amount of the price protection is generally the difference between the old wholesale price and the new reduced wholesale price . in certain countries for our pc and console packaged goods software products , we also have a practice of allowing channel partners to return older software products in the channel in exchange for a credit allowance . as a general practice , we do not give cash refunds . taxes collected from customers and remitted to governmental authorities taxes assessed by a government authority that are both imposed on and concurrent with specific revenue transactions between us and our customers are presented on a net basis in our consolidated statements of operations . concentration of credit risk , significant customers and channel partners we extend credit to various retailers and channel partners . collection of trade receivables may be affected by changes in economic or other industry conditions and may , accordingly , impact our overall credit risk . although we generally do not require collateral , we perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses . invoices are aged based on contractual terms with our customers . the provision for doubtful accounts is recorded as a charge to general and administrative expense when a potential loss is identified . losses are written off against the allowance when the receivable is determined to be uncollectible . worldwide , we had three customers who accounted for approximately 17 percent , 15 percent , and 11 percent and two customers who accounted for 13 percent and 10 percent of our consolidated gross receivables as of march 31 , 2014 and 2013 , respectively . story_separator_special_tag using the income approach requires the use of financial models , which require us to make various estimates including , but not limited to ( 1 ) the potential future cash flows for the asset or liability being measured , ( 2 ) the timing of receipt or payment of those 29 future cash flows , ( 3 ) the time value of money associated with the expected receipt or payment of such cash flows , and ( 4 ) the inherent risk associated with the cash flows ( risk premium ) . making these cash flow estimates is inherently difficult and subjective , and if any of the estimates used to determine the fair value using the income approach turns out to be inaccurate , our financial results may be negatively impacted . furthermore , relatively small changes in many of these estimates can have a significant impact to the estimated fair value resulting from the financial models or the related accounting conclusion reached . for example , a relatively small change in the estimated fair value of an asset may change a conclusion as to whether an asset is impaired . while we are required to make certain fair value assessments associated with the accounting for several types of transactions , the following areas are the most sensitive to these assessments : business combinations . we must estimate the fair value of assets acquired , liabilities and contingencies assumed , acquired in-process technology , and contingent consideration issued in a business combination . our assessment of the estimated fair value of each of these can have a material effect on our reported results as intangible assets are amortized over various estimated useful lives . furthermore , the estimated fair value assigned to an acquired asset or liability has a direct impact on the amount we recognize as goodwill , which is an asset that is not amortized . determining the fair value of assets acquired requires an assessment of the highest and best use or the expected price to sell the asset and the related expected future cash flows . determining the fair value of acquired in-process technology also requires an assessment of our expectations related to the use of that technology . determining the fair value of an assumed liability requires an assessment of the expected cost to transfer the liability . determining the fair value of contingent consideration requires an assessment of the probability-weighted expected future cash flows over the period in which the obligation is expected to be settled , and applying a discount rate that appropriately captures the risk associated with the obligation . the significant unobservable inputs used in the fair value measurement of the contingent consideration payable are forecasted earnings . significant changes in forecasted earnings would result in significantly higher or lower fair value measurement . this fair value assessment is also required in periods subsequent to a business combination . such estimates are inherently difficult and subjective and can have a material impact on our consolidated financial statements . assessment of impairment of goodwill , intangibles , and other long-lived assets . current accounting standards require that we assess the recoverability of our finite lived acquisition-related intangible assets and other long-lived assets whenever events or changes in circumstances indicate the remaining value of the assets recorded on our consolidated balance sheets is potentially impaired . in order to determine if a potential impairment has occurred , management must make various assumptions about the estimated fair value of the asset by evaluating future business prospects and estimated future cash flows . for some assets , our estimated fair value is dependent upon predicting which of our products will be successful . this success is dependent upon several factors , such as which operating platforms will be successful in the marketplace . also , our revenue and earnings are dependent on our ability to meet our product release schedules . judgments and assumptions about future cash flows and remaining useful lives are complex and often subjective . they can be affected by a variety of factors , including but not limited to , significant negative industry or economic trends , significant changes in the manner of our use of the assets or the strategy of our overall business and significant under-performance relative to projected future operating results . when we consider such assets to be impaired , the amount of impairment we recognize is measured by the amount by which the carrying amount of the asset exceeds its fair value . in assessing impairment on our goodwill , we first analyze qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test . the qualitative factors we assess include long-term prospects of our performance , share price trends and market capitalization , and company specific events . if we conclude it is more likely than not that the fair value of a reporting unit exceeds its carrying amount , we do not need to perform the two-step impairment test . if based on that assessment , we believe it is more likely than not that the fair value of the reporting unit is less than its carrying value , a two-step goodwill impairment test will be performed . the first step measures for impairment by applying fair value-based tests at the reporting unit level . the second step ( if necessary ) measures the amount of impairment by applying fair value-based tests to the individual assets and liabilities within each reporting unit . reporting units are determined by the components of operating segments that constitute a business for which ( 1 ) discrete financial information is available , ( 2 ) segment management regularly reviews the operating results of that component , and ( 3 ) whether the component has dissimilar economic

% convertible senior notes due 2016 ( the “ notes ” ) . the notes are senior unsecured obligations which pay interest semiannually in arrears at a rate of 0.75 percent per annum on january 15 and july 15 of each year , beginning on january 15 , 2012 and will mature on july 15 , 2016 , unless earlier purchased or converted in accordance with their terms prior to such date . the notes are convertible into cash and shares of our common stock based on an initial conversion value of 31.5075 shares of our common stock per $ 1,000 principal amount of notes ( equivalent to an initial conversion price of approximately $ 31.74 per share ) . upon conversion of the notes , holders will receive cash up to the principal amount of each note , and any excess conversion value will be delivered in shares of our common stock . we used the net proceeds of the notes to finance the cash consideration of our acquisition of popcap , which closed in august 2011. prior to april 15 , 2016 , the notes will be convertible only upon the occurrence of certain events and during certain periods , and thereafter , at any time until the close of business on the second scheduled trading day immediately preceding the maturity date of the notes . the notes do not contain any financial covenants . the conversion rate is subject to customary anti-dilution adjustments , but will not be adjusted for any accrued and unpaid interest . following certain corporate events described in the indenture governing the notes ( the “ indenture ” ) that occur prior to the maturity date , the conversion rate will be increased for a holder who elects to convert its notes in connection with such corporate event in certain circumstances . the notes are not redeemable prior to maturity , and no sinking fund is provided for the notes . if we undergo a “ fundamental change , ” as defined in the indenture , subject to certain conditions , holders may require us to purchase for cash all or any portion of their notes . the fundamental change purchase price will be 100 percent of the principal amount of the notes to be purchased plus any accrued and unpaid interest up to but excluding the fundamental change purchase date . the indenture contains

1 , dated as of june 5 , 2014 , to the employment agreement by and between advaxis , inc. and sara m. bonstein . incorporated by reference to exhibit 10.8 to quarterly report on form 10-q filed with the sec on june 10 , 2014 . 10.36‡ employment agreement , dated october 20 , 2014 , by and between advaxis , inc. and david j. mauro . incorporated by reference to exhibit 10.1 to current report on form 8-k filed with the sec on october 21 , 2014 10.37‡ form of restricted stock agreement between advaxis , inc. and david j. mauro , dated october 20 , 2014. incorporated by reference to exhibit 10.2 to current report on form 8-k filed with the sec on october 21 , 2014 . 10.38 clinical trial collaboration agreement , dated july 21 , 2014 , by and between advaxis , inc. and medimmune , llc . incorporated by reference to exhibit 10.1 to quarterly report on form 10-q filed with the sec on september 9 , 2014 . 10.39 5 th amendment to the amended & restated license agreement , dated july 25 , 2014 , by and between advaxis , inc. and university of pennsylvania . incorporated by reference to exhibit 10.2 to quarterly report on form 10-q filed with the sec on september 9 , 2014 . 10.40 amendment no . 2 to the advaxis , inc. 2011 omnibus incentive plan , effective july 9 , 2014. incorporated by reference to annex a to current report on schedule 14a filed with the sec on may 20 , 2014 . 10.41 amended and restated 2011 omnibus incentive plan , dated september 8 , 2014. incorporated by reference to exhibit 10.4 to quarterly report on form 10-q filed with the sec on september 9 , 2014 . 10.42 master services agreement for technical transfer and clinical supply , dated february 5 , 2014 , by and between advaxis , inc. and synco bio partners b.v. incorporated by reference to exhibit 10.1 to current report to form 8-k filed with the sec on february 11 , 2014 . 10.43 clinical trial collaboration and supply agreement by and between advaxis , inc. and merck & co. dated august 22 , 2014. incorporated by reference to exhibit 10.101 to annual report on form 10-k filed with the sec on january 6 , 2015 10.44‡ amendment no . 1 , dated as of april 17 , 2015 , to the employment agreement by and between advaxis , inc and david j. mauro . incorporated by reference to exhibit 10.2 to quarterly report on form 10-q filed with the sec on june 15 , 2015 . 10.45‡ amendment no . 2 , dated as of april 17 , 2015 , to the employment agreement by and between advaxis , inc and sara m. bonstein . incorporated by reference to exhibit 10.3 to quarterly report on form 10-q filed with the sec on june 15 , 2015 . 10.46‡ amendment no . 3 , dated as of april 17 , 2015 , to the employment agreement by and between advaxis , inc and daniel j. o'connor . incorporated by reference to exhibit 10.4 to quarterly report on form 10-q filed with the sec on june 15 , 2015 . 10.47‡ amendment no . 3 , dated as of april 17 , 2015 , to the employment agreement by and between advaxis , inc and gregory t. mayes . incorporated by reference to exhibit 10.5 to quarterly report on form 10-q filed with the sec on june 15 , 2015 . 10.48‡ amendment no . 3 , dated as of april 17 , 2015 , to the employment agreement by and between advaxis , inc and robert g. petit . incorporated by reference to exhibit 10.6 to quarterly report on form 10-q filed with the sec on june 15 , 2015 . 10.49 exclusive license agreement , dated august 25 , 2015 , by and between advaxis , inc. and knight therapeutics , inc. incorporated by reference to exhibit 10.57 to annual report on form 10-k filed with the sec on january 8 , 2016 . 10.50 securities purchase agreement , dated as of august 25 , 2015 , between advaxis , inc. , knight therapeutics inc. , and sectoral asset management . incorporated by reference to exhibit 10.1 to current report on form 8-k filed with the sec on august 28 , 2015 . 10.51 ‡ amendment no . 4 , dated as of december 31 , 2015 , to the employment agreement by and between advaxis , inc and robert g. petit . incorporated by reference to exhibit 10.58 to annual report on form 10-k filed with the sec on january 8 , 2016 . 10.52 ‡ amendment no . 3 , dated as of december 31 , 2015 , to the employment agreement by and between advaxis , inc and sara m. bonstein . incorporated by reference to exhibit 10.59 to annual report on form 10-k filed with the sec on january 8 , 2016 . 10.53 ‡ amendment no . 4 , dated as of december 31 , 2015 , to the employment agreement by and between advaxis , inc and daniel j. o'connor . incorporated by reference to exhibit 10.60 to annual report on form 10-k filed with the sec on january 8 , 2016 . 10.54 ‡ amendment no . 4 , dated as of december 31 , 2015 , to the employment agreement by and between advaxis , inc and gregory t. mayes . incorporated by reference to exhibit 10.61 to annual report on form 10-k filed with the sec on january 8 , 2016 . story_separator_special_tag milestones are considered substantive if all of the following conditions are met : ( 1 ) the milestone is nonrefundable ; ( 2 ) achievement of the milestone was not reasonably assured at the inception of the arrangement ; ( 3 ) substantive effort is involved to achieve the milestone ; and ( 4 ) the amount of the milestone appears reasonable in relation to the effort expended , and the other milestones in the arrangement and the related risk associated with the achievement of the milestone and any ongoing research and development or other services are priced at fair value . if product development is successful , the company will recognize revenue from royalties based on licensees ' sales of its products or products using its technologies . royalties are recognized as earned in accordance with the contract terms when royalties from licensees can be reasonably estimated and collectability is reasonably assured . if royalties can not be reasonably estimated or collectability of a royalty amount is not reasonably assured , royalties are recognized as revenue when the cash is received . deferred revenue represents the portion of payments received for which the earnings process has not been completed . deferred revenue expected to be recognized within the next 12 months is classified as a current liability . an allowance for doubtful accounts is established based on the company 's best estimate of the amount of probable credit losses in the company 's existing license fee receivables , using historical experience . the company reviews its allowance for doubtful accounts periodically . past due accounts are reviewed individually for collectability . account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote . to date , this is yet to occur . stock based compensation we account for stock-based compensation using fair value recognition and record stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards . as such , we recognize stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over their requisite service period , based on the vesting provisions of the individual grants . the process of estimating the fair value of stock-based compensation awards and recognizing stock-based compensation cost over their requisite service period involves significant assumptions and judgments . we estimate the fair value of stock option awards on the date of grant using the black-scholes option-valuation model for the remaining awards , which requires that we make certain assumptions regarding : ( i ) the expected volatility in the market price of our common stock ; ( ii ) dividend yield ; ( iii ) risk-free interest rates ; and ( iv ) the period of time employees are expected to hold the award prior to exercise ( referred to as the expected holding period ) . as a result , if we revise our assumptions and estimates , our stock-based compensation expense could change materially for future grants . stock-based compensation for employees , executives and directors is measured based on the fair value of the shares issued on the date of grant and is to be recognized over the requisite service period in both research and development expenses and general and administrative expenses on the statement of operations . for non-employees , the fair value of the award is generally measured based on contractual terms . derivative financial instruments we do not use derivative instruments to hedge exposures to cash flow , market or foreign currency risks . we evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives . for derivative financial instruments that are accounted for as liabilities , the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date , with changes in the fair value reported in the statements of operations . the determination of fair value requires the use of judgment and estimates by management . for stock-based derivative financial instruments , we used the bsm which approximated the binomial lattice options pricing model to value the derivative instruments at inception and on subsequent valuation dates . the classification of derivative instruments , including whether such instruments should be recorded as liabilities or as equity , is evaluated at the end of each reporting period . derivative liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the instrument could be required within 12 months of the balance sheet date . the variables used in the model are projected based on our historical data , experience , and other factors . changes in any of these variables could result in material adjustments to the expense recognized for changes in the valuation of the warrant derivative liability . 38 intangible assets intangible assets primarily consist of legal and filing costs associated with obtaining patents and licenses and are amortized on a straight-line basis over their remaining useful lives which are estimated to be twenty years from the effective dates of the university of pennsylvania ( penn ) license agreements , beginning in july 1 , 2002. these legal and filing costs are invoiced to the company through penn and its patent attorneys . management has reviewed its long-lived assets for impairment whenever events and circumstances indicate that the carrying value of an asset might not be recoverable and its carrying amount exceeds its fair value , which is based upon estimated undiscounted future cash flows . net assets are recorded on the balance sheet for patents and licenses related to axal , adxs-psa and adxs-her2 and other products that are in development . however , if a competitor were to gain fda approval for a treatment before us or if future clinical trials fail to meet the targeted endpoints , the company would likely record an impairment

we also issued gbp 108,724 shares of common stock pursuant to a stock purchase agreement with gbp , resulting in net proceeds of approximately $ 0.4 million . this was partially offset by approximately $ 0.9 million of taxes paid related to the net share settlement of equity awards . 36 our capital resources and operations to date have been funded primarily with the proceeds from public , private equity and debt financings , nol tax sales and income earned on investments and grants . we have sustained losses from operations in each fiscal year since our inception , and we expect losses to continue for the indefinite future , due to the substantial investment in research and development . as of october 31 , 2016 and october 31 , 2015 , we had an accumulated deficit of $ 207,706,825 and $ 134,054,259 , respectively and shareholders ' equity of $ 119,302,194 and $ 115,598,875 , respectively . the company believes its current cash position is sufficient to fund its business plan approximately through the second quarter of fiscal 2019. we have based this estimate on assumptions that may prove to be wrong , and we could use available capital resources sooner than currently expected . because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates , we are unable to estimate the amount of increased capital outlays and operating expenses associated with completing the development of our current product candidates . the company recognizes it may need to raise additional capital in order to continue to execute its business plan . there is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the company or whether the company will become profitable and generate positive operating cash flow . if the company is unable to raise sufficient additional funds , it will have to scale back its business plan , extend payables and reduce overhead until sufficient additional capital is raised to support further operations . there can be no assurance that such a plan will be successful . < p style= '' font : 10pt times new roman , times , serif ;

the fees are generally constrained and are recognized as revenue when costs are incurred to perform the services . these fees are generally offset by the costs incurred to provide such services . other administrative service agreements for participant recordkeeping and transfer agent services for defined contribution retirement plans ; brokerage services , and trust services generally have one performance obligation as the promised services in each agreement are not separately identifiable from other performance obligations in the contract and , therefore , are not distinct . our performance obligation in each agreement is satisfied over time and revenue is recognized as time passes . the fees for these services vary by contract and are both fixed and variable . distribution and servicing fees the agreements for distribution and servicing fees earned from 12b-1 plans of the advisor class , r class , and variable annuity ii class shares of the u.s. mutual funds have one performance obligation , as distribution services are not separately identifiable from shareholder servicing promises in the agreements and , therefore , are not distinct . our performance obligation is satisfied at the point in time when an investor makes an investment into these share classes of the u.s. mutual funds . the fees for these distribution and servicing agreements are based on the assets under management in these shares classes , which change based on fluctuations in financial markets , and represent variable consideration . these fees are generally constrained , and excluded from revenue , until the asset values on which our client is billed are not subject to financial market volatility . accordingly , the majority of the distribution and servicing revenue disclosed in note 3 - information about receivables , revenues and services relates to distribution and servicing obligations that were satisfied during prior periods . these fees are offset entirely by the distribution and servicing costs paid to third-party financial intermediaries that source the assets of these share classes . advertising costs of advertising are expensed the first time that the advertising takes place . page 61 stock-based compensation we maintain three stockholder-approved employee long-term incentive plans ( 2012 long-term incentive plan , 2004 stock incentive plan , and 2001 stock incentive plan , collectively the lti plans ) and two stockholder-approved non-employee director plans ( 2017 non-employee director equity plan and 2007 non-employee director equity plan , collectively the director plans ) . we believe that our stock-based compensation programs align the interests of our employees and directors with those of our common stockholders . as of december 31 , 2018 , a total of 20,024,786 shares were available for future grant under the 2012 long-term incentive plan and the 2017 non-employee director equity plan ( 2017 plan ) . under our lti plans , we have issued restricted shares and restricted stock units to employees that settle in shares of our common stock after vesting . vesting of these awards is based on the individual continuing to render service over an average 5.0 year graded schedule . all restricted shareholders and restricted stock unitholders receive non-forfeitable cash dividends and cash dividend equivalents , respectively , on our dividend payable date . we are also authorized to grant qualified incentive and nonqualified fixed stock options with a maximum term of 10 years . we have not granted options to employees since 2015. we grant performance-based restricted stock units to certain executive officers in which the number of restricted stock units ultimately retained is determined based on achievement of certain performance thresholds . the number of restricted stock units retained is also subject to similar time-based vesting requirements as the other restricted stock units described above . cash dividend equivalents are accrued and paid to the holders of performance-based restricted stock units only after the performance period has lapsed and the performance thresholds have been met . under the director plans , we may grant options with a maximum term of 10 years , restricted shares , and restricted stock units to non-employee directors . under the 2017 plan , awards generally vest over one year and , in the case of restricted stock units , are settled upon the non-employee directors ' departure from the board . for restricted shares , cash dividends are accrued and paid only after the award vests . restricted stock unit holders receive dividend equivalents in the form of unvested stock units that vest over the same period as the underlying award . we have not granted options to non-employee directors since 2016. we recognize the grant-date fair value of these awards as compensation expense ratably over the awards ' requisite service period . compensation expense recognized for performance-based restricted units includes an estimate regarding the probability of the performance thresholds being met . we account for forfeitures as they occur . both time-based and performance-based restricted stock units are valued on the grant-date using the closing market price of our common stock . we used the following weighted-average inputs to the black-scholes option-pricing model to estimate the fair value of each option granted in 2016 to certain non-employee directors . grant-date fair value per option awarded $ 10.62 assumptions used : expected life in years 6.8 expected volatility 20 % dividend yield 2.5 % risk-free interest rate 1.6 % our expected life assumptions are based on the vesting period for each option grant and our historical experience with respect to the average holding period from vesting to option exercise . the assumptions for expected volatility are based on historical experience for the same periods as our expected lives . dividend yields are based on recent historical experience and future expectations . risk-free interest rates are set using grant-date u.s. treasury yield curves for the same periods as our expected lives . story_separator_special_tag specifically , about two-thirds of the increase for 2017 as compared with 2016 was attributable to increased professional fees incurred to support these continued investments in our operational and regulatory business demands . the increased level of professional fees for 2017 did not recur for 2018. page 33 non-operating income net non-operating investment income decreased $ 373.1 million for the year ended december 31 , 2018 compared with 2017 and increased $ 169.2 million for the year ended december 31 , 2017 compared with 2016 . net non-operating investment activity for the years ended december 31 , 2018 , 2017 and 2016 comprised the following : replace_table_token_14_th during 2018 , non-operating income included the impact of sharp market declines in the later part of 2018 , which resulted in unrealized losses on our investment portfolio , including our consolidated products , compared with unrealized gains recognized during 2017. partially offsetting these losses was the recognition during 2018 of a realized gain in other investment income associated with the sale of our 10 % holding in daiwa sb investments ltd. additionally , on january 1 , 2018 , we implemented new accounting guidance that eliminated the available-for-sale investment category for equity securities . as a result of this change , realized gains of $ 30.8 million from the sale of certain available-for-sale investments recognized in 2017 did not reoccur in 2018. during 2017 , non-operating income included $ 30.8 million in gains realized from the disposition of certain available-for-sale investments and $ 23.6 million in unrealized gains recognized on t. rowe price trading investments that result from our decision to economically hedge the market exposure associated with our supplemental savings plan liability . in order to fund the hedge portfolio , we used the proceeds from the sale of certain available-for-sale investments in certain u.s. mutual funds as well as designated a mutual fund that was held as available-for-sale . the designation of the mutual fund as an economic hedge transferred its accounting classification from an available-for-sale security to a trading security , and resulted in the reclassification of the investment 's unrealized holding gain at the date of designation to the income statement from the balance sheet where it was previously recognized . page 34 the impact of consolidating certain t. rowe price investment products on the individual lines of our consolidated statements of income for 2018 , 2017 , and 2016 is as follows : replace_table_token_15_th provision for income taxes our effective tax rate for 2018 was 25.8 % , compared with 36.9 % for 2017 and 36.0 % for the 2016 . the decrease in our effective tax rate in 2018 from 2017 is primarily due to the reduction in the u.s. federal corporate tax rate from 35 % to 21 % on january 1 , 2018 following the enactment on december 22 , 2017 , of a comprehensive u.s. tax reform bill known as the tax cuts and jobs act ( `` tax reform `` ) . for 2018 and 2017 , the income tax provision includes nonrecurring charges of $ 20.8 million and $ 71.1 million , respectively , related to the enactment of u.s. tax reform as we adjusted our deferred tax asset and liability estimates . the increase in tax rate in 2017 from 2016 was primarily due to the nonrecurring charges taken in 2017. our tax rate in 2017 and 2016 was reduced by tax benefits related to the exercise of stock options , vesting of restricted stock , and net income attributable to redeemable non-controlling interests related to our consolidated t. rowe price investment products , as these earnings are not taxable to us . on april 24 , 2018 , the state of maryland enacted new state tax legislation . this new state tax legislation , effective in 2018 , adopted a five-year phase-in of the single sales factor method of apportionment for calculating income tax for multi-state companies doing business in maryland and is expected to result in a net benefit over time . accordingly , we recognized a nonrecurring charge of $ 7.9 million during 2018 for the re-measurement of our deferred tax assets and liabilities to reflect the effect of this maryland state tax legislation . based on information currently available , we expect that the maryland state tax legislation will reduce our effective state tax rate over the five-year phase-in period to less than 2.5 % . page 35 the following table reconciles the statutory federal income tax rate to our effective tax rate for the years ended december 31 , 2018 , 2017 , and 2016 : replace_table_token_16_th ( 1 ) state income tax benefits are reflected in the total benefits for net income attributable to redeemable non-controlling interests and stock-based compensation plans activity . our effective tax rate will continue to experience volatility in future periods as the tax benefits recognized from stock-based compensation are impacted by market fluctuations in our stock price and timing of option exercises . the rate will also be impacted by changes in our consolidated investment products that are driven by market fluctuations and changes in the proportion of their net income that is attributable to non-controlling interests . we currently estimate our effective tax rate for the full-year 2019 will be in the range of 23.5 % to 26.5 % . non-gaap information and reconciliation . we believe the non-gaap financial measures below provide relevant and meaningful information to investors about our core operating results . these measures have been established in order to increase transparency for the purpose of evaluating our core business , for comparing current results with prior period results , and to enable more appropriate comparison with industry peers . however , non-gaap financial measures should not be considered as a substitute for financial measures calculated in accordance with u.s. gaap and may be calculated differently by other companies . beginning in 2018 , our non-gaap adjustments no longer include non-operating income related to our

additionally , we expended $ 1,099.6 million in 2018 to repurchase 10.8 million shares , or 4.4 % , of our outstanding common stock at an average price of $ 101.48 per share . these dividends and repurchases were expended using existing cash balances and cash generated from operations . we will generally repurchase our common stock over time to offset the dilution created by our equity-based compensation plans . since the end of 2015 , we have returned $ 4.0 billion to stockholders through stock repurchases and our regular quarterly dividends , as follows : replace_table_token_24_th we anticipate property and equipment expenditures for the full-year 2019 to be up to $ 200 million , of which about 65 % is planned for technology initiatives . we expect to fund our anticipated capital expenditures with operating cash flows and other available resources . the following tables summarize the cash flows for 2018 , 2017 and 2016 , that are attributable to t. rowe price group , our consolidated t. rowe price investment products , and the related eliminations required in preparing the statement . 2018 cash flow attributable to : ( in millions ) t. rowe price group consolidated t. rowe price investment products elims as reported cash flows from operating activities net income $ 1,837.5 $ ( 105.6 ) $ 36.8 $ 1,768.7 adjustments to reconcile net income to net cash provided by ( used in ) operating activities depreciation and amortization of property and equipment 159.5 — — 159.5 stock-based compensation expense 197.1 — — 197.1 net gains recognized on investments ( 13.7 ) < div

if we elect to bypass the qualitative assessment , or if a qualitative assessment indicates it is more likely than not that the estimated carrying value exceeds the fair value , we test for impairment using a quantitative process . if the company determines that impairment of its intangible assets may exist , the amount of impairment loss is measured as the excess of carrying value over fair value . our estimates in the determination of the fair value of indefinite-lived intangible assets include the anticipated future revenues of company-operated and franchised restaurants and the resulting cash flows . investments the company has a 50 % share in a partnership in a canadian restaurant real estate joint venture ( “ timwen ” ) with a subsidiary of restaurant brands international inc. , a quick-service restaurant company that owns the tim hortons ® brand . ( tim hortons is a registered trademark of tim hortons usa inc. ) in addition , the company has a 20 % share in a joint venture for the operation of wendy 's restaurants in brazil ( the “ brazil jv ” ) . the company has significant influence over these investees . such investments are accounted for using the equity method , under which our results of operations include our share of the income ( loss ) of the investees in “ other operating income , net . ” investments in limited partnerships and other non-current investments in which the company does not have significant influence over the investees , which includes our indirect 18.5 % interest in arby 's restaurant group , inc. ( “ arby 's ” ) , are recorded at cost with related realized gains and losses reported as income or loss in the period in which the securities are sold or otherwise disposed . our 18.5 % equity interest as of january 1 , 2017 has the potential to be diluted by stock options issued as incentives to arby 's management . cash distributions and dividends received that are determined to be returns of capital are recorded as a reduction of the carrying value of our investments and returns on our investments are recorded to “ investment income , net . ” the difference between the carrying value of our timwen equity investment and the underlying equity in the historical net assets of the investee is accounted for as if the investee were a consolidated subsidiary . accordingly , the carrying value difference is amortized over the estimated lives of the assets of the investee to which such difference would have been allocated if the equity investment were a consolidated subsidiary . to the extent the carrying value difference represents goodwill , it is not amortized . derivative instruments the company used interest rate swap agreements to manage its exposure to changes in interest rates as well as to maintain an appropriate mix of fixed and variable rate debt . in may 2015 , the company terminated its floating to fixed interest rate swap agreements which were accounted for as cash flow hedges . changes in the fair value of the cash flow hedging instruments were recorded as an adjustment to “ accumulated other comprehensive loss ” to the extent of the effectiveness of such hedging instruments and subsequently reclassified into “ interest expense ” in the period that the hedged forecasted transaction affects earnings . share-based compensation the company has granted share-based compensation awards to certain employees under several equity plans . the company measures the cost of employee services received in exchange for an equity award , which include grants of employee stock options and restricted shares , based on the fair value of the award at the date of grant . share-based compensation expense is recognized net of estimated forfeitures , determined based on historical experience . the company recognizes share-based compensation expense over the requisite service period unless the awards are subject to performance conditions , in which case we recognize compensation expense over the requisite service period to the extent performance conditions are considered probable . the company determines the grant date fair value of stock options using a black-scholes-merton option pricing model ( the “ black-scholes 69 the wendy 's company and subsidiaries notes to consolidated financial statements ( in thousands except per share amounts ) model ” ) . the grant date fair value of restricted share awards ( “ rsas ” ) , restricted share units ( “ rsus ” ) and performance-based awards are determined using the average of the high and low trading prices of our common stock on the date of grant , unless the awards are subject to market conditions , in which case we use a monte carlo simulation model . the monte carlo simulation model utilizes multiple input variables to estimate the probability that market conditions will be achieved . foreign currency translation substantially all of the company 's foreign operations are in canada where the functional currency is the canadian dollar . financial statements of foreign subsidiaries are prepared in their functional currency and then translated into u.s. dollars . assets and liabilities are translated at the exchange rate as of the balance sheet date and revenues , costs and expenses are translated at a monthly average exchange rate . net gains or losses resulting from the translation are recorded to the “ foreign currency translation adjustment ” component of “ accumulated other comprehensive loss . ” gains and losses arising from the impact of foreign currency exchange rate fluctuations on transactions in foreign currency are included in “ general and administrative . ” income taxes the company accounts for income taxes under the asset and liability method . story_separator_special_tag this decrease in sales was partially offset by sales during the 53 rd week of 2015 of $ 19.2 million , which were excluded from same-restaurant sales , and sales from restaurants acquired of $ 36.9 million . company-operated same-restaurant sales during 2015 increased due to an increase in our average per customer check amount , which reflects benefits from strategic price increases on our menu items and changes in product mix . same-restaurant sales also benefited from higher sales growth at our new and remodeled image activation restaurants and a slight 40 increase in customer count . the customer count increase for the year was driven by significantly higher customer transactions during the fourth quarter of 2015 , which resulted in a company-operated same-restaurant sales increase of 3.7 % during the fourth quarter of 2015 compared to the fourth quarter of 2014. sales during 2015 were negatively impacted by $ 7.4 million due to changes in canadian foreign currency rates relative to the u.s. dollar . replace_table_token_13_th the increase in franchise royalty revenue and fees during 2016 was primarily due to sales of company-operated restaurants to franchisees and facilitating franchisee-to-franchisee restaurant transfers under our system optimization initiative . royalty revenue also benefited from a 1.4 % increase in franchise same-restaurant sales . these increases were partially offset by royalty revenue of approximately $ 6.0 million for the 53 rd week of 2015. the increase in franchise royalty revenue and fees during 2015 was primarily due to sales of company-operated restaurants to franchisees and facilitating franchisee-to-franchisee restaurant transfers under our system optimization initiative . royalty revenue was also positively impacted by an increase in franchise same-restaurant sales , which excludes sales during the 53 rd week of 2015. we believe franchise same-restaurant sales were higher than company-operated same-restaurant sales during 2015 due to higher price increases . royalty revenue also includes approximately $ 6.0 million for the 53 rd week of 2015. replace_table_token_14_th the increase in franchise rental income during 2016 and 2015 was primarily due to leasing and or subleasing properties to franchisees in connection with the sale of company-operated restaurants and facilitating franchisee-to-franchisee restaurant transfers . replace_table_token_15_th the improvement in cost of sales , as a percent of sales , during 2016 was primarily due to a decrease in commodity costs , reflecting lower beef prices . in addition , the increase in same-restaurant sales and higher sales at our new and remodeled image activation restaurants contributed to the improvement in cost of sales , as a percent of sales . these decreases in cost of sales , as a percent of sales , were partially offset by ( 1 ) higher medical insurance costs , ( 2 ) increased labor rates and ( 3 ) the negative impact of changes in product mix . the decrease in cost of sales , as a percent of sales , during 2015 was due to benefits from strategic price increases on our menu items and higher sales at our image activation restaurants . as a percent of sales , commodity costs were flat compared with prior year , as higher beef prices were offset by lower prices of other commodities . the impact of the 53 rd week in 2015 on cost of sales , as a percent of sales , was not material . 41 replace_table_token_16_th the increase in franchise rental expense during 2016 and 2015 was primarily due to subleasing properties to franchisees that were previously company-operated restaurants and as such , had been previously recorded in cost of sales . rental expense in 2016 and 2015 also increased as a result of entering into new leases in connection with facilitating franchisee-to-franchisee restaurant transfers for purposes of subleasing such properties to the franchisee . replace_table_token_17_th the decrease in general and administrative expenses during 2016 was primarily due to decreases in ( 1 ) employee compensation and related expenses primarily as a result of changes in staffing driven by our system optimization initiative and ( 2 ) incentive compensation accruals due to a decrease in operating performance as compared to plan in 2016 versus 2015. these decreases in general and administrative expenses were partially offset by increases in ( 1 ) severance expense , ( 2 ) legal reserves and ( 3 ) professional services due to legal and other costs associated with the cybersecurity incident ( see “ item 1a . risk factors ” and “ item 8. financial statements and supplementary data , ” note 23 to the consolidated financial statements for further information ) . the decrease in general and administrative expenses during 2015 was primarily due to ( 1 ) a decrease in share-based compensation primarily as a result of awards granted and timing of expense recognition , ( 2 ) a decrease in franchise incentives due to the 2015 image activation incentive program solely including royalty reductions as compared to our 2014 program which also included a cash incentive and ( 3 ) a decrease in employee compensation and related expenses primarily as a result of the realignment of our u.s. field operations and restaurant support center in dublin , ohio as part of our g & a realignment plan to reduce general and administrative expenses . these decreases were partially offset by higher incentive compensation accruals due to stronger operating performance as compared to plan in 2015 versus 2014. replace_table_token_18_th the decrease in restaurant depreciation and amortization during 2016 was primarily due to decreases in ( 1 ) depreciation on assets sold or classified as held for sale under our system optimization initiative of $ 19.5 million and ( 2 ) accelerated depreciation on existing assets that are being replaced as part of our image activation program of $ 6.0 million . the decrease in restaurant depreciation and amortization during 2015 was primarily due to decreases in ( 1 ) accelerated depreciation on existing assets that are being replaced as part of our image activation program of $ 10.7 million and ( 2

investing activities cash provided by investing activities increased $ 56.7 million during 2016 as compared to 2015 , primarily due to ( 1 ) a decrease of $ 101.6 million in capital expenditures and ( 2 ) an increase of $ 57.8 million in proceeds from dispositions related to our system optimization initiative . these changes were partially offset by ( 1 ) a decrease of $ 78.4 million in proceeds from the sale of the bakery in 2015 and ( 2 ) an increase in restricted cash for the reinvestment in capital assets under our securitized financing facility of $ 18.6 million . cash provided by investing activities increased $ 223.2 million during 2015 as compared to 2014 , primarily due to ( 1 ) $ 78.4 million in proceeds from the sale of the bakery , ( 2 ) a decrease of $ 52.7 million in payments for restaurant acquisitions , ( 3 ) a decrease of $ 46.8 million in capital expenditures and ( 4 ) an increase of $ 43.0 million in proceeds from dispositions related to our system optimization initiative . 47 financing activities cash used in financing activities increased $ 228.7 million during 2016 as compared to 2015 , primarily due to a net decrease in cash provided by long-term debt activities of $ 949.6 million resulting from the securitized financing facility and the related repayment of the 2013 restated credit agreement during 2015. the unfavorable impact of long-term debt activities was partially offset by a decrease in repurchases of common stock of $ 761.8 million . cash used in financing activities decreased $ 198.8 million during 2015 as compared to 2014 , primarily due to a net increase in cash provided by long-term debt activities of $ 961.3 million resulting from the securitized financing facility and the related repayment of the 2013 restated credit agreement . the favorable impact of long-term debt activities was partially offset by an increase in repurchases of common stock of $ 797.5 million . capitalization replace_table_token_28_th the wendy 's company 's total capitalization at january 1 , 2017 decreased $ 139.0 million from $ 3,179.0 million at january 3 , 2016 and was impacted principally by the following : stock repurchases of $ 335.3 million dividends paid of $ 63.8 million repayments of long-term debt of $ 24.6 million ; partially offset by comprehensive income of $ 137.2 million ; capital lease obligations of $ 104.1 million ; tax benefit from share-based compensation of $ 3.3 million ; and < table cellpadding= '' 0 '' cellspacing= '' 0 ''

marketing and advertising expenses of $ 5.1 million , $ 3.2 million and $ 3.5 million for the years ended 2017 , 2016 and 2015 , respectively , were recorded within distribution expense in the statement of operations . income taxes the company accounts for income taxes using the liability method . the company records a valuation allowance to reduce the deferred tax assets reported if , based on the weight of the evidence , it is more likely than not that some portion or all of the deferred tax assets will be not realized . as of december 31 , 2017 , the company recorded a valuation allowance of $ 0.5 million . for additional information , refer to note 15 , income taxes . as of december 31 , 2016 , the company had no valuation allowance recorded against any deferred tax assets . stock-based compensation the company recognizes cost of employee services received in exchange for awards of equity instruments based on the fair value of each instrument at the date of grant . compensation expense is recognized on a straight-line basis over the period during which an employee is required to provide service in exchange for an award . the company has issued and outstanding restricted stock awards , stock option awards and performance share awards . restricted stock awards are valued at the fair value of the shares on the date of grant . the fair value of share option awards is estimated on the date of grant using the black-scholes valuation model . the fair value of performance share awards is estimated through the use of a monte carlo simulation model . for additional information , refer to note 9 , stock-based compensation . concentrations of risk the company 's business may be adversely affected by increases in the price of aircraft fuel , the volatility of the price of aircraft fuel , or both . aircraft fuel , one of the company 's largest expenditures , represented approximately 27 % , 24 % and 28 % of total operating expenses in 2017 , 2016 and 2015 , respectively . the company 's operations are largely concentrated in the southeast united states with fort lauderdale being the highest volume fueling point in the system . gulf coast jet indexed fuel is the basis for a substantial majority of the company 's fuel consumption . any disruption to the oil production or refinery capacity in the gulf coast , as a result of weather or any other disaster , or disruptions in supply of jet fuel , dramatic escalations in the costs of jet fuel and or the failure of fuel providers to perform under fuel arrangements for other reasons could have a material adverse effect on the company 's financial condition and results of operations . the company 's operations will continue to be vulnerable to weather conditions ( including hurricane season or snow and severe winter weather ) , which could disrupt service or create air traffic control problems . these events may result in decreased revenue and or increased costs . 73 notes to financial statements— ( continued ) due to the relatively small size of the fleet and high utilization rate , the unavailability of one or more aircraft and resulting reduced capacity could have a material adverse effect on the company 's business , results of operations and financial condition . as of december 31 , 2017 , the company had four union-represented employee groups that together represented approximately 75 % of all employees . as of december 31 , 2016 , the company had four union-represented employee groups that together represented approximately 73 % of all employees . a strike or other significant labor dispute with the company 's unionized employees is likely to adversely affect the company 's ability to conduct business . additional disclosures are included in note 16 , commitments and contingencies . 2. recent accounting developments revenue from contracts with customers in may 2014 , the financial accounting standards board ( the fasb ) issued accounting standards update ( asu ) no . 2014-09 , ( asu 2014-09 ) , `` revenue from contracts with customers . `` the objective of asu 2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers . the new guidance is effective for the company in the first quarter of 2018. entities have the option to use either a full retrospective or a modified retrospective approach to adopt asu 2014-09. the company currently anticipates utilizing the full retrospective method of adoption allowed by the standard , in order to provide for comparative results in all periods presented , and will adopt the standard as of january 1 , 2018. while the company is still evaluating the impact , it currently believes the most significant impact of this asu will be the elimination of the incremental cost method for frequent flier program accounting , which will require the company to re-value and record a liability associated with customer flight miles earned as part of the company 's frequent flier program with a relative fair value approach . while our evaluation is ongoing , the company currently estimates that applying a relative fair value would increase its air traffic liability by approximately $ 10 million at the date of adoption . the company also expects the classification and timing of recognition of certain ancillary fees to be impacted by the adoption of asu 2014-09. while the company believes the adoption will not have a significant impact on earnings , the classification of certain revenues , such as bags , seats and other travel-related fees may be deemed part of the single performance obligation of providing passenger transportation . the company expects that these revenues currently classified as non-ticket revenue , approximately $ 1 billion annually , will be reclassified to passenger revenue after adoption . story_separator_special_tag our most significant non-ticket revenues include revenues generated from air travel-related services paid for baggage , passenger usage fees , advance seat selection , itinerary changes , and loyalty programs . the majority of our non-ticket revenues are recognized once the related flight departs . some of our non-ticket revenues , such as those related to itinerary changes , are recognized at the time products are purchased or services are provided . these revenues also include commissions from the sales of hotel rooms , trip insurance and rental cars recognized at the time the service is rendered . non-ticket revenues also include revenues from our subscription-based $ 9 fare club , recognized on a straight-line basis over 12 months . customers may elect to change their itinerary prior to the date of departure . a service charge is assessed and recognized on the date the change is initiated and is deducted from the face value of the original purchase price of the ticket , and the original ticket becomes invalid . the amount remaining after deducting the service charge is called a credit shell which generally expires 60 days from the date the credit shell is created and can be used towards the purchase of a new ticket and our other service offerings . the amount of credits expected to expire unused is recognized as revenue upon issuance of the credit and is estimated based on historical experience . estimating the amount of credits that will go unused involves some level of subjectivity and judgment . frequent flier program . we accrue for mileage credits earned through travel , including mileage credits for members with an insufficient number of mileage credits to earn an award , under our free spirit program based on the estimated incremental cost of providing free travel for credits that are expected to be redeemed . incremental costs include fuel , insurance , security , ticketing and facility charges reduced by an estimate of amounts required to be paid by the passenger when redeeming the award . under our affinity card program , funds received for the marketing of a co-branded spirit credit card and delivery of award miles are accounted for as a multiple-deliverable arrangement . at the inception of the arrangement , we evaluated all deliverables in the arrangement to determine whether they represent separate units of accounting . we determined the arrangement had three separate units of accounting : ( i ) travel miles to be awarded , ( ii ) licensing of brand and access to member lists and ( iii ) advertising and marketing efforts . we established the estimated selling price for all deliverables that qualified for separation , as arrangement consideration should be allocated based on relative selling price . the manner in which the selling price was established was based on the applicable hierarchy of evidence . total arrangement consideration was then allocated to each deliverable on the basis of the deliverable 's relative selling price . in considering the hierarchy of evidence , we first determined whether vendor-specific objective evidence of selling price or third-party evidence of selling price existed . we determined that neither vendor-specific objective evidence of selling price nor third-party evidence existed due to the uniqueness of our program . as such , we developed our best estimate of the selling price for all deliverables . for the selling price of travel , we considered a number of entity-specific factors , including the number of miles needed to redeem an award , average fare of comparable segments , breakage , restrictions , fees to redeem miles and other charges . for licensing of brand and access to member lists , we considered both market-specific factors and entity-specific factors , including general profit margins realized in the marketplace/industry , brand power , market royalty rates and size of customer base . for the advertising and marketing element , we considered market-specific factors and entity-specific factors , including our internal costs ( and fluctuations of costs ) of providing services , volume of marketing efforts and overall advertising plan . consideration allocated based on the relative selling price to both brand licensing and advertising elements is recognized as revenue when earned and recorded in non-ticket revenue . consideration allocated to award miles is deferred and recognized ratably as passenger revenue over the estimated period the transportation is expected to be provided which is currently estimated at 17 months . for additional information , refer to “ notes to financial statements—1 . summary of significant accounting policies—frequent flier program ” . accounting for property and equipment . property and equipment is stated at cost , less accumulated depreciation and amortization . depreciation of operating property and equipment is computed using the straight-line method applied to each unit of property . property under capital leases and related obligations are initially recorded at an amount equal to the present value of future minimum lease payments computed using our incremental borrowing rate or , when known , the interest rate implicit in the lease . amortization of property under capital leases is on a straight-line basis over the lease term and is included in depreciation and amortization expense . in accounting for property and equipment , we must make estimates about the expected useful lives of the assets , the expected residual values of the assets , and the potential for impairment based on the fair value of the assets and their future expected cash flows . the depreciable lives used for the principal depreciable asset classifications are : 44 estimated useful life aircraft , engines and flight simulators 25 years spare rotables and flight assemblies 7 to 15 years other equipment and vehicles 5 to 7 years internal use software 3 to 10 years capital leases lease term leasehold improvements lesser of lease term or estimated useful life of the improvement buildings lesser of lease term or 30 years as of december 31 , 2017 , we had 54

upon termination of the lease , title of the project , which will be fully depreciated , will automatically pass to the authority . we completed the project during the first quarter of 2017 and had no remaining capital commitments related to this project as of december 31 , 2017 . off-balance sheet arrangements we have significant obligations for aircraft and spare engines as 58 of our 112 aircraft and 11 of our 15 spare engines are financed under operating leases and therefore are not reflected on our balance sheets . these leases expire between 2019 and 2029 . aircraft rent payments were $ 220.9 million and $ 213.9 million for 2017 and 2016 , respectively . our aircraft lease payments for 57 of our aircraft are fixed-rate obligations . one of our leases provide for variable rent payments , which fluctuate based on changes in libor ( london interbank offered rate ) . our contractual purchase commitments consist primarily of aircraft and engine acquisitions through manufacturers . as of december 31 , 2017 , our firm aircraft orders consisted of the following : replace_table_token_23_th during the first quarter of 2018 , we negotiated revisions to our a320 aircraft order . we originally had 14 a320neo aircraft scheduled for delivery in 2019. pursuant to the revision , 5 of the 14 scheduled a320neo aircraft were converted to a320ceo aircraft but remain scheduled to be delivered in 2019. we also have four spare engine orders for v2500 selecttwo engines with iae and nine spare engine orders for purepower pw 1100g-jm engines with pratt & whitney . spare engines are scheduled for delivery from 2018 through 2023 . committed expenditures for these aircraft and spare engines , including estimated amounts for contractual price escalations and aircraft pdps , are expected to be $ 528.4 million in 2018 , $ 774.8 million in 2019 , $ 820.9 million in 2020 , $ 785.1 million in 2021 , $ 16.8 million in 2022 , and $ 7.9 million in 2023 and beyond . as of december 31 , 2017 , we had lines of credit related to corporate credit cards of $ 33.6 million from which we had drawn $ 1.7 million . < div

this $ 28,000 restructuring charge was recorded in restructuring expense in the 2011 consolidated statement of net income and relates to the upholstery fabrics segment . fiscal 2010 during fiscal 2010 , we recorded a restructuring and related credit of $ 312,000 , of which a credit of $ 186,000 was for employee termination benefits , a credit of $ 170,000 for sales proceeds received on equipment with no carrying value , a credit of $ 50,000 was inventory markdowns , a credit of $ 14,000 for lease termination and other exit costs , offset by a charge of $ 108,000 for other operating costs associated with closed plant facilities . of this total credit , a charge of $ 58,000 was recorded to cost of sales and a credit of $ 370,000 was recorded to restructuring credit in the 2010 consolidated statement of net income and relates to the upholstery fabrics segment . 3 . assets held for sale and related impairments a summary of assets held for sale follows : replace_table_token_15_th the carrying value of these assets held for sale are presented separately in the april 29 , 2012 and may 1 , 2011 consolidated balance sheets and are no longer being depreciated . 58 u.s. upholstery fabrics during fiscal 2012 , we received proceeds of $ 63,000 associated with the sale of equipment classified as held for sale and recorded a gain on the sale of equipment of $ 3,000 which was recorded in cost of sales in the 2012 consolidated statement of net income . during the fourth quarter of fiscal 2011 , we determined that the carrying value of equipment classified as held for sale exceeded its fair value ( based on quoted market prices form a used equipment dealer ) . consequently , we recorded an impairment loss of $ 28,000 in restructuring expense in the 2011 consolidated statement of operations . mattress fabrics during fiscal 2011 , we determined that the carrying value of equipment classified as held for sale exceeded its fair value ( based on quoted market prices ) . consequently , we recorded an impairment loss of $ 10,000 in cost of sales in the 2011 consolidated statement of net income . during fiscal 2011 , we received proceeds of $ 10,000 associated with sale of equipment classified as held for sale . 4. accounts receivable a summary of accounts receivable follows : replace_table_token_16_th a summary of the activity in the allowance for doubtful accounts follows : replace_table_token_17_th a summary of the activity in the allowance for returns and allowances and discounts follows : replace_table_token_18_th 5. inventories a summary of inventories follows : replace_table_token_19_th 59 6. property , plant and equipment a summary of property , plant and equipment follows : replace_table_token_20_th * * shorter of life of lease or useful life . at april 29 , 2012 , we had total amounts due regarding capital expenditures totaling $ 169,000 , which pertain to outstanding vendor invoices , none of which are financed . the total outstanding amount of $ 169,000 is required to be paid in full in fiscal 2013. at may 1 , 2011 , we had total amounts due regarding capital expenditures totaling $ 140,000 , which pertain to outstanding vendor invoices , none of which are financed . we did not finance any of our capital expenditures in fiscal 2012 , 2011 , and 2010. we financed a $ 2.4 million equipment purchase with a capital lease obligation totaling $ 1.4 million in fiscal 2009. this capital lease was paid in full in fiscal 2010. the $ 1.4 million in equipment under capital leases is reflected in property , plant , and equipment in the accompanying consolidated balance sheets as of april 29 , 2012 and may 1 , 2011 , respectively . depreciation expense on the carrying value of $ 2.4 million associated with this capital lease obligation was $ 208,000 in each of fiscal 2012 , 2011 and 2010 , respectively . 7. goodwill a summary of the change in the carrying amount of goodwill follows : replace_table_token_21_th the goodwill balance relates to the mattress fabrics segment . during the first quarter of fiscal 2010 , we finalized our valuation of the fair values for the assets acquired and liabilities assumed regarding the purchase of the bodet & horst usa , lp and bodet & horst gmbh & co. kg 's ( collectively `` bodet & horst `` ) knitted mattress fabric operation located in high point , nc . as a result of this final valuation , we recorded an adjustment to increase the fair value of the non-compete agreement and reduce the fair value of the goodwill by $ 131,000 . 60 8. other assets a summary of other assets follows : replace_table_token_22_th we recorded non-compete agreements in connection with the company 's asset purchase agreements with international textile group , inc. ( itg ) and bodet & horst at their fair values based on valuation techniques . these non-compete agreements pertain to our mattress fabrics segment . the non-compete agreement associated with itg was amortized on a straight line basis over the four year life of the agreement that expired at the end of the third quarter of fiscal 2011. the non-compete agreement associated with bodet & horst is amortized on a straight-line basis over the six year life of the agreement and requires quarterly payments of $ 12,500 over the life of the agreement . as of april 29 , 2012 , the total remaining non-compete payments were $ 112,500 . at april 29 , 2012 and may 1 , 2011 , the gross carrying amount of the non-compete agreements were $ 1.1 million and $ 1.0 million , respectively . at april 29 , 2012 and may 1 , 2011 , accumulated amortization for these non-compete agreements was $ 741,000 and $ 544,000 , respectively . story_separator_special_tag ● the income tax rate increased 1.4 % for non-deductible stock-based compensation expense and other miscellaneous items . the income tax benefit for fiscal 2011 is different from the amount obtained by applying our statutory rate of 34 % to income before income taxes for the following reasons : ● the income tax rate was reduced by 42 % or an income tax benefit of $ 6.4 million was recorded for the reduction in the valuation allowance recorded against our net deferred tax assets associated with our u.s. and china operations . this income tax benefit of $ 6.4 million represents a $ 2.8 million realization of u.s. loss carryforwards associated with fiscal 2011 pre-tax income from our u.s. operations , a $ 2.3 million adjustment pertaining to a change in judgment about the future realization of our u.s. net deferred tax assets , and a $ 1.3 million adjustment pertaining to a change in judgment about the future realization of our china net deferred tax assets . ● the income tax rate was reduced by 7 % for taxable income subject to lower statutory income rates in foreign jurisdictions compared with the statutory income tax rate of 34 % for the united states . ● the income tax rate was reduced by 2 % for adjustments made to our canadian deferred tax liabilities associated with our election to file our canadian income tax returns in u.s. dollars commencing with our fiscal 2011 tax year . our canadian income tax returns were filed in canadian dollars for fiscal years prior to fiscal 2011. this adjustment totaled $ 315,000 and represented a discrete event in which the full tax effects were recorded in the first quarter and the full year of fiscal 2011 . 34 ● the income tax rate increased 9 % for an increase in unrecognized tax benefits . ● the income tax rate increased 0.7 % for non-deductible stock-based compensation expense and other miscellaneous items . deferred income taxes – valuation allowance summary in accordance with asc topic 740 , we evaluate our deferred income taxes to determine if a valuation allowance is required . asc topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “ more likely than not ” standard with significant weight being given to evidence that can be objectively verified . since the company operates in multiple jurisdictions , we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis , taking into account the effects of local tax law . based on this assessment , we recorded a partial valuation allowance of $ 12.8 million and $ 16.4 million against our net deferred tax assets associated with our u.s. operations at april 29 , 2012 and may 1 , 2011 , respectively . at april 29 , 2012 and may 1 , 2011 , no valuation allowance was recorded against our net deferred tax assets associated with our operations located in china and poland . united states our net deferred tax asset regarding our u.s. operations primarily pertain to incurring significant u.s. pre-tax losses during previous years , with u.s. loss carryforwards totaling $ 59.9 million and $ 60.0 million at april 29 , 2012 and may 1 , 2011 , respectively . fiscal 2011 due to the favorable results of our multi-year restructuring process in our upholstery fabric operations and key acquisitions and capital investments made for our mattress fabric segment , on a cumulative three-year basis ending may 1 , 2011 , our u.s. operations earned a pre-tax income of $ 4.2 million . in addition , our u.s. operations reported a pre-tax income over fiscal years 2011 and 2010 totaling $ 8.2 million . we believe that fiscal years 2011 and 2010 are a more indicative measure of future pre-tax income as these fiscal years reflect operating performance after the cost savings of the profit-improvement and restructuring plans were realized and the full operational effects of the acquisitions associated with the company 's mattress fabric operations located in the u.s. although the financial results of our u.s. operations improved , the significant uncertainty in the overall economic climate made it very difficult to forecast medium and long-term financial results associated with our u.s. operations . based on these economic conditions , we believed it was too uncertain to project pre-tax income associated with our u.s. operations after fiscal 2012. based on this significant positive and negative evidence , we recorded a partial valuation allowance of $ 16.4 million against our net deferred tax assets associated with our u.s. operations that was expected to reverse beyond fiscal 2012 and we recognized an income tax benefit of $ 2.3 million in the fourth quarter of fiscal 2011 for the reduction in this valuation allowance for projected u.s. taxable income in fiscal 2012 that was expected to reduce our u.s. loss carryforwards . fiscal 2012 this improvement in the u.s. operations ' financial results continued through fiscal 2012. our u.s. operations earned a cumulative pretax income through the second quarter of fiscal 2012 and fiscal years 2011 and 2010 totaling $ 10.0 million . this continued earnings improvement from our u.s. operations was driven by our mattress fabrics operations ( which primarily resides in the u.s. ) . during the second quarter of fiscal 2012 , our mattress fabrics operations had net sales totaling $ 35.2 million compared with $ 28.3 million in the second quarter of fiscal 2011. in addition , our mattress fabrics operations had operating income totaling $ 3.8 million in the second quarter of fiscal 2012 compared with $ 3.3 million in the second quarter of fiscal 2011. these improved results in the second quarter of fiscal 2012 , which were better than expected , can be attributed to increased sales from our sales and marketing initiatives and new programs with customers who are leading suppliers in the bedding industry . collectively these developments

on june 13 , 2012 , we announced that our board of directors approved the payment of a quarterly cash dividend of $ 0.03 per share to be paid on or about july 16 , 2012 , to shareholders of record as of the close of business on july 2 , 2012. our last dividend payment was over eleven years ago . we anticipate paying a cash dividend each quarter , with expected payment dates in october , january , april , and july . future dividend payments are subject to board approval and may be adjusted at the board 's discretion as business needs or market conditions change . our cash and cash equivalents and short-term investment balance may be adversely affected by factors beyond our control , such as weakening industry demand and delays in receipt of payment on accounts receivable . 41 working capital accounts receivable at april 29 , 2012 , were $ 25.1 million , an increase of 24 % compared with $ 20.2 million , at may 1 , 2011. this increase primarily reflects increased business volume in both our business segments for fiscal 2012 compared with fiscal 2011. days ' sales in receivables were 29 days and 30 days during the fourth quarters of fiscal 2012 and 2011 , respectively . inventories at april 29 , 2012 were $ 36.4 million , an increase of 27 % , compared with $ 28.7 million at may 1 , 2011. this increase primarily reflects increased business volume in both our business segments for fiscal 2012 compared with fiscal 2011. inventory turns were 6.6 for fiscal 2012 and 2011 , respectively . accounts payable-trade as of april 29 , 2012 , were $ 30.7 million , an increase of 23 % , compared with $ 24.9 million at may 1 , 2011. this increase primarily reflects increased business volume and inventory purchases in both our business segments for fiscal 2012 compared with fiscal 2011. operating working capital ( comprised of accounts receivable and inventories , less accounts payable –trade and capital expenditures ) was $ 30.6 million at april 29 , 2012 , compared with $ 23.9 million at may 1 , 2011. operating working capital turnover was 8.9 in fiscal 2012 compared to 8.8 in fiscal 2011. financing arrangements < div align= '' justify '' style= '' display :

the audit committee selects the company 's independent registered public accounting firm , approves its compensation , oversees and evaluates the performance of the independent registered public accounting firm , oversees the accounting and financial reporting policies and internal control systems of the company , reviews the company 's interim and annual financial statements , independent registered public accounting firm reports and management letters , and performs other duties , as specified in the audit committee charter , a copy of which is available on the company 's website at www.atossagenetics.com . additionally , the audit committee is involved in the oversight of the company 's risk management through its review of policies relating to risk assessment and management . the audit committee met four times in fiscal 2015. all members of the audit committee satisfy the current independence standards promulgated by nasdaq and the sec and the board has determined that richard steinhart qualifies as an “ audit committee financial expert , ” as the sec has defined that term in item 407 of regulation s-k. equity compensation plan information the following table sets forth certain information , as of december 31 , 2015 , regarding the company 's 2010 stock option and incentive plan , as well as other stock options and warrants previously issued by the company as compensation for services . 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 first column ) ( 1 ) equity compensation plans approved by security holders 2,583,944 $ 2.71 1,109,440 equity compensation plans not approved by security holders 1,030,000 ( 2 ) $ 2.19 — total 3,613,944 $ 2.57 1,109,440 ( 1 ) excludes shares that may be added after december 31 , 2015 pursuant to the “ evergreen ” feature under the 2010 stock option and incentive plan . for example , on january 1 , 2016 , 1,306,290 shares were automatically added to the 2010 stock option and incentive plan under the evergreen feature . ( 2 ) represents options granted to new employees as inducements for employment which were not required to be approved by security holders . the options are subject to the 2010 stock option and incentive plan , but were granted outside of such plan . excludes warrants granted and outstanding in connection with financing agreements . section 16 ( a ) beneficial ownership reporting compliance section 16 ( a ) of the exchange act requires our executive officers and directors , and persons who own more than 10 % of a registered class of our equity securities , to file reports of beneficial ownership and changes in beneficial ownership with the sec . executive officers , directors and greater-than-10 % stockholders are required by sec regulations to furnish us with copies of all reports filed under section 16 ( a ) . to the company 's knowledge , based solely on the review of copies of the reports filed with the sec , all reports required to be filed by our executive officers , directors and greater-than-10 % stockholders were timely filed in fiscal 2015 , except that a form 4 that was required to be filed by dr. stephen j. galli was required to be filed on may 14 , 2015 but was not filed until may 18 , 2015 . 62 item 11. executive compensation remuneration of officers our compensation committee is responsible for reviewing and evaluating key executive employee base salaries , setting goals and objectives for executive bonuses and administering benefit plans . the compensation committee provides advice and recommendations to our board of directors on such matters . summary compensation table the following table sets forth the compensation earned by our president and chief executive officer , chief financial officer , chief operating officer , and former senior vice president of global regulatory affairs and quality assurance , and senior vice president of sales and marketing ( collectively , the “ named executive officers ” ) , for fiscal years 2014 and 2015 : replace_table_token_4_th ( 1 ) the value of the option awards has been computed in accordance with fasb asc 718 , excluding the effect of estimated forfeitures . assumptions used in the calculations for these amounts are included in notes to our financial statements included in this report . additional information about the terms of each option award is below under part iii item 11 “ executive compensation – outstanding equity awards at fiscal year end . ” ( 2 ) mr. sawyer was hired as our senior vice president of global regulatory affairs and quality assurance in june 2014 and resigned in june 2015 . ( 3 ) mr. destro resigned as our senior vice president of sales and marketing in may 2015. based on the separation agreement between the company and mr. destro , mr. destro received the following in connection with his departure from the company , which is included in “ all other compensation ” : ( i ) $ 10,000 , ( ii ) $ 87,689 based on sales performance of the nrlbh , and ( iii ) continuation of salary and partial bonus payment in the amount of $ 25,000 . ( 4 ) amounts represent 401 ( k ) match paid by the company on behalf of the named executive officer , except mr. destro 's 2015 balance , which includes $ 122,689 of severance compensation and $ 2,781 of 401 ( k ) match paid by the company . story_separator_special_tag in 2014 , we recorded an impairment charge related to the intangible assets purchased in the acueity transaction in 2012 of $ 2,352,626. discontinued operations : we have determined that the disposition of the nrlbh qualifies for reporting as a discontinued operation because the sale represents a strategic shift that will have a major effect on our operations and financial results . financial results of the nrlbh are presented separately as discontinued operations for both years presented . discontinued operations for the year ended december 31 , 2015 include $ 1,931,798 net loss from the nrlbh operations , $ 670,943 loss from the sale of the nrlbh , and $ 399,395 in exit costs related to discontinuing the laboratory business . this compares to $ 2,487,158 in loss from discontinued operations for the year ended december 31 , 2014 , all from net loss from the laboratory operations . the results of the nrlbh are disclosed as discontinued operations in the company 's consolidated statements of operations and comprehensive loss for all periods presented : replace_table_token_3_th income taxes : we have incurred net operating losses from inception ; we did not record an income tax benefit for our incurred losses for both 2014 and 2015 due to uncertainty regarding utilization of our net operating carryforwards and due to our history of losses . story_separator_special_tag 0pt 0 ; text-indent : 0.5in `` > 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 will be sufficient to fund our planned operations for at least the next four to six months . in addition to our cash and cash equivalents at december 31 , 2015 of approximately $ 3.7 million , we would be selling securities that are registered on our form s-3 registration statement and seeking to raise 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 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 . 54 off-balance sheet arrangements 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 may 2014 , the financial accounting standards board ( the “ fasb ” ) issued accounting standards update ( “ asu ” ) no . 2014-09 , revenue from contracts with customers : topic 606 ( “ asu 2014-09 ” ) , to supersede nearly all existing revenue recognition guidance under u.s. gaap . the core principle of asu 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services . asu 2014-09 defines a five step process to achieve this core principle and , in doing so , it is possible more judgment and estimates may be required within the revenue recognition process than required under existing gaap including identifying performance obligations in the contract , estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation . asu 2014-09 is effective in the first quarter of 2017 using either of two methods : ( i ) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within asu 2014-09 ; or ( ii ) retrospective with the cumulative effect of initially applying asu 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per asu 2014-09. we are currently evaluating the impact of our pending adoption of asu 2014-09 on our consolidated financial statements . in august 2014 , fasb issued asu no . 2014-15 , disclosure of uncertainties about an entity 's ability to continue as a going concern . this asu requires management to determine whether substantial doubt exists regarding the entity 's going concern presumption , which generally refers to an entity 's ability to meet its obligations as they become due . if substantial doubt exists but is not alleviated by management 's plan , the footnotes must specifically state that “ there is substantial doubt about the entity 's ability to continue as a going concern within one year after the financial statements

53 in june 2015 , we sold 1,454,003 shares of common stock at the purchase price of $ 1.15 per share and pre-funded warrants to purchase 3,610,997 shares of common stock ( the “ pre-funded warrants ” ) at a purchase price of $ 1.14 per share for total gross proceeds of $ 5.8 million ( the “ 2015 offering ” ) . each pre-funded warrant is exercisable for $ 0.01 per share , subject to adjustments from time to time and certain limits on each holder 's beneficial ownership of common stock of the company . as of december 31 , 2015 , all of the pre-funded warrants have been exercised . in 2016 through the date of filing this report , we have sold 6,086,207 shares of common stock to aspire under the november 2015 agreement with them for aggregate gross proceeds to us of $ 2,153,583. as a result , no shares remain available for sale to aspire under this agreement . our ability to continue as a going concern is dependent on our obtaining additional adequate capital to fund additional operating losses until we become profitable . if we are unable to obtain adequate capital , we could be forced to cease operations . cash flows as of december 31 , 2015 , we had cash and cash equivalents of $ 3,715,895. net cash flows from operating activities : net cash used in operating activities was approximately $ 13,953,296 , including $ 2,633,943 from discontinued operations for the year ended december 31 , 2015 , compared with $ 10,555,450 , including $ 2,093,588 from discontinued operations for the year ended december 31 , 2014. the increase in cash used in operating activities of $ 3,397,845 resulted primarily from an increase in r & d activities related to our new product developments , additional salaries to support the launch of new products and services , and legal expenses related to the ongoing litigation . net cash flows from investing activities : net cash used in investing activities was $ 288,419 , including $ 157,684 from discontinued operations for the year ended december 31 , 2015 , compared with $ 343,257 , including $ 338,669 from discontinued operations for the year ended december 31 , 2014. the decrease was primarily attributable to the reduction in purchases of fixed asset equipment in 2015 as compared to 2014. net cash flows from financing activities : net cash provided by financing activities was $ 9,456,892 for the year ended december 31 , 2015 , compared with $ 13,057,264 for the year ended december 31 , 2014. the decrease is mainly attributed to lower prices at which we were able to sell our stock and warrants in financing activities in 2015 compared

consumers and businesses are increasingly using non-banks to complete their financial transactions , which could adversely affect our business and results of operations . technology and other changes are allowing consumers and businesses to complete financial transactions that historically have involved banks through alternative methods . for example , the wide acceptance of internet-based commerce has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor roles . customers can now maintain funds in prepaid debit cards or digital currencies , and pay bills and transfer funds directly without the direct assistance of banks . the diminishing role of banks as financial intermediaries has resulted and could continue to result in the loss of fee income , as well as the loss of customer deposits and the related income generated from those deposits . the loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have a material adverse effect on our business , financial condition and results of operations . 20 we have a continuing need for technological change , and we may not have the resources to effectively implement new technology . the financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services . in addition to enabling us to better serve our customers , the effective use of technology increases efficiency and the potential for cost reduction . our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow our market share . many of our larger competitors have substantially greater resources to invest in technological improvements . as a result , they may be able to offer additional or superior products to those that we will be able to offer , which could put us at a competitive disadvantage . accordingly , we can not provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers . we may be adversely affected by risks associated with completed and potential acquisitions , including execution risks , failure to realize anticipated transaction benefits , and failure to overcome integration risks , which could adversely affect our growth and profitability . we plan to continue to grow our businesses organically but remain open to considering potential bank or other acquisition opportunities that make financial and strategic sense . in the event that we do pursue acquisitions , such as the pending acquisition of atbancorp , we may have difficulty executing on acquisitions and may not realize the anticipated benefits of any transaction we complete . any of the foregoing matters could materially and adversely affect us . in any acquisition that we complete , we may fail to realize some or all of the anticipated transaction benefits if the integration process takes longer or is more costly than expected or otherwise fails to meet our expectations . acquisition activities could be material to our business and involve a number of risks , including the following : we may incur time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions , resulting in our attention being diverted from the operation of our existing business . we are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the banks or businesses we acquire . if these issues or liabilities exceed our estimates , our earnings , capital and financial condition may be materially and adversely affected . the acquisition of other entities generally requires integration of systems , procedures and personnel of the acquired entity . this integration process is complicated and time consuming and can also be disruptive to the customers and employees of the acquired business and our business . if the integration process is not conducted successfully , we may not realize the anticipated economic benefits of acquisitions within the expected time frame , or ever , and we may lose customers or employees of the acquired business . we may also experience greater than anticipated customer losses even if the integration process is successful . to finance an acquisition , we may borrow funds or pursue other forms of financing , such as issuing voting and or non-voting common stock or convertible preferred stock , which may have high dividend rights or may be highly dilutive to holders of our common stock , thereby increasing our leverage and diminishing our liquidity , or issuing capital stock , which could dilute the interests of our existing shareholders . we may be unsuccessful in realizing the anticipated benefits from acquisitions . for example , we may not be successful in realizing anticipated cost savings . we also may not be successful in preventing disruptions in service to existing customer relationships of the acquired institution , which could lead to a loss in revenues . in addition to the foregoing , we may face additional risks in acquisitions to the extent we acquire new lines of business or new products , or enter new geographic areas , in which we have little or no current experience , especially if we lose key employees of the acquired operations . we can not assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions . our inability to overcome risks associated with acquisitions could have an adverse effect on our ability to successfully implement our acquisition growth strategy and grow our business and profitability . accounting and tax risks we are subject to changes in accounting principles , policies or guidelines . our financial performance is impacted by accounting principles , policies and guidelines . story_separator_special_tag the assessment base against which an fdic-insured institution 's deposit insurance premiums paid to the dif has been calculated since effectiveness of the dodd-frank act is based on its average consolidated total assets less its average tangible equity . this method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than u.s. deposits . the reserve ratio is the fdic insurance fund balance divided by estimated insured deposits . the dodd-frank act altered the minimum reserve ratio of the dif , increasing the minimum from 1.15 % to 1.35 % of the estimated amount of total insured deposits , and eliminating the requirement that the fdic pay dividends to fdic-insured institutions when the reserve ratio exceeds certain thresholds . the reserve ratio reached 1.36 % as of september 30 , 2018 ( most recent available ) , exceeding the statutory required minimum reserve ratio of 1.35 % . the fdic will provide assessment credits to insured depository institutions , like the bank , with total consolidated assets of less than $ 10 billion for the portion of their regular assessments that contribute to growth in the reserve ratio between 1.15 % and 1.35 % . the fdic will apply the credits each quarter that the reserve ratio is at least 1.38 % to offset the regular deposit insurance assessments of institutions with credits . fico assessments . in addition to paying basic deposit insurance assessments , fdic-insured institutions must pay federal corporation ( “ fico ” ) assessments . fico is a mixed-ownership governmental corporation chartered by the former federal home loan bank board pursuant to the competitive equality banking act of 1987 to function as a financing vehicle for the recapitalization of the former federal savings and loan insurance corporation . fico issued 30-year noncallable bonds of approximately $ 8.1 billion that mature in 2018 through 2019. fico 's authority to issue bonds ended on december 12 , 1991. since 1996 , federal legislation has required that all fdic-insured institutions pay assessments to cover interest payments on fico 's outstanding obligations . the fico assessment rate is adjusted quarterly and for the fourth quarter of 2018 was 32 cents per $ 100 dollars of assessable deposits . supervisory assessments . all iowa banks are required to pay supervisory assessments to the iowa division to fund the operations of that agency . the amount of the assessment is calculated on the basis of the bank 's total assets . during the year ended december 31 , 2018 , the bank paid supervisory assessments to the iowa division totaling approximately $ 141,000 . capital requirements . banks are generally required to maintain capital levels in excess of other businesses . for a discussion of capital requirements , see “ -the role of capital ” above . 10 liquidity requirements . liquidity is a measure of the ability and ease with which bank assets may be converted to cash . liquid assets are those that can be converted to cash quickly if needed to meet financial obligations . to remain viable , fdic-insured institutions must have enough liquid assets to meet their near-term obligations , such as withdrawals by depositors . because the global financial crisis was in part a liquidity crisis , basel iii also includes a liquidity framework that requires fdic-insured institutions to measure their liquidity against specific liquidity tests . one test , referred to as the liquidity coverage ration ( “ lcr ” ) , is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario . the other test , known as the net stable funding ration ( “ nsfr ” ) , is designed to promote more medium- and long-term funding of the assets and activities of fdic-insured institutions over a one-year horizon . these tests provide an incentive for banks and holding companies to increase their holdings in treasury securities and other sovereign debt as a component of assets , increase the use of long-term debt as a funding source and rely on stable funding like core deposits ( in lieu of brokered deposits ) . in addition to liquidity guidelines already in place , the federal bank regulatory agencies implemented the basel iii lcr in september 2014 , which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil , and in 2016 proposed implementation of the nsfr . while these rules do not , and will not , apply to the bank , we continue to review our liquidity risk management policies in light of these developments . dividend payments . the primary source of funds for the company is dividends from the bank . under the iowa banking act , iowa-chartered banks generally may pay dividends only out of undivided profits . the iowa division may restrict the declaration or payment of a dividend by an iowa-chartered bank , such as the bank . the payment of dividends by any fdic-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations , and a fdic-insured institution generally is prohibited from paying any dividends if , following payment thereof , the institution would be undercapitalized . as described above , the bank exceeded its capital requirements under applicable guidelines as of december 31 , 2018 . notwithstanding the availability of funds for dividends , however , the fdic and the iowa division may prohibit the payment of dividends by the bank if either or both determine such payment would constitute an unsafe or unsound practice . in addition , under the basel iii rule , institutions that seek the freedom to pay dividends will have to maintain 2.5 % in common equity tier 1

furthermore , taxation laws administered by the internal revenue service and state taxing authorities , accounting rules developed by the financial accounting standards board ( the “ fasb ” ) , securities laws administered by the sec and state securities authorities , and anti-money laundering laws enforced by the u.s. department of the treasury ( “ treasury ” ) have an impact on our business . the effect of these statutes , regulations , regulatory policies and accounting rules are significant to our operations and results . federal and state banking laws impose a comprehensive system of supervision , regulation and enforcement on the operations of fdic-insured institutions , their holding companies and affiliates that is intended primarily for the protection of the fdic-insured deposits and depositors of banks , rather than shareholders . these laws , and the regulations of the bank regulatory agencies issued under them , affect , among other things , the scope of our business , the kinds and amounts of investments the company and the bank may make , reserve requirements , required capital levels relative to assets , the nature and amount of collateral for loans , the establishment of branches , the ability to merge , consolidate and acquire , dealings with our insiders and affiliates and the payment of dividends . in reaction to the global financial crisis and particularly following the passage of the dodd frank act , we experienced heightened regulatory requirements and scrutiny . although the reforms primarily targeted systemically important financial service providers , their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes , and the costs thereof , to increase . after the 2016 federal elections , momentum to decrease the regulatory burden on community banks gathered strength . in may 2018 , the economic growth , regulatory relief and consumer protection act ( the “ regulatory relief act ” ) was enacted to modify or remove certain financial reform rules and regulations . while the regulatory relief act maintains most of the regulatory structure established by the dodd-frank act , it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $ 10 billion , like us , and for large banks with assets of more than $ 50 billion . many of these changes are intended to result in meaningful regulatory relief for community banks and their holding companies , including new rules that may make the capital

under our current board approved loan concentration policy , such loans ( including construction and land loans ) shall not exceed 300 % of our capital plus alll . we intend to continue to increase our origination of nonresidential real estate and multi-family real estate loans , with a focus on multi-family loans . most nonresidential real estate and multi-family loans are originated with adjustable rates . nonresidential real estate and multi-family lending is expected to increase loan yields with shorter repricing terms than fixed-rate loans . nonresidential real estate and multi-family originations in 2019 increased $ 8.1 million or 54.9 % over 2018 origination levels . see “ business of cincinnati federal—lending activities—commercial real estate and multi-family lending . ” · continuing to focus on our residential mortgage banking operations . for the year ended december 31 , 2019 , we originated $ 113.7 million of one-to four-family residential loans , and we sold $ 93.8 million of one-to four-family residential loans . for the year ended december 31 , 2018 , we originated $ 73.1 million of one-to four family residential loans , and we sold $ 52.8 million of one- to four-family residential loans . these loans are all sold on a non-recourse basis primarily to the fhlb-cincinnati , freddie mac , and other private sector third-party buyers . loans are sold on both a servicing-retained and servicing-released basis . subject to mortgage market conditions , we intend to continue to increase the number of mortgage loan originators in order to increase our volume of sold loans with the potential for increased servicing income . · continuing to emphasize one- to four-family residential adjustable rate mortgage lending . we will continue to focus on originating one- to four-family adjustable rate mortgages for retention in our portfolio . as of december 31 , 2019 , $ 83.0 million , or 46.1 % , of our total loans consisted of one- to four-family residential adjustable rate mortgage loans with contractual maturities after december 31 , 2020. as of december 31 , 2018 , $ 84.6 million , or 49.7 % , of our total loans consisted of one- to four-family residential adjustable rate mortgage loans . adjustable rate loans have shorter repricing terms to mitigate interest rate risk . 39 · increasing our “ core ” deposit base . we seek to increase our core deposit base , particularly checking accounts . core deposits include all deposit account types except certificates of deposit . core deposits are our least costly source of funds , which improves our interest rate spread , and represent our best opportunity to develop customer relationships that enable us to cross-sell our full complement of products and services . core deposits also contribute non-interest income from account-related fees and services and are generally less sensitive to withdrawal when interest rates fluctuate . we have continued our marketing efforts for checking accounts through digital , print and outdoor advertising channels . core deposits as of december 31 , 2019 grew $ 4.3 million or 7.0 % over december 31 , 2018 balances . in recent years , we have significantly expanded and improved the products and services we offer our retail and business deposit customers who maintain core deposit accounts and have improved our infrastructure for electronic banking services , including business online banking , mobile banking , bill pay , remote deposit capture and e-statements . the deposit infrastructure we have established can accommodate significant increases in retail and business deposit accounts without additional capital expenditure . we will also continue to use non-core deposits , including certificates of deposit from the national cd rateline program , as a source of funds , in accordance with our asset/liability policies and funding strategies . · implementing a managed growth strategy . we intend to pursue a growth strategy for the foreseeable future , with the goal of improving the profitability of our business through increased net interest income and new sources of non-interest income . subject to market conditions , we intend to grow our one- to four-family residential adjustable rate , nonresidential real estate and multi-family loan portfolios . to a lesser extent we intend to grow our construction and commercial business loan portfolio . summary of critical accounting policies the discussion and analysis of the financial condition and results of operations are based on our consolidated financial statements , which are prepared in conformity with u.s. generally accepted accounting principles . the preparation of these financial statements requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities , disclosure of contingent assets and liabilities , and the reported amounts of income and expenses . we consider the accounting policies discussed below to be critical accounting policies . the estimates and assumptions that we use are based on historical experience and various other factors and are believed to be reasonable under the circumstances . actual results may differ from these estimates under different assumptions or conditions , resulting in a change that could have a material impact on the carrying value of our assets and liabilities and our results of operations . as an “ emerging growth company ” we may delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies . we intend to take advantage of the benefits of this extended transition period . accordingly , our financial statements may not be comparable to companies that comply with such new or revised accounting standards . the following represent our critical accounting policies : allowance for loan losses . the allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income . story_separator_special_tag the rate column shows the effects attributable to changes in rate ( changes in rate multiplied by prior volume ) . the volume column shows the effects attributable to changes in volume ( changes in volume multiplied by prior rate ) . the total column represents the sum of the prior columns . for purposes of this table , changes attributable to both rate and volume , which can not be segregated , have been allocated proportionately based on the changes due to rate and the changes due to volume . replace_table_token_20_th management of market risk general . our most significant form of market risk is interest rate risk because , as a financial institution , the majority of our assets and liabilities are monetary in nature and sensitive to changes in interest rates . therefore , a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates . our asset/liability committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities , for determining the level of risk that is appropriate , given our business strategy , operating environment , capital , liquidity and performance objectives , and for managing this risk consistent with the policy and guidelines approved by our board of directors . our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income , our primary source of earnings . among the techniques we use to manage interest rate risk are : · originating nonresidential real estate and multi-family loans , and , to a lesser extent , construction , consumer and commercial business loans , all of which tend to have shorter terms and higher interest rates than one- to four-family residential real estate loans , and which generate customer relationships that can result in larger non-interest bearing checking accounts ; 46 · selling substantially all of our newly-originated longer-term fixed-rate one- to four-family residential real estate loans and retaining the shorter-term fixed-rate and adjustable-rate one- to four-family residential real estate loans that we originate , subject to market conditions and periodic review of our asset/liability management needs ; · reducing our dependence on certificates of deposit to support lending and investment activities and increasing our reliance on core deposits , including checking accounts and savings accounts , which are less interest rate sensitive than certificates of deposit ; and our board of directors is responsible for the review and oversight of our asset/liability committee , which is comprised of our executive management team and other essential operational staff . this committee is charged with developing and implementing an asset/liability management plan , and meets at least quarterly to review pricing and liquidity needs and assess our interest rate risk . we currently utilize a third-party modeling program , prepared on a quarterly basis , to evaluate our sensitivity to changing interest rates , given our business strategy , operating environment , capital , liquidity and performance objectives , and for managing this risk consistent with the guidelines approved by the board of directors . net portfolio value . we compute amounts by which the net present value of our cash flow from assets , liabilities and off-balance sheet items ( net portfolio value or “ npv ” ) would change in the event of a range of assumed changes in market interest rates . we measure our interest rate risk and potential change in our npv through the use of a financial model . this model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value . historically , the model estimated the economic value of each type of asset , liability and off-balance sheet contract under the assumption that the united states treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments . however , given the current level of market interest rates , an npv calculation for an interest rate decrease of greater than 100 basis points has not been prepared . a basis point equals one-hundredth of one percent , and 100 basis points equals one percent . an increase in interest rates from 3 % to 4 % would mean , for example , a 100 basis point increase in the “ change in interest rates ” column below . the table below sets forth , as of december 31 , 2019 , the calculation of the estimated changes in our net portfolio value that would result from the designated immediate changes in the united states treasury yield curve . replace_table_token_21_th ( 1 ) assumes an immediate uniform change in interest rates at all maturities . ( 2 ) npv is the discounted present value of expected cash flows from assets , liabilities and off-balance sheet contracts . ( 3 ) present value of assets represents the discounted present value of incoming cash flows on interest-earning assets . ( 4 ) npv ratio represents npv divided by the present value of assets . the table above indicates that at december 31 , 2019 , in the event of an instantaneous parallel 100 basis point increase in interest rates , we would experience a 5.65 % decrease in net portfolio value . in the event of an instantaneous 100 basis point decrease in interest rates , we would experience an 8.41 % decrease in net portfolio value . 47 replace_table_token_22_th ( 1 ) the calculated changes assume an immediate shock of the static yield curve . depending on the relationship between long-term and short-term interest rates , market conditions and consumer preference , we may place greater emphasis on maximizing our net interest margin than on strictly matching the interest rate sensitivity of our assets and liabilities . we believe that the increased net income which may result from an acceptable mismatch

federal home loan bank advances increased $ 18.6 million , or 65.1 % , to $ 47.2 million at december 31 , 2018 from $ 28.6 million at december 31 , 2018. proceeds from fhlb advances were used primarily to fund loan originations and reduce the level of national cd rateline certificates of deposit . stock subscription funds . stock subscription funds totaled $ 23.4 million at december 31 , 2019 , representing segregated funds received pending the closing of the second step stock conversion . the closing occurred effective january 22 , 2020. the subscription offering was over-subscribed and $ 9.8 million was refunded to prospective investors after the closing date . stockholders ' equity . stockholders ' equity increased $ 876,000 , or 3.8 % , to $ 23.8 million at december 31 , 2019 from $ 23.0 million at december 31 , 2018. the increase resulted primarily from net income for the year of 798,000. comparison of operating results for the years ended december 31 , 2019 and december 31 , 2018 general . net income for the year ended december 31 , 2019 was $ 798,000 , compared to a net income of $ 2.3 million for the year ended december 31 , 2018 , a decrease of $ 1.5 million or 65.3 % . the decrease was primarily due to a $ 1.9 million decrease in noninterest income , a $ 419,000 increase in noninterest expense , partially offset by a $ 720,000 increase in net interest income , a $ 20,000 decrease in the provision for loan losses and a $ 104,000 decrease in the provision for income taxes . the decrease was largely attributable to the $ 2.2 million gain on merger with kentucky federal for the year ended december 31 , 2018. there was no gain on merger for the year ended december 31 , 2019. the merger with kentucky federal was completed on october 12 , 2018. as a result , the results of operations for year ended december 31 , 2019 include the effects of the merger , while the results of operations for the year ended december 31 , 2018 include the effects of kentucky federal only for the period after the completion date of the merger . accordingly , the income and expense items in the income statement for the year ended december 31 , 2019 , can be expected to show overall increases in comparison to the year ended december

service fee receivable is reported net of an estimated allowance for doubtful accounts . the allowance for doubtful accounts is determined based on periodic evaluations of aged receivables , historical business data , management 's experience and current economic conditions . ( i ) reinsurance : reinsurance losses and loss adjustment expenses are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts . losses ceded to other companies have been reported as a reduction of incurred loss and loss adjustment expenses . commissions paid to the company by reinsurers on business ceded have been accounted for as a reduction of the related policy acquisition costs . reinsurance recoverable is recorded for that portion of paid and unpaid losses and loss adjustment expenses that are ceded to other companies . ( j ) deferred acquisition costs , net : the company defers commissions and agency expenses that are directly related to successful efforts to acquire new or existing vehicle service agreements to the extent they are considered recoverable . costs deferred on vehicle service agreements are amortized as the related revenues are earned . changes in estimates , if any , are recorded in the accounting period in which they are determined . anticipated investment income is included in determining the realizable value of the deferred acquisition costs . ( k ) property and equipment : property and equipment are reported in the consolidated financial statements at cost . depreciation of property and equipment has been provided using the straight-line method over the estimated useful lives of such assets . repairs and maintenance are recognized in operations during the period incurred . land is not depreciated . the company estimates useful life to be forty years for buildings ; five to fifty years for site improvements ; four to fifteen years for leasehold improvements ; three to ten years for furniture and equipment ; and three to five years for computer hardware . ( l ) goodwill and intangible assets : when the company acquires a subsidiary or other business where it exerts significant influence , the fair value of the net tangible and intangible assets acquired is determined and compared to the amount paid for the subsidiary or business acquired . any excess of the amount paid over the fair value of those net assets is considered to be goodwill . goodwill is tested for impairment annually as of december 31 , or more frequently if events or circumstances indicate that the carrying value may not be recoverable , to ensure that its fair value is greater than or equal to the carrying value . any excess of carrying value over fair value is charged to the consolidated statements of operations in the period in which the impairment is determined . the company has the option to assess goodwill for impairment by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount . if facts and circumstances indicate that it is more likely than not that the goodwill is impaired , a fair value-based impairment test would be required . the goodwill impairment test is a two-step process that requires management to make judgments in determining what assumptions to use in the calculation . in the first step , the fair value of the reporting unit is compared to its book value including goodwill . if the fair value of the reporting unit is in excess of its book value , the related goodwill is not impaired and no further analysis is necessary . if the replace_table_token_75_th kingsway financial services inc. notes to consolidated financial statements fair value of the reporting unit is less than its book value , there is an indication of potential impairment and a second step is performed . when required , the second step of testing involves calculating the implied fair value of goodwill for the reporting unit . the implied fair value of goodwill is determined in the same manner as goodwill recognized in a business combination , which is the excess of the fair value of the reporting unit determined in step one over the fair value of its net assets and identifiable intangible assets as if the reporting unit had been acquired . if the carrying value of the reporting unit 's goodwill exceeds the implied fair value of that goodwill , an impairment loss is recognized in an amount equal to that excess . for reporting units with a negative book value , qualitative factors are evaluated to determine whether it is necessary to perform the second step of the goodwill impairment test . when the company acquires a subsidiary or other business where it exerts significant influence or acquires certain assets , intangible assets may be acquired , which are recorded at their fair value at the time of the acquisition . an intangible asset with a definite useful life is amortized in the consolidated statements of operations over its estimated useful life . the company writes down the value of an intangible asset with a definite useful life when the undiscounted cash flows are not expected to allow for full recovery of the carrying value . intangible assets with indefinite useful lives are not subject to amortization and are tested for impairment annually as of december 31 , or more frequently if events or circumstances indicate that the carrying value may not be recoverable , to ensure that fair values are greater than or equal to carrying values . any excess of carrying value over fair value is charged to the consolidated statements of operations in the period in which the impairment is determined . story_separator_special_tag the company owns 0 % and 26.7 % of the outstanding units of 1347 investors llc ( `` 1347 investors `` ) at december 31 , 2019 and december 31 , 2018 , respectively . the fair value of this investment is calculated based on a model that distributes the net equity of 1347 investors to all classes of membership interests . the model uses quoted market prices and significant market observable inputs . net lease owns investments in limited liability companies that hold investment properties . the fair value of net lease 's investments is based upon the net asset values of the underlying investments companies as a practical expedient to estimate fair value . argo holdings makes investments in limited liability companies and limited partnerships that hold investments in search funds and private operating companies . the fair value of argo holdings ' limited liability investments that hold investments in search funds is based on the initial investment in the search funds . the fair value of argo holdings ' limited liability investments that hold investments in private operating companies is valued using a market approach . refer to note 27 , `` fair value of financial instruments , `` to the consolidated financial statements for further information . valuation of real estate investments the fair value of real estate investments involves a combination of the market and income valuation techniques . under this approach , a market-based capitalization rate is derived from comparable transactions , adjusted for any unique characteristics of each asset , and applied to the asset under consideration . the cap rates used during underwriting and subsequent valuations incorporate the consideration of risks of vacancy and collection loss , administrative costs of owning net leased assets and possible capital expenditures that could be determined a landlord expense . valuation of deferred income taxes the provision for income taxes is calculated based on the expected tax treatment of transactions recorded in our consolidated financial statements . in determining our provision for income taxes , we interpret tax legislation in a variety of jurisdictions and make assumptions about the expected timing of the reversal of deferred income tax assets and liabilities and the valuation of deferred income taxes . the ultimate realization of the deferred income tax asset balance is dependent upon the generation of future taxable income during the periods in which the company 's temporary differences reverse and become deductible . a valuation allowance is established when it is more likely than not that all or a portion of the deferred income tax asset balance will not be realized . in determining whether a valuation allowance is needed , management considers all available positive and negative evidence affecting specific replace_table_token_28_th kingsway financial services inc. management 's discussion and analysis deferred income tax asset balances , including the company 's past and anticipated future performance , the reversal of deferred income tax liabilities , and the availability of tax planning strategies . objective positive evidence is necessary to support a conclusion that a valuation allowance is not needed for all or a portion of a company 's deferred income tax asset balances when significant negative evidence exists . cumulative losses are the most compelling form of negative evidence considered by management in this determination . to the extent a valuation allowance is established in a period , an expense must be recorded within the income tax provision in the consolidated statements of operations . as of december 31 , 2019 , the company maintains a valuation allowance of $ 173.4 million , all of which relates to its u.s. deferred income taxes . the largest component of the u.s. deferred income tax asset balance relates to tax loss carryforwards that have arisen as a result of losses generated from the company 's u.s. operations . uncertainty over the company 's ability to utilize these losses over the short-term has led the company to record a valuation allowance . future events may result in the valuation allowance being adjusted , which could materially affect our financial position and results of operations . if sufficient positive evidence were to arise in the future indicating that all or a portion of the deferred income tax assets would meet the more likely than not standard , all or a portion of the valuation allowance would be reversed in the period that such a conclusion was reached . valuation of mandatorily redeemable preferred stock mandatorily redeemable preferred stock is recorded at the time of issuance based upon the gross proceeds of the offering less ( i ) proceeds of the offering allocated to additional paid-in capital based upon the relative fair values of equity-classified warrants issued as part of the offering and the preferred stock without the warrants ; ( ii ) proceeds of the offering allocated to additional paid-in capital based upon the calculation of a beneficial conversion feature ; and ( iii ) costs of the offering allocated to the preferred stock . the discount to the carrying value of the preferred stock created by the allocation of proceeds to the warrants and a beneficial conversion feature and the allocation of offering costs to the preferred stock is accreted over time as dividend expense . additional information regarding our mandatorily redeemable preferred stock is included in note 23 , `` redeemable class a preferred stock , `` to the consolidated financial statements . valuation and impairment assessment of intangible assets intangible assets are recorded at their estimated fair values at the date of acquisition . intangible assets with definite useful lives consist of vehicle service agreements in-force , database , customer relationships , in-place lease and non-compete agreement . intangible assets with definite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable . if circumstances require that a definite-lived intangible asset be tested for possible impairment , we first compare

an increase at iws , primarily driven by an increase in policies-in-force ; and a decrease at trinity due to net customer turnover and focusing on building the higher-margin warranty products , as well a decrease at pwsc due to net customer turnover and slower than anticipated introduction of new product offerings . the extended warranty operating income was $ 4.6 million for the year ended december 31 , 2019 compared with $ 4.2 million for the year ended december 31 , 2018 . the increase in operating income is primarily due to the inclusion of geminus in 2019 following its acquisition effective march 1 , 2019. geminus operating income was $ 0.5 million for the year ended december 31 , 2019 . leased real estate leased real estate rental income was $ 13.4 million for the year ended december 31 , 2019 compared to $ 13.4 million for the year ended december 31 , 2018 . the rental income is derived from cmc 's long-term triple net lease . leased real estate operating income was $ 2.8 million for the year ended december 31 , 2019 compared to $ 2.5 million for the year ended december 31 , 2018 . the increase in operating income for the year ended december 31 , 2019 is primarily due to decreased legal and interest expenses compared to the same period in 2018 . leased real estate recorded legal expense of $ 0.6 million and interest expense of $ 6.1 million for the year ended december 31 , 2019 compared with legal expense of $ 0.7 million and interest expense of $ 6.2 million for the year ended december 31 , 2018 . see `` investments '' section below for further discussion . net investment income net investment income was $ 2.9 million in 2019 compared to $ 3.0 million in 2018 . the decrease in 2019 is primarily explained by less income from limited liability investments , at fair value , in 2019 compared to 2018 , partially offset by interest income recognized on fixed maturities held at geminus following its acquisition effective march 1 , 2019. net realized gains ( losses ) the company incurred net realized gains of

 10.21 * first amendment , dated july 1 , 2016 , to the restricted stock purchase agreement , dated november 13 , 2015 , by and between 3d systems corporation and david r. styka . ( incorporated by reference to exhibit 10.4 to registrant 's current report on form 8-k , filed on july 5 , 2016 . )  10.22 * employment agreement , dated august 4 , 2016 , between 3d systems corporation and charles w. hull . ( incorporated by reference to exhibit 10.1 to registrant 's current report on form 8-k , filed on august 8 , 2016 . )  10.23 * 3d systems corporation change of control severance policy ( incorporated by reference to exhibit 10.1 to the registrant 's current report on form 8-k , filed february 23 , 2018 . ) 10.24 * employment agreement , dated september 5 , 2016 , between 3d systems sa and herbert koeck . 10.25 * letter of secondment , dated march 5 , 2018 , between 3d systems corporation and herbert koeck . 10.26 * employment agreement , dated august 24 , 2016 , between 3d systems corporation and philip schultz .  21.1 subsidiaries of registrant .  23.1 consent of independent registered public accounting firm .  31.1 certification of principal executive officer pursuant to section 302 of the sarbanes‑oxley act of 2002 , dated february 28 , 2019 .  31.2 certification of principal financial officer pursuant to section 302 of the sarbanes‑oxley act of 2002 , dated february 28 , 2019 .  32.1 certification of principal executive officer pursuant to section 906 of the sarbanes‑oxley act of 2002 , dated february 28 , 2019 .  32.2 certification of principal financial officer pursuant to section 906 of the sarbanes‑oxley act of 2002 , dated february 28 , 2019 .  101.ins xbrl instance document  101.sch xbrl taxonomy extension scheme document 48  101.cal xbrl taxonomy extension calculation linkbase document  101.def xbrl taxonomy extension definition linkbase document  101.lab xbrl taxonomy extension label linkbase document  101.pre xbrl taxonomy extension presentation linkbase document * management contract or compensatory plan or arrangement item 16. form 10-k summary none . 49 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 our behalf by the undersigned , thereunto duly authorized .  3d systems corporation  by : v yomesh i. j oshi  vyomesh i. joshi  chief executive officer , president and director  date : february 28 , 2019 pursuant to the requirements of the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of registrant and in the capacities and on the dates indicated . signature title date vyomesh i. joshi chief executive officer , president and director ( principal executive officer ) february 28 , 2019 vyomesh i. joshi john n. mcmullen executive vice president and chief financial officer ( principal financial and accounting officer ) february 28 , 2019 john n. mcmullen charles w. hull executive vice president , chief technology february 28 , 2019 charles w. hull officer and director charles g. mcclure , jr chairman of the board of directors february 28 , 2019 charles g. mcclure , jr. jim d. kever director february 28 , 2019 jim d. kever kevin s. moore director february 28 , 2019 kevin s. moore william e. curran director february 28 , 2019 william e. curran john j. tracy director february 28 , 2019 dr. john j. tracy william d. humes director february 28 , 2019 william d. humes jeffrey wadsworth director february 28 , 2019 dr. jeffrey wadsworth thomas w. erickson director february 28 , 2019 thomas w. erickson ໿ 50 3d systems corporation index to consolidated financial statements   consolidated financial statements report of independent registered public accounting firm f-2 report of independent registered public accounting firm f-3 consolidated balance sheets as of december 31 , 2018 and 2017 f-4 consolidated statements of operations for the years ended december 31 , 2018 , 2017 and 2016 f-5 consolidated statements of comprehensive loss for the years ended december 31 , 2018 , 2017 and 2016 f-6 consolidated statements of cash flows for the years ended december 31 , 2018 , 2017 and 2016 f-7 consolidated statements of stockholders ' equity for the years ended december 31 , 2018 , 2017 and 2016 f-8 notes to consolidated financial statements for the years ended december 31 , 2018 , 2017 and 2016 f-9 f- 1 report of independent registered public accounting firm shareholders and board of directors 3d systems corporation rock hill , south carolina opinion on internal control over financial reporting we have audited 3d systems corporation and its subsidiaries ' ( the “ company 's ” ) internal control over financial reporting as of december 31 , 2018 , based on criteria established in internal control - integrated framework ( 2013 ) issued by the committee of sponsoring organizations of the treadway commission ( the “ coso criteria ” ) . in our opinion , 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 the company as of december 31 , 2018 and 2017 , the related consolidated statements of operations , comprehensive loss , stockholders ' 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 february 28 , 2019 expressed an unqualified opinion thereon . story_separator_special_tag we review specific receivables periodically to determine the appropriate reserve for accounts receivable . the majority of our inventory consists of finished goods , including products , materials and service parts . inventory also consists of raw materials for certain printers and service products . the changes that make up the other components of working capital not discussed above resulted from the ordinary course of business . differences between the amounts of working capital item changes in the cash flow statement and the balance sheet changes for the corresponding items are primarily the result of foreign currency translation adjustments . 35 cash flow the following tables set forth components of cash flow for the years ended december 31 , 2018 , 2017 and 2016 . table 14 replace_table_token_16_th story_separator_special_tag style= `` font-family : inherit ; font-size:10pt ; `` > in the normal course of business we periodically enter into agreements to indemnify customers or suppliers against claims of intellectual property infringement made by third parties arising from the use of our products . historically , costs related to these indemnification provisions have not been significant . we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations . to the extent permitted under delaware law , we indemnify our directors and officers for certain events or occurrences while the director or officer is , or was , serving at our request in such capacity , subject to limited exceptions . the maximum potential amount of future payments we could be required to make under these indemnification obligations is unlimited ; however , we have directors ' and officers ' insurance coverage that may enable us to recover future amounts paid , subject to a deductible and to the policy limits . financial instruments we conduct business in various countries using both the functional currencies of those countries and other currencies to effect cross border transactions . as a result , we are subject to the risk that fluctuations in foreign exchange rates between the dates that those transactions are entered into and their respective settlement dates will result in a foreign exchange gain or loss . when practicable , we endeavor to match assets and liabilities in the same currency on our balance sheet and those of our subsidiaries in order to reduce these risks . we also , when we consider it to be appropriate , enter into foreign currency contracts to hedge exposures arising from those transactions . the company had $ 75.3 million and $ 39.6 million in notional foreign exchange contracts outstanding as of december 31 , 2018 and 2017 , respectively . the fair value of these contracts was not material . we do not hedge for trading or speculative purposes , and our foreign currency contracts are generally short-term in nature , typically maturing in 90 days or less . we have elected not to prepare and maintain the documentation to qualify for hedge accounting treatment under asc 815 , “ derivatives and hedging , ” and therefore , we recognize all gains and losses ( realized or unrealized ) in interest and other expense , net in our consolidated statements of operations and other comprehensive loss . changes in the fair value of derivatives are recorded in interest and other expense , net , in our consolidated statements of operations and other comprehensive loss . depending on their fair value at the end of the reporting period , derivatives are recorded either in prepaid and other current assets or in accrued liabilities in our consolidated balance sheets . see note 11 to the consolidated financial statements . 38 critical accounting policies and significant estimates we prepare our consolidated financial statements in accordance with u.s. generally accepted accounting principles ( gaap ) . in doing so , we have to make estimates and assumptions that affect our reported amounts of assets , liabilities , revenues , expenses , gains and losses , as well as related disclosure of contingent assets and liabilities . in some cases , we could reasonably have used different accounting policies and estimates . in some cases , changes in the accounting estimates are reasonably likely to occur from period to period . accordingly , actual results could differ materially from our estimates . to the extent that there are material differences between these estimates and actual results , our financial condition or results of operations will 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 . we refer to accounting estimates of this type as critical accounting policies and estimates , which we discuss further below . we have reviewed our critical accounting policies and estimates with the audit committee of our board of directors . please see notes to consolidated financial statements included in part ii , item 8 of this annual report on form 10-k for a summary of significant accounting policies and the effect on our financial statements . revenue recognition revenue is recognized when control of the promised products or services is transferred to customers in an amount that reflects the consideration the company expects to receive in exchange for those products or services . a majority of the company 's revenue is recognized at the point in time when products are shipped or services are delivered to customers . the company enters into contracts that can include various combinations of products and services , which are generally capable of being distinct and accounted for as separate performance obligations . many of its contracts with customers include multiple performance obligations . for such arrangements , the company allocates revenue to each performance obligation based on its relative standalone selling price ( “ ssp ” ) . judgment is required to determine the ssp for each distinct performance obligation in a contract . for the majority

the company was in compliance with all covenants at both december 31 , 2018 and december 31 , 2017 . the prior credit agreement was terminated on february 27 , 2019. see note 12 to the consolidated financial statements . on february 27 , 2019 , we entered into a 5-year $ 100.0 million senior secured term loan facility ( the “ term facility ” ) and a 5-year $ 100.0 million senior secured revolving credit facility ( the “ revolving facility ” and , together with the term facility , the “ senior credit facility ” ) , which replaced the prior credit agreement . borrowings under the senior credit facility were used to refinance the existing indebtedness under the prior credit agreement and will be used to support working capital and for general corporate purposes . for further discussion of the senior credit facility , see item 9b and note 12 to the consolidated financial statements . redeemable noncontrolling interests the minority interest shareholders of a certain subsidiary have the right to require us to acquire either a portion of or all ownership interest under certain circumstances pursuant to a contractual arrangement , and we have a similar call option under the same contractual terms . the amount of consideration under the put and call rights is not a fixed amount , but rather is dependent upon various valuation formulas and on future events , such as revenue and gross margin performance of the subsidiary through the date of exercise , as described in note 22 to the consolidated financial statements . management estimates , assuming that the subsidiary owned by us at december 31 , 2018 performs at its forecasted earnings levels , that these rights , if exercised , could require us to pay an amount of approximately $ 8.9 million to the owners of such put rights . this amount has been recorded as redeemable noncontrolling interests on the balance sheet at december 31 , 2018 and 2017 and would be payable in 2019 , if exercised . indemnification < font

001-33664 ) ) . 10.22 exchange and registration rights agreement , dated february 19 , 2016 , relating to the 5.875 % senior notes due 2024 , among cco holdings , llc , cco holdings capital corp. , charter communications , inc. , as guarantor , and deutsche bank securities inc. , credit suisse securities ( usa ) llc , goldman , sachs & co. , merrill lynch , pierce , fenner & smith incorporated , ubs securities llc , citigroup global markets inc. and wells fargo securities , llc , as representatives of the several purchasers ( as defined therein ) ( incorporated by reference to exhibit 10.1 to the current report on form 8-k filed by charter communications , inc. on february 22 , 2016 ( file no . 001-33664 ) ) . 10.23 seventh supplemental indenture , dated as of april 21 , 2016 , among cco holdings , llc , cco holdings capital corp. , charter communications , inc. , as guarantor , and the bank of new york mellon trust company , n.a . , as trustee ( incorporated by reference to exhibit 4.1 to the current report on form 8-k filed by charter communications , inc. on april 27 , 2016 ( file no . 001-33664 ) ) . 10.24 exchange and registration rights agreement , dated april 21 , 2016 , relating to the 5.500 % senior notes due 2026 , among cco holdings , llc , cco holdings capital corp. , charter communications , inc. , as guarantor , and merrill lynch , pierce , fenner & smith incorporated , citigroup global markets inc. , credit suisse securities ( usa ) llc , deutsche bank securities inc. , goldman , sachs & co. , ubs securities llc and wells fargo securities , llc , as representatives of the several purchasers ( as defined therein ) ( incorporated by reference to exhibit 10.1 to the current report on form 8-k filed by charter communications , inc. on april 27 , 2016 ( file no . 001-33664 ) ) . 10.25 second supplemental indenture , dated as of may 18 , 2016 , by and among charter communications operating , llc , charter communications operating capital corp. , cco safari ii , llc and the bank of new york mellon trust company , n.a . , as trustee and collateral agent ( incorporated by reference to exhibit 4.1 to the current report on form 8-k filed by charter communications , inc. on may 24 , 2016 ( file no . 001-33664 ) ) . 10.26 third supplemental indenture , dated as of may 18 , 2016 , by and among cco holdings , llc , the subsidiary guarantors party thereto and the bank of new york mellon trust company , n.a . , as trustee and collateral agent ( incorporated by reference to exhibit 4.2 to the current report on form 8-k filed by charter communications , inc. on may 24 , 2016 ( file no . 001-33664 ) ) . 10.27 second supplemental indenture , dated as of may 18 , 2016 , by and among cco holdings , llc , cco holdings capital corp. , ccoh safari , llc and the bank of new york mellon trust company , n.a . , as trustee ( incorporated by reference to exhibit 4.3 to the current report on form 8-k filed by charter communications , inc. on may 24 , 2016 ( file no . 001-33664 ) ) . 10.28 indenture , dated as of april 30 , 1992 ( the “ twce indenture ” ) , as amended by the first supplemental indenture , dated as of june 30 , 1992 , among time warner entertainment company , l.p. ( “ twe ” ) , time warner companies , inc. ( “ twci ” ) , certain of twci 's subsidiaries that are parties thereto and the bank of new york , as trustee ( incorporated herein by reference to exhibits 10 ( g ) and 10 ( h ) to twci 's current report on form 8-k dated june 26 , 1992 and filed with the sec on july 15 , 1992 ( file no . 1-8637 ) ) . 10.29 second supplemental indenture to the twce indenture , dated as of december 9 , 1992 , among twe , twci , certain of twci 's subsidiaries that are parties thereto and the bank of new york , as trustee ( incorporated herein by reference to exhibit 4.2 to amendment no . 1 to twe 's registration statement on form s-4 dated and filed with the sec on october 25 , 1993 ( registration no . 33-67688 ) ( the “ twe october 25 , 1993 registration statement ” ) ) . 10.30 third supplemental indenture to the twce indenture , dated as of october 12 , 1993 , among twe , twci , certain of twci 's subsidiaries that are parties thereto and the bank of new york , as trustee ( incorporated herein by reference to exhibit 4.3 to the twe october 25 , 1993 registration statement ) . 10.31 fourth supplemental indenture to the twce indenture , dated as of march 29 , 1994 , among twe , twci , certain of twci 's subsidiaries that are parties thereto and the bank of new york , as trustee ( incorporated herein by reference to exhibit 4.4 to twe 's annual report on form 10-k for the year ended december 31 , 1993 and filed with the sec on march 30 , 1994 ( file no . 1-12878 ) ) . story_separator_special_tag actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions . we have elected to follow a mark-to-market pension accounting policy for recording the actuarial gains or losses annually during the fourth quarter , or earlier if a remeasurement event occurs during an interim period . we use a december 31 measurement date for our pension plans . we recognized a net periodic pension benefit of $ 813 million in 2016. net periodic pension benefit or expense is determined using certain assumptions , including the expected long-term rate of return on plan assets , discount rate and expected rate of compensation increases . we determined the discount rate used to compute pension expense based on the yield of a large population of high-quality corporate bonds with cash flows sufficient in timing and amount to settle projected future defined benefit payments . in developing the expected long-term rate of return on assets , we considered the current pension portfolio 's composition , past average rate of earnings , and our asset allocation targets . we used a discount rate of 3.99 % from the date of the transaction to june 30 , 2016 , and 3.72 % from july 1 , 2016 to december 31 , 2016 to compute 2016 pension expense . a decrease in the discount rate of 25 basis points would result in a $ 154 million increase in our pension plan benefit obligation as of december 31 , 2016 and net periodic pension expense recognized in 2016 under our mark-to-market accounting policy . our expected long-term rate of return on plan assets used to compute 2016 pension expense was 6.50 % . a decrease in the expected long-term rate of return of 25 basis points , from 6.50 % to 6.25 % , while holding all other assumptions constant , would result in an increase in our 2017 net periodic pension expense of approximately $ 7 million . see note 19 to the accompanying consolidated financial statements contained in “ part ii . item 8. financial statements and supplementary data ” for additional discussion on these assumptions . results of operations the following table sets forth the consolidated statements of operations for the periods presented ( dollars in millions , except per share data ) : replace_table_token_5_th revenues . total revenues grew $ 19.2 billion or 197 % in the year ended december 31 , 2016 as compared to 2015 and grew $ 646 million or 7.1 % in the year ended december 31 , 2015 as compared to 2014 . revenue growth primarily reflects the transactions 39 and increases in the number of residential internet and triple play customers and in commercial business customers , growth in rates driven by higher equipment revenue and rate increases offset by a decrease in basic video customers . the transactions increased revenues for year ended december 31 , 2016 as compared to 2015 by approximately $ 18.6 billion . on a pro forma basis , assuming the transactions occurred as of january 1 , 2015 , total revenue growth was 7 % for the year ended december 31 , 2016 compared to 2015 . revenues by service offering were as follows ( dollars in millions ; all percentages are calculated using whole numbers . minor differences may exist due to rounding ) : replace_table_token_6_th video revenues consist primarily of revenues from basic and digital video services provided to our residential customers , as well as franchise fees , equipment rental and video installation revenue . excluding the impacts of the transactions , residential video customers increased by 42,000 in 2016 and decreased by 2,000 in 2015 . the increases in video revenues are attributable to the following ( dollars in millions ) : replace_table_token_7_th on a pro forma basis , assuming the transactions occurred as of january 1 , 2015 , residential video customers decreased by 226,000 in 2016 and the increase in video revenues is attributable to the following ( dollars in millions ) : replace_table_token_8_th 40 excluding the impacts of the transactions , residential internet customers grew by 461,000 and 442,000 customers in 2016 and 2015 , respectively . the increases in internet revenues from our residential customers are attributable to the following ( dollars in millions ) : replace_table_token_9_th on a pro forma basis , assuming the transactions occurred as of january 1 , 2015 , residential internet customers increased by 1,463,000 in 2016 and the increase in internet revenues is attributable to the following ( dollars in millions ) : 2016 compared to 2015 increase in average residential internet customers $ 957 service level changes , price adjustments and bundle revenue allocation 436 $ 1,393 excluding the impacts of the transactions , residential voice customers grew by 95,000 and 159,000 customers in 2016 and 2015 , respectively . the change in voice revenues from our residential customers is attributable to the following ( dollars in millions ) : replace_table_token_10_th on a pro forma basis , assuming the transactions occurred as of january 1 , 2015 , residential voice customers increased by 368,000 in 2016 and the increase in voice revenues is attributable to the following ( dollars in millions ) : replace_table_token_11_th 41 excluding the impacts of the transactions , small and medium business psus increased 128,000 and 109,000 in 2016 and 2015 , respectively . the increases in small and medium business commercial revenues are attributable to the following ( dollars in millions ) : replace_table_token_12_th on a pro forma basis , assuming the transactions occurred as of january 1 , 2015 , small and medium business psus increased by 291,000 in 2016 and the increase in small and medium business commercial revenues is attributable to the following ( dollars in millions ) : replace_table_token_13_th excluding the impacts of the transactions , enterprise psus increased 6,000 and 5,000 in 2016 and

in addition , our liabilities related to capital expenditures increased by $ 603 million , $ 28 million and $ 33 million for the years ended december 31 , 2016 , 2015 and 2014 , respectively . the following tables present our major capital expenditures categories on an actual and pro forma basis , assuming the transactions occurred as of january 1 , 2015 , in accordance with national cable and telecommunications association ( “ ncta ” ) disclosure guidelines for the years ended december 31 , 2016 , 2015 and 2014 . the disclosure is intended to provide more consistency in the reporting of capital expenditures among peer companies in the cable industry . these disclosure guidelines are not required disclosures under gaap , nor do they impact our accounting for capital expenditures under gaap ( dollars in millions ) : replace_table_token_23_th ( a ) customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units . it also includes customer installation costs and customer premise equipment ( e.g. , set-top boxes and cable modems ) . ( b ) scalable infrastructure includes costs not related to customer premise equipment , to secure growth of new customers and revenue generating units , or provide service enhancements ( e.g. , headend equipment ) . ( c ) line extensions include network costs associated with entering new service areas ( e.g. , fiber/coaxial cable , amplifiers , electronic equipment , make-ready and design engineering ) . ( d ) upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks , including betterments . ( e ) support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence ( e.g. , non-network equipment , land , buildings and vehicles ) . ( f ) transition represents incremental costs incurred to integrate the legacy twc and legacy bright house operations and to bring the three companies ' systems and processes into a uniform operating structure . 50 debt as of december 31 , 2016 , the accreted value of our total debt was approximately $ 61.7 billion , as summarized below ( dollars in millions ) : replace_table_token_24_th

we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) , the consolidated balance sheets of spectrum brands holdings , inc. and subsidiaries as of september 30 , 2016 and 2015 , and the related consolidated statements of income , comprehensive income , shareholders ' equity , and cash flows for each of the years in the three-year period ended september 30 , 2016 , and our report dated november 17 , 2016 expressed an unqualified opinion on those consolidated financial statements . kpmg llp milwaukee , wisconsin november 17 , 2016   66 report of independent registered public accounting firm the board of directors and shareholder sb/rh holdings , llc : we have audited the accompanying consolidated statements of financial position of sb/rh holdings , llc and subsidiaries ( the company ) as of september 30 , 2016 and 2015 , and the related consolidated statements of income , comprehensive income , shareholder 's equity , and cash flows for each of the years in the three-year period ended september 30 , 2016. these consolidated financial statements are the responsibility of the company 's management . our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly , in all material respects , the financial position of sb/rh holdings , llc and subsidiaries as of september 30 , 2016 and 2015 , and the results of their operations and their cash flows for each of the years in the three-year period ended september 30 , 2016 , in conformity with u.s. generally accepted accounting principles .  kpmg llp milwaukee , wisconsin november 17 , 2016 67 spectrum br ands holdings , inc. consolidated statements of financial position september 30 , 2016 and 2015 ( in millions , except per share figures ) replace_table_token_20_th  see accompanying notes to the consolidated financial statements . 68 spectrum brands holdings , inc. consolidated statements of income years ended september 30 , 2016 , 2015 and 2014 ( in millions , except per share figures )  replace_table_token_21_th  see accompanying notes to the consolidated financial statements .  spectrum brands holdings , inc. consolidated statements of comprehensive income years ended september 30 , 2016 , 2015 and 2014 ( in millions ) replace_table_token_22_th  see accompanying notes to the consolidated financial statements .    69 spectrum brands holdings , inc. consolidated statements of shareholders ' equity years ended september 30 , 2016 , 2015 and 2014 ( in millions )  replace_table_token_23_th see accompanying notes to the consolidated financial statements .  70 spectrum brands holdings , inc. consolidated statements of cash flows years ended september 30 , 2016 , 2015 and 2014 ( in millions )        replace_table_token_24_th  see accompany notes to the consolidated financial statements .   71 sb/rh hol dings , llc consolidated statements of financial position september 30 , 2016 and 2015 ( in millions )                 replace_table_token_25_th        see accompanying notes to the consolidated financial statements 72 sb/rh holdings , llc consolidated statements of income years ended september 30 , 2016 , 2015 and 2014 ( in millions ) replace_table_token_26_th  see accompanying notes to the consolidated financial statements    sb/rh holdings , llc consolidated statements of comprehensive income years ended september 30 , 2016 , 2015 and 201 4 ( in millions )  replace_table_token_27_th  see accompanying notes to the consolidated financial statements   73 sb/rh holdings , llc consolidated statements of shareholder 's equity years ended september 30 , 2016 , 2015 and 2014 ( in millions ) replace_table_token_28_th  see accompanying notes to the consolidated financial statements .    74 sb/rh holdings , llc consolidated statements of cash flows years ended september 30 , 2016 , 2015 and 2014 ( in millions )  replace_table_token_29_th   see accompanying notes to the consolidated financial statements .        75 spectrum brands holdings , inc. sb/rh holdings , llc notes to the consolidated financial statements this report is a combined report of spectrum brands holdings , inc. ( “ sbh ” ) and sb/rh holdings , llc ( “ sb/rh ” ) ( collectively , the “ company ” ) . the notes to the consolidated financial statements that follow include both consolidated sbh and sb/rh notes , unless otherwise indicated below .  note 1 - description of bu siness  spectrum brands holdings , inc. , a delaware corporation , is a diversified global branded consumer products company . sbh 's common stock trades on the new york stock exchange ( the “ nyse ” ) under the symbol “ spb . ” sb/rh holdings , llc is a wholly-owned subsidiary of sbh . sb/rh along with its wholly-owned subsidiary spectrum brands , inc. ( “ sbi ” ) issued certain debt guaranteed by domestic subsidiaries of the company . see note 10 “ debt ” of notes to the consolidated financial statements for more information pertaining to debt . story_separator_special_tag % , for the year ended september 30 , 2015 , compared to the year ended september 30 , 2014 , including $ 200.1 million of acquisition sales . organic net sales decreased $ 15.8 million , or 2.6 % , primarily due to decreases in aquatic sales of $ 12.8 million .  adjusted ebitda in the year ended september 30 , 2016 increased $ 15.6 million , while adjusted ebitda margin increased by 60 bps compared to th e year ended september 30 , 2015. adjusted ebitda increased primarily due to acquisitions sales previously discussed and cost improvements . adjusted ebitda margin increased due to cost improvements and contributing margins from prior year acquisitions . adjusted ebitda in the year ended september 30 , 2015 increased $ 11.3 million and the adjusted ebitda margin declined by 250 bps from the year ended september 30 , 2014. the increase in adjusted ebitda was due to increase in net sales previously discussed . the decrease in adjusted ebitda margin is due to increased product costs due to product mix .  46 home & garden ( h & g )   replace_table_token_12_th  net sales for the year ended september 30 , 2016 increased $ 35.0 million , or 7.4 % , compared to the year ended september 30 , 2015. the increase is attributable to repellent products growth of $ 15.7 million due to volume growth with key retailers and increased demand in response to the zika virus ; an increase in lawn and garden control products of $ 9.0 million from an extended outdoor season due to warmer weather and early season retail shipments ; and an increase in household insect control produ cts of $ 10.3 million from volume growth with key retailers . net sales for the year ended september 30 , 2015 increased $ 42.1 million , or 9.7 % , compared to the year ended september 30 , 2014. the increase is attributable to increases in repellent products of $ 16.2 million , lawn and garden control products of $ 13.1 million and household insect control products of $ 12.8 million . the sales increase for all categories within home and garden was a result of distribution gains , strong point of sale activity driving replenishment orders at existing customer and market share gains on certain brands .  adjusted ebitda in the year ended september 30 , 2016 increased $ 13.8 million with an increase i n adjusted ebitda margin of 90 bps compared to the year ended septe mber 30 , 2015. adjusted ebitda increased primarily due to the increase in net sales discussed above and cost improvements . the increase in adjusted ebitda margin was due to cost improvements . adjusted ebitda in the year ended september 30 , 2015 increased $ 22.7 million with an improvement in adjusted ebitda margin of 270 bps as compared to the year ended september 30 , 2014. the increase in adjusted ebitda is primarily due to increases in net sales discussed above and cost improvements . the adjusted ebitda margin increase is due to improved product mix , and cost improvements .  global auto care ( gac )  replace_table_token_13_th  net sales for the year ended september 30 , 2016 increased $ 293.2 million , including acquisition sales of $ 277.3 million , compared to the year ended september 30 , 2015. for the period of may 21 , 2016 through september 30 , 2016 , org anic net sales increased $ 16.6 million , or 10.3 % , compared to the period of may 21 , 2015 th rough september 30 , 2015 , primarily driven by increased sales from a/c recharge and refrigerant products and the introduction of private label products with a key customer . net sales for the year ended september 30 , 2015 relate to the acquired aag business subsequent to the acquisition date of may 21 , 2015 .  adjusted ebitda for the year ended september 30 , 2016 increased $ 106.1 million compared to the year ended september 30 , 2015. for the period of may 21 , 2016 through september 30 , 2016 , adjusted ebitda increased $ 10.5 million , or 22 % , compared to the period of may 21 , 2015 through september 30 , 2015 , primarily due to increases in net sales discussed above . adjusted ebitda margin increased 430bps due to reduced operating expenses and cost improvements from post integration synergies .  non-gaap measurements  while management believes that non-gaap measurements are useful supplemental information , such adjusted results are not intended to replace the company 's gaap financial results . ebitda , adjusted ebitda , and o rganic net s ales are measures that are not prescribed by us gaap . ebitda , adjusted ebitda and organic net sales are further defined below , including reconciliation to their most directly comparable gaap measurement . as such , we encourage investors not to use these measures as substitutes for the determination of net income , net sales or other similar gaap measures .  adjusted ebitda . our consolidated and segment results include financial information regarding adjusted ebitda ( “ earnings before interest , taxes , depreciation , amortization ” ) , which are non-gaap earnings . adjusted ebitda is a metric used by management and we believe this non-gaap measure provides useful information to investors because it reflects ongoing operating performance and trends of our segments , excluding certain non-cash based expenses and or non-recurring items during each of the comparable periods and facilitates comparisons between peer companies since interest , taxes , depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies . further , adjusted ebitda is a useful measure of a company 's ability to service debt and is one measure used for determining the company 's debt covenant . ebitda is calculated

 net cash used by investing activities  the $ 1,181.3 million decrease and $ 1,186.2 million increase in cash used by investing activities from sb/rh for the year ended september 30 , 2016 and the year ended september 30 , 2015 , respectively , are primarily attributable to the sbh factors discussed above .  net cash ( used ) provided by financing activities  net cash used b y financing activities of $ 478.9 million for the year ended september 30 , 2016 consist of ( i ) $ 498.9 million net proceeds from debt including $ 477.6 million from the 4.00 % notes , $ 13.9 million from intercompany note with parent and $ 7.4 million from other debt financing ; ( ii ) $ 868.1 million of payments on debt , including partial redemption of $ 390.3 million of 6.375 % notes , payments on term loans of $ 415.5 million , $ 48.6 million payment on inte rcompany note with parent , $ 4.4 million payment on other debt financing and $ 9.3 million payments on capital leases ; ( iv ) payment of debt issuance costs of $ 9.3 million ; ( v ) cash dividends to parent of $ 97.2 million ; and ( vi ) payment on contingent consideration associated with previous acquisitions of $ 3.2 million .  net cash provided by financing activities of $ 922.6 million for the year ended september 30 , 20 15 consist of ( i ) refinancing of the then-existing senior term facilities resulting in $ 2 , 036.5 million of proceeds for the issuance of the new term loans and $ 1,589.6 million payment on the then existing senior term facilities ; ( ii ) $ 1,000.0 million proceeds from the issuance of the 5.75 % notes ( iii ) $ 540.0 million repayment of aag debt assumed as part of the aag acquisition ( iv ) $ 250.0 million proceeds from the issuance of the 6.125 % notes ; ( v ) $ 300.0 million repayment of the 6.75 % notes ; ( vi ) $ 363.6 million of payments on debt ; ( vii ) payment of debt issuance costs of $ 37.8 million ; ( vi ) $ 528.3 million of proceeds from the parent , sbh ; and ( vii ) cash dividends paid to sbh of $ 72.1 million .  net cash used by financing activities of $ 338.2 million for the year end ed september 30 , 2014 consist of

inc. 2,000,000 $ 2,000 $ 1,075 $ - $ 3,075 capital contributions - 2005 - - 10,186 - 10,186 net income - - - - - balance , december 31 , 2005 2,000,000 2,000 11,261 - 13,261 capital contributions - 2006 - - 3,435 - 3,435 net income - 2006 - - - 5,648 5,648 balance , december 31 , 2006 2,000,000 2,000 14,696 5,648 22,344 capital draws- 2007 - - ( 9,185 ) - ( 9,185 ) capital contributions -2007 - - 7,588 - 7,588 net income - 2007 - - - 30,397 30,397 balance , december 31 , 2007 2,000,000 2,000 13,099 36,045 51,144 capital draws- 2008 - - ( 47,787 ) - ( 47,787 ) net income - 2008 - - - 19,989 19,989 balance , december 31 , 2008 2,000,000 2,000 ( 34,688 ) 56,034 23,346 capital draws- 2009 - - ( 17,190 ) - ( 17,190 ) net income - 2009 - - - 5,331 5,331 balance , december 31 , 2009 2,000,000 2,000 ( 51,878 ) 61,365 11,487 capital draws - 2010 - - ( 38,440 ) - ( 38,440 ) net income - 2010 - - - 5,076 5,076 balance , december 31 , 2010 2,000,000 2,000 ( 90,318 ) 66,441 ( 21,877 ) capital contributions - 2011 - - 22,463 - 22,463 net income - 2011 - - - 4,206 4,206 balance , december 31 , 2011 2,000,000 2,000 ( 67,855 ) 70,647 4,792 capital draws- 2012 - - ( 3,849 ) - ( 3,849 ) net income - 2012 - - - 1,845 1,845 balance , december 31 , 2012 2,000,000 2,000 ( 71,704 ) 72,492 2,788 conversion of shareholder loan to equity – september 26 , 2013 – at par value – 5 million shares 5,000,000 5,000 - - 5,000 capital contributions - net - - 4,262 - 4,262 net loss - 2013 - - - ( 9,149 ) ( 9,149 ) balance , december 31 , 2013 7,000,000 $ 7,000 $ ( 67,442 ) $ 63,343 $ 2,901 the accompanying notes are an integral part of these financial statements . f-4 maple tree kids , inc. ( a development stage company ) statements of cash flows replace_table_token_8_th supplemental disclosures of cash flow information : cash paid during development stage for interest $ – $ – $ – cash paid during development stage for income taxes $ – $ – $ – supplemental schedule of non-cash activity : conversion of shareholder advances to equity $ 5,000 $ $ 5,000 common stock issued in the plan of merger with maple tree kids llc $ 1,000 $ – $ 1,000 the accompanying notes are an integral part of these financial statements . f-5 maple tree kids , inc. ( a development stage company ) notes to financial statements december 31 , 2013 note 1 – description of the development stage business , merger and going concern maple tree kids inc. ( “ the company ” ) was incorporated on august 14 , 2013 in the state of nevada . at the time of our incorporation , our president and sole stockholder subscribed for and purchased 1,000,000 shares of our common stock at a purchase price of $ 0.001 per share for an aggregate purchase price of $ 1,000 . the company is a retail distribution company selling all of its products over the internet in the united states , operating in the infant and toddler products business market . the company 's products consist of personalized infant and toddler clothing , toys , towels , wash clothes , bibs , disposable products , blankets , baby wraps and slings , wet bags and other accessories . predecessor business - maple tree kids llc : maple tree kids llc a vermont limited liability company was formed on august 12 , 2005 under state of vermont statutes . under the terms of the llc operating agreement ( “ operating agreement ” ) , the term of the company expires on certain events of dissolution . the company had one member at who owned 100 % of maple tree kids llc . sale of member 's llc interest : on august 16 , 2013 , the former single member of maple tree kids llc sold 100 % of her interest in the company to our president and sole stockholder for $ 8,800 . all cash , inventory and equipment were distributed to the prior member at the closing and the url websites , customer list and vendor list were retained by the company and the new sole member . the prior member assumed all liabilities of the company at closing . merger agreement on september 26 , 2013 the company , pursuant to an agreement and plan of merger , merged into maple tree kids , inc , a nevada corporation and ceased to exist as a vermont llc as of the date of this merger . our principal shareholder , who was the sole member of maple tree kids llc at the time of the merger , received 1 million shares of maple tree kids , inc. pursuant to the plan of merger , resulting in her owning a total of 2 million shares of maple tree kids , inc after the merger and continuing to be the sole shareholder of maple tree kids , inc. maple tree kids , inc. had assets consisting of cash of $ 1,000 and stockholder 's equity of $ 1,000 with no revenue or expenses incurred since its date of incorporation to the time of this merger . story_separator_special_tag 2013. the decrease in the gross profit percentage from 39 % in 2012 to 28 % in 2013 was due a decrease in our selling prices to our major customer in 2013. our operating expenses were $ 13,524 for the year ended december 31 , 2013 and $ 8,812 for the year ended december 31 , 2012 and a cumulative amount of $ 220,038 for the period from the date of our inception on august 12 , 2005 to december 31 , 2013. the increase in our operating expenses in 2013 was due to an increase in our annual fees and professional services of approximately $ 7,600. this increase was offset by a decrease in our marketing and promotion and other administrative expenses of approximately $ 2,900 . 18 net income ( loss ) our net income ( loss ) for the year ended december 31 , 2013 was $ ( 9,149 ) and was $ 1,845 for the year ended december 31 , 2012 and a cumulative amount of $ 63,343 for the period from the date of our inception on august 12 , 2005 to december 31 , 2013. the decrease in net income in 2013 was due to the reasons stated above . impact of potential loss of our major customer on our liquidity currently sales to our major customer constitute approximately 80 % of our total revenue . any substantial decrease in selling our products to them will substantially affect our operating results and liquidity . although we currently have a satisfactory relationship with our major customer , if they were to terminate their relationship or stop ordering products from us , these events would currently result in a loss of substantially all of our revenue which would have a material impact on the liquidity of our company . it is uncertain how long our major customer will continue to order products from us as we do not have any assurances from them as to how long they will continue ordering products from us . we do not have an exclusive agreement with them for selling our type of products to them . in the event that the company is not able to retain our major customer or obtain new customers , we will incur increased operating losses and we will need to raise additional capital to maintain our current operations . we presently are seeking to increase our web-based sales by attracting new customers to our websites . we are not presently negotiating any agreements with any new major customers . story_separator_special_tag intend to meet our cash requirements for the next 12 months through a combination of debt financing and equity financing . we have an effective registration statement on file with the securities and exchange commission but currently do not have any arrangements in place for the completion of any financings and there is no assurance that we will be successful in completing any further financings or raising any capital . there is no assurance that any financing will be available or if available , on terms that will be acceptable to us . we may not raise sufficient funds to fully carry out any business plan . off-balance sheet arrangements as of the date of this report , we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition , changes in our financial condition , revenues or expenses , results of operations , liquidity , capital expenditures or capital resources that are material to our stockholders . inflation the effect of inflation on our revenues and operating results has not been significant . critical accounting policies our financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation . a complete listing of these policies is included in note 2 of the notes to our financial statements for the year ended december 31 , 2013 and 2012 and for the period august 12 , 2005 ( date of inception ) to december 31 , 2013. we have identified below the accounting policies that are of particular importance in the presentation of our financial position , results of operations and cash flows , and which require the application of significant judgment by management . revenue recognition sales to consumers are recorded when goods are shipped and are reported net of allowances for estimated returns and allowances in the accompanying statements of operations . the customer authorizes us to charge their credit card at the time of purchase with the understanding their credit card will be charged upon shipment . we recognize revenue based on the below three criteria . our policy is to allow the return of any unused merchandise purchased from us for any reason for a 15-day period after the date of sale . delivery has occurred . we have our vendors drop ship inventory to our customers and we recognize revenue when we are notified that shipment has occurred . fee is fixed or determinable . the price is deemed to be fixed and determinable based on our successful collection history and our arrangement with our customers . collectability is reasonably assured . we determine for all of our customers whether collectability is reasonably assured pursuant to our credit review policy . all credit card payments are approved and processed through our website . we evaluate the criteria outlined in fasb asc subtopic 605-45 , revenue recognition—principal agent considerations , in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions . generally , according to this accounting principle , when we are primarily obligated in a transaction , subject to inventory risk , have latitude in establishing prices and selecting suppliers , or have several but not all of these indicators , revenue is recorded gross . if we are not primarily obligated and amounts

currently , we do not have sufficient cash in our bank accounts to cover our estimated expenses for the next 12 months . our current average monthly negative cash flow is approximately $ 2,000 per month . based on our current cash position at december 31 , 2013 we have approximately 2 months of cash on hand to fund our current operations . we anticipate meeting our future cash requirements through a combination of equity financing from the proceeds of this offering and debt financing from our principal shareholder to fund the costs of this offering and the costs of being a public reporting company . although we anticipate meeting our future cash requirements though , among other things , debt financing from our principal shareholder , we do not currently have any agreements with our principal shareholder to provide such financing , written or unwritten . we estimate that our operating expenses , based on us being able to raise the necessary equity capital , will be approximately $ 100,000 as described in the table below . these estimates may change significantly depending on the nature of our future business activities and our ability to raise capital from shareholders or other sources . replace_table_token_2_th 20 we

under the guidance , the company may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount . if this assessment indicates the possibility of impairment , the income approach to test for goodwill impairment would be used . under the income approach , management calculates the fair value of its reporting units based on the present value of estimated future cash flows . if the fair value of an individual reporting unit exceeds the carrying value of the net assets including goodwill assigned to that unit , goodwill is not impaired . if the carrying value of the reporting unit 's net assets including goodwill exceeds the fair value of the reporting unit , then management determines the implied fair value of the reporting unit 's goodwill . if the carrying value of the reporting unit 's goodwill exceeds its implied fair value , then the company would record an impairment loss equal to the difference . for fiscal years ended june 30 , 2019 and 2018 , the company performed a qualitative assessment which indicated that the fair value of its reporting units more likely than not exceeded their respective carrying amounts . the company did no t recognize any goodwill impairment charges in the fiscal years ended june 30 , 2019 , 2018 and 2017 . intangible assets intangible assets consist primarily of relationships , reacquired franchise rights , product trade names , legal and contractual rights surrounding a patent and a non-compete agreement . these assets are recorded at their estimated fair values at the acquisition dates using the income approach . definite lived intangible assets are being amortized using the straight-line method based on their estimated useful lives ranging from 5 to 20 years . the estimated useful lives of dealer relationships consider the average length of dealer relationships at the time of acquisition , historical rates of dealer attrition and retention , the company 's history of renewal and extension of dealer relationships , as well as competitive and economic factors resulting in a range of useful lives . the useful life of reacquired franchise rights is based on the remainder of the contractual term of the licensee 's exclusive manufacturing and distributors agreement with the company . the estimated useful lives of the company 's trade 73 names are based on a number of factors including technological obsolescence and the competitive environment . the estimated useful lives of legal and contractual rights are estimated based on the benefits that the patent provides for its remaining terms unless competitive , technological obsolescence or other factors indicate a shorter life . the useful life of the non-compete agreement is based on a ten -year agreement entered into by the company and former owner of the licensee as part of the acquisition . management , assisted by third-party valuation specialists , determined the estimated fair values of separately identifiable intangible assets at the date of acquisition under the income approach . significant data and assumptions used in the valuations included cost , market and income comparisons , discount rates , royalty rates and management forecasts . discount rates for each intangible asset were selected based on judgment of relative risk and approximate rates of returns investors in the subject assets might require . the royalty rates were based on historical and projected sales and profits of products sold and management 's assessment of the intangibles ' importance to the sales and profitability of the product . management provided forecasts of financial data pertaining to assets , liabilities and income statement balances to be utilized in the valuations . while management believes the assumptions , estimates , appraisal methods and ensuing results are appropriate and represent the best evidence of fair value in the circumstances , modification or use of other assumptions or methods could have yielded different results . the carrying amount of definite lived intangible assets are reviewed whenever circumstances arise that indicate the carrying amount of an asset may not be recoverable . the carrying value of these assets is compared to the undiscounted future cash flows the assets are expected to generate . if the asset is considered to be impaired , the carrying value is compared to the fair value and this difference is recognized as an impairment loss . there was no impairment loss recognized on intangible assets for the fiscal years ended june 30 , 2019 , 2018 and 2017 . dealer incentives the company provides for various structured dealer rebate and sales promotions incentives , which are recognized as a component of sales in measuring the amount of consideration the company expects to receive in exchange for transferring goods , at the time of sale to the dealer . examples of such programs include rebates , seasonal discounts , promotional co-op arrangements and other allowances . dealer rebates and sales promotion expenses are estimated based on current programs and historical achievement and or usage rates . actual results may differ from these estimates if market conditions dictate the need to enhance or reduce sales promotion and incentive programs or if dealer achievement or other items vary from historical trends . free floor financing incentives include payments to the lenders providing floor plan financing to the dealers or directly to the dealers themselves . free floor financing incentives are estimated at the time of sale to the dealer based on the expected expense to the company over the term of the free flooring period and are recognized as a reduction in sales . the company accounts for both incentive payments directly to dealers and payment to third party lenders in this manner . story_separator_special_tag our dealers are exposed to seasonal variations in consumer demand for boats . we address anticipated demand for our products and manage our manufacturing in order to mitigate seasonal variations . we also use our dealer incentive programs to encourage dealers to order in the off-season by providing floor plan financing relief , which typically permits dealers to take delivery of current model year boats between july 1 and april 30 on an interest-free basis for a specified period . we also offer our dealers other incentives , including rebates , seasonal discounts , promotional co-op arrangements and other allowances . we facilitate floor plan financing programs for many of our dealers by entering into repurchase agreements with certain third-party lenders , which enable our dealers , under certain circumstances , to establish lines of credit with the third-party lenders to purchase inventory . under these floor plan financing programs , a dealer draws on the floor plan facility upon the purchase of our boats and the lender pays the invoice price of the boats . for fiscal year 2019 , we agreed to accept a return associated with the repurchase of eight units from the lender of two of our former dealers . in fiscal year 2020 these boats were resold above their cost and at minimal margin loss . in fiscal years 2018 and 2017 , no units were repurchased . we will continue to review and refine our dealer incentive offerings and monitor any exposures arising under these arrangements . vertical integration we have vertically integrated a number of key components of our manufacturing process , including the manufacturing of boat trailers , towers and tower accessories , machined and billet parts , and tooling . most recently , we have begun the marinization of our own engines for our malibu and axis brands . we believe we will successfully incorporate our engines in all malibu and axis models in fiscal 2020. since we entered into a supply agreement for engine blocks with general motors in november 2016 , we have invested approximately $ 18 million in this engine initiative , including the acquisition of a 70,000 square foot facility adjacent to our boat manufacturing operations in loudon , tennessee . vertical integration of key components of our boats gives us the ability to increase incremental margin per boat sold by reducing our cost base and improving the efficiency of our manufacturing process . additionally , it allows us to have greater control over design , consumer customization options , construction quality , and our supply chain . we believe our engine marinization initiative will reduce our reliance on our previous engine suppliers for our malibu and axis brands while reducing the risk that a change in cost or production from any engine supplier for such brands could adversely affect our business . we continually review our manufacturing process to identify opportunities for additional vertical integration investments across our portfolio of premium brands . results of operations the table below sets forth our consolidated results of operations , expressed in thousands ( except unit volume and net sales per unit ) and as a percentage of net sales , for the periods presented . our consolidated financial results for these periods are not necessarily indicative of the consolidated financial results that we will achieve in future periods . certain totals for the table below will not sum to exactly 100 % due to rounding . 45 replace_table_token_3_th comparison of the fiscal year ended june 30 , 2019 to the fiscal year ended june 30 , 2018 net sales net sales for fiscal year 2019 increased $ 187.0 million , or 37.6 % , to $ 684.0 million , compared to fiscal year 2018 . unit volume for fiscal year 2019 increased 1,070 units , or 17.0 % , to 7,362 units compared to fiscal year 2018 . the increase in net sales and unit volumes was driven primarily by our acquisition of pursuit in october 2018 , as well as increased demand for our malibu , axis and cobalt brands coupled with year-over-year price increases . 46 net sales attributable to our malibu u.s. segment increased $ 55.8 million , or 19.0 % , to $ 349.0 million for fiscal year 2019 compared to fiscal year 2018. unit volumes attributable to our malibu u.s. segment increased 456 units for fiscal year 2019 compared to fiscal year 2018. the increase in net sales and unit volume for malibu u.s. was driven primarily by strong demand for new models and optional features , which led to a higher net sales per unit for malibu and axis models . net sales was also impacted by year-over-year price increases on all of our malibu and axis models . net sales from our cobalt segment increased $ 26.2 million , or 14.6 % , to $ 206.6 million for fiscal year 2019 compared to fiscal year 2018. unit volumes attributable to cobalt increased 177 units for fiscal year 2019 compared to fiscal year 2018. the increase in cobalt net sales and unit volume was driven primarily by strong demand for our r series models . net sales was also impacted by year-over-year price increases on all of our cobalt models . net sales and unit volume contributed by pursuit since its acquisition on october 15 , 2018 were $ 102.8 million and 406 units , respectively , for fiscal year 2019. net sales from our malibu australia segment increased $ 2.2 million , or 9.3 % , to $ 25.6 million for fiscal year 2019 compared to fiscal year 2018. our overall net sales per unit increased 17.6 % to $ 92,912 per unit for fiscal year 2019 compared to fiscal year 2018. net sales per unit for our malibu u.s. segment increased 6.1 % to $ 82,837 per unit for fiscal year 2019 compared to fiscal year 2018 , driven by strong demand for new models and optional features and year-over-year

loans and commitments we currently have a revolving credit facility with borrowing capacity of up to $ 120.0 million and a $ 75.0 million term loan outstanding . as of june 30 , 2019 , we had $ 40.0 million outstanding under our revolving credit facility and $ 0.7 million in outstanding letters of credit . the revolving credit facility matures on july 1 , 2024 and the term loan matures on july 1 , 2022. the revolving credit facility and term loan are governed by a credit agreement with malibu boats , llc ( “ boats llc ” ) as the borrower and suntrust bank , as the administrative agent , swingline lender and issuing bank . the obligations of boats llc under the credit agreement are guaranteed by malibu boats holdings , llc , and , subject to certain exceptions , the present and future domestic subsidiaries of boats llc , and all such obligations are secured by substantially all of the assets of the malibu boats holdings llc , boats llc and such subsidiary guarantors . malibu boats , inc. is not a party to the credit agreement . borrowings under our credit agreement bear interest at a rate equal to either , at our option , ( i ) the highest of the prime rate , the federal funds rate plus 0.5 % , or one-month libor plus 1 % ( the “ base rate ” ) or ( ii ) libor , in each case plus an applicable margin ranging from 1.25 % to 2.25 % with respect to libor borrowings and 0.25 % to 1.25 % with respect to base rate borrowings . the applicable margin will be based upon the consolidated leverage ratio of malibu boats holdings , llc and its subsidiaries calculated on a consolidated basis . as of june 30 , 2019 , the interest rate on our term loan and revolving credit facility was 3.65 % . we are required to pay a commitment fee for the unused portion of the revolving credit facility , which will range from 0.20 % to 0.40 % per annum , depending on malibu boats holdings , llc 's and its subsidiaries ' consolidated leverage ratio . the credit agreement permits prepayment of the term loan without any penalties . on august 17 , 2017 we made a voluntary principal payment on the term loan in the amount of $ 50.0 million

10.17 second amended and restated registration rights agreement , dated as of january 5 , 2015 , by and among hc2 holdings , the initial purchasers of the series a preferred stock , the initial purchasers of the series a-1 preferred stock and the purchasers of the series a-2 preferred stock ( incorporated by reference to exhibit 10.2 on hc2 's current report on form 8-k , filed on january 9 , 2015 ) ( file no . 001-35210 ) . 10.18 secured loan agreement , dated as of january 20 , 2014 , by and among global marine systems ( vessels ) limited , as borrower , global marine systems limited , as guarantor , and dvb bank se nordic branch , as lender ( incorporated by reference to exhibit 10.8 on hc2 's quarterly report on form 10-q , filed on november 10 , 2014 ) ( file no . 001-35210 ) . 10.19 supplemental charter agreement , dated as of march 21 , 2012 , by and among global marine systems limited , as charterer , and international cableship pte ltd , as owner ( incorporated by reference to exhibit 10.9.1 on hc2 's quarterly report on form 10-q , filed on november 10 , 2014 ) ( file no . 001-35210 ) . 10.20 bareboat charter , dated as of september 24 , 1992 , between international cableship pte ltd and global marine systems limited ( as successor-in-interest to cable & wireless ( marine ) ltd ) ( incorporated by reference to exhibit 10.9.2 on hc2 's quarterly report on form 10-q , filed on november 10 , 2014 ) ( file no . 001-35210 ) . 10.21 deed of covenant , dated as of march 14 , 2006 , by and among global marine systems limited , as mortgagee , and dyvi cable ship , as mortgagor ( incorporated by reference to exhibit 10.10.1 on hc2 's quarterly report on form 10-q , filed on november 10 , 2014 ) ( file no . 001-35210 ) . 10.22 bareboat charter , dated as of march 14 , 2006 , between dyvi cable ship as and global marine systems limited ( incorporated by reference to exhibit 10.10.2 on hc2 's quarterly report on form 10-q , filed on november 10 , 2014 ) ( file no . 001-35210 ) . 10.23 mortgage , dated as of march 14 , 2006 , of dyvi cable ship as , as mortgagor , in favor of global marine systems limited , as mortgagee ( incorporated by reference to exhibit 10.10.3 on hc2 's quarterly report on form 10-q , filed on november 10 , 2014 ) ( file no . 001-35210 ) . 10.24 consent and waiver , dated as of october 9 , 2014 to securities purchase agreement , dated as of may 29 , 2014 , by and among hc2 and affiliates of hudson bay capital management lp , benefit street partners l.l.c . and dg capital management , llc ( incorporated by reference to exhibit 10.14 on hc2 's quarterly report on form 10-q , filed on november 10 , 2014 ) ( file no . 001-35210 ) . 10.25 consent , waiver and amendment , dated as of september 22 , 2014 to securities purchase agreement , dated as of may 29 , 2014 , by and among hc2 and affiliates of hudson bay capital management lp , benefit street partners l.l.c . and dg capital management , llc ( incorporated by reference to exhibit 10.15 on hc2 's quarterly report on form 10-q , filed on november 10 , 2014 ) ( file no . 001-35210 ) . 10.26^ reformed and clarified option agreement , dated october 26 , 2014 , by and between hc2 and philip falcone ( incorporated by reference to exhibit 10.18.1 on hc2 's annual report on form 10-k , filed on march 16 , 2015 ) ( file no . 001-35210 ) . 10.27^ form of option agreement ( additional time contingent option ) by and between hc2 and philip falcone ( incorporated by reference to exhibit 10.18.2 on hc2 's annual report on form 10-k , filed on march 16 , 2015 ) ( file no . 001-35210 ) . 10.28^ form of option agreement ( contingent option ) by and between hc2 and philip falcone ( incorporated by reference to exhibit 10.18.3 on hc2 's annual report on form 10-k , filed on march 16 , 2015 ) ( file no . 001-35210 ) . 10.29^ form of non-qualified stock option award agreement ( incorporated by reference to exhibit 10.1 on hc2 's current report on form 8-k , filed on september 22 , 2014 ) ( file no . 001-35210 ) 10.30^ form of restricted stock award agreement ( incorporated by reference to exhibit 10.2 on hc2 's current report on form 8-k , filed on september 22 , 2014 ) ( file no . 001-35210 ) 10.31^ employment agreement , dated october 1 , 2014 , by and between hc2 and paul voigt ( incorporated by reference to exhibit 10.2 on hc2 's quarterly report on form 10-q , filed on may 11 , 2015 ) ( file no . 001-35210 ) . 10.32^ employment agreement , dated may 20 , 2015 , by and between hc2 and michael sena ( incorporated by reference to exhibit 10.2 on hc2 's quarterly report on form 10-q , filed on august 10 , 2015 ) ( file no . 001-35210 ) . 10.33^ non-qualified stock option award agreement dated april 18 , 2016 , by and between hc2 and philip a. falcone ( incorporated by reference to exhibit 10.1 on hc2 's quarterly report on form 10-q , filed on may 9 , 2016 ) ( file no . 001-35210 ) . story_separator_special_tag 67 depreciation and amortization : depreciation and amortization from our marine services segment for the year ended december 31 , 2016 increased $ 3.2 million , to $ 22.0 million from $ 18.8 million for the year ended december 31 , 2015 . the increase was due primarily to the acquired cwind assets . other operating ( income ) expense : other operating income from our marine services segment for the year ended december 31 , 2017 increased $ 3.3 million , driven by the sale of a vessel in 2017. energy segment replace_table_token_11_th net revenue : net revenue from our energy segment for the year ended december 31 , 2017 increased $ 10.0 million to $ 16.4 million from $ 6.4 million for the year ended december 31 , 2016 . the increase was primarily driven by increased cng sales from stations acquired in late 2016 and developed in 2017. this was partially offset by the utilization of tax credits in the comparable period , which expired on december 31 , 2016 and as of december 31 , 2017 were not renewed . see note 23. subsequent events for updated details regarding the tax credits as a result of legislation passed in 2018. adoption of asu 2014-09 will have an impact on 704games ' results of operations . as the company is adopting asu 2014-09 utilizing the modified retrospective approach , the company will recognize previously deferred revenue in retained earnings on january 1 , 2018 , and going forward , software revenues , which were previously deferred , will be recognized upon sale to the customer . net revenue from our energy segment for the year ended december 31 , 2016 decreased $ 0.3 million to $ 6.4 million from $ 6.8 million for the year ended december 31 , 2015 . the decrease was driven by a reduction in design and build project revenues , which was largely offset by an increase in cng sales volumes , resulting largely from the inclusion of sales from newly developed and acquired stations . cost of revenue : cost of revenue from our energy segment for the year ended december 31 , 2017 increased $ 7.7 million to $ 10.3 million from $ 2.6 million for the year ended december 31 , 2016 . the increase was driven by an increase in cng supply , utility and other station operating expenses from the newly acquired or developed stations , combined with the impact of station down time associated with the integration upgrade of stations and repair and maintenance expenses associated with the acquired stations from constellation cng and questar fueling company in december 2016. cost of revenue from our energy segment for the year ended december 31 , 2016 decreased $ 1.3 million to $ 2.6 million from $ 3.9 million for the year ended december 31 , 2015 . the decrease was due primarily to the reduction in design and build project revenues , which typically generate higher cost of revenue and lower margin than recurring revenues generated through compressed natural gas sales from our network of owned , operated and maintained stations . selling , general and administrative expenses : selling , general and administrative expenses from our energy segment for the year ended december 31 , 2017 increased $ 1.6 million to $ 3.6 million from $ 2.0 million for the year ended december 31 , 2016 . the increases were driven primarily by an increase in operating expenses to support the growth in the number of stations . selling , general and administrative expenses from our energy segment for the year ended december 31 , 2016 decreased $ 0.1 million to $ 2.0 million from $ 2.1 million for the year ended december 31 , 2015 , driven by slightly lower salary costs . depreciation and amortization : depreciation and amortization from our energy segment for the year ended december 31 , 2017 increased $ 2.9 million to $ 5.1 million from $ 2.2 million for the year ended december 31 , 2016 . the increases were primarily due to the expense from stations acquired in late 2016 and developed in 2017. depreciation and amortization from our energy segment for the year ended december 31 , 2016 increased $ 0.6 million to $ 2.2 million from $ 1.6 million for the year ended december 31 , 2015 . the increase was primarily due to the increase in the number of natural gas fueling stations placed in service . 68 telecommunications segment replace_table_token_12_th net revenue : net revenue from our telecommunications segment for the year ended december 31 , 2017 decreased $ 33.1 million to $ 701.9 million from $ 735.0 million for the year ended december 31 , 2016 . the decrease was due primarily to decreases in wholesale traffic volumes as the segment is focused on a wholesale traffic termination mix that maximizes margin contribution . net revenue from our telecommunications segment for the year ended december 31 , 2016 increased $ 274.7 million to $ 735.0 million from $ 460.4 million for the year ended december 31 , 2015 . the increase was due primarily to growth in wholesale traffic volumes driven by the changing regulatory environment throughout the european market combined with continued business growth in the middle east region . cost of revenue : cost of revenue from our telecommunications segment for the year ended december 31 , 2017 decreased $ 35.3 million to $ 685.9 million from $ 721.2 million for the year ended december 31 , 2016 . the decrease was driven primarily by the decrease in revenues and focus on a wholesale traffic termination mix that maximizes margin contribution . cost of revenue from our telecommunications segment for the year ended december 31 , 2016 increased $ 269.5 million to $ 721.2 million from $ 451.7 million for the year ended december 31 , 2015 . the increase is directly correlated to the growth in wholesale traffic volumes .

63 results of operations year ended december 31 , 2017 compared to the year ended december 31 , 2016 , and the year ended december 31 , 2016 compared to the year ended december 31 , 2015 presented below is a disaggregated table that summarizes our results of operations and a comparison of the change between the periods presented ( in thousands ) : replace_table_token_8_th net revenue : net revenue for the year ended december 31 , 2017 increased $ 76.0 million to $ 1,634.1 million from $ 1,558.1 million for the year ended december 31 , 2016 . all segments except for our telecommunication segment recognized increased revenues during the year ended december 31 , 2017 . the construction segment was a major driver of the increase , largely due to contribution from large complex projects which have brought in greater revenue when compared to the previous period and additional revenues from bds and pdc , both of which were acquired in the fourth quarter of 2016. also contributing to the increase in revenues was our energy segment , which experienced increased compressed natural gas ( `` cng '' ) sales from new fueling stations acquired or developed during 2016 which have incurred a full year of operations in 2017. further , growth in the insurance segment was primarily driven by an increase in the asset base for both fixed maturity securities and mortgage loans and yield improvements for fixed maturity securities when compared to the previous period . finally , increased revenues from our marine services segment were driven by higher offshore power installation revenues . these increases were offset by decreases in revenues from our telecommunications segment as a result of a decrease in wholesale traffic volumes as the segment has been focused on a wholesale traffic termination mix that maximizes margin contribution . 64 net revenue for the year ended december 31 , 2016 increased $ 437.3 million to $ 1,558.1 million from $ 1,120.8 million for the year ended december 31 , 2015 . this increase was due primarily to our telecommunications segment , as a result of growth in wholesale traffic volumes , the addition of revenues associated with our insurance company which was acquired in december 2015 , and an increase in revenue in our marine services segment driven by increased maintenance revenues as a result of the cwind acquisition . loss from operations : loss from operations for the year ended december 31 , 2017 decreased $ 0.3 million to $ 1.1 million from $ 1.4 million for the year ended december 31 , 2016 . the decrease in loss was driven by the insurance segment 's release of reserves , offset in part by our construction segment due primarily to better-than-bid performance on large , commercial projects in backlog in the comparable period that was not repeated in 2017 , and our life sciences segment as a result of research and

the company will further study the implications of this standard in order to evaluate the method of adoption and the expected impact on the consolidated financial statements . in august 2014 , the fasb issued a new u.s. gaap accounting standard that provides guidance about 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 . the new accounting standard requires management to assess an entity 's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in u.s. auditing standards . the new accounting standard is effective for the annual period ending after december 15 , 2016 , and for annual periods and interim periods thereafter . early application is permitted . the company does not expect the adoption of this standard to have a material impact on the consolidated financial statements . ( 3 ) comprehensive loss the changes in accumulated other comprehensive income ( loss ) by component for the years ended december 31 , 2014 and 2013 are summarized below . no amounts were reclassified out of accumulated other comprehensive income during the years ended december 31 , 2014 , 2013 and 2012. replace_table_token_26_th 79 celldex therapeutics , inc. notes to consolidated financial statements ( continued ) ( 4 ) fair value measurements the following tables set forth the company 's financial assets subject to fair value measurements : as of december 31 , 2014 level 1 level 2 level 3 ( in thousands ) money market funds and cash equivalents $ 18,677 — $ 18,677 — marketable securities $ 173,023 — $ 173,023 — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ 191,700 — $ 191,700 — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ as of december 31 , 2013 level 1 level 2 level 3 ( in thousands ) money market funds and cash equivalents $ 148,549 — $ 148,549 — marketable securities $ 133,581 — $ 133,581 — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ 282,130 — $ 282,130 — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ there have been no transfers of assets or liabilities between the fair value measurement classifications . the company 's financial instruments consist mainly of cash and cash equivalents , marketable securities , short-term accounts receivable and accounts payable . the company values its marketable securities utilizing independent pricing services which normally derive security prices from recently reported trades for identical or similar securities , making adjustments based on significant observable transactions . at each balance sheet date , observable market inputs may include trade information , broker or dealer quotes , bids , offers or a combination of these data sources . short-term accounts receivable and accounts payable are reflected in the accompanying consolidated financial statements at cost , which approximates fair value due to the short-term nature of these instruments . 80 celldex therapeutics , inc. notes to consolidated financial statements ( continued ) ( 5 ) marketable securities a summary of marketable securities is shown below : replace_table_token_27_th the marketable securities held by the company were high investment grade and there were no marketable securities that the company considered to be other-than-temporarily impaired as of december 31 , 2014 . 81 celldex therapeutics , inc. notes to consolidated financial statements ( continued ) ( 6 ) property and equipment , net property and equipment include the following : replace_table_token_28_th depreciation and amortization expense related to property and equipment was $ 2.4 million , $ 1.9 million and $ 2.0 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . ( 7 ) intangible assets and goodwill intangible assets , net of accumulated amortization , and goodwill are as follows : replace_table_token_29_th the ipr & d intangible asset was recorded in connection with the acquisition of curagen and relates to the development of glembatumumab vedotin . at the date of acquisition and at december 31 , 2014 , glembatumumab vedotin had not yet reached technological feasibility nor did it have any alternative future use . glembatumumab vedotin is in a randomized , phase 2b study for the treatment of triple negative breast cancer and a phase 2 study for the treatment of metastatic melanoma . amortization expense for intangible assets was $ 1.0 million , $ 1.0 million and $ 1.1 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . the estimated future amortization expense of intangible assets for the years ending december 31 , 2015 , 2016 , 2017 , 2018 and 2019 is $ 1.0 million , $ 1.0 million , $ 0.9 million , $ 0.9 million and $ 0.9 million , respectively . 82 celldex therapeutics , inc. notes to consolidated financial statements ( continued ) ( 8 ) accrued expenses accrued expenses include the following : replace_table_token_30_th ( 9 ) other long-term liabilities other long-term liabilities include the following : replace_table_token_31_th in december 2014 , january 2014 , january 2013 , january 2012 and january 2011 , the company received approval from the new jersey economic development authority and agreed to sell new jersey tax benefits of $ 1.9 million , $ 1.1 million , $ 0.8 million , $ 0.8 million and $ 0.6 million to an independent third party for $ 1.8 million , $ 1.0 million , $ 0.8 million , $ 0.7 million and story_separator_special_tag in may 2014 , we entered into a clinical trial collaboration with bristol-myers squibb company , or bms , to evaluate the safety , tolerability and preliminary efficacy of varlilumab and opdivo® , bms 's pd-1 immune checkpoint inhibitor , in a phase 1/2 study . under the terms of this clinical trial 54 collaboration , bms made a one-time payment to us of $ 5.0 million and the companies amended the terms of our existing license agreement with medarex ( a subsidiary of bms ) related to our cd27 program whereby certain future milestone payments were waived and future royalty rates were reduced that may have been due from us to medarex . in return , bms was granted a time-limited right of first negotiation if we wish to out-license varlilumab . the companies also agreed to work exclusively with each other to explore anti-pd-1 antagonist antibody and anti-cd27 agonist antibody combination regimens . the clinical trial collaboration provides that the companies will share development costs and that we will be responsible for conducting the phase 1/2 study . the phase 1/2 study was initiated in january of 2015 and is being conducted in adult patients with advanced non-small cell lung cancer , metastatic melanoma , colorectal cancer , ovarian cancer , and head and neck squamous cell carcinoma . the phase 1 dose-escalation portion of the study will assess the safety and tolerability of varlilumab at varying doses when administered with opdivo . following dose escalation , a phase 2 portion of the study will include five disease specific cohorts . the primary objective of the phase 2 study is overall response rate . secondary objectives include pharmacokinetics assessments , determining the immunogenicity of varlilumab when given in combination with opdivo and further assessing the anti-tumor activity of combination treatment . in may 2014 , we also entered into a clinical trial collaboration with oncothyreon inc. to evaluate the safety , tolerability and preliminary efficacy of varlilumab and ont-10 , oncothyreon 's therapeutic vaccine targeting the tumor-associated antigen muc1 , in a phase 1b study . under the terms of the clinical trial collaboration , the phase 1b trial will be conducted and funded by oncothyreon . both companies will jointly own the data from the trial and will make any plans for potential future development of the combination therapy together . the phase 1b study was initiated in november 2014 and is being conducted in up to 42 patients with advanced breast or ovarian cancer . the primary objective of the trial is to determine the safety and tolerability of the combined therapy . additional objectives include evaluations of the impact of combination treatment on muc1-specific humoral and cellular immune responses , t-cell activation markers and levels of regulatory t-cells , and anti-tumor effects . multiple efforts are underway to finalize designs and plans for additional phase 2 combination studies of varlilumab , including but not limited to : a phase 1/2 study of varlilumab and ipilumumab in patients with metastatic melanoma ( plus cdx-1401 in ny-eso positive patients ) ; a phase 1/2 of varlilumab plus sunitinib in renal cell carcinoma ; and a phase 1/2 study of varlilumab plus a mek pathway agent ( followed sequentially by a checkpoint inhibitor ) for patients with b-raf mutated metastatic melanoma . in addition to our sponsored studies and clinical trial collaborations , we anticipate that varlilumab 's potential activity will also be explored in investigator sponsored studies at various academic institutions . cdx-1401 cdx-1401 , developed from our apc targeting technology , is a fusion protein consisting of a fully human monoclonal antibody with specificity for the dendritic cell receptor , dec-205 , linked to the ny-eso-1 tumor antigen . in humans , ny-eso-1 has been detected in 20 % - 30 % of all melanoma , lung , esophageal , liver , gastric , prostate , ovarian and bladder cancers , thus representing a broad opportunity . this product is intended to selectively deliver the ny-eso-1 antigen to dendritic cells for generating robust immune responses against cancer cells expressing ny- eso-1 . we are developing cdx-1401 for the treatment of malignant melanoma and a variety of solid tumors which express the proprietary cancer antigen ny-eso-1 , which we licensed from the ludwig institute for cancer research in 2006. preclinical studies have shown that cdx-1401 is effective for activation of human t cell responses against ny-eso-1 . we have completed a phase 1 study of cdx-1401 which assessed the safety , immunogenicity and clinical activity of escalating doses of cdx-1401 with tlr agonists ( resiquimod and or poly iclc ) in 55 45 patients with advanced malignancies refractory to all available therapies . 60 % of patients had confirmed ny-eso expression in archived tumor sample . thirteen patients maintained stable disease for up to 13.4 months with a median of 6.7 months . treatment was well-tolerated and there were no dose limiting toxicities . humoral responses were elicited in both ny-eso-1 positive and negative patients . ny-eso-1-specific t cell responses were absent or low at baseline , but increased post-vaccination in 53 % of evaluable patients , including both cd4 and or cd8 t cell responses . robust immune responses were observed with cdx-1401 with resiquimod and poly iclc alone and in combination . long-term patient follow up suggested that treatment with cdx-1401 may predispose patients to better outcomes on subsequent therapy with checkpoint inhibitors . of the 45 patients in the phase 1 study , eight went on to receive subsequent therapy of either ipilimumab or an investigational checkpoint inhibitor and six of these patients had objective tumor regression . six patients with melanoma received ipilimumab within three months of treatment with cdx-1401 and four ( 67 % ) had objective tumor responses , including one complete response , which compares favorably to the overall response rate of 11 % previously reported in metastatic melanoma patients treated with single-agent ipilimumab . in addition , two patients

we have incurred and will continue to incur significant costs in the area of research and development , including preclinical and clinical trials and clinical drug product manufacturing as our drug candidates are developed . we plan to spend significant amounts to progress our current drug candidates through the clinical trial and commercialization processes as well as to develop additional 64 drug candidates . as our drug candidates progress through the clinical trial process , we may be obligated to make significant milestone payments . investing activities net cash used in investing activities was $ 41.0 million for the year ended december 31 , 2014 compared to $ 77.4 million for the year ended december 31 , 2013. the decrease in net cash used in investing activities was primarily due to net purchases of marketable securities for the year ended december 31 , 2014 of $ 39.1 million as compared to $ 73.2 million for the year ended december 31 , 2013. we expect that cash provided by investing activities will increase over the next twelve months as we fund our operations through the net proceeds from the sale and maturity of marketable securities , cash provided by financing activities and or new partnerships , although there may be significant fluctuations on a quarterly basis . financing activities net cash provided by financing activities was $ 1.2 million for the year ended december 31 , 2014 compared to $ 289.6 million for the year ended december 31 , 2013. net proceeds from stock issuances , including stock issued pursuant to employee benefit plans , were $ 1.2 million during the year ended december 31 , 2014 compared to $ 301.1 million for the year ended december 31 , 2013. we paid $ 11.0 million in principal payments on our term loan during the year ended december 31 , 2013. equity offerings in december 2013 , we filed an automatic shelf registration statement with the securities and exchange commission to register for sale any combination of the types of securities described in the shelf registration statement . during the years ended december 31 , 2013 and 2012 , we issued 21,613,483 and 12,075,000 shares of our common stock in underwritten public offerings resulting in net proceeds to us of $ 278.6 million and $ 43.5 million , after deducting underwriting fees and offering expenses , respectively . during the years ended december 31 , 2013 and 2012 , we issued 2,433,608 and 8,003,290 shares of our common stock under our controlled equity offering sales agreement with cantor fitzgerald & co. , as amended , resulting in net proceeds

any impairment is measured by the amount that the carrying value of such assets exceeds their fair value , primarily based on estimated discounted cash flows . considerable management judgment is necessary to estimate the fair value of assets . assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value , less cost to sell . leases 59 in certain circumstances , we enter into leases with free rent periods , tenant improvement allowances , and rent escalations over the term of the lease . in such cases , we calculate the total payments over the term of the lease and record them ratably as rent expense over that term . intangible assets and goodwill we account for our business combinations using the purchase method of accounting . we allocate the total cost of an acquisition to the underlying net assets based on their respective estimated fair values . as part of this allocation process , we must identify and attribute values and estimated lives to the intangible assets acquired . finite-lived intangible assets identifiable intangible assets with finite lives are generally amortized on a straight-line basis over their respective lives , as follows : replace_table_token_17_th we review the carrying amount of finite-lived intangible assets at least annually to determine whether current events or circumstances indicate a triggering event which could require an adjustment to the carrying amount . a finite-lived intangible asset is considered to be impaired if its carrying value exceeds the estimated future undiscounted cash flows to be derived from it . we exercise judgment in selecting the assumptions used in the estimated future undiscounted cash flows analysis . any impairment is measured by the amount that the carrying value of such assets exceeds their fair value . we did not identify any impairment in the fiscal years ended november 30 , 2018 , 2017 , and 2016 . goodwill we review the carrying amount of goodwill at least annually to determine whether current events or circumstances indicate a triggering event which could require an adjustment to the carrying amount . we test goodwill for impairment on a reporting unit level . a reporting unit is a group of businesses ( i ) for which discrete financial information is available and ( ii ) that have similar economic characteristics . we determined that we have six reporting units for 2018. we use both qualitative and quantitative analysis to determine whether we believe it is more likely than not that goodwill has been impaired . in 2018 and 2017 , we used a qualitative analysis in determining that no impairment indicators were present . in 2016 , we tested goodwill for impairment quantitatively by determining the fair value of each reporting unit and comparing it to the reporting unit 's carrying value . we determined the fair value of our reporting units based on projected future discounted cash flows , which , in turn , were based on our views of uncertain variables such as growth rates , anticipated future economic conditions , and the appropriate discount rates relative to risk and estimates of residual values . we did not identify any impairment in the fiscal years ended november 30 , 2018 , 2017 , and 2016 . income taxes deferred income taxes are provided using tax rates enacted for periods of expected reversal on all temporary differences . temporary differences relate to differences between the book and tax basis of assets and liabilities , principally intangible assets , property and equipment , deferred revenue , pension and other postretirement benefits , accruals , and stock-based compensation . valuation allowances are established to reduce deferred tax assets to the amount that will more likely than not be realized . to the extent that a determination is made to establish or adjust a valuation allowance , the expense or benefit is recorded in the period in which the determination is made . judgment is required in determining the worldwide provision for income taxes . additionally , the income tax provision is based on calculations and assumptions that are subject to examination by many different tax authorities and to changes in tax law and rates in many jurisdictions . we record tax benefits when it is more likely than not that the tax benefits will be sustained upon examination by tax authorities . we adjust our income tax provision in the period in which it becomes probable that actual results will differ from our estimates . pension accounting during the fourth quarter of each fiscal year ( or upon any other remeasurement date ) , we immediately recognize net actuarial gains or losses in excess of a corridor in our operating results . the corridor amount is equivalent to 10 percent of the 60 greater of the market-related value of plan assets or the plan 's benefit obligation at the beginning of the year . we use the actual fair value of plan assets at the measurement date as the measure of the market-related value of plan assets . treasury shares treasury share purchases , whether through share withholdings for taxes or repurchase programs and transactions , are recorded at cost . issuances from treasury shares are recorded using the weighted-average cost method . earnings per share basic earnings per share ( “ eps ” ) is computed by dividing net income by the weighted-average number of common shares outstanding during the period . diluted eps is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period . diluted eps reflects the potential dilution that could occur if securities were exercised or converted into common shares . advertising costs production costs are expensed as of the first date that the advertisements take place . story_separator_special_tag we exercise significant judgment in determining our provision for income taxes , current tax assets and liabilities , deferred tax assets and liabilities , future taxable income ( for purposes of assessing our ability to realize future benefit from our deferred tax assets ) , our permanent reinvestment assertion regarding foreign earnings , and recorded reserves related to uncertain tax positions . a valuation allowance is established to reduce our deferred tax assets to the amount that is considered more likely than not to be realized through the generation of future taxable income and other tax planning opportunities . to the extent that a determination is made to establish or adjust a valuation allowance , the expense or benefit is recorded in the period in which the determination is made . if actual results differ from estimates we have used , or if we adjust these estimates in future periods , our operating results and financial position could be materially affected . the tcja significantly changed existing u.s. tax law and includes numerous provisions that affect our business . we have recognized a tax charge of $ 31 million due to transition tax liability and a tax benefit of $ 172 million due to the impact of the reduction in u.s. tax rates in the period when the tcja was enacted as a component of our provision for income taxes from continuing operations . we have completed the accounting for all the impacts of the tcja . see “ item 8 - financial statements and supplementary data - notes to consolidated financial statements - note 10 ” in part ii of this form 10-k for further information about these changes . these computations are based on the regulations and guidance already provided by federal and state tax authorities . we will continue to assess the impact of the further guidance from federal and state tax authorities on our business and consolidated financial statements . any future adjustments will be recognized as discrete income tax expense or benefit in the period the guidance is issued . pension accounting . during the fourth quarter of each fiscal year ( or upon any remeasurement date ) , we immediately recognize net actuarial gains or losses in excess of a corridor in our operating results . the corridor amount is equivalent to 10 percent of the greater of the market-related value of plan assets or the plan 's benefit obligation at the beginning of the year . we use the actual fair value of plan assets at the measurement date as the measure of the market-related value of plan assets . our pension expense and associated pension liability requires the use of judgment in determining assumptions about the estimated long-term rate of return on plan assets and the discount rate , as well as various demographic assumptions . our pension investment strategy is designed to align the majority of our pension assets with the underlying pension liability , which should minimize volatility caused by changes in asset returns and discount rates . our pension expense estimates are updated for actual experience through the remeasurement process in the fourth quarter , or sooner if earlier remeasurements are required . for 2018 , we used a 4.3 percent expected long-term rate of return on plan assets and a 3.8 percent discount rate for the u.s. retirement income plan ( rip ) . the actual return on u.s. rip plan assets during 2018 was negative 4.5 percent . 39 discount rates and expected rates of return on plan assets are selected at the end of a given fiscal year and will impact expense in the subsequent year . a 50-basis-point change in certain assumptions made at the beginning of 2018 would have resulted in the following effects on 2018 pension expense and the projected benefit obligation ( “ pbo ” ) as of november 30 , 2018 for the u.s. and u.k. rip plans ( in millions ) : replace_table_token_1_th we have taken initial steps to terminate the u.s. rip and are awaiting regulatory approval before proceeding . for the year ending november 30 , 2018 , we have used the same accounting estimate methodology as in prior years . stock-based compensation . our stock plans provide for the grant of various equity awards , including performance-based awards . for time-based restricted stock unit grants , we calculate stock-based compensation cost by multiplying the grant date fair market value by the number of shares granted , reduced for estimated forfeitures . for time-based stock option grants , we calculate stock-based compensation cost by multiplying the grant date fair market value by the number of option shares granted , reduced for estimated forfeitures . the estimated forfeiture rate is based on historical experience , and we periodically review our forfeiture assumptions based on actual experience . for performance-based restricted stock unit grants , including those with a market-based adjustment factor , we calculate stock-based compensation cost by multiplying the grant date fair market value by the number of shares granted , reduced for estimated forfeitures . each quarter , we evaluate the probability of the number of shares that are expected to vest and adjust our stock-based compensation expense accordingly . results of operations total revenue total revenue for 2018 increased 11 percent compared to the same period of 2017 . total revenue for 2017 increased 32 percent compared to the same period in 2016 . the table below displays the percentage point change in revenue due to organic , acquisitive , and foreign currency factors when comparing 2018 to 2017 and 2017 to 2016 . markit 's revenue of $ 1.233 billion for the year ended november 30 , 2017 , less the $ 68 million increase from the year ended november 30 , 2016 , has been included in the calculation of acquisitive growth in the table immediately below , and the components of markit 's $ 68 million revenue growth from 2016 to 2017 have

the amount of cash to be paid is based on put/call provisions that tie the valuation to underlying adjusted ebitda performance of am . based on our current estimates , we believe that the purchase price for the remaining equity interests will be in a range of $ 150 million to $ 175 million . in addition to the term loans and notes , as of november 30 , 2018 , we also had $ 1.1 billion of outstanding borrowings under our $ 2.0 billion 2018 revolving facility at a current annual interest rate of 3.69 percent . the facility has a five-year term ending in june 2023. we also had approximately $ 7 million in capital lease obligations as of november 30 , 2018. recent accounting pronouncements please refer to “ item 8 - financial statements and supplementary data - notes to consolidated financial statements - note 2 ” in part ii of this form 10-k for a discussion of recent accounting pronouncements and their anticipated effect on our

the company recognizes software license revenue ratably over the duration of the annual license term as vsoe of pcs , the only remaining undelivered element , can not be established in accordance with asc 985-605. the pcs associated with these arrangements is coterminous with the duration of the license term . in certain instances , the customers are billed for access on a monthly basis for the term-based software licenses and the company recognizes revenue accordingly . in addition , specialized markets are comprised of transaction-based fees recognized as information is delivered to customers , provided that all other revenue recognition criteria have been met . the company services long-term contract arrangements with certain customers . for these arrangements , revenue is recognized in accordance with asc 605-35 , revenue recognition — construction-type and production-type contracts ( “ asc 605-35 ” ) , using the percentage-of-completion method , which requires the use of estimates . in such instances , management is required to estimate the input measures , based on hours incurred to date compared to 66 verisk analytics , inc. notes to consolidated financial statements — ( continued ) total estimated hours of the project , with consideration also given to output measures , such as contract milestones , when applicable . adjustments to estimates are made in the period in which the facts requiring such revisions become known . accordingly , recognized revenues and profits are subject to revisions as the contract progresses to completion . the company considers the contract substantially complete when there is compliance with all performance specifications and there are no remaining costs or potential risk . there are also services within energy and specialized markets , which are comprised of transaction-based fees recognized as information is delivered to customers , provided that all other revenue recognition criteria have been met . ( c ) deferred revenues the company invoices its customers in annual , quarterly , monthly , or milestone installments . amounts billed and collected in advance of earnings are recorded as “ deferred revenues ” in the accompanying consolidated balance sheets and are recognized as the services are performed and the applicable revenue recognition criteria are met . ( d ) fixed assets and finite-lived intangible assets property and equipment , internal-use software and finite-lived intangibles are stated at cost less accumulated depreciation and amortization , which are computed on a straight-line basis over their estimated useful lives . leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term . the company 's internal software development costs primarily relate to internal-use software . such costs are capitalized in the application development stage in accordance with asc 350-40 , internal-use software . the company also capitalizes software development costs upon the establishment of technological feasibility for a product in accordance with asc 985-20 , software to be sold , leased , or marketed ( “ asc 985-20 ” ) . software development costs are amortized on a straight-line basis over a three -year period , which management believes represents the useful life of these capitalized costs . in accordance with asc 360 , property , plant & equipment , whenever events or changes in circumstances indicate that the carrying amount of long-lived assets and finite-lived intangible assets may not be recoverable , the company reviews its long-lived assets and finite-lived intangible assets for impairment by first comparing the carrying value of the assets to the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the assets . if the carrying value exceeds the sum of the assets ' undiscounted cash flows , the company estimates and recognizes an impairment loss by taking the difference between the carrying value and fair value of the assets . ( e ) capital and operating leases the company leases various property , plant and equipment . leased property is accounted for under asc 840 , leases ( “ asc 840 ” ) . accordingly , leased property that meets certain criteria is capitalized and the present value of the related lease payments is recorded as a liability . amortization of assets accounted for as capital leases is computed utilizing the straight-line method over the shorter of the remaining lease term or the estimated useful life ( principally three to four years for computer equipment and automobiles ) . all other leases are accounted for as operating leases . rent expense for operating leases , which may have rent escalation provisions or rent holidays , is recorded on a straight-line basis over the non-cancelable lease period in accordance with asc 840. the initial lease term generally includes the build-out period , where no rent payments are typically due under the terms of the lease . the difference between rent expensed and rent paid is recorded as deferred rent . construction allowances received from landlords are recorded as a deferred rent credit and amortized to rent expense over the term of the lease . ( f ) fair value of financial and non-financial instruments the company follows the provisions of asc 820-10 , fair value measurements ( “ asc 820-10 ” ) , which defines fair value , establishes a framework for measuring fair value under u.s. gaap and expands fair value measurement disclosures . the company follows the provisions of asc 820-10 for its financial assets and liabilities recognized or disclosed at fair value on a recurring basis . the company follows the provisions of asc 820-10 for its non-financial assets and liabilities recognized or disclosed at fair value . 67 verisk analytics , inc. notes to consolidated financial statements — ( continued ) ( g ) accounts receivable and allowance for doubtful accounts accounts receivable is generally recorded at the invoiced amount . story_separator_special_tag revenues in our risk assessment segment , excluding our recent acquisitions of rii , geoinformation , marketstance , and healix increased by $ 34.0 million or 4.7 % . both types of categories within risk assessment , industry-standard insurance programs and property-specific rating and underwriting information , contributed to its revenue growth . refer to the results of continuing operations by segment within this section for further information regarding our revenues . cost of revenues cost of revenues was $ 783.8 million for the year ended december 31 , 2017 compared to $ 714.4 million for the year ended december 31 , 2016 , an increase of $ 69.4 million or 9.7 % . our recent acquisitions accounted for an increase of $ 45.3 million in cost of revenues , primarily related to salaries and employee benefits . excluding the impact of our recent acquisitions , our cost of revenues increased $ 24.1 million or 3.4 % . the increase was primarily due to increases in salaries and employee benefits cost of $ 30.7 million , data costs and data processing fees of $ 6.1 million , information technology expense of $ 1.7 million and other operating costs of $ 0.1 million . these increases were offset by a decrease in a nonrecurring esop charge of $ 14.5 million which occurred in 2016. the esop charge was related to the stretch-out of our esop loan , which was paid off in 2015 . 35 selling , general and administrative expenses selling , general and administrative expenses , or sga , were $ 322.8 million for the year ended december 31 , 2017 compared to $ 301.6 million for the year ended december 31 , 2016 , an increase of $ 21.2 million or 7.0 % . our recent acquisitions accounted for an increase of $ 13.7 million in sga , primarily related to salaries and employee benefits and transaction costs . excluding the impact of our recent acquisitions , sga increased $ 7.5 million or 2.5 % . the increase was primarily due to increases in salaries and employee benefits of $ 8.8 million , professional consulting fees of $ 4.0 million and other general and administrative of $ 0.2 million . these increases were offset by a decrease in information technology expense of $ 1.2 million and a 2016 esop charge of $ 4.3 million . depreciation and amortization of fixed assets depreciation and amortization of fixed assets was $ 135.6 million for the year ended december 31 , 2017 compared to $ 119.1 million for the year ended december 31 , 2016 , an increase of $ 16.5 million or 13.8 % . the increase in depreciation and amortization of fixed assets includes depreciation and amortization related to our recent acquisitions of $ 3.8 million . the remaining increase primarily relates to depreciation and amortization of hardware and software development costs placed into production to support data capacity expansion and revenue growth . amortization of intangible assets amortization of intangible assets was $ 101.8 million for the year ended december 31 , 2017 compared to $ 92.5 million for the year ended december 31 , 2016 , an increase of $ 9.3 million or 10.1 % . the increase in amortization of intangible assets was primarily related to our recent acquisitions of $ 13.5 million offset by currency fluctuations impacting amortization denominated in currencies other than u.s. dollars . investment income and others , net investment income and others , net was a gain of $ 9.2 million for the year ended december 31 , 2017 compared to $ 6.1 million for the year ended december 31 , 2016 , an increase of $ 3.1 million . the increase was primarily related to an increase in interest income of $ 5.1 million generated from the subordinated promissory note associated with the divestiture of our healthcare business . this increase was offset by a gain on sale of equity investments of $ 1.5 million in 2016. interest expense interest expense was $ 119.4 million for the year ended december 31 , 2017 compared to $ 120.0 million for the year ended december 31 , 2016 , a decrease of $ 0.6 million or 0.5 % . as a result of the second amendment to the credit facility in may 2016 , which reduced the borrowing capacity from $ 1,750.0 million to $ 1,500.0 million . provision for income taxes the provision for income taxes was $ 135.9 million for the year ended december 31 , 2017 compared to $ 202.2 million for the year ended december 31 , 2016 , a decrease of $ 66.3 million or 32.8 % . the effective tax rate was 19.7 % for the year ended december 31 , 2017 compared to 30.9 % for the year ended december 31 , 2016 . the decrease in the effective tax rate in 2017 compared to 2016 was primarily due to lowered federal income tax rates as a result of u.s. tax reform and the adoption of asu no . 2016-09 , partially offset by legislation enacted in the u.k. net income the net income margin for our consolidated results , including discontinued operations , was 25.9 % for the year ended december 31 , 2017 compared to 28.1 % for the year ended december 31 , 2016 . our net income margin for the year ended december 31 , 2017 was positively impacted by the 2017 tax reform legislation of 4.2 % . our net income margin for the year ended december 31 , 2016 was positively impacted by the discontinued operations , including the gain on sale of our healthcare business of 5.5 % and lowered by an esop charge of 0.6 % . ebitda the ebitda margin for our consolidated results , including discontinued operations , was 48.8 % for the year ended december 31 , 2017 compared to 59.4 % for the year ended december 31 , 2016 . our ebitda margin

net cash used in financing activities of $ 1,064.2 million for the year ended december 31 , 2016 was primarily related to a $ 770.0 million repayments of borrowings under our credit facilities and share repurchases of $ 326.8 million , partially offset by proceeds from stock option exercises and other option-related items of $ 38.0 million . net cash provided by financing activities of $ 2,440.9 million for the year ended december 31 , 2015 was primarily related to the net proceeds from the debt and equity offerings of $ 1,244.0 million and $ 720.8 million , respectively , and other borrowings from our old and new credit facilities of 830.0 million and proceeds from stock option exercises and other option-related items of $ 36.4 million , partially offset by repayments of short-term and long-term debt of $ 340.0 million , and repurchases of common stock of $ 20.4 million . 45 contractual obligations the following table summarizes our contractual obligations at december 31 , 2017 and the future periods in which such obligations are expected to be settled in cash : replace_table_token_12_th < div

the staff of the u.s. securities and exchange commission ( “sec” ) has recognized the complexity of reflecting the impacts of the act , and on december 22 , 2017 issued guidance in staff accounting bulletin 118 ( “sab 118” ) , which clarifies accounting for income taxes under asc 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting ( the measurement period ) . sab 118 describes three scenarios ( or “buckets” ) associated with a company 's status of accounting for income tax reform : ( 1 ) a company is complete with its accounting for certain effects of tax reform , ( 2 ) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount , or ( 3 ) a company is not able to determine a reasonable estimate and therefore continues to apply asc 740 , based on the provisions of the tax laws that were in effect immediately prior to the act being enacted . the various provisions under the act deemed most relevant to the company have been considered in preparation of its financial statements as of december 31 , 2017. the company had made a reasonable estimate for certain effects of tax reform and had recorded provisional amounts as part of its income tax provision . to the extent that clarifications or interpretations materialized in the future that would impact upon the effects of the act incorporated into the december 31 , 2017 financial statements , those effects would have been reflected in the future as or if they materialize . as of december 31 , 2018 , the company has completed its accounting for all of the tax effects of the act . based on the additional analysis performed , no adjustments to the provisional amounts were made in the reporting period which had an impact to the tax provision or consolidated financial statements . research and development research and development costs are charged to expense as incurred . these costs include , but are not limited to , employee-related expenses , including salaries , benefits and travel of the company 's research and development personnel ; expenses incurred under agreements with contract research organizations and investigative sites that conduct clinical and preclinical studies and manufacture the drug product for the clinical studies and preclinical activities ; facilities ; supplies ; rent , insurance , certain legal fees , share-based compensation , depreciation , other costs associated with clinical and preclinical activities and regulatory operations and acquisition of in-process research and development write-offs . refundable research and development credits / tax credits received are recorded as an offset to these costs . costs for certain development activities , such as company funded outside research programs , are recognized based on an evaluation of the progress to completion of specific tasks with respect to their actual 147 meiragtx holdings plc and subsidiaries notes to consolidated financial statements costs incurred . payments for these activities are based on the terms of the individual arrangements , which may differ from the pattern of costs incurred , and are reflected in the consolidated financial statements as prepaid or accrued research and development expense , as the case may be . share-based compensation expense options the company grants share options to employees , non-employee members of the company 's board of directors and non-employee consultants as compensation for services performed . employee and non-employee members of the board of directors ' awards of share-based compensation are accounted for in accordance with asc 718 , compensation - stock compensation , or asc 718 . asc 718 requires all share-based payments to employees and non-employee directors , including grants of share options , to be recognized in the statement of operations and comprehensive loss based on their grant date fair values . the grant date fair value of share options is estimated using the black-scholes option valuation model . using this model , fair value is calculated based on assumptions with respect to ( i ) the fair value of the company 's ordinary shares on the grant date ; ( ii ) expected volatility of the company 's ordinary share price , ( iii ) the periods of time over which employees and members of the company 's board of directors are expected to hold their options prior to exercise ( expected term ) , ( iv ) expected dividend yield on the company 's ordinary shares , and ( v ) risk-free interest rates . as there had been no public market for the company 's ordinary shares until the company 's ipo on june 7 , 2018 , the estimated fair value of the ordinary shares until that time had been determined by the company 's board of directors as of the date of each option grant , with input from management , considering the most recently available third-party valuations of ordinary shares and the board of directors ' 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 fair value of ordinary shares after the company 's ipo was determined based upon the closing share price on the date of grant . the third party estimated the fair value of the equity using a special case of the market approach known as the backsolve method . the backsolve method was used to solve for the implied total equity value based on the company 's recent series c financing round . consideration was given to the rights and preferences of each of the company 's classes of equity and the expected time to a liquidity event . story_separator_special_tag using this model , fair value is calculated based on assumptions with respect to ( i ) the fair value our ordinary shares on the grant date ; ( ii ) expected volatility of our ordinary share price , ( iii ) the periods of time over which employees and members of our board of directors are expected to hold their options prior to exercise ( expected term ) , ( iv ) expected dividend yield on our ordinary shares , and ( v ) risk-free interest rates . our ordinary shares were not traded on a public exchange prior to our ipo in june 2018. therefore , we believe that our future volatility will differ materially during the expected term from the volatility that would be calculated from our historical share prices to date . consequently , expected volatility is based on an analysis of guideline companies in accordance with asc 718. the expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future . risk-free interest rates are based on quoted u.s. treasury rates for securities with maturities approximating the option 's expected term . as of january 1 , 2016 , we early adopted asu 2016-09 , improvements to employee share-based payment accounting , and accounts for forfeitures as they occur from that date . additionally , excess tax benefits and deficiencies will be recognized as income tax expense or benefit in the income statement . there was no cumulative effect adjustment as we did not issue any options prior to january 1 , 2016. we had accounted for options granted to non-employee consultants under asc 505-50 , equity-based payments to non-employees . as such , we estimate the fair value of each such option using the black-scholes model , with the expected term of share options granted to non-employees initially equal to the options ' maximum contractual life of ten years , at issuance . on each subsequent reporting date until performance is complete , we revalue all outstanding options granted to non-employee consultants during the vesting period of each tranche . under asc 505-50 , upon re-measurement of each award , income or expense is recognized during its vesting term . compensation cost relating to awards with service-based graded vesting schedules is recognized as general and administrative and research and development expenses in the consolidated statement of operations and comprehensive loss using the straight-line method . on july 1 , 2018 , we early adopted asu 2018-07 , improvements to nonemployee share-based payment accounting , which simplifies the accounting for share-based payments granted to nonemployees for goods and services . the adoption did not have a material effect on the consolidated financial statements . 129 restricted shares in connection with certain service agreements and research agreements , we have granted restricted ordinary shares as compensation . the shares are recognized in the statement of operations and comprehensive loss based on their grant date fair values . compensation cost relating to share grants with service-based graded vesting schedules is recognized based on the vesting schedule . results of operations the following table summarizes our results of operations for the years ended december 31 , 2018 and 2017 , respectively replace_table_token_2_th general and administrative expenses general and administrative expenses were $ 44.5 million for the year ended december 31 , 2018 , compared to $ 9.3 million for the year ended december 31 , 2017. the increase of $ 35.2 million was primarily due to increases of $ 19.7 million in payroll , $ 14.0 million in share-based compensation , $ 1.1 million in legal , $ 0.7 million in insurance $ 0.5 million in accounting , $ 0.4 million in travel , and $ 0.3 million in investor relations , which was partially offset by a decrease of $ 1.5 million in rent . research and development expenses research and development expenses for the year ended december 31 , 2018 were $ 33.6 million , compared to $ 22.4 million for the year ended december 31 , 2017. the increase of $ 11.2 million was primarily due to an increase in costs of $ 3.0 million for clinical trial costs related to our ophthalmology programs , $ 3.0 million for acquired neurology research and development , $ 2.3 million related costs of payroll and consultants , $ 1.6 million of depreciation , $ 1.3 million related to the preparation for production of our manufacturing facility , $ 1.0 million in share-based compensation , and $ 0.7 million in rent , which was partially offset an increase of $ 1.7 million in the research and development credit in the united kingdom in 2018 . 130 foreign currency ( loss ) gain foreign currency loss was $ 3.8 million for the year ended december 31 , 2018 compared to a gain of $ 1.7 million for the year ended december 31 , 2017. the change of $ 5.5 million was primarily due to a strengthening of the u.s. dollar against the pound sterling in 2018. convertible note inducement expense we recorded a $ 0.5 million convertible note inducement expense for the year ended december 31 , 2017 primarily due to the issuance of a warrant to purchase 231,898 convertible preferred c shares in 2017 to a convertible noteholder as an inducement to convert the note into convertible preferred c shares . change in fair market value of warrant liability we recorded $ 1.5 million change in fair value of a warrant liability for the year ended december 31 , 2018 , compared to $ 0.5 million for the year ended december 31 , 2017. the increase of $ 1.0 million was primarily due to the revaluation of certain warrants , which were issued to certain investors in september and november 2017 , using the black-scholes valuation model at june 7 , 2018 , when the warrants were exercised and december 31 , 2017. income taxes the 2018

the loss included non-cash charges of $ 3.0 million , which consisted of $ 3.0 million of share-based compensation , change in fair value of warrant liability in the amount of $ 0.5 million , convertible note inducement expense of $ 0.5 million and depreciation of $ 0.7 million , which was partially offset by a foreign currency gain of $ 1.7 million . additionally , current liabilities , consisting of accounts payable , accrued expenses deferred rent , and due to affiliate , increased by $ 11.1 million . current assets , consisting of prepaid expenses and other current assets , decreased by $ 1.2 million . investing activities net cash used in investing activities for the years ended december 31 , 2018 and december 31 , 2017 of $ 11.3 million and $ 10.5 million , respectively , consisted of purchase of property plant and equipment , primarily for our manufacturing facility . financing activities net cash provided by financing activities was $ 130.0 million for the year ended december 31 , 2018 , represented proceeds of $ 65.6 million from the issuance of ordinary shares in connection with our initial public offering , $ 56.1 million from the issuance of convertible preferred c shares and $ 9.7 million from the exercise of warrants , which was partially offset by the repayment of a note payable in the amount of $ 1.4 million . net cash provided by financing activities was $ 19.3 million for the year ended december 31 , 2017 , represented proceeds of $ 16.8 million from the issuance of convertible preferred c shares and $ 2.5 million from the issuance of a note payable 132 funding requirements our operating expenses increased substantially in 2018 and 2017 and are expected to increase substantially in the future in connection with our ongoing activities , particularly as we advance our clinical activities including scale-up of manufacturing processes and additional clinical trials . in addition , we expect to continue to incur additional costs associated with operating as a public company . specifically , our expenses will increase as we : pursue the preclinical and clinical development of our product candidates ; < p align= '' left ''

loss contingencies loss contingencies , including claims and legal actions arising in the ordinary course of business , are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated . stockholders ' equity on july 20 , 2010 , the corporation sold 1,437,500 shares of its common stock in an underwritten public offering at a price of $ 24 per share . the net proceeds of the offering , after the underwriting discount and offering expenses paid by the corporation , were $ 32,362,000 . earnings per share . basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period . diluted earnings per share reflects the potential dilution that could occur if outstanding stock options and restricted stock units ( “ rsus ” ) were converted into shares of common stock that then shared in the earnings of the corporation . diluted earnings per share is computed by dividing net income by the weighted average number of common shares and dilutive stock options and rsus . there were 46,102 , 95,119 and 44,594 anti-dilutive stock options at december 31 , 2012 , 2011 and 2010 , respectively , and no anti-dilutive rsus . other than the stock options and rsus described in note j and the rights described in note i , the corporation has no securities that could be converted into common stock nor does the corporation have any contracts that could result in the issuance of common stock . shares tendered upon the exercise of stock options and withheld upon the vesting of rsus . the amount shown for 2012 on the line captioned “ repurchase of common stock ” in the consolidated statement of changes in stockholders ' equity is comprised of 8,450 shares with a value of $ 244,000 tendered upon the exercise of stock options and 4,700 shares with a value of $ 125,000 withheld upon the conversion of rsus . the amount shown for 2011 represents 1,897 shares with a value of $ 49,000 tendered upon the exercise of stock options and 5,125 shares with a value of $ 136,000 withheld upon the conversion of rsus . the amount shown for 2010 represents 3,581 shares with a value of $ 91,000 withheld upon the conversion of rsus . 38 stock-based compensation the corporation has a stock-based compensation plan as more fully described in note j. compensation cost is recognized for stock options and rsus issued to employees based on the grant date fair value of the award . the cost is recognized over the period during which an employee is required to provide service in exchange for the award , which is usually the vesting period . for stock options , compensation expense is recognized ratably over the five-year vesting period or the period from the grant date to the participant 's eligible retirement date , whichever is shorter . for rsus , compensation expense is recognized over the three-year performance period and adjusted periodically to reflect the estimated number of shares of the corporation 's common stock into which the rsus will ultimately be convertible . however , if the period between the grant date and the grantee 's eligible retirement date is less than three years , compensation expense is recognized ratably over this shorter period . in determining compensation expense for stock options and rsus outstanding and not yet vested , the corporation assumes , based on prior experience that no forfeitures will occur . comprehensive income comprehensive income includes net income and other comprehensive income . other comprehensive income includes revenues , expenses , gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income . other comprehensive income for the corporation consists of unrealized holding gains or losses on available-for-sale securities and changes in the funded status of the bank 's defined benefit pension plan , both net of related income taxes . accumulated other comprehensive income is recognized as a separate component of stockholders ' equity . the components of other comprehensive income ( loss ) and the related tax effects are as follows : replace_table_token_21_th the following sets forth the components of accumulated other comprehensive income , net of tax : replace_table_token_22_th operating segments while senior management monitors the revenue streams of the bank 's various products and services , the identifiable segments are not material and operations are managed and financial performance is evaluated on a company-wide basis . accordingly , all of the financial operations of the bank are aggregated in one reportable operating segment . investment management division assets held in a fiduciary capacity are not assets of the corporation and , accordingly , are not included in the accompanying consolidated financial statements . the investment management division records fees on the accrual basis . 39 reclassifications when appropriate , items in the prior year financial statements are reclassified to conform to the current period presentation . adoption of new accounting standards in may 2011 , the financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) 2011-04 “ fair value measurement : amendments to achieve common fair value measurement and disclosure requirements in u.s. gaap and ifrss . ” asu 2011-04 represents the converged guidance of the fasb and the international accounting standards board on fair value measurement . the boards have concluded that the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with u.s. gaap and ifrss . story_separator_special_tag while the average balance of the bank 's taxable securities portfolio grew moderately when comparing 2012 to 2011 , the size of the portfolio declined by $ 106.9 million , or 17.8 % , when comparing year-end 2012 to 2011. the decline occurred because of the deleveraging transaction and the deployment of funds , when possible , into loans rather than securities . the most significant sources of funding for the growth in the average balances of loans and securities were growth in the average balances of savings , now and money market deposits of $ 93.2 million , or 12.5 % , noninterest-bearing checking deposits of $ 48.3 million , or 11.5 % , and borrowings of $ 31.0 million , or 13.7 % . the bank 's ability to continue to grow deposits is attributable to , among other things , expansion of the bank 's branch distribution system , targeted solicitation of local commercial businesses and municipalities , new and expanded lending relationships , the bank 's positive reputation in its marketplace , volatility in the equity markets and the acquisition of some local competitors by larger financial institutions . net interest margin declined from 3.63 % in 2011 to 3.34 % in 2012 as loans repriced and cash flows were deployed in a very low interest rate environment . also contributing to the decline in the net interest margin was the aforementioned refinancing transaction involving the repayment of overnight borrowings with six and seven year term borrowings . management 's continued efforts to make loans a larger portion of total assets and reduce deposit and borrowing costs have helped to mitigate the negative impact of the low interest rate environment and virtually stabilize net interest margin throughout 2012. net interest spread , or the difference between the overall yield on interest-earning assets and the overall cost of interest-bearing liabilities , declined by 23 basis points for largely the same reasons as the decline in net interest margin . 19 net interest income – 2011 versus 2010 net interest income on a tax-equivalent basis was $ 64.9 million in 2011 , an increase of $ 4.2 million from $ 60.7 million in 2010. the increase resulted from growth in the average balances of loans and taxable and nontaxable securities , which in the aggregate grew $ 190.8 million , or 12.1 % . the growth in average balances was partially offset by market driven declines in yield on both the bank 's securities and loan portfolios . funding the interest-earning asset growth was a combination of increases in total deposits , capital and long-term debt . total deposit growth was the most significant contributor increasing on average $ 129.1 million , or 9.9 % , during 2011. net interest margin decreased by 18 basis points when comparing 2011 to 2010. this decrease occurred primarily because the negative impact of market driven declines in yield on the bank 's securities and loan portfolios and the bank 's liability extension strategy more than offset the positive impact of growth in noninterest-bearing funding sources and management 's lowering of savings , now and money market deposit rates throughout 2010 and 2011. net interest spread also declined by 18 basis points for largely the same reasons as the decline in net interest margin . noninterest income noninterest income includes service charges on deposit accounts , investment management division income , gains or losses on sales of securities , and all other items of income , other than interest , resulting from the business activities of the corporation . excluding gains on sales of securities , noninterest income increased $ 287,000 , or 4.6 % , when comparing 2012 to 2011. the increase was primarily attributable to an increase in investment management division income of $ 85,000 , an increase in mortgage assignment and other loan related fees of $ 195,000 , and a decrease in losses on loans held-for-sale of $ 103,000. the positive impact on earnings of these items was partially offset by a decrease in return check charges incurred by the bank 's customers of $ 157,000. gains on sales of securities increased $ 3.5 million when comparing 2012 to 2011 as a result of the deleveraging transaction . noninterest income decreased $ 1.5 million , or 19.0 % , when comparing 2011 to 2010. the decrease was principally due to a $ 1.6 million decrease in net gains on sales of available-for-sale securities and a $ 321,000 decrease in overdraft charges , as partially offset by a $ 275,000 reduction in losses on loans held for sale . overdraft charges declined because of , among other things : ( 1 ) regulatory changes that accelerated the timeframe for check clearing and limited overdrafts caused by debit card transactions ; and ( 2 ) reduced tolerance by management of commercial accounts with repeat overdraft activity . noninterest expense noninterest expense is comprised of salaries , employee benefits , occupancy and equipment expense and other operating expenses incurred in supporting the various business activities of the corporation . noninterest expense , before debt extinguishment costs , increased $ 731,000 , or 2.0 % , when comparing 2012 to 2011. the largest components of the increase are increases in salaries of $ 575,000 , depreciation of $ 148,000 , and certain loan related costs of $ 203,000 , as partially offset by a reduction in amounts expensed for the settlement of pending litigation of $ 448,000. salaries increased primarily because of normal annual salary adjustments and additions to both branch and back-office staff . depreciation expense increased due to new branch facilities , investments in technology , and the expansion and restoration of existing branch and back-office facilities . certain loan related costs increased due to an increased volume of lending . debt extinguishment costs resulting from the deleveraging transaction amounted to $ 3.8 million in 2012. noninterest expense increased $ 883,000 , or 2.5 % , to $ 36.7 million

since some of the commitments to extend credit and letters of credit are expected to expire without being drawn upon and , with respect to unused home equity lines , can be frozen , reduced or terminated by the bank based on the financial condition of the borrower , the total commitment amounts shown in the table do not necessarily represent future cash requirements . the amounts shown for long-term debt are based on the contractual maturities of such borrowings and include scheduled principal and interest payments . some repurchase agreements can be terminated by the purchaser prior to contractual maturity ( see note f to the corporation 's december 31 , 2012 consolidated financial statements for more detailed information regarding repurchase agreements ) . the corporation believes that its current sources of liquidity are more than sufficient to fulfill the obligations it has at december 31 , 2012 pursuant to off-balance sheet arrangements and contractual obligations . replace_table_token_13_th commitments to extend credit and letters of credit arise in the normal course of the bank 's business of meeting the financing needs of its customers and involve , to varying degrees , elements of credit risk in excess of the amount recognized in the consolidated balance sheets . the bank 's exposure to credit loss in the event of nonperformance by the other party to financial instruments for commitments to extend credit , standby letters of credit and commercial letters of credit is represented by the contractual notional amount of these instruments . the bank uses the same credit policies in making commitments to extend credit , and generally uses the same credit policies for letters of credit , as it does for on-balance-sheet instruments such as loans . the purchase obligations shown in the preceding table are pursuant to contracts that the bank has with providers of data processing services . required pension plan contributions for years beyond 2013 are not presently known and are therefore not included in the table . the bank has no minimum required pension contribution and , due to the fact that the plan is funded beyond most critical statutory thresholds , the bank will have no opportunity to make a tax-deductible contribution for the plan year ending september 30 , 2013. impact of inflation and changing prices

2 , 2020 terri a. herubin h. richard haverstick , jr. trustee march 2 , 2020 h. richard haverstick , jr. 58 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 . brandywine operating partnership , l.p. by : brandywine realty trust , its general partner by : gerard h. sweeney gerard h. sweeney president and chief executive officer date : march 2 , 2020 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 . 59 signature title date michael j. joyce chairman of the board and trustee march 2 , 2020 michael j. joyce gerard h. sweeney president , chief executive officer and trustee ( principal executive officer ) march 2 , 2020 gerard h. sweeney thomas e. wirth executive vice president and chief financial officer ( principal financial officer ) march 2 , 2020 thomas e. wirth daniel palazzo vice president and chief accounting officer ( principal accounting officer ) march 2 , 2020 daniel palazzo wyche fowler trustee march 2 , 2020 wyche fowler james diggs trustee march 2 , 2020 james diggs anthony a. nichols , sr. trustee march 2 , 2020 anthony a. nichols , sr. charles p. pizzi trustee march 2 , 2020 charles p. pizzi terri a. herubin trustee march 2 , 2020 terri a. herubin h. richard haverstick , jr. trustee march 2 , 2020 h. richard haverstick , jr. 60 report of independent registered public accounting firm to the board of trustees and shareholders of brandywine realty trust opinions on the financial statements and internal control over financial reporting we have audited the accompanying consolidated balance sheets of brandywine realty trust and its subsidiaries ( the “ company ” ) as of december 31 , 2019 and 2018 , and the related consolidated statements of operations , of comprehensive income , of beneficiaries ' equity and of cash flows for each of the three years in the period ended december 31 , 2019 , including the related notes and financial statement schedules listed in the index appearing under item 15 ( a ) ( collectively referred to as the “ consolidated financial statements ” ) . we also have audited the company 's internal control over financial reporting as of december 31 , 2019 , based on criteria established in internal control - integrated framework ( 2013 ) issued by the committee of sponsoring organizations of the treadway commission ( coso ) . in our opinion , the consolidated financial statements referred to above present fairly , in all material respects , the financial position of the company as of december 31 , 2019 and 2018 , and the results of its operations and its cash flows for each of the three years in the period ended december 31 , 2019 in conformity with accounting principles generally accepted in the united states of america . also in our opinion , the company maintained , in all material respects , effective internal control over financial reporting as of december 31 , 2019 , based on criteria established in internal control - integrated framework ( 2013 ) issued by the coso . basis for opinions the company 's management is responsible for these consolidated financial statements , 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 the company 's consolidated financial statements and on the company 's internal control over financial reporting 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement , whether due to error or fraud , and whether effective internal control over financial reporting was maintained in all material respects . our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated 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 consolidated financial statements . 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 . definition and limitations of internal control over financial reporting 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 . story_separator_special_tag the same store property portfolio includes properties acquired or placed in service on or prior to january 1 , 2018 and owned through december 31 , 2019 , ( b ) “ total portfolio , ” which represents all properties owned by us during 2019 and 2018 , ( c ) `` recently completed/acquired properties , `` which represents 17 properties placed into service or acquired on or subsequent to january 1 , 2018 , ( d ) `` development/redevelopment properties , `` which represents 5 properties currently in development/redevelopment . a property is excluded from our same store property portfolio and moved into development/redevelopment in the period that we determine to proceed with development/redevelopment for a future development strategy , and ( e ) `` 2018 and 2019 dispositions , `` which represents 11 properties disposed of during 2018 and 2019 . comparison of year ended december 31 , 2019 to the year ended december 31 , 2018 replace_table_token_8_th ( a ) represents certain revenues and expenses at the corporate level as well as various intercompany costs that are eliminated in consolidation , third-party management fees , provisions for impairment , and changes in the accrued rent receivable allowance . other/ ( eliminations ) also includes properties sold and properties classified as held for sale . 36 ( b ) pertains to core properties ( i.e . not under development or redevelopment ) . total revenue rents from the total portfolio increased by $ 39.6 million from 2018 to 2019 , of which $ 74.4 million relates to recently completed/acquired properties , primarily the dra austin and quarry lake ii acquisitions . this increase was largely offset by a $ 34.9 million decrease relating to the 2018 and 2019 dispositions . third party management fees , labor reimbursement , and leasing income decreased $ 3.0 million from 2018 to 2019 , due primarily to decreases in third party management and development fees . the decrease includes $ 3.5 million of third party management fees related to the sale of twelve office properties by the dra austin venture in the fourth quarter of 2018 , $ 2.4 million related to the sale of three office properties held by our bdn – ai venture in the fourth quarter of 2018 , and a decrease of $ 2.5 million related to general contractor management services provided primarily to the map venture . these decreases were primarily offset by a $ 3.2 million increase in third party management fees from our herndon innovation center venture , which was formed during the fourth quarter of 2018 , $ 1.2 million increase in third party developer fees related to the development of a medical facility located in radnor , pennsylvania that commenced during the second quarter of 2019 , and $ 0.5 million related to the fee received for our involvement in facilitating the disposition of the pjp ii , pjp vi and pjp vii ventures . property operating expenses the $ 0.6 million decrease in property operating expenses is primarily driven by the following : $ 9.9 million decrease related to 2018 and 2019 dispositions ; $ 2.1 million decrease related to the reduction in the accrued rent receivable allowance during the fourth quarter of 2019 ( included in `` other/eliminations `` ) ; $ 1.8 million decrease related to same store property portfolio ; $ 1.3 million decrease related to development/redevelopment properties ; and $ 15.1 million increase due to recently completed/acquired properties . real estate taxes real estate taxes across our total portfolio increased by $ 11.0 million from 2018 to 2019 , primarily related to $ 3.4 million in increased real estate tax assessments at the same store property portfolio , primarily in the philadelphia cbd segment , and $ 12.4 million related to recently completed/acquired properties , primarily the dra austin and quarry lake ii acquisitions . these increases were partially offset by a decrease of $ 4.2 million from the 2018 and 2019 dispositions . depreciation and amortization depreciation and amortization expense increased by $ 34.0 million from 2018 to 2019 , of which $ 42.5 million relates to an increase in depreciation expense from recently completed/acquired properties , primarily the dra austin and quarry lake ii acquisitions in december 2018 , 500 north gulph road being placed into service in december 2018 , and broadmoor 6 being placed into service in october 2018 . $ 2.2 million of the increase relates to properties within our same store portfolio and $ 1.3 million increase in properties within development/redevelopment . these increases were partially offset by a $ 13.7 million decrease relating to the 2018 and 2019 dispositions . general and administrative expenses general and administrative expenses across our total portfolio increased by $ 4.4 million from 2018 to 2019 , primarily related to a $ 2.0 million increase in payroll , bonus , stock compensation expense , and related benefits , $ 1.4 million decrease in capitalized costs , $ 0.5 million increase in professional fees , and $ 0.3 million increase in charitable contributions . provision for impairment during 2018 , we recognized a provision for impairment of $ 71.7 million , which consists of the following : $ 56.9 million impairment charge related to the disposition of eight office properties in our metropolitan washington , d.c. segment ; and $ 14.8 million held for use impairment charge on an office property in our metropolitan washington , d.c. segment . 37 there was no provision for impairment recognized during 2019. net gain on disposition of real estate the $ 0.4 million gain on disposition of real estate for 2019 relates to the disposition of the office property at 1900 gallows rd in vienna , virginia . the $ 2.9 million gain on disposition of real estate for 2018 resulted from the following sales transactions : $ 2.6 million on the sale of the subaru ntsc , located in camden , new jersey ; and $ 0.4 million on

during the year ended december 31 , 2019 , the parent company paid dividends in excess of the 90 % criterion . see note 12 , `` beneficiaries ' equity of the parent company , ” to our consolidated financial statements for further information related to our dividends declared for the fourth quarter , information related to our continuous offering program , and information related to our share repurchase program during the year ended december 31 , 2019 . inflation we do not believe inflation will have a material impact on income from continuing operations . commitments and contingencies the following table outlines the timing of payment requirements related to our contractual commitments as of december 31 , 2019 : replace_table_token_14_th ( a ) amounts are gross of deferred financing costs and do not include unamortized discounts and or premiums . ( b ) future lease payments under the terms of all noncancellable ground leases under which we are the lessee . ( c ) represents contractual obligations for wholly owned development projects and does not contemplate all costs expected to be incurred for such developments . this table does not include contractual obligations for our real estate venture developments , which are described below . ( d ) represents cash commitments under signed leases and excludes tenant-funded improvements . the timing of these expenditures may fluctuate . ( e ) variable rate debt future interest expense commitments are calculated using december 31 , 2019 interest rates . 43 ( f ) consists of ( i ) our deferred compensation liability , ( ii ) the interest accretion on the anticipated transfer tax liability on two logan square in philadelphia , pennsylvania ; ( iii ) the contingent consideration associated with the purchase of 618 market street in philadelphia , pennsylvania in 2015 ; and ( iv ) a payment to a tenant under a profit sharing arrangement . the above table does not include amounts related to the development at 4040 wilson , an unconsolidated real estate venture in which we hold a 50 % ownership interest , in arlington , virginia . see note 4 , `` investment in unconsolidated real estate ventures , '' to our consolidated financial statements for further discussion of this development . we provide customary guarantees for certain development projects of our unconsolidated real estate ventures . see note 19 , `` commitments and contingencies , ” to our consolidated financial statements for further details on payment guarantees provided on the behalf of real estate ventures .

rayonier claimed the afmc on its 2009 income tax return , and accordingly , the 2009 consolidated statement of income and comprehensive income includes income of $ 205.2 million net of associated expenses , recorded in `` other operating income , net `` for black liquor produced and used . in october 2010 , the internal revenue service ( `` irs `` ) issued clarification that both the afmc and cbpc can be claimed in the same taxable year for different volumes of black liquor . rayonier received approval from the irs to claim the cbpc . as a result , the 2010 consolidated statement of income and comprehensive income includes a tax credit of $ 24.3 million recorded in `` income tax expense `` for black liquor produced and used in 2009 , which was not eligible for the afmc . in 2011 , management approved an exchange of black liquor gallons previously claimed under the afmc for the cbpc . the net tax benefit from the exchange was $ 5.8 million . f- 16 index to financial statements rayonier inc. and subsidiaries notes to consolidated financial statements ( continued ) ( dollar amounts in thousands unless otherwise stated ) provision for income taxes the ( provision for ) /benefit from income taxes consisted of the following : replace_table_token_46_th a reconciliation of the u.s. federal statutory income tax rate to the actual income tax rate was as follows : replace_table_token_47_th the effective tax rate , before non-routine items , increased in 2011 from 2010 due to proportionally higher trs income . the effective tax rate , before non-routine items , decreased in 2010 from 2009 due to proportionately higher earnings from the reit . the company 's effective tax rate is below the 35 percent u.s. statutory rate primarily due to tax benefits associated with being a reit , and the cbpc and afmc . f- 17 index to financial statements rayonier inc. and subsidiaries notes to consolidated financial statements ( continued ) ( dollar amounts in thousands unless otherwise stated ) deferred taxes deferred income taxes result from recording revenues and expenses in different periods for financial reporting versus tax reporting . the nature of the temporary differences and the resulting net deferred tax asset ( liability ) for the two years ended december 31 , were as follows : replace_table_token_48_th included above are the following foreign and state net operating loss ( `` nol `` ) and tax credit carryforwards as of december 31 , 2011 : replace_table_token_49_th ( a ) fully reserved at december 31 , 2011 . in 2011 and 2010 , the company recorded excess tax benefits of $ 5.7 million and $ 5.4 million , respectively , related to stock-based compensation . these amounts were credited directly to shareholders ' equity and were not included in the consolidated tax provisions . f- 18 index to financial statements rayonier inc. and subsidiaries notes to consolidated financial statements ( continued ) ( dollar amounts in thousands unless otherwise stated ) unrecognized tax benefits in accordance with generally accepted accounting principles , we recognize the impact of a tax position if a position is `` more likely than not `` to prevail . a reconciliation of the beginning and ending unrecognized tax benefits for the three years ended december 31 is as follows : replace_table_token_50_th ( a ) during 2011 , the company received a final examination report from the irs regarding its trs 2009 tax return . as a result , rayonier reversed the uncertain tax liability recorded in 2009 relating to the taxability of the afmc and recognized a $ 16 million tax benefit in the third quarter of 2011. the total amount of unrecognized tax benefits that , if recognized , would have affected the effective tax rate at december 31 , 2011 , 2010 and 2009 is $ 2.6 million , $ 18.6 million , and $ 18.0 million , respectively . at december 31 , 2011 , the amount of unrecognized tax benefits that , if recognized , would decrease prepaid tax assets is $ 4.0 million . prepaid tax assets are reported in `` other assets `` on the company 's consolidated balance sheets . the company records interest ( and penalties , if applicable ) related to unrecognized tax benefits in non-operating expenses . for both years ended december 31 , 2011 and 2010 , the company recorded an interest benefit of $ 0.3 million . in 2009 , the company recorded interest expense of $ 0.3 million . the company has liabilities of approximately $ 0.2 million and $ 0.6 million for the payment of interest at december 31 , 2011 and 2010 , respectively . tax statutes the following table provides detail of the tax years that remain open to examination by the irs and other significant taxing jurisdictions : taxing jurisdiction open tax periods u.s. internal revenue service 2008 – 2011 state of alabama 2008 – 2011 state of florida 2005 – 2011 state of georgia 2008 – 2011 new zealand inland revenue 2007 – 2011 9. earnings per common share basic earnings per share ( `` eps `` ) is calculated by dividing net income by the weighted average number of common shares outstanding during the year . diluted eps is calculated by dividing net income by the weighted average number of common shares outstanding adjusted to include the potentially dilutive effect of outstanding stock options , performance shares , restricted shares and convertible debt . on july 22 , 2011 , the board of directors authorized a three-for-two stock split in the form of a stock dividend . the additional shares were distributed on august 24 , 2011 to shareholders of record on august 10 , 2011. the impact of the stock split is reflected for all periods presented . story_separator_special_tag our 27 index to financial statements sawmills continue to produce at a reduced capacity due to a weak housing market . other operations sales improved from 2010 primarily due to higher export demand ; however , operating income was consistent with the prior year reflecting low margins . corporate and other expense/eliminations the 2011 results include a $ 7 million increase in a disposition reserve . see note 15 — liabilities for dispositions and discontinued operations for additional information . the 2010 results include a first quarter gain of $ 12 million from the sale of a portion of the company 's interest in its new zealand jv . see note 5 — joint venture investment for additional information . excluding these special items , corporate and other expenses were $ 4 million below the prior year as 2010 included a $ 3 million accrual for closed facilities . interest expense and interest/other income interest expense and interest/other income were comparable to the prior year . income tax expense the full year effective tax rate was 9.9 percent compared to 6.5 percent in 2010. excluding non-routine items , the effective tax rate was 24.6 percent , up from 18.2 percent in 2010. the higher rate in 2011 was due to proportionately higher earnings from the trs . see note 8 — income taxes for additional information regarding the provision for income taxes and the non-routine tax items . outlook for 2012 we expect strong performance in 2012. in forest resources , we will continue integrating our newly acquired southeastern timberlands and plan to increase harvest volumes in the northwest to continue taking advantage of asian export markets . we anticipate another record year in performance fibers , with average price increases of 12 to 13 percent for our high purity cellulose specialties products offsetting expected weakness in absorbent materials pricing and higher input costs . overall , we expect operating income to increase about 10 percent over 2011. however , we anticipate eps and cash available for distribution to be comparable to 2011 due to an increase in the effective tax rate , which is anticipated to range from 24 to 26 percent in 2012 , as we do not expect the same level of non-routine tax benefits . our 2012 outlook is subject to a number of variables and uncertainties , including those discussed at item 1a — risk factors . results of operations , 2010 versus 2009 forest resources replace_table_token_18_th replace_table_token_19_th 28 index to financial statements in the atlantic and gulf states regions , 2010 sales were comparable to prior year as higher prices mainly due to weather-related supply constraints were offset by lower volumes as thinnings returned to more normalized levels . average prices rose approximately $ 4.00 per short green ton , or approximately 25 percent , for the year , while volumes declined 21 percent . operating income improved from 2009 due to higher margins . in the northern region , sales and operating income improved from prior year periods primarily due to higher prices driven largely by stronger export demand . the 38 percent average price improvement was somewhat offset by a two percent decline in volumes as well as increased costs , mainly for road maintenance . in february 2010 , our new zealand jv sold a 35 percent interest in the jv to a new investor for nz $ 167 million . the investment was for newly issued capital by matariki which was used entirely to pay down a portion of the outstanding nz $ 367 million debt . the transaction reduced our ownership interest in matariki from 40 percent to 26 percent . rayonier continues to manage the jv . the new zealand sales represent timberland management fees for services provided to the jv . the operating income primarily represents equity earnings related to the jv 's timber activities which have increased from 2009 mainly due to improved export demand . real estate replace_table_token_20_th replace_table_token_21_th full year sales and operating income were $ 5 million and $ 3 million below the prior year , respectively , primarily due to a 14 percent decline in rural prices reflecting a change in geographic mix . a 17 percent decline in non-strategic timberland acres sold due to timing of sales was mostly offset by an average price increase of $ 215 per acre , or 17 percent , due to location and site characteristics . performance fibers replace_table_token_22_th cellulose specialties sales improved as prices increased $ 8 per ton , and volumes increased four percent from the prior year period reflecting strong demand . the 2010 price increase was mostly offset by the removal of a 2009 cost-based surcharge . absorbent materials sales increased as prices rose $ 153 per ton , or 24 percent , mainly due to tight supply . sales volumes declined by 12 percent due to the timing of customer orders , a shift in production to cellulose specialties and production issues . replace_table_token_23_th 29 index to financial statements in 2010 , operating income improved from 2009 primarily due to higher absorbent materials and cellulose specialties prices as well as an increase in cellulose specialties volumes . full year costs were above 2009 mainly due to an increase in wood , chemical and transportation costs . wood products replace_table_token_24_th operating loss ( in millions ) 2009 changes attributable to : 2010 price costs total operating ( loss ) income $ ( 11 ) $ 13 $ — $ 2 although below historical averages , sales and operating income improved from the prior year as prices and volumes rose 23 percent and nine percent , respectively . prices increased in the first half of the year due to supply constraints caused by wet weather , and remained above 2009 for the second half of 2010 as demand increased . our sawmills continued to produce at a reduced capacity due to a weak housing market . other operations sales and operating results

cash payments for income taxes in 2012 are anticipated to be between $ 55 million and $ 60 million . expenditures of $ 10 million for environmental costs related to our dispositions and discontinued operations are expected in 2012 . see note 15 — liabilities for dispositions and discontinued operations for further information . performance and liquidity indicators the discussion below is presented to enhance the reader 's understanding of our operating performance , liquidity , ability to generate cash and satisfy rating agency and creditor requirements . this information includes two measures of financial results : earnings before interest , taxes , depreciation , depletion and amortization ( `` ebitda '' ) , and adjusted cash available for distribution ( `` adjusted cad '' ) . these measures are not defined by generally accepted accounting principles ( `` gaap '' ) and the discussion of ebitda and adjusted cad is not intended to conflict with or change any of the gaap disclosures described above . management considers these measures to be important to estimate the enterprise and shareholder values of the company as a whole and of its core segments , and for allocating capital resources . in addition , analysts , investors and creditors use these measures when analyzing our operating performance , financial condition and cash generating ability . management uses ebitda as a performance measure and adjusted cad as a liquidity measure . ebitda is defined by the securities and exchange commission . adjusted cad as defined , however , may not be comparable to similarly titled measures reported by other companies . below is a reconciliation of net income to ebitda and a table of ebitda by segment for the five years ended december 31 ( in millions of dollars ) : replace_table_token_27_th replace_table_token_28_th ( a ) the results for 2011 included a $ 7 million increase in a disposition reserve . the results for 2010 included a gain of $ 12 million from the sale of a portion of the company 's interest in its new zealand jv . the results for 2009 included $ 205 million related to the afmc . excluding special items noted in the footnote above , 2011 ebitda was $ 86 million above prior year primarily due to higher operating results in our performance fibers segment . 2010 ebitda was $ 50 million above 2009 primarily due to higher operating results . see item 6 — selected financial data for a reconciliation of ebitda to operating

research and development expenses research and development costs , including internal and contract research costs , are expensed as incurred . research and development expenses consist mainly of clinical trial costs , manufacturing of clinical material , toxicology and other preclinical studies , personnel costs , depreciation , license fees and funding of outside contracted research . 86 celldex therapeutics , inc. notes to financial statements ( continued ) ( 2 ) summary of significant accounting policies ( continued ) clinical trial expenses include expenses associated with clinical research organization , or cro , services . contract manufacturing expenses include expenses associated with contract manufacturing organization , or cmo , services . the invoicing from cros and cmos for services rendered can lag several months . the company accrues the cost of services rendered in connection with cro and cmo activities based on our estimate of costs incurred . the company maintains regular communication with our cros and cmos to assess the reasonableness of its estimates . differences between actual expenses and estimated expenses recorded have not been material and are adjusted for in the period in which they become known . patent costs patent costs are expensed as incurred . certain patent costs are reimbursed by the company 's product development and licensing partners . any reimbursed patent costs are recorded as product development and licensing agreement revenues in the company 's financial statements . stock-based compensation the company records stock-based compensation expense for all stock-based awards made to employees , directors and non-employees based on the estimated fair values of the stock-based awards expected to vest at the grant date and adjust , if necessary , to reflect actual forfeitures . compensation expense for all stock-based awards is recognized using the straight-line method over the term of vesting or performance . foreign currency translation net unrealized gains and losses resulting from foreign currency translation are included in accumulated other comprehensive income . at december 31 , 2018 and 2017 , accumulated other comprehensive income includes a net unrealized gain related to foreign currency translation of $ 2.6 million . income taxes the company uses the asset and liability method to account for income taxes , including the recognition of deferred tax assets and deferred tax liabilities for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax basis . quarterly , the company reviews its deferred tax assets for recovery . a valuation allowance is established when the company believes that it is more likely than not that its deferred tax assets will not be realized . changes in valuation allowances from period to period are included in the company 's tax provision in the period of change . the company records uncertain tax positions in the financial statements only if it is more likely than not that the uncertain tax position will be sustained upon examination by the taxing authorities . the company records interest and penalties related to uncertain tax positions in income tax expense . comprehensive loss comprehensive loss is comprised of net loss and certain changes in stockholders ' equity that are excluded from net loss . the company includes foreign currency translation adjustments and unrealized 87 celldex therapeutics , inc. notes to financial statements ( continued ) ( 2 ) summary of significant accounting policies ( continued ) gains and losses on marketable securities in other comprehensive loss . the statements of operations and comprehensive loss reflect total comprehensive loss for the years ended december 31 , 2018 , 2017 and 2016. net loss per share basic net loss per common share is based upon the weighted-average number of common shares outstanding during the period , excluding restricted stock that has been issued but is not yet vested . diluted net loss per common share is based upon the weighted-average number of common shares outstanding during the period plus additional weighted-average potentially dilutive common shares outstanding during the period when the effect is dilutive . the potentially dilutive common shares that have not been included in the net loss per common share calculations because the effect would have been anti-dilutive are as follows : replace_table_token_15_th newly-adopted accounting pronouncements on january 1 , 2018 , the company adopted the new u.s. gaap standard `` revenue from contracts with customers `` using a modified retrospective application method , recognizing an immaterial cumulative-effect adjustment to accumulated deficit . the company applied the new guidance to ( i ) contracts not completed as of the date of adoption and ( ii ) all new revenue contracts entered into after january 1 , 2018. refer to note 12 `` revenue `` for additional details on this adoption and the company 's updated revenue accounting policy and disclosures . on january 1 , 2018 , the company adopted a u.s. gaap standard update `` classification of certain cash receipts and cash payments `` which clarifies the classification of certain cash receipts and payments in the statement of cash flows . the adoption of this new standard did not impact the company 's consolidated financial statements . on july 1 , 2018 , the company adopted a u.s. gaap standard that aligns the accounting for share-based payment awards issued to employees and nonemployees . under the new guidance , the existing employee guidance is applied to nonemployee share-based transactions . the adoption of this new standard did not have a material impact on the company 's consolidated financial statements . recent accounting pronouncements from time to time , new accounting pronouncements are issued by the financial accounting standards board ( `` fasb `` ) or other standard setting bodies that are adopted by the company as of the specified effective date . unless otherwise discussed , the company believes that the impact of recently issued standards that are not yet effective will not have a material impact on the company 's consolidated financial statements upon adoption . story_separator_special_tag our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may vary from what we anticipate and different assumptions or estimates about the future could materially change our reported results . we believe the following accounting policies are the most critical to us in that they are important to the portrayal of 62 our financial statements and they require our most difficult , subjective or complex judgments in the preparation of our financial statements : business combinations we account for business combinations under the acquisition method of accounting . we record the fair value of the consideration transferred to acquire a business to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition . we assess the fair value of assets , including intangible assets such as ipr & d , using a variety of methods including present-value models . each asset is measured at fair value from the perspective of a market participant . the method used to estimate the fair values of ipr & d assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset , including a market participant 's assumptions regarding the probability of completing ipr & d projects , which would require obtaining regulatory approval for marketing of the associated drug candidate ; a market participant 's estimates regarding the timing of and the expected costs to complete ipr & d projects ; a market participant 's estimates of future cash flows from potential product sales ; and the appropriate discount rates for a market participant . transaction costs and restructuring costs associated with the transaction are expensed as incurred . the difference between the purchase price and the fair value of assets acquired and liabilities assumed in a business combination is recorded to goodwill . goodwill is evaluated for impairment on an annual basis during the third quarter , or earlier if impairment indicators are present . as a result of the discontinuation of the glemba program , the company evaluated goodwill for potential impairment in the first quarter of 2018. it was determined that the goodwill asset was fully impaired and an impairment charge of $ 91.0 million was recorded . we record contingent consideration resulting from a business combination at its fair value on the acquisition date . we determine the fair value of the contingent consideration based primarily on the following factors : timing and probability of success of clinical events or regulatory approvals ; timing and probability of success of meeting clinical and commercial milestones ; and discount rates . our contingent consideration liabilities arose in connection with our acquisition of kolltan . on a quarterly basis , we revalue these obligations and record increases or decreases in their fair value as an adjustment to operating earnings . changes to contingent consideration obligations can result from adjustments to discount rates , accretion of the discount rates due to the passage of time , changes in our estimates of the likelihood or timing of achieving development or commercial milestones , changes in the probability of certain clinical events or changes in the assumed probability associated with regulatory approval . the assumptions related to determining the value of contingent consideration include a significant amount of judgment , and any changes in the underlying estimates could have a material impact on the amount of contingent consideration expense recorded in any given period . revenue recognition revenues are recognized when performance obligations under agreements or contracts are satisfied , in an amount that reflects the consideration the company expects to be entitled to in exchange for those services . 63 the company determines revenue recognition through the following steps : identification of the contract , or contracts , with a customer ; identification of the performance obligations in the contract ; determination of the transaction price ; allocation of the transaction price to the performance obligations in the contract ; and recognition of revenue when , or as , the company satisfies a performance obligation . revenue for the company has historically been derived from biopharmaceutical product development agreements with collaborative partners for the research and development of therapeutic drug candidates . the terms of the agreements may include nonrefundable signing and licensing fees , funding for research , development and manufacturing , milestone payments and royalties on any product sales derived from collaborations . the company assesses the multiple obligations typically within product development contracts to determine the distinct performance obligations and how to allocate the arrangement consideration to each distinct performance obligation . under product development agreements , revenue is generally recognized using a cost-to-cost measure of progress . revenue is recognized based on the costs incurred to date as a percentage of the total estimated costs to fulfill the contract . incurred cost represents work performed , which corresponds with , and thereby best depicts , the transfer of control to the customer . due to the nature of the work performed in these arrangements , the estimation of cost at completion is complex , subject to many variables , such as expected clinical trial costs , and requires significant judgements . circumstances can arise that change original estimates of costs or progress toward completion . any revisions to estimates are reflected in revenue on a cumulative catch-up basis in the period in which the change in circumstances became known . revenue for the company is also derived from manufacturing and research and development arrangements . the company owns and operates a cgmp manufacturing facility in fall river , massachusetts , to produce drug substance for its current and planned early-stage clinical trials . in order to utilize excess capacity , the company has , from time to time , entered into contract manufacturing and research and development arrangements in which

we may decide to pay those milestone payments in cash , shares of our common stock or a combination thereof . if we are unable to raise the funds necessary to meet our liquidity needs , we may have to delay or discontinue the development of one or more programs , discontinue or delay ongoing or anticipated clinical trials , license out programs earlier than expected , raise funds at a significant discount or on other unfavorable terms , if at all , or sell all or a part of our business . operating activities net cash used in operating activities was $ 75.2 million for the year ended december 31 , 2018 compared to $ 99.9 million for the year ended december 31 , 2017. the decrease in net cash used in operating activities was primarily due to decreases in both general and administrative and research and development expenses . we expect that cash used in operating activities will decrease over the next twelve months primarily due to our restructuring in april 2018 , the discontinuation of the glemba and cdx-014 programs , and our pipeline prioritization , although there may be fluctuations on a quarterly basis . net cash used in operating activities was $ 99.9 million for the year ended december 31 , 2017 compared to $ 113.0 million for the year ended december 31 , 2016. the decrease in net cash used in operating activities was primarily due to an increase in revenue and decreases in both general and administrative and research and development expenses . we have incurred and will continue to incur significant costs in the area of research and development , including preclinical and clinical trials and clinical drug product manufacturing as our drug candidates are developed . we plan to spend significant amounts to progress our current drug candidates through the clinical trial processes as well as to develop additional drug candidates . as our drug candidates progress through the clinical trial process , we may be obligated to make significant milestone payments . investing activities net cash provided by investing activities was $ 29.8 million for the year ended december 31 , 2018 compared to net cash provided by investing activities of $ 46.5 million for the year ended december 31 , 2017. the decrease in net cash provided by investing activities was primarily due to net sales and maturities of marketable securities for the year ended december 31 , 2018 of $ 30.3 million as compared to net sales and maturities of marketable securities of

annual store rent is comprised of a fixed minimum amount and or contingent rent based on a percentage of sales . for construction allowances , the company records a deferred lease credit on the consolidated balance sheets and amortizes the deferred lease credit as a reduction of rent expense on the consolidated statements of operations and comprehensive ( loss ) income over the term of the lease . for scheduled rent escalation clauses during the lease term , the company records minimum rental expense on a straight-line basis over the term of the lease on the consolidated statements of operations and comprehensive ( loss ) income . the difference between rent expense and the amounts paid under the lease , less amounts attributable to the repayment of construction allowances recorded as deferred rent , is included in accrued expenses and other liabilities on the consolidated balance sheets . the term over which the company amortizes construction allowances and minimum rental expenses on a straight-line basis begins on the date of initial possession , which is generally when the company enters the space and begins construction . certain leases provide for contingent rents , which are determined as a percentage of gross sales . the company records a contingent rent liability in accrued expenses on the consolidated balance sheets , and the corresponding rent expense on the consolidated statements of operations and comprehensive ( loss ) income on a ratable basis over the measurement period when it is determined that achieving the specified levels during the fiscal year is probable . in addition , most leases require payment of real estate taxes , insurance and certain common area maintenance costs in addition to future minimum lease payments . a summary of rent expense follows ( in thousands ) : replace_table_token_16_th ( 1 ) includes lease termination fees of $ 12.4 million , $ 39.2 million and $ 3.4 million for fiscal 2014 , fiscal 2013 and fiscal 2012 , respectively . for fiscal 2014 and fiscal 2013 , lease termination fees of $ 6.8 million and $ 39.1 million , respectively , related to the gilly hicks restructuring . at january 31 , 2015 , the company was committed to non-cancelable leases with remaining terms of one to 16 years . excluded from the obligations below are portions of lease terms that are currently cancelable at the company 's discretion without condition . while included in the obligations below , in many instances the company has options to terminate certain leases if stated sales volume levels are not met or the company ceases operations in a given country , which may be subject to lease termination policies . a summary of operating lease commitments , including leasehold financing obligations , under non-cancelable leases follows ( in thousands ) : replace_table_token_17_th 50 abercrombie & fitch co. notes to consolidated financial statements — ( continued ) leasehold financing obligations in certain lease arrangements , the company is involved in , or is deemed to be involved in , the construction or modification of the building . if it is determined that the company has substantially all of the risks of ownership during construction of the leased property and therefore is deemed to be the owner of the construction project , the company records an asset for the amount of the total project costs , including the portion funded by the landlord , and an amount related to the value attributed to the pre-existing leased building in property and equipment , net , and a corresponding financing obligation in leasehold financing obligations , on the consolidated balance sheets . once construction is complete , if it is determined that the asset does not qualify for sale-leaseback accounting treatment , the company continues to amortize the obligation over the lease term and depreciates the asset over its useful life . the company allocates a portion of its rent obligation to the assets which are owned for accounting purposes as a reduction of the financing obligation and interest expense . as of january 31 , 2015 and february 1 , 2014 , the company had $ 50.5 million and $ 60.7 million , respectively , of long-term liabilities related to leasehold financing obligations . total interest expense related to landlord financing obligations was $ 6.2 million , $ 6.6 million and $ 6.8 million for fiscal 2014 , fiscal 2013 and fiscal 2012 , respectively . store pre-opening expenses pre-opening expenses related to new store openings are expensed as incurred and are reflected as a component of `` stores and distribution expense . `` design and development costs costs to design and develop the company 's merchandise are expensed as incurred and are reflected as a component of “ marketing , general and administrative expense . ” net income per share net income per basic and diluted share is computed based on the weighted-average number of outstanding shares of class a common stock ( “ common stock ” ) . weighted-average shares outstanding and anti-dilutive shares ( in thousands ) : replace_table_token_18_th ( 1 ) reflects the number of shares subject to outstanding share-based compensation awards but excluded from the computation of net income per diluted share because the impact would be anti-dilutive . share-based compensation see note 3 , “ share-based compensation . ” 51 abercrombie & fitch co. notes to consolidated financial statements — ( continued ) recent accounting pronouncements in july 2013 , the financial accounting standards board ( `` fasb `` ) issued account standards update ( `` asu `` ) no . 2013-11 , `` presentation of an unrecognized tax benefit when a net operating loss carryforward , a similar tax loss , or a tax credit carryforward exists , `` which amends accounting standards codification ( `` asc `` ) 740 , `` income taxes . story_separator_special_tag fiscal 2013 compared to fiscal 2012 net sales net sales for fiscal 2013 were $ 4.117 billion , a decrease of 9 % from fiscal 2012 net sales of $ 4.511 billion . the net sales decrease was attributable to an 11 % decrease in comparable sales , which equated to an 11 % decrease in net sales , partially offset by growth from opening new international stores . u.s. stores net sales for fiscal 2013 were $ 2.161 billion , a decrease of 17 % from fiscal 2012 u.s. stores net sales of $ 2.615 billion . the decrease in u.s. stores net sales was primarily due to a 15 % decrease in comparable u.s. stores sales , which equated into a 14 % decrease in u.s. stores net sales , and a 3 % decrease in u.s. stores sales attributable to net closure of 59 stores . international stores net sales for fiscal 2013 were $ 1.179 billion , a decrease of 1 % from fiscal 2012 international stores net sales of $ 1.195 billion . the decrease in international stores net sales was primarily due to a 19 % decrease in comparable international stores sales , which equated into an 18 % decrease in international stores net sales , which was largely offset by a 17 % increase in international stores net sales attributable to net opening of 24 stores . direct-to-consumer net sales for fiscal 2013 , including shipping and handling revenue , were $ 776.9 million , an increase of 11 % from fiscal 2012 direct-to-consumer net sales of $ 700.7 million . the increase in direct-to-consumer net sales was primarily due to a 25 % increase in comparable international direct-to-consumer net sales and a 7 % increase in comparable u.s. direct-to-consumer sales , which together equated into a 13 % increase in direct-to-consumer sales . the direct-to-consumer business , including shipping and handling revenue , accounted for 19 % of total net sales in fiscal 2013 compared to 16 % in fiscal 2012 . the impact of changes in foreign currency ( based on converting prior year sales at current year exchange rates ) benefited sales by approximately $ 13.4 million in fiscal 2013 , which primarily related to the international stores segment . the fiscal 2012 retail year included a fifty-third week and , therefore , fiscal 2013 comparable sales are compared to the fifty-two week period ended february 2 , 2013. the net sales for the fifty-two week period ended february 2 , 2013 were approximately $ 63 million less than the net sales for the reported fifty-three week period ended february 2 , 2013. for fiscal 2013 , comparable sales by brand , including direct-to-consumer sales , decreased 10 % for abercrombie & fitch , decreased 5 % for abercrombie kids , and decreased 14 % for hollister . gross profit gross profit was $ 2.575 billion for fiscal 2013 compared to gross profit of $ 2.817 billion for fiscal 2012 . the gross profit rate ( gross profit divided by net sales ) for fiscal 2013 was 62.6 % , up 20 basis points from the fiscal 2012 rate of 62.4 % . stores and distribution expense stores and distribution expense was $ 1.908 billion for fiscal 2013 compared to $ 1.981 billion for fiscal 2012 . the stores and distribution expense rate ( stores and distribution expense divided by net sales ) for fiscal 2013 was 46.3 % compared to 43.9 % for fiscal 2012 . stores and distribution expense for the full year included $ 1.1 million of charges related to the profit improvement initiative . savings in store payroll , store management and support and other stores and distribution expenses , including savings 30 from the profit improvement initiative , were more than offset by the deleveraging effect of negative comparable sales and higher direct-to-consumer expense . shipping and handling costs , including costs incurred to store , move and prepare merchandise for shipment and costs incurred to physically move the merchandise to the customer , associated with direct-to-consumer operations were $ 93.4 million and $ 78.6 million for fiscal 2013 and fiscal 2012 , respectively . the increase in shipping and handling costs in fiscal 2013 was primarily driven by increased sales volume and a higher international mix component . these amounts are recorded in stores and distribution expense in our consolidated statements of operations and comprehensive ( loss ) income . handling costs , including costs incurred to store , move and prepare merchandise for shipment to stores were $ 53.9 million and $ 59.4 million for fiscal 2013 and fiscal 2012 , respectively . these amounts are recorded in stores and distribution expense in our consolidated statements of operations and comprehensive ( loss ) income . marketing , general and administrative expense marketing , general and administrative expense was $ 481.8 million for fiscal 2013 compared to $ 473.9 million for fiscal 2012 . marketing , general and administrative expense for fiscal 2013 included $ 12.7 million in charges related to the profit improvement initiative . excluding these charges , marketing , general and administrative expense was $ 469.1 million for fiscal 2013. restructuring charges on november 1 , 2013 , a & f 's board of directors approved the closure of the company 's 24 stand-alone gilly hicks branded stores . in connection with the strategic review , the company decided to focus the future development of the gilly hicks brand through hollister stores and direct-to-consumer channels . restructuring charges associated with the store closures for the full year were $ 81.5 million , of which $ 42.7 million related to lease terminations and store closure costs and $ 37.9 million for asset impairments . asset impairment the company recorded asset impairment charges of $ 46.7 million for fiscal 2013 primarily related to 97 stores , and $ 7.4 million for fiscal 2012 primarily related to 17 stores . other operating expense (

although the company has no intent to repatriate cash held in europe and asia , the company has the ability to repatriate current europe and asia cash balances without the occurrence of a taxable dividend in the united states . off-balance sheet arrangements the company uses in the ordinary course of business stand-by letters of credit under the existing abl facility . the company had $ 9.2 million in stand-by letters of credit outstanding as of january 31 , 2015 . the company has no other off-balance sheet arrangements . contractual obligations replace_table_token_9_th ( 1 ) includes leasehold financing obligations of $ 50.5 million and related interest . refer to note 2 , `` summary of significant accounting policies , '' of the notes to consolidated financial statements included in “ item 8. financial statements and supplementary data ” of this annual report on form 10-k for additional information . l ong-term debt obligations consist of principal payments under the term loan agreement . refer to note 12 , `` borrowings , `` of the notes to consolidated financial statements included in “ item 8. financial statements and supplementary data ” of this annual report on form 10-k for additional information . operating lease obligations consist primarily of non-cancelable future minimum lease commitments related to store operating leases . see note 2 , “ summary of significant accounting policies -- leased facilities , ” of the notes to consolidated financial statements included in “ item 8. financial statements and supplementary data ” of this annual report on form 10-k , for further discussion . excluded from the obligations above are amounts related to portions of lease terms that are currently cancelable at the company 's discretion . while included in the obligations above , in many instances , the company has options to terminate certain leases if stated sales volume levels are not met or the company ceases operations in a given country . operating lease obligations do not include common area maintenance ( “ cam ” ) , insurance , marketing or tax payments for which the company is also obligated . total expense related to cam , insurance , marketing and taxes was $ 172.3 million in fiscal 2014 . the purchase obligations category represents purchase orders for merchandise to be delivered during fiscal 2015 and commitments for fabric expected to be used during upcoming seasons . in addition , purchase obligations include agreements to purchase goods or services including information technology contracts and third-party distribution center service contracts . other obligations consist primarily of asset retirement obligations and the supplemental executive retirement plan . see note 16 , “ retirement benefits , ” of the notes to

( h ) maintenance and repairs— the cost of maintenance and repairs , including the cost of minor replacements , is charged to expense as incurred , except for costs incurred under our power-by-the-hour ( “pbth” ) engine maintenance agreements . pbth contracts transfer certain risk to third-party service providers and fix the amount we pay per flight hour or per cycle to the service provider in exchange for maintenance and repairs under a predefined maintenance program . under pbth agreements , the 73 company recognizes expense at a level rate per engine hour , unless the level of service effort and the related payments during the period are substantially consistent , in which case the company recognizes expense based on the amounts paid . ( i ) lease fair value adjustments— lease fair value adjustments , which arose from recording operating leases at fair value under fresh start accounting or the merger , are amortized on a straight line basis over the related lease term . ( j ) regional capacity purchase— payments made to regional carriers under cpas are reported in regional capacity purchase in our consolidated statements of operations . ( k ) advertising— advertising costs , which are included in other operating expenses , are expensed as incurred . advertising expenses were $ 178 million , $ 154 million and $ 142 million for the years ended december 31 , 2013 , 2012 and 2011 , respectively . ( l ) intangibles— the company has finite-lived and indefinite-lived intangible assets , including goodwill . as of december 31 , 2013 , goodwill represents the excess purchase price over the fair values of tangible and identifiable intangible assets acquired and liabilities assumed from continental in the merger . finite-lived intangible assets are amortized over their estimated useful lives . goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment annually or more frequently if events or circumstances indicate that the asset may be impaired . goodwill and indefinite-lived assets are reviewed for impairment on an annual basis as of october 1 , or on an interim basis whenever a triggering event occurs . see notes 2 and 17 for additional information related to intangibles . ( m ) long-lived asset impairments— the company evaluates the carrying value of long-lived assets and intangible assets subject to amortization whenever events or changes in circumstances indicate that an impairment may exist . for purposes of this testing , the company has generally identified the aircraft fleet type as the lowest level of identifiable cash flows for purposes of testing aircraft for impairment . an impairment charge is recognized when the asset 's carrying value exceeds its net undiscounted future cash flows and its fair market value . the amount of the charge is the difference between the asset 's carrying value and fair market value . see note 17 for information related to asset impairments . ( n ) share-based compensation— the company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award . the resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award , usually the vesting period . obligations for restricted stock units ( “rsus” ) are remeasured at fair value throughout the requisite service period on the last day of each reporting period based upon ual 's stock price . in addition to the service requirement , certain rsus have performance metrics that must be achieved prior to vesting . these awards are accrued based on the expected level of achievement at each reporting period . a cumulative adjustment is recorded on the last day of each reporting period to adjust compensation expense based on both ual 's stock price and the then current level of expected performance achievement for the performance-based awards . see note 5 for additional information on ual 's share-based compensation plans . ( o ) ticket taxes— certain governmental taxes are imposed on the company 's ticket sales through a fee included in ticket prices . the company collects these fees and remits them to the appropriate government agency . these fees are recorded on a net basis ( excluded from operating revenue ) . ( p ) retirement of leased aircraft— the company accrues for estimated lease costs over the remaining term of the lease at the present value of future minimum lease payments , net of estimated sublease rentals ( if any ) , in the period that aircraft are permanently removed from service . when reasonably estimable and probable , the company estimates maintenance lease return condition obligations for items such as minimum aircraft and engine conditions specified in leases and accrues these amounts over the lease term while the aircraft are operating , and any remaining unrecognized estimated obligations are accrued in the period that an aircraft is removed from service . 74 ( q ) uncertain income tax positions— the company has recorded reserves for income taxes and associated interest that may become payable in future years . although management believes that its positions taken on income tax matters are reasonable , the company nevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge certain of the positions taken by the company , potentially resulting in additional liabilities for taxes and interest . the company 's uncertain tax position reserves are reviewed periodically and are adjusted as events occur that affect its estimates , such as the availability of new information , the lapsing of applicable statutes of limitation , the conclusion of tax audits , the measurement of additional estimated liability , the identification of new tax matters , the release of administrative tax guidance affecting its estimates of tax liabilities , or the rendering of relevant court decisions . story_separator_special_tag in november 2013 , ual issued $ 300 million aggregate principal amount of 6 % senior notes due december 1 , 2020. the notes are fully and unconditionally guaranteed and recorded by united on its balance sheet as debt . ual issued approximately 28 million shares of ual common stock pursuant to agreements that ual entered into with certain of its securityholders in exchange for approximately $ 240 million in aggregate principal amount of ual 's outstanding 6 % convertible senior notes due 2029 held by such securityholders . the company retired the 6 % convertible senior notes acquired in the exchange . in 42 february 2014 , ual issued 3,582,640 additional shares of ual common stock pursuant to agreements that ual entered into with certain of its securityholders of ual 's 6 % convertible senior notes due 2029 in exchange for $ 31,126,000 in aggregate principal amount . in august 2013 , december 2012 and october 2012 , united created separate eetc pass-through trusts , each of which issued pass-through certificates . the proceeds of the issuance of the pass-through certificates are used to purchase equipment notes issued by united and secured by its aircraft . the company records the debt obligation upon issuance of the equipment notes rather than upon the initial issuance of the pass-through certificates . the pass-through certificates represent fractional undivided interests in the respective pass-through trusts and are not obligations of united . the payment obligations under the equipment notes are those of united . proceeds received from the sale of pass-through certificates are initially held by a depositary in escrow for the benefit of the certificate holders until united issues equipment notes to the trust , which purchases such notes with a portion of the escrowed funds . these escrowed funds are not guaranteed by united and are not reported as debt on our consolidated balance sheet because the proceeds held by the depositary are not united 's assets . united has received all of the proceeds from the 2012 eetcs . united expects to receive all proceeds from the august 2013 pass-through trusts by the end of 2014. certain details of the pass-through trusts are as follows ( in millions , except interest rate ) : replace_table_token_19_th significant financing events in 2012 were as follows : the company received $ 1.5 billion in proceeds from eetc transactions in 2012 ; during the year ended december 31 , 2012 , the company made debt and capital lease payments of $ 1.5 billion , including prepayments . these payments include $ 195 million related to united 's series 2002-1 eetcs ; and in august 2012 , the new jersey economic development authority ( the “authority” ) issued approximately $ 101 million of special facility revenue bonds ( the “2012 bonds” ) to provide funds for the defeasance of approximately $ 100 million of the authority 's previously issued and outstanding special facility revenue bonds maturing on september 15 , 2012 ( the “refunded bonds” ) . the refunded bonds were guaranteed by united and payable from certain rental payments made by united pursuant to two lease agreements between the authority and united . the 2012 bonds are payable from certain loan repayments made by united under a loan agreement between united and the authority . the 2012 bonds are recorded by the company as unsecured long-term debt . 43 significant financing events in 2011 were as follows : the company entered into a $ 500 million revolving credit facility with a syndicate of banks , led by citibank , n.a . , as administrative agent . the facility was undrawn when it was replaced on march 27 , 2013 with the credit agreement . the company terminated its prior $ 255 million revolver under the amended credit facility on december 21 , 2011 ; during 2011 , the company made debt and capital lease payments of $ 2.6 billion . these payments include $ 150 million related to the repurchase of ual 's 5 % senior convertible notes and $ 570 million related to the repurchase of ual 's 4.5 % senior limited-subordination convertible notes ; and the company received $ 239 million in 2011 from its december 2010 pass-through trust financing . the proceeds were used to fund the acquisition of new aircraft and in the case of the currently owned aircraft , for general corporate purposes . for additional information regarding these matters , see notes 3 , 11 , 13 and 16 to the financial statements included in part ii , item 8 of this report . credit ratings . as of the filing date of this report , ual and united had the following corporate credit ratings : s & p moody 's fitch ual b b2 b united b * b * the credit agency does not issue corporate credit ratings for subsidiary entities . these credit ratings are below investment grade levels . downgrades from these rating levels , among other things , could restrict the availability or increase the cost of future financing for the company . other liquidity matters below is a summary of additional liquidity matters . see the indicated notes to our consolidated financial statements included in part ii , item 8 of this report for additional details related to these and other matters affecting our liquidity and commitments . pension and other postretirement plans note 8 hedging activities note 10 long-term debt and debt covenants ( a ) note 11 leases and capacity purchase agreements note 13 commitments and contingencies note 15 ( a ) certain of the company 's financing agreements have covenants that impose certain operating and financial restrictions , as applicable , on the company and its material subsidiaries . contractual obligations . the company 's business is capital intensive , requiring significant amounts of capital to fund the acquisition of assets , particularly aircraft . in the past , the company has funded the acquisition of aircraft through outright

the following is a discussion of the company 's sources and uses of cash from 2011 through 2013. cash flows from operating activities 2013 compared to 2012 the company 's cash from operating activities increased by $ 509 million in 2013 , as compared to 2012. cash from operations increased primarily due to the company 's improvement in earnings in 2013 . 2012 compared to 2011 the company 's cash from operating activities decreased by $ 1.5 billion in 2012 , as compared to 2011. cash from operations declined due to the company 's net loss position and the reduction of frequent flyer deferred revenue and advanced purchase of miles by $ 712 million in 2012. cash flows from investing activities 2013 compared to 2012 the company 's capital expenditures were $ 2.2 billion and $ 2 billion in 2013 and 2012 , respectively . the company 's capital expenditures for 2013 were primarily attributable to the purchase of new boeing aircraft and other fleet-related expenditures to improve the onboard experience of our existing aircraft . 41 2012 compared to 2011 the company 's capital expenditures were $ 2 billion and $ 840 million in 2012 and 2011 , respectively . the company 's capital expenditures for 2012 were primarily attributable to the purchase of new boeing aircraft and other fleet-related expenditures to improve the onboard experience of our existing aircraft . the company increased its short-term investments , net of proceeds , by $ 245 million in 2012 in order to improve interest income . cash flows from financing activities significant financing events in 2013 were as follows : on february 1 , 2013 , united redeemed all of the $ 400 million aggregate principal amount of its 9.875 % senior secured notes due 2013 and $ 200 million aggregate principal amount of 12.0 % senior second lien notes due 2013. on february 8 , 2013 , united redeemed all $ 123 million aggregate principal amount of the b tranche of the 2006-1 enhanced equipment trust certificate ( “eetc” ) equipment notes due 2013. on april 1 , 2013 , united redeemed all of the $ 180 million aggregate principal amount of the senior tranche of the 2006-1 eetc equipment notes due 2013. on march 27 , 2013 , the company used $ 900 million

the compensation committee 's duties , which are specified in our compensation committee charter , include , but are not limited to : ● reviewing and approving on an annual basis the corporate goals and objectives relevant to our chief executive officer 's compensation , evaluating our chief executive officer 's performance in light of such goals and objectives and determining and approving the remuneration ( if any ) of our chief executive officer 's based on such evaluation; ● reviewing and approving the compensation of all of our other executive officers; ● reviewing our executive compensation policies and plans; ● implementing and administering our incentive compensation equity-based remuneration plans; ● assisting management in complying with our proxy statement and annual report disclosure requirements; ● approving all special perquisites , special cash payments and other special compensation and benefit arrangements for our executive officers and employees; ● if required , producing a report on executive compensation to be included in our annual proxy statement; and ● reviewing , evaluating and recommending changes , if appropriate , to the remuneration for directors . 36 code of ethics and committee charters we have adopted a code of ethics applicable to our directors , officers and employees . we have filed a copy of our code of ethics , our audit committee charter , our nominating committee charter and our compensation committee charter as exhibits to our registration statement for our initial public offering . you will be able to review these documents by accessing our public filings at the sec 's web site at www.sec.gov . in addition , a copy of the code of ethics will be provided without charge upon request from us in writing at 1720 peachtree street , suite 629 , atlanta , ga 30309 or by telephone at ( 404 ) 239-2863. we intend to disclose any amendments to or waivers of certain provisions of our code of ethics in a current report on form 8-k. section 16 ( a ) beneficial ownership reporting compliance section 16 ( a ) of the securities exchange act of 1934 requires our officer , directors and persons who own more than ten percent of a registered class of our equity securities to file reports of ownership and changes in ownership with the sec . officers , directors and ten percent stockholders are required by regulation to furnish us with copies of all section 16 ( a ) forms they file . based solely on copies of such forms received , we believe that , during the fiscal year ended march 31 , 2018 , all filing requirements applicable to our officer , directors and greater than ten percent beneficial owners were complied with . item 11. executive compensation as of march 31 , 2020 , no executive officer has received any cash compensation for services rendered to us . we have entered into a strategic services agreement with john foley , our chief financial officer , pursuant to which we agreed to pay mr. foley consulting fees of $ 500 per hour for any hours of consulting services provided by mr. foley in excess of ten hours per month . the strategic services agreement has an initial term of two years commencing on the date of our final prospectus , as filed with the sec on july 31 , 2017 , subject to earlier termination by either party . mr. foley also received a grant of profits interests in our sponsor . we are obligated to make the same payments to our special advisors pursuant to strategic services agreements we have entered into with each of them , and each of our special advisors and dr. willis has also received a grant of profits interest in our sponsor . mr. foley resigned from his position as the chief financial officer of the company upon the closing of our business combination . the profits interests in our sponsor that were granted to dr. willis , mr. foley and our special advisors are class b membership units in our sponsor that were assigned to such individuals by mr. mays , who holds the remaining class b membership units . the value of these profits interests , if any , will be wholly dependent on the value , following the consummation of our initial business combination , of the founders ' shares and the private warrants held by our sponsor . at that time , the holders of the class b membership units would be entitled to receive distributions from the sponsor , which may consist of a portion of the founders ' shares and private warrants or the proceeds obtained by the sponsor upon the sale thereof , to the extent available after the holders of class a membership units in the sponsor shall have received distributions equal to a multiple of their initial capital contributions in the sponsor . accordingly , the value of the profits interests is related to our performance , because if the prices of our shares and warrants increase , the value of the profits interests will increase ( assuming that the holders of class a membership units have received the full amount of distributions payable to them ) . the profits interests ( or , in the case of dr. willis and mr. panton , a portion of the profits interests ) are subject to partial forfeiture if the recipient ceases providing services to us prior to the first anniversary of the consummation of our initial business combination , or if the value of the distributions received by the recipient on account of such profits interests would exceed a specified value . story_separator_special_tag however , by their nature , judgments are subject to an inherent degree of uncertainty , and , therefore , actual results could differ from our estimates . 28 under our amended and restated certificate of incorporation , all of the public shares may be converted into cash in connection with our liquidation or a tender offer or stockholder approval in connection with an initial business combination . in accordance with fasb asc 480 , “ distinguishing liabilities from equity ” , redemption provisions not solely within the control of our company require the security to be classified outside of permanent equity . ordinary liquidation events , which involve the conversion and liquidation of all of the entity 's equity instruments , are excluded from the provisions of fasb asc 480. although we did not specify a maximum conversion threshold , our charter provides that in no event will we convert the public shares in an amount that would cause its net tangible assets ( stockholders ' equity ) to be less than $ 5,000,001. we recognize changes in conversion value immediately as they occur and will adjust the carrying value of the security to equal the conversion value at the end of each reporting period . increases or decreases in the carrying amount of convertible common stock shall be affected by charges against additional paid-in capital in accordance with asc 480. accordingly , at march 31 , 2020 and march 31 , 2019 , 0 and 26,982,942 public shares were classified outside of permanent equity at their conversion value , respectively . ordinary shares subject to possible redemption we account for our ordinary shares subject to possible conversion in accordance with the guidance in accounting standards codification ( “ asc ” ) topic 480 “ distinguishing liabilities from equity . ” ordinary shares subject to mandatory redemption are classified as a liability instrument and are measured at fair value . conditionally redeemable ordinary shares ( including ordinary shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control ) are classified as temporary equity . at all other times , ordinary shares are classified as shareholders ' equity . our ordinary shares feature certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events . accordingly , the ordinary shares subject to possible redemption are presented at redemption value as temporary equity , outside the shareholders ' equity section of our balance sheet . recent accounting pronouncements management does not believe that any recently issued , but not yet effective , accounting pronouncements , if currently adopted , would have a material effect on our condensed financial statements . proposed business combination and extension on july 25 , 2019 , we issued a press release announcing the execution of the agreement among the company , computex , tango merger sub corp. , a delaware corporation and stratos management systems holdings , llc , a delaware limited liability company , pursuant to which the company agreed to acquire computex in a transaction that will result in computex becoming a wholly owned subsidiary of the company . computex is an industry-leading it service provider of choice focused on helping customers transform their businesses through technology . computex offers a comprehensive portfolio of managed it services to a wide range of clients including ucaas , directory and messaging services , enterprise networking , cybersecurity , collaboration , data center , integration , storage , backup , virtualization , and converged infrastructure . on december 20 , 2019 , we entered into amendment no . 1 to the agreement . the amendment amends the agreement to , among other things , ( i ) reduce the aggregate merger consideration payable from $ 65 million to $ 60 million , ( ii ) change the allocation of the merger consideration so that it is payable as follows : ( a ) an amount in cash equal to two-thirds of the cash raised by pensare in the pipe transaction less $ 5 million , subject to a cap of $ 20 million , ( b ) $ 5 million of any securities , other than shares of pensare 's common stock , sold in the pipe transaction , and ( c ) the balance of the merger consideration in shares of the company 's common stock , ( iii ) provide for the optional redemption of some or all of the pipe securities following the closing of the merger , to the extent that pensare raises additional funds in private placements following the of the merger , ( iv ) adjust a condition to the closing of the merger to require that pensare shall have at least an aggregate of $ 35 million of cash held either in or outside of the trust account at the effective time of the merger ( reduced from $ 150 million ) ; and ( v ) adjust the date by which the closing of the merger must occur from december 31 , 2019 to april 1 , 2020 . 29 additionally , on july 25 , 2019 , we announced that we have entered into a non-binding letter of intent to acquire a second company , a leading developer of ucaas technology and that we have joined at & t partner exchange® , a platform pursuant to which we will be able to bundle and resell certain at & t branded products and solutions with our own services following the consummation of the transaction . the business combination february 27 , 2020 , we held a special meeting of stockholders ( the “ special meeting ” ) in connection with the proposed business combination with computex . the proposed business combination was approved at the special meeting by a vote of 6,030,888 votes in favor to the proposal , 2 votes

for the year ended march 31 , 2020 , cash used in operating activities amounted to $ 3,412,413 resulting from net loss of ( $ 5,024,004 ) , interest earned on cash and marketable securities held in the trust account of $ 1,365,456 , depreciation of $ 3,660 , deferred taxes — change in valuation of $ 216,000 and changes in assets and liabilities of $ 2,757,387 for the year ended march 31 , 2019 , cash used in operating activities amounted to $ 2,041,313 resulting from net income of $ 989,799 , interest earned on cash and marketable securities held in trust account of $ 5,281,923 , depreciation of $ 3,659 , deferred income taxes of $ 216,000 , and changes in our operating assets and liabilities of $ 2,463,152. we intend to use substantially all of the remaining proceeds of the initial public offering , including funds held in the trust account , to acquire a target business and to pay our expenses related thereto . to the extent that our capital stock or debt is used , in whole or in part , as consideration to complete our business combination , the remaining proceeds held in the trust account will be used as working capital to finance the operation of the target business or businesses , make other acquisitions and pursue our growth strategies . we intend to use the funds held outside the trust account primarily to complete a business combination . in order to finance transaction costs in connection with an intended business combination , the sponsor , or certain of our officers and directors may , but are not obligated to , loan us funds as may be required . if we complete a business combination , we will repay such loaned amounts out of the proceeds of the trust account released to us . in the event that a business combination does not close , we may use a portion of the working capital held outside the trust account to repay such loaned amounts but in no event will proceeds from our trust account be used to repay such amounts . 27 we believe we have raised sufficient additional funds , when taken together with funds that may be made available to us by our sponsor , officers , directors and their affiliates through loans , to meet the expenditures required for operating our business . however , if our estimate of the costs of consummating a business

qualified costs incurred during the operating stage of our software applications relating to upgrades and enhancements are capitalized to the extent it is probable that they will result in added functionality , while costs that can not be separated between maintenance of , and minor upgrades and enhancements to , websites and internal‑use software are expensed as incurred . 70 capitalized website and software development costs are amortized on a straight ‑line basis over their estimated useful life of three years beginning with the time when it is ready for intended use . amounts amortized are presented through cost of revenue . management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets . during the years ended december 31 , 2020 and 2019 , the company capitalized $ 6,396 and $ 4,176 of website development costs , respectively . the company recorded amortization expense associated with its capitalized website development costs of $ 3,324 , including write offs of $ 844 of capitalized website development costs related to the exit of certain international markets , for the year ended december 31 , 2020. the company recorded amortization expense associated with its capitalized website development costs of $ 1,643 and $ 1,508 for the years ended december 31 , 2019 and 2018 , respectively . since the adoption of asu 2018-15 , intangibles – goodwill and other – internal-use software ( subtopic 350-24 ) : customer 's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract ( asu 2018-15 ) , on january 1 , 2019 , the company evaluates upfront costs including implementation , set-up or other costs ( collectively , implementation costs ) for hosting arrangements under the internal-use software framework . costs related to preliminary project activities and post implementation activities are expensed as incurred , whereas costs incurred in the development stage are generally capitalized . capitalized implementation costs are amortized on a straight‑line basis over an estimated useful life of the term of the hosting arrangement , taking into consideration several other factors such as , but not limited to , options to extend the hosting arrangement or options to terminate the hosting arrangement , beginning with the time when the software is ready for intended use . amounts amortized are presented through operating expense , rather than depreciation or amortization . management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets . during the years ended december 31 , 2020 and 2019 , the company launched separate initiatives designed to evaluate and enhance its enterprise applications . during the year ended december 31 , 2020 the company capitalized $ 332 of implementation costs in other non-current assets . during the year ended december 31 , 2019 , the company capitalized $ 2,615 and $ 616 of implementation costs in other non-current assets and in prepaid expenses , prepaid income taxes and other current assets , respectively . the company recorded amortization expense associated with its internal-use software of $ 690 and $ 132 for the years ended december 31 , 2020 and 2019 , respectively . business combinations valuation of acquired assets and liabilities the company measures all consideration transferred in a business combination at its acquisition-date fair value . consideration transferred is determined by the acquisition-date fair value of assets transferred , liabilities assumed , including contingent consideration obligations , as applicable . the company measures goodwill as the excess of the consideration transferred over the net of the acquisition-date amounts of assets acquired less liabilities assumed . the company makes significant assumptions and estimates in determining the fair value of the acquired assets and liabilities as of the acquisition date , especially the valuation of intangible assets and certain tax positions . the company records estimates as of the acquisition date and reassess the estimates at each reporting period up to one year after the acquisition date . changes in estimates made prior to finalization of purchase accounting are recorded to goodwill . intangible assets intangible assets are recorded at their estimated fair value at the date of acquisition . the company amortizes intangible assets over their estimated useful lives on a straight-line basis . amortization is recorded over the relevant estimated useful lives ranging from three to eleven years . the company evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets . if the estimate of an intangible asset 's remaining useful life is changed , the company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life . for the years ended december 31 , 2020 and 2019 , the company did no t identify any impairment of its intangible assets . 71 goodwill goodwill is recorded when consideration paid in a purchase acquisition exceeds the fair value of the net assets acquired . goodwill is not amortized , but rather is tested for impairment annually or more frequently if facts and circumstances warrant a review . conditions that could trigger a more frequent impairment assessment include , but are not limited to , a significant adverse change in certain agreements , significant underperformance relative to historical or projected future operating results , an economic downturn affecting automotive marketplaces , increased competition , a significant reduction in our stock price for a sustained period or a reduction of our market capitalization relative to net book value . story_separator_special_tag these costs include salaries , benefits , incentive compensation , and stock-based compensation for our customer support team and third-party service provider costs such as data center and networking expenses , allocated overhead costs , depreciation expense associated with our property and equipment , and amortization of capitalized website development costs . we allocate overhead costs , such as rent and facility costs , information technology costs , and employee benefit costs , to all departments based on headcount . as such , general overhead expenses are reflected in cost of revenue and each operating expense category . despite our implementation of the expense reduction plan , we expect these expenses to increase as we continue to scale our business and introduce new products . operating expenses sales and marketing sales and marketing expenses consist primarily of personnel and related expenses for our sales and marketing team , including salaries , benefits , incentive compensation , commissions , stock-based compensation , and travel costs ; costs associated with consumer marketing , such as traffic acquisition , brand building , and public relations activities ; costs associated with dealer marketing , such as content marketing , customer and promotional events , and industry events ; amortization of internal-use software ; and allocated overhead costs . a portion of our commissions that are related to obtaining a new contract is capitalized and amortized over the estimated benefit period of customer relationships . all other sales and marketing costs are expensed as incurred . we expect sales and marketing expenses to fluctuate from quarter to quarter as we respond to the covid-19 pandemic and changes in the competitive landscape affecting our consumer audience and brand awareness , which will impact our quarterly results of operations . product , technology , and development product , technology , and development expenses , which include research and development costs , consist primarily of personnel and related expenses for our development team , including salaries , benefits , incentive compensation , stock-based compensation and allocated overhead costs . other than website development and internal-use software costs as well as other costs that qualify for capitalization , research and development costs are expensed as incurred . despite our implementation of the expense reduction plan , we expect product , technology , and development expenses to increase as we invest in additional engineering resourcing to develop new solutions and make improvements to our existing platform . general and administrative general and administrative expenses consist primarily of personnel and related expenses for our executive , finance , legal , people & talent , and administrative teams , including salaries , benefits , incentive compensation , and stock-based compensation , in addition to the costs associated with professional fees for external legal , accounting and other consulting services , insurance premiums , payment processing and billing costs , and allocated overhead costs . general and administrative costs are expensed as the products and services are provided . despite our implementation of the expense reduction plan , we expect general and administrative expenses to increase as we continue to scale our business . depreciation and amortization depreciation and amortization expenses consist of depreciation on property and equipment and amortization of intangible assets . 41 other incom e , net other income , net consists primarily of interest income earned on our cash , cash equivalents , and investments , sublease income and net foreign exchange gains and losses . provision for ( benefit from ) income taxes we are subject to federal and state income taxes in the united states and taxes in foreign jurisdictions in which we operate . we have recorded a provision for income taxes for the year ended december 31 , 2020 as a result of our consolidated taxable income position and recognized a benefit from income taxes for the year ended december 31 , 2019 as a result of stock-based compensation benefits recorded . we recognize deferred tax assets and liabilities based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates . we regularly assess the need to record a valuation allowance against net deferred tax assets if , based upon the available evidence , it is more likely than not that some or all of the deferred tax assets will not be realized . our valuation allowances against our net deferred tax assets as of december 31 , 2020 and 2019 were both immaterial . results of operations the following table sets forth our selected consolidated income statements data for each of the periods indicated . the period‑to‑period comparison of financial results is not necessarily indicative of future results . replace_table_token_7_th replace_table_token_8_th 42 the following table sets forth our selected consolidated income statements data as a percentage of revenue for each of the periods indicated . replace_table_token_9_th replace_table_token_10_th note amounts in tables above may not sum due to rounding . 43 year ended december 31 , 2020 compared to year ended december 31 , 2019 revenue revenue by source replace_table_token_11_th overall revenue decreased $ 37.5 million , or 6 % , in the year ended december 31 , 2020 compared to the year ended december 31 , 2019. marketplace subscription revenue decreased by 8 % and advertising and other revenue increased by 6 % . marketplace subscription revenue decreased $ 41.1 million in the year ended december 31 , 2020 compared to the year ended december 31 , 2019 and represented 88 % of total revenue for the year ended december 31 , 2020 and 89 % of total revenue for the year ended december 31 , 2019 . this decrease in marketplace subscription revenue was attributable primarily to the approximately $ 50 million impact of fee reductions that we provided to our paying dealers during the second quarter of 2020 in response to the covid-19 pandemic . of the approximately $ 50 million in billing concessions , approximately $ 47 million resulted in revenue reductions during

cash provided by operating activities of $ 70.1 million during 2019 was due primarily to net income of $ 42.1 million , adjusted for $ 34.3 million of stock-based compensation expense , $ 8.4 million of amortization of deferred contract costs and $ 7.8 million of depreciation and amortization , partially offset by $ 3.7 million of deferred taxes . cash provided by operating activities was also attributable to a $ 4.3 million increase in accounts payable , a $ 2.8 million increase in accrued expenses , accrued income taxes , and other liabilities and a $ 1.2 million increase in deferred revenue , partially offset by a $ 16.0 million increase in deferred contract costs , a $ 9.6 million increase in accounts receivable , and a $ 1.5 million decrease in lease obligations . 48 investing activities cash used in investing activities of $ 16.9 million during 2020 was due to $ 21.1 million of acquisition cash payments , net of cash acquired , $ 4.6 million related to the capitalization of website development costs , and $ 3.0 million of purchases of property and equipment , offset in part by $ 111.7 million of maturities in certificates of deposit , net of investments in certificates of deposit of $ 100.0 million . cash used in investing activities of $ 22.3 million during 2019 was due to $ 19.1 million of acquisition cash payments , $ 11.2 million of purchases of property and equipment and $ 3.0 million related to the capitalization of website development costs . this was offset by $ 188.9 million of maturities of certificates of deposit , net of investments in certificates of deposit of $ 177.8 million . financing activities cash used in financing activities of $ 10.1 million during 2020 was due primarily to the payment of withholding taxes on net share settlements of restricted stock units of $ 11.2 million , partially offset by $ 1.1 million related to the proceeds from the issuance of common stock related to the exercise of vested stock options . cash used in financing activities of $ 14.7 million during 2019 was due primarily to the payment of withholding taxes and option costs on net share settlements of restricted stock units and stock options of $ 16.5 million , partially offset by $ 1.8

the compensation committee operates under a written charter that satisfies the applicable standards of the sec and nasdaq . nominating and corporate governance committee . the nominating and corporate governance committee 's responsibilities include : ● identifying individuals qualified to become board members ; ● recommending to our board of directors the persons to be nominated for election as directors and to each board committee ; ● developing and recommending to our board of directors ' corporate governance guidelines , and reviewing and recommending to our board of directors proposed changes to our corporate governance guidelines from time to time ; and ● overseeing a periodic evaluation of our board of directors . the initial members of our nominating and corporate governance committee will be douglas losordo ( chair ) and cathy ross , with additional members to be added . mr. losordo and ms. ross are independent under the applicable rules and regulations of nasdaq relating to nominating and corporate governance committee independence . the nominating and corporate governance committee operates under a written charter that satisfies the applicable standards of the sec and nasdaq . compensation committee interlocks and insider participation no member of our compensation committee will have been a current or former officer or employee . none of our executive officers served as a director or a member of a compensation committee ( or other committee serving an equivalent function ) of any other entity , one of whose executive officers served as a director or member of our compensation committee during the last completed fiscal year . 84 code of ethics and code of conduct we have adopted a written code of business conduct and ethics that applies to our directors , officers and employees , including our principal executive officer , principal financial officer , principal accounting officer or controller , or persons performing similar functions . our code of business conduct and ethics is available under the corporate governance section of our website at www.longeveron.com . in addition , we intend to post on our website all disclosures that are required by law or the nasdaq rules concerning any amendments to , or waivers from , any provision of the code . 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 form 10-k. item 11. executive compensation this section discusses the material components of the executive compensation program for our executive officers who are named in the “ summary compensation table ” below , whom we refer to as our “ neos . ” this discussion may contain forward-looking statements that are based on our current plans , considerations , expectations and determinations regarding future compensation programs . summary compensation table the following table presents summary information regarding the total compensation that was awarded to , earned by or paid to our neos for services rendered during the years ended december 31 , 2020 and 2019. replace_table_token_8_th ( 1 ) other compensation represents 401 ( k ) matching and health insurance costs paid by the company . ( 2 ) dr. hare did not receive any additional compensation from the company in connection with his service on the board in 2019 or 2020 . ( 3 ) amount reflects the full value of consulting fees earned by dr. hare during fiscal year 2020. of this amount , the company deferred $ 270,625 of the payment of his 2020 and 2019 consulting compensation . ( 4 ) mr. clavijo 's employment agreement was amended whereby his salary increased to $ 210,000 on december 1 , 2020. mr. clavijo deferred $ 5,000 of his 2020 salary . ( 5 ) mr. lehr deferred $ 57,801 in total of his $ 210,000 consulting compensation due in 2019 and 2020. narrative disclosure to compensation tables the primary elements of compensation for our neos are base salary , discretionary annual performance bonuses and discretionary equity awards . our neos are also entitled to participate in employee benefit plans and programs that we offer to our other employees , as described below . annual base salary . we pay our neos a base salary or a consulting fee to compensate them for the satisfactory performance of services rendered to us . the base salary payable to each neo is intended to provide a fixed component of compensation reflecting the executive 's skill set , experience , role and responsibilities . base salaries for our neos have generally been set at lower levels than would normally be deemed necessary to attract and retain individuals with this level of talent . 85 bonus compensation . from time to time our board , upon the recommendation of our chief executive officer , may approve bonuses for our neos based on individual performance , company performance or as otherwise determined appropriate . equity-based incentive awards . our equity-based incentive awards are designed to align our interests and the interests of our stockholders with those of our employees and consultants , including our named executive officers . the board of directors is responsible for approving equity grants . prior to our conversion to a corporation in february 2021 as part of our ipo , we granted restricted stock units ( rsus ) to purchase series c units under the 2017 longeveron llc incentive plan ( the “ 2017 incentive plan ” ) . in january 2021 we granted awards of 159,817 restricted units to our directors , executive officers , and employees under the 2017 incentive plan . each restricted unit represented the right to receive a series c unit upon vesting , which thereafter converted into the right to receive 855,247 shares of class a common stock pursuant to the corporate conversion . story_separator_special_tag 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 additional funds through other third-party funding , collaboration agreements , strategic alliances , licensing arrangements or marketing and distribution arrangements , 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 . 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 biologic drug 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 as of december 31 , 2020 , we have $ 4,354,000 in operating lease obligations . we enter into contracts in the normal course of business with third-party contract organizations for clinical trials , preclinical studies , manufacturing and other services and products for operating purposes . these contracts generally provide for termination following a certain period after notice and therefore we believe that our non-cancelable obligations under these agreements are not material and they are not included in the table above . we have not included milestone or royalty payments or other contractual payment obligations in the table above if the timing and amount of such obligations are unknown or uncertain . critical accounting policies and use of estimates our management 's discussion and analysis of financial condition , results of operations and liquidity are based on our financial statements , which have been prepared in accordance with generally accepted accounting principles in the united states ( u.s. gaap ” ) . the preparation of our financial statements and related disclosures requires us to make estimates , judgements 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 and the reported amounts of revenues and expenses during the reporting period . 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 materially differ from these estimates under different assumptions or conditions . on an on-going basis , we review our estimates to ensure that they appropriately reflect changes in our business or new information as it becomes available . while our significant accounting policies are described in more detail in the notes to our financial statements appearing at the end of this form 10-k , we believe that the following accounting policies are those most critical due to the judgments and estimates used in the preparation of our financial statements . intangible assets . intangible assets include payments on license agreements with our co-founder and chief science officer and the university of um and legal costs incurred related to patents and trademarks . license agreements have been recorded at the value of cash consideration and or membership units transferred to the respective parties when acquired . payments on license agreements are amortized using the straight-line method over the estimated useful life of 20 years . patents are amortized over their estimated useful life , once issued . we consider trademarks to have an indefinite useful life and evaluates them for impairment on an annual basis . amortization expense is recorded in the research and development line of the statement of operations as the assets are primarily related to our clinical programs . impairment of long-lived assets . we evaluate long-lived assets for impairment , including property and equipment and intangible assets , when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable . upon the occurrence of a triggering event , the asset is reviewed to assess whether the estimated undiscounted cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset . if the carrying value exceeds the estimated recoverable amounts , the asset is written down to the estimated fair value . any resulting impairment loss is reflected on the statements of operations . management determined that there was no impairment of long-lived assets during the year ended december 31 , 2020 and 2019 . 74 deferred revenue . the unearned portion of advanced grant funds and prepayments for clinical trial revenue , which will be recognized as revenue when we meet the respective performance obligations , has been presented as deferred revenue in our balance sheets . for the year ended december 31 , 2020 and 2019 , we recognized $ 542,000 and $ 408,000 , respectively , of funds that were previously classified as deferred revenue . revenue recognition . we adopted asc topic 606 , revenue from contracts with customers , which establishes a single and comprehensive framework on how much revenue is to be recognized , and when , effective january 1 , 2018. the core principle is that a vendor should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services . revenue will be recognized by a vendor when control over the goods or services is transferred to the customer . we recognize revenue when performance obligations related to respective revenue streams are met . for grant revenue , we consider the performance obligation

on march 4 , 2021 , the $ 0.3 million due for the ppp loan was forgiven . revenue from our bahamas registry trial , after the bahamas lifted the covid-19 travel restrictions , has been slowed due to continued concerns for international travel . during the year ended december 31 , 2020 , we received $ 0.5 million from loans provided by the sba . on september 15 , 2020 , we were awarded a $ 0.7 million grant from the maryland stem cell research commission ( tedco ) for the use of our cell-based technology for ards due to covid-19 and the flu . 71 capital in 2020 during the year ended december 31 , 2020 , we received $ 1.1 million from investors in exchange of 18,335 series c membership units . these units were subsequently converted into shares of class a common stock as part of our corporate conversion , as discussed below . capital in 2021 on february 12 , 2021 , as part of our ipo , our class a common stock began to trade on the nasdaq under the stock symbol “ lgvn ” . pursuant to our ipo , we sold 2,660,000 shares of class a common stock at an ipo price of $ 10.00 per share for aggregate gross proceeds of $ 26,600,000 prior to deducting underwriting discounts , commissions , and other offering expenses . in addition , we granted the underwriters a 30-day option to purchase up to an additional 399,000 shares at the ipo price less the underwriting discounts and commissions . on march 15 , 2021 , the underwriters of our ipo partially exercised their over-allotment option to purchase an additional 250,000 shares of class a common stock at a public offering price of $ 10.00 per share for aggregate gross proceeds of $ 2,500,000 prior to deducting underwriting discounts , commissions , and other offering expenses , from the partial

changes in the fair values of financial derivatives not designated as cash flow hedges are reported in `` gains/ ( losses ) on financial derivatives and hedging activities `` in the consolidated statements of operations . for financial derivatives designated in fair value hedging relationships , changes in the fair values of the hedged items related to the risk being hedged are also reported in `` gains/ ( losses ) on financial derivatives and hedging activities `` in the consolidated statements of operations . the accrual of the contractual amounts due on the financial derivative is included as an adjustment to the yield of the hedged item and is reported in net interest income . for financial derivatives designated in cash flow hedging relationships , the effective portion of the derivative gain/loss is recorded in other comprehensive income ; amounts are disclosed as a reclassification out of other comprehensive income and affecting net interest income when the hedged forecasted transaction affects earnings . any ineffective portion of designated hedge transactions is recognized immediately in `` gains/ ( losses ) on financial derivatives and hedging activities `` in the consolidated statements of operations . farmer mac has made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio , consistent with how farmer mac previously has been measuring credit risk for these instruments . see notes 6 and 13 for more information on financial derivatives . ( i ) notes payable notes payable are classified as due within one year or due after one year based on the length of time remaining to their contractual maturities . debt issuance costs and premiums and discounts are deferred and amortized to interest expense using the effective interest method over the contractual life of the related debt . ( j ) allowance for loan losses and reserve for losses farmer mac maintains an allowance for losses to cover estimated probable losses incurred as of the balance sheet date on loans held ( `` allowance for loan losses `` ) and loans underlying ltspcs and off-balance sheet farmer mac guaranteed securities ( `` reserve for losses `` ) based on available information . disaggregation by commodity type is performed , where appropriate , in analyzing the need for an allowance for losses . the allowance for losses increases through periodic provisions for loan losses that are charged against net interest income and the reserve for losses increases through provisions for losses that are charged to non-interest expense , and decreases by charge-offs for actual losses , net of recoveries . negative provisions , or releases of allowance for losses , generally occur when the estimate of probable losses as of the end of a period is lower than the estimate at the beginning of the period . in certain circumstances , for example , 139 when a defaulted loan is purchased out of a guaranteed security or pursuant to an ltspc , the related reserve for losses is reclassified as allowance for loan losses and there is a corresponding release from the provision for losses and a charge to the provision for loan losses . the total allowance for losses consists of a general allowance for losses and a specific allowance for individual impaired loans . charge-offs farmer mac records a charge-off against the allowance for losses principally when a loss has been confirmed through the receipt of assets , generally the underlying collateral , in full satisfaction of the loan . the loss equals the excess of the recorded investment in the loan over the fair value of the collateral less estimated selling costs . general allowance for losses farm & ranch farmer mac 's methodology for determining its allowance for losses incorporates farmer mac 's automated loan classification system . that system scores loans based on criteria such as historical repayment performance , indicators of current financial condition , loan seasoning , loan size and loan-to-value ratio . the allowance methodology captures the migration of loan scores across concurrent and overlapping 3-year time horizons and calculates loss rates separately within each loan classification for ( 1 ) loans underlying ltspcs and ( 2 ) loans held and loans underlying farm & ranch guaranteed securities . the calculated loss rates are applied to the current classification distribution of unimpaired loans in farmer mac 's portfolio to estimate inherent losses , on the assumption that the historical credit losses and trends used to calculate loss rates will continue in the future . management evaluates this assumption by taking into consideration several factors , including : economic conditions ; geographic and agricultural commodity/product concentrations in the portfolio ; the credit profile of the portfolio ; delinquency trends of the portfolio ; historical charge-off and recovery activities of the portfolio ; and other factors to capture current portfolio trends and characteristics that differ from historical experience . management believes that its use of this methodology produces a reasonable estimate of probable losses , as of the balance sheet date , for all loans held in the farm & ranch portfolio and loans underlying off-balance sheet farm & ranch guaranteed securities and ltspcs . there were no purchases or sales during 2015 that materially affected the credit profile of the farm & ranch portfolio . rural utilities farmer mac separately evaluates the rural utilities loans it owns to determine if there are any probable losses inherent in those assets . no allowance for losses has been provided for this portfolio segment based on the performance of these loans and the credit quality of the collateral supporting rural utilities assets 140 and farmer mac 's counterparty risk analysis . as of december 31 , 2015 , there were no delinquencies and no probable losses inherent in farmer mac 's rural utilities loans held or underlying ltspcs . story_separator_special_tag also reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets and a reconciling adjustment to exclude the recognition of deferred gains over the estimated lives of certain farmer mac guaranteed securities and usda securities . includes $ 39.4 million of interest expense related to securities purchased under agreements to resell and securities sold , not yet purchased and $ 37.0 million of realized gains on securities sold , not yet purchased during 2014. includes $ 3.1 million of realized gains from the sale of an available-for-sale investment security during 2013 . ( 7 ) includes the tax impact of non-gaap reconciling items between net income attributable to common stockholders and core earnings because those non-gaap reconciling items are presented after tax . income tax expense as reported in the consolidated statements of operations includes the reduction of $ 13.0 million tax valuation allowance against capital loss carryforwards related to capital gains on securities sold , not yet purchased during 2014 , a reduction in tax valuation allowance of $ 0.9 million and $ 2.1 million associated with certain gains on investment portfolio assets during 2014 and 2013 , respectively , and the reduction of $ 1.1 million of tax valuation allowance against capital loss carryforwards related to realized gains from the sale of an available-for-sale investment security during 2013. specifically , the five non-gaap reconciling items between net income attributable to common stockholders and core earnings , presented on an after-tax basis , are : 1. unrealized gains/ ( losses ) on financial derivatives and hedging activities . the table below calculates the non-gaap reconciling item for unrealized gains/ ( losses ) on financial derivatives and hedging activities , after tax . table 2 replace_table_token_20_th 73 2. gains/ ( losses ) on trading assets . the table below calculates the non-gaap reconciling item for gains/ ( losses ) on trading assets , after tax . table 3 non-gaap reconciling item for unrealized gains/ ( losses ) on trading assets , after tax for the year ended december 31 , 2015 2014 2013 ( in thousands ) gains/ ( losses ) on trading securities ( see consolidated statements of operations ) $ 1,220 $ 38,629 $ ( 819 ) less : realized gains related to securities sold , not yet purchased ( see `` md & a - results of operations - gains and losses on trading securities `` ) — ( 37,032 ) — unrealized gains/ ( losses ) on trading assets , before tax 1,220 1,597 ( 819 ) income tax impact at 35 % statutory corporate income tax rate ( 427 ) ( 559 ) 286 unrealized gains/ ( losses ) on trading assets , after tax $ 793 $ 1,038 $ ( 533 ) 3. amortization of premiums/discounts and deferred gains on assets consolidated at fair value . the amount of this non-gaap reconciling item is the recorded amount of premium , discount , or deferred gain amortization during the reporting period on those assets for which the premium , discount or deferred gain was based on the application of an accounting principle ( e.g . , consolidation of variable interest entities ) rather than on a cash transaction ( e.g . , a purchase price premium or discount ) . 4. the net effect of settlements on agency forward contracts that are used as a short-term economic hedge of the issuance of debt . for gaap purposes , realized gains or losses on settlements of agency forward contracts used as a short-term hedge of the issuance of debt are reported in the consolidated statements of operations in the period in which they occur . for core earnings purposes , these realized gains or losses on settlements of agency forward contracts are deferred and amortized as yield adjustments over the term of the related debt , which generally ranges from 3 to 15 years . 5. the loss on retirement of the farmer mac ii llc preferred stock in first quarter 2015 has been excluded from core earnings because it is not a frequently occurring transaction and not indicative of future operating results . this is also consistent with farmer mac 's previous treatment of these types of origination costs associated with securities underwriting that are capitalized and deferred during the life of the security . the following sections provide more detail regarding specific components of farmer mac 's results of operations . 74 net interest income . the following table provides information regarding interest-earning assets and funding for the years ended december 31 , 2015 , 2014 , and 2013 . the average balance of non-accruing loans is included in the average balance of loans , farmer mac guaranteed securities , and usda securities presented , though the related income is accounted for on a cash basis . therefore , as the average balance of non-accruing loans and the income received increases or decreases , the net interest yield will fluctuate accordingly . the average balance of loans in consolidated trusts with beneficial interests owned by third parties is disclosed in the net effect of consolidated trusts and is not included in the average balances of interest-earning assets and interest-bearing liabilities . the interest income and expense associated with these trusts are shown in the net effect of consolidated trusts . table 4 replace_table_token_21_th ( 1 ) average balance in 2014 includes $ 906.4 million of securities purchased under agreements to resell . includes $ 0.4 million of interest expense related to securities purchased under agreements to resell in 2014 . ( 2 ) includes $ 11.6 million and $ 15.9 million related to the acceleration of premium amortization in first quarter 2014 and fourth quarter 2013 due to refinancing activity in the rural utilities line of business . ( 3 ) excludes interest income of $ 20.1 million , $ 13.9 million , and $ 7.9

general and administrative expenses , including legal , audit , and consulting fees , were $ 13.1 million for 2015 compared to $ 12.2 million and $ 11.6 million , respectively , for 2014 and 2013. the increase in general and administrative expenses in 2015 compared to 2014 was 82 due primarily to legal fees incurred for the preparation of comment letters in response to fca 's proposed rule on farmer mac 's board governance and standards of conduct and higher legal and consulting fees and information services expenses related to corporate strategic initiatives . additionally , general and administrative costs for 2015 and 2014 included $ 0.5 million and $ 0.1 million , respectively , in operating expenses for farmer mac 's consolidated appraisal company subsidiary . the increase in general and administrative expenses in 2014 compared to 2013 were primarily attributable to fees related to farmer mac 's cash management and liquidity initiative and other corporate strategic initiatives . regulatory fees . regulatory fees ( which consist of the fees paid to fca ) were $ 2.4 million for 2015 , 2014 , and 2013. fca has advised farmer mac that its estimated fees for the federal fiscal year ending september 30 , 2016 will remain at the same level ( $ 0.6 million per federal fiscal quarter ) as the prior federal fiscal year . after the end of a federal government fiscal year , fca may revise its prior year estimated assessments to reflect actual costs incurred , and has issued both additional assessments and refunds in the past . income tax expense . income tax expense totaled $ 34.2 million in 2015 , compared to income tax expense of $ 2.8 million and $ 33.8 million , respectively , for 2014 and 2013. the increase in income tax expense in 2015 compared to 2014 was a result of higher pre-tax income in 2015 and the absence

71 10.12+ amendment to exlservice holdings , inc. 2006 omnibus award plan ( incorporated by reference to exhibit 10.43 of amendment 5 to the company 's registration statement on form s-1 ( registration no . 333-121001 ) filed october 4 , 2006 ) . 10.13+ amendment no . 2 to exlservice holdings , inc. 2006 omnibus award plan ( incorporated by reference to exhibit 10.46 of amendment 6 to the registration statement on form s-1 ( registration no . 333-121001 ) filed october 17 , 2006 ) . 10.14+ amendment no . 3 to exlservice holdings , inc. 2006 omnibus award plan ( incorporated by reference to exhibit 4.6 to the company 's registration statement on form s-8 ( registration no . 333-157076 ) filed february 2 , 2009 ) . 10.15+ form of restricted stock unit agreement ( u.s. ) under the 2006 omnibus award plan ( incorporated by reference to exhibit 10.1 to the company 's quarterly report on form 10-q ( file no . 1-33089 ) filed on may 1 , 2014 ) . 10.16+ exlservice holdings , inc. 2015 amendment and restatement of the 2006 omnibus award plan ( incorporated by reference to exhibit 10.1 to the company 's current report on form 8-k ( file no . 1-33089 ) filed on june 25 , 2015 ) . 10.17+ form of restricted stock unit agreement ( u.s. ) under the exlservice holdings , inc. 2015 amendment and restatement of the 2006 omnibus award plan ( incorporated by reference to exhibit 10.1 to the company 's quarterly report on form 10-q ( file no . 1-33089 ) filed on october 27 , 2016 ) . 10.18+ form of restricted stock unit agreement ( u.s. ) under the exlservice holdings , inc. 2015 amendment and restatement of the 2006 omnibus award plan “ ( incorporated by reference to exhibit 10.40 to the company 's annual report on form 10-k ( file no . 1-33089 ) filed on march 15 , 2017 ) . 10.19+ exlservice holdings , inc. 2018 omnibus incentive plan ( incorporated by reference to exhibit 10.1 to the company 's current report on form 8-k ( file no . 1-33089 ) filed on june 20 , 2018 ) . 10.20+ form of restricted stock unit agreement ( u.s. executive officers combined ) under the 2018 omnibus incentive plan ( incorporated by reference to exhibit 10.2 to the company 's current report on form 8-k ( file no . 1-33089 ) filed on june 20 , 2018 ) . 10.21+ form of restricted stock unit agreement ( international executive officers ) under the 2018 omnibus incentive plan ( incorporated by reference to exhibit 10.3 to the company 's current report on form 8-k ( file no . 1-33089 ) filed on june 20 , 2018 ) . 10.22+ form of restricted stock unit agreement ( directors ) under the 2018 omnibus incentive plan ( incorporated by reference to exhibit 10.4 to the company 's current report on form 8-k ( file no . 1-33089 ) filed on june 20 , 2018 ) . 10.23 credit agreement , dated as of november 21 , 2017 , among exlservice holdings , inc. , the other loan parties thereto , the lenders party thereto , and citibank , n.a . , as administrative agent , citibank , n.a . and pnc capital markets llc , as joint lead arrangers and joint bookrunners , and jpmorgan chase bank , n.a . , as syndication agent ( incorporated by reference to exhibit 10.37 to the company 's annual report on form 10-k ( file no . 1-33089 ) filed on february 27 , 2018 ) . 10.24 first amendment to credit agreement , dated as of july 2 , 2018 , by and among the company and the other loan parties thereto , the lenders party thereto , and citibank , n.a . , as administrative agent ( incorporated by reference to exhibit 10.24 to the company 's annual report on form 10-k ( file no . 1-33089 ) filed on february 28 , 2019 ) . 10.25 second amendment to credit agreement , dated as of october 1 , 2018 , by and among the company and the other loan parties thereto , the lenders party thereto , and citibank , n.a . , as administrative agent ( incorporated by reference to exhibit 10.2 to the company 's current report on form 8-k ( file no . 1-33089 ) filed on october 4 , 2018 ) . 10.26 investment agreement , dated as of october 1 , 2018 , by and between the company and orogen echo llc ( incorporated by reference to exhibit 10.1 to the company 's current report on form 8-k ( file no . 1-33089 ) filed on october 4 , 2018 ) . 21.1 subsidiaries of the company . 23.1 consent of deloitte & touche llp , independent registered public accounting firm . 31.1 certification of the chief executive officer of exlservice holdings , pursuant to rule 13a-14 ( a ) of the exchange act , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 31.2 certification of the chief financial officer of exlservice holdings , pursuant to rule 13a-14 ( a ) of the exchange act , as adopted pursuant to section 302 of the sarbanes-oxley act of 2002 . 72 32.1 certification of the chief executive officer pursuant to rule 13a-14 ( b ) of the exchange act and 18 u.s.c . section 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 . 32.2 certification of the chief financial officer pursuant to rule 13a-14 ( b ) of the exchange act and 18 u.s.c . section 1350 , as adopted pursuant to section 906 of the sarbanes-oxley act of 2002 . story_separator_special_tag general and administrative ( “ g & a ” ) expenses also include acquisition-related costs , legal and professional fees ( which represent the costs of third party legal , tax , accounting and other advisors ) , investment in product development , digital technology , advanced automation and robotics , bad debt allowance and non-cash amortization of stock compensation expenses related to our issuance of equity awards to members of our board of directors . we expect our g & a costs to increase as we continue to strengthen our support and enabling functions and invest in leadership development , performance management and training programs . selling and marketing expenses primarily consist of salaries and benefits ( including stock based compensation ) and other compensation expenses of sales and marketing and client management personnel , sales commission , travel and brand building , client events and conferences . we expect that sales and marketing expenses will continue to increase as we invest in our sales and client management functions to better serve our clients and in our branding . depreciation and amortization expense depreciation and amortization pertains to depreciation of our tangible assets , including network equipment , cabling , computers , office furniture and equipment , motor vehicles and leasehold improvements and amortization of intangible assets . as we add new facilities and expand our existing operations centers , we expect that depreciation expense will increase , reflecting additional investments in equipment such as desktop computers , servers and other infrastructure . we expect amortization of intangible assets to increase further as we pursue strategic relationships and acquisitions . 41 impairment charges impairment charges pertain to the write down of carrying values to fair values of goodwill and intangible assets acquired in a business combination . we perform our annual impairment test annually during the fourth quarter , or more frequently , as circumstances warrant , for all our reporting units and intangible assets . based on the results , if the carrying values of our reporting units exceeds their fair values , we record impairment charges to the extent that carrying value exceeds estimated fair value . long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable . such assets are required to be tested for impairment if the carrying amount of the assets is higher than the future undiscounted net cash flows expected to be generated from the assets . the impairment amount to be recognized is measured as the amount by which the carrying value of such assets exceeds their fair value . foreign exchange we report our financial results in the u.s. dollar . however , a significant portion of our total revenues are earned in the u.k. pound sterling ( 8.3 % and 10.2 % , respectively , for the years ended december 31 , 2020 and 2019 ) , while a significant portion of our expenses are incurred and paid in indian rupees ( 27.2 % and 25.6 % , respectively , of our total costs for the years ended december 31 , 2020 and 2019 ) and the philippine peso ( 11.5 % and 7.9 % , of our total costs for the years ended december 31 , 2020 and 2019 ) . the exchange rates among the indian rupee , the philippine peso , the u.k. pound sterling and the u.s. dollar have changed substantially in recent years and may fluctuate substantially in the future as well . the results of our operations could be substantially impacted as the indian rupee , the philippine peso and the u.k. pound sterling appreciate or depreciate against the u.s. dollar . see note 2 - summary of significant accounting policies and note 17 - derivatives and hedge accounting to our consolidated financial statements and part ii , item 7a , “ quantitative and qualitative disclosures about market risk-foreign currency risk . ” interest expense interest expense primarily consist of interest on our borrowings under our credit facility and convertible senior notes , finance lease liabilities and notional interest implicit in the purchase of property and equipment . other income , net other income , net primarily consists of gain/ ( loss ) on sale , mark to market and dividend income on our investments in mutual funds , and interest on time deposits classified under “ cash and cash equivalents ” , “ short-term investments ” and “ other assets ” , as applicable on our consolidated balance sheets . other income , net also consists of changes in fair value of earn-out consideration , interest on refunds received from income tax authorities in india on completion of tax assessments and components of net periodic benefit cost such as interest cost , expected return on plan assets , amortization of actuarial gain or loss and profit or loss on disposal of long-lived assets . income taxes we are subject to income taxes in the united states and other foreign jurisdictions . our tax expense and cash tax liability in the future could be adversely affected by various factors , including , but not limited to , changes in tax laws , regulations , accounting principles or interpretations and the potential adverse outcome of tax examinations . changes in the valuation of deferred tax assets and liabilities , which may result from a decline in our profitability or changes in tax rates or legislation , could have a material adverse effect on our tax expense . during the year 2018 , we made an election to change the tax status of most of our controlled foreign corporations ( “ cfc ” ) to disregarded entities for u.s. income tax purposes . as a result , we no longer have undistributed earnings in connection with these cfcs . the transition tax resulted in previously taxed income ( “ pti ” ) which may be subject to

the major drivers contributing to the increase of $ 76.0 million year-over-year included the following : increase in net income of $ 10.9 million in 2019 compared to 2018 , primarily due to an increase in income from operations of $ 26.6 million driven by growth in revenues , partially offset by higher income tax expense of $ 11.8 million and lower interest and other income of $ 3.9 million . changes in accounts receivable , including advance billings , contributed additional cash flow of $ 14.6 million in 2019 compared to 2018. the increase was a result of the growth in our revenues ( including revenues from our scio acquisition in july 2018 ) and higher collections of our accounts receivable . as a result , our accounts receivable days sales outstanding improved to 59 days in 2019 from 62 days in 2018. increases in accrued employee costs , accrued expenses and other liabilities contributed additional cash flow of $ 30.9 million in 2019 compared to 2018 , primarily resulting from higher annual performance incentives and other employee costs accruals of $ 15.6 million , higher accrued expenses of $ 8.2 million due to an increase in our cost base to support 58 revenue growth , and lower cash outflows in client liabilities of $ 4.3 million due to lower funds held on behalf of our clients . other drivers increasing operating cash flows in 2019 compared to 2018 included : income tax expense , net of advances and deferred taxes , of $ 9.6 million , primarily due to higher income tax provisions and timing of payments ; and changes in various current assets and other assets aggregating to $ 10.3 million , primarily due to higher recovery of our receivables from statutory authorities in 2019 compared to 2018. investing activities : cash flows used for investing activities were $ 18.3 million for the year ended december 31 , 2020 as compared to cash flows

evaluation of disclosure controls and procedures our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in rules 13a-15 ( f ) and 15d-15 ( f ) under the securities exchange act . our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with section 404 of the sarbanes-oxley act of 2002 ( “ section 404 ” ) . management assessed the effectiveness of our internal control over financial reporting as of december 31 , 2019. in making this assessment , we used the criteria set forth by the committee of sponsoring organizations of the treadway commission ( coso ) in internal control - integrated framework . during our assessment of the effectiveness of internal control over financial reporting as of december 31 , 2019 , management identified material weaknesses related to ( i ) our internal audit functions ( ii ) inadequate levels of review of the financial statements , ( iii ) a lack of segregation of duties within accounting functions and ( iv ) the absence of any independent directors . therefore , our internal controls over financial reporting were not effective as of december 31 , 2019 . 24 management has determined that our internal controls contain material weaknesses due to the absence of segregation of duties , as well as lack of qualified accounting personnel and excessive reliance on third party consultants for accounting , financial reporting and related activities . the lack of any separation of duties , with the same person , who is our only employee who serves as both chief executive officer and chief financial officer , and who does not have an accounting background and serves on a part-time basis , makes it unlikely that we will be able to implement effective internal controls over financial reporting in the near future . due to our size and nature , segregation of all conflicting duties is not possible . however , to the extent possible , we plan to implement procedures to assure that the initiation of transactions , the custody of assets and the recording of transactions will be performed by separate individuals if and when we have sufficient income to enable us to hire such individuals , and we can not give any assurance that we will be able to hire such personnel . our financial condition makes it difficult for us to implement a system of internal controls over financial reporting . until we generate significantly greater revenues and employ accounting personnel , it is doubtful that we will be able implement any system which provides us with any degree of internal controls over financial reporting . due to the nature of this material weakness in our internal control over financial reporting , there is more than a remote likelihood that misstatements which could be material to our annual or interim financial statements could not be prevented or detected . a material weakness ( within the meaning of pcaob auditing standard no . 5 ) is a deficiency , or a combination of deficiencies , in internal control over financial reporting , such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis . a significant deficiency is a deficiency , or a combination of deficiencies , in internal control over financial reporting that is less severe than a material weakness , yet important enough to merit attention by those responsible for oversight of our financial reporting . because of its inherent limitations , internal control over financial reporting may not prevent or detect misstatements . 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 and procedures may deteriorate . changes in internal control over financial reporting there was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected , or is reasonably likely to materially affect , our internal control over financial reporting . item 9b . other information . none . 25 part iii item 10. directors , executive officers and corporate governance . director and executive officer of the company name age position he-siang yang 68 chief executive officer ( “ ceo ” ) , president , secretary , treasurer and chairman of the board ( 1 ) yu-cheng yang 40 director and general manager ( 2 ) lai-chen kwok 76 director ( 3 ) ( 1 ) mr. yang will serve as a director until the next annual shareholder meeting . ( 2 ) mr. yang will serve as a director until the next annual shareholder meeting . ( 3 ) mr. kwok will serve as a director until the next annual shareholder meeting the term of office of each director of the company ends at the next annual meeting of the company 's stockholders or when such director 's successor is elected and qualifies . no date for the next annual meeting of stockholders is specified in the company 's bylaws or has been fixed by the board of directors . the term of office of each officer of the company ends at the next annual meeting of stockholders , or when such officer 's successor is elected and qualifies . background of the executive officers and directors of the company the following information sets forth the background and business experience of our directors and executive officers . he-siang yang , ceo , president , secretary , treasurer and director mr. yang obtained a bachelor of science degree in mathematics from the national taiwan ocean university in taiwan . story_separator_special_tag it establishes a hierarchy which prioritizes the inputs to valuation techniques used to measure fair value . this hierarchy increases the consistency and comparability of fair value measurements and related disclosures by maximizing the use of observable inputs and minimizing the use of unobservable inputs by requiring that observable inputs be used when available . observable inputs are inputs that reflect the assumptions market participants would use in pricing the assets or liabilities based on market data obtained from sources independent of the company . unobservable inputs are inputs that reflect the company 's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances . the hierarchy prioritizes the inputs into three broad levels based on the reliability of the inputs as follows : level 1 – inputs are quoted prices in active markets for identical assets or liabilities that the company has the ability to access at the measurement date . valuation of these instruments does not require a high degree of judgment as the valuations are based on quoted prices in active markets that are readily and regularly available . level 2 – inputs other than quoted prices in active markets that are either directly or indirectly observable as of the measurement date , such as quoted prices for similar assets or liabilities ; quoted prices in markets that are not active ; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities . level 3 – valuations based on inputs that are unobservable and not corroborated by market data . the fair value for such assets and liabilities is generally determined using pricing models , discounted cash flow methodologies , or similar techniques that incorporate the assumptions a market participant would use in pricing the asset or liability . the carrying values of certain assets and liabilities of the company , such as cash and cash equivalents , accounts receivable , inventory , advance to suppliers , prepaid expenses , accounts payable , accrued expenses , and due to shareholders , approximate fair value because of to their relatively short maturities . 19 net income per share basic income per share is computed by dividing net income by weighted average number of shares of common stock outstanding during each period . diluted income per share is computed by dividing net income by the weighted average number of shares of common stock , common stock equivalents , and potentially dilutive securities outstanding during each period . for the years ended december , 2019 and 2018 , the company does not have any outstanding common stock equivalents ; therefore , a separate computation of diluted income per share is not presented . income taxes the company accounts for income taxes in accordance with asc 740 , income taxes , which requires that the company recognize deferred tax liabilities and assets based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities , using enacted tax rates in effect in the years the differences are expected to reverse . deferred income tax benefit ( expense ) results from the change in net deferred tax assets or deferred tax liabilities . a valuation allowance is recorded when , in the opinion of management , it is more likely than not that some or all of any deferred tax assets will not be realized . concentration of credit risk story_separator_special_tag supplements , partially offset by the decrease in sales of skin care products . gross profit gross profit was $ 2,014,080 for the year ended december 31 , 2019 , compared to $ 1,561,440 for the same period in 2018. gross profit as a percentage of net sales was 87.97 % for the year ended december 31 , 2019 , compared to 87.82 % in the same period in 2018. the change in gross margin was because the higher gross margin product accounted for a higher proportion of sales for the year ended december 31 , 2019. selling , general and administrative expenses selling , general and administrative expenses consist primarily of office rent , salary and related costs for personnel and facilities , and professional service fees . selling , general and administrative expenses were $ 905,822 for the year ended december 31 , 2019 , representing an increase of $ 358,142 , or 65.39 % , as compared to $ 547,680 for the year ended december 31 , 2018. the increase in selling , general and administrative expenses was primarily attributable to the increase in payroll expenses of approximately $ 160,000 , accounting , legal and professional fees of approximately $ 90,000 , advertising expense of approximately $ 26,000 and travel of approximately $ 25,000 . 22 income from operations income from operations was $ 1,108,258 for the year ended december 31 , 2019 compared to income from operations of $ 1,013,760 for the year ended december 31 2018 , representing an increase of $ 94,498 , or 9.32 % . such increase was primarily due to the increase in sales of automobile carbon reduction machines , water purifying machines and nutrition supplements , partially offset by the decrease in sales of skin care products and the increase in selling , general and administrative expenses . other income ( expense ) other income ( expense ) was $ ( 26,491 ) for the year ended december 31 , 2019 , reflecting a decrease of $ 59,851 , or 179.41 % , compared to $ 33,360 for the year december 31 , 2018. the decrease was mainly attributable to the increase in loss on foreign currency exchange and the increase in loss on investment in equity securities under the equity method . net income as a result of the above factors , our net income was $ 1,081,767 for the year ended december 31 ,

such financial statements were translated into u.s. dollars ( “ $ ” or “ usd ” ) in accordance asc 830 , `` foreign currency matters '' , with the ntd and rmb as the functional currency . according to the statement , all assets and liabilities are translated at the current exchange rate , common stock and additional paid-in capital are translated at the historical rates , and income statement items are translated at an average exchange rate for the period . the resulting translation adjustments are reported under accumulated other comprehensive income ( loss ) as a component of stockholders ' equity . comprehensive income ( loss ) comprehensive income ( loss ) includes accumulated foreign currency translation gains and losses . the company has reported the components of comprehensive income ( loss ) on its consolidated statements of operations and other comprehensive income ( loss ) . 21 recent accounting pronouncements in august 2018 , the fasb issued asu 2018-13 , fair value measurement ( topic 820 ) : disclosure framework - changes to the disclosure requirements for fair value measurement . the asu modifies the disclosure requirements in topic 820 , fair value measurement , by removing certain disclosure requirements related to the fair value hierarchy , modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements , such as disclosing the changes in unrealized gains and losses for the period included in other comprehensive income for recurring level 3 fair value measurements held at the end of the reporting period and disclosing the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements . this asu is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after december 15 , 2019. the company is currently evaluating the effect , if any , that the asu will have on its consolidated financial statements . in december 2019 , the fasb issued asu no . 2019-12 , simplifying the accounting for income taxes , as part of its initiative to reduce complexity in accounting standards . the amendments in the asu are effective for fiscal years beginning after december 15 , 2020 , including interim periods therein . early adoption of the standard is permitted , including adoption in interim or annual periods for which financial statements have not yet been issued . the company is currently evaluating the effect , if any , that the asu will have on its consolidated financial statements . results of operations the following presents the consolidated results of the company for the years ended december 31 , 2019 and december 31 , 2018. net sales net sales

18 limitations on internal control all internal control systems , no matter how well designed , have inherent limitations . therefore , even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation . 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 . this annual report does not include an attestation report of baker tilly virchow krause , llp , our registered public accounting firm , regarding internal control over financial reporting . management 's report was not subject to attestation by the company 's registered public accounting firm pursuant to rules of the securities and exchange commission that permit us to provide only management 's report in this annual report . the board of directors of napco security technologies has an audit committee comprised of three non-management directors . the committee meets periodically with financial management and the independent auditors to review accounting , control , audit and financial reporting matters . baker tilly virchow krause , llp has full and free access to the audit committee , with and without the presence of management . changes in internal control over financial reporting there have been no changes in our internal control over financial reporting during the quarter ended june 30 , 2015 that has materially affected or is likely to materially affect our internal controls over financial reporting . item 9b : other information none part iii item 10 : directors , executive officers and corporate governance the information about our directors appearing in the company 's definitive proxy statement for the 2015 annual meeting of stockholders , to be filed with the securities and exchange commission pursuant to regulation 14a within 120 days after the end of the fiscal year covered by this annual report on form 10-k ( “ proxy statement ” ) under the heading “ election of directors ” , is incorporated herein by reference . we have adopted a code of ethics which applies to our senior executive and financial officers , among others . the code is posted on our website , www.napcosecurity.com , under the “ investors – other ” caption . we intend to make all required disclosures regarding any amendment to , or waiver of , a provision of the code of ethics for senior executive and financial officers by posting such information on our website . the information appearing in the proxy statement relating to the members of the audit committee and the audit committee financial expert under the headings “ corporate governance and board matters – board structure and committee composition ” and “ corporate governance and board matters – board structure and committee composition – audit committee ” and the information appearing in the proxy statement under the heading “ section 16 ( a ) beneficial ownership reporting compliance ” is incorporated herein by this reference . the information set forth in the proxy statement under the heading “ information concerning executive officers ” is incorporated herein by reference . 19 item 11 : executive compensation the information appearing in the proxy statement under the heading “ executive compensation ” and the information appearing in the proxy statement relating to the compensation of directors under the caption “ compensation of directors ” is incorporated herein by this reference . item 12. security ownership of certain beneficial owners and management and related stockholder matters the information appearing in the proxy statement under the heading “ beneficial ownership of common stock ” is incorporated herein by this reference . information regarding equity compensation plan information as of june 30 , 2015 and unregistered sales of equity securities and use of proceeds is included in item 5. item 13. certain relationships and related transactions , and director independence the information appearing in the proxy statement under the headings “ corporate governance and board matters – independence of directors , ” “ corporate governance and board matters – board structure and committee composition , ” “ corporate governance – policy with respect to related person transactions , ” and “ executive compensation – certain transactions ” is incorporated herein by this reference . item 14. principal accounting fees and services information appearing in the proxy statement under the headings “ principal accountant fees ” and “ policy on audit committee pre-approval of audit and permissible non-audit services of independent auditors ” is incorporated herein by this reference . part iv item 15 : exhibits and financial statement schedules . ( a ) 1. financial statements the following consolidated financial statements of napco security technologies , inc. and its subsidiaries are included in part ii , item 8 : replace_table_token_33_th 20 ( a ) 3 and ( b ) . exhibits management contracts designated by asterisk . exhibit no . title ex-3 . ( i ) certificate of amendment of certificate of incorporation exhibit-3 . ( i ) to report on form 10-k ( commission file no . 0-10004 ) for the fiscal year ended june 30 , 2011 ex-3 . ( ii ) certificate of incorporation as amended exhibit-3 . ( ii ) to report on form 10-k ( commission file no . 0-10004 ) for the fiscal year ended june , 30 2011 ex-3 . ( iii ) amended and restated by-laws exhibit 3 . ( ii ) to report on form 10-k ( commission file no . 0-10004 ) for the fiscal year ended june 30 , 2010 ex 4.01 third amended and restated credit agreement dated june 29 , 2012. exhibit 4.01 to report on form 8-k ( commission file no . story_separator_special_tag impairment testing is performed in two steps : ( i ) the company determines if there is impairment by comparing the fair value of a reporting unit with its carrying value , and ( ii ) if there is impairment , the company measures the amount of impairment loss by comparing the implied fair value of intangible assets with the carrying amount of the intangible assets . 12 income taxes the company has identified the united states and new york state as its major tax jurisdictions . the fiscal 2012 and forward years are still open for examination . for the year ended june 30 , 2015 , the company recognized a net income tax expense of $ 216,000. during the year ending june 30 , 2015 the company decreased its reserve for uncertain income tax positions by $ 67,000. the company 's practice is to recognize interest and penalties related to income tax matters in income tax expense and accrued income taxes . as of june 30 , 2015 , the company had accrued interest totaling $ 0 and $ 102,000 of unrecognized net tax benefits that , if recognized , would favorably affect the company 's effective income tax rate in any future period . the company uses the flow through method to account for investment tax credits earned on eligible research and development expenditures . under this method , the investment tax credits are recognized as a reduction to income tax expense . deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases . 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 in the period that includes the enactment date . deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities . the components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics . deferred tax assets are reduced by a valuation allowance when , in the opinion of management , it is more likely than not that some portion or all of the deferred tax assets will not be realized . the company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis . story_separator_special_tag gin : 0pt 0 `` > results of operations fiscal 2015 compared to fiscal 2014 replace_table_token_7_th net sales in fiscal 2015 increased by $ 3,380,000 to $ 77,762,000 as compared to $ 74,382,000 in fiscal 2014. the increase in net sales was primarily due to increased sales of the company 's alarm lock brand door-locking products ( $ 1,077,000 ) , continental brand access control products ( $ 326,000 ) and marks brand door-locking products ( $ 232,000 ) and was partially offset by decreases in the company 's napco brand intrusion products ( $ 191,000 ) . the company 's gross profit increased by $ 2,334,000 to $ 26,047,000 or 33.5 % of net sales in fiscal 2015 as compared to $ 23,713,000 or 31.9 % of net sales in fiscal 2014. gross profit and gross profit as a percentage of net sales was primarily affected by the increase in net sales as discussed above and a positive shift in product mix in fiscal 2015 as compared to fiscal 2014. selling , general and administrative expenses as a percentage of net sales increased to 26.7 % in fiscal 2015 from 26.1 % in fiscal 2014. selling , general and administrative expenses for fiscal 2015 increased by $ 1,369,000 to $ 20,766,000 as compared to $ 19,397,000 in fiscal 2014. the increases in dollars and as a percentage of sales resulted primarily from increases in selling wages and commissions as well as increased advertising and tradeshow expenditures . the company increased expenditures in these areas in order to generate higher sales . interest expense for fiscal 2015 decreased by $ 80,000 to $ 215,000 from $ 295,000 for the same period a year ago . the decrease in interest expense is primarily the result of the decrease in interest rates charged by the company 's primary banks as well as the company 's reduction of its outstanding borrowings under its revolving line of credit and its term loan . 15 other expenses remained relatively constant at $ 5,000 and $ 14,000 for fiscal 2015 and 2014 , respectively . the company 's provision for income taxes for fiscal 2015 decreased by $ 315,000 to $ 216,000 as compared to $ 531,000 for the same period a year ago . the decrease in income taxes from fiscal 2014 to fiscal 2015 resulted primarily from the benefit resulting from r & d credits and a decrease in certain of the company 's income tax reserves . net income for fiscal 2015 increased by $ 1,369,000 to $ 4,845,000 as compared to $ 3,476,000 in fiscal 2014. this resulted primarily from the items discussed above . forward-looking information this annual report on form 10-k and the information incorporated by reference may include `` forward-looking statements `` within the meaning of section 27a of the securities act of 1933 and section 21e of the exchange act of 1934. the company intends the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements . all statements regarding the company 's expected financial position and operating results , its business strategy , its financing plans and the outcome of any contingencies are forward-looking statements . the forward-looking statements are based on current estimates and projections about our industry and our business . words such as `` anticipates , ``

on april 26 , 1993 , the company 's foreign subsidiary entered into a 99-year land lease of approximately 4 acres of land in the dominican republic , on which the company 's principle manufacturing facility is located , at an annual cost of approximately $ 288,000. working capital . working capital increased by $ 2,154,000 to $ 35,590,000 at june 30 , 2015 from $ 33,436,000 at june 30 , 2014. working capital is calculated by deducting current liabilities from current assets . accounts receivable . accounts receivable increased by $ 1,090,000 to $ 17,994,000 at june 30 , 2015 as compared $ 16,904,000 at june 30 , 2014. the increase in accounts receivable was due primarily to a increase in sales for the quarter ended june 30 , 2015 as compared to the same quarter a year ago . inventories . inventories , which include both current and non-current portions , increased by $ 1,860,000 to $ 26,870,000 at june 30 , 2015 as compared to $ 25,010,000 at june 30 , 2014. the increase was due primarily to the company increasing stock of several of its new products as well as purchasing raw materials to produce products needed to fulfill several large orders that were received at the end of fiscal 2015 for the company 's marks products . accounts payable and accrued expenses . accounts payable and accrued expenses increased by $ 185,000 to $ 7,828,000 as of june 30 , 2015 as compared to $ 7,643,000 at june 30 , 2014. this increase is primarily due to increased purchases of raw materials to produce products needed to fulfill several large orders that were received at the end of fiscal 2015 for the company 's marks products . off-balance sheet arrangements the company does not maintain any off-balance sheet arrangements . 14 contractual obligations the following table summarizes the company 's contractual obligations by fiscal year : replace_table_token_6_th ( 1 ) see footnote 10 to the accompanying consolidated financial

the company assesses the remaining useful life and the recoverability of intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable using undiscounted cash flows . cloud computing arrangements the company capitalizes costs incurred to implement cloud computing arrangements that are service contracts within other current and non-current assets and amortizes such costs over the expected term of the hosting arrangement to the same income statement line as the associated cloud operating expenses . as of december 31 , 2020 and 2019 , the company had net capitalized implementation costs of $ 24.2 million and $ 3.5 million , respectively . amortization expense recorded during the period ended december 31 , 2020 was $ 1.4 million and was insignificant for the period ended december 31 , 2019. leases the company determines if an arrangement includes a lease at inception . lease agreements generally have lease and non-lease components , which are accounted for separately . at lease commencement , the company recognizes operating lease liabilities equal to the present value of the lease payments and operating lease assets representing the right to use the underlying asset for the lease term . the company assesses if it is reasonably certain to exercise lease options to extend or terminate the lease for inclusion or exclusion in the lease term when the company measures the lease liability . as the company 's leases do not provide an implicit rate , the company uses an incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments . the company 's incremental borrowing rate estimates a secured rate that reflects the term of the lease , the nature of the underlying asset and the economic environment . the company excludes leases with an expected term of one year or less from recognition on the consolidated balance sheet . operating lease assets includes lease payments made prior to lease commencement and excludes lease incentives and initial direct costs incurred . lease expense is recognized on a straight-line basis over the lease term . contingencies the company records a liability on the consolidated balance sheet for loss contingencies when a loss is considered probable and the amount can be reasonably estimated . if the reasonable estimate of a known or probable loss is a range , and no amount within the range is a better estimate than any other , the minimum amount of the range is accrued . if a loss is reasonably possible but not known or probable , and can be reasonably estimated , the estimated loss or range of loss is disclosed . product warranty the company provides a four-year warranty on its pdms sold in the united states and europe and a five-year warranty on pdms sold in canada and may replace pods that do not function in accordance with product specifications . the company estimates its warranty obligation at the time the product is shipped based on historical experience and the estimated cost to service the claims . warranty expense is recorded in cost of revenue in the consolidated statements of income . costs to service the claims reflect the current product cost . since the company continues to introduce new products and versions , the anticipated performance of the product over the warranty period is also considered in estimating warranty reserves . revenue recognition effective january 1 , 2018 , the company adopted asu 2014-09 , revenue from contracts with customers , and its related amendments ( collectively referred to as asc 606 ) using the modified retrospective method for all contracts not completed as of the date of adoption . the cumulate effect of applying the new revenue standard resulted in a $ 20.4 million decrease to the opening balance of accumulated deficit upon adoption , primarily related to how revenue is recognized for the company 's drug delivery product line and the capitalization of contract acquisition costs such as commissions . revenue is recognized when a customer obtains control of the promised products . the amount of revenue recognized reflects the consideration the company expects to be entitled to receive in exchange for these products . to achieve this core principle , the company applies the following five steps : 51 identify contracts with customers . the company 's contracts with its direct customers generally consist of a physician order form , a customer information form and , if applicable , third-party insurance ( payor ) approval . contracts with the company 's intermediaries are generally in the form of master service agreements against which firm purchase orders are issued . at the outset of the contract , the company assesses the customer 's ability and intention to pay , which is based on a variety of factors including historical payment experience or , in the case of a new intermediary , published credit , credit references and other available financial information pertaining to the customer and , in the case of a new direct customer , an investigation of insurance eligibility . identify performance obligations . the performance obligations in contracts for the delivery of the omnipod to new end-users , either directly to end-users or through intermediaries , primarily consist of the pdm and the initial and subsequent quantity of pods ordered . in the company 's judgment , these performance obligations are capable of being distinct and distinct in the context of the contract in that the customer can benefit from each item in conjunction with other readily available resources and the transfer of the pdm and the pods is separately identifiable in the contract with the customer . determine transaction price . the price charged for the pdm and pods is dependent on the company 's pricing as established with third party payors and intermediaries . story_separator_special_tag the amount of variable consideration that is included in the transaction price is included in revenue only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period . we estimate reductions to our revenues for rebates paid to distributors in the united states and canada and pharmacy benefit managers ( “ pbm ” ) in the united states . rebates are based on contractual arrangements , which may vary . our estimates are based on products sold , historical experience , trends and , as available , channel inventory data . rebates charged against gross sales amounted to $ 82.5 million , $ 59.1 million and $ 34.1 million in 2020 , 2019 and 2018 , respectively . provisions for rebates , sales discounts and returns , are accounted for as a reduction of sales when revenue is recognized and are included within accounts receivable trade or accrued expenses and other current liabilities on our consolidated balance sheets , based upon the recipient of the rebate . if the actual amounts of consideration that we receive differ from our estimates , we would adjust our estimates and that would affect reported revenue in the period that such variances become known . our drug delivery product line includes sales of a modified version of the omnipod to pharmaceutical and biotechnology companies who use our technology as a delivery method for their drugs . revenue from the drug delivery product was $ 69.5 million for 2020. revenue for this product line is recognized as the product is produced . accounting for drug delivery revenue requires us to select a method to measure progress towards the satisfaction of the performance obligation . this election of the most meaningful measure of progress by which to recognize drug delivery revenue requires the application of judgment . we elected the input method and selected a blend of cost and time to produce as the measure of progress . accordingly , revenue is recognized over time using a blend of costs incurred to date relative to total estimated costs at completion and time incurred to date relative to total production time to measure progress toward the satisfaction of our performance obligations . we believe that both incurred cost and elapsed time reflect the value generated , which best depicts the transfer of control to the customer . contract costs include third party costs as well as an allocation of manufacturing overhead . changes from quarter to quarter in quantity and stage of production of in-process inventory could have a significant quarterly impact on revenue . contingencies we are involved in various legal proceedings that arise in the ordinary course of business as further discussed in note 13 to our consolidated financial statements , including a patent infringement case with roche . accruals recorded for various contingencies including legal proceedings , self-insurance and other claims , are based on judgment , both regarding the probability of losses and range of loss , and , where applicable , include the consideration of opinions of internal and or external legal counsel . when a range is established but a best estimate can not be made , we record the minimum loss contingency amount , which could be zero . an estimate is often initially developed substantially earlier than the ultimate loss is known and is reevaluated each accounting period . as information becomes known , additional loss provision is recorded when either a best estimate can be made , or the 38 minimum loss amount is increased . when events result in an expectation of a more favorable outcome than previously expected , our best estimate is changed to a lower amount . we record receivables from third-party insurers up to the amount of the related liability when we have determined that existing insurance policies will provide reimbursement . in making this determination , we consider applicable deductibles , policy limits and the historical payment experience of the insurance carriers . accounting standards issued and not yet adopted as of december 31 , 2020 in december 2019 , the financial accounting standards board ( “ fasb ” ) issued asu 2019-12 , income taxes ( topic 740 ) : simplifying the accounting for income taxes . asu 2019-12 eliminates certain exceptions in the current guidance regarding the approach for intraperiod tax allocations , the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences . this new guidance also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies such things as the accounting for transactions that result in a step up in the tax basis of goodwill . the guidance is effective for us beginning in the first quarter of 2021 with early adoption permitted . the adoption of this guidance is not expected to have a significant impact on our consolidated financial statements . in august 2020 , the fasb issued asu 2020-06 , accounting for convertible debt instruments and contracts in an entity 's own equity , which simplifies the accounting for convertible instruments by eliminating certain separation models . under asu 2020-06 , a convertible debt instrument will generally be reported as a single liability at its amortized cost with no separate accounting for embedded conversion features . consequently , the interest rate of convertible debt instruments will be closer to the coupon interest rate . in addition , asu 2020-06 eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method . the guidance is effective for us beginning in the first quarter of 2022 with early adoption permitted . early adoption of asu 2020-06 as of january 1 , 2021 , would result in an approximate $ 330 million decrease in additional paid in capital from the derecognition of the bifurcated

the increase in inventories was primarily due to an increase in raw materials and finished goods related to the startup of our u.s. manufacturing plant and an increase in work-in-process to support demand for our product . the increase in prepaid expenses and other assets was primarily driven by an increase in operating lease assets resulting from new leases entered into during the year and an increase in deferred commissions . investing activities net cash provided by investing activities was $ 14.0 million in 2020 , compared with net cash used in investing activities of $ 73.6 million in 2019. capital spending —capital expenditures were $ 129.0 million in 2020 and primarily related to equipment to increase our manufacturing capacity . capital expenditures were $ 163.7 million in 2019 and primarily related to the construction of our manufacturing and corporate headquarters facility in acton , massachusetts . we expect capital expenditures for 2021 to increase compared with 2020 as we continue to expand manufacturing capacity to support our growth and the launch of omnipod 5. we expect to fund our capital expenditures using a combination of existing cash and investments as well as cash generated from operations . purchases and sales of investments —during 2020 , net sales of marketable securities were $ 180.5 million , compared with net purchases of marketable securities of $ 97.3 million for 2019. the increase in net sales of marketable securities was driven by a shift in a portion of our investment portfolio to investments that are classified as cash equivalents in order to satisfy future cash needs . acquisition of intangible assets —in 2020 , following the resolution of a purchase price contingency associated with our 2018 acquisition of customer relationships from a former european distributor , we paid the distributor an additional $ 36.2 million for a total purchase price of $ 41.2 million . we had previously paid the distributor $ 3.8 million in 2019 and the remainder in 2018 . < span style= '' color : # 000000 ; font-family : 'times new

in most of our businesses , including advertising , which also includes studio production efforts and media planning and buying services , public relations , healthcare advertising and most of our crm consumer experience businesses , we act as an agent and arrange , at the client 's direction , for third parties to perform certain services . in these cases , we do not control the goods or services prior to the transfer to the client . as a result , revenue is recorded net of these costs , equal to the amount retained for our fee or commission . in certain businesses we may act as principal when contracting for third-party services on behalf of our clients . in our events business and most of our crm execution & support businesses , including field marketing and certain specialty marketing businesses , we act as principal because we control the specified goods or services before they are transferred to the client and we are responsible for providing the specified goods or services , or we are responsible for directing and integrating third-party vendors to fulfill our performance obligation at the agreed upon contractual price . in such arrangements , we also take pricing risk under the terms of the client contract . in certain specialty media buying business , we act as principal when we control the buying process for the purchase of the media and contract directly with the media vendor . in these arrangements , we assume the pricing risk under the terms of the client contract . when we act as principal , we include billable amounts related to third-party costs in the transaction price and record revenue over time at the gross amount billed , including out-of-pocket costs , consistent with the manner that we recognize revenue for the underlying services contract . however , in media buying contracts where we act as principal , we recognize revenue at a point in time , typically when the media is run , including when it is not subject to cancellation by the client or media vendor . variable consideration some of our client arrangements include variable consideration provisions , which include performance incentives , tiered commission structures and vendor rebates in certain markets outside of the united states . variable consideration is estimated and included in total consideration at contract inception based on either the expected value method or the most likely outcome method . these estimates are based on historical award experience , anticipated performance and other factors known at the time . performance incentives are typically recognized in revenue over time . variable consideration for our media businesses in certain international markets includes rebate revenue and is recognized when it is probable that the media will be run , including when it is not subject to cancellation by the client . in addition , when we receive rebates or credits from vendors for transactions entered into on behalf of clients , they are remitted to the clients in accordance with contractual requirements or retained by us based on the terms of the client contract or local law . amounts passed on to clients are recorded as a liability and amounts retained by us are recorded as revenue when earned , which is typically when the media is run . operating expenses . operating expenses are comprised of cost of services , selling , general and administrative , or sg & a , expenses and depreciation and amortization . we measure cost of services in two distinct categories : salary and service costs and occupancy and other costs . as a service business , salary and service costs make up the vast majority of our operating expenses and substantially all these costs comprise the essential components directly linked to the delivery of our services . salary and service costs include employee compensation and benefits , freelance labor and direct service costs , which include third-party supplier costs and client-related travel costs . occupancy and other costs consist of the indirect costs related to the delivery of our services , including office rent and other occupancy costs , equipment rent , technology costs , general office expenses and other expenses . sg & a expenses primarily consist of third-party marketing costs , professional fees and compensation and benefits and occupancy and other costs of our corporate and executive offices , which includes group-wide finance and accounting , treasury , legal and governance , human resource oversight and similar costs . f-10 omnicom group inc. and subsidiaries notes to consolidated financial statements cash and cash equivalents . cash equivalents consist of highly liquid interest-bearing time deposits with original maturities of three months or less . due to the short-term nature of these investments , carrying value approximates fair value . we have a policy governing counterparty credit risk for financial institutions that hold our cash and cash equivalents and we have deposit limits for each institution . short-term investments . short-term investments consist of interest-bearing time deposits with maturities of less than twelve months . short-term investments are carried at cost , which approximates fair value . work in process . work in process consists of accrued costs incurred on behalf of customers , including media and production costs , and fees and other third-party costs that have not yet been billed . media and production costs are billed during the production process . unbilled fees and costs are in the process of being billed to clients , typically within the next 30 days . property and equipment . property and equipment are carried at cost and are depreciated over the estimated useful lives of the assets using the straight-line method . the estimated useful lives range from seven to ten years for furniture and three to five years for equipment . leasehold improvements are amortized on a straight-line basis over the shorter of the related lease term or the estimated useful life of the asset . story_separator_special_tag the minimum decline in fair value that one of our reporting units would need to experience in order to fail the goodwill impairment test was approximately 60 % . notwithstanding our belief that the assumptions we used for wacc and long-term growth rate in our impairment testing are reasonable , we performed a sensitivity analysis for each of our reporting units . the results of this sensitivity analysis on our impairment test as of june 30 , 2018 revealed that if the wacc increased by 1 % and or the long-term growth rate decreased by 1 % , the fair value of each of our reporting units would continue to be substantially in excess of its respective net book value and would pass the impairment test . we will continue to perform our impairment test at the end of the second quarter of each year unless events or circumstances trigger the need for an interim impairment test . the estimates used in our goodwill impairment test do not constitute forecasts or projections of future results of operations , but rather are estimates and assumptions based on historical results and assessments of macroeconomic factors affecting our reporting units as of the valuation date . we believe that our estimates and assumptions are reasonable , but they are subject to change from period to period . actual results of operations and other factors will likely differ from the estimates used in our discounted cash flow valuation and it is possible that differences could be significant . a change in the estimates we use could result in a decline in the estimated fair value of one or more of our reporting units from the amounts derived as of our latest valuation and could cause us to fail our goodwill impairment test if the estimated fair value for the reporting unit is less than the carrying value of the net assets of the reporting unit , including its goodwill . a large decline in estimated fair value of a reporting unit could result in a non-cash impairment charge and may have an adverse effect on our results of operations and financial condition . subsequent to the annual impairment test at june 30 , 2018 and considering our operating performance in the second half of the year , there were no events or circumstances that triggered the need for an interim impairment test . additional information about acquisitions and goodwill appears in notes 2 , 5 and 6 to the consolidated financial statements . 12 revenue recognition effective january 1 , 2018 , we adopted asc 606 ( see note 1 to the consolidated financial statements ) . as described below , in accordance with asc 606 we changed certain aspects of our revenue recognition accounting policy . asc 606 was applied using the modified retrospective method , where the cumulative effect of the initial application was recognized as an adjustment to opening retained earnings at january 1 , 2018. therefore , comparative prior periods have not been adjusted and continue to be reported under fasb asc topic 605 , revenue recognition . under asc 606 , revenue is recognized when a customer obtains control of promised goods or services ( the performance obligation ) in an amount that reflects the consideration we expect to receive in exchange for those goods or services ( the transaction price ) . we measure revenue by estimating the transaction price based on the consideration specified in the client arrangement . revenue is recognized as the performance obligations are satisfied . our revenue is primarily derived from the planning and execution of advertising communications and marketing services in the following fundamental disciplines : advertising , which includes creative advertising services and strategic media planning and buying services , customer relationship management or crm , which includes crm consumer experience and crm execution & support , public relations and healthcare advertising . our client contracts are primarily fees for service on a rate per hour or per project basis . revenue is recorded net of sales , use and value added taxes . performance obligations in substantially all our disciplines , the performance obligation is to provide advisory and consulting services at an agreed-upon level of effort to accomplish the specified engagement . our client contracts are comprised of diverse arrangements involving fees based on any one or a combination of the following : an agreed fee or rate per hour for the level of effort expended by our employees ; commissions based on the client 's spending for media purchased from third parties ; qualitative or quantitative incentive provisions specified in the contract ; and reimbursement for third-party costs that we are required to include in revenue when we control the vendor services related to these costs and we act as principal . the transaction price of a contract is allocated to each distinct performance obligation based on its relative stand-alone selling price and is recognized as revenue when , or as , the customer receives the benefit of the performance obligation . clients typically receive and consume the benefit of our services as they are performed . substantially all our client contracts provide that we are compensated for services performed to date and allow for cancellation by either party on short notice , typically 90 days , without penalty . generally , our short-term contracts , which normally take 30 to 90 days to complete , are performed by a single agency and consist of a single performance obligation . as a result , we do not consider the underlying services as separate or distinct performance obligations because our services are highly interrelated , occur in close proximity , and the integration of the various components of a marketing message is essential to overall service . in certain of our long-term client contracts , which have a term of up to one year , the performance obligation is a stand-ready obligation , because we provide a constant level

non-gaap financial measures should not be considered in isolation from , or as a substitute for , financial information presented in compliance with u.s. gaap . non-gaap financial measures reported by us may not be comparable to similarly titled amounts reported by other companies . the following table reconciles the u.s. gaap financial measure of net income - omnicom group inc. to ebita and ebita margin for the for the periods presented ( in millions ) : replace_table_token_15_th 21 revenue in 2017 , revenue decreased $ 143.3 million to $ 15,273.6 million from $ 15,416.9 million in 2016 . changes in foreign exchange rates increased revenue $ 42.9 million , acquisition revenue net of disposition revenue , decreased revenue $ 647.3 million and organic growth increased revenue $ 461.1 million . the components of revenue change in the united states ( “ domestic ” ) and the remainder of the world ( “ international ” ) were ( in millions ) : replace_table_token_16_th the components and percentages are calculated as follows : the foreign exchange impact is calculated by translating the current period 's local currency revenue using the prior period average exchange rates to derive current period constant currency revenue ( in this case $ 15,230.7 million for the total column ) . the foreign exchange impact is the difference between the current period revenue in u.s. dollars and the current period constant currency revenue ( $ 15,273.6 million less $ 15,230.7 million for the total column ) . acquisition revenue is calculated as if the acquisition occurred twelve months prior to the acquisition date by aggregating the comparable prior period revenue of acquisitions through the acquisition date . as a result , acquisition revenue excludes the positive or negative difference between our current period revenue subsequent to the acquisition date and the comparable prior period revenue and the positive or negative growth after the acquisition is attributed to organic growth . disposition revenue is calculated as if the disposition occurred twelve months prior to the disposition date by aggregating the comparable prior period revenue of dispositions through the disposition date . the acquisition revenue and disposition revenue amounts are netted in the table . organic growth is calculated by subtracting the foreign exchange rate impact , and the acquisition revenue ,

because the substantial majority of the ea volume occurs each year before that year 's tax refund payment patterns can be analyzed and subsequent underwriting changes made , credit losses during a current year could be higher than management 's predictions if tax refund payment patterns change materially between years . ​ in response to changes in the legal , regulatory and competitive environment , management annually reviews and revises the eas product parameters . further changes in ea product parameters do not ensure positive results and could have an overall material negative impact on the performance of the ea product offering and therefore on the company 's financial condition and results of operations . ​ republic payment solutions — rps is managed and operated within the trs segment . the rps division is an issuing bank offering general-purpose reloadable prepaid cards through third-party service providers . for the projected near-term , as the prepaid card program matures , the operating results of the rps division are expected to be immaterial to the company 's overall results of operations and will be reported as part of the trs segment . the rps division will not be considered a separate reportable segment until such time , if any , that it meets quantitative reporting thresholds . ​ the company reports fees related to rps programs under program fees . additionally , the company 's portion of interchange revenue generated by prepaid card transactions is reported as noninterest income under “ interchange fee income . ” ​ republic credit solutions segment — through the rcs segment , the bank offers consumer credit products . in general , the credit products are unsecured , small dollar consumer loans and are dependent on various factors . rcs loans typically earn a higher yield but also have higher credit risk compared to loans originated through the traditional banking segment , with a significant portion of rcs clients considered subprime or near-prime borrowers . the bank uses third-party service providers for certain services such as marketing and loan servicing of rcs loans . additional information regarding consumer loan products offered through rcs follows : ​ ● rcs line-of-credit product – the bank originates a line-of-credit product to generally subprime borrowers in multiple states . elevate credit , inc. , a third-party service provider subject to the bank 's oversight and supervision , provides the bank with certain marketing , servicing , technology , and support services for the rcs line-of-credit program , while a separate third party also provides customer support , servicing , and other services for the rcs line-of-credit product on the bank 's behalf . the bank is the lender for the rcs line-of-credit product and is marketed as such . further , the bank controls the loan 100 terms and underwriting guidelines , and the bank exercises consumer compliance oversight of the rcs line-of-credit product . ​ the bank sells participation interests in the rcs line-of-credit product . these participation interests are a 90 % interest in advances made to borrowers under the borrower 's line-of-credit account , and the participation interests are generally sold three business days following the bank 's funding of the associated advances . although the bank retains a 10 % participation interest in each advance , it maintains 100 % ownership of the underlying rcs line-of-credit account with each borrower . the rcs line-of-credit product represents the substantial majority of rcs activity . loan balances held for sale through this program are carried at the lower of cost or fair value . ​ ● rcs installment loan product – in december 2019 , through rcs , the bank began offering installment loans with terms ranging from 12 to 60 months to borrowers in multiple states . a third-party service provider subject to the bank 's oversight and supervision provides the bank with marketing services and loan servicing for these rcs installment loans . the bank is the lender for these rcs installment loans , and is marketed as such . furthermore , the bank controls the loan terms and underwriting guidelines , and the bank exercises consumer compliance oversight of this rcs installment loan product . currently , all loan balances originated under this rcs installment loan program are carried as “ held for sale ” on the bank 's balance sheet , with the intention to sell these loans to its third-party service provider generally within sixteen days following the bank 's origination of the loans . loans originated under this rcs installment loan program are carried at fair value under a fair-value option , with the portfolio marked to market monthly . ​ ● rcs healthcare receivables products – the bank originates healthcare-receivables products across the u.s. through two different third-party service providers . in one program , the bank retains 100 % of the receivables originated . in the other program , the bank retains 100 % of the receivables originated in some instances , and in other instances , sells 100 % of the receivables within one month of origination . loan balances held for sale through this program are carried at the lower of cost or fair value . ​ the company reports interest income and loan origination fees earned on rcs loans under “ loans , including fees , ” while any gains or losses on sale and mark-to-market adjustments of rcs loans are reported as noninterest income under “ program fees . ” ​ use of estimates — to prepare financial statements in conformity with gaap management makes estimates and assumptions based on available information . these estimates affect the amounts reported in the financial statements and the disclosures provided . actual amounts could differ from these estimates . the resulting change in estimates could be material to the financial statements . story_separator_special_tag ​ net interest income ​ banking operations are significantly dependent upon net interest income . net interest income is the difference between interest income on interest-earning assets , such as loans and investment securities and the interest expense on interest-bearing liabilities used to fund those assets , such as interest-bearing deposits , securities sold under agreements to repurchase , and fhlb advances . net interest income is impacted by both changes in the amount and composition of interest-earning assets and interest-bearing liabilities , as well as market interest rates . ​ a large amount of the company 's financial instruments track closely with or are primarily indexed to either the fftr , prime , or libor . these market rates trended higher from december 2015 through december 2019 but moved lower again during 2020 as the fomc reduced the fftr by 75 basis points during the year . the fomc has provided on-going guidance that additional changes to the fftr will be data dependent , depending upon market conditions . ​ additional increases in short-term interest rates and overall market rates are generally believed by management to be favorable to the bank 's net interest income and net interest margin in the near term , while additional decreases in short-term interest rates and overall market rates are generally believed by management to be unfavorable to the bank 's net interest income and net interest margin in the near term . increases in short-term interest rates , however , could have a negative impact on net interest income and net interest margin if the bank is unable to maintain its deposit balances and the cost of those deposits at the levels assumed in its interest-rate-risk model . in addition , a further flattening or inversion of the yield curve , causing the spread between long-term interest rates and short-term interest rates to decrease , could negatively impact the company 's net interest income and net interest margin . unknown variables , which may impact the company 's net interest income and net interest margin in the future , include , but are not limited to , the actual steepness of the yield curve , future demand for the bank 's financial products and the bank 's overall future liquidity needs . ​ total company net interest income decreased $ 3.8 million , or 2 % , during 2020 compared to the same period in 2019. total company net interest margin decreased to 4.10 % during 2020 compared to 4.46 % in 2019 . ​ the most significant components affecting the total company 's net interest income and net interest margin by reportable segment follow : ​ traditional banking segment ​ the traditional banking segment 's net interest income decreased $ 8.7 million , or 5 % , during 2020 compared to 2019. the traditional banking net interest margin decreased to 3.42 % for 2020 compared to 3.76 % for 2019 . ​ 52 the following factors primarily impacted the traditional bank 's net interest income and net interest margin during 2020 : ​ ● the traditional bank 's net interest spread , the weighted average rate earned on its interest-earning assets less the weighted average cost paid on its interest-bearing liabilities , compressed 30 basis points and its net interest margin compressed 33 basis points primarily because the core bank 's liabilities had less room to reprice downward than its interest-earning asset counterparts . ​ ● because the bank is already paying zero interest on its noninterest-bearing funding sources , such as noninterest-bearing deposits and common stockholders ' equity , it had no ability to reprice any of these funding sources downward to offset the negative impact of the decline in yield on its interest-earning assets , which these noninterest-bearing sources fund . ​ ● also negatively impacting net interest income from traditional banking was a decline in loan balances , excluding ppp loans . the decrease in traditional bank loans included the negative impact of the sale of $ 128 million of the traditional bank 's loans in november 2019 as part of the company 's branch divestiture . ​ ● partially offsetting the decline in net interest income driven by items noted above , interest income increased by approximately $ 12.2 million from the origination of $ 528 million of ppp loans during the year , as well as , the sba 's forgiveness and early payoff of $ 127 million of these loans . the ppp portfolio contributed $ 342 million in average traditional bank loans for 2020. as part of the sba 's forgiveness and early payoff , all unearned fees associated with these loans are credited to interest income upon their payoff . approximately $ 2.8 million of ppp fee income recognized in interest income during 2020 was from the forgiveness and early payoff of the loans . as of december 31 , 2020 , approximately $ 8.6 million of ppp fees remained unearned on the company 's balance sheet to be earned and recognized over the remaining life of these loans . ​ for additional information on the potential future effect of changes in short-term interest rates on republic 's net interest income , see the table titled “ bank interest rate sensitivity at december 31 , 2020 and 2019 ” under “ financial condition . ” ​ warehouse lending segment ​ net interest income increased $ 10.2 million , or 64 % , for 2020 compared to 2019. average outstanding warehouse balances grew from $ 654 million during 2019 to $ 813 million during 2020 , as falling mortgage rates during 2020 drove a surge in consumer refinance volume for warehouse clients . overall , committed warehouse lines-of-credit grew from $ 1.1 billion to $ 1.2 billion and usage rates on those lines were 59 % and 66 % , respectively , during the same periods . in addition , the warehouse net interest margin increased to 3.19 % for 2020 compared to 2.42

​ gross loans increased by $ 380 million , or 9 % , during 2020 to $ 4.8 billion at december 31 , 2020. the most significant components comprising the change in loans by reportable segment follow : ​ traditional banking segment ​ traditional banking loans increased $ 120 million , or 3 % , during 2020. the following primarily drove the change in loan balances during 2020 : ​ ● the bank originated $ 528 million of ppp loans during 2020. approximately $ 401 million of these loans remained outstanding at december 31 , 2020. these loans are reported in table 11 above , net of $ 9 million in unaccreted origination fees . ​ 64 ● aircraft loans grew $ 31 million during 2020. in mid-2020 the bank increased its financing threshold for aircraft-secured loans to $ 2.0 million ​ ● the c & i category decreased $ 140 million during 2020. the company 's strategic wind down of its auto dealer floor plan program drove approximately $ 30 million of this decrease . the remaining decrease reflected paydowns and payoffs of c & i loans during the period . c & i loan production to offset these paydowns has been negatively impacted by pandemic driven credit conditions . ​ ● the c & d category decreased $ 61 million , driven by paydowns and payoffs of c & d loans during the period . c & d loan production to offset these payoffs and paydowns was negatively impacted by pandemic driven conditions . ​ ● the owner-occupied residential real estate and home equity categories decreased $ 70 million and $ 53 million . these decreases largely reflect a sharp drop in long-term market interest rates during 2020 that drove an increase in refinance volume for residential mortgages , with much of the refinance activity going into fixed rate products sold on the secondary market . ​ regarding the company 's ppp loans , these loans have a stated maturity of two years , an annualized fixed coupon rate of 1.0 % to the client , are 100 % guaranteed by the sba , and 100 % forgivable to the client if certain program metrics are met . the bank earns an origination fee of 1 % , 3 % , or 5 % based on the size of the loan . ​ republic carried approximately $ 9 million in unaccreted ppp loan fees as of december 31 , 2020 , which it expects to accrete into income over the remaining life of the loans . while no guarantee can be made as to the overall life of these

audit committee the board of directors approved the audit committee charter on march 24 , 2015 to be effective april 15 , 2015 , in accordance with section 3 ( a ) ( 58 ) ( a ) of the exchange act and nyse american rule 803 ( b ) as modified for smaller reporting companies by nyse american rule 801 ( h ) . the audit committee was established to oversee the company 's corporate accounting and financial reporting processes and audits of its financial statements . the members of our audit committee are messrs. beale and lawrence . mr. lawrence is the chairman of the audit committee . the board of directors has determined that julian h. beale and peter j.l . lawrence are independent under sec rule 10a-3 ( b ) ( 1 ) and nyse american rule 803 ( a ) . management has determined that all members of the audit committee are “ financially literate ” as interpreted by management . no members of the audit committee have been qualified as an audit committee financial expert , as defined in the applicable rules of the sec because the board believes that the company 's status as a smaller reporting company does not require expertise beyond financial literacy . the audit committee charter deals with the establishment of the audit committee and sets out its duties and responsibilities . the audit committee will review and reassess the adequacy of the audit committee charter on an annual basis . the audit committee charter is available on our company website at http : //www.algodongroup.com . 60 no nominating committee the company has not established a nominating committee . under the nyse american rule 804 ( a ) , if there is no nominating committee , nominations must be made by a majority of the independent directors . the company believes that this is appropriate in light of the nyse american rules on point and based on the fact that ggh remains a smaller reporting company and ( as described below ) nominating decisions are made by the independent directors . in order to comply with the nyse american rules , however effective april 15 , 2015 , the board of directors adopted a nomination procedure by which eligible stockholders may nominate a person to the board of directors . that procedure is as follows : the company will consider all recommendations from any person ( or group ) who holds and has ( or collectively if a group have ) held more than 5 % of the company 's voting securities for longer than one year . any stockholder who desires to submit a nomination of a person to stand for election of directors at the next annual or special meeting of the stockholders at which directors are to be elected must submit a notification of the stockholder 's intention to make a nomination ( “ notification ” ) to the company by the date mentioned in the most recent proxy statement under the heading “ proposal from stockholders ” as such date may be amended in cases where the annual meeting has been changed as contemplated in sec rule 14a-8 ( e ) , question 5 , and in that notification must provide the following additional information to the company : ● name , address , telephone number and other methods by which the company can contact the stockholder submitting the notification and the total number of shares beneficially owned by the stockholder ( as the term “ beneficial ownership ” is defined in sec rule 13d-3 ) ; ● if the stockholder owns shares of the company 's voting stock other than on the records of the company , the stockholder must provide evidence that he or she owns such shares ( which evidence may include a current statement from a brokerage house or other appropriate documentation ) ; ● information from the stockholder regarding any intentions that he or she may have to attempt to make a change of control or to influence the direction of the company , and other information regarding the stockholder any other persons associated with the stockholder that would be required under items 4 and 5 of sec schedule 14a were the stockholder or other persons associated with the stockholder making a solicitation subject to sec rule 14a-12 ( c ) ; ● information from the stockholder regarding any intentions that he or she may have to attempt to make a change of control or to influence the direction of the company , and other information regarding the stockholder any other persons associated with the stockholder that would be required under items 4 and 5 of sec schedule 14a were the stockholder or other persons associated with the stockholder making a solicitation subject to sec rule 14a-12 ( c ) ; ● all information required by item 7 of sec schedule 14a with respect to the proposed nominee , which shall be in a form reasonably acceptable to the company . 61 no compensation committee or compensation consultant the company has not established a compensation committee . the company believes that this is appropriate in light of the nyse american rules on point and based on the fact that the company remains a smaller reporting company and ( as described below ) compensation decisions are made by the independent directors . under the nyse american rule 805 ( a ) , if there is no compensation committee , compensation of the chief executive officer ( being mr. mathis ) must be determined , or recommended to the board of directors for determination , by a majority of the independent directors on its board . the ceo may not be present during voting or deliberations of his compensation . story_separator_special_tag the fair value amount of the shares expected to ultimately vest is then recognized over the period services are required to be provided in exchange for the award , usually the vesting period . the estimation of stock-based awards that will ultimately vest requires judgment , and to the extent actual results or updated estimates differ from original estimates , such amounts are recorded as a cumulative adjustment in the period estimates are revised . we consider many factors when estimating expected forfeitures , including types of awards , employee class , and historical experience . comprehensive income ( loss ) comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources . it includes all changes in equity during a period except those resulting from investments by owners and distributions to owners . the guidance requires other comprehensive income ( loss ) to include foreign currency translation adjustments . 49 real estate lots held for sale as the development of a real estate lot is completed and the lot becomes available for immediate sale in its present condition , the lot is marketed for sale and is included in real estate lots held for sale on the company 's balance sheet . real estate lots held for sale are reported at the lower of carrying value or fair value less cost to sell . if the carrying value of a real estate lot held for sale exceeds its fair value less estimated selling costs , an impairment charge is recorded . the company did not record any impairment charge in connection with real estate lots held for sale during the year ended december 31 , 2018. impairment of long-lived assets when circumstances , such as adverse market conditions , indicate that the carrying value of a long-lived asset may be impaired , we perform an analysis to review the recoverability of the asset 's carrying value , which includes estimating the undiscounted cash flows ( excluding interest charges ) from the expected future operations of the asset . these estimates consider factors such as expected future operating income , operating trends and prospects , as well as the effects of demand , competition and other factors . if the analysis indicates that the carrying value is not recoverable from future cash flows , an impairment loss is recognized to the extent that the carrying value exceeds the estimated fair value . any impairment losses are recorded as operating expenses , which reduce net income . there were no impairments of long-lived assets for the years ended december 31 , 2018 and 2017 , respectively . segment information the fasb has established standards for reporting information on operating segments of an enterprise in interim and annual financial statements . since gg is not yet operational , we currently operate as one segment which is the business of real estate development in argentina . our chief operating decision-maker reviews our operating results on an aggregate basis and manages our operations as a single operating segment . revenue recognition we earn revenues from our real estate , hospitality , food & beverage , broker-dealer and other related services . revenue from rooms , food and beverage , and other operating departments are recognized as earned at the time of sale or rendering of service . cash received in advance of the sale or rendering of services is recorded as advance deposits or deferred revenue on the consolidated balance sheets . deferred revenues associated with real estate lot sale deposits are recognized as revenues ( along with any outstanding balance ) when the lot sale closes and the deed is provided to the purchaser . other deferred revenues primarily consist of deposits accepted by us in connection with agreements to sell barrels of wine . these wine barrel deposits are recognized as revenues ( along with any outstanding balance ) when the barrel of wine is shipped to the purchaser . sales taxes and value added ( “ vat ” ) taxes collected from customers and remitted to governmental authorities are presented on a net basis with revenues in the consolidated statements of operations . income taxes we account for income taxes under the liability method , which requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards . additionally , we establish a valuation allowance to reflect the likelihood of realization of deferred tax assets . 50 new accounting pronouncements in may 2014 , the fasb issued accounting standards update ( “ asu ” ) no . 2014-09 , “ revenue from contracts with customers , ” ( “ asu 2014-09 ” ) . asu 2014-09 supersedes the revenue recognition requirements in asc 605 — revenue recognition ( “ asc 605 ” ) and most industry-specific guidance throughout asc 605. the standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services . the guidance in asu 2014-09 was revised in july 2015 to be effective for interim periods beginning on or after december 15 , 2017 and should be applied on a transitional basis either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying asu 2014-09 recognized at the date of initial application . in 2016 , fasb issued additional asus that clarify the implementation guidance on principal versus agent considerations ( asu 2016-08 ) , on identifying performance obligations and licensing ( asu 2016-10 ) , and on narrow-scope improvements and practical expedients ( asu 2016-12 ) as well as on the revenue recognition criteria and

for the year ended december 31 , 2018 , the net cash provided by financing activities resulted primarily from the proceeds from convertible debt obligations of approximately $ 3,508,000 , net proceeds from the issuance of equity securities of approximately $ 1,324,000 , proceeds from loans payable of approximately $ 580,000 partially offset by net repayments of debt of approximately $ 200,000 , and dividends paid of approximately $ 128,000. for the year ended december 31 , 2017 , the net cash provided by financing activities resulted primarily from the net proceeds from a preferred stock offering of approximately $ 7,760,000 , proceeds from convertible debt obligations of approximately $ 1,280,000 , net proceeds from the issuance of common stock of approximately $ 41,000 and proceeds from loans payable of approximately $ 519,000 , partially offset by net repayments of debt of approximately $ 267,000 , and dividends paid of approximately $ 61,000. going concern and management 's liquidity plans the accompanying financial statements have been prepared assuming that we will continue as a going concern , which contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business . as discussed in note 2 to the accompanying consolidated financial statements , we have not achieved a sufficient level of revenues to support our business and development activities and have suffered substantial recurring losses from operations since our inception , which conditions raise substantial doubt that we will be able to continue operations as a going concern . the accompanying consolidated financial statements do not include any adjustments that might be necessary if we were unable to continue as a going concern . based on current cash on hand and subsequent activity as described herein , our cash-on-hand only allows us to operate our business operations on a month-to-month basis . because of our limited cash availability , we have scaled back our operations to the extent possible . while we are exploring opportunities with third parties and related parties to provide some or all of the capital we need , we have not entered into any agreement to provide us with the necessary capital . historically , we have been successful in

historically , the company has collected on the notes receivable in full at the time of maturity . the notes receivable do not meet the true sales criteria as defined by the accounting guidance for accounting for transfers and servicing of financial assets . an allowance for doubtful accounts is calculated based on the aging of the company 's trade receivables , historical experience , and management judgment . the company writes off trade receivables against the allowance when management determines a balance is uncollectible and no longer actively pursues collection of the receivable . inventories inventories consist of on-hand raw materials , work-in-progress inventories and finished goods . raw materials and work-in-progress inventories are stored mainly on the company 's premises . finished goods are stored on the company 's premises as well as on consignment at certain customer sites . inventories are stated at the lower of standard cost , which approximates actual cost determined on the weighted average basis , or market value . inventories are recorded using the first-in , first-out method . the company routinely evaluates quantities and values of inventories in light of current market conditions and market trends , and records a write-down for quantities in excess of demand and product obsolescence . the evaluation may take into consideration historic usage , expected demand , anticipated sales price , new product 79 neophotonics corporation notes to consolidated financial statements— ( continued ) development schedules , the effect new products might have on the sale of existing products , product obsolescence , customer concentrations , product merchantability and other factors . market conditions are subject to change and actual consumption of inventory could differ from forecasted demand . the company also regularly reviews the cost of inventories against their estimated market value and records a lower of cost or market reserve for inventories that have a cost in excess of estimated market value . once a reserve for inventories is recorded , this results in a new cost basis for the related inventories which is not reversed . goodwill goodwill represents the excess of the purchase price over the fair value of the net tangible assets , identifiable intangible assets and in-process research and development acquired in a business combination . goodwill is not subject to amortization , but is subject to at least an annual assessment for impairment . the company evaluates goodwill , at a minimum , on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable . the company performs its annual goodwill impairment testing as of december 31 of each year . goodwill is reviewed for impairment utilizing a two-step process . first , impairment of goodwill is tested at the reporting unit level by comparing the reporting unit 's carrying amount , including goodwill , to the fair value of the reporting unit . if the carrying amount of the reporting unit exceeds its fair value , a second step is performed to measure the amount of impairment loss , if any . in step two , the implied fair value of goodwill is calculated as the excess of the fair value of a reporting unit over the fair values assigned to its assets and liabilities . if the implied fair value of goodwill is less than the carrying value of the reporting unit 's goodwill , the difference is recognized as an impairment loss . the company considers that it has only one reporting unit for the purposes of testing goodwill for impairment . a reporting unit is an operating segment or one level below an operating segment ( referred to as a component ) . a component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component . during the fourth quarter of 2011 , the company recognized a goodwill impairment charge of $ 13.1 million , the result of which is that the company does not have any goodwill on its consolidated balance sheet as of december 31 , 2011. the impairment charge was due to a decline in the market capitalization of the company during the fourth quarter of 2011. see note 8 for further discussion . long-lived assets property , plant and equipment are stated at cost , net of accumulated depreciation and amortization . depreciation and amortization is computed using the straight-line method over the following estimated useful lives : buildings 20-30 years machinery and equipment 5 years furniture , fixtures and office equipment 5 years software 5-7 years leasehold improvements 5 years or lease term , if shorter repairs and maintenance costs are expensed as incurred . intangible assets acquired in a business combination are recorded at fair value . identifiable finite-lived intangible assets are amortized over the period of estimated benefit using the straight-line method , reflecting the pattern of economic benefits associated with these assets . the estimated useful lives of the company 's intangible 80 neophotonics corporation notes to consolidated financial statements— ( continued ) assets generally range from five to seven years , except for acquired land use rights in china , which have an estimated useful life of 45 years . the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances , both internally and externally , that may suggest impairment . story_separator_special_tag our sales transactions to customers are denominated primarily in chinese renminbi ( “rmb” ) or u.s. dollars . revenue is driven by the volume of shipments and may be impacted by pricing pressures . for the year ended december 31 , 2011 , 64 % of our sales were derived from our china-based subsidiaries , the majority of which were denominated in rmb . in addition , we have generated most of our revenue from a limited number of customers . given the high concentration of network equipment vendors in our industry , our top ten customers represented 91 % , 92 % and 91 % of our revenue in 2011 , 2010 and 2009 , respectively . replace_table_token_7_th total revenue increased by $ 23.4 million in 2011 compared to 2010 , representing a 13 % increase . the increase in revenue was primarily attributable to increases in demand for our products as carriers continued to deploy fiber-to-the home solutions and deploy 40gbps , 100gbps and other telecom networks . in addition , our acquisition of santur contributed $ 5.8 million of revenue in 2011. on a global basis , the increase was primarily realized in china and to a lesser extent in the u.s. total revenue increased by $ 32.4 million in 2010 compared to 2009 , representing a 22 % increase . the increase in revenue was primarily attributable to an increase in demand for our speed and agility products , as customers began to deploy more sophisticated product offerings , plus additional design wins and overall market expansion in 2010. although sales increased on a global basis , the increase was primarily realized in china and the u.s. we expect that our revenue for 2012 will be higher than our revenue for 2011. we also expect that a significant portion of our revenue will continue to be derived from a limited number of customers , as a result of growth in purchases by our key china , u.s. and european customers . our largest customer , huawei technologies , represented 51 % of our total revenue in 2011. as a result , the loss of , or a significant reduction in orders from , huawei technologies or any of our other key customers would materially and adversely affect our revenue and results of operations . we expect a significant portion of our sales to continue to be denominated in rmb , and therefore may be affected by changes in foreign exchange rates . cost of goods sold and gross margin our cost of goods sold consists primarily of the cost to produce wafers and to manufacture and test our products . we have a global set of suppliers to help balance considerations related to product availability , quality and cost . components of our cost of goods sold are denominated primarily in rmb . our manufacturing process extends from wafer fabrication through final module and subsystem assembly and test . the cost of our manufacturing , assembly and test processes includes the cost of personnel and the cost of our manufacturing equipment and facilities . our cost of goods sold is impacted by manufacturing variances such as assembly and test yields and production volume . we typically experience lower yields and higher associated costs on new products . in general , our cost of goods sold associated with a particular product declines over time as a result of decreases in wafer costs associated with the increase in the volume of wafers produced , as well as yield improvements and assembly and test enhancements . additionally , our cost of goods sold includes stock-based compensation , reserves for excess and obsolete inventory , royalty payments , amortization of certain purchased intangible assets and acquisition-related fair value adjustments , warranty , shipping and allocated facilities costs . 52 gross profit as a percentage of total revenue , or gross margin , has been and is expected to continue to be affected by a variety of factors , including the introduction of new products , production volume , production volume compared to sales over time , the mix of products sold , inventory changes , changes in the average selling prices of our products , changes in the cost and volumes of materials purchased from our suppliers , changes in labor costs , changes in overhead costs or requirements , revaluation of stock appreciation unit awards that are impacted by our stock price , and any reserves for excess and obsolete inventories . our newer and more advanced products typically have higher average selling prices and higher gross margins . average selling prices by product typically decline as a result of periodic negotiations with our customers and competitive pressures . we strive to increase our gross margin as we seek to manage the costs of our supply chain and increase productivity in our manufacturing processes . replace_table_token_8_th replace_table_token_9_th cost of goods sold increased by $ 27.6 million in 2011 compared to 2010 , representing a 22 % increase . cost of goods sold increased primarily from higher sales volumes and increased employee benefit cost from an increase in payroll taxes in accordance with the new housing fund and minimum wage as required by the shenzhen ( china ) government effective as of late 2010 and early 2011 , respectively , a catch-up expense for stock appreciation units previously granted to certain employees as well as the ongoing expense relating to the portion of these awards vesting after our initial public offering in february 2011 , and equipment purchases as a result of capacity expansion . also , in 2011 we incurred additional cost of goods sold of $ 6.4 million due to the acquisition of santur . the increase in cost of goods sold was partially offset by overall continuous price reduction efforts in material purchases , improved manufacturing utilization and a decrease in amortization of purchased intangible assets as certain assets became fully amortized . gross margin was 25

a $ 7.0 million equipment line advance for capital expenditures in the u.s. advances may be drawn in four tranches and are due and payable in equal monthly installments of principal and interest such that all amounts will be repaid by september 2015. borrowings under this facility bear interest at a rate of libor plus 2 % . as of december 31 , 2011 , $ 0.0 million was outstanding under the acquisition advance and the total available borrowing capacity under this facility was $ 7.0 million . in connection with the september 2011 amendment to the loan and security agreement , the stand-by letters of credit issued by the bank to guarantee a loan for our subsidiaries in china was terminated and a $ 9 . 5 million credit facility based on capital expenditures under the original loan and security agreement was terminated . our primary subsidiary in china had a $ 5.0 million line of credit facility with a hong kong bank . this line of credit agreement was supported by letters of credit issued pursuant to our u.s. loan and security agreement , as referenced above . in september 2011 , we eliminated the $ 5.0 million letter of credit and there was no capacity available under the line of credit . our u.s. loan and security agreement requires us to maintain specified financial covenants , including a liquidity ratio , and restricts our ability to incur additional debt or to engage in specified transactions and is secured by substantially all of our u.s. assets , other than intellectual property assets . as of december 31 , 2011 , we were in compliance with all covenants contained in this agreement . our subsidiaries in china have short-term line of credit facilities with several banking institutions . these short-term loans have an original maturity date of one year or less as of december 31 , 2011. amounts requested by us are not guaranteed and are subject to the banks ' funds and currency availability . the short-term loan agreements do not contain financial covenants and one such loan agreement is secured by our main manufacturing facility in china . as of december 31 , 2011 , we had no short-term loans outstanding . the table below sets forth selected cash flow data

in our opinion , such consolidated financial statements present fairly , in all material respects , the financial position of pnm resources , inc. and subsidiaries as of december 30 , 2011 and 2010 , and the results of their operations and their cash flows for each of the three years in the period ended december 31 , 2011 , in conformity with accounting principles generally accepted in the united states of america . we have also audited , in accordance with the standards of the public company accounting oversight board ( united states ) , the company 's internal control over financial reporting as of december 31 , 2011 , based on the criteria established in internal control-integrated framework issued by the committee of sponsoring organizations of the treadway commission and our report dated february 29 , 2012 expressed an unqualified opinion on the company 's internal control over financial reporting . deloitte & touche llp dallas , texas february 29 , 2012 b- 6 report of independent registered public accounting firm to the board of directors and stockholders of public service company of new mexico albuquerque , new mexico we have audited the accompanying consolidated balance sheets of public service company of new mexico and subsidiaries ( the `` company `` ) as of december 31 , 2011 and 2010 , and the related consolidated statements of earnings , comprehensive income , cash flows , and changes in equity for each of the three years in the period ended december 31 , 2011. 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 . the company is not required to have , nor were we engaged to perform , an audit of its internal control over financial reporting . our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances , 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 . an audit includes 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 , as well as evaluating the overall financial statement presentation . we believe that our audits provide a reasonable basis for our opinion . in our opinion , such consolidated financial statements present fairly , in all material respects , the financial position of public service company of new mexico and subsidiaries as of december 31 , 2011 and 2010 , and the results of their operations and their cash flows for each of the three years in the period ended december 31 , 2011 , in conformity with accounting principles generally accepted in the united states of america . deloitte & touche llp dallas , texas february 29 , 2012 b- 7 report of independent registered public accounting firm to the board of directors and stockholder of texas-new mexico power company lewisville , texas we have audited the accompanying consolidated balance sheets of texas-new mexico power company and subsidiaries ( the `` company `` ) as of december 31 , 2011 and 2010 , and the related consolidated statements of earnings , comprehensive income , cash flows , and changes in common stockholder 's equity for each of the three years in the period ended december 31 , 2011. 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 . the company is not required to have , nor were we engaged to perform , an audit of its internal control over financial reporting . our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances , 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 . an audit includes 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 , as well as evaluating the overall financial statement presentation . we believe that our audits provide a reasonable basis for our opinion . in our opinion , such consolidated financial statements present fairly , in all material respects , the financial position of texas-new mexico power company and subsidiaries as of december 31 , 2011 and 2010 , and the results of their operations and their cash flows for each of the three years in the period ended december 31 , 2011 , in conformity with accounting principles generally accepted in the united states of america . deloitte & touche llp dallas , texas february 29 , 2012 b- 8 pnm resources , inc. and subsidiaries consolidated statements of earnings ( loss ) replace_table_token_36_th the accompanying notes , as they relate to pnmr , are an integral part of these financial statements . b- 9 replace_table_token_37_th the accompanying notes , as they relate to pnmr , are an integral part of these financial statements . story_separator_special_tag the average consumers reported above include 67,268 , 75,220 , and 86,007 consumers of tnmp electric for 2011 , 2010 , and 2009 that chose first choice as their rep. these consumers are also included in the first choice segment . a- 35 the following table shows tnmp electric gwh sales by retail tariff consumers class : replace_table_token_20_th ( 1 ) the gwh sales reported above include 836.6 , 1,012.8 , and 1,131.9 gwhs for 2011 , 2010 , and 2009 used by consumers of tnmp electric who have chosen first choice as their rep. these gwhs are also included below in the first choice segment . implementation of base rate increases in february 2011 and may 2010 increased revenues and margins by $ 8.7 million in 2011. increases in consumer usage primarily associated with warmer temperatures in the second and third quarter as well as cooler temperatures in the first quarter and moderate growth in the number of consumers in tnmp 's service areas also improved retail margins and revenues . changes to texas retail electric rules that allow distribution providers to defer and later recover or refund differences between revenues and costs charged by transmission providers improved gross margin by $ 2.7 million in 2011. on august 11 , 2011 , tnmp implemented a surcharge for its ams deployment . the surcharge will recover tnmp 's investment in ams over a 12 year period . the surcharge has a true-up mechanism , which allows tnmp to match revenues collected against the expenses incurred and allows for a return to be earned on its investments . in 2011 , revenues increased by $ 1.6 million for this surcharge , which offset increases in operating expenses and depreciation . increases in revenues associated with recovery of the ctc , hurricane ike , rate case expenses , and energy efficiency programs are offset with increases in operating expenses as described below . in 2010 , rate increases implemented in the third quarter of 2009 and the second quarter of may 2010 increased revenues and margins . in addition , implementation of riders for recovery of hurricane ike and energy efficiency programs increased revenues . increased maintenance activities in the gulf coast region of tnmp 's operations resulting from extreme drought conditions increased operating expenses by $ 1.2 million in 2011. operating expense increases of $ 1.0 million in vegetation management and maintenance , $ 3.8 million in higher allocation of corporate overhead and incentive compensation , and higher street rental and property taxes of $ 0.8 million were , partially offset by a $ 3.0 million reduction in property insurance and injuries and damages reserves as well as higher capitalization of administrative and general expenses . in addition , increases in energy efficiency programs and rate case amortization further increased operating expenses , which are offset with revenues as described above . in 2011 , operating expenses increased due to a regulatory disallowance of $ 3.9 million , based on a ruling in the 3 rd court of appeals regarding retroactive application of the interest rate used to calculate the return on tnmp 's ctc regulatory assets . see note 17. in 2010 , operating expenses increased due to costs associated with energy efficiency programs that are being recovered in revenues , lower capitalized overhead costs due to lower capital spending compared to 2009 , and increased costs associated with the implementation of a new work management system . depreciation and amortization increased in 2011 related to the amortization of ctc and hurricane ike restoration costs . in addition , depreciation expense increased due to increases in transmission plant and the ams deployment . in 2010 , depreciation expense increased due to the amortization of hurricane ike restoration costs and increases in transmission plant . the refinancing of tnmp 's revolving credit facility in 2010 resulted in a write-off of unamortized debt issuance costs that did not recur in 2011. the recovery of carrying costs on the hurricane ike restoration costs recorded in 2009 increased other income and deductions in 2009. in december 2010 , the tnmp revolving credit facility was amended , which resulted in lower fees and more favorable interest rates that lowered interest charges in 2011. in addition , on september 30 , 2011 , tnmp replaced its 2009 term loan agreement , at lower interest rates , which further reduced interest expense in 2011. in 2010 , interest charges increased due to higher interest rates on long-term debt issued in march 2009 and lower capitalization of interest due to reduced capital expenditures in 2010. a- 36 pnm gas pnm completed the sale of pnm gas on january 30 , 2009. the table below summarizes the operating results for pnm gas , which is classified as discontinued operations in the consolidated statements of earnings : replace_table_token_21_th first choice the table below summarizes the operating results for first choice : replace_table_token_22_th pnmr completed the sale of first choice on november 1 , 2011. as a result of the sale , the above table reflects operations of first choice from january 1 through october 31 , 2011 , compared to a full year of operations for 2010 and 2009. a- 37 the changes to total revenues , cost of energy , and gross margin in 2011 compared to 2010 are primarily due to ten months of operations in 2011 compared to twelve months in 2010. the following table summarizes the significant changes to total revenues , cost of energy , and gross margin for 2010 compared to 2009 : replace_table_token_23_th the following table shows first choice operating revenues by customer class , including intersegment revenues , and actual number of customers : replace_table_token_24_th ( 1 ) see note above in the tnmp electric segment discussion about the impact of teca . ( 2 ) due to the competitive nature of first choice 's business , actual customer count at the end of the period is presented in the table above

key activities in pnmr 's current construction program include : upgrading generation resources , including those for renewable energy expanding the electric transmission and distribution systems purchasing nuclear fuel projected capital requirements are : replace_table_token_28_th a- 41 the construction expenditure estimates are under continuing review and subject to ongoing adjustment , as well as to board review and approval . the construction expenditures above do not include any amounts related to environmental upgrades at sjgs or four corners that may be required by epa to address regional haze , additional renewable resources that may be required to meet the rps , or additional peaking resources that may be needed to meet needs outlined in pnm 's current irp . estimates for construction expenditures currently do not include any significant expenditures for environmental control facilities . see note 16 and commitments and contractual obligations below . the ability of pnmr to pay dividends on its common stock is dependent upon the ability of pnm and tnmp to be able to pay dividends to pnmr . note 5 describes regulatory and contractual restrictions on the payment of dividends by pnm and tnmp . during the year ended december 31 , 2011 , pnmr met its capital requirements and construction expenditures through cash generated from operations , as well as its liquidity arrangements . in addition to the capital requirements for construction expenditures and dividends , the company has long-term debt that must be paid or refinanced at maturity . note 6 contains information about the maturities on long-term debt . the company has from time to time refinanced or repurchased portions of its outstanding debt before scheduled maturity . depending on market conditions , the company may refinance other debt issuances or make additional debt repurchases in the future . liquidity pnmr 's liquidity arrangements include the pnmr revolving credit facility and the pnm revolving credit facility that both expire in 2016 and the tnmp revolving credit

for all other designated hedges , the company assesses at the time the derivative contract is entered into , and at least quarterly thereafter , whether the derivative instrument is effective in offsetting the changes in fair value or cash flows . dps also measures hedge ineffectiveness on a quarterly basis throughout the designated period . for fair value hedges , changes in the fair value of the derivative instrument that do not effectively offset changes in the fair value of the underlying hedged item throughout the designated hedge period are recorded in earnings each period . for cash flow hedges , ineffectiveness , if any , related to the company 's changes in estimates about the forecasted transaction would be recognized directly in earnings during the period incurred . if a fair value or cash flow hedge were to cease to qualify for hedge accounting , or were terminated , it would continue to be carried on the balance sheet at fair value until settled , but hedge accounting would be discontinued prospectively . if the underlying hedged transaction ceases to exist , any associated amounts reported in long term obligations or aocl , respectively , are reclassified to earnings at that time . refer to note 10 for additional information . fair value the fair value of senior unsecured notes and marketable securities as of december 31 , 2016 and 2015 are based on quoted market prices for publicly traded securities . the company estimates fair values of financial instruments measured at fair value in the financial statements on a recurring basis to ensure they are calculated based on market rates to settle the instruments . these values represent the estimated amounts dps would pay or receive to terminate agreements , taking into consideration current market rates and creditworthiness . the fair value for financial instruments categorized as level 1 is based on quoted prices in active markets for identical assets or liabilities . the fair value of financial instruments categorized as level 2 is determined using valuation techniques based on inputs derived from observable market data , quoted market prices for similar instruments or pricing models , such as discounted cash flow techniques . refer to note 14 for additional information . transfers between levels are recognized at the end of each reporting period . pension and postretirement benefits the company has u.s. and foreign pension and postretirement benefit plans which provide benefits to a defined group of employees who satisfy age and length of service requirements at the discretion of the company . as of december 31 , 2016 , the company has several stand-alone non-contributory defined benefit plans and postretirement medical plans . depending on the plan , pension and postretirement benefits are based on a combination of factors , which may include salary , age and years of service . pension expense has been determined in accordance with the principles of u.s. gaap . the company 's policy is to fund pension plans in accordance with the requirements of the employee retirement income security act of 1974 , as amended . employee benefit plan obligations and expenses included in the consolidated financial statements are determined from actuarial analyses based on plan assumptions , employee demographic data , years of service , compensation , benefits and claims paid and employer contributions . the expense related to the postretirement plans has been determined in accordance with u.s. gaap and the company accrues the cost of these benefits during the years that employees render service . 62 dr pepper snapple group , inc. notes to audited consolidated financial statements ( continued ) the company participates in three multi-employer pension plans and makes contributions to those plans , which are recorded in either cost of sales or sg & a expenses . refer to note 13 for additional information . risk management programs the company retains selected levels of property , casualty , workers ' compensation , health and other business risks . many of these risks are covered under conventional insurance programs with high deductibles or self-insured retentions . accrued liabilities related to the retained casualty and health risks are calculated based on loss experience and development factors , which contemplate a number of variables including claim history and expected trends . as of december 31 , 2016 and 2015 , the company had accrued liabilities related to the retained risks of $ 103 million and $ 117 million , respectively , including both other current and long-term liabilities . as of december 31 , 2016 and 2015 , the company recorded receivables of $ 13 million and $ 21 million , respectively , for insurance recoveries related to these retained risks . income taxes income taxes are accounted for using the asset and liability approach under u.s. gaap . this method involves determining the temporary differences between assets and liabilities recognized for financial reporting and the corresponding amounts recognized for tax purposes and computing the tax-related carryforwards at the 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 resulting amounts are deferred tax assets or liabilities . the total of taxes currently payable per the tax return , the deferred tax expense or benefit and the impact of uncertain tax positions represents the income tax expense or benefit for the year for financial reporting purposes . the company periodically assesses the likelihood of realizing its deferred tax assets based on the amount that the company believes is more likely than not to be realized . the company bases its judgment of the recoverability of its deferred tax assets primarily on historical earnings , its estimate of current and expected future earnings and prudent and feasible tax planning strategies . refer to note 12 for additional information . story_separator_special_tag these increases were partially offset by a 1 % decrease in mott 's and a 3 % decline in our other ncb brands in total . net sales . net sales increased $ 161 million , or approximately 3 % , for the year ended december 31 , 2015 compared with the year ended december 31 , 2014. the primary drivers of the increase were favorable product and package mix , an increase in branded sales volumes , favorable segment mix and higher pricing , partially offset by $ 115 million in unfavorable foreign currency translation . gross profit . gross profit increased $ 93 million , or approximately 3 % , for the year ended december 31 , 2015 compared with the year ended december 31 , 2014. although the gross margin for the year ended december 31 , 2015 of 59.3 % remain unchanged year over year , the following drivers impacted the gross margin : lower commodity costs , led by packaging , and net of the change in our last-in , first-out ( `` lifo `` ) inventory provision , which increased our gross margin by 0.8 % ; ongoing productivity improvements , which increased our gross margin by 0.5 % ; decrease in our other manufacturing costs , which increased our gross margin by 0.2 % ; increase in our net pricing , which increased our gross margin by 0.1 % ; unfavorable product , package and segment mix , which decreased our gross margin by 0.7 % ; unfavorable foreign currency effects , which decreased our gross margin by 0.5 % ; and unfavorable comparison in our mark-to-market activity on commodity derivative contracts , which decreased our gross margin by 0.4 % . the unfavorable mark-to-market activity on commodity derivative contracts for the year ended december 31 , 2015 was $ 13 million in unrealized losses versus $ 11 million in unrealized gains in the prior year . sg & a expenses . sg & a expenses decreased $ 21 million for the year ended december 31 , 2015 compared with the prior year . the decrease was primarily driven by the impact of favorable foreign currency effects , which decreased sg & a expenses by $ 41 million , and a $ 32 million favorable comparison in the mark-to-market activity on commodity derivative contracts . for the year ended december 31 , 2015 , we recognized $ 8 million in unrealized gains related to the mark-to-market activity on commodity derivative contracts versus $ 24 million in unrealized losses in the year ago period . these drivers were partially offset by higher people costs , which were driven by inflationary increases and the impact of increased sales volumes , and higher performance-based incentive compensation . income from operations . income from operations increased $ 118 million to $ 1,298 million for the year ended december 31 , 2015 , due primarily to the increase in gross profit and decreases in sg & a expenses and depreciation and amortization , partially offset by a non-cash charge of $ 7 million for the brand value impairment of garden cocktail . interest expense . interest expense increased $ 8 million primarily driven by the impact of the issuance of our 3.40 % senior notes due november 15 , 2025 ( the `` 2025 notes `` ) and 4.50 % senior notes due november 15 , 2045 ( the `` 2045 notes `` ) during the fourth quarter of 2015. effective tax rate . the effective tax rates for the year ended december 31 , 2015 and 2014 were 35.5 % and 34.6 % , respectively . the 2015 effective tax rate was higher , compared to the prior year , as a result of an income tax benefit in 2014 of $ 4 million due to the resolution of a tax audit in a foreign jurisdiction . 35 results of operations by segment the following tables set forth net sales and sop for our segments for the years ended december 31 , 2015 and 2014 , as well as the other amounts necessary to reconcile our total segment results to our consolidated results presented in accordance with u.s. gaap : replace_table_token_9_th beverage concentrates the following table details our beverage concentrates segment 's net sales and sop for the years ended december 31 , 2015 and 2014 : replace_table_token_10_th net sales . net sales increased $ 13 million for the year ended december 31 , 2015 , compared with the year ended december 31 , 2014. the increase was due to favorable mix , primarily driven by our fountain business , and higher pricing . the increases were partially offset by higher discounts primarily driven by our fountain business , unfavorable foreign currency translation of $ 11 million and a slight reduction in our concentrate case sales . sop . sop increased $ 17 million for the year ended december 31 , 2015 , compared with the year ended december 31 , 2014 , driven primarily by an increase in net sales and a decrease in cost of sales . the decrease in cost of sales was primarily driven by a favorable lifo comparison , favorable manufacturing and delivery costs , ongoing productivity improvements and lower commodity costs . 36 volume ( bcs ) . volume ( bcs ) was flat for the year ended december 31 , 2015 compared with the year ended december 31 , 2014. schweppes had gains of 8 % driven by distribution gains in our sparkling water and growth in the ginger ale category . our core 4 brands increased 1 % compared to the prior year as a result of a 7 % increase in canada dry , partially offset by a 7 % decrease in 7up , a 4 % decline in sunkist soda and a 3 % decrease in a & w . these increases were fully offset by decreases in dr pepper , crush and our other brands .

crush increased 3 % for the current year . these increases were partially offset by a 7 % decline in our other brands . packaged beverages the following table details our packaged beverages segment 's net sales and sop for the years ended december 31 , 2016 and 2015 : replace_table_token_6_th volume . sales volume was flat for the year ended december 31 , 2016 as compared with the year ended december 31 , 2015 as increases in our branded ncb volumes were fully offset by declines in our branded csd volumes and contract manufacturing . branded csd volumes de creased 1 % for the year ended december 31 , 2016 compared with the year ended december 31 , 2015 . volume for our core 4 brands de creased 1 % , led by a 4 % decrease in 7up , a 3 % decrease in a & w and a 1 % decline in sunkist soda , partially offset by a 6 % in crease in canada dry . our other csd brands decreased 6 % . the decreases were partially offset by a 5 % gain in squirt . dr pepper was flat compared to the prior year as increases in regular were fully offset by declines in diet . branded ncb volumes in creased 2 % for the year ended december 31 , 2016 compared with the year ended december 31 , 2015 . our water category increased 23 % primarily due to distribution gains for bai brands , fiji and core hydration , and incremental promotional activity behind bai brands primarily in our club channel . clamato and snapple increased 5 % and 1 % , respectively . our other ncb brands increased 3 % , led by body armor and venom . these increases were partially offset by a 5 % decline in hawaiian punch due to category headwinds and higher

these inputs may include quoted prices for similar assets or liabilities or quoted market prices in markets that are not active to the general public . level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities . the carrying amounts for financial instruments consisting of cash and cash equivalents , accounts payable and accrued liabilities approximate fair value due to their short maturities . derivative instruments are carried at fair value based on unobservable market inputs . ( xiv ) comprehensive loss comprehensive loss represents all changes in stockholders ' equity ( deficit ) , except those resulting from distributions to stockholders . for all periods presented , comprehensive loss was the same as reported net loss . ( xv ) recently issued or effective accounting standards recently issued or effective accounting pronouncements that impact , or may have an impact , on the company 's financial statements have been discussed within the footnote to which each relates . other recent accounting pronouncements not disclosed in these financial statements have been determined by the company 's management to have no impact , or an immaterial impact , on its current and expected future financial position , results of operations , or cash flows . 3. balance sheet account detail the composition of select financial statement captions that comprise the accompanying balance sheets are summarized below : ( a ) property and equipment , net of accumulated depreciation 127 tarsus pharmaceuticals , inc. notes to the financial statements “ property and equipment , net ” consists of the following : replace_table_token_9_th depreciation expense ( included within “ total operating expenses ” in the accompanying statements of operations and comprehensive loss ) for the years ended december 31 , 2020 and 2019 was $ 0.1 million an d $ 37 thousand , res pectively . ( b ) accounts payable and other accrued liabilities “ accounts payable and other accrued liabilities ” consists of the following : replace_table_token_10_th ( c ) other long-term liabilities “ other long-term liabilities ” consists of the following : replace_table_token_11_th 4. stockholders ' equity authorized stock under the october 2020 amended and restated certificate of incorporation , the company is authorized to issue two classes of stock : common and preferred . the total number of shares authorized for issuance is 200.0 million of common shares and 10.0 million of preferred shares . preferred stock overview series a preferred stock issuance 128 tarsus pharmaceuticals , inc. notes to the financial statements in march and may 2018 , the company executed a private placement series a stock purchase agreement and issued 1.6 million shares of series a preferred stock at $ 2.3174 per share for net proceeds of $ 3.6 million , after issuance costs of $ 0.1 million . series b preferred stock issuance in december 2019 , the company executed a private placement series b stock purchase agreement of 6.7 million shares of series b preferred stock at $ 8.9904 per share for net proceeds of $ 57.4 million , after issuance costs of $ 0.2 million . concurrently , convertible notes issued in may , august , and october 2019 for aggregate proceeds of $ 2.0 million were converted based on principal an d accrued interest , and the company issued 0.3 million shares of series b preferred stock at its contractual conversion price ( see note 8 ) . series c preferred stock issuance in september 2020 , the company executed a private placement series c stock purchase agreement of 2.9 million shares of series c preferred stock at a purchase price of $ 14.0003 per share for net proceeds of $ 39.8 million , after issuance costs of $ 0.2 million . on october 20 , 2020 , upon the closing of the ipo , all outstanding shares of preferred stock were automatically converted into an aggregate 11,107,018 shares of the company 's common stock and $ 103.2 million of mezzanine equity was reclassified to common stock and additional paid-in capital . as of december 31 , 2020 , there were no shares of preferred stock issued and outstanding . the table below includes preferred stock details as of december 31 , 2019. replace_table_token_12_th common stock overview and reserve for future issuance common stockholders have one vote for each share of common stock held and are entitled to receive any dividends declared by the company 's board of directors when legally available for distribution , subject to the dividend rights of the holders of series a , series b , and series c preferred stock discussed above . for the years ended december 31 , 2020 and 2019 , no dividends were declared . as of december 31 , 2020 and 2019 , the company had 20.5 million and 2.7 million common shares issued , respectively . at december 31 , 2020 and 2019 , the company had 20.3 million and 2.6 million , common shares outstanding , respectively . the following shares of common stock were reserved for issuance : replace_table_token_13_th 5. stock-based compensation 129 tarsus pharmaceuticals , inc. notes to the financial statements 2020 equity incentive plan the company 's board of directors and stockholders adopted and approved the company 's 2020 equity incentive plan ( the “ 2020 plan ” ) on october 8 , 2020. the 2020 plan replaces the 2016 plan , however , awards outstanding under the 2016 plan will continue to be governed by their existing terms . the number of shares of the company 's common stock available for issuance under the 2020 plan equal the initial sum of 9,000,000 shares plus 2,432,980 shares remaining available for issuance under the 2016 plan , or issued pursuant to or subject to awards granted under the 2016 plan . story_separator_special_tag our potential inability to raise capital when needed could have a negative impact on our financial condition and our ability to pursue our business strategies . if we are unable to raise additional funds as required , we may need to delay , reduce , or terminate some or all development programs and clinical trials . we may also be required to sell or license our rights to product candidates in certain territories or indications that we would otherwise prefer to develop and commercialize ourselves . if we are required to enter into collaborations and other arrangements to address our liquidity needs , we may have to give up certain rights that limit our ability to develop and commercialize our product candidates or may have other terms that are not favorable to us or our stockholders , which could materially and adversely affect our business and financial prospects . see the section of this annual report on 10-k titled “ risk factors ” for additional risks associated with our substantial capital requirements . convertible notes from may 2019 through october 2019 , we issued convertible promissory notes with an aggregate principal amount of $ 2.0 million . these notes were all converted into an aggregate of 268,056 shares of series b preferred stock in december 2019 ( see note 4 ) . 111 summary statement of cash flows the following table sets forth the primary sources and uses of cash , cash equivalents and restricted cash for each of the periods presented below : replace_table_token_3_th story_separator_special_tag that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ materially from these estimates under different assumptions or conditions . while our significant accounting policies are described in the notes to our financial statements also included in this annual report on form 10-k , we believe these critical accounting policies are the most important to understanding and evaluating our reported financial results . research and development expenses research and development costs are expensed as incurred or as certain upfront or milestone payments become contractually due to licensors upon the achievement of clinical or regulatory events . these expenses also include internal costs directly attributable to in-development programs , including cost of certain salaries , payroll taxes , employee benefits , and stock-based compensation expense , as well as laboratory and clinical supplies , pre-clinical and clinical trial related expenses , and the cost of services provided by outside contractors . we have entered , and may continue to enter into , license agreements to access and utilize certain technology . in each case , we evaluate if the assets acquired in a transaction represent the acquisition of an asset or a business , as defined under applicable gaap . our only executed in-license agreement was evaluated and determined to represent an asset acquisition . because this asset had not yet received regulatory approval and has no alternative future use , its fair value was immediately recognized as research and development expense . we make research and development expense accrual estimates as of each balance sheet date , based on facts known to us at that time . 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 cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost . we periodically confirm the accuracy of our estimates with the service providers , including cros , and record adjustments , if necessary . to date , there have been no material differences between our estimates of such expenses and the amounts actually incurred . stock-based compensation we measure and recognize compensation expense for all stock options based on the estimated fair value of the award on the grant date . we use the black-scholes option-pricing model to estimate the fair value of awarded stock options . the fair value is recognized as expense on a straight-line or ratable basis over the requisite or implicit service period . 113 the determination of the grant date fair value of our issued stock options is affected principally by our model assumptions , including ( a ) the expected term of the stock option until its exercise by the recipient , ( b ) our assumed stock price volatility through a designated peer group of publicly-traded companies for a period equal to the expected option term , ( c ) the prevailing risk-free interest rate over the expected term , and ( d ) any expected dividend payments over the expected term . if any of these assumptions change , our stock-based compensation expense for future grants could materially differ . stock-based compensation expense for equity awards granted to our employees and members of our board of directors is recognized on a straight-line basis over each award 's vesting period . we account for forfeitures as they occur . we use the black-scholes option pricing model to determine the fair value of stock options ( as of the date of grant ) . the recognition of stock-based compensation expense and the initial calculation of stock option fair value requires uncertain assumptions , including ( a ) the expected term that the stock option will remain outstanding , ( b ) our stock price volatility over the expected term , and ( c ) the prevailing risk-free interest rate for the period matching the expected term . expected term – the expected term is calculated using the simplified method which is used when there is insufficient historical data about exercise patterns and post-vesting employment termination behavior . the simplified method is based on the vesting period and the contractual term for each grant , or for each

if any or all milestones are met , we believe that the corresponding increase in value from the related drug program will exceed the amount of our milestone obligation . ( 3 ) purchase obligations represent the amount of open purchase orders and contractual commitments to vendors for products and services that have not been delivered or rendered , as of december 31 , 2020. we enter contracts in the normal course of business with clinical research organizations and clinical sites and with contract manufacturers for pre-clinical and clinical drug supply , as well as with various other vendors in operating our business . these contracts generally provide for termination provisions with notice . the values in each column represent the obligations that are non-cancelable as of december 31 , 2020. we enter into contracts in the normal course of business with ( i ) clinical research organizations and clinical sites , ( ii ) contract manufacturers for pre-clinical and clinical drug supply , ( iii ) regulatory consultants and ( iv ) various other vendors in operating our business . these contracts generally provide for termination provisions with notice , and therefore we believe that our non-cancelable obligations under these agreements were not material as of december 31 , 2020. critical accounting policies , significant judgments 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 u.s. generally accepted accounting principles ( `` 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 incurred during the reporting periods . our estimates are based on our historical experience and on various other factors

management develops estimates based on assumptions as a part of the purchase price allocation process to value the assets acquired and liabilities assumed as of the business combination date . as a result , during the purchase price measurement period , which may be up to one year from the business combination date , the company may record adjustments to the assets acquired and liabilities assumed , with the corresponding offset to goodwill . after the purchase price measurement period , the company will record adjustments to assets acquired or liabilities assumed subsequent to the purchase price measurement period in operating expenses in the period in which the adjustments were determined . 43 index to financial statements the company records acquisition and transaction related expenses in the period in which they are incurred . acquisition and transaction related expenses primarily consist of legal , banking , accounting and other advisory fees of third parties related to potential acquisitions . goodwill and intangible assets goodwill and other intangible assets were recognized in conjunction with the interpoint , meta , clg and opportune it acquisitions , as well as the unibased acquisition ( prior to divestiture of such assets ) . identifiable intangible assets include purchased intangible assets with finite lives , which primarily consist of internally-developed software , client relationships , supplier agreements , non-compete agreements , customer contracts and license agreements . finite-lived purchased intangible assets are amortized over their expected period of benefit , which generally ranges from one to 15 years , using the straight-line and undiscounted expected future cash flows methods . see note 3 - acquisitions and divestitures to our consolidated financial statements included in part ii , item 8 herein for information on the sale of our looking glass® patient engagement suite of solutions in fiscal 2016 , which the company acquired in connection with its acquisition of unibased in february 2014. the company assesses the useful lives and possible impairment of existing recognized goodwill and intangible assets when an event occurs that may trigger such a review . factors considered important which could trigger a review include : significant under performance relative to historical or projected future operating results ; significant changes in the manner of use of the acquired assets or the strategy for the overall business ; identification of other impaired assets within a reporting unit ; disposition of a significant portion of an operating segment ; significant negative industry or economic trends ; significant decline in the company 's stock price for a sustained period ; and a decline in the market capitalization relative to the net book value . determining whether a triggering event has occurred involves significant judgment by the company . the company assesses goodwill annually ( as of november 1 ) , or more frequently when events and circumstances , such as the ones mentioned above , occur indicating that the recorded goodwill may be impaired . the company did not note any of the above qualitative factors , which would be considered a triggering event for impairment . in assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount , the company assesses relevant events and circumstances that may impact the fair value and the carrying amount of a reporting unit . the identification of relevant events and circumstances and how these may impact a reporting unit 's fair value or carrying amount involve significant judgments by management . these judgments include the consideration of macroeconomic conditions , industry and market considerations , cost factors , overall financial performance , events which are specific to the company and trends in the market price of the company 's common stock . each factor is assessed to determine whether it impacts the impairment test positively or negatively , and the magnitude of any such impact . the two-step goodwill impairment test requires the company to identify its reporting units and to determine estimates of the fair values of those reporting units as of the impairment testing date . reporting units are determined based on the organizational structure the entity has in place at the date of the impairment test . a reporting unit is an operating segment or component business unit with the following characteristics : ( a ) it has discrete financial information , ( b ) segment management regularly reviews its operating results ( generally an operating segment has a segment manager who is directly accountable to and maintains regular contact with the chief operating decision maker to discuss operating activities , financial results , forecasts or plans for the segment ) , and ( c ) its economic characteristics are dissimilar from other units ( this contemplates the nature of the products and services , the nature of the production process , the type or class of customer for the products and services and the methods used to distribute the products and services ) . the company determined that it has one operating segment and one reporting unit . to conduct a quantitative two-step goodwill impairment test , the fair value of the reporting unit is first compared to its carrying value . if the reporting unit 's carrying value exceeds its fair value , the company performs the second step and records an impairment loss to the extent that the carrying value of goodwill exceeds its implied fair value . the company estimates the fair value of its reporting unit using a blend of market and income approaches . the market approach consists of two separate methods , including reference to the company 's market capitalization , as well as the guideline publicly traded company method . the market capitalization valuation method is based on an analysis of the company 's stock price on and around the testing date , plus a control premium . story_separator_special_tag application of critical accounting policies the following is a summary of the company 's most critical accounting policies . see note 2 - significant accounting policies to our consolidated financial statements included in part ii , item 8 herein for a complete discussion of the significant accounting policies and methods used in the preparation of our consolidated financial statements . 26 index to financial statements revenue recognition the company recognizes revenue for perpetual and term licenses in accordance with asc 985-605 , software-revenue recognition and asc 605-25 , revenue recognition — multiple-element arrangements . the company commences revenue recognition when the following criteria all have been met : persuasive evidence of an arrangement exists , delivery has occurred or services have been rendered , the arrangement fees are fixed or determinable , and collection is considered probable . if the company determines that any of the above criteria has not been met , the company will defer recognition of the revenue until all the criteria have been met . if non-standard acceptance periods or non-standard performance criteria , cancellation or right of refund terms are required , revenue is recognized upon the satisfaction of such criteria , as applicable . multiple element arrangements we record revenue for non-software related products and services pursuant to accounting standards update no . 2009-13 , revenue recognition ( topic 605 ) , “ multiple-deliverable revenue arrangements — a consensus of the fasb emerging issues task force ” ( “ asu 2009-13 ” ) . the company follows this accounting guidance for revenue recognition of multiple deliverable revenue arrangements ( meaning the delivery or performance of multiple products , services and or rights to use assets ) to determine whether such arrangements contain more than one unit of accounting . to qualify as a separate unit of accounting , the delivered item must have value to the client on a stand-alone basis ( meaning the item can be sold separately by any vendor or the client could resell the item on a stand-alone basis ) . additionally , if the arrangement includes a general right of return relative to the delivered item , delivery or performance of the undelivered items must be considered probable and substantially in the control of the vendor . allowance for doubtful accounts accounts and contract receivables are comprised of amounts owed the company for solutions and services provided . contracts with individual clients and resellers determine when receivables are due and payable . in determining the allowances for doubtful accounts , the unpaid receivables are reviewed monthly to determine the payment status based upon the most currently available information . during these monthly reviews , the company determines the required allowances for doubtful accounts for estimated losses resulting from the unwillingness or inability of its clients or resellers to make required payments . capitalized software development costs software development costs are accounted for in accordance with either asc 985-20 , software — costs of software to be sold , leased or marketed , or asc 350-40 , internal-use software . costs associated with the planning and designing phase of software development are classified as research and development costs and are expensed as incurred . once technological feasibility has been determined , a portion of the costs incurred in development , including coding , testing and quality assurance , are capitalized until available for general release to clients , and subsequently reported at the lower of unamortized cost or net realizable value . amortization is calculated on a solution-by-solution basis and is over the estimated economic life of the software . amortization for our legacy software systems is provided on a solution-by-solution basis over the estimated economic life of the software , using the straight-line method . amortization commences when a solution is available for general release to clients . acquired internally-developed software from acquisitions is amortized using the straight-line method . unamortized capitalized costs determined to be in excess of the net realizable value of a solution are expensed at the date of such determination . the company reviews , on an on-going basis , the carrying value of its capitalized software development expenditures , net of accumulated amortization . goodwill and intangible assets goodwill and other intangible assets were recognized in conjunction with the interpoint , meta , clg , opportune it and unibased acquisitions , taking into account the divestiture discussed in note 3 - acquisitions and divestitures to our consolidated financial statements included in part ii , item 8 herein . identifiable intangible assets include purchased intangible assets with finite lives , which primarily consist of internally-developed software , client relationships , supplier agreements , non-compete agreements , customer contracts and license agreements . finite-lived purchased intangible assets are amortized over their expected period of benefit , which generally ranges from six months to 15 years , using the straight-line and undiscounted expected future cash flows methods . 27 index to financial statements we assess the useful lives and possible impairment of existing recognized goodwill on at least an annual basis , and goodwill and intangible assets when an event occurs that may trigger such a review . factors considered important which could trigger a review include : significant under-performance relative to historical or projected future operating results ; significant changes in the manner of use of the acquired assets or the strategy for the overall business ; identification of other impaired assets within a reporting unit ; disposition of a significant portion of an operating segment ; significant negative industry or economic trends ; significant decline in the company 's stock price for a sustained period ; and a decline in the market capitalization relative to the net book value . determining whether a triggering event has occurred involves significant judgment by the company . income taxes income taxes are accounted for under the asset and liability method . deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the

however , the credit agreement prohibits the company and its subsidiary from declaring or paying any dividend or making any other payment or distribution , directly or indirectly , on account of equity interests issued by the company if such equity interests : ( a ) mature or are mandatorily redeemable pursuant to a sinking fund obligation or otherwise ( except as a result of a change of control or asset sale so long as any rights of the holders thereof upon the occurrence of a change of control or asset sale event shall be subject to the prior repayment in full of the loans and all other obligations that are accrued and payable upon the termination of the credit agreement ) , ( b ) are redeemable at the option of the holder thereof , in whole or in part , ( c ) provide for the scheduled payments of dividends in cash , or ( d ) are or become convertible into or exchangeable for indebtedness or any other equity interests that would constitute disqualified equity interests pursuant to clauses ( a ) through ( c ) hereof , in each case , prior to the date that is 180 days after the maturity date of the credit agreement . significant cash obligations replace_table_token_12_th please reference note 3 — acquisitions and note 6 — debt to our consolidated financial statements included in part ii , item 8 for additional information . operating cash flow activities replace_table_token_13_th the decrease in net cash provided by operating activities in fiscal 2016 is primarily due to higher collections in fiscal 2015 , as a result of the company 's efforts to resolve issues that were delaying payments . the company 's clients typically have been well-established hospitals , medical facilities or major health information system companies that resell the company 's solutions , which have good credit histories , and payments have been received within normal time frames for the industry . however , some healthcare organizations have experienced significant operating losses as a result of limits on third-party reimbursements from insurance companies and governmental entities . agreements with clients often involve significant amounts and contract terms typically require clients to make progress payments . adverse economic events , as well as uncertainty in the credit markets , may adversely affect the liquidity for some of our clients . investing cash flow activities

74 index to financial statements magnachip semiconductor corporation and subsidiaries notes to consolidated financial statements— ( continued ) ( tabular dollars in thousands , except share data ) derivative financial instruments the company applies the provisions of asc 815 , “derivatives and hedging” ( “asc 815” ) . this statement requires the recognition of all derivative instruments as either assets or liabilities measured at fair value . under the provisions of asc 815 , the company may designate a derivative instrument as hedging the exposure to variability in expected future cash flows that are attributable to a particular risk ( a “cash flow hedge” ) or hedging the exposure to changes in the fair value of an asset or a liability ( a “fair value hedge” ) . special accounting for qualifying hedges allows the effective portion of a derivative instrument 's gains and losses to offset related results on the hedged item in the consolidated statements of operations and requires that a company formally document , designate and assess the effectiveness of the transactions that receive hedge accounting treatment . both at the inception of a hedge and on an ongoing basis , a hedge must be expected to be highly effective in achieving offsetting changes in cash flows or fair value attributable to the underlying risk being hedged . if the company determines that a derivative instrument is no longer highly effective as a hedge , it discontinues hedge accounting prospectively and future changes in the fair value of the derivative are recognized in current earnings . the company assesses hedge effectiveness at the end of each quarter . in accordance with asc 815 , changes in the fair value of derivative instruments that are cash flow hedges are recognized in accumulated other comprehensive income ( loss ) and reclassified into earnings in the period in which the hedged item affects earnings . ineffective portions of a derivative instrument 's change in fair value are immediately recognized in earnings . derivative instruments that do not qualify , or cease to qualify , as hedges must be adjusted to fair value and the adjustments are recorded through net income ( loss ) . the cash flows from derivative instruments receiving hedge accounting treatment are classified in the same categories as the hedged items in the consolidated statements of cash flows . advertising the company expenses advertising costs as incurred . advertising expense was approximately $ 155 thousand , $ 161 thousand and $ 142 thousand for the years ended december 31 , 2014 , 2013 and 2012 , respectively . product warranties the company records , in other current liabilities , warranty liabilities for the estimated costs that may be incurred under its basic limited warranty . the standard limited warranty period is one year for the majority of products . this warranty covers defective products , and related liabilities are accrued when product revenues are recognized . factors that affect the company 's warranty liability include historical and anticipated rates of warranty claims and repair or replacement costs per claim to satisfy the company 's warranty obligation . as these factors are impacted by actual experience and future expectations , the company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts when necessary . research and development research and development costs are expensed as incurred and include wafers , masks , employee expenses , contractor fees , building costs , utilities and administrative expenses . 75 index to financial statements magnachip semiconductor corporation and subsidiaries notes to consolidated financial statements— ( continued ) ( tabular dollars in thousands , except share data ) licensed patents and technologies the company has entered into a number of royalty agreements to license patents and technology used in the design of its products . the company carries two types of royalties : lump-sum and running basis . lump-sum royalties which require initial payments , usually paid in installments , represent a non-refundable commitment , such that the total present value of these payments is recorded as a prepaid expense and a liability upon execution of the agreements and the costs are amortized over the contract period using the straight-line method and charged to research and development expenses in the consolidated statements of operations . running royalties are paid based on the revenue of related products sold by the company . stock-based compensation the company follows the provisions of asc 718 , “compensation-stock compensation” ( “asc 718” ) . under asc 718 , stock-based compensation cost is measured at the grant date , based on the fair value of the award , and is recognized as expense over the requisite service period . as permitted under asc 718 , the company elected to recognize compensation expense for all options with graded vesting based on the graded attribution method . the company uses the black-scholes option-pricing model to measure the grant-date-fair-value of options . the black-scholes model requires certain assumptions to determine an option 's fair value , including expected term , risk free interest , expected volatility and fair value of underlying common share . the expected term of each option grant was based on employees ' expected exercises and post-vesting employment termination behavior and the risk free interest rate was based on the u.s. treasury yield curve for the period corresponding with the expected term at the time of grant . the expected volatility was estimated using historical volatility of share prices of similar public entities . no dividends were assumed for this calculation of option value . earnings per share in accordance with asc 260 , “earnings per share” ( “asc 260” ) , the company computes basic earnings per share by dividing net income ( loss ) available to common stockholders by the weighted average number of common shares outstanding during the period . diluted earnings per share reflect the dilution of potential common stock outstanding during the period . story_separator_special_tag ( h ) this adjustment eliminates expenses incurred in connection with the audit committee 's independent investigation and related restatement and litigation , primarily comprised of legal , audit and consulting fees . this amount does not include any allocation of internal costs related to the restatement . adjusted net income has limitations as an analytical tool , and you should not consider it in isolation , or as a substitute for analysis of our results as reported under us gaap . some of these limitations are : adjusted net income does not reflect our cash expenditures , or future requirements , for capital expenditures or contractual commitments ; adjusted net income does not reflect changes in , or cash requirements for , our working capital needs ; adjusted net income does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees ; adjusted net income does not reflect the costs of holding certain assets and liabilities in foreign currencies ; and other companies in our industry may calculate adjusted net income differently than we do , limiting its usefulness as a comparative measure . because of these limitations , adjusted net income should not be considered as a measure of discretionary cash available to us to invest in the growth of our business . we compensate for these limitations by relying primarily on our us gaap results and using adjusted net income only supplementally . in evaluating adjusted ebitda and adjusted net income , you should be aware that in the future we may incur expenses similar to the adjustments in our presentation of adjusted ebitda and adjusted net income . our presentation of adjusted ebitda and adjusted net income should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items . adjusted ebitda and adjusted net income are not measures defined in accordance with us gaap and should not be construed as an alternative to operating income , cash flows from operating activities or net income ( loss ) , as determined in accordance with us gaap . our adjusted ebitda and adjusted net loss for the year ended december 31 , 2014 were $ 8.5 million and $ 38.1 million , respectively . our adjusted ebitda and adjusted net loss for the year ended december 31 , 2013 were $ 20.0 million and $ 31.5 million , respectively . our adjusted ebitda and adjusted net income for the year ended december 31 , 2012 were $ 124.3 million and $ 64.5 million , respectively . 47 index to financial statements factors affecting our results of operations net sales . we derive virtually all of our sales ( net of sales returns and allowances ) from three business lines : display solutions , power solutions and semiconductor manufacturing services . our product inventory is primarily located in korea and is available for drop shipment globally . outside of korea , we maintain limited product inventory , and our sales representatives generally relay orders to our factories in korea for fulfillment . we have strategically located our sales and technical support offices near concentrations of major customers . our sales offices are located in korea , the united states , japan and greater china . our network of authorized agents and distributors consists of agents in the united states and europe and distributors and agents in the asia pacific region . our net sales from all other consist principally of the disposal of waste materials . we recognize revenue when risk and reward of ownership pass to the customer either upon shipment , upon product delivery at the customer 's location or upon customer acceptance , depending on the terms of the arrangement . for the years ended december 31 , 2014 and 2013 , we sold products to over 282 and 284 customers , respectively , and our net sales to our ten largest customers represented 61 % and 59 % of our net sales , respectively . we have a combined production capacity of over 127,000 eight-inch equivalent semiconductor wafers per month . we believe our large-scale , cost-effective fabrication facilities enable us to rapidly adjust our production levels to meet shifts in demand by our end customers . gross profit . our overall gross profit generally fluctuates as a result of changes in overall sales volumes and in the average selling prices of our products and services . other factors that influence our gross profit include changes in product mix , the introduction of new products and services and subsequent generations of existing products and services , shifts in the utilization of our manufacturing facilities and the yields achieved by our manufacturing operations , changes in material , labor and other manufacturing costs including outsourced manufacturing expenses , and variation in depreciation expense . average selling prices . average selling prices for our products tend to be highest at the time of introduction of new products which utilize the latest technology and tend to decrease over time as such products mature in the market and are replaced by next generation products . we strive to offset the impact of declining selling prices for existing products through our product development activities and by introducing new products that command selling prices above the average selling price of our existing products . in addition , we seek to manage our inventories and manufacturing capacity so as to preclude losses from product and productive capacity obsolescence . material costs . our cost of material consists of costs of raw materials , such as silicon wafers , chemicals , gases and tape , packaging supplies , equipment maintenance and depreciation expenses . we use processes that require specialized raw materials , such as silicon wafers , that are generally available from a limited number of suppliers . if demand increases or supplies decrease , the costs of our raw materials could significantly increase . labor costs .

our working capital balance as of december 31 , 2014 was $ 106.8 million compared to $ 172.1 million as of december 31 , 2013. the $ 65.3 million decrease was primarily attributable to a $ 51.2 million decrease in cash and cash equivalents and a $ 15.6 million increase in accrued expenses , primarily as a result of accrual of outside service fees related to the audit committee 's independent investigation and related restatement and litigation . cash flow used in investing activities totaled $ 16.7 million in the year ended december 31 , 2014 , compared to $ 44.1 million of cash used in investing activities in the year ended december 31 , 2013. the decrease was primarily due to a decrease in capital expenditures of $ 24.7 million . cash inflows generated by financing activities totaled $ 0.1 million for the year ended december 31 , 2014 , compared to $ 50.1 million of cash outflow used in financing activities for the year ended december 31 , 2013. the financing cash outflow for the year ended december 31 , 2013 mainly consisted of the repayment of $ 229.3 million of our 2018 notes and the repurchase of $ 51.0 million of our outstanding common stock , which were offset by $ 11.4 million of proceed received from the issuance of common stock in connection with option and warrant exercises and the net proceeds of $ 218.8 million from the issuance of our 2021 notes . we repurchased 2,614,748 shares of common stock at a cost of $ 51.0 million for the year ended december 31 , 2013. in march 2014 , our board of directors suspended the stock repurchase program indefinitely , and the stock repurchase program expired by its terms on december 15 , 2014. subsequent to december 31 , 2013 , we did not repurchase any shares under the stock repurchase program . for the year ended december 31 , 2014 , capital expenditures were $ 18.4 million , a $ 24.7 million , or 57.4 % , decrease from $ 43.1 million in the year ended december 31 , 2013 , due to reduced need for capital spending on technology upgrades as a result of the high level of spending in prior years . 57 index to financial statements year ended december 31 , 2013 compared to year ended december 31 , 2012 as of december 31 , 2013 , our cash and cash equivalents balance was $ 153.6 million , a $ 28.6 million decrease , compared to $ 182.2 million as of december 31 , 2012. the decrease resulted

see note 8 : property , plant and equipment for additional information regarding property , plant and equipment . goodwill — we follow the acquisition method of accounting to record the assets and liabilities of acquired businesses at their estimated fair value at the date of acquisition . we initially record goodwill for the amount costs exceed the acquisition-date fair value of net identifiable assets acquired . we test goodwill for impairment at a level within the company referred to as the reporting unit , which is our business segment level , and , if and when applicable , one level below the business segment . we test our goodwill for impairment annually , or under certain circumstances , more frequently , such as when events or circumstances indicate there may be impairment . such events or circumstances may include a significant deterioration in overall economic conditions , changes in the business climate of our industry , a decline in our market capitalization , operating performance indicators , competition , reorganizations of our business or the disposal of all or a portion of a reporting unit . we identify goodwill impairment and measure any loss from an impairment by comparing the fair value of each reporting unit to its carrying amount , including goodwill . if the carrying amount of a reporting unit exceeds its fair value , goodwill is considered impaired , and an impairment loss is recognized in an amount equal to that excess . see note 3 : discontinued operations and divestitures and note 9 : goodwill for additional information regarding goodwill . long-lived assets , including finite-lived intangible assets — long-lived assets , including finite-lived intangible assets , are amortized on a straight-line basis over their useful lives . we assess the recoverability of the carrying value of our long-lived assets , including finite-lived intangible assets , whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable . we evaluate the recoverability of such assets based on the expectations of undiscounted cash flows from such assets . if the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset , a loss would be recognized for the difference between the fair value and the carrying amount . see note 8 : property , plant and equipment and note 10 : intangible assets for additional information regarding long-lived assets and intangible assets . other assets and liabilities — no assets within the “ other current assets ” or “ other non-current assets ” line items in our consolidated balance sheet exceeded 5 percent of our total current assets or total assets , respectively , as of june 28 , 2019 or june 29 , 2018 . no accrued liabilities or expenses within the “ other accrued items ” or “ other long-term liabilities ” line items in our consolidated balance sheet exceeded 5 percent of our total current liabilities or total liabilities , respectively , as of june 28 , 2019 or june 29 , 2018 . 70 income taxes — we follow the liability method of accounting for income taxes . we record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in our consolidated balance sheet , as well as operating loss and tax credit carryforwards . we follow very specific and detailed guidelines in each tax jurisdiction regarding the recoverability of any tax assets recorded on the balance sheet and provide necessary valuation allowances as required . we regularly review our deferred tax assets for recoverability based on historical taxable income , projected future taxable income , the expected timing of the reversals of existing temporary differences and tax planning strategies . see note 22 : income taxes for additional information regarding income taxes . standard warranties — we record estimated standard warranty costs in the period in which the related products are delivered . factors that affect the estimated cost for warranties include the terms of the contract , the type and complexity of the delivered product , number of installed units , historical experience and management 's assumptions regarding anticipated rates of warranty claims and cost per claim . our standard warranties start from the shipment , delivery or customer acceptance date and continue as follows : segment average warranty period communication systems one to five years electronic systems one to two years space and intelligence systems 60 days to two years because our products are manufactured , in many cases , to customer specifications and their acceptance is based on meeting those specifications , we historically have experienced minimal warranty costs . factors that affect our warranty liability include the number of installed units , historical experience , anticipated delays in delivery of products to end customers , in-country support for international sales and our assumptions regarding anticipated rates of warranty claims and cost per claim . we assess the adequacy of our recorded warranty liabilities every quarter and make adjustments to the liability as necessary . see note 11 : accrued warranties for additional information regarding warranties , including extended warranties . foreign currency translation — the functional currency for most international subsidiaries is the local currency . assets and liabilities are translated at current rates of exchange and income and expense items are translated at the weighted average exchange rate for the year . the resulting translation adjustments are recorded as a separate component of shareholders ' equity . stock options and other share-based compensation — we measure compensation cost for all share-based payments ( including employee stock options ) at fair value and recognize cost over the vesting period , with forfeitures recognized as they occur . it is our practice to issue shares when options are exercised . see note 15 : stock options and other share-based compensation for additional information regarding share-based compensation . story_separator_special_tag engineering , selling and administrative expenses fiscal 2019 compared with fiscal 2018 : the increase in engineering , selling and administrative ( “ esa ” ) expenses in fiscal 2019 compared with fiscal 2018 was primarily due to $ 65 million of l3harris merger-related transaction and integration costs and increased investments in r & d and bids and proposals , partially offset by the absence in fiscal 2019 of $ 47 million of charges related to our decision to transition and exit a commercial air-to-ground lte radio communications line of business and other items and a $ 12 million non-cash adjustment for deferred compensation , which were incurred in fiscal 2018 . the decrease in esa expenses as a percentage of revenue ( “ esa percentage ” ) in fiscal 2019 compared with fiscal 2018 was primarily due to management of expenses on higher revenue . overall company-sponsored r & d costs were $ 331 million in fiscal 2019 compared with $ 311 million in fiscal 2018 . fiscal 2018 compared with fiscal 2017 : the increase in esa expenses in fiscal 2018 compared with fiscal 2017 was primarily due to $ 47 million of charges related to our decision to transition and exit a commercial air-to-ground lte radio communications line of business and other items , higher employment and distribution costs and a $ 12 million non-cash adjustment for deferred compensation , partially offset by a $ 53 million reduction in exelis acquisition-related and other charges in fiscal 2018 compared with fiscal 2017. the decrease in esa percentage in fiscal 2018 compared with fiscal 2017 was primarily due to cost containment . overall company-sponsored r & d costs were $ 311 million in fiscal 2018 compared with $ 310 million in fiscal 2017 . see the “ discussion of business segment results of operations ” discussion below in this md & a for further information . non-operating income fiscal 2019 compared with fiscal 2018 : the increase in non-operating income in fiscal 2019 compared with fiscal 2018 was primarily due to $ 27 million of losses and other costs related to debt refinancing in the fourth quarter of fiscal 2018. fiscal 2018 compared with fiscal 2017 : the decrease in non-operating income in fiscal 2018 compared with fiscal 2017 was primarily due to $ 27 million of losses and other costs related to debt refinancing in the fourth quarter of fiscal 2018 , partially offset by a $ 20 million increase in pension and postretirement benefit income . see note 20 : non-operating income in the notes for further information . net interest expense fiscal 2019 compared with fiscal 2018 : our net interest expense decreased in fiscal 2019 compared with fiscal 2018 primarily due to lower average debt levels as a result of $ 281 million of net repayment of borrowings , which included our repayment at maturity of the entire outstanding $ 300 million aggregate principal amount of our floating rate notes due february 27 , 2019. see note 13 : debt in the notes for further information . fiscal 2018 compared with fiscal 2017 : our net interest expense decreased in fiscal 2018 compared with fiscal 2017 primarily due to lower average debt levels as a result of $ 271 million of net repayment of borrowings , which included our repayment at maturity of the entire outstanding $ 500 million aggregate principal amount of our 1.999 % notes due april 27 , 2018. income taxes fiscal 2019 compared with fiscal 2018 : in fiscal 2019 , our effective tax rate ( income taxes as a percentage of income from continuing operations before income taxes ) benefited from the net favorable impact of : legislative changes from the tax cuts and jobs act which became applicable to harris during fiscal 2019 , such as : ( i ) a reduction in our u.s. statutory corporate income tax rate from the blended rate of 28.1 % in fiscal 2018 to a flat 21 % rate in fiscal 2019 ; ( ii ) the recent clarification that foreign military sales qualify for the foreign derived intangible income deduction ; ( iii ) tax planning to allow for the utilization of foreign tax credits that were previously valued ; and ( iv ) the loss of the u.s. domestic manufacturing deduction ; the favorable impact of excess tax benefits related to equity-based compensation ; and additional research credits claimed on our prior year tax returns . 41 in fiscal 2018 , our effective tax rate benefited from the net favorable impact of : the enactment of a lower u.s. statutory corporate income tax rate in fiscal 2018 ; additional research credits claimed on our fiscal 2017 tax return compared with our recorded estimates at the end of fiscal 2017 ; and the favorable impact of releasing provisions for uncertain tax positions . fiscal 2018 compared with fiscal 2017 : the major discrete items from which our fiscal 2018 effective tax rate benefited are those noted for fiscal 2018 in the preceding discussion under “ income taxes . ” in fiscal 2017 , our effective tax rate benefited from : the favorable impact of excess tax benefits related to equity-based compensation ; several differences between u.s. generally accepted accounting principles ( “ gaap ” ) and tax accounting related to investments ; and additional deductions and additional research credits claimed on our fiscal 2016 tax return compared with our recorded estimates at the end of fiscal 2016. see note 22 : income taxes in the notes for further information . income from continuing operations fiscal 2019 compared with fiscal 2018 : the increase in income from continuing operations in fiscal 2019 compared with 2018 was primarily due to the combined effects of the reasons noted above in this “ consolidated results of operations ” discussion regarding fiscal 2019 and 2018 . fiscal 2018 compared with fiscal 2017 : the increase in income from continuing operations in fiscal 2018 compared with 2017

as a result , we did not make any contributions to our u.s. qualified pension plans and only minor contributions to our non-u.s. pension plan in fiscal 2019. in addition to the anticipated voluntary contributions to l3harris pension plans from the proceeds from the pending divestiture of the harris night vision business disclosed in note 26 : subsequent events in the notes , we currently anticipate making $ 2 million of contributions to harris u.s. qualified pension plans and $ 23 million of contributions to l3 u.s. qualified pension plans during the fiscal transition period . future required contributions primarily will depend on the actual annual return on assets and the discount rate used to measure the benefit obligation at the end of each year . depending on these factors , and the resulting funded status of our pension plans , the level of future statutory minimum contributions could be material . we had net unfunded defined benefit plan obligations of approximately $ 1,174 million as of june 28 , 2019 compared with approximately $ 714 million as of june 29 , 2018 . this 64 percent increase in net unfunded defined benefit plan obligations was primarily due to a lower discount rate . see note 14 : pension and other postretirement benefits in the notes for further information regarding our defined benefit plans . common stock repurchases during fiscal 2019 , we used $ 200 million to repurchase 1,219,750 shares of our common stock under our 2017 repurchase program at an average price per share of $ 163.99 , including commissions of $ .02 per share . during fiscal 2018 , we used $ 272 million to repurchase 1,959,435 shares of our common stock under our 2017 repurchase program at an average price per share of $ 138.89 , including commissions of $ .02 per share . in fiscal 2019 and fiscal 2018 , $ 24 million and $ 17 million , respectively , in shares of our common stock were delivered to us or withheld by us to satisfy withholding taxes on employee share-based awards . shares repurchased by us are cancelled and retired . on january 26 , 2017 , our board of directors approved our $ 1 billion 2017 repurchase program that was in addition to our prior repurchase program , a $ 1 billion share repurchase program approved in 2013. our repurchases during the fourth quarter of fiscal 2017 used the entire remaining authorization under our prior repurchase program . as of june 28 , 2019 ,

the company recognizes the amount of the rebates and stock rotation rights as a reduction of revenues when the underlying revenue is recognized . deferred revenue primarily represents customer billings in excess of revenue recognized , primarily for support services . support services are typically billed in advance on an annual basis or at the inception of a multiple year support contract and revenue is recognized ratably over the support period of one to five years . the company also sells stand-alone software products . these software products are sold with software maintenance services . vsoe of fair value for software maintenance services will be established by the rates charged in stand-alone sales of software maintenance contracts within a reasonably narrow pricing range . as the company has not established vsoe of fair value on the software maintenance services due to lack of renewal history , revenue is recognized ratably for the entire arrangement fee , once the services have commenced , over the longest delivery period . during the years ended june 30 , 2011 , 2012 , and 2013 , the company 's software revenue was not significant to its consolidated statements of operations . shipping and handling costs are included in cost of sales . cash and cash equivalents cash consists of deposits with financial institutions , and cash equivalents consist of money market funds . concentrations of credit risk and significant customers and suppliers financial instruments that potentially subject the company to a concentration of credit risk consist principally of cash , cash equivalents , and accounts receivable . the company deposits cash with a high-credit-quality financial institution , which at times may exceed federally insured amounts . the company has policies that limit its investments as to types of investments , maturity , liquidity , credit quality , concentration , and diversification of issuers . the company performs initial and ongoing credit evaluations of its customers ' financial condition and will limit the amount of credit as deemed necessary , but generally does not require collateral . the customers accounting for 10 % or greater of revenue were as follows : replace_table_token_23_th f-13 fusion-io , inc. notes to consolidated financial statements – ( continued ) the customers accounting for 10 % or greater of accounts receivable , net were as follows : replace_table_token_24_th * indicates less than 10 % of total accounts receivable , net . as a consequence of the concentration of the company 's customers and typically , a small number of large purchases by these customers , revenue , gross margin , and operating results may fluctuate significantly from period to period . the company relies on a limited number of suppliers for its contract manufacturing and certain raw material components . the company believes that other vendors would be able to provide similar products and services ; however , the qualification of such vendors may require substantial start-up time . in order to mitigate any adverse impacts from a disruption of supply , the company attempts to maintain an adequate supply of critical single-sourced raw materials . accounts receivable accounts receivable balances are recorded at the invoiced amount and are non-interest-bearing . the company maintains an allowance for doubtful accounts to reserve for potential uncollectible receivables . allowances are made based upon a specific review of all significant outstanding invoices . for those invoices not specifically reserved , allowances are provided based upon a percentage of aged outstanding invoices . in determining these percentages , the company analyzes its historical collection experience and current economic trends . provisions are recorded in general and administrative expenses . the company writes off accounts receivable balances to the allowance for doubtful accounts when it becomes likely that they will not be collected . accounts receivable balances are considered past due when not paid in accordance with the contractual terms of the related arrangement . as of june 30 , 2012 and 2013 , the company 's allowance for doubtful accounts was not considered significant . the company records a sales allowance to provide for estimated future product returns and price adjustments . in the period revenue is recognized , allowances are provided for estimated future product returns based on historical product return rates . if reliable estimates of future returns can not be made , revenue is not recognized until the rights of return expire . the company also provides allowances for rebates , discounts , and stock rotation rights based on programs in existence at the time revenue is recognized . the company evaluates the estimate of sales allowances on a regular basis and adjusts the amount reserved accordingly . f-14 fusion-io , inc. notes to consolidated financial statements – ( continued ) the changes in the company 's sales allowances were as follows ( in thousands ) : replace_table_token_25_th inventories inventories are stated at the lower of cost ( using the first-in , first-out method ) or market value . the company periodically assesses the recoverability of all inventories , including raw materials , work-in-process , and finished goods to determine whether adjustments are required to record inventory at the lower of cost or market value . inventory that the company determines to be obsolete or in excess of forecasted usage is reduced to its estimated realizable value based on assumptions about future demand and market conditions . if actual demand is lower than the forecasted demand , additional inventory write-downs may be required . property and equipment property and equipment are stated at historical cost less accumulated depreciation . property and equipment acquired through the acquisition of a business are recorded at their estimated fair value at the date of acquisition . repairs and maintenance costs are expensed as incurred if repairs and maintenance do not extend the useful life or improve the related assets . story_separator_special_tag prior to may 2012 , borrowings under the revolving line of credit would have accrued interest at a floating per annum rate equal to one-half of one percentage point ( 0.50 % ) above the prime rate as published in the wall street journal . an unused commitment fee equal to 0.375 % of the difference between the $ 25.0 million limit and the average daily balance of borrowings outstanding each quarter was due on the last day of such quarter . prior to may 2012 , the revolving line of credit was secured by substantially all of our assets . we could make advances against the revolving line of credit until its maturity date , at which time all unpaid principal and interest was due and payable . in august 2011 , we entered into an amendment to the revolving line of credit which provided for the consent of the financial institution with respect to the io turbine acquisition and certain amendments to provide us with further flexibility to consummate mergers and acquisitions permitted under the revolving line of credit . in may 2012 , we entered into a second amendment to the revolving line of credit . pursuant to this amendment , the pricing on revolving line of credit was amended such that borrowings under the revolving line of credit accrued interest at a per annum rate equal to , at our option , a floating per annum rate equal to the prime rate as published in the wall street journal , or the libor rate ( based on 1 , 2 , 3 or 6-month interest periods ) plus a margin equal to two percent ( 2.00 % ) per annum . this amendment further provided for , among other things , ( i ) the reduction of the quarterly unused commitment fee to an amount equal to one-quarter of one percent ( 0.25 % ) per annum of the difference between the $ 25.0 million loan commitment and the average daily balance of borrowings outstanding on the last day of each quarter , ( ii ) the removal of the borrowing base formula and the sublimit restricting the issuance of letters of credit , cash management services and foreign exchange forward contracts , and ( iii ) the release of the financial institution 's security interest in all of our assets . under the terms of the revolving line of credit , we were required to maintain the following minimum financial covenants on a consolidated basis : a ratio of current assets to current liabilities plus , without duplication , any of our obligations to the financial institution , of at least 1.25 to 1.00. a tangible net worth of at least $ 25.0 million , plus 25 % of the net proceeds we received from the sale or issuance of our equity or subordinated debt , such increase to be measured as of the last day of the quarter in which we received such proceeds . in september 2012 , we entered into a third amendment to the revolving line of credit . pursuant to this amendment , the maturity date of the revolving line of credit was extended to december 2012. as of june 30 , 2013 , we no longer had a revolving line of credit . -49- future capital requirements our future capital requirements will depend on many factors , including our rate of revenue growth , possible acquisitions of , or investments in , businesses , technologies , or other assets , the expansion of our sales and marketing activities , the timing and extent of spending to support product development efforts , and the expansion into new territories , the timing of new product introductions , the building of infrastructure to support our growth , the continued market acceptance of our products , and strategic investments in businesses . we believe that our cash and cash equivalents will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months . although we are not currently a party to any material agreement or letter of intent regarding potential investments in , or acquisitions of , complementary businesses , applications , or technologies , we may enter into these types of arrangements , which could require us to seek additional equity or debt financing . if required , additional financing may not be available on terms that are favorable to us , if at all . if we raise additional funds through the issuance of equity or convertible debt securities , the percentage ownership of our stockholders will be reduced and these securities might have rights , preferences , and privileges senior to those of our current stockholders . we can not assure you that additional financing will be available or that , if available , such financing can be obtained on terms favorable to our stockholders and us . off balance sheet arrangements during the periods presented , 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 purpose . contractual obligations and material commitments the following is a summary of our contractual obligations as of june 30 , 2013 ( in thousands ) : replace_table_token_12_th ( 1 ) relates to commitments resulting from our fiscal 2013 acquisitions and other agreements . as of june 30 , 2013 , we had fulfilled all of our raw materials purchase commitments that were outstanding as of the prior year and no outstanding commitment remained . operating lease payments primarily relate to our leases of office space with various expiration dates through 2021. during fiscal 2012 and 2013 , we entered into new leases to expand our primary office facilities in salt lake city , utah and san jose , california

for fiscal 2012 , our net cash used in investing activities was $ 41.6 million , including $ 24.0 million from purchases of property and equipment and $ 17.6 million for the acquisition of io turbine , net of cash acquired . for fiscal 2013 , our net cash used in investing activities was $ 128.6 million , including $ 114.2 million of cash paid for the acquisitions of nexgen and the id7 entities , net of cash acquired , and $ 14.4 million for purchases of property and equipment . financing activities cash flows from financing activities primarily include net proceeds from our employee stock purchase plan , issuance of common stock , and exercise of stock options . we generated $ 221.1 million of net cash from financing activities in fiscal 2011 , primarily due to $ 219.2 million in net proceeds from the issuance of common stock , $ 11.0 million that we borrowed from a financial institution , $ 1.5 million in proceeds from the exercise of stock options and a $ 1.2 million tax benefit from the exercise of stock options and $ 0.7 million related to a change in restricted cash . these increases were offset by the repayment of $ 11.3 million of notes payable and capital lease obligations and $ 1.2 million in repurchases of common stock . we generated $ 108.5 million in cash from financing activities in fiscal 2012 , primarily due to the $ 94.0 million in net proceeds from the issuance of common stock through our follow-on public offering , $ 13.3 million in net proceeds from our employee stock purchase plan and exercise of stock options , and $ 2.5 million from a tax benefit from the exercise of stock options , all offset by the payout of a common stock repurchase derivative liability of $ 1.1 million . -48- we generated $ 6.4 million in cash from financing activities in fiscal 2013 , primarily due to net proceeds of $ 15.1 million from the exercise of stock options and our employee stock purchase plan , offset by $ 4.9 million of a change in restricted cash and $ 3.4 million in net issuance of restricted stock awards and restricted stock units , net of repurchases . revolving line of credit < font size= '' 2 ''

for example , if the price of our common stock were to significantly decrease combined with other adverse changes in market conditions , thus indicating that the underlying fair value of our reporting units may have decreased , we might be required to reassess the value of our goodwill in the period such circumstances were identified . intangible assets intangible assets consist primarily of intangible assets purchased through acquisitions . purchased intangible assets primarily include acquired developed technologies ( developed and core technology ) . intangible assets are amortized using the straight-line method over the estimated economic useful lives of the assets , which is the period during which expected cash flows support the fair value of such intangible assets . 58 lumentum holdings inc. notes to consolidated financial statements ( continued ) long-lived asset valuation ( property , plant and equipment and intangible assets subject to amortization ) we test long-lived assets for recoverability , at the asset group level , when events or changes in circumstances indicate that their carrying amount may not be recoverable . circumstances which could trigger a review include , but are not limited to : significant decreases in the market price of the asset , significant adverse changes in the business climate or legal factors , accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset , current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset , or current expectation that the asset will more likely than not be sold or disposed significantly before the end of its estimated useful life . recoverability is assessed based on the difference between the carrying amount of the asset and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset . an impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value . pension benefits the funded status of our retirement-related benefit plan is measured as the difference between the fair value of plan assets and the benefit obligation at fiscal year end , the measurement date . the funded status of an underfunded benefit plan , of which the fair value of plan assets is less than the benefit obligation , is recognized as a non-current net pension liability in the consolidated balance sheets unless the fair value of plan assets is not sufficient to cover the expected payments to be made over the next year ( or operating cycle , if longer ) from the measurement date . for defined benefit pension plans , the benefit obligation is the projected benefit obligation ( “ pbo ” ) which represents the actuarial present value of benefits expected to be paid upon retirement . net periodic pension cost ( income ) ( “ nppc ” ) is recorded in the consolidated statements of operations and includes service cost , interest cost , expected return on plan assets , amortization of prior service cost and ( gains ) losses previously recognized as a component of accumulated other comprehensive income . service cost represents the actuarial present value of participant benefits attributed to services rendered by employees in the current year . interest cost represents the time value of money cost associated with the passage of time . ( gains ) losses arise as a result of differences between actual experience and assumptions or as a result of changes in actuarial assumptions . prior service cost ( credit ) represents the cost of benefit improvements attributable to prior service granted in plan amendments . ( gains ) losses and prior service cost ( credit ) that arise during the current year are first recognized as a component of accumulated other comprehensive income in the consolidated balances sheets , net of tax . prior service cost is amortized as a component of nppc over the average remaining service period of active plan participants starting at the date the plan amendment is adopted . deferred actuarial ( gains ) losses are subsequently recognized as a component of nppc if they exceed the greater of ten percent of pbo or the fair value of plan assets , with the excess amortized over the average remaining service period of active plan participants . the measurement of the benefit obligation and nppc is based on our estimates and actuarial valuations , provided by third-party actuaries , which are approved by management . these valuations reflect the terms of the plans and use participant-specific information such as compensation , age and years of service , as well as certain assumptions , including estimates of discount rates , expected return on plan assets , rate of compensation increases , and mortality rates . we evaluate these assumptions annually at a minimum . in estimating the expected return on plan assets , we consider historical returns on plan assets , adjusted for forward-looking considerations , inflation assumptions and the impact of the active management of the plan 's invested assets . concentration of credit and other risks financial instruments that potentially subject our business to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables . we perform credit evaluations of our customers ' financial condition and generally do not require collateral from our customers . these evaluations require significant judgment and are based on a variety of factors including , but not limited to , current economic trends , payment history , bad debt write-off experience , and financial review of the customer . although the company deposits its cash with financial institutions that management believes are of high credit quality , its deposits , at times , may exceed federally insured limits . the company 's investment portfolio consists of investment grade securities diversified amongst security types , industries , and issuers . story_separator_special_tag our senior management has reviewed our critical accounting policies and related disclosures with the audit committee of our board of directors . warranty we provide reserves for the estimated costs of product warranties at the time revenue is recognized . we estimate the costs of our warranty obligations based on our historical experience of known product failure rates , use of materials to repair or replace defective products and service delivery costs incurred in correcting product failures . in addition , from time to time , specific warranty accruals may be made if unforeseen technical problems arise . recently issued accounting pronouncements refer to “ note 2. recently issued accounting pronouncements ” in the notes to consolidated financial statements . 36 results of operations the results of operations for the periods presented are not necessarily indicative of results to be expected for future periods . the following table summarizes selected consolidated statements of operations items as a percentage of net revenue : replace_table_token_5_th financial data for fiscal 2017 , 2016 and 2015 the following table summarizes selected consolidated statements of operations items ( in millions , except for percentages ) : replace_table_token_6_th 37 net revenue net revenue increased by $ 98.6 million , or 10.9 % during fiscal 2017 compared to fiscal 2016. this increase was primarily due to an increase in net revenue from our opcomms segment . opcomms net revenue increased $ 96.5 million , or 12.7 % , during fiscal 2017 compared to fiscal 2016 driven by increases from telecom and 100g datacom products . lasers net revenue increased $ 2.1 million , or 1.5 % , in fiscal 2017 compared to fiscal 2016. net revenue increased by $ 65.9 million , or 7.9 % , during fiscal 2016 compared to fiscal 2015. this increase was primarily due to an increase in net revenue from our opcomms segment . opcomms net revenue increased $ 67.2 million , or 9.7 % , during fiscal 2016 compared to fiscal 2015 driven by increases from telecom and 100g datacom products . lasers net revenue decreased $ 1.3 million , or 0.9 % , in fiscal 2016 compared to fiscal 2015. revenue by region we operate in three geographic regions : americas , asia-pacific and emea . net revenue is assigned to the geographic region and country where our product is initially shipped . for example , certain customers may request shipment of our product to a contract manufacturer in one country , however , the location of the end customers may differ . the following table presents net revenue by the three geographic regions we operate in and net revenue from countries that exceeded 10 % or more of our total net revenue ( in millions , except for percentages ) : replace_table_token_7_th during fiscal 2017 , 2016 and 2015 , net revenue from customers outside the united states , based on customer shipping location , represented 85.2 % , 82 % and 80.6 % of net revenue , respectively . our net revenue is primarily denominated in u.s. dollars , including our net revenue from customers outside the united states as presented above . we expect revenue from customers outside of the united states to continue to be an important part of our overall net revenue and an increasing focus for net revenue growth opportunities . 38 gross margin and segment gross margin the following table summarizes segment gross margin for fiscal 2017 , 2016 and 2015 ( in millions , except for percentages ) : replace_table_token_8_th ( 1 ) the unallocated corporate items for the years presented include the effects of amortization of acquired developed technology intangible assets , share-based compensation and certain other charges . we do not allocate these items to the gross margin for each segment because management does not include such information in measuring the performance of the operating segments . gross margin gross margin in fiscal 2017 increased by 1.1 % to 31.8 % from 30.7 % in fiscal 2016 . this increase was primarily due to an increase in opcomms gross margins partially offset by a decrease in lasers gross margins . gross margin in fiscal 2016 was relatively flat compared to fiscal 2015. a decrease in lasers gross margins was offset by an increase in opcomms gross margins . as discussed in more detail under “ net revenue ” above , we sell products in certain markets that are consolidating , undergoing product , architectural and business model transitions , have high customer concentrations , are highly competitive ( increasingly due to asia-pacific-based competition ) , are price sensitive and or are affected by customer seasonal and mix variant buying patterns . we expect these factors to continue to result in variability of our gross margin . segment gross margin opcomms opcomms gross margin in fiscal 2017 increased 2.5 % to 33.5 % from 31.0 % in fiscal 2016 . this increase was primarily due to higher revenue volume and product mix . opcomms gross margin in fiscal 2016 increased 1.5 % to 31.0 % from 29.5 % in fiscal 2015. this increase was primarily due to higher revenue volume and cost reductions , partially offset by an inventory write-off related to our legacy 3d sensing product . lasers lasers gross margin in fiscal 2017 decreased 1.6 % to 41.7 % from 43.3 % in fiscal 2016. this decrease was primarily due to higher manufacturing and warranty costs . lasers gross margin in fiscal 2016 decreased 3.8 % to 43.3 % from 47.1 % in fiscal 2015. this decrease was primarily due to lower revenue volume and higher warranty cost due to a component quality issue on our fiber laser product . research and development r & d expense increased $ 7.2 million , or 5.1 % , in fiscal 2017 compared to fiscal 2016 . the increase in r & d expense was primarily due to the increase in the payroll related expense of $ 8.6 million , which includes

cash used in investing activities was mainly for capital expenditures and purchases of short-term investments , net of sales of $ 138.1 million and $ 282.5 million , respectively , for the year ended july 1 , 2017. changes in investing cash flow in fiscal 2017 also related to the acquisition of a business for $ 5.1 million . cash provided by financing activities was $ 456.7 million for the year ended july 1 , 2017 , consisting primarily from proceeds of $ 442.3 million from the issuance of the 2024 notes . fiscal 2016 as of july 2 , 2016 , our consolidated balance of cash and cash equivalents and short-term investments was $ 157.1 million , an increase of $ 142.3 million , or 961.5 % , as compared to $ 14.8 million as of june 27 , 2015. cash provided by operating activities was $ 86.6 million , primarily resulting from $ 9.3 million of net income , which included $ 80.7 million of non-cash items such as depreciation , stock-based compensation , derivative liability , amortization of intangibles and disposal of property , plant and equipment , offset by changes in operating assets and liabilities of $ 3.4 million . changes in our operating assets and liabilities related primarily to an increase in accounts payable of $ 28.9 million , an increase in accounts receivable of $ 21.8 million , an increase in prepayments , other current and non-currents assets of $ 12.7 million , an increase in accrued payroll and related expenses of $ 9.2 million , a decrease in deferred taxes , net of $ 1.7 million , a decrease in income taxes payable of $ 1.7 million , an increase in inventories of $ 3.1 million and a decrease in accrued expenses and other current and non-current liabilities of $ 0.5 million . cash used in investing activities included $ 82.0 million , of cash used for capital expenditures , primarily to expand our manufacturing capacity . cash provided by financing activities was $ 136.4 million resulting primarily from net transfers from viavi of $ 134.2 million at the separation date . 44 fiscal 2015 as of june 27 , 2015 , our consolidated balance of cash and cash equivalents and short-term investments was $ 14.8 million , a decrease of < font

the purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired with the remainder recorded as goodwill on the basis of estimated fair values , as follows : replace_table_token_17_th the goodwill of £10.6 million ( $ 15.7 million ) consists largely of synergies achieved through the introduction of ses products to the corporation 's distribution channels as well as synergies achieved from combining the operations of ses with the corporation 's united kingdom based operations . the corporation has determined that the goodwill will not be deductible for tax purposes . ses provides a range of rugged products for airborne and other severe environments , with particular expertise in solid state data recording , computing and control display units . key platforms include fixed-wing , rotary-wing , and unmanned aircraft , tactical vehicles , and navy vessels . ses is located in camberley , united kingdom and had 41 employees as of the date of the acquisition . revenues of the acquired business were £4.7 million ( $ 7.5 million ) for the fiscal year ended may 31 , 2010 . 57 hybricon corporation on june 1 , 2010 , the corporation acquired all the issued and outstanding stock of hybricon corporation ( “hybricon” ) for $ 19.0 million in cash . under the terms of the stock purchase agreement , the corporation deposited $ 2.3 million into escrow as security for potential indemnification claims against the seller . the escrow amount will be held for a period of eighteen months , provided that 50 % of the escrow will be released after twelve months subject to amounts held back for pending claims . management funded the purchase from the corporation 's revolving credit facility . the purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired with the remainder recorded as goodwill on the basis of estimated fair values , as follows : replace_table_token_18_th the goodwill of $ 11.4 million consists largely of synergies from combining the operations of hybricon with the corporation 's electronic systems business in littleton , ma as well as value associated with the acquisition 's assembled workforce . the corporation has determined that the goodwill will not be deductible for tax purposes . hybricon designs and manufactures custom and standards-based enclosures and electronic backplanes for defense and commercial applications , and is a leading supplier for predominant embedded commercial-off-the-shelf system architectures . hybricon had 72 employees as of the date of the acquisition and was located in ayer , ma prior to their relocation to the existing curtiss-wright facility in littleton , ma in december 2010. revenues of the acquired business were $ 16.8 million for the fiscal year ended june 30 , 2009. skyquest systems limited on december 18 , 2009 , the corporation acquired all of the issued and outstanding capital stock of skyquest systems limited ( “ssl” or “skyquest” ) . the purchase price of the acquisition , subsequent to customary adjustments provided for in the stock purchase agreement , was £9.8 million ( $ 15.8 million ) in cash and the assumption of certain liabilities . in addition , the stock purchase agreement provides for additional consideration to the selling shareholders contingent upon ssl exceeding certain sales targets over a two-year period . based on the estimated amount of sales over the two year measurement period , the corporation recorded a liability of the estimated fair value of the contingent consideration in the amount of £1.8 million ( $ 2.9 million ) . based on fiscal 2010 sales results , skyquest did not attain the contingent consideration target for the first measurement period , resulting in a gain from operations of £0.4 million ( $ 0.7 million ) . the remaining liability for contingent consideration is £1.4 million ( $ 2.2 million ) as of december 31 , 2010. under the terms of the stock purchase agreement , the corporation deposited £1.5 million ( $ 2.4 million ) into escrow as security for potential indemnification claims against the seller . any amount of holdback remaining after the claims for indemnification have been settled will be paid as follows : ( i ) an initial release of one-third of the holdback less amounts held in reserve to cover pending claims for indemnification in 12 months after the closing date and ( ii ) a final release of the remaining balance of the holdback less amounts held in reserve to cover pending claims for indemnification in 24 months after the closing date . since no claims were raised during the 12 months following the closing , one-third of the funds held in escrow was released to the seller . management funded the acquisition from the corporation 's available cash . the purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired with the remainder recorded as goodwill on the basis of estimated fair values , as follows : 58 replace_table_token_19_th skyquest is a supplier of aircraft video displays , recorders , and video/radar converters for surveillance aircraft applications in the aerospace and defense markets . skyquest 's display and recorder technology supports demanding airborne surveillance missions with proven reliability in harsh environments . key products include the video management system , which provides fully integrated systems that enable observers and pilots to independently select , view , and record images with maximum fidelity . skyquest also develops lightweight , airworthy standard and high definition video recorders for airborne surveillance . located in basildon , united kingdom , ssl was formed from two businesses , skyquest ltd. and real-time vision ltd. , founded in 1996 and 1998 , respectively . ssl is a part of the corporation 's motion control segment within the embedded computing division . story_separator_special_tag the decline in organic sales was driven by a reduction in our metal treatment segment of $ 51 million and partially offset by an increase in our motion control segment of $ 15 million . organic sales for our flow control segment were essentially flat over the prior year period . incremental sales from our 2008 and 2009 acquisitions and divestitures were $ 43 million or 2 % . the remaining sales decline of $ 27 million or 1 % was due to the unfavorable effects of foreign currency translation . across the corporation , we experienced significant reductions in organic sales within our general industrial , oil and gas , and commercial aerospace markets due to generally weak global economic conditions . the decline in sales to the general industrial market is attributed to depressed sales for our automotive , industrial control products , and services across all of our segments . economic pressures on our customers in the oil and gas market caused delays for new order placement for our coker valve products as well as other valves and services within our flow control segment . similarly in our commercial aerospace market , we experienced a decline in demand within our metal treatment segment and , to a lesser extent , delayed orders for integrated sensing products within our motion control segment . while challenged in several markets , we continued to experience strong growth in our power generation and defense markets which partially offset the aforementioned decreases . the increase within our power generation markets , primarily in our flow control segment , resulted from higher sales of valves and engineering services to plant operators , as well as reactor coolant pumps for the ap1000 nuclear reactors . an increase was realized across all our defense markets . our motion control segment had strong growth in the aerospace , ground and naval defense markets and our flow control segment had strong growth in the naval defense market . most notably , the growth in our naval and aerospace defense markets was driven by increased sales on the ford class aircraft carrier and global hawk unmanned aerial vehicle programs , respectively . backlog decreased 3 % to $ 1,627 million at december 31 , 2009 , from $ 1,679 million at december 31 , 2008. new orders declined by $ 502 million ( $ 1,730 million versus $ 2,232 million ) , or 22 % , during 2009. in 2008 , we received a large order in excess of $ 300 million related to our next-generation reactor coolant pumps for the ap1000 nuclear power plants that did not recur in the current year . acquisitions contributed an incremental $ 44 million to new orders from the comparable period in 2008. operating income for 2009 was $ 169 million , which decreased $ 27 million , or 14 % , from $ 197 million in 2008. organic operating income decreased by approximately $ 30 million in 2009 , while our 2008 and 2009 acquisitions had $ 6 million in incremental operating losses . our metal treatment and flow control segments ' organic operating income declined 57 % and 14 % , respectively , mainly due to under-absorption of overhead costs resulting from significantly lower volumes in our general industrial and oil and gas markets , offset partially by cost reduction programs . the decrease in our metal treatment and flow control segments was partially offset by an increase in the motion control segment 's organic operating income of 35 % . this increase was the result of several nonrecurring events that negatively impacted the margins in 2008 as well as current year benefits generated from our cost reduction and restructuring programs . organic research and development , selling , general , and administrative costs remained essentially flat as a percentage of sales over the prior year due to cost reduction programs . please refer to note 10 to the condensed consolidated financial statements for more information regarding our restructuring . foreign currency translation had an additional favorable impact of $ 8 million on our results in 2009 versus 2008. net earnings for 2009 totaled $ 95 million or $ 2.08 per diluted share , a decrease of 13 % compared to $ 109 million or $ 2.41 per diluted share in 2008. compared to the prior year period , the lower operating income , noted above , was partially offset by a $ 4 million decrease in interest expense and a $ 10 million decrease in tax expense . interest expense decreased for 2009 , compared to 2008 , due to lower average interest rates partially offset by higher average outstanding debt . our effective tax rate for 2009 was 34.4 % compared to 35.3 % in the same period of 2008. our 2009 effective tax rate included a tax benefit principally due to a canadian tax rate change which was partially offset by an increase in state tax expense . the 2009 effective tax rate was also favorably impacted by an increase in research and development tax credits from our canadian and u.k. operations . 34 segment performance we operate in three principal operating segments on the basis of products and services offered and markets served : flow control , motion control , and metal treatment . see note 18 to the consolidated financial statements for further segment financial information . the following table sets forth revenues , operating income , operating margin , and the percentage changes on those items , for 2010 as compared with the prior year periods , by operating segment : replace_table_token_6_th flow control year ended december 31 , 2010 compared with year ended december 31 , 2009 our flow control segment reported sales of $ 1,025 million for 2010. this was a year over year increase of $ 40 million , or 4 % , from $ 985 million . organic sales increased $ 33 million , or 3 % , over

our available credit under the credit facility increased from $ 400 million to $ 425 million from a syndicate of banks , led by bank of america , n.a . and jp morgan chase bank , n.a . as the co-arrangement banks . the credit agreement also contains an accordion feature which can expand the overall credit line to a maximum aggregate amount of $ 600 million . the consortium membership has remained relatively the same . the credit agreement extended the maturity from july 23 , 2009 to august 10 , 2012 , at which time all amounts then outstanding under the credit agreement will be due and payable . in addition , the credit agreement provides for improved pricing and more favorable covenant terms , reduced facility fees , and increased availability of the facility for letters of credit . borrowings under the credit agreement bear interest at a floating rate based on market conditions . in addition , our interest rate and level of facility fees are dependent on certain financial ratio levels , as defined in the credit agreement . we are subject to annual facility fees on the commitments under the credit agreement . in connection with the credit agreement , we paid customary transaction fees that have been deferred and are being amortized over the term of the credit agreement . we are required under the credit agreement to maintain certain financial ratios and meet certain financial tests , the most restrictive of which is a debt to capitalization limit of 60 % and a cross default provision with our other senior indebtedness . as of december 31 , 2010 , we were in compliance with all covenants and had the flexibility to issue additional debt of approximately $ 1.3 billion without exceeding the covenant limit defined in the credit agreement . we would consider other financing alternatives to maintain capital structure balance and ensure compliance with all debt covenants . we had $ 110 million and $ 100 million in borrowings outstanding ( excluding letters of credit ) under the credit agreement at december 31 , 2010 and december 31 , 2009 , respectively . the unused credit available under the credit agreement at december 31 , 2010 was $ 258 million . the corporation believes that its

as additional information becomes known , it adjusts the actuarial model accordingly to establish medical claims liability estimates . the company periodically reviews actual and anticipated experience compared to the assumptions used to establish medical costs . the company establishes premium deficiency reserves if actual and anticipated experience indicates that existing policy liabilities together with the present value of future gross premiums will not be sufficient to cover the present value of future benefits , settlement and maintenance costs . revenue recognition the company 's health plans generate revenues primarily from premiums received from the states in which it operates health plans , premiums received from its members and the centers for medicare and medicaid services ( cms ) for its medicare product , and premiums from members of its commercial health plans . in addition to member premium payments , its marketplace contracts also generate revenues from subsidies received from cms . the company generally receives a fixed premium per member per month pursuant to its contracts and recognizes premium revenues during the period in which it is obligated to provide services to its members at the amount reasonably estimable . in some instances , the company 's base premiums are subject to an adjustment , or risk score , based on the acuity of its membership . generally , the risk score is determined by the state or cms analyzing submissions of processed claims data to determine the acuity of the company 's membership relative to the entire state 's membership . 69 the company estimates the amount of risk adjustment based upon the processed claims data submitted and expected to be submitted to cms and records revenues on a risk adjusted basis . some contracts allow for additional premiums related to certain supplemental services provided such as maternity deliveries . the company 's contracts with states may require us to maintain a minimum health benefits ratio ( hbr ) or may require us to share profits in excess of certain levels . in certain circumstances , including commercial plans , its plans may be required to return premium to the state or policyholders in the event profits exceed established levels . the company estimates the effect of these programs and recognizes reductions in revenue in the current period . other states may require us to meet certain performance and quality metrics in order to receive additional or full contractual revenue . for performance-based contracts , the company does not recognize revenue subject to refund until data is sufficient to measure performance . revenues are recorded based on membership and eligibility data provided by the states or cms , which is adjusted on a monthly basis by the states or cms for retroactive additions or deletions to membership data . these eligibility adjustments are estimated monthly and subsequent adjustments are made in the period known . the company continuously reviews and updates those estimates as new information becomes available . it is possible that new information could require us to make additional adjustments , which could be significant , to these estimates . the company 's medicare advantage contracts are with cms . cms deploys a risk adjustment model which apportions premiums paid to all health plans according to health severity and certain demographic factors . the cms risk adjustment model pays more for members whose medical history would indicate that they are expected to have higher medical costs . under this risk adjustment methodology , cms calculates the risk adjusted premium payment using diagnosis data from hospital inpatient , hospital outpatient , physician treatment settings as well as prescription drug events . the company and the healthcare providers collect , compile and submit the necessary and available diagnosis data to cms within prescribed deadlines . the company estimates risk adjustment revenues based upon the diagnosis data submitted and expected to be submitted to cms and records revenues on a risk adjusted basis . the company 's specialty services generate revenues under contracts with state and federal programs , healthcare organizations and other commercial organizations , as well as from its own subsidiaries . revenues are recognized when the related services are provided or as ratably earned over the covered period of services . the company recognizes revenue related to administrative services under the tricare government-sponsored managed care support contract for the dod 's tricare program on a straight-line basis over the option period , when the fees become fixed and determinable . the tricare contract includes various performance-based measures . for each of the measures , an estimate of the amount that has been earned is made at each interim date , and revenue is recognized accordingly . some states enact premium taxes , similar assessments and provider pass-through payments , collectively premium taxes , and these taxes are recorded as a separate component of both revenues and operating expenses . additionally , the company 's insurance subsidiaries are subject to the affordable care act annual health insurer fee ( hif ) , absent a hif moratorium . the aca imposed the hif in 2014 , 2015 , 2016 and 2018. the hif was suspended in 2017 and 2019. if the company is able to negotiate reimbursement of portions of these premium taxes or the hif , it recognizes revenue associated with the hif on a straight-line basis when the company has binding agreements for such reimbursements , including the `` gross-up `` to reflect the hifs non-tax deductible nature . collectively , this revenue is recorded as premium tax and health insurer fee revenue in the consolidated statements of operations . for certain products , premium taxes , state assessments and the hif are not pass-through payments and are recorded as premium revenue and premium tax expense or health insurer fee expense in the consolidated statements of operations . some states require state directed payments that have minimal risk , but are administered as a premium adjustment . story_separator_special_tag both ratios decreased due to the acquisition of fidelis care , which operates at a lower sg & a expense ratio , the veterans affairs contract expiration in 2018 , and lower variable compensation costs in 2019. health insurer fee expense as a result of the health insurer fee moratorium , which suspended the health insurance provider fee for the 2019 calendar year , we did not record hif expense for the year ended december 31 , 2019 , compared to $ 709 million for the year ended december 31 , 2018 . goodwill and intangible impairment in 2019 , we recorded $ 271 million , or $ 0.57 per diluted share , of non-cash goodwill and intangible asset impairment . substantially all of the impairment is associated with our usmm physician home health business and was identified as part of our third quarter review procedures , which included an analysis of new information related to our shared savings demonstration programs , slower than expected penetration of the physician home health business model into our medicaid population , and the related impact to revised forecasts . the business continues to generate positive cash flows and plays an important role in care management ; however , it has fallen short of our overall performance expectations . 46 other income ( expense ) the following table summarizes the components of other income ( expense ) for the year ended december 31 , ( $ in millions ) : replace_table_token_7_th investment and other income . investment and other income increased by $ 190 million for year ended december 31 , 2019 compared to 2018 . the increase in investment income in 2019 reflects higher investment balances over 2018 , including the proceeds of our $ 7.0 billion senior note issuance related to the planned financing for the cash consideration for the wellcare acquisition and the impact of higher investment balances as a result of the fidelis care acquisition . the increase also reflects higher interest rates , the ribera salud acquisition gain of $ 16 million , and improved performance associated with our deferred compensation investment portfolio , which fluctuates with its underlying investments . the earnings from our deferred compensation portfolio were substantially offset by increases in deferred compensation expense , recorded in sg & a expense . debt extinguishment costs . in october 2019 , we redeemed the outstanding principal balance on the $ 1,400 million 5.625 % senior notes due february 15 , 2021 , plus applicable premium for early redemption and accrued and unpaid interest through the redemption date . we recognized a pre-tax loss on extinguishment of $ 30 million on the redemption of the $ 1,400 million 5.625 % senior notes , including the call premium , the write-off of unamortized debt issuance costs and a loss on the termination of the $ 600 million interest rate swap agreement associated with the notes . interest expense . interest expense increased by $ 69 million in the year ended december 31 , 2019 , compared to the corresponding period in 2018 . the increase is driven by a net increase in borrowings related to the issuance of an additional $ 7.0 billion in senior notes in december 2019 , intended primarily to finance the cash consideration of the wellcare acquisition , and increased borrowings in may 2018 related to the financing of the fidelis care acquisition . the net impact of the $ 7.0 billion senior notes issued in preparation of the wellcare acquisition was approximately $ 13 million . income tax expense for the year ended december 31 , 2019 , we recorded income tax expense of $ 473 million on pre-tax earnings of $ 1.8 billion , or an effective tax rate of 26.5 % , which reflects the impact of the health insurer fee moratorium , partially offset by the non-deductibility of a portion of our non-cash goodwill and intangible impairment recorded in the third quarter of 2019. for the year ended december 31 , 2018 , we recorded income tax expense of $ 474 million on pre-tax earnings of $ 1.4 billion , or an effective tax rate of 34.6 % , which reflects the impact of the non-deductibility of the health insurer fee . segment results the following table summarizes our consolidated operating results by segment for the year ended december 31 , ( $ in millions ) : replace_table_token_8_th 47 managed care total revenues increased 25 % in the year ended december 31 , 2019 , compared to the corresponding period in 2018 , primarily due to the acquisition of fidelis care , growth in the health insurance marketplace business , and expansions and new programs in many of our states in 2018 and 2019 , particularly arkansas , illinois , iowa , new mexico and pennsylvania . these increases were partially offset by the health insurer fee moratorium in 2019. total revenues also increased due to at-risk , state directed and pass through payments of approximately $ 825 million from the state of california and pass through payments of approximately $ 531 million from the state of new york . earnings from operations increased $ 496 million between years primarily as a result of the acquisition of fidelis care and lower acquisition related expenses , partially offset by the health insurer fee moratorium in 2019. specialty services total revenues increased 10 % in the year ended december 31 , 2019 , compared to the corresponding period in 2018 , resulting primarily from increased services associated with membership growth in the managed care segment and acquisitions , partially offset by the previously mentioned veterans affairs contract expiration . earnings from operations decreased $ 173 million between years primarily due to the previously discussed non-cash goodwill and intangible impairment and our transition to transparent pharmacy pricing , partially offset by higher costs recognized in 2018 associated with our veterans affairs contract expiration . the transparent pricing decrease was offset by higher earnings in

we recognized a loss on extinguishment of debt of $ 30 million on the redemption of the notes in the fourth quarter of 2019 , including the call premium , the write-off of unamortized debt issuance costs , and a loss on the termination of the $ 600 million interest rate swap agreement associated with the note . in october 2019 , our board of directors approved a $ 500 million increase to our company 's stock repurchase program . under the increased stock repurchase program , we will have flexibility to repurchase shares or pay down debt with the proceeds from divestitures related to the wellcare acquisition . in december 2019 , in connection with the planned financing of the wellcare acquisition , we issued approximately $ 1.0 billion 4.75 % senior notes due 2025 ( the additional 2025 notes ) , $ 2.5 billion 4.25 % senior notes due 2027 ( the 2027 notes ) , and $ 3.5 billion 4.625 % senior notes due 2029 ( the 2029 notes ) . the net proceeds of the 2027 notes and the 2029 notes and a portion of the net proceeds of the additional 2025 notes were used to finance the cash consideration . the credit agreement underlying our revolving credit facility and term loan facility contains non-financial and financial covenants , including requirements of minimum fixed charge coverage ratios and maximum debt-to-ebitda ratios . we are required to not exceed a maximum debt-to-ebitda ratio of 3.5 to 1.0. as of december 31 , 2019 , we had $ 93 million in borrowings outstanding under our revolving credit facility and $ 1,450 million in borrowings outstanding under our term loan facility and we were in compliance with all covenants . as of december 31 , 2019 , there were no limitations on the availability under the revolving credit facility as a result of the debt-to-ebitda ratio . we have a $ 200 million non-recourse construction loan to fund the expansion of our corporate headquarters . the loan bears interest based on the one month libor plus 2.70 % and matures in april 2021 with an optional one-year extension . the agreement contains financial and non-financial covenants aligning with our company credit facility . we have guaranteed completion of the construction project associated with the loan . as of december 31 , 2019 , we had $ 140 million of borrowings outstanding under the loan . 49 we had outstanding letters of credit of $ 68 million as of december 31 , 2019 , which were not part of our revolving credit facility . we

after the determination is made to capitalize a cost , it is allocated to the specific component of a project that benefited . determination of when a development project 78 commences , and capitalization begins , and when a development project has reached substantial completion , and is available for occupancy and capitalization must cease , involves a degree of judgment . the company does not engage in speculative real estate development . the company does , however , opportunistically agree to reimburse certain of its tenants for development costs at its properties in exchange for contractually-specified rent that generally increases proportionally with its funding . the fair value of the tangible assets of an acquired property with an in-place operating lease is determined by valuing the property as if it were vacant , and the `` as-if-vacant `` value is then allocated to the tangible assets based on the fair value of the tangible assets . the fair value of in-place leases is determined by considering estimates of carrying costs during the expected lease-up periods , current market conditions , as well as costs to execute similar leases based on the specific characteristics of each tenant 's lease . the company estimates the cost to execute leases with terms similar to the remaining lease terms of the in-place leases , including leasing commissions , legal and other related expenses . factors the company considers in this analysis include an estimate of the carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases . in estimating carrying costs , the company includes real estate taxes , insurance and other operating expenses , and estimates of lost rentals at market rates during the expected lease-up periods , which primarily range from six to 12 months . the fair value of above- or below-market leases is recorded based on the net present value ( using a discount rate that reflects the risks associated with the leases acquired ) of the difference between the contractual amount to be paid pursuant to the in-place lease and the company 's estimate of the fair market lease rate for the corresponding in-place lease , measured over the remaining non-cancelable term of the lease including any below-market fixed rate renewal options for below-market leases . in making estimates of fair values for purposes of allocating purchase price , the company uses a number of sources , including real estate valuations prepared by independent valuation firms . the company also considers information and other factors including market conditions , the industry that the tenant operates in , characteristics of the real estate ( e.g . , location , size , demographics , value and comparative rental rates ) , tenant credit profile and the importance of the location of the real estate to the operations of the tenant 's business . additionally , the company considers information obtained about each property as a result of its pre-acquisition due diligence , marketing and leasing activities in estimating the fair value of the tangible and intangible assets acquired . the company uses the information obtained as a result of its pre-acquisition due diligence as part of its consideration of the accounting standard governing asset retirement obligations and , when necessary , will record an asset retirement obligation as part of the purchase price allocation . real estate investments that are intended to be sold are designated as `` held for sale `` on the consolidated balance sheets at the lesser of carrying amount and fair value less estimated selling costs . real estate investments are no longer depreciated when they are classified as held for sale . if the disposal , or intended disposal , of certain real estate investments represents a strategic shift that has had or will have a major effect on the company 's operations and financial results , the operations of such real estate investments would be presented as discontinued operations in the consolidated statements of operations for all applicable periods . depreciation and amortization depreciation is computed using the straight-line method over the estimated useful lives of up to 40 years for buildings and 15 years for site improvements . the company recorded the following amounts of depreciation expense on its real estate investments during the periods presented : replace_table_token_27_th lease incentives are amortized on a straight-line basis as a reduction of rental income over the remaining non-cancellable terms of the respective leases . if a tenant terminates its lease , the unamortized portion of the lease incentive is charged to rental revenue . construction in progress is not depreciated until the development has reached substantial completion . tenant improvements are depreciated over the non-cancellable term of the related lease or their estimated useful life , whichever is shorter . capitalized above-market lease values are amortized on a straight-line basis as a reduction of rental revenue over the remaining non-cancellable terms of the respective leases . capitalized below-market lease values are 79 accreted on a straight-line basis as an increase to rental revenue over the remaining non-cancellable terms of the respective leases including any below-market fixed rate renewal option periods . capitalized above-market ground lease values are accreted as a reduction of property expenses over the remaining terms of the respective leases . capitalized below-market ground lease values are amortized as an increase to property expenses over the remaining terms of the respective leases and any expected below-market renewal option periods where renewal is considered probable . the value of in-place leases , exclusive of the value of above-market and below-market lease intangibles , is amortized to depreciation and amortization expense on a straight-line basis over the remaining periods of the respective leases . story_separator_special_tag the operating partnership may re-borrow amounts paid down on the revolving credit facility but not on the april 2019 term loan . the operating partnership is required to pay revolving credit fees throughout the term of the revolving credit agreement based upon its usage of the revolving credit facility , at a rate which depends on its usage of such facility during the period before we receive an investment grade corporate credit rating from s & p or moody 's , and which rate shall be based on the corporate credit rating from s & p and or moody 's after the time , if applicable , we receive such a rating . the amended credit agreement has an accordion feature to increase , subject to certain conditions , the maximum availability of credit ( either through increased revolving commitments or additional term loans ) by up to $ 200.0 million . the operating partnership is the borrower under the amended credit agreement , and we and each of the subsidiaries of the operating partnership that owns a direct or indirect interest in an eligible real property asset are guarantors under the amended credit agreement . under the terms of the amended credit agreement , we are subject to various restrictive financial and nonfinancial covenants which , among other things , require us to maintain certain leverage ratios , cash flow and debt service coverage ratios , secured borrowing ratios and a minimum level of tangible net worth . the amended credit agreement restricts our ability to pay distributions to our stockholders under certain circumstances . however , we may make distributions to the extent necessary to maintain our qualification as a reit under the code . the amended credit agreement contains certain additional covenants that , subject to exceptions , limit or restrict our incurrence of indebtedness and liens , disposition of assets , transactions with affiliates , mergers and fundamental changes , modification of organizational documents , changes to fiscal periods , making of investments , negative pledge clauses and lines of business and reit qualification . 49 november 2019 term loan on november 26 , 2019 , we , through our operating partnership , entered into a $ 430.0 million term loan credit facility ( the `` november 2019 term loan `` ) with a group of lenders . the november 2019 term loan provides for term loans to be drawn up to an aggregate amount of $ 430.0 million with a maturity of november 26 , 2026. the loans under the november 2019 term loan are available to be drawn in up to three draws during the six-month period beginning on november 26 , 2019. in december 2019 , we made an initial borrowing of $ 250.0 million available under the november 2019 term loan and in march 2020 we borrowed the remaining $ 180.0 million available under the november 2019 term loan . borrowings under the november 2019 term loan bear interest at an annual rate of applicable libor plus the applicable margin . the applicable libor will be the rate with a term equivalent to the interest period applicable to the relevant borrowing . the applicable margin will initially be a spread set according to a leverage-based pricing grid . at the operating partnership 's irrevocable election , on and after receipt of an investment grade corporate credit rating from s & p or moody 's , the applicable margin will be a spread set according to our corporate credit ratings provided by s & p and or moody 's . the november 2019 term loan is pre-payable at any time by the operating partnership , provided , that if the loans under the november 2019 term loan are repaid on or before november 26 , 2021 , they are subject to a one percent prepayment premium . after november 26 , 2021 the loans may be repaid without penalty . the november 2019 term loan has an accordion feature to increase , subject to certain conditions , the maximum availability of the facility up to an aggregate of $ 500 million . the operating partnership is the borrower under the november 2019 term loan , and our company and each of its subsidiaries that owns a direct or indirect interest in an eligible real property asset are guarantors under the facility . under the terms of the november 2019 term loan , we are subject to various restrictive financial and nonfinancial covenants which , among other things , require us to maintain certain leverage ratios , cash flow and debt service coverage ratios , secured borrowing ratios and a minimum level of tangible net worth . the november 2019 term loan restricts our ability to pay distributions to our stockholders under certain circumstances . however , we may make distributions to the extent necessary to maintain our qualification as a reit under the code . the november 2019 term loan contains certain additional covenants that , subject to exceptions , limit or restrict our incurrence of indebtedness and liens , disposition of assets , transactions with affiliates , mergers and fundamental changes , modification of organizational documents , changes to fiscal periods , making of investments , negative pledge clauses and lines of business and reit qualification . master trust funding program scf rc funding i llc , scf rc funding ii llc and scf rc funding iii llc ( collectively , the `` master trust issuers `` ) , all of which are indirect wholly-owned subsidiaries of the operating partnership , have issued net-lease mortgage notes payable ( the `` notes `` ) with an aggregate outstanding gross principal balance of $ 173.2 million as of december 31 , 2020. the notes are secured by all assets owned by the master trust issuers . we provide property management services with respect to the mortgaged properties owned by the master trust issuers and service the related leases pursuant to an amended and restated

these cash inflows were partially offset by a $ 65.9 million outflow related to principal payments on our master trust funding notes , $ 115.0 million of repayments on the revolving credit facility , the payment of $ 86.5 million in dividends , $ 2.8 million of offering costs paid related to our follow-on offerings and the atm program and the payment of deferred financing costs of approximately $ 25,000. the decrease in net cash provided by financing activities was due to our net borrowings being reduced during the year by nearly $ 100 million and increased dividends of approximately $ 22.6 million , offset by our increase proceeds from the issuance of stock of approximately $ 50 million . cash flows for the year ended december 31 , 2019 during the year ended december 31 , 2019 , net cash provided by operating activities was $ 88.6 million . our cash flows from operating activities primarily depend on the occupancy of our portfolio , the rental rates specified in our leases , and the collectability of such rent and our operating expenses and other general and administrative costs . cash inflows related to net income adjusted for non-cash items of $ 86.1 million ( net income of $ 48.0 million adjusted for non-cash items , including depreciation and amortization of tangible , intangible and right-of-use real estate assets , amortization of deferred financing costs and other assets , loss on repurchase of secured borrowings , provision for impairment of real estate , gains on dispositions of real estate , net , straight-line rent receivable , equity-based compensation expense and adjustment to rental revenue for tenant credit , of $ 38.1 million ) , an increase in accrued liabilities and other payables of $ 1.2 million and a decrease in rent receivables , prepaid expenses and other assets of $ 1.2 million . net cash used in investing activities during the year ended december 31 , 2019 was $ 607.8 million . our net cash used in investing activities is generally used to fund our investments in real estate , including capital expenditures , the development of our construction in progress and investments in loans receivable , offset by cash provided from the disposition of real estate and principal collections on our loans and direct financing lease receivables . the cash used in investing activities included $ 570.0 million to fund investments in real estate , including capital expenditures , $ 17.9 million to fund construction in progress , $ 94.6 million of investments in loans receivable and $ 2.1 million paid to tenants as lease incentives . these cash outflows were partially offset by $ 66.8 million of proceeds from sales of investments , net of disposition costs and $ 9.5 million of principal collections

based on our analysis , we determined that the llcs and ctfs were vies , as the at-risk equity holders do not have the ability to direct the activities that most significantly impact the entity 's economic performance , and the company and its representatives have a majority control of the entity 's board of directors and can influence the entity 's management and affairs . although we have related parties on the ucits fund board of directors , the shareholders have rights to remove the current directors with a simple majority vote , so we determined the ucits fund is not a vie . as the company and its representatives do not have representation on the westwood funds'® independent board of directors , which direct the activities that most significantly impact the entity 's economic performance , we determined that the westwood funds® were not vies . therefore , the ucits fund and the westwood funds® should be analyzed under the voe consolidation method . based on our analysis of our seed investments in these entities for the year ended december 31 , 2017 , we have not consolidated the llcs or ctfs under the vie method or the ucits fund or the westwood funds® under the voe method , and therefore the results of these entities are not included in the company 's consolidated financial results . we have included the disclosures related to vies and voes in note 11 `` variable interest entities . `` use of estimates the preparation of consolidated financial statements in conformity with gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , the disclosure of contingent assets and liabilities at the date of the consolidated financial statements , and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates . cash and cash equivalents cash and cash equivalents consist of money market accounts and other short-term , highly liquid investments with maturities of three months or less , other than pooled investment vehicles that are considered investments . we maintain some cash and cash equivalents balances with financial institutions that are in excess of federal deposit insurance corporation insurance limits . the company has not experienced losses on uninsured cash accounts . accounts receivable accounts receivable represents balances arising from services provided to customers and are recorded on an accrual basis , net of any allowance for doubtful accounts . accounts receivable are written off when they are determined to be uncollectible . any allowance for doubtful accounts is estimated based on the company 's historical amounts written off , existing conditions in the industry , and the financial stability of the customer . the majority of our accounts receivable balances consist of advisory and trust fees receivable from customers that we believe and have experienced to be fully collectible . accordingly , our consolidated financial statements do not include an allowance for bad debt nor any bad debt expense . investments investments are classified as trading securities and are carried at quoted market values on the accompanying consolidated balance sheets . net unrealized holding gains or losses on investments classified as trading securities are reflected as a component of other revenues . we measure realized gains and losses on investments using the specific identification method . f-8 westwood holdings group , inc. and subsidiaries notes to consolidated financial statements — ( continued ) fair value of financial instruments we determined the estimated fair values of our financial instruments using available information . the fair value amounts discussed in notes 3 `` investments `` and 4 `` fair value of financial instruments `` are not necessarily indicative of either the amounts realizable upon disposition of these instruments or our intent or ability to dispose of these assets . the estimated fair value of cash and cash equivalents , accounts receivable , prepaid income taxes , other current assets , accounts payable and accrued liabilities , dividends payable , compensation and benefits payable and income taxes payable approximates their carrying value due to their short-term maturities . the carrying amount of investments designated as “ trading ” securities , primarily u.s. government and government agency obligations , money market funds , westwood funds® mutual funds , the ucits fund and westwood trust common trust fund shares , equals fair value based on prices quoted in active markets and , with respect to funds , the reported net asset value ( `` nav `` ) of the shares held . market values of our money market holdings generally do not fluctuate . goodwill and other intangible assets goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable assets at the date of acquisition . goodwill is not amortized but is tested at least annually for impairment . we test more frequently if indicators are present or changes in circumstances suggest that impairment may exist . these indicators include declines in revenues , earnings or cash flows , or the development of a material adverse change in the business climate . we assess goodwill for impairment at the reporting unit level , which is defined as an operating segment or one level below an operating segment , referred to as a component . we have identified two reporting units , which are consistent with our reporting segments : advisory and trust . the company is not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that its fair value is less than the carrying amount . we assess goodwill for impairment using either a qualitative or quantitative assessment . the qualitative assessment includes consideration of the current trends in the industry in which we operate , macroeconomic conditions , recent financial performance of our reporting units and a market multiple approach valuation . story_separator_special_tag factors included in this assessment include the legal organization of the entity , our contractual involvement with the entity and any related party or de facto agent implications of the company 's involvement with the entity . determining if the company is the primary beneficiary of a vie also requires significant judgment . there is judgment involved to assess if the company has the power to direct the activities that most significantly impact the entity 's economic results and to assess if the company has an obligation to absorb the majority of expected losses or a right to receive the majority of residual returns . we reconsider whether entities are a vie or voe whenever contractual arrangements change , the entity receives additional equity or returns equity to its investors or changes in facts and circumstances occur that change the investors ' ability to direct the activities of the entity . we have evaluated all of our advisory relationships with the westwood investment funds plc ( the “ ucits fund ” ) , the westwood funds® , limited liability companies ( `` llcs `` ) and our relationship as sponsor of the common trust funds ( `` ctfs `` ) to determine whether any of these entities is a vie or voe . based on our analysis , we determined that the llcs and ctfs were vies , as the at-risk equity holders do not have the ability to direct the activities that most significantly impact the entity 's economic performance , and the company and its representatives have a majority control of the entity 's board of directors and can influence the entity 's management and affairs . although we have related parties on the ucits fund board of directors , the shareholders have rights to remove the current directors with a simple majority vote , so we determined the ucits fund is not a vie . as the company and its representatives do not have representation on the westwood funds'® independent board of directors , which direct the activities that most significantly impact the entity 's economic performance , we determined that the westwood funds® were not vies . therefore , the ucits fund and the westwood funds® should be analyzed under the voe consolidation method . based on our analysis of our seed investments in these entities for the year ended december 31 , 2016 , we have not consolidated the llcs or ctfs under the vie method or the ucits fund or the westwood funds® under the voe method , and therefore the results of these entities are not included in the company 's consolidated financial results . business combinations in allocating the purchase price of a business combination , the company records all assets acquired and liabilities assumed at fair value , with the excess of the purchase price over the aggregate fair values recorded as goodwill . asc 820 , fair value measurements and disclosures , defines fair value 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 . the purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values as of the date of acquisition . to the extent the purchase price exceeds the fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed such excess is allocated to goodwill . the company determines the estimated fair values after review and consideration of relevant information , including discounted cash flows , quoted market prices and estimates made by management . the fair value assigned to identifiable intangible assets acquired is based on estimates and assumptions made by management at the time of the acquisition . the company adjusts the preliminary purchase price allocation , as necessary , during the measurement period of up to one year after the acquisition closing date as it obtains more information as to the facts and circumstances existing as of the acquisition date . acquisition-related costs are recognized separately from the acquisition purchase price and are expensed as incurred . goodwill goodwill is not amortized but is tested for impairment , at least annually . we assess the recoverability of the carrying amount of goodwill either qualitatively or quantitatively as of july 1 of each fiscal year , or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable . when assessing the recoverability of goodwill , we may first assess qualitative factors . if an initial qualitative assessment indicates that it is more likely than not that the carrying amount exceeds fair value , a quantitative analysis may be required . we may also elect to skip the qualitative assessment and proceed directly to the quantitative analysis . recoverability of the carrying value of goodwill is measured at the reporting unit level . we have identified two reporting units , which are consistent with our reporting segments . in performing a quantitative analysis , we measure the recoverability of goodwill for our reporting units using a combination of the income approach and market multiple approach . the income approach is based on the long-term projected future cash flows of the reporting units . we discount the estimated cash flows to present value using a weighted average cost of capital that considers factors such as market assumptions , the timing of cash flows and the risks inherent in those cash flows . the key assumptions used in the market multiple valuation require significant management judgment , including the determination of our peer group and the valuation multiples of such peer group . 36 if the calculated fair value of a reporting unit is less than the current carrying amount , impairment of the reporting unit may exist . when the recoverability test indicates potential impairment , we will calculate an implied fair value of goodwill

cash flow used in investing activities during 2017 and 2016 of $ 1.2 million and $ 1.8 million , respectively , was primarily related to purchases of property and equipment . cash flow used in investing activities during 2015 of $ 25.1 million was due to the acquisition of woodway . cash used in financing activities of $ 28.6 million during 2017 , compared to $ 34.9 million and $ 22.1 million during 2016 and 2015 , respectively . the decrease primarily related to the 2016 payment of contingent consideration related to the acquisition of our westwood trust houston office and repurchases of common stock under our share repurchase plan during fiscal 2016. our future liquidity and capital requirements will depend upon numerous factors , including our results of operations , the timing and magnitude of capital expenditures or strategic initiatives , our dividend policy and other business and risk factors described under “ item 1a . risk factors ” in this report . we believe that current cash and short-term investment balances and cash generated from operations will be sufficient to meet both the operating and capital requirements of our ordinary business operations through at least the next twelve months . however there can be no assurance that we will not require additional financing within this time frame . the failure to raise needed capital on attractive terms , if at all , could have a material adverse effect on our business , financial condition and results of operations . cash dividends < div

buildings and leasehold improvements 15 - 40 years furniture and equipment 3-7 years goodwill and intangible assets : goodwill represents the cost in excess of the fair value of net assets acquired ( including identifiable intangibles ) in transactions accounted for as business combinations . goodwill has an indefinite useful life and is evaluated for impairment annually , or more frequently if events and circumstances indicate that the asset might be impaired . an impairment loss is recognized to the extent that the carrying amount exceeds the acquired asset 's fair value . the goodwill impairment analysis is a two-step test . the first , used to identify potential impairment , involves comparing each reporting unit 's estimated fair value to its carrying value , including goodwill . if the estimated fair value of a reporting unit exceeds its carrying value , goodwill is considered not to be impaired . if the carrying value exceeds estimated fair value , there is an indication of potential impairment and the second step is performed to measure the amount of impairment . the company performs its annual goodwill impairment test as of december 31 of each year . for 2015 , the results of the first step of the goodwill impairment test provided no indication of potential impairment . goodwill will continue to be monitored for triggering events that may indicate impairment prior to the next scheduled annual impairment test . intangible assets consist of core deposit premiums acquired in connection with the gulf south and cornerstone transactions . the core deposit premium is initially recognized based on a valuation performed as of the consummation date . the core deposit premium is amortized over the average remaining life of the acquired customer deposits . amortization expense relating to these intangible assets was $ 233,204 and $ 163,100 for the years ended december 31 , 2015 and 2014 , respectively . the intangible assets were evaluated for impairment as of december 31 , 2015 , and based on that evaluation it was determined that there was no impairment . transfer of financial assets : transfers of financial assets are accounted for as sales , when control over the assets has been surrendered . control over transferred assets is deemed to be surrendered when ( 1 ) the assets have been isolated from the company - put presumptively beyond the reach of the transferor and its creditors , even in bankruptcy or other receivership , ( 2 ) the transferee obtains the right ( free of conditions that constrain it from taking advantage of that right ) to pledge or exchange the transferred assets , and ( 3 ) the company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets . 55 smartfinancial , inc. and subsidiaries notes to consolidated financial statements december 31 , 2015 and 2014 note 1. summary of significant accounting policies , continued advertising costs : the company expenses all advertising costs as incurred . advertising expense was $ 452,849 and $ 420,048 for the years ended december 31 , 2015 and 2014 , respectively . income taxes : the income tax accounting guidance results in two components of income tax expense : current and deferred . current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues . the company determines deferred income taxes using the liability ( or balance sheet ) method . under this method , the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities , and enacted changes in tax rates and laws are recognized in the period in which they occur . deferred income tax expense results from changes in deferred tax assets and liabilities between periods . deferred tax assets are recognized if it is more likely than not , based on the technical merits , that the tax position will be realized or sustained upon examination . the term more likely than not means a likelihood of more than 50 percent ; the terms examined and upon examination also include resolution of the related appeals or litigation processes , if any . a tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information . the determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts , circumstances , and information available at the reporting date and is subject to management 's judgment . deferred tax assets may be reduced by deferred tax liabilities and a valuation allowance if , based on the weight of evidence available , it is more likely than not that some portion or all of a deferred tax asset will not be realized . stock compensation plans : at december 31 , 2015 , the company had options outstanding under stock-based compensation plans , which are described in more detail in note 10. the plans have been accounted for under the accounting guidance ( fasb asc 718 , compensation - stock compensation ) which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements . that cost will be measured based on the grant date fair value of the equity or liability instruments issued . the stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options , restricted share plans , performance-based awards , share appreciation rights , and stock or other stock based awards . story_separator_special_tag 30 nonperforming loans as a percentage of total gross loans was 0.38 percent as of december 31 , 2015 compared to 1.39 percent as of december 31 , 2014. total nonperforming assets as a percentage of total assets as of december 31 , 2015 totaled 0.79 percent compared to 1.88 percent as of december 31 , 2014. acquired pci loans that are included in loan pools are reclassified at acquisition to accrual status and thus are not included as nonperforming assets unless they are 90 days or greater past due . in 2015 there was $ 202 thousand in interest income recognized on nonaccrual and restructured loans compared to the $ 312 thousand in gross interest income that would have been recognized if the loans had been current in accordance with their original terms . the following table summarizes the company 's nonperforming assets as of december 31 for the periods presented . replace_table_token_12_th ( 1 ) balances include pci loans past due 90 days or more that are grouped in pools which accrue interest based on pool yields . potential problem loans at december 31 , 2015 problem loans amounted to approximately $ 3.2 million or 0.43 percent of total loans outstanding . potential problem loans , which are not included in nonperforming loans , represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have doubts about the borrower 's ability to comply with present repayment terms . this definition is believed to be substantially consistent with the standards established by the banks ' primary regulators , for loans classified as substandard or worse , but not considered nonperforming loans . allocation of the allowance for loan losses we maintain the allowance at a level that we deem appropriate to adequately cover the probable losses inherent in the loan portfolio . as of december 31 , 2015 and december 31 , 2014 , our allowance for loan losses was $ 4.4 million and $ 3.9 million , respectively , which we deemed to be adequate at each of the respective dates . the increase in the allowance for loan losses in 2015 as compared to 2014 is primarily the result of increases in organic loan growth offset slightly by improving overall credit metrics within our portfolio , including the reduction in net charge-offs . our allowance for loan loss as a percentage of total loans has decreased from 1.07 percent at december 31 , 2014 to 0.60 percent at december 31 , 2015 , primarily as a result of the increase in pci and purchased non-credit impaired loans both of which are carried on the balance sheet net of their respective discounts . as a percentage of organic loans the allowance for loan losses decreased from 1.11 percent at december 31 , 2014 to 0.95 percent at december 31 , 2015. in 2016 we expect the allowance to organic loans to remain in the range of 0.90 to 1.00 percent . our purchased loans were recorded at fair value upon acquisition . the fair value adjustments on the performing purchased loans will be accreted into income over the life of the loans . at december 31 , 2015 , the remaining accretable fair value adjustment was $ 10.2 million . also at the end of 2015 the balance on pci loans was $ 47.1 million and the carrying value was $ 38.3 million , for a net difference of $ 8.8 million in discounts . these loans are subject to the same allowance methodology as our legacy portfolio . the calculated allowance is compared to the remaining fair value discount on a loan-by-loan basis to determine if additional provisioning should be recognized . at december 31 , 2015 , there were no allowances on purchased loans . the judgments and estimates associated with our allowance determination are described in note 1 in the `` notes to consolidated financial statements . ” 31 the following table sets forth , based on our best estimate , the allocation of the allowance to types of loans as well as the unallocated portion as of december 31 for each of the past five years and the percentage of loans in each category to total loans ( in thousands ) : replace_table_token_13_th the increase in the overall allowance for loan losses is due to the increased balance of organic loans offset by improvements of our loan portfolio and the reduction of nonperforming loans and net charge-offs , which is largely influenced by the overall improvement in the economies in our market areas . the allocation by category is determined based on the assigned risk rating , if applicable , and environmental factors applicable to each category of loans . for impaired loans , those loans are reviewed for a specific allowance allocation . as we have worked to rehabilitate impaired loans and total impaired loans has decreased , the specific allocations for impaired loans have generally decreased . specific valuation allowances related to impaired loans were approximately $ 258 thousand at december 31 , 2015 compared to $ 234 thousand at december 31 , 2014 with the increase due to the addition of one specific impaired loan which accounts for the entire balance . additional information on the allocation of the allowance between performing and impaired loans is provided in note 4 to the `` notes to the consolidated financial statements . `` analysis of the allowance for loan losses the following is a summary of changes in the allowance for loan losses for each of the years in the five year period ended december 31 , 2015 and the ratio of the allowance for loan losses to total loans as of the end of each period ( in thousands ) : replace_table_token_14_th we assess the adequacy of the allowance at the end of each calendar quarter . this assessment includes procedures to estimate the allowance and test the adequacy and appropriateness of

economic value of equity - our economic value of equity model measures the extent that estimated economic values of our assets , liabilities and off-balance sheet items will change as a result of interest rate changes . economic values are determined by discounting expected cash flows from assets , liabilities and off-balance sheet items , which establishes a base case economic value of equity . to help monitor our related risk , we 've established the following policy limits regarding simulated changes in our economic value of equity : replace_table_token_19_th at december 31 , 2015 , our model results indicated that we were within these policy limits . each of the above analyses may not , on its own , be an accurate indicator of how our net interest income will be affected by changes in interest rates . income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates . in addition , the magnitude and duration of changes in interest rates may have a significant impact on net interest income . for example , although certain assets and liabilities may have similar maturities or periods of repricing , they may react in different degrees to changes in market interest rates . interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates , while interest rates on other types may lag behind changes in general market rates . in addition , certain assets , such as adjustable rate mortgage loans , have features ( generally referred to as interest rate caps and floors ) which limit changes in interest rates . prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments . the ability of many borrowers to service their debts also may decrease during periods of rising interest rates . our alco reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory , consistent level of profitability within the framework of established liquidity , loan , investment , borrowing , and capital policies . < div style= '' margin-top : 12pt ;

the warrants were carried at fair value because they conditionally obligated the company to transfer assets at some point in the future . subsequent to december 31 , 2010 and upon completion of the company 's ipo in february 2011 , all such warrants were converted to common stock or converted to common stock warrants ( see note 9 ) . net loss per share attributed to common stockholders the company 's basic net loss per share attributed to common stockholders is calculated by dividing net loss attributed to common stockholders by the weighted-average number of shares of common stock outstanding for the period . the weighted-average number of shares of common stock used to calculate the company 's basic net loss per share attributed to common stockholders exclude shares subject to repurchase rights related to stock 84 fluidigm corporation notes to consolidated financial statements— ( continued ) december 31 , 2011 options that were exercised prior to vesting , as such shares are not deemed to be issued for accounting purposes until the related stock options vest . diluted net loss per share attributed to common stockholders is computed by dividing net loss attributed to common stockholders by the weighted-average number of potential common shares outstanding for the period as determined using the treasury-stock method . for purposes of this calculation , convertible preferred stock , options to purchase common stock and warrants to purchase convertible preferred stock are considered to be potential common shares but have been excluded from the calculation of diluted net loss per share attributed to common stockholders as their effect is anti-dilutive for all periods presented . the following potential common shares were excluded from the computations of net loss per share attributed to common stockholders for the periods presented because including them would have been anti-dilutive ( in thousands ) . replace_table_token_20_th recent accounting pronouncements fair value measurement in may 2011 , the fasb amended existing guidance regarding fair value measurement and disclosure to conform u.s. gaap to international financial reporting standards . this guidance clarifies the application of existing fair value measurements and disclosures , and changes certain principles or requirements for fair value measurements and disclosures . the amendment is effective for interim and annual periods beginning after december 15 , 2011 and will be applied prospectively . the company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements . comprehensive income in june 2011 , the fasb amended guidance regarding presentation of comprehensive income . the change gives an entity the option to present the total of comprehensive income , the components of net income , and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements . the option to present components of other comprehensive income as part of the statement of changes in stockholders ' equity was eliminated . the items that must be reported in other comprehensive income were not changed . additionally , no changes were made to the calculation and presentation of earnings per share . the amendment is effective for fiscal years , and interim periods within those years , beginning after december 15 , 2011 and is required to be applied retrospectively . the company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements . 3. license , development , collaboration and grant agreements license agreements on june 30 , 2011 , the company entered into a series of patent license agreements with life technologies corporation and its subsidiary , applied biosystems , llc ( collectively , life ) . these agreements settled litigation filed by the company against life on june 29 , 2011 in united states district court for the northern district of california and litigation filed by life against the company on june 29 , 2011 in united states district court for 85 fluidigm corporation notes to consolidated financial statements— ( continued ) december 31 , 2011 the district of delaware . pursuant to the terms of the agreements , the company paid $ 3.0 million to life , which was recognized as a litigation settlement expense in the company 's consolidated statement of operations because the amount paid by the company was principally attributable to resolving life 's litigation claims with respect to a specific expiring u.s. patent and its foreign counterparts . the agreements also provide for various royalty payments on future sales of certain products by each of the parties . under the terms of the agreements each party had the option , exercisable for thirty days from the date of the agreements , to limit or preclude certain patent litigation between the parties for a period of two to four years . these rights were subject to certain exceptions and required an additional payment by the party exercising the option at the time of exercise . in july 2011 , the company exercised its option and paid life $ 2.0 million . as a result , subject to certain exceptions , life may not initiate litigation under its patents existing as of june 30 , 2011 against the company 's customers for two years and against the company , with respect to its current products and equivalent future products , for four years . the additional payment was included in other assets and is being amortized to selling , general and administrative expense over four years on a straight-line basis beginning in july 2011. the additional payment is being amortized to selling , general and administrative expense because it precludes life from initiating litigation under its relevant patents for any alleged prior and future infringement by us for four years , and because such preclusion relates to our equivalent future products . story_separator_special_tag the arrangement also provided for milestone payments for the design and development of product prototypes , which have been recognized as we achieved each milestone . during 2011 , we achieved three milestones , submitted our final report under the agreement , and recognized $ 1.0 million of milestone revenue . during 2010 , we achieved three milestones and recognized $ 1.25 million of milestone revenue . all of our performance obligations under the agreement were completed at december 31 , 2011. we may receive additional payments if and when we finalize our on-going negotiations with our partner for the next phase of the agreement . we can not predict the outcome of these negotiations . grant revenue grant revenue consists of incentive grants from government entities , including edb and cirm . grant revenue decreased $ 0.9 million to $ 0.6 million for 2011 compared to $ 1.5 million for 2010. the decrease relates to a reduction in activity under the edb grant agreements as we achieved certain milestones and reached the end of the grant periods , partially offset by new grant revenue from cirm . under our incentive grant agreements with edb , we received incentive grant payments equal to a portion of qualifying expenses we incurred in singapore . qualifying expenses incurred by us in singapore were $ 0.5 million in 2011 and $ 3.8 million in 2010. our agreements with edb provided that grants extended to us were subject to certain grant conditions , including increasing our levels of research , development and manufacturing in singapore through the use of local service providers , the hiring and training of personnel in singapore , the incurrence of research and development expenses in singapore , receipt of new investment in our company and the achievement of certain agreed upon milestones relating to the development of our products . development and manufacturing milestones achieved include completion of feasibility studies and prototype development , establishment of manufacturing lines , process automation and manufacturing yield improvements for our chips and related instruments . these agreements further provided edb with the right to demand repayment of a portion of past grants in the event that we did not meet our obligations under the applicable agreements . based on correspondence with edb , we believe we have satisfied our obligations applicable to our edb grant revenue through december 31 , 2011. our first grant agreement with the edb was completed in july 2010. in october 2010 , we received confirmation from edb that all of our obligations under the first grant had been met and , in october 2010 , we received our final grant payment relating thereto . our second grant agreement with the edb was completed in may 2011. based on correspondence with edb , we believe we have satisfied our obligations applicable to our edb grant revenue through december 31 , 2011. our first cirm grant was awarded in 2009 in the amount of $ 0.8 million to be earned over a two-year period . our second cirm grant was awarded in 2011 in the amount of $ 1.9 million to be earned over a three-year period . the cirm grant revenue is recognized as the related research and development services are performed and costs associated with the grants are recognized as research and development expense during the period incurred . we expect total grant revenue for 2012 and future periods to decrease compared to 2011 as our edb agreements were completed during 2010 and 2011. this decrease is partially offset by grant revenue from cirm for us to design and develop prototype microfluidic systems for use in stem cell research . 56 cost of product revenue the following table presents our cost of product revenue and product margin for each period presented ( in thousands ) . year ended december 31 , 2011 december 31 , 2010 cost of product revenue $ 13,191 $ 11,581 product margin 67 % 62 % cost of product revenue includes manufacturing costs incurred in the production process , including component materials , assembly labor and overhead , installation , warranty , service and packaging and delivery costs . in addition , cost of product revenue includes royalty costs for licensed technologies included in our products , provisions for slow-moving and obsolete inventory and stock-based compensation expense . costs related to license , collaboration and grant revenue are included in research and development expense . cost of product revenue increased $ 1.6 million , or 14 % , to $ 13.2 million for 2011 from $ 11.6 million for 2010 due to increased product sales in 2011. cost of product revenue as a percentage of related revenue decreased to 33 % for 2011 compared to 38 % for 2010. this decrease was primarily due to lower instrument component costs and higher instrument average selling prices , and , to a lesser extent , lower chip manufacturing costs . operating expenses the following table presents our operating expenses for each period presented ( in thousands ) : replace_table_token_5_th research and development research and development expense consists primarily of personnel costs , independent contractor costs , prototype and material expenses and other allocated facilities and information technology expenses . we have made substantial investments in research and development since our inception . our research and development efforts have focused primarily on enhancing our technologies and to support development and commercialization of new and existing products and services . research and development expense increased $ 0.9 million , or 7 % , to $ 13.9 million for 2011 compared to $ 13.0 million for 2010. the increase relates primarily to increased lab supplies and consumables of $ 0.6 million , consulting and professional fees of $ 0.2 million to support our new product development , and increased compensation and personnel related costs of $ 0.3 million , which include stock based compensation , partially offset by lower equipment and depreciation expense of $ 0.2 million .

we used $ 1.3 million of cash in investing activities during 2010 for purchases of capital equipment to support our infrastructure and manufacturing operations of $ 1.5 million , partially offset by the release of $ 0.2 million from restricted cash for a sub-lease that expired and from a lower restricted cash requirement on the new lease for our headquarters facility in south san francisco , california . we used $ 0.7 million of cash in investing activities during 2009 for purchases of capital equipment to support our infrastructure and manufacturing operations of $ 0.8 million , partially offset by proceeds of $ 0.1 million from disposals of property and equipment . net cash provided by financing activities prior to our ipo , we funded our operations principally through issuances of convertible preferred stock and long-term debt . we generated $ 70.4 million of cash from financing activities during 2011 primarily from net proceeds of $ 77.0 million , net of underwriting discounts , commissions and offering expenses and proceeds from the exercise of stock options of $ 1.3 million , partially offset by principal payments on our long-term debt of $ 4.7 million and repayment of our bank line of credit balance of $ 3.1 million . 65 we generated $ 3.8 million of cash from financing activities during 2010 primarily from proceeds from our line of credit of $ 3.1 million and proceeds from exercises of preferred stock warrants and stock options of $ 0.7 million . we generated $ 16.9 million of cash from financing activities during 2009 primarily from proceeds from the issuance of convertible promissory notes , net of issuance costs , of $ 10.5 million and proceeds from the issuance of convertible preferred stock , net of issuance costs , of $ 7.4 million , partially offset by principal payments on our long-term debt of $ 1.0 million . capital resources at december 31 , 2011 , december 31 , 2010 and december 31 , 2009 , our working capital was $ 49.9 million , $ 2.4 million and $ 21.4 million , respectively , including cash and cash equivalents of $ 13.6 million , $ 5.7 million and $ 14.6 million , respectively , and investments of $ 41.4 million at december 31 , 2011. in december 2010 , we entered into a bank line of credit agreement that is collateralized by our accounts receivable and provides us the ability to draw up to $ 7.0 million , subject to

used in preparing the option pricing model for valuing the company 's warrants as of december 31 , 2016 include ( i ) volatility ( 75.0 % ) , ( ii ) risk free interest rate of 1.47 % ( estimated using treasury bonds with a 3 year life ) , ( iii ) strike price ( $ 6.00 ) for the common stock warrants , ( iv ) fair value of common stock ( $ 5.70 ) and ( v ) expected life ( three years ) . the following is a roll forward of the fair value of level 3 warrants : replace_table_token_20_th level 1 level 2 level 3 2015 assets : cash equivalents $ 34,324 $ — $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ total assets at fair value $ 34,324 $ — $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ liabilities : common stock warrants — — 406 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ total liabilities at fair value $ — $ — $ 406 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ the significant assumptions used in preparing the option pricing model for valuing the company 's warrants as of december 31 , 2015 include ( i ) volatility ( 75.0 % ) , ( ii ) risk free interest rate of 1.54 % ( estimated using treasury bonds with a 4 year life ) , ( iii ) strike price ( $ 6.00 ) for the common stock warrants , ( iv ) fair value of common stock ( $ 9.76 ) and ( v ) expected life ( four years ) . 137 agile therapeutics , inc. notes to financial statements ( continued ) december 31 , 2016 ( in thousands , except share and per share data ) 3. fair value measurements ( continued ) there were no transfers between level 1 , 2 or 3 during 2016 or 2015. if the company 's estimates regarding the fair value of its warrants are inaccurate , a future adjustment to these estimated fair values may be required . additionally , these estimated fair values could change significantly . 4. prepaid expenses prepaid expenses consist of the following : replace_table_token_21_th 5. property and equipment property and equipment , consisting of manufacturing , office and computer equipment , is stated at cost , less accumulated depreciation . depreciation is computed using the straight-line , method over the estimated useful lives of the assets . property and equipment consist of the following : replace_table_token_22_th as december 31 , 2016 and 2015 , manufacturing equipment includes approximately $ 12.4 million of equipment which is in the process of being constructed and qualified and is not currently being depreciated . 138 agile therapeutics , inc. notes to financial statements ( continued ) december 31 , 2016 ( in thousands , except share and per share data ) 6. accrued liabilities accrued liabilities consist of the following : replace_table_token_23_th 7. convertible note financing on april 28 , 2014 , the company and certain of the company 's existing preferred stockholders , all of whom qualify as accredited institutional investors , entered into a convertible subordinated note purchase agreement pursuant to which such holders agreed to loan the company an aggregate of $ 3.0 million . the company issued convertible promissory notes ( the `` notes `` ) to evidence its payment obligations with respect to the $ 3.0 million . the notes had an interest rate of 8 % , accruing daily and compounding annually . the notes are convertible into unregistered equity securities of the company upon the occurrence of events stated therein . the notes and accrued interest automatically converted into 503,450 shares of common stock at $ 6.00 per share which was equal to the purchase price at which shares were sold to the public in an underwritten public offering ( see note 9 ) . the notes were subordinate to the company 's term loan with oxford finance llc . 8. loan and security agreements oxford finance llc in december 2012 , the company entered into a loan and security agreement ( the `` oxford loan `` ) with oxford finance llc ( `` oxford `` ) pursuant to which the company borrowed a total of $ 15.0 million from oxford . the oxford loan accrued interest at a fixed annual rate equal to 9.20 % ( three-month u.s. libor rate of 0.47 % plus 8.73 % ) . interest on the oxford loan was payable monthly and principal was due in 30 equal consecutive monthly installments beginning on february 1 , 2015 and ending on july 1 , 2017. in addition , the company was required to make a final payment of $ 675 on the maturity date of the oxford loan ( july 1 , 2017 ) . in connection with the oxford loan , the company issued oxford warrants to purchase 62,505 shares of common stock at $ 6.00 per share . these warrants expire on december 14 , 2019. in february 2015 , the company terminated and repaid all amounts outstanding under the oxford loan and recorded a loss on the extinguishment of the oxford loan ( see further discussion below ) . story_separator_special_tag included in the loss on extinguishment of debt is the prepayment premium , the unamortized discount and the write off of deferred financing costs . benefit from income taxes . benefit from income taxes for the years ended december 31 , 2016 and 2015 represents the proceeds we received from the sale of new jersey net operating losses , or nols , as part of the technology and business tax certificate program sponsored by the new jersey economic development authority . under the program , emerging biotechnology companies with unused state nols are allowed to sell these nols to other companies . in november 2016 , we completed the sale of new jersey state nols totaling approximately $ 28.2 million and research and development credits totaling approximately $ 0.8 million for net proceeds of approximately $ 3.0 million . in november 2015 , we completed the sale of new jersey state nols totaling approximately $ 59.8 million and research and development credits totaling approximately $ 1.1 million for net proceeds of approximately $ 6.0 million . 114 comparison of years ended december 31 , 2015 and 2014 replace_table_token_12_th research and development expenses . research and development expenses increased by $ 12.3 million , or 92 % , from $ 13.4 million for the year ended december 31 , 2014 to $ 25.6 million for the year ended december 31 , 2015. this overall increase in research and development expenses was primarily due to the following : an increase in clinical development expenses of $ 11.2 million for the year ended december 31 , 2015 as compared to the year ended december 31 , 2014. the increase is primarily related to cro service fees and costs associated with our phase 3 clinical trial for twirla ; and an increase in manufacturing commercialization expenses of $ 1.1 million for the year ended december 31 , 2015 as compared to the year ended december 31 , 2014. payments for labor and materials increased from approximately $ 0.2 million in 2014 to $ 1.2 million in 2015 associated with manufacturing scale-up activities related to larger scale production for twirla . general and administrative expenses . general and administrative expenses increased by $ 2.3 million , or 45 % , from $ 5.2 million for the year ended december 31 , 2014 to $ 7.5 million for the year ended december 31 , 2015. this increase in general and administrative expense was primarily due to the following : an increase in stock compensation expense of $ 1.0 million for the year ended december 31 , 2015 as compared to the year ended december 31 , 2014 , primarily associated with stock option grants in february 2015 ; an increase in compensation expense of $ 0.6 million for the year ended december 31 , 2015 as compared to the year ended december 31 , 2014 , primarily attributed to increased headcount to support public company operations including sec reporting as well as increased salaries ; an increase in franchise tax expense of $ 0.3 million associated with an increase in our capitalization from our initial public offering in may 2014 and our private placement in january 2015 ; and an increase in directors and officers insurance expense of $ 0.3 million for the year ended december 31 , 2015 as compared to the year ended december 31 , 2014 attributed to becoming a public company . 115 interest expense . interest expense is primarily attributable to our term loans with hercules and oxford finance llc , or oxford for the year ended december 31 , 2015 and our term loan with oxford for the year ended december 31 , 2014. interest expense also includes the amortization of the discount associated with allocating value to the common stock warrants issued to hercules and oxford and the amortization of the deferred financing costs associated with the term loans . interest income . interest income comprises interest income earned on cash and cash equivalents . change in fair value of warrants . certain of our warrants to purchase our preferred stock ( prior to the ipo ) and common stock are recorded at fair value and are subject to re-measurement at each balance sheet date . these liabilities are re-measured at each balance sheet date with the corresponding charge or credit to earnings recorded within change in fair value of warrant liability . the fair value of the convertible preferred stock warrants ( prior to the ipo ) and warrants to purchase common stock with non-standard anti-dilution provisions are determined using the black-scholes option pricing model which incorporates a number of assumptions and judgments to estimate the fair value of these warrants including the fair value per share of the underlying stock , the remaining contractual term of the warrants , risk-free interest rate , expected dividend yield , credit spread and expected volatility of the price of the underlying stock . during the year ended december 31 , 2015 , the fair value of our warrant liability changed by $ 0.1 million compared to the year ended december 31 , 2014 , primarily due to the change in the fair value of the underlying common stock . story_separator_special_tag net cash provided by financing activities for the year ended december 31 , 2015 was $ 20.0 million which included ( i ) net proceeds of $ 19.3 million from the private placement of approximately 3.4 million shares of our common stock , ( ii ) net proceeds of $ 16.3 million from a term loan with hercules and ( iii ) the repayment of our term loan with oxford of $ 15.8 million . net cash provided by financing activities for the year ended december 31 , 2014 was $ 52.7 million which included net proceeds of ( i ) $ 49.7 million received from our initial public offering of 9,166,667 shares of common stock and ( ii ) $ 3.0 million received from the issuance of convertible bridge

we can make no assurances that our discussions will ultimately be successful and , if such discussions result in an extension of the period in which we may draw the additional tranche of $ 8.5 million , we could incur additional fees payable to hercules . on february 1 , 2017 , we began making principal payments with respect to the hercules loan . in january 2016 , we closed an underwritten public offering of 5,511,812 shares of common stock at a public offering price of $ 6.35 per share . in february 2016 , the underwriters of the public offering of common stock exercised in full their option to purchase an additional 826,771 shares of common stock at the public offering price of $ 6.35 per share , less underwriting discounts and commissions . a total of 6,338,583 shares of common stock were sold in the public offering , resulting in total net proceeds of approximately $ 37.5 million . at december 31 , 2016 , we had cash and cash equivalents totaling $ 48.8 million . we invest our cash equivalents in highly liquid , interest-bearing investment-grade and government securities in order to preserve principal . the following table sets forth the primary sources and uses of cash for the periods indicated : replace_table_token_13_th operating activities we have incurred significant costs in the area of research and development , including cro fees , manufacturing , regulatory and other clinical trial costs , as our primary product candidate twirla was being developed . net cash used in operating activities was $ 23.3 million for the year ended december 31 , 2016 and consisted of a net loss of $ 28.7 million which was offset , in part , by non-cash compensation and non-cash interest expense of $ 4.4 million as well as a decrease in prepaid clinical trial costs of $ 0.8 million . net cash used in operating activities was $ 25.5 million for the year ended december 31 , 2015 and consisted of a net loss of $ 30.3 million which was offset , in part , by non-cash 117 stock compensation expense of $ 3.0 million and a loss on extinguishment of debt of $ 1.0 million . net cash used in operating activities was $ 14.5 million for the year ended december 31 , 2014 and consisted of a net loss of $

on january 14 , 2015 , the company 's board of directors approved a five-for-one stock split of the company 's class a common stock and class b common stock . effective january 16 , 2015 the company amended its certificate of incorporation to give effect to the stock split and to change the company 's authorized common equity capital to 900,000,000 shares of common stock , 750,000,000 shares of class a common stock , and 150,000,000 shares of class b common stock , par value $ 0.000005 per share . all share data included in these financial statements give retroactive effect to the stock split and related amendment to the company 's certificate of incorporation . 2. summary of significant accounting policies ( in thousands , except years ) principles of consolidation —the accompanying consolidated financial statements include the accounts of inovalon holdings , inc. and its wholly owned subsidiaries . all intercompany accounts and transactions have been eliminated in consolidation . basis of presentation and use of estimates —these consolidated financial statements have been prepared in accordance with united states generally accepted accounting principles ( `` gaap `` ) . the preparation of consolidated financial statements in conformity with gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , disclosures of contingent assets and liabilities as of the date of the financial statements , and the reported amounts of revenue and expenses during the reported period . significant estimates made by management include , but are not limited to : revenue recognition , specifically selling prices associated with the individual elements in multiple element arrangements ; accounts receivable allowances ; estimates of the fair value of stock-based awards ; fair value of intangibles and goodwill ; depreciable lives of property , equipment and capitalized software ; and useful f-9 inovalon holdings , inc. notes to consolidated financial statements ( continued ) 2. summary of significant accounting policies ( in thousands , except years ) ( continued ) lives of intangible assets . actual results could differ from management 's estimates , and such differences could be material to the company 's consolidated financial position and results of operations . cash and cash equivalents —cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less at the time of purchase , and demand deposits with financial institutions . short-term investments —short-term investments consists of investment grade debt securities . the company classifies short-term investments as available-for-sale at the time of purchase and reevaluates such classification as of each balance sheet date . all short-term investments are recorded at estimated fair value . unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive loss , a component of stockholders ' equity . the company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired . the company considers impairments to be other-than-temporary if they are related to deterioration in credit risk , if it is more likely than not that the company will be required to or if the company intends to sell the securities before the recovery of their cost basis . realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported as components of other income and ( expenses ) , in the consolidated statements of operations . interest , amortization of premiums , and accretion of discount on short-term investments classified as available for sale are included as a component of interest income , in the consolidated statements of operations . there were no other-than-temporary impairments during 2016. the company may sell short-term investments at any time , without significant penalty , for use in current operations or for other purposes , even if the short-term investments have not yet reached maturity . as a result , the company classifies these investments , including securities with maturities beyond 12 months , as current assets in the accompanying consolidated balance sheets . gains or losses realized from the sale of securities are reclassified out of other comprehensive income ( loss ) into earnings using the specific identification method . concentrations of credit risk —accounts receivable and cash and cash equivalents subject the company to its highest potential concentrations of credit risk . although the company deposits its cash and cash equivalents with multiple financial institutions , the company 's deposits may exceed federally insured limits . the company has not experienced any losses on cash and cash equivalent accounts to date , and management believes the company is not exposed to any significant credit risk related to cash and cash equivalents . the company sells services to clients without requiring collateral , based on an evaluation of the client 's financial condition . exposure to losses on receivables is principally dependent on each client 's financial condition . the company monitors its exposure for credit losses and maintains allowances for anticipated losses . f-10 inovalon holdings , inc. notes to consolidated financial statements ( continued ) 2. summary of significant accounting policies ( in thousands , except years ) ( continued ) revenue from significant clients , those representing 10 % or more of total revenue for the respective periods , is summarized as follows : replace_table_token_21_th * less than 10 % accounts receivable from significant clients , those representing 10 % or more of total accounts receivable for the dates noted , is summarized below : december 31 , accounts receivable : 2016 2015 client a 14 % * client b * 10 % * less than 10 % accounts receivable and allowances —accounts receivable consists primarily of amounts due to the company from its normal business activities . story_separator_special_tag 2015 compared with 2014. revenue during the year ended december 31 , 2015 increased by approximately $ 75.7 million , or 21 % , as compared with the year ended december 31 , 2014. the increase was primarily attributable to an increase in revenue from new clients of $ 36.0 million along with a net increase of $ 39.7 million from existing clients . revenue for 2015 includes $ 17.5 million related to the acquisition of avalere . cost of revenue 2016 compared with 2015. during the year ended december 31 , 2016 , cost of revenue increased by approximately $ 13.0 million , or 9 % , compared with the year ended december 31 , 2015. approximately $ 8.9 million of the increase was driven by the composition of a greater volume of data-driven intervention platform services as a percentage of revenue and approximately $ 4.1 million 60 was attributable to the acquisition of creehan . cost of revenue as a percentage of revenue was 37 % , and 33 % , for the years ended december 31 , 2016 and 2015 , respectively . 2015 compared with 2014. in 2015 , cost of revenue increased by approximately $ 33.4 million , or 30 % , compared with the year ended december 31 , 2014. the increase in cost of revenue was primarily due to the corresponding increase in revenue of $ 75.7 million or 21 % , during the period and also resulted from an increase in employee-related expenses related partially to the newly acquired data-driven advisory services service line and a greater volume of data-driven intervention platform services as a percentage of total revenue . cost of revenue as a percentage of revenue was 33 % in 2015 compared to 31 % in 2014. sales and marketing 2016 compared with 2015. during the year ended december 31 , 2016 , sales and marketing expenses increased by approximately $ 12.4 million , or 84 % , compared with the year ended december 31 , 2015. approximately $ 10.5 million of the increase was directly attributable to salaries and benefits for employees that was driven by our investment in new sales personnel to focus on adding new clients and capturing an increased amount of the market opportunity . 2015 compared with 2014. in 2015 , sales and marketing expenses increased by approximately $ 7.5 million , or 106 % , compared to 2014. the increase was primarily attributable to increased employee related expenses of approximately $ 6.5 million , and marketing program spend of approximately $ 1.0 million , both of which was driven by our investment in additional sales personnel to focus on adding new clients and capturing an increased amount of our market opportunity , as well as the addition of the sales and marketing personnel acquired with avalere . research and development 2016 compared with 2015. during the year ended december 31 , 2016 , research and development expense increased by approximately $ 6.8 million , or 31 % , compared with the year ended december 31 , 2015. approximately $ 6.3 million of the increase was attributable to growth in employee-related expenses necessary to support our on-going investment in innovation and platform development . 2015 compared with 2014. in 2015 , research and development expenses decreased $ 2.8 million as a result of incremental capitalization of internally developed software efforts related to our on-going investment in platform and product innovation , and was partially offset by an increase of $ 2.0 million , which includes $ 1.0 million attributable to stock based compensation expense , attributable to an increase in employee related expenses and professional fees . general and administrative 2016 compared with 2015. during the year ended december 31 , 2016 , general and administrative expenses increased by approximately $ 22.2 million , or 19 % , compared with the year ended december 31 , 2015. the increase was primarily attributable to our expansion , driven by the acquisitions of avalere during september 2015 and creehan during october 2016 , resulting in additional employee related expenses of approximately $ 11.1 million , combined with additional post-acquisition contingent consideration expenses of approximately $ 5.5 million related to the avalere and creehan acquisitions , and approximately $ 4.3 million of increased growth-related infrastructure expenses . 2015 compared with 2014. in 2015 , general and administrative expense increased by approximately $ 26.5 million , or 30 % , compared with 2014. throughout the second half of 2014 and throughout 2015 , we increased our investment in incremental personnel to support our growth and our transition from a private to a public company . our investment resulted in an increase in employee related costs of $ 22.4 million , which includes an increase of approximately $ 3.1 million related to stock-based 61 compensation expense and an increase of $ 7.5 million related to our growth and expansion . in addition , general and administrative expenses for 2015 includes incremental expenses that are not comparable to the prior year , comprised of $ 1.5 million for acquisition-related transaction costs , $ 2.9 million of post-acquisition contingent consideration expense related to the acquisition of avalere , and $ 0.7 million for employer taxes related to stock option awards exercised by employees . the increases in general and administrative expenses for 2015 were partially offset by capitalization of internal-use software development costs of $ 1.0 million compared to the prior period . depreciation and amortization 2016 compared with 2015. during the year ended december 31 , 2016 , depreciation and amortization expense increased by approximately $ 14.7 million , or 65 % , compared with the year ended december 31 , 2015. the increase is primarily attributable to approximately $ 7.3 million of incremental amortization of capitalized software , approximately $ 6.2 million of amortization of intangible assets related to the acquisitions of avalere and creehan , and approximately $ 0.8 million of depreciation of other assets acquired with avalere and

investing cash flow activities we make investments in innovation , including research and development expense , capital software development costs , and research and development infrastructure investments , on a recurring basis . we expect our investment in innovation to increase in the foreseeable future to support our continued growth and new service offerings . 2016 compared with 2015. cash provided by investing activities during the year ended december 31 , 2016 was approximately $ 39.8 million compared with cash used in investing activities of approximately $ 768.3 million during the year ended december 31 , 2015. the cash provided by investing activities was primarily due to proceeds generated from approximately $ 167.3 million of sales and maturities of available-for-sale securities , net of purchases . the cash provided by investing activities was partially offset by approximately $ 88.5 million of our investment in creehan , ( net of cash acquired of approximately $ 0.9 million ) , and $ 39.0 million of our investments in property and equipment and capitalized software . 2015 compared with 2014. cash used in investing activities in the year ended december 31 , 2015 was approximately $ 768.3 million , an increase in cash outflow of approximately $ 745.7 million compared to the year ended december 31 , 2014. the increase in cash outflow primarily resulted from purchases of available-for-sale short term investments , net of sales and maturities of $ 619.4 million and $ 122.6 million related to the acquisition of avalere , net of cash acquired of $ 4.0 million , and investments in property and equipment as well as capitalized software of approximately $ 26.4 million . 66 financing cash flow activities our primary financing activities have consisted of private purchases and sales of common stock , credit facility borrowings , dividend distributions , and stock option exercises by employees . 2016 compared with 2015. cash used in financing activities during the year ended december 31 , 2016 was approximately $ 119.0 million , compared with cash provided by financing activities of approximately $ 652.2 million during the year ended december 31 , 2015. the cash used in financing activities during the year ended december 31 , 2016 was primarily comprised of approximately $ 106.2 million related to share repurchases , approximately $ 15.0 million for the repayment of credit facility

cost of services consists primarily of data acquisition costs , royalty fees , hardware and software expense associated with transaction processing systems , telecommunication and computer network expense and occupancy costs associated with facilities where 47 these functions are performed by employees . cost of services also includes client service costs , which include personnel costs to collect , maintain and update our proprietary databases , to develop and maintain software application platforms and to provide consumer and client call center support . selling , general and administrative expenses selling , general and administrative expenses consist primarily of personnel-related costs , selling costs , corporate costs , fees for professional and consulting services , advertising costs , uncollectible accounts and other costs of administration such as marketing , human resources , finance , legal and administrative roles . income taxes we account for income taxes under the asset and liability method , whereby we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as expected benefits of utilizing net operating loss and credit carryforwards . we measure deferred tax assets and liabilities using enacted tax rates we expect to apply in the years in which we expect to recover or settle those temporary differences . we recognize in income the effect of a change in tax rates on deferred tax assets and liabilities in the period that includes the enactment date . we recognize the effect of income tax positions only if sustaining those positions is more likely than not . we reflect changes in recognition or measurement of uncertain tax positions in the period in which a change in judgment occurs . we recognize interest and penalties , if any , related to uncertain tax positions within income tax expense . accrued interest and penalties are included within the related tax liability line in the accompanying consolidated balance sheet . we evaluate the need to establish a valuation allowance based upon expected levels of taxable income , future reversals of existing temporary differences , tax planning strategies and recent financial operations . we establish a valuation allowance to reduce deferred tax assets to the extent it is more-likely-than-not that some or all of the deferred tax assets will not be realized . comprehensive income comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners . specifically , foreign currency translation adjustments , amounts related to supplemental benefit plans , unrealized gains and losses on interest rate swap transactions and unrealized gains and losses on investment are recorded in other comprehensive loss . the following table shows the components of accumulated other comprehensive loss , net of taxes as of december 31 , 2017 and 2016 : replace_table_token_14_th share-based compensation our primary means of providing stock-based compensation is granting restricted stock units ( “ rsus ” ) and performance-based restricted stock units ( “ pbrsus ” ) . the fair value of any grant is based on the market value of our shares on the date of grant and is generally recognized as compensation expense over the vesting period . we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award . the cost is recognized over the period during which an employee is required to provide services in exchange for the award . we utilize the monte-carlo simulation method to estimate the fair value for any pbrsus granted and the black-scholes model to estimate the fair value of stock options . we apply the straight-line single option method of attributing the value of stock-based compensation expense . as stock-based compensation expense recognized in results of operations is based on awards ultimately 48 expected to vest , stock-based compensation expense has been reduced for forfeitures . forfeitures are recognized at the time they occur . we apply the long-form method for determining the pool of windfall tax benefits . in addition , we have an employee stock purchase plan that allows eligible employees to purchase common stock of the company at 85.0 % of the closing price on the first or last day of each quarter , whichever is lower . we recognize an expense in the amount equal to the estimated fair value of the discount . see note 13 –share-based compensation for additional information . foreign currency the functional currencies of our foreign subsidiaries are their respective local currencies . the financial statements of the foreign subsidiaries are translated into u.s. dollars for consolidation as follows : ( i ) assets and liabilities at the exchange rate as of the balance sheet date , ( ii ) stockholders ' equity at the historical rates of exchange and ( iii ) income and expense amounts at average rates prevailing throughout the period . translation adjustments resulting from the translation of the subsidiaries ' accounts are included in “ accumulated other comprehensive loss , ” a separate component of stockholders ' equity . gains and losses resulting from foreign currency transactions are included within “ selling , general and administrative expenses ” and are not material to the results of operations . earnings/ ( loss ) per share basic earnings/ ( loss ) per share is computed by dividing net income/ ( loss ) available to our stockholders by the weighted-average number of common shares outstanding . the computation of diluted earnings per share is similar to the computation of basic earnings per share , except that the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if dilutive stock options had been exercised and rsus and pbrsus were vested . story_separator_special_tag net cash provided by financing activities during 2016 was primarily comprised of proceeds from debt issuance of $ 962.0 million and net settlement from stock-based compensation related transactions of $ 6.7 million , partially offset by repayment of long-term debt of $ 710.0 million , share repurchases of $ 195.0 million , debt extinguishment premiums of $ 16.3 million and debt issuance costs of $ 6.3 million . net cash used in financing activities during 2015 was primarily comprised of share repurchases of $ 97.4 million , repayment of long-term debt of $ 82.9 million and debt issuance costs of $ 6.5 million , partially offset by proceeds from debt issuance of $ 114.4 million and net settlement from stock-based compensation related transactions of $ 13.9 million . financing and financing capacity we had total debt outstanding of $ 1.8 billion and $ 1.6 billion as of december 31 , 2017 and 2016 , respectively . our significant debt instruments are described below . credit agreement in august 2017 , we amended and restated our credit agreement . the credit agreement provides for a $ 1.8 billion term facility and a $ 700.0 million revolving facility . the term facility matures and the revolving facility expires in august 2022. the credit agreement also provides for the ability to increase the term facility and or revolving facility by up to $ 100.0 million in the aggregate ; however , the lenders are not obligated to do so . for a detailed description of our credit agreement , see note 8 - long-term debt of our consolidated financial statements . as of december 31 , 2017 , we had borrowing capacity under the revolving facility of $ 700.0 million and were in compliance with the financial and restrictive covenants of the credit agreement . see note 8 -long term debt for further discussion . the credit agreement provides that loans under the term facility shall be repaid in equal quarterly installments , commencing on the last day of the next full fiscal quarter and continuing on each three-month anniversary thereafter . the loans under the term facility shall be repaid in an amount equal to $ 22.5 million for the first eight quarterly payments and in an amount equal to $ 45.0 million for each quarterly payment thereafter . the outstanding balance of the term loans will be due in august 2022. the credit agreement contains the following financial maintenance covenants : ( i ) a maximum total leverage ratio not to exceed 4.50 : 1.00 ; ( stepped down to 4.25 : 1.00 starting with the fiscal quarter ending on september 30 , 2018 , with a further step down to 4.00 : 1.00 starting with the fiscal quarter ending on september 30 , 2019 , with an additional step down to 3.75 : 1.00 starting with the fiscal quarter ending on september 30 , 2020 , and a final step down to 3.50 : 1.00 starting with the fiscal quarter ending on september 30 , 2021 ) and ( ii ) a minimum interest coverage ratio of at least 3.50 : 1.00 . at december 31 , 2017 , we had borrowing capacity of $ 700.0 million under the revolving facility and we were in compliance with all of our covenants under the credit agreement . however , if we have a significant increase in our outstanding debt or if our covenant ebitda decreases significantly , we may be unable to incur additional indebtedness , and the lenders under the credit agreement may be unwilling to permit us to amend the financial or restrictive covenants described above to provide additional flexibility . as of december 31 , 2017 and december 31 , 2016 , we recorded $ 1.0 million and $ 0.8 million , respectively , of accrued interest expense . interest rate swaps we have entered into amortizing interest rate swaps ( `` swaps `` ) in order to convert a portion of our interest rate exposure on the term facility floating rate borrowings from variable to fixed . in june 2017 , we entered into swaps which become effective in march 2018 and terminate in march 2021. the swaps entered in june 2017 are for an initial notional balance of $ 275.0 million , with a notional step up of $ 200.0 million in march 2019 , and a fixed interest rate of 1.83 % . in august 2016 , we entered into swaps which became effective in september 2016 and terminate in april 2020. the swaps entered in august 2016 are for an initial notional balance of $ 500.0 million , with a fixed interest rate of 1.03 % , and amortize quarterly by $ 25.0 million through december 2018 , with a step up in the notional balance of $ 100.0 million in march 2019 and 30 continued quarterly amortization of $ 25.0 million through april 2020. in may 2014 , we entered into swaps which became effective in december 2014 and terminate in march 2019. the swaps entered in may 2014 are for an initial notional balance of $ 500.0 million , with a fixed interest rate of 1.57 % , and amortize quarterly by $ 12.5 million through december 31 , 2017 and $ 25.0 million through december 31 , 2018. liquidity and capital strategy we expect that cash flows from operations and current cash balances , together with available borrowings under our revolving facility , will be sufficient to meet operating requirements through the next twelve months . cash available from operations , however , could be affected by any general economic downturn or any decline or adverse changes in our business such as a loss of clients , competitive pressures or other significant change in business environment . we strive to pursue a balanced approach to capital allocation and will consider the repurchase of common shares , the retirement of outstanding debt , investments and the pursuit of strategic acquisitions on an

our uws segment revenues increased by $ 431.5 million , or 52.3 % , when compared to 2015 . acquisition activity contributed $ 384.8 million in 2016 . excluding acquisition activity , the increase of $ 46.7 million was primarily due to higher mortgage loan origination volumes and market-share gains , which increased our revenues from property tax solutions by $ 37.5 million , credit solutions by $ 36.2 million and flood data solutions by $ 7.5 million , partially offset by lower valuation solutions of $ 3.5 million and lower other revenues of $ 31.0 million due to certain business line exits and market volume decreases . our corporate and eliminations revenues were comprised of intercompany revenue eliminations between our operating segments . cost of services ( exclusive of depreciation and amortization ) our consolidated cost of services was $ 1.0 billion for the year ended december 31 , 2016 , an increase of $ 267.4 million , or 34.4 % , when compared to 2015 . acquisition activity contributed an increase of $ 272.5 million in 2017. excluding acquisition activity , the decrease of $ 5.1 million was primarily due to lower costs of $ 26.0 million resulting from our on-going operational efficiency programs and favorable product mix , partially offset by higher costs of $ 20.9 million associated with higher mortgage origination volumes . 26 selling , general and administrative expense our consolidated selling , general and administrative expenses was $ 458.1 million for the year ended december 31 , 2016 , an increase of $ 60.3 million , or 15.2 % , when compared to 2015 . acquisition activity contributed an increase of $ 74.7 million in 2017. excluding acquisition activity , the decrease of $ 14.4 million was primarily due to our on-going operational efficiency programs which resulted in lower compensation-related expenses of $ 20.4 million and lower professional fees of $ 18.4 million , partially offset by higher external services costs of $ 17.1 million ( including cyber-security and compliance costs ) , higher provision for doubtful accounts of $ 5.1 million and other of $ 2.2 million . depreciation and amortization our consolidated depreciation and amortization expense was $ 172.6 million for the year ended december 31 , 2016

10.1 * composite form of amended and restated participation agreement , dated as of june 1 , 2001 , between nelnet , inc. ( subsequently renamed national education loan network , inc. ) and union bank and trust company , as amended by the first amendment thereto dated as of december 19 , 2001 through the cancellation of the fifteenth amendment thereto dated as of march 16 , 2011 ( such participation agreement and each amendment through the cancellation of the fifteenth amendment thereto have been previously filed as set forth in the exhibit index for the registrant 's annual report on form 10-k for the year ended december 31 , 2012 , and are incorporated by reference herein ) . 10.2 sixteenth amendment of amended and restated participation agreement , dated as of march 23 , 2012 , by and between union bank and trust company and national education loan network , inc. , filed as exhibit 10.3 to the registrant 's quarterly report on form 10-q for the quarter ended march 31 , 2012 and incorporated by reference herein . 10.3 guaranteed purchase agreement , dated as of march 19 , 2001 , by and between nelnet , inc. ( subsequently renamed national education loan network , inc. ) and union bank and trust company , filed on september 25 , 2003 as exhibit 10.36 to the registrant 's registration statement on form s-1 ( registration no . 333-108070 ) and incorporated by reference herein . 10.4 first amendment of guaranteed purchase agreement , dated as of february 1 , 2002 , by and between nelnet , inc. ( subsequently renamed national education loan network , inc. ) and union bank and trust company , filed on september 25 , 2003 as exhibit 10.37 to the registrant 's registration statement on form s-1 ( registration no . 333-108070 ) and incorporated by reference herein . 10.5 second amendment of guaranteed purchase agreement , dated as of december 1 , 2002 , by and between nelnet , inc. ( f/k/a/ nelnet , inc. ) ( subsequently renamed national education loan network , inc. ) and union bank and trust company , filed on september 25 , 2003 as exhibit 10.38 to the registrant 's registration statement on form s-1 ( registration no . 333-108070 ) and incorporated by reference herein . 10.6 guaranteed purchase agreement , dated as of september 1 , 2010 , by and between nelnet , inc. and union bank and trust company , filed as exhibit 10.3 to the registrant 's quarterly report on form 10-q for the quarter ended september 30 , 2010 and incorporated by reference herein . 10.7 first amendment of guaranteed purchase agreement , dated as of march 22 , 2011 , by and between nelnet , inc. and union bank and trust company , filed as exhibit 10.2 to the registrant 's quarterly report on form 10-q for the quarter ended march 31 , 2011 and incorporated by reference herein . 10.8 amendment to application and agreement for standby letter of credit , loan purchase agreements , and standby student loan purchase agreements , dated effective october 21 , 2003 , by and among national education loan network , inc. , nelnet , inc. , nelnet education loan funding , inc. , union bank and trust company , and bank of america , n.a . , filed on october 27 , 2003 as exhibit 10.94 to the registrant 's registration statement on form s-1 ( registration no . 333-108070 ) and incorporated by reference herein . 10.9 february 2004 amendment to application and agreement for standby letter of credit , loan purchase agreements and standby student loan purchase agreements , dated as of february 20 , 2004 , among national education loan network , inc. , nelnet , inc. , nelnet education loan funding , inc. , union bank and trust company , and bank of america , n.a . , filed as exhibit 10.62 to the registrant 's annual report on form 10-k for the year ended december 31 , 2003 and incorporated by reference herein . 10.10 november 2003 amendment to application and agreement for standby letter of credit , loan purchase agreements , and standby student loan purchase agreements , dated effective as of november 20 , 2003 , by and among national education loan network , inc. , nelnet , inc. , nelnet education loan funding , inc. , union bank and trust company , and bank of america , n.a . , filed as exhibit 10.63 to the registrant 's annual report on form 10-k for the year ended december 31 , 2003 and incorporated by reference herein . 10.11 december 2003 amendment to application and agreement for standby letter of credit , loan purchase agreements , and standby student loan purchase agreements , dated effective as of december 19 , 2003 , by and among national education loan network , inc , nelnet , inc. , nelnet education loan funding , inc. , union bank and trust company , and bank of america , n.a . , filed as exhibit 10.64 to the registrant 's annual report on form 10-k for the year ended december 31 , 2003 and incorporated by reference herein . 10.12 april 2004 amendment to application and agreement for standby letter of credit , loan purchase agreements , and standby student loan purchase agreements , dated effective april 15 , 2004 , among bank of america , n.a . , nelnet education loan funding , inc. , national education loan network , inc , nelnet , inc. , and union bank and trust company , filed as exhibit 10.67 to the registrant 's quarterly report on form 10-q for the quarter ended march 31 , 2004 and incorporated by reference herein . story_separator_special_tag the $ 2.17 billion includes approximately $ 432.5 million 41 ( as of december 31 , 2013 ) of overcollateralization included in the asset-backed securitizations . these excess net asset positions are reflected variously in the following balances on the consolidated balance sheet : `` student loans receivable , `` `` restricted cash and investments , `` and `` accrued interest receivable . `` the forecasted cash flow presented below includes all loans funded in asset-backed securitizations as of december 31 , 2013 . as of december 31 , 2013 , the company had $ 24.6 billion of loans included in asset-backed securitizations , which represented 94.6 percent of its total ffelp student loan portfolio . the forecasted cash flow does not include cash flows that the company expects to receive related to loans funded in its warehouse facilities or loans acquired subsequent to december 31 , 2013 . the company uses various assumptions , including prepayments and future interest rates , when preparing its cash flow forecast . these assumptions are further discussed below . prepayments : the primary variable in establishing a life of loan estimate is the level and timing of prepayments . prepayment rates equal the amount of loans that prepay annually as a percentage of the beginning of period balance , net of scheduled principal payments . a number of factors can affect estimated prepayment rates , including the level of loan consolidation activity , borrower default rates , and utilization of ffel program debt management options such as income-based repayment , deferments , and forbearance . should any of these factors change , management may revise its assumptions , which in turn would impact the projected future cash flow . the company 's cash flow forecast above assumes prepayment rates that are generally consistent with those utilized in the company 's recent asset-backed securities transactions . if management used a prepayment rate assumption two times greater than what was used to forecast the cash flow , the cash flow forecast would be reduced by approximately $ 240 million to $ 300 million . interest rates : the company funds the majority of its student loans with three-month libor indexed floating rate securities . meanwhile , the interest earned on the company 's student loan assets is indexed primarily to a one-month libor rate . the different interest rate characteristics of the company 's loan assets and liabilities funding these assets result in basis risk . the company 's cash flow forecast assumes three-month libor will exceed one-month libor by 12 basis points for the life of the portfolio , which approximates the historical relationship between these indices . if the forecast is computed assuming a spread of 24 basis points between three-month and one-month libor for the life of the portfolio , the cash flow forecast would be reduced by approximately $ 100 million to $ 140 million . the company uses the current forward interest rate yield curve to forecast cash flows . a change in the forward interest rate curve would impact the future cash flows generated from the portfolio . an increase in future interest rates will reduce the amount of fixed rate floor income the company is currently receiving . the company attempts to mitigate the impact of a rise in short-term rates by hedging interest rate risks . as of december 31 , 2013 , the net fair value of the company 's interest rate derivatives used to hedge loans earning fixed rate floor income was a net liability of $ 8.7 million . see item 7a , `` quantitative and qualitative disclosures about market risk — interest rate risk . `` 42 ffelp warehouse facilities the company funds a portion of its ffelp loan acquisitions using its ffelp warehouse facilities . student loan warehousing allows the company to buy and manage student loans prior to transferring them into more permanent financing arrangements . as of december 31 , 2013 , the company had three ffelp warehouse facilities with an aggregate maximum financing amount available of $ 1.8 billion , of which $ 1.4 billion was outstanding and $ 0.4 billion was available for additional funding . one of the warehouse facilities provides for formula-based advance rates , depending on ffelp loan type , up to a maximum of the principal and interest of loans financed . the other two ffelp warehouse facilities have static advance rates that require initial equity for loan funding , but do not require increased equity based in market movements . as of december 31 , 2013 , the company had $ 88.5 million advanced as equity support on these facilities . for further discussion of the company 's ffelp warehouse facilities outstanding at december 31 , 2013 , see note 4 of the notes to consolidated financial statements included in this report . upon termination or expiration of the warehouse facilities , the company would expect to access the securitization market , obtain replacement warehouse facilities , use operating cash , consider the sale of assets , or transfer collateral to satisfy any remaining obligations . other uses of liquidity effective july 1 , 2010 , the reconciliation act of 2010 prohibits new loan originations under the ffel program and requires that all new federal loan originations be made through the federal direct loan program . as a result , the company no longer originates new ffelp loans , but continues to acquire ffelp loan portfolios from third parties and believes additional loan purchase opportunities exist . the company plans to fund additional ffelp student loan acquisitions using current cash and investments ; its union bank participation agreement ( as described below ) ; using its ffelp warehouse facilities ( as described above ) ; and continuing to access the asset-backed securities market . union bank participation agreement the company maintains an agreement with union bank , as trustee for various grantor trusts , under which union bank has agreed to purchase from

in addition , the payment of dividends is subject to the terms of the company 's outstanding hybrid securities , which generally provide that if the company defers interest payments on those securities it can not pay dividends on its capital stock . off-balance sheet arrangements the company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition , revenues or expenses , results of operations , liquidity , capital expenditures , or capital resources that are material to investors . contractual obligations the company 's contractual obligations were as follows : replace_table_token_25_th ( a ) amounts exclude interest as substantially all bonds and notes payable carry variable rates of interest . as of december 31 , 2013 , the company had a reserve of $ 12.4 million for uncertain income tax positions ( including the federal benefit received from state positions ) . this obligation is not included in the above table as the timing and resolution of the income tax positions can not be reasonably estimated at this time . as of december 31 , 2013 , the company had participated a cumulative amount of $ 120.9 million ( par value ) of non-federally insured loans to third parties . loans participated under these agreements have been accounted for by the company as loan sales . accordingly , the participation interests sold are not included on the company 's consolidated balance sheets . per the terms of the servicing agreements , the company 's servicing operations are obligated to repurchase loans subject to the participation interests in the event such loans become 60 or 90 days delinquent . in addition , on january 13 , 2011 , the company sold a portfolio of non-federally insured loans for proceeds of $ 91.3 million ( 100 % par value ) . the company retained credit risk related to this portfolio and will pay cash to purchase back any loans which become 60 days delinquent . as of december 31 , 2013 , the outstanding balance of loans related to this loan sale was $ 63.6 million ( par value ) . as of december 31 , 2013 , the company has $ 16.1 million accrued related to these repurchase obligations which is included in `` other liabilities '' in the company 's consolidated balance sheet . these obligations are not included in the above table . critical accounting policies this management 's discussion and analysis of financial condition and results

the estimate of proven and probable mineral reserves , the related present value of estimated future cash flows , and useful lives of plant assets can affect various other items including depletion , the net carrying value of intrepid 's mineral properties , the useful lives of related property , plant , and equipment , estimates associated with asset retirement obligations , and depreciation expenses . specific to income tax items , we experience fluctuations in the valuation of the deferred tax assets and liabilities due to changing state income tax rates and the blend of state tax rates . 73 revenue recognition —revenue is recognized when evidence of an arrangement exists , risks and rewards of ownership have been transferred to customers , which is generally when title passes , the selling price is fixed and determinable , and collection is reasonably assured . title passes at the designated shipping point for the majority of sales , but , in a few cases , title passes at the delivery destination . the shipping point may be the plant , a distribution warehouse , a customer warehouse , or a port . title passes for some international shipments upon payment by the purchaser ; however , revenue is not recognized for these transactions until shipment because the risks and rewards of ownership have not transferred pursuant to a contractual arrangement . prices are generally set at the time of , or prior to , shipment . in cases where the final price is determined upon resale of the product by the customer , revenue is deferred until the final sales price is known . sales are reported on a gross basis . intrepid quotes prices to customers both on a delivered basis and on the basis of pick-up at intrepid 's plants and warehouses . when a sale occurs on a delivered basis , intrepid incurs and , in turn , bills the customer and records as gross revenue the product sales value , freight , packaging , and certain other distribution costs . many customers , however , arrange and pay for these costs directly and , in these situations , only the product sales are included in gross revenues . by-product credits —when by-product inventories are sold , intrepid records the sale of by-products as a credit to cost of goods sold . inventory and long-term parts inventory —inventory consists of product and by-product stocks that are ready for sale ; mined ore ; potash in evaporation ponds , which is considered work-in-process ; and parts and supplies inventory . product and by-product inventory cost is determined using the lower of weighted average cost or estimated net realizable value and includes direct costs , maintenance , operational overhead , depreciation , depletion , and equipment lease costs applicable to the production process . direct costs , maintenance , and operational overhead include labor and associated benefits . intrepid evaluates its production levels and costs to determine if any should be deemed abnormal and therefore excluded from inventory costs and expensed directly during the applicable period . the assessment of normal production levels is judgmental and is unique to each period . intrepid models normal production levels and evaluates historical ranges of production by operating plant in assessing what is deemed to be normal . parts inventory , including critical spares , that is not expected to be utilized within a period of one year is classified as non-current . parts and supply inventory cost is determined using the lower of average acquisition cost or estimated replacement cost . detailed reviews are performed related to the net realizable value of parts inventory , giving consideration to quality , slow-moving items , obsolescence , excessive levels , and other factors . parts inventories that have not turned over in more than a year , excluding parts classified as critical spares , are reviewed for obsolescence and , if deemed appropriate , are included in the determination of an allowance for obsolescence . property , plant , and equipment —property , plant , and equipment are stated at historical cost . expenditures for property , plant , and equipment relating to new assets or improvements are capitalized , provided the expenditure extends the useful life of an asset or extends the asset 's functionality . property , plant , and equipment are depreciated under the straight-line method using estimated useful lives . no depreciation is taken on assets classified as construction in progress until the asset is placed into service . gains and losses are recorded upon retirement , sale , or disposal of assets . maintenance and repair costs are recognized as period costs when incurred . capitalized interest , to the extent of debt outstanding , is calculated and capitalized on assets that are being constructed , drilled , or built or that are otherwise classified as construction in progress . recoverability of long-lived assets —intrepid evaluates its long-lived assets for impairment when events or changes in circumstances indicate that the related carrying amount may not be recoverable . an impairment is considered to exist if an asset 's total estimated net future cash flows on an undiscounted basis are less than the carrying amount of the related asset . an impairment loss is measured and recorded based on the discounted estimated future cash flows . changes in significant assumptions underlying future cash flow estimates or fair values of assets may have a material effect on our financial position and results of operations . mineral properties and development costs —mineral properties and development costs , which are referred to collectively as mineral properties , include acquisition costs , the cost of drilling wells , and the cost of other development work , all of which are capitalized . depletion of mineral properties is calculated using the units-of-production method over the estimated life of the relevant ore body . story_separator_special_tag we view net sales , which are gross sales less freight costs , as the key performance indicator of our revenue as it conveys the net sales price of the product that we realize . we manage our sales and marketing operations centrally and we work to achieve the highest average net realized sales price we can by evaluating the product needs of our customers and associated logistics and then determining which of our production facilities can best satisfy these needs . the volume of product we sell is determined by demand for our products and by our production capabilities . we intend to operate our facilities at full production levels , which provide the greatest operating efficiencies . by having adequate warehouse capacity , we can maintain production levels during periods of fluctuating product demand . cost of goods sold our cost of goods sold reflects the costs to produce our potash and trio ® products , less credits generated from the sale of our by-products . many of our production costs are largely fixed and , consequently , our costs of sales per ton on a facility-by-facility basis tend to move inversely with the number of tons we produce , within the context of normal production levels . our principal production costs include labor and employee benefits , maintenance materials , contract labor , and materials for operating or maintenance projects , natural gas , electricity , operating supplies , chemicals , depreciation and depletion , royalties , and leasing costs . there are elements of our cost structure associated with contract labor , consumable operating supplies , and reagents and royalties that are variable , which make up a smaller component of our cost base . our periodic production costs and costs of goods sold will not necessarily match one another from period-to-period based on the fluctuation of inventory , sales , and production levels at our facilities . our production costs per ton are also impacted when our production levels change , due to factors such as changes in the grade of ore delivered to the plant , levels of mine development , plant operating performance , downtime , and annual maintenance turnarounds . we expect that our labor and contract labor costs in carlsbad , new mexico , will continue to be influenced most directly by the demand for labor in the local carlsbad , new mexico , region where we compete for labor with the potash , oil and gas , and nuclear waste storage industries . additionally , the east mine has a complex mineralogy with a mixed ore body comprised of potash and langbeinite . this complex ore is processed through a singular product flow at the surface facility . the specific grade , volume , and characterization of the ore that is mined at any particular time influences the amount of tons of potash and langbeinite ultimately produced from the facility , which affects our production costs per ton for both products and affects our quarter-to-quarter results . we pay royalties to federal , state , and private lessors under our mineral leases . these payments typically equal a percentage of net sales of minerals extracted and sold under the applicable lease . in some cases , federal royalties for potash are 46 paid on a sliding scale that varies with the grade of ore extracted . our average royalty rate was 3.6 % , 3.9 % and 3.7 % in 2013 , 2012 and 2011. we expect that future average royalty rates will increase modestly from rates experienced in 2013 , as certain new mexico mineral leases are currently being renewed at a fixed royalty rate of 5.0 % . income taxes we are a subchapter c corporation and , therefore , are subject to federal and state income taxes on our taxable income . our effective tax rate for the years ended december 31 , 2013 , 2012 , and 2011 was 41.5 % , 36.1 % , and 37.6 % , respectively . our effective income tax rates are impacted primarily by changes in the underlying tax rates in jurisdictions in which we are subject to income tax and permanent differences between book and tax income for the period , including the benefit associated with the estimated effect of the depletion and domestic production activities deduction and research and development credits . our federal and state income tax returns are subject to examination by federal and state tax authorities . during the year ended december 31 , 2013 , we recognized income tax expense of $ 15.8 million compared with income tax expense of $ 49.5 million and $ 65.9 million during the years ended december 31 , 2012 and 2011 , respectively . total tax expense for the year ended december 31 , 2013 , was comprised of $ 14.3 million of current income tax benefit and $ 30.1 million of deferred income tax expense . the current income tax benefit in 2013 was derived from the creation of a net operating loss . we expect to carry back our net operating loss to 2011 and 2012 , with the remaining amount carried forward as a deferred tax asset . total tax expense for the year ended december 31 , 2012 , was comprised of $ 11.5 million of current income tax expense and $ 38.0 million of deferred income tax expense . total tax expense for the year ended december 31 , 2011 , was comprised of $ 16.9 million of current income tax expense and $ 49.0 million of deferred income tax expense . our current tax expense for each of these periods was less than our total tax expense in large part due to the impact of accelerated tax bonus depreciation and the utilization of percentage depletion . we evaluate our deferred tax assets and liabilities each reporting period using the enacted tax rates expected to apply to taxable income in the periods in

in addition , we experienced an increase in trade and other receivables , which is related to a refundable employment-related credit in the state of new mexico . investing activities total cash used in investing activities increased $ 76.3 million in 2013 compared with the comparable period in 2012 as a result of lower proceeds from the sale of investments , and a slight increase in capital investments . the decline in proceeds from investments was the result of the overall lower level of investments as the investment portfolio was utilized to fund our capital projects . in 2013 , we also received $ 6.1 million of proceeds from the sale of assets , most of which were received as we entered into a sale leaseback transaction for certain mining equipment purchased earlier in 2013. total cash used in investing activities decreased in 2012 compared to 2011 due to an increase in the proceeds from the sale of investments and a reduction in purchases of investments . these net proceeds were used to fund our increased activity associated with investments in property , plant , and equipment , mineral properties and development costs of $ 246.4 million in 2012 , and the special dividend paid in december 2012 . the level of capital investment in 2012 increased from the $ 137.1 million invested in 2011 . financing activities < div

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 or other factors unrelated to the project . other real estate 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 repayment of these loans may be dependent upon the profitability and cash flows of the business or project . commercial and industrial loans carry risks associated with the successful operation of a business because repayment of these loans may be dependent upon the profitability and cash flows of the business . 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 reliability . consumer and other loans carry risk associated with the continued creditworthiness of the borrower and the value of the collateral , if any . these loans are typically either unsecured or secured by rapidly depreciating assets such as automobiles . they are also likely to be immediately and adversely affected by job loss , divorce , illness , personal bankruptcy , or other changes in circumstances . consumer and other loans also include purchased consumer loans which could have been originated outside of the company 's market area . the allowance for loan losses 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 , fair value of collateral less estimated costs to sell , or 58 observable market price of the impaired loan is lower than the carrying value of that loan . for collateral dependent loans , an updated appraisal is 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 like properties or general market conditions among other considerations . the general component covers loans that are not considered impaired and is based on historical loss experience adjusted for qualitative factors . the historical loss experience is calculated by loan type and uses an average loss rate during the preceding twelve quarters . the qualitative factors are assigned by management based on delinquencies and asset quality , national and local economic trends , effects of the changes in the value of underlying collateral , trends in volume and nature of loans , effects of changes in the lending policy , the experience and depth of management , concentrations of credit , quality of the loan review system , and the effect of external factors such as competition and regulatory requirements . the factors assigned differ by loan type . the general allowance estimates losses whose impact on the portfolio has yet to be recognized by a specific allowance . allowance factors and the overall size of the allowance may change from period to period based on management 's assessment of the above described factors and the relative weights given to each factor . premises and equipment land is carried at cost . premises and equipment are stated at cost , less accumulated depreciation and amortization . premises and equipment are depreciated over their estimated useful lives ranging from three years to forty years ; leasehold improvements are amortized over the lives of the respective leases or the estimated useful life of the leasehold improvement , whichever is less . software is amortized over its estimated useful life ranging from three to seven years . depreciation and amortization are recorded on the straight-line method . costs of maintenance and repairs are charged to expense as incurred . costs of replacing structural parts of major units are considered individually and are expensed or capitalized as the facts dictate . gains and losses on routine dispositions are reflected in current operations . other real estate owned other real estate owned ( oreo ) consists of properties obtained through a foreclosure proceeding or through an in-substance foreclosure in satisfaction of loans and properties originally acquired for branch operations or expansion but no longer intended to be used for that purpose . oreo is initially recorded at fair value less estimated costs to sell to establish a new cost basis . oreo is subsequently reported at the lower of cost or fair value less costs to sell , determined on the basis of current appraisals , comparable sales , and other estimates of fair value obtained principally from independent sources , adjusted for estimated selling costs . management also considers other factors or recent developments , such as changes in absorption rates or market conditions from the time of valuation and anticipated sales values considering management 's plans for disposition , which could result in adjustments to the collateral value estimates indicated in the appraisals . significant judgments and complex estimates are required in estimating the fair value of other real estate owned , and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility . in response to market conditions and other economic factors , management may utilize liquidation sales as part of its distressed asset disposition strategy . as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition , the net proceeds realized from sales transactions could differ significantly from appraisals , comparable sales , and other estimates used to determine the fair value of other real estate owned . management reviews the value of other real estate owned each quarter and adjusts the values as appropriate . revenue and expenses from operations and changes in the valuation allowance are included in other real estate owned income . story_separator_special_tag additionally , the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject , to a greater extent , to adverse conditions in the real estate market or in the economy in general . the bank 's commercial real estate loan underwriting criteria require an examination of debt service coverage ratios , the borrower 's creditworthiness , prior credit history , and reputation . the bank typically requires personal guarantees of the borrowers ' principal owners and considers the valuation of the real estate collateral . 30 commercial and industrial lending commercial and industrial loans generally have a higher degree of risk than loans secured by real estate , but typically have higher yields . commercial business loans typically are made on the basis of the borrower 's ability to make repayment from cash flow from its business . the loans may be unsecured or secured by business assets , such as accounts receivable , equipment , and inventory . as a result , the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself . furthermore , any collateral for commercial business loans may depreciate over time and generally can not be appraised with as much reliability as real estate . consumer lending loans to individual borrowers may be secured or unsecured , and include unsecured consumer loans and lines of credit , automobile loans , deposit account loans , and installment and demand loans . these consumer loans may entail greater risk than residential mortgage loans , particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles . in such cases , any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage , loss , or depreciation . consumer loan collections are dependent on the borrower 's continuing financial stability , and thus are more likely to be adversely affected by job loss , divorce , illness , or personal bankruptcy . furthermore , the application of various federal and state laws , including federal and state bankruptcy and insolvency laws , may limit the amount which can be recovered on such loans . the underwriting standards employed by the bank for consumer loans include a determination of the applicant 's payment history on other debts and an assessment of ability to meet existing obligations and payments on a proposed loan . the stability of the applicant 's monthly income may be determined by verification of gross monthly income from primary employment , and additionally from any verifiable secondary income . also included in this category are loans purchased through a third-party lending program . these portfolios include consumer loans and carry risks associated with the borrower , changes in the economic environment , and the vendor itself . the company manages these risks through policies that require minimum credit scores and other underwriting requirements , robust analysis of actual performance versus expected performance , as well as ensuring compliance with the company 's vendor management program . results of operations general net interest income represents the primary source of earnings for the company . net interest income equals the amount by which interest income on interest-earning assets , predominantly loans and securities , exceeds interest expense on interest-bearing liabilities , including deposits , other borrowings , subordinated debt , and junior subordinated debt . changes in the volume and mix of interest-earning assets and interest-bearing liabilities , as well as their respective yields and rates , are the components that impact the level of net interest income . the net interest margin is calculated by dividing tax-equivalent net interest income by average earning assets . the provision for loan losses , noninterest income , and noninterest expense are the other components that determine net income . noninterest income and expense primarily consists of income from service charges on deposit accounts , revenue from wealth management services , atm and check card income , revenue from other customer services , income from bank owned life insurance , general and administrative expenses , amortization expense , and other real estate owned income . net interest income for the year ended december 31 , 2017 , net interest income increased $ 2.0 million , or 9 % , to $ 25.3 million , compared to $ 23.3 million for the same period in 2016 . the increase resulted primarily from higher average earning asset balances , as well as a higher net interest margin . average earning asset balances increased 4 % , and the net interest margin increased 16 basis points to 3.77 % for the year ended december 31 , 2017 , compared to 3.61 % for the same period in 2016 . the 16 basis point increase in the net interest margin resulted from a 21 basis point increase in the yield on total earning assets , which was partially offset by a 5 basis point increase in interest expense as a percent of average earning assets . the higher yield on earning assets was attributable to an increase in yields from all earning asset classes and a change in the composition of earning assets . yields increased on loans , securities , and interest-bearing deposits in banks by 8 basis points , 15 basis points , and 43 basis points , respectively . a change in the asset composition also favorably impacted the earning asset 31 yield , as average loan balances increased to 74 % of average earning assets for the year ended december 31 , 2017 , compared to 71 % of average earning assets for the same period in 2016 . loan yields were higher than yields on securities and interest-bearing deposits in other banks

at december 31 , 2017 , the bank had $ 2.8 million in locked-rate commitments to originate mortgage loans . risks arise from the possible inability of counterparties to meet the terms of their contracts . the bank does not expect any counterparty to fail to meet its obligations . capital resources the adequacy of the company 's capital is reviewed by management on an ongoing basis with reference to the size , composition , and quality of the company 's asset and liability levels and consistent with regulatory requirements and industry standards . management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses . the company meets eligibility criteria of a small bank holding company in accordance with the federal reserve board 's small bank holding company policy statement issued in february 2015 , and is no longer obligated to report consolidated regulatory capital . in july 2013 , the u.s. banking regulators adopted a final rule which implements the basel iii regulatory capital reforms from the basel committee on banking supervision , and certain changes required by the dodd-frank act . the final rule established an integrated regulatory capital framework and introduces the “ standardized approach ” for risk-weighted assets , which replaced the basel i risk-based guidance for determining risk-weighted assets as of january 1 , 2015 , the date the bank became subject to the new rules . based on the bank 's current capital composition and levels , the bank believes it is in compliance with the requirements as set forth in the final rules . the rules included new risk-based capital and leverage ratios , which are being phased in from 2015 to 2019 , and refined the definition of what constitutes “ capital ” for purposes of calculating those ratios . the new minimum capital level requirements applicable to the bank under the final rules were as follows : a new common equity tier 1 capital ratio of 4.5 % ; a tier 1 capital ratio of 6 % ( increased from 4 % ) ; a total capital ratio of 8 % ( unchanged from previous rules ) ; and a tier 1 leverage ratio of 4 % 43 for all institutions . the final rules also established a “ capital conservation buffer ” above the new regulatory

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 the inherent limitations of internal control over financial reporting , including the possibility of collusion or improper management override of controls , material misstatements due to error or fraud may not be prevented or detected on a timely basis . also , projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the 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 , the company maintained , in all material respects , effective internal control over financial reporting as of september 28 , 2013 , based on the criteria established in internal control — integrated framework ( 1992 ) issued by the committee of sponsoring organizations of the treadway commission . we have also audited , in accordance with the standards of the public company accounting oversight board ( united states ) , the accompanying consolidated financial statements and financial statement schedule as of and for the year ended september 28 , 2013 of the company and our report dated december 12 , 2013 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule . deloitte & touche llp birmingham , alabama december 12 , 2013 39 report of independent registered public accounting firm the board of directors and stockholders ingles markets , incorporated we have audited the accompanying consolidated statements of income , stockholders ' equity , and cash flows of ingles markets , incorporated and subsidiaries for the year ended september 24 , 2011. our audit also included the financial information for the year ended september 24 , 2011 included in the financial statement schedule listed in the index at item 15 ( a ) . these financial statements and schedule are the responsibility of the company 's management . our responsibility is to express an opinion on these financial statements and schedule 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 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 audit provide s a reasonable basis for our opinion . in our opinion , the financial statements referred to above present fairly , in all material respects , the consolidated results of operations and cash flows of ingles markets , incorporated and subsidiaries for the year ended september 24 , 2011 , in conformity with u.s. generally accepted accounting principles . also , in our opinion , the financial information for the year ended september 24 , 2011 included in the related financial statement schedule , when considered in relation to the basic financial statements taken as a whole , presents fairly in all material respects the information set forth therein . ernst & young llp charlotte , north carolina december 2 , 2011 40 ingles markets , incorporated and subsidiaries consolidated balance sheets september 28 , 2013 and september 29 , 2012 replace_table_token_23_th see n otes to c onsolidated f inancial s tatements . 41 ingles markets , incorporated and subsidiaries consolidated balance sheets september 28 , 2013 and september 29 , 2012 replace_table_token_24_th see n otes to c onsolidated f inancial s tatements 42 ingles markets , incorporated and subsidiaries consolidated statements of income fiscal years ended september 28 , 2013 , september 29 , 2012 and september 24 , 2011 replace_table_token_25_th see n otes to c onsolidated f inancial s tatements . 43 ingles markets , incorporated and subsidiaries consolidated statements of changes in stockholders ' equity fiscal years ended september 28 , 2013 , september 29 , 2012 and september 24 , 2011 replace_table_token_26_th see n otes to c onsolidated f inancial s tatements . 44 ingles markets , incorporated and subsidiaries consolidated statements of cash flows fiscal years ended september 28 , 2013 , september 29 , 2012 and september 24 , 201 1 replace_table_token_27_th see n otes to c onsolidated f inancial s tatements . 45 ingles markets , incorporated and subsidiaries notes to consolidated financial statements fiscal years ended september 28 , 201 3 , september 29 , 2012 and september 24 , 201 1 1. summary of significant accounting policies business - ingles markets , incorporated ( “ ingles ” or the “ company ” ) , is a leading supermarket chain in the southeast united states , operates 203 supermarkets in georgia ( 73 ) , north carolina ( 70 ) , south carolina ( 36 ) , tennessee ( 21 ) , virginia ( 2 ) and alabama ( 1 ) . story_separator_special_tag the company 's modernization program includes the opening of new stores , the completion of major remodels and expansion of selected existing stores , and the relocation of selected existing stores to larger , more convenient locations . the company also believes that the new warehouse and distribution facility completed during fiscal 2012 has lowered its overall distribution costs and improved product availability in its stores . capital expenditures totaled $ 101.5 million and $ 180.6 million for fiscal 2013 and 2012 , respectively . the largest capital expenditure in fiscal 2012 was for the completion of the new distribution facility , including expenditures for related vehicles and equipment . other major capital expenditures include the following : replace_table_token_18_th ( including those added at new or replacement stores ) capital expenditures also included upgrading and replacing store equipment , technology investments , capital expenditures related to the company 's distribution operation and its milk processing plant , and expenditures for stores to open in subsequent fiscal years . ingles ' capital expenditure plans for fiscal 2014 include investments of approximately $ 100 to $ 140 million . the majority of the company 's fiscal 2014 capital expenditures will be dedicated to continued improvement of its store base and will include construction of two or more new/remodeled stores . fiscal 2014 capital expenditures will also include investments in stores expected to open in fiscal 2015 as well as technology improvements , upgrading and replacing existing store equipment and warehouse and transportation equipment and improvements to the company 's milk processing plant . the company expects that its net annual capital expenditures will be in the range of approximately $ 100 to $ 160 million going forward in order to maintain a modern store base . planned expenditures for any given future fiscal year will be affected by the availability of financing , which can affect both the number of projects pursued at any given time and the cost of those projects . the number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores and major remodel/expansions . the company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment , other company capital initiatives and its financial condition . in general , the company finances its capital expenditures to the extent possible from cash on hand and cash flow from operations . additional financing sources for capital expenditures include borrowings under the $ 175 million of committed line of credit , other borrowings that could be collateralized by unencumbered real property and equipment with a net book value of approximately $ 951 million , and the public debt or equity markets . the company has used each of these to finance past capital expenditures and expects to have them available in the future . the company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project . construction commitments at september 28 , 2013 totaled $ 9.8 million . liquidity the company generated $ 145.2 million of cash from operations in fiscal 2013 compared with $ 133.8 million for fiscal 2012. changes in working capital components accounted for most of the year over year increase . cash used by investing activities for fiscal 2013 totaled $ 93.6 million compared with $ 103.6 million for fiscal 2012. the company 's most significant investing activity is capital expenditures . during fiscal year 2012 , capital expenditures for the new distribution facility were funded with $ 75.7 million proceeds of recovery zone bonds issued in fiscal 2011. the 26 recovery zone bond proceeds were invested in restricted investments until withdrawn to pay distribution facility costs . during fiscal 2013 , the company received $ 7.5 million from the sale of a former store property . during fiscal 2013 , the company 's net financing activities used $ 39.4 million . in june 2013 , the company issued $ 700.0 million aggregate principal amount of senior notes due in 2023 ( the “ notes ” ) in a private placement . subsequent to the private placement , the company filed a registration statement with the securities and exchange commission to exchange private placement notes with registered ones . the notes bear an interest rate of 5.750 % per annum and were issued at par . note proceeds were used to repay $ 575.0 million aggregate principal amount of senior notes maturing in 2017 , $ 52.0 million of indebtedness outstanding under the company 's line of credit , and pay costs related to the offering of the notes . remaining note proceeds were used for general corporate purposes , including capital expenditures . the company 's effective interest rate on senior notes borrowings decreased from 9.5 % to 5.75 % . in connection with the offering of the notes , the company extended the maturity date of its $ 175.0 million line of credit from december 29 , 2015 to june 12 , 2018 and modified certain interest rate options and covenants . at september 28 , 2013 , the company had no borrowing outstanding under the line of credit . the line of credit provides the company with various interest rate options based on the prime rate , the federal funds rate , or the london interbank offering rate . the line allows the company to issue up to $ 30.0 million in unused letters of credit , of which $ 9.4 million of unused letters of credit were issued at september 28 , 2013. the company is not required to maintain compensating balances in connection with this line of credit . on december 29 , 2010 , the company completed the funding of $ 99.7 million of recovery zone facility bonds ( the “ bonds ” ) for : ( a ) acquisition

net sales for the fiscal year ended september 29 , 2012 increased 4.2 % to $ 3.72 billion , compared with $ 3.57 billion for the fiscal year ended september 24 , 2011. excluding gasoline and the effect of the 53 rd week in fiscal 2012 , net sales increased 1.7 % . in fiscal years with 53 weeks , such as fiscal 2012 , management analyzes annual comparable store sales for the 53 weeks of fiscal 2012 with the corresponding 53 calendar weeks of the previous year . on this basis , grocery segment comparable store sales increased 2.4 % , including gasoline and 1.9 % excluding gasoline . the number of customer transactions ( excluding gasoline ) increased 1.5 % , while the average transaction size ( excluding gasoline ) increased by approximately $ 0.07. comparing fiscal 2102 with fiscal 2011 , gasoline gallons sold were level , per gallon prices were higher and gasoline gross profit was lower . sales by product category for the fiscal years ended september 29 , 2012 and september 24 , 2011 , respectively , were as follows : replace_table_token_15_th the grocery category includes grocery , dairy and frozen foods . the non-foods category includes alcoholic beverages , tobacco , pharmacy , health and video . the perishables category includes meat , produce , deli and bakery . 23 changes in grocery segment sales for the fiscal year ended september 29 , 2012 are summarized as follows ( in thousands ) :

accordingly , the company has not established a reserve for any remediation costs . note 12 – stock-based compensation plans plan administration the company 's 2009 equity compensation plan ( “ equity plan ” ) provides for the grant of nonqualified and incentive stock options , stock awards and stock units to officers and employees of the company . the equity plan also provides for the grant of option rights and restricted stock to non-employee directors . under the equity plan , 500,000 shares of common stock were 40 available to be awarded with no participant being granted more than 40,000 shares of common stock in any calendar year . as of december 31 , 2013 , the company had approximately 77,000 shares of common stock still available under the equity plan . the equity plan is administered by the compensation committee of the board of directors , or its designee , which as administrator of the plan , has the authority to select plan participants , grant awards , and determine the terms and conditions of the awards . the company also has a stock performance rights plan ( “ spr plan ” ) that provides for the issuance of stock performance rights ( “ sprs ” ) that allow non-employee directors , officers and key employees to receive cash awards , subject to certain restrictions , equal to the appreciation of the company 's common stock . the spr plan is administered by the compensation committee of the board of directors . stock performance rights sprs entitle the recipient to receive a cash payment equal to the excess of the market value of the company 's common stock over the spr exercise price when the sprs are surrendered . expense , equal to the fair market value of the spr at the date of grant and remeasured each reporting period , is recorded ratably over the vesting period . employees and non-employee directors who are retirement eligible , defined as age 65 or older , are permitted to retain their awards after retirement and exercise them during the remaining contractual life . all expense is recognized on the date of grant for sprs granted to retirement eligible recipients . compensation expense or benefit is included in selling , general and administrative expense . a majority of the outstanding sprs have a seven or ten year life and vest over one to three years beginning on the first anniversary of the date of the grant . on december 31 , 2013 , the sprs outstanding were re-measured at fair value using the black-scholes valuation model . this model requires the input of subjective assumptions that may have a significant impact on the fair value estimate . the weighted-average estimated value of sprs outstanding as of december 31 , 2013 was $ 4.76 per spr using the following assumptions : expected volatility 32.2 % to 65.3 % risk-free rate of return 0.1 % to 1.9 % expected term ( in years ) 0.7 to 5.2 expected annual dividend $ 0 the expected volatility was based on the historic volatility of the company 's stock price commensurate with the expected life of the spr . the risk-free rate of return reflects the interest rate offered for zero coupon treasury bonds over the expected life of the spr . the expected life represents the period of time that options granted are expected to be outstanding and was calculated using the simplified method allowed by the sec due to insufficient historical data . the estimated annual dividend was based on the recent dividend payout trend . compensation expense of $ 1.4 million was recorded for the year ended december 31 , 2013. a benefit of $ 0.6 million and $ 1.1 million was recognized for the years ended december 31 , 2012 and 2011 , respectively , as the overall decline in the fair value of the sprs exceeded the amortization expense related to the unvested sprs . no cash has been paid out for spr exercises during the three year period ended december 31 , 2013 . activity related to the company 's sprs during the year ended december 31 , 2013 was as follows : replace_table_token_24_th 41 the sprs outstanding had an intrinsic value of $ 1.5 million as of december 31 , 2013. unrecognized compensation cost related to non-vested sprs was $ 1.3 million at december 31 , 2013 , which will be recognized over a weighted average period of 2.7 years . during the year ended december 31 , 2013 , 100,867 sprs with a fair value of $ 0.8 million vested . at december 31 , 2013 , the weighted average remaining contractual term was 5.9 years for all outstanding sprs and 5.4 years for all exercisable sprs . restricted stock awards restricted stock awards ( `` rsas `` ) generally vest over a one to three year period beginning on the first anniversary of the date of the grant . upon vesting , the vested restricted stock awards are exchanged for an equal number of the company 's common stock . the participants have no voting or dividend rights with the restricted stock awards . the restricted stock awards are valued at the closing price of the common stock on the date of grant and the expense is recorded ratably over the vesting period . compensation expense of $ 0.6 million , $ 0.7 million and $ 0.7 million related to the rsas was recorded in selling , general and administrative expenses for 2013 , 2012 and 2011 , respectively . story_separator_special_tag gain on sale of assets in 2012 , in conjunction with the construction of the mccook facility and the relocation of our headquarters to chicago , illinois , we sold four properties : our former des plaines , illinois headquarters and packaging facility , our addison , illinois distribution center ; our vernon hills , illinois distribution center ; and a des plaines , illinois administrative building . we received cash proceeds of $ 12.3 million from the sales of the four facilities which resulted in a gain of $ 3.7 million . goodwill impairment during 2012 , we determined that operating losses and the reduction in our market capitalization below book value were indicators of potential goodwill impairment . when we performed an impairment analysis of our goodwill balance , we determined that the full amount of the goodwill was impaired and we recorded a non-cash charge of $ 28.3 million . other operating expenses , net in 2011 , we recorded a $ 1.2 million expense for the estimated cost of settling the employment tax matter related to the classification of the sales representatives of one of our subsidiaries as independent contractors . no such charges were incurred in 2012. other expenses , net other expenses , net increased to $ 0.8 million in 2012 from $ 0.6 million in 2011. the 2012 expense was primarily due to interest on borrowings from our revolving line of credit , while the 2011 expense primarily consisted of interest assessed on unclaimed property settlements . income tax expense ( benefit ) in 2012 , we recorded income tax expense of $ 17.9 million on a pre-tax loss of $ 46.1 million , which included a $ 33.3 million increase in the valuation allowance on our deferred tax assets . the increase in the valuation allowance was primarily due to cumulative losses we had incurred over several reporting periods . we determined that it was more likely than not that we would not be able to utilize our deferred tax assets to offset future taxable income and , therefore , increased our deferred tax valuation allowance . the 2011 income tax benefit was $ 1.8 million on a pre-tax loss of $ 6.4 million , resulting in an effective tax rate of 27.8 % . 20 story_separator_special_tag href= `` https : //www.sec.gov/archives/edgar/data/0000703604/000070360414000011/ # seadba5b42ccb56bd5e0660223d7e8950 `` style= `` font-family : inherit ; font-size:10pt ; `` > note 2 to the consolidated financial statements . the following provides supplemental information to these accounting policies as well as information on the accounts requiring more significant estimates . allowance for doubtful accounts — we evaluate the collectability of accounts receivable based on a combination of factors . in circumstances where we are aware of a specific customer 's inability to meet its financial obligations ( e.g . , bankruptcy filings , substantial down-grading of credit ratings ) , a specific reserve for bad debts is recorded against amounts due to reduce the receivable to the amount we believe will be collected . for all other customers , we recognize reserves for bad debts based on our historical experience of bad debt write-offs as a percent of accounts receivable outstanding . if circumstances change ( e.g . , higher than expected defaults or an unexpected material adverse change in a major customer 's ability to meet its financial obligations ) , the estimates of the recoverability of amounts due to us could be revised by a material amount . at december 31 , 2013 , our reserve was 2.7 % of our gross accounts receivable outstanding . a hypothetical change of one percent to our reserve as a percent of our gross accounts receivable would have affected our annual doubtful accounts expense by approximately $ 0.3 million . inventory reserves — inventories consist principally of finished goods and are stated at the lower of cost ( determined using the first-in-first-out method ) or market . most of our products are not exposed to the risk of obsolescence due to technology changes . however , some of our products do have a limited shelf life , and from time to time we add and remove items from our catalogs , brochures or website for marketing and other purposes . 22 to reduce our inventory to a lower of cost or market value , we record a reserve for slow-moving and obsolete inventory based on historical experience and monitoring of our current inventory activity . we use estimates to determine the necessity of recording these reserves based on periodic detailed analysis , using both qualitative and quantitative factors . as part of this analysis , we consider several factors including the inventories ' length of time on hand , historical sales , product shelf life , product life cycle , product category , and product obsolescence . in general , depending on the product category , we reserve inventory with low turnover at higher rates than inventory with high turnover . our policy is to not re-value inventory to the original cost basis subsequent to establishing a new cost basis . at december 31 , 2013 , our inventory reserve was $ 5.3 million , equal to approximately 10.4 % of our total inventory . a hypothetical change of one percent to our reserve as a percent of total inventory would have affected our cost of goods sold by $ 0.5 million . income taxes — deferred tax assets or liabilities reflect temporary differences between amounts of assets and liabilities for financial and tax reporting . such amounts are adjusted , as appropriate , to reflect changes in enacted tax rates expected to be in effect when the temporary differences reverse . a valuation allowance is established to offset any deferred tax assets if , based upon the available evidence , it is more likely than not ( i.e . greater than 50 % likely ) that some or all of the deferred tax assets will not be realized

should funding be insufficient at any time in the future , we may be unable to develop or enhance our products or services , take advantage of business opportunities or respond to competitive pressures , any of which could have a material adverse effect on our business , financial condition and results of operations . no cash dividends were paid out in 2013 , while $ 3.1 million and $ 4.1 million were paid out to stockholders ' in 2012 and 2011 , respectively . dividends are currently restricted under the loan agreement to amounts not to exceed $ 7.0 million annually . we believe cash expected to be provided by operations and the funds available under our loan agreement are sufficient to fund our operating requirements , strategic initiatives and capital improvements throughout 2014 . 21 contractual obligations contractual obligations that require cash payment over future periods at december 31 , 2013 were as follows : replace_table_token_8_th ( 1 ) the revolving line of credit with the privatebank expires in august 2017. due to the lock box arrangement and a subjective acceleration clause contained in the borrowing agreement , the revolving line of credit is classified as a current contractual obligation . ( 2 ) operating lease obligations are partially offset by future proceeds of $ 0.8 million from a sub-lease expiring in march 2023 . ( 3 ) payments to participants in our security bonus plan are made on a lump sum basis at time of separation from the company . payouts for known separation dates have been included in the scheduled year of payout , while payouts for unknown separation dates are reflected in the thereafter column . off-balance sheet arrangements of the $ 12.5 million operating lease obligation , $ 10.5 million relates to a lease agreement for our headquarters which expires in march 2023. the headquarters lease obligation is partially offset by $ 0.8 million of total future minimum lease proceeds from a portion of the leased headquarters that has been sub-leased through march of 2023. also , as of december 31 , 2013 , we had contractual commitments to purchase $ 9.9 million of product from our suppliers and contractors in 2014. critical accounting policies we have disclosed our significant accounting policies in < a

we determined that we have five reporting units for 2017. we use both qualitative and quantitative analysis to determine whether we believe it is more likely than not that goodwill has been impaired . in 2017 , we used a qualitative analysis in determining that no impairment indicators were present . in 2016 and 2015 , we tested goodwill for impairment quantitatively by determining the fair value of each reporting unit and comparing it to the reporting unit 's carrying value . we determined the fair value of our reporting units based on projected future discounted cash flows , which , in turn , were based on our views of uncertain variables such as growth rates , anticipated future economic conditions , and the appropriate discount rates relative to risk and estimates of residual values . we did not identify any impairment in the fiscal years ended november 30 , 2017 , 2016 , and 2015 . income taxes deferred income taxes are provided using tax rates enacted for periods of expected reversal on all temporary differences . temporary differences relate to differences between the book and tax basis of assets and liabilities , principally intangible assets , property and equipment , deferred revenue , pension and other postretirement benefits , accruals , and stock-based compensation . valuation allowances are established to reduce deferred tax assets to the amount that will more likely than not be realized . to the extent that a determination is made to establish or adjust a valuation allowance , the expense or benefit is recorded in the period in which the determination is made . judgment is required in determining the worldwide provision for income taxes . additionally , the income tax provision is based on calculations and assumptions that are subject to examination by many different tax authorities and to changes in tax law and rates in many jurisdictions . we record tax benefits when it is more likely than not that the tax benefits will be sustained upon examination by tax authorities . we adjust our income tax provision in the period in which it becomes probable that actual results will differ from our estimates . pension accounting during the fourth quarter of each fiscal year ( or upon any other remeasurement date ) , we immediately recognize net actuarial gains or losses in excess of a corridor in our operating results . the corridor amount is equivalent to 10 percent of the greater of the market-related value of plan assets or the plan 's benefit obligation at the beginning of the year . we use the actual fair value of plan assets at the measurement date as the measure of the market-related value of plan assets . treasury shares treasury share purchases , whether through share withholdings for taxes or repurchase programs and transactions , are recorded at cost . issuances from treasury shares are recorded using the weighted-average cost method . earnings per share basic earnings per share ( “ eps ” ) is computed by dividing net income by the weighted-average number of common shares outstanding during the period . diluted eps is computed using the weighted-average number of common shares and dilutive potential common shares outstanding during the period . diluted eps reflects the potential dilution that could occur if securities were exercised or converted into common shares . 58 advertising costs production costs are expensed as of the first date that the advertisements take place . advertising expense was approximately $ 55.5 million , $ 50.8 million , and $ 44.7 million for the years ended november 30 , 2017 , 2016 , and 2015 , respectively , and was primarily comprised of advertising for carfax . foreign currency the functional currency of each of our foreign subsidiaries is typically such subsidiary 's local currency . assets and liabilities are translated at period-end exchange rates . income and expense items are translated at weighted-average rates of exchange prevailing during the year . any translation adjustments are included in other comprehensive income . transactions executed in currencies other than a subsidiary 's functional currency ( which result in exchange adjustments ) are remeasured at spot rates and resulting foreign-exchange-transaction gains and losses are included in the results of operations . stock-based compensation all stock-based awards are recognized in the income statement based on their grant date fair values . compensation expense is recognized net of estimated forfeitures . we adjust compensation expense in future periods if actual forfeitures differ from our estimates . our forfeiture rate is based upon historical experience as well as anticipated employee turnover considering certain qualitative factors . we amortize the value of stock-based awards to expense over the vesting period on a straight-line basis . for awards with performance conditions , we evaluate the probability of the number of shares that are expected to vest , and compensation expense is then adjusted to reflect the number of shares expected to vest and the cumulative vesting period met to date . in march 2016 , the financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) 2016-09 , which impacts the accounting for stock-based compensation . we early adopted the standard in the first quarter of our fiscal 2017. as a result of the adoption , for 2017 , excess tax benefits or deficiencies associated with stock-based compensation award activity are reflected in income tax expense in the consolidated statements of operations ; for 2016 and 2015 , excess tax benefits and deficiencies are reported as a component of additional paid-in capital . in addition , excess tax benefits associated with award activity are now classified as cash flows from operating activities along with all other income tax cash flows , and we have elected to apply this classification change on a prospective basis . reclassifications certain reclassifications have been made to prior period amounts to conform to the current year presentation . story_separator_special_tag similarly , markit 's revenue from july 12 , 2016 to november 30 , 2016 of approximately $ 449 million , less the $ 9 million change from the comparable 2015 stub period , has been included in the calculation of acquisitive growth in the table immediately below , and then the components of markit 's $ 9 million revenue growth in the period from july 12 , 2016 to november 30 , 2016 versus the prior year have been included in their related factors in the table further below . we have noted financial services growth percentages as not meaningful ( n/m ) where applicable , as absolute growth percentages are not meaningful comparisons due to the timing of the merger in 2016. increase ( decrease ) in total revenue ( all amounts represent percentage points ) organic acquisitive foreign currency 2017 vs. 2016 4 % 29 % ( 1 ) % 2016 vs. 2015 — % 27 % ( 2 ) % 38 organic revenue growth in 2017 was attributable to both recurring and nonrecurring revenue growth , while organic revenue growth in 2016 was flat . the recurring-based business represented 83 percent of total revenue in 2017 , compared to 82 percent and 81 percent of total revenue in 2016 and 2015 , respectively . the recurring-based business increased 3 percent organically in 2017 , led by transportation and financial services offerings , partially offset by resources , and had relatively flat organic growth in 2016. the non-recurring business increased 9 percent organically in 2017 , led by transportation and financial services offerings , and decreased 3 percent organically in 2016 , which was adversely impacted by lower consulting , software , and services revenue , mostly in our resources segment . the non-recurring revenue increase in 2017 and revenue decline in 2016 was also partially due to the timing of the biennial cycle of the bpvc standard . bpvc contributed approximately $ 12 million of revenue in the 2017 results and $ 10 million in the 2015 results . acquisition-related revenue growth for 2017 was primarily due to the merger , as well as the run-out of the carproof and opis acquisitions from the first quarter of 2016. acquisition-related revenue growth for 2017 was also minimally impacted by the acquisitions of automotivemastermind and macroeconomic advisers in the fourth quarter of 2017. acquisition-related revenue growth for 2016 was primarily due to the merger , as well as the acquisitions of carproof and opis and the run-out of our 2015 acquisitions . foreign currency movements had a moderately adverse impact on our 2017 and 2016 revenue growth as the u.s. dollar continued to maintain its strength against foreign currencies . due to the extent of our global operations , foreign currency movements could have an adverse impact on our results in the future . revenue by segment replace_table_token_3_th the percentage change in revenue for each segment is due to the factors described in the following table . replace_table_token_4_th resources revenue encountered significant energy industry headwinds in 2016 and into early 2017 due to lower energy prices and reduced industry spending . however , we began to see a more stable price environment and more favorable capital spending budgets as 2017 progressed . during 2016 , on a constant currency basis , our resources annual contract value excluding opis ( “ acv ” ) , which represents the annualized value of recurring revenue contracts , declined approximately 10 percent , and in 2017 , acv was relatively flat , reflecting a more stabilized upstream market . as a result , recurring revenue moderated from a 9 percent organic decline in 2016 to a 5 percent organic decline in 2017. these challenges in the energy industry contributed to difficulties in our organic non-recurring revenue results for 2016 , with a 12 percent decline , but recovered in 2017 to a 3 percent organic growth rate , aided by growth in events and paid presentations . our chemicals and opis product offerings continue to perform well . transportation revenue increases for 2016 and 2017 were driven by continued solid organic recurring and non-recurring growth , led by our automotive product offerings . we continue to see strong organic growth in our automotive product category due to continued penetration and new products within our used car product offerings , strong recall product offerings and activity , and continued benefits from ongoing innovation around our new car product offerings as a result of the increasing use of digital marketing , new automotive technologies , and global regulatory pressure to curb fuel consumption and emissions . 39 cms organic revenue growth in 2017 was primarily due to growth in our product design offerings , including the bpvc release this year . the cms organic revenue decline in 2016 was primarily due to the prior year bpvc release , as well as the loss of a large rootmetrics customer contract and product rationalization within our technology , media & telecom product offerings . financial services revenue experienced strong organic recurring and non-recurring growth . within our information product offerings , our 7 percent organic growth in 2017 and 4 percent organic growth in 2016 was primarily due to the strong performance of our indices and bond pricing product offerings . our processing offerings delivered 6 percent organic revenue growth in both 2017 and 2016 , with strength in our loans processing products driven by the strong leveraged finance and syndicated loans markets . derivatives processing experienced negative organic revenue growth in 2016 and 2017 due to lower credit volumes . solutions organic revenue growth of 8 percent in 2017 and 2 percent in 2016 benefitted from broad-based growth across the portfolio , led by our loan services and edm product offerings . revenue by transaction type replace_table_token_5_th recurring revenue represents a steady and predictable source of revenue for us . recurring fixed revenue increased 2 percent organically for 2017 , compared to 2016 , and

our board of directors has separately authorized , subject to applicable regulatory requirements , the repurchase of our common shares surrendered by employees in an amount equal to the exercise price , if applicable , and statutory tax liability associated with the vesting of their equity awards , for which we pay the statutory tax on behalf of the employee and forgo receipt of the exercise price of the award from the employee , if applicable . such repurchases have been authorized in addition to the share repurchase program described above . because of our cash , debt , and cash flow positions , we believe we will have sufficient liquidity to meet our ongoing working capital and capital expenditure needs . our future capital requirements will depend on many factors , including the number and magnitude of future acquisitions and share repurchase programs , the need for additional facilities or facility improvements , the timing and extent of spending to support product development efforts , information technology infrastructure investments , investments in our internal business applications , and the continued market acceptance of our offerings . we could be required , or could elect , to seek additional funding through public or private equity or debt financings ; however , additional funds may not be available on terms acceptable to us . see “ item 8 - financial statements and supplementary data - notes to consolidated financial statements - note 8 ” in part ii of this form 10-k for additional information about our debt obligations . cash flows replace_table_token_10_th in 2017 , net cash provided by operating activities increased significantly , primarily as a result of the merger . net cash provided by operating activities for 2016 and 2015 was relatively stable , with acquisitions and increased operating performance particularly contributing to an increase in cash flow from operations in 2016 , partially offset by increased payments for merger-related fees , interest expense , and income tax payments . < font

the fair value of restricted stock awards is equal to the fair value of the company 's common stock on the date of grant . compensation expense is recognized net of estimated forfeitures using the straight-line method over the service period , which is generally the vesting period . convertible preferred and common stock warrant liabilities prior to the company 's ipo , convertible preferred stock warrants and common stock warrants included provisions that potentially adjust the number of shares to be issued on settlement , or that potentially adjust the exercise prices , which made these instruments freestanding and accordingly they were classified as liabilities on the company 's consolidated balance sheets . these warrant liabilities were subject to re-measurement at each balance sheet date until april 3 , 2014 when , in connection with the company 's ipo , all the then-outstanding convertible preferred stock warrants became warrants to purchase common stock and the carrying value of the liabilities had been reclassified to additional paid-in capital . income taxes the company accounts for income taxes using 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 basis . deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date . the company records a valuation allowance to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized . as of december 31 , 2016 and 2015 , the company recorded a full valuation allowance against the net deferred tax assets because of its history of operating losses in the united states . the company classifies interest and penalties on unrecognized tax benefits as income tax expense . net loss per share basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period , and excludes any dilutive effects of employee stock-based awards and warrants . diluted net income per share is computed giving effect to all potentially dilutive common shares , including common stock issuable upon exercise of stock options and warrants , vesting of restricted stock and purchases under the espp . in periods of net loss , all potentially issuable common shares are excluded from the diluted net loss per share computation because they are anti-dilutive . therefore , basic and diluted net loss per share are the same for all years presented in the consolidated statements of operations and comprehensive loss . the company applied the two-class method to calculate basic and diluted net loss per share of common stock in periods in which shares of convertible preferred stock were outstanding , as shares of convertible preferred stock are participating securities due to their dividend rights . the two-class method is an earnings allocation method under which earnings per share is calculated for common stock considering a participating security 's rights to undistributed earnings as if all such earnings had been distributed during the period . the company 's participating securities are 78 not included in the computation of net loss per share in periods of net loss because the preferred shareholders have no contractual obligation to participate in losses . indemnification certain of the company 's agreements with clients include provisions for indemnification against liabilities if its services infringe a third-party 's intellectual property rights . to date , the company has not incurred any material costs as a result of such indemnification provisions and the company has not accrued any liabilities related to such obligations in the consolidated financial statements as of december 31 , 2016 and 2015 . segment information the company has determined that its chief executive officer is its chief operating decision maker . the company 's chief executive officer reviews financial information presented on a consolidated basis for purposes of assessing performance and making decisions on how to allocate resources . accordingly , the company has determined that it operates in a single reportable segment . recently adopted accounting pronouncements in august 2016 , the financial accounting standards board , or fasb , issued accounting standards update , or asu , no . 2016-15 , classification of certain cash receipts and cash payments ( topic 230 ) , which addresses eight classification issues related to the statement of cash flows , including those for debt prepayment or debt extinguishment costs . asu 2016-15 is effective for the company in its first quarter of 2018 , with early adoption permitted . as permitted by asu 2016-15 , the company early-adopted this new guidance at the beginning of the third quarter of 2016 and applied it prospectively . no prior periods were retrospectively adjusted . in april 2015 , the fasb issued asu no . 2015-05 , intangibles - goodwill and other - internal-use software ( subtopic 350-40 ) : customer 's accounting for fees paid in a cloud computing arrangement . the asu provides guidance to customers about whether a cloud computing arrangement includes a software license . if a cloud computing arrangement includes a software license , then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses . if a cloud computing arrangement does not include a software license , the customer should account for the arrangement as a service contract . the asu does not change the accounting for a customer 's accounting for service contracts . a company can elect to adopt the asu either prospectively or retrospectively . story_separator_special_tag 55 general and administrative replace_table_token_19_th the increase in general and administrative expenses for 2015 compared to 2014 was primarily due to a $ 2.6 million increase in contingent state and local taxes and surcharges ( see below ) , a $ 0.5 million increase in outside professional services fees primarily due to increased consulting expenses as we prepare for section 404 compliance and higher auditors fees , and a $ 0.5 million increase in stock-based compensation expense primarily due to an increase in the fair value of employee equity awards , partially offset by a $ 2.3 million decrease in federal fees ( see below ) . the $ 2.6 million increase in contingent state and local taxes and surcharges for 2015 compared to 2014 was primarily due to a one-time $ 2.8 million credit recorded in the second quarter of 2014 to release a contingent state tax liability that was accrued progressively on a quarterly basis from 2011 through the first quarter of 2014 for a specific state following a favorable ruling from that state 's revenue authority , a $ 0.6 million immaterial out of period adjustment recorded in the first quarter of 2015 for additional sales taxes for certain revenue earned during the period 2011 through 2014 , partially offset by a $ 0.8 million decrease in state sales taxes primarily for our usage-based fees as we commenced collecting state and local taxes and surcharges from our clients for applicable states in june 2014. the $ 2.3 million decrease in federal fees for 2015 compared to 2014 resulted from a $ 2.0 million one-time charge recorded in the third quarter of 2014 for a then tentative fcc civil penalty and a $ 0.3 million credit recorded in the second quarter of 2015 to discount the final fcc civil penalty of $ 2.0 million to its present value ( see note 6 and note 10 of the notes to our consolidated financial statements ) . other income ( expense ) , net replace_table_token_20_th the increase in interest expense for 2015 compared to 2014 was primarily a result of a higher average balance of capital leases to finance our equipment purchases . liquidity and capital resources to date , we have financed our operations , primarily through sales of our solution , lease facilities and net proceeds from our equity and debt financings . as of december 31 , 2016 , we had cash and cash equivalents totaling $ 58.1 million . as of december 31 , 2016 , we had a total of $ 32.6 million in principal amount outstanding under a revolving credit facility governed by our 2016 loan and security agreement . on august 1 , 2016 , we entered into the 2016 loan and security agreement with two lenders for the new revolving credit facility of up to $ 50.0 million . the new revolving credit facility matures august 1 , 2019. under the terms of the new revolving credit facility , the balance outstanding can not exceed our trailing four months of mrr ( monthly recurring revenue including subscription and usage ) multiplied by the average trailing 12 month dollar based retention rate ( calculated on the same basis as set forth in item 7 of this report , see `` annual dollar-based retention rate `` ) . the new revolving 56 credit facility carries a variable annual interest rate of the prime rate plus 0.50 % , subject to a 0.25 % increase if our adjusted ebitda is negative at the end of any fiscal quarter . as of december 31 , 2016 , the company was required to maintain $ 25.0 million of unrestricted cash and cash equivalents deposited with two lenders in connection with its credit agreement as a compensating balance ( see note 6 ) . upon the effectiveness of the 2016 loan and security agreement , we immediately drew down $ 32.6 million and terminated the 2013 loan and security agreement and the 2014 loan and security agreement by repaying the aggregate outstanding principal , accrued interest and prepayment penalty balances thereunder of $ 32.4 million along with $ 0.2 million in administrative fees . in addition , as of december 31 , 2016 , we had a $ 1.0 million fcc civil penalty payable to the u.s. treasury and $ 0.1 million in outstanding principal amount under a promissory note with the usac ( see note 6 of the notes to consolidated financial statements included in this form 10-k ) . we believe our existing cash and cash equivalents and the amount available for borrowing under our new revolving credit facility ( or any refinancing of the facility ) will be sufficient to meet our working capital and capital expenditure needs at least through december 31 , 2017 . our future capital requirements will depend on many factors including our growth rate , continuing market acceptance of our solution , client retention , ability to gain new clients , the timing and extent of spending to support development efforts , the expansion of sales and marketing activities and the introduction of new and enhanced offerings . we may also acquire or invest in complementary businesses , technologies and intellectual property rights , which may increase our future capital requirements , both to pay acquisition costs and to support our combined operations . we may raise additional equity or debt financing at any time . we may not be able to raise additional equity or debt financing on terms acceptable to us or at all . if we are unable to raise additional capital when desired or required , our business , operating results , and financial condition would be harmed . in addition , if our operating performance during the next twelve months is below our expectations , our liquidity and ability to operate our business could be harmed . if we raise additional funds by issuing equity or equity-linked securities , the ownership of our existing stockholders

the increase in accrued and other liabilities was attributable to increased bonus accrual driven by our improved financial performance in the fourth quarter of 2014 , increased commissions accrual for sales personnel driven by the growth in sales of our solution and increased accrual for other personnel related costs . cash outflows from changes in operating assets and liabilities primarily included a $ 1.4 million increase in accounts receivable due to increased sales . cash flows from investing activities during the year ended december 31 , 2016 , cash used in investing activities of $ 2.4 million was primarily for $ 1.2 million in purchases of convertible notes held for investment and $ 1.1 million in purchases of property and equipment . during the year ended december 31 , 2015 , cash provided by investing activities of $ 19.7 million was primarily due to $ 40.0 million of proceeds from the maturity of short-term investments and a $ 0.8 million decrease in restricted cash due to the release of two letters of credit related to our office lease obligation and an insurance policy , offset in part by the purchase of short-term investments of $ 20.0 million and purchase of property and equipment of $ 1.1 million . during the year ended december 31 , 2014 , cash used in investing activities of $ 21.0 million was primarily for purchase of short-term investments of $ 50.0 million and purchase of property and equipment of $ 1.0 million , offset by $ 30.0 million in proceeds from the sale of short-term investments . cash flows from financing activities during the year ended december 31 , 2016 , cash used in financing activities of $ 4.8 million was primarily for repayments of $ 36.9 million in notes payable and our revolving line of credit as part of our cancellation of the 2013 loan and security agreement and the 2014 loan and security agreement , as well as $ 6.2 million in payments under our capital lease obligations . cash outflows were offset in part by cash received from the $ 32.6 million drawdown under the new

as a result , revenue associated with point product arrangements with premier plus sms included for the contract term is recognized ratably over the term of the arrangement , once the other revenue recognition criteria have been met . f-10 aspen technology , inc. and subsidiaries notes to consolidated financial statements services and other revenue professional services revenue professional services are provided to customers on a time-and-materials ( t & m ) or fixed-price basis . we recognize professional services fees for our t & m contracts based upon hours worked and contractually agreed-upon hourly rates . revenue from fixed-price engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs . project costs are typically expensed as incurred . the use of the proportional performance method is dependent upon our ability to reliably estimate the costs to complete a project . we use historical experience as a basis for future estimates to complete current projects . additionally , we believe that costs are the best available measure of performance . out-of-pocket expenses which are reimbursed by customers are recorded as revenue . in certain circumstances , professional services revenue may be recognized over a longer time period than the period over which the services are performed . if the costs to complete a project are not estimable or the completion is uncertain , the revenue and related costs are recognized upon completion of the services . in circumstances in which professional services are sold as a single arrangement with , or in contemplation of , a new aspenone license or point product arrangement with premier plus sms , revenue is deferred and recognized on a ratable basis over the longer of ( i ) the period the services are performed , or ( ii ) the license term . when we provide professional services considered essential to the functionality of the software , we recognize the combined revenue from the sale of the software and related services using the completed contract or percentage-of-completion method . we have occasionally been required to commit unanticipated additional resources to complete projects , which resulted in losses on those contracts . provisions for estimated losses on contracts are made during the period in which such losses become probable and can be reasonably estimated . training revenue we provide training services to our customers , including on-site , internet-based , public and customized training . revenue is recognized in the period in which the services are performed . in circumstances in which training services are sold as a single arrangement with , or in contemplation of , a new aspenone license or point product arrangement with premier plus sms , revenue is deferred and recognized on a ratable basis over the longer of ( i ) the period the services are performed or ( ii ) the license term . deferred revenue deferred revenue includes amounts billed or collected in advance of revenue recognition , including arrangements under the aspenone licensing model , point product arrangements with premier plus sms , professional services , and training . deferred revenue is recorded as each invoice becomes due . other licensing matters our standard licensing agreements include a product warranty provision . we have not experienced significant claims related to software warranties beyond the scope of sms support , which we are already obligated to provide , and consequently , we have not established reserves for warranty obligations . our agreements with our customers generally require us to indemnify the customer against claims that our software infringes third-party patent , copyright , trademark or other proprietary rights . such indemnification obligations are generally limited in a variety of industry-standard respects , including our right to replace an infringing product . as of june 30 , 2018 and 2017 , we had not experienced any material losses related to these indemnification obligations and no claims with respect thereto were outstanding . we do not expect significant claims related to these indemnification obligations , and consequently , have not established any related reserves . ( e ) computer software development costs f-11 aspen technology , inc. and subsidiaries notes to consolidated financial statements certain computer software development costs are capitalized in the accompanying consolidated balance sheets . capitalization of computer software development costs begins upon establishing technological feasibility defined as meeting specifications determined by the program design . amortization of capitalized computer software development costs is provided on a product-by-product basis using the greater of ( a ) the amount computed using the ratio that current gross revenue for a product bears to total of current and anticipated future gross revenue for that product or ( b ) the straight-line method , beginning upon commercial release of the product , and continuing over the remaining estimated economic life of the product , not to exceed three years . total computer software costs capitalized were $ 0.4 million , $ 0.4 million and $ 0.3 million during the years ended june 30 , 2018 , 2017 and 2016 , respectively . total amortization expense charged to operations was approximately $ 0.4 million , $ 0.5 million and $ 0.6 million for the years ended june 30 , 2018 , 2017 and 2016 , respectively . computer software development accumulated amortization totaled $ 74.7 million and $ 74.3 million as of june 30 , 2018 and 2017 , respectively . weighted average remaining useful life of computer software development costs was 1.0 years and 0.6 years at june 30 , 2018 and 2017 , respectively . at each balance sheet date , we evaluate the unamortized capitalized software costs for potential impairment by comparing the balance to the net realizable value of the products . story_separator_special_tag during fiscal 2016 , other income ( expense ) , net was $ 0.1 million of net currency gains , which was comprised primarily of $ ( 3.4 ) million of net foreign currency exchange losses related to the acquisition bid , offset by $ 3.5 million of net currency gains . provision for income taxes replace_table_token_20_th fiscal 2018 compared to fiscal 2017 the effective tax rate for the periods presented is primarily the result of income earned in the u.s. taxed at u.s. federal and state statutory income tax rates , income earned in foreign tax jurisdictions taxed at the applicable rates , as well as the impact of permanent differences between book and tax income . on december 22 , 2017 , the president of the united states signed into law public law no . 115-97 , commonly referred to as the tax cuts and jobs act ( the “ tax act ” ) , following its passage by the united states congress . the tax act made significant changes to u.s. federal income tax laws , including reduction of the corporate tax rate from 35.0 % to 21.0 % , limitation of the tax deduction for interest expense to 30.0 % of adjusted taxable income ( except for certain small businesses ) , limitation of the deduction for net operating losses to 80.0 % of current year taxable income and elimination of net operating loss carrybacks , one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated , elimination of u.s. tax on foreign earnings ( subject to certain important exceptions ) , immediate deductions for certain new investments instead of deductions for depreciation expense over time , and modifying or repealing many business deductions . as a result of the enactment of the tax act , the blended u.s. statutory federal income tax rate for fiscal 2018 was 28.1 % . the tax act has several significant changes that impact all taxpayers , including a transition tax , which is a one-time tax charge on accumulated , undistributed foreign earnings . the calculation of accumulated foreign earnings requires an analysis of each foreign entity 's financial results going back to 1986. in response to the tax act , the securities and exchange commission ( “ sec ” ) staff issued a staff accounting bulletin no . 118 ( “ sab 118 ” ) that provides guidance on accounting for the impact of the tax act . sab 118 allows companies to record provisional amounts while the accounting impact of the tax act is still under analysis , not to extend beyond the measurement period of one year from the enactment of the tax act . we are currently estimating that we will not be subject to the transition tax associated with our accumulated , undistributed foreign earnings . we will continue to evaluate this area and expect to finalize our conclusions by the second quarter of fiscal 2019. our effective tax rate was 26.9 % and 22.9 % during fiscal 2018 and 2017 , respectively . we recognized income tax expense of $ 54.7 million during fiscal 2018 compared to $ 48.2 million during fiscal 2017 . fiscal 2018 was favorably impacted by the recognition of excess tax benefits related to stock-based compensation , the domestic production activity deduction , and the lower blended u.s. statutory tax rate of 28.1 % , partially offset by $ 5.2 million of tax 35 expense associated with the decrease in our net deferred income tax assets due to the reduction in the corporate income tax rate under the tax act . fiscal 2017 was favorably impacted by an income tax benefit of $ 19.1 million , which primarily resulted from the release of tax contingency reserves following an examination of our fiscal 2015 federal tax return by the irs . as of june 30 , 2018 , we maintained a valuation allowance in the u.s. primarily for certain deferred tax assets related to capital losses that are anticipated to expire unused . we also maintain a valuation allowance on certain foreign subsidiary nol carryforwards and state r & d credits because it is more likely than not that a benefit will not be realized . as of june 30 , 2018 and 2017 , our total valuation allowance was $ 10.4 million and $ 11.3 million , respectively . we made cash tax payments totaling $ 50.6 million during fiscal 2018 . we paid $ 44.0 million for u.s. federal and state income taxes and $ 6.6 million for foreign tax liabilities . fiscal 2017 compared to fiscal 2016 the effective tax rate for the periods presented is primarily the result of income earned in the u.s. taxed at u.s. federal and state statutory income tax rates , income earned in foreign tax jurisdictions taxed at the applicable rates , as well as the impact of permanent differences between book and tax income . our effective tax rate was 22.9 % and 33.6 % during fiscal 2017 and 2016 , respectively . we recognized income tax expense of $ 48.2 million during fiscal 2017 compared to $ 70.7 million during fiscal 2016 . the $ 22.5 million year-over-year decrease was generally attributable to an income tax benefit of $ 19.1 million primarily resulting from the release of tax contingency reserves as a result of concluding an examination of our fiscal 2015 federal tax return by the irs and additional federal and state research and development ( “ r & d ” ) credits . as of june 30 , 2017 , we maintained a valuation allowance in the u.s. primarily for certain deferred tax assets related to capital losses that are anticipated to expire unused . we also maintain a valuation allowance on certain foreign subsidiary nol carryforwards and state r & d credits because it is more likely than not that a benefit will not be realized . as of june 30 ,

partially offsetting these uses of cash were net increases in deferred revenue of $ 18.5 million . investing activities fiscal 2018 37 during fiscal 2018 , we used $ 34.4 million of cash from investing activities . the use of cash was from $ 33.7 million for business acquisitions and $ 0.7 million for capital expenditures . fiscal 2017 during fiscal 2017 , we used $ 36.7 million of cash from investing activities . the use of cash was from $ 36.2 million for business acquisitions and $ 3.1 million for capital expenditures . partially offsetting this use of cash was $ 2.6 million related to the net maturity of marketable securities . financing activities fiscal 2018 during fiscal 2018 , we used $ 178.5 million of cash for financing activities . we used $ 205.0 million for repurchases of our common stock , $ 8.6 million for deferred business acquisition payments , and $ 7.9 million for withholding taxes on vested and settled restricted stock units . sources of cash in the period included proceeds of $ 30.0 million from the credit agreement and proceeds of $ 13.5 million from the exercise of employee stock options . fiscal 2017 during fiscal 2017 , we used $ 362.0 million of cash for financing activities . we paid $ 371.5 million for repurchases of our common stock and paid withholding taxes of $ 5.8 million on vested and settled restricted stock units . sources of cash in the period included proceeds of $ 9.3

the company is no longer subject to examinations by the related tax authorities for the company 's u.s. federal and state income tax returns for years prior to 2012. comprehensive income the company does not have any reconciling other comprehensive income items for the for the years ended december 31 , 2019 and 2018 , respectively . 45 eastside distilling , inc. and subsidiaries notes to consolidated financial statements years ended december 31 , 2019 and 2018 excise taxes the company is responsible for compliance with the ttb regulations , which includes making timely and accurate excise tax payments . the company is subject to periodic compliance audits by the ttb . individual states also impose excise taxes on alcoholic beverages in varying amounts . the company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws . excise taxes totaled $ 0.8 million and $ 0.7 million in years 2019 and 2018 , respectively . stock-based compensation the company recognizes as compensation expense all stock-based awards issued to employees . the compensation cost is measured based on the grant-date fair value of the related stock-based awards and is recognized over the service period of stock-based awards , which is generally the same as the vesting period . the fair value of stock options is determined using the black-scholes valuation model , which estimates the fair value of each award on the date of grant based on a variety of assumptions including expected stock price volatility , expected terms of the awards , risk-free interest rate , and dividend rates , if applicable . stock-based awards issued to nonemployees are recorded at fair value on the measurement date and are subject to periodic market adjustments at the end of each reporting period and as the underlying stock-based awards vest . stock-based compensation was $ 0.7 million and $ 0.7 million in fiscal years 2019 and 2018 , respectively . accounts receivable factoring program the company has entered into two accounts receivable factoring programs . one for its spirits customers ( the “ spirits program ” ) and another for its co-packing customers ( the “ co-packing program ” ) . under the programs , the company has the option to sell certain customer account receivables in advance of payment for 75 % ( spirits program ) or 85 % ( co-packing program ) of the amount due . when the customer remits payment , the company receives the remaining balance . for the spirits program , interest is charged on the advanced 75 % payment at a rate of 2.4 % for the first 30 days plus 1.44 % for each additional ten-day period . for the co-packing program , interest is charged against the greater of $ 500,000 or the total funds advanced at a rate of 5 % plus the prime rate published in the wall street journal . under the terms of both agreements , the factoring provider has full recourse against the company should the customer fail to pay the invoice . in accordance with asc 860 , we have concluded that these agreements have met all three conditions identified in asc 860-10-40-5 ( a ) – ( c ) and have accounted for this activity as a sale . given the quality of the factored accounts , the company has not recognized a recourse obligation . in certain limited instances , the company may provide collection services on the factored accounts but does not receive any fees for acting as the collection agent , and as such , the company has not recognized a service obligation asset or liability . the company factored $ 2.2 million of invoices and incurred $ 0.1 million in fees associated with the factoring programs during the year ended december 31 , 2019. at december 31 , 2019 , the company had $ 0.6 million factored invoices outstanding . discontinued operations the company reports discontinued operations by applying the following criteria in accordance with accounting standards codification ( “ asc ” ) topic 205-20 – presentation of financial statements – discontinued operations : ( 1 ) component of an entity ; ( 2 ) held for sale criteria ; ( 3 ) strategic shift . on december 31 , 2019 , management made a strategic shift to focus the company 's sale and marketing efforts on the nationally branded product platform , resulting in the decision to close all four of its retail stores in the portland , oregon area . although this decision meets the criteria ( 1 ) and ( 3 ) for reporting discontinued operations , it does not meet the ( 2 ) held for sale criteria until the retail stores are closed / abandoned , which is planned to occur by march 31 , 2020. as a result , the retail operations will not be reported as discontinued operations as of december 31 , 2019. recently adopted accounting pronouncements in august 2016 , the financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) 2016-15 , statement of cash flows – classification of certain cash receipts and cash payments ( “ asu 2016-15 ” ) and in november 2016 issued asu 2016-18 , statement of cash flows ( topic 230 ) : restricted cash ( “ asu 2016-18 ” ) . the new standards are effective for fiscal years beginning after december 15 , 2017 , and interim periods within those fiscal years and amend the existing accounting standards for the statement of cash flows . story_separator_special_tag the company recognizes sales when merchandise is shipped from a warehouse directly to wholesale customers ( except in the case of a consignment sale ) . for consignment sales , which include sales to the oregon liquor control commission ( olcc ) , the company recognizes sales upon the consignee 's shipment to the customer . postage and handling charges billed to customers are also recognized as sales upon shipment of the related merchandise . shipping terms are generally fob shipping point , and title passes to the customer at the time and place of shipment or purchase by customers at a retail location . for consignment sales , title passes to the consignee concurrent with the consignee 's shipment to the customer . the customer has no cancellation privileges after shipment or upon purchase at retail locations , other than customary rights of return . the company excludes sales tax collected and remitted to various states from sales and cost of sales . sales from items sold through the company 's retail locations are recognized at the time of sale . sales received from online merchants who sell discounted gift certificates for the company 's merchandise and tastings is deferred until the customer has redeemed the discounted gift certificate or the gift certificate has expired , whichever occurs earlier . customer programs and incentives customer programs and incentives , which include customer promotional discount programs , customer incentives and other payments , are a common practice in the alcoholic beverage industry . the company makes these payments to customers and incurs these costs to promote sales of products and to maintain competitive pricing . amounts paid in connection with customer programs and incentives are recorded as reductions to net sales or as advertising , promotional and selling expenses in accordance with asc 606 - revenue from contracts with customers , based on the nature of the expenditure . amounts paid to customers totaled $ 0.6 million and $ 0.4 million in 2019 and 2018 , respectively . the customer programs and incentives for redneck riviera whiskey in 2019 were $ 0.4 million , compared to $ 0.1 million in 2018 , for which 50 % of these charges are expected to be reimbursed upon the eventual sale of the brand by the licensor while the licensing agreement is in effect . cost of sales cost of sales consists of the finished spirits imported from mexico for the azuñia tequila brand , costs of ingredients utilized in the production of spirits , manufacturing labor and overhead , warehousing rent , packaging , and in-bound freight charges . ingredients account for the largest portion of the cost of sales , followed by packaging and production costs . advertising , promotional and selling expenses the following expenses are included in advertising , promotional and selling expenses in the accompanying consolidated statements of operations : media advertising costs , special event costs , tasting room costs , sales and marketing expenses , promotional costs of value added packaging , salary and benefit expenses , travel and entertainment expenses for the sales , brand and sales support workforce and promotional activity expenses . advertising , promotional and selling costs are expensed as incurred . advertising , promotional and selling expense was $ 7.5 million and $ 4.3 million in 2019 and 2018 , respectively . the advertising , promotional and selling expense for redneck riviera whiskey in 2019 was $ 4.0 million compared to $ 2.3 in 2018 for which 50 % of these charges are expected to be reimbursed upon the eventual sale of the brand by the licensor while the licensing agreement is in effect . shipping and fulfillment costs freight costs incurred related to shipment of merchandise from the company 's distribution facilities to customers are recorded in cost of sales . 34 cash and cash equivalents cash equivalents are considered to be highly liquid investments with maturities of three months or less at the time of the purchase . the company had no cash equivalents at december 31 , 2019 and december 31 , 2018. concentrations financial instruments that potentially subject the company to concentrations of credit risk consist principally of trade receivables . at december 31 , 2019 , two distributors represented 40 % of trade receivables . at december 31 , 2018 , two distributors represented 37 % of trade receivables . sales to one distributor accounted for 16 % of consolidated sales for the year ended december 31 , 2019. sales to two distributors accounted for 42 % of consolidated sales for the year ended december 31 , 2018. inventories inventories primarily consist of bulk spirits , packaging supplies , and finished goods which are stated at the lower of cost or market . cost is determined using an average costing methodology , which approximates cost under the first-in , first-out ( fifo ) method . a portion of our finished goods inventory is held by certain independent distributors on consignment until it is sold to a third party . the company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based primarily on the company 's estimated forecast of product demand and production requirements . such write-downs establish a new cost basis of accounting for the related inventory . the company has recorded write-downs of inventory of $ 0.3 million and $ nil for the years ended december 31 , 2019 and 2018 , respectively . excise taxes the company is responsible for compliance with the alcohol , tobacco tax and trade bureau ( “ ttb ” ) regulations , which includes making timely and accurate excise tax payments . the company is subject to periodic compliance audits by the ttb . individual states also impose excise taxes on alcoholic beverages in varying amounts . the company calculates its excise tax expense based upon units produced and on its understanding of the applicable excise tax laws . excise taxes totaled $

in 2018 , the inventory build was $ 7.0 million which was principally raw spirit inventory . accounts receivable increased $ 0.2 million and a $ 0.2 million increase in accrued liabilities was partially offset by a $ 0.7 million increase in accounts payable . investing activities cash used in investing activities consists primarily of acquisitions and purchases of property and equipment . we incurred capital expenditures of $ 3.6 million and $ 1.3 million in 2019 and 2018 , respectively . the increase in cash usage can largely be attributed to the $ 1.5 million craft canning acquisition , net of cash acquired , in january 2019 , and the further buildout and equipment additions to our primary production facility in milwaukie , oregon . 32 financing activities our operating losses and working capital needs were primarily funded by existing cash on hand and $ 2.5 million in proceeds from the issuance of common stock and debt ( net of repayments ) . net cash flows provided by financing activities during 2018 were from $ 8.7 million in proceeds from the sale of common stock , $ 3.6 million in proceeds from the issuance of notes , $ 2.9 million net proceeds from the secured credit facility and warrant exercises of $ 8 million , partially offset by principal payments on notes of $ 0.5 million . common stock financings < p

in some instances premiums are returned when medical costs fall below a certain percentage of gross premiums ; or when administrative costs or profits exceed a certain percentage of gross premiums . in other instances , premiums are partially determined by the acuity of care provided to members ( risk adjustment ) . to the extent that our expenses and profits change from the amounts previously reported ( due to changes in estimates ) our revenue earned for those periods will also change . in all of these instances our revenue is only subject to estimate due to the fact that the thresholds themselves contain elements ( expense or profit ) that are subject to estimate . while we have adequate experience and data to make sound estimates of our expenses or profits , changes to those estimates may be necessary , which in turn will lead to changes in our estimates of revenue . in general , a change in estimate relating to expense or profit would offset any related change in estimate to premium , resulting in no or small impact to net income . the following contractual provisions fall into this category : california health plan medical cost floors ( minimums ) : a portion of certain premiums received by our california health plan may be returned to the state if certain minimum amounts are not spent on defined medical care costs . we recorded a liability under the terms of these contract provisions of $ 0.3 million and $ 1.0 million at december 31 , 2012 , and december 31 , 2011 , respectively . florida health plan medical cost floor ( minimum ) for behavioral health : a portion of premiums received by our florida health plan may be returned to the state if certain minimum amounts are not spent on defined behavioral health care costs . at both december 31 , 2012 , and december 31 , 2011 , we had not recorded any liability under the terms of this contract provision since behavioral health expenses are not less than the contractual floor . new mexico health plan medical cost floors ( minimums ) and administrative cost and profit ceilings ( maximums ) : our contract with the state of new mexico directs that a portion of premiums received may be returned to the state if certain minimum amounts are not spent on defined medical care costs , or if administrative costs or profit ( as defined ) exceed certain amounts . at both december 31 , 2012 , and december 31 , 2011 we had not recorded any liability under the terms of these contract provisions . texas health plan profit sharing : under our contract with the state of texas , there is a profit-sharing agreement under which we pay a rebate to the state of texas if our texas health plan generates pretax income , as defined in the contract , above a certain specified percentage , as determined in accordance with a tiered rebate schedule . we are limited in the amount of administrative costs that we may deduct in calculating the rebate , if any . as a result of profits in excess of the amount we are allowed to fully retain , we accrued an aggregate liability of approximately $ 3.2 million and $ 0.7 million pursuant to our profit-sharing agreement with the state of texas at december 31 , 2012 and december 31 , 2011 , respectively . washington health plan medical cost floors ( minimums ) : a portion of certain premiums received by our washington health plan may be returned to the state if certain minimum amounts are not spent on defined medical care costs . at both december 31 , 2012 , and december 31 , 2011 , we had not recorded any liability under the terms of this contract provision because medical expenses are not less than the contractual floor . medicare revenue risk adjustment : based on member encounter data that we submit to cms , our medicare premiums are subject to retroactive adjustment for both member risk scores and member pharmacy cost experience for up to 2 years after the original year of service . this adjustment takes into account the acuity of each member 's medical needs relative to what was anticipated when premiums were originally set for that member . in the event that a member requires less acute medical care than was anticipated by the original premium amount , cms may recover premium from us . in the event that a member requires more acute medical care than was anticipated by the original premium amount , cms may pay us additional retroactive premium . a similar retroactive reconciliation is undertaken by cms for our medicare members ' pharmacy utilization . we estimate the amount of medicare revenue that will ultimately be realized for the periods presented based on our knowledge of our members ' heath care utilization patterns and cms practices . based on our knowledge of member health care utilization patterns and expenses we have recorded a net receivable of approximately $ 0.3 million and $ 5.0 million for anticipated medicare risk adjustment premiums at december 31 , 2012 and december 31 , 2011 , respectively . quality incentives that allow us to recognize incremental revenue if certain quality standards are met . these are contract provisions that allow us to earn additional premium revenue in certain states if we achieve certain quality-of-care or administrative measures . we estimate the amount of revenue that will ultimately be realized for the periods presented based on our experience and expertise in meeting the quality and administrative measures as well as our ongoing and current monitoring of our progress 78 in meeting those measures . the amount of the revenue that we will realize under these contractual provisions is determinable based upon that experience . story_separator_special_tag % in the 2012 , compared with 85.4 % in 2011 . the higher premium revenue pmpm associated with the abd membership , however , offset the increased medical care ratio so that income from operations was consistent between 2012 and 2011. the medical care ratio of the wisconsin health plan increased to 96.2 % in 2012 , compared with 92.5 % in 2011 primarily due to increases in inpatient costs . the plan has implemented provider contracting initiatives and new utilization management techniques as a part of its efforts to improve profitability . 42 health plans segment operating data the following table summarizes member months , premium revenue , medical care costs , medical care ratio , and premium taxes by health plan for the periods indicated ( pmpm amounts are in whole dollars ; member months and other dollar amounts are in thousands ) : replace_table_token_9_th replace_table_token_10_th ( 1 ) a member month is defined as the aggregate of each month 's ending membership for the period presented . ( 2 ) our contract with the state of missouri expired without renewal on june 30 , 2012. the missouri health plan 's claims run-out activity subsequent to june 30 , 2012 , is reported in “ other . ” ( 3 ) “ other ” medical care costs also include medically related administrative costs of the parent company . ( 4 ) the “ mcr excluding premium tax expense ” represents medical costs as a percentage of premium revenues , where premium revenue is reduced by premium tax expense . days in medical claims and benefits payable the days in medical claims and benefits payable were as follows : 43 replace_table_token_11_th molina medicaid solutions segment performance of the molina medicaid solutions segment was as follows : replace_table_token_12_th operating income for our molina medicaid solutions segment improved $ 21.7 million for the year ended december 31 , 2012 , compared with 2011 . this improvement was primarily the result of stabilization of our newest contracts in idaho and maine . consolidated expenses general and administrative expenses general and administrative expenses increased to 8.8 % of total revenue for the year ended december 31 , 2012 , compared with 8.7 % of total revenue for the year ended december 31 , 2011 . premium tax expense premium tax expense decreased to 2.8 % of premium revenue net of premium tax for the year ended december 31 , 2012 , compared with 3.5 % of total premium revenue for the year ended december 31 , 2011 . the decrease in 2012 was primarily due to the reduction of premium taxes at the michigan and california health plans effective in 2012 , and the growth in revenue at our texas health plan , which is subject to a lower premium tax rate ( measured as a percentage of premium revenue ) than our consolidated average . depreciation and amortization depreciation and amortization related to our health plans segment is all recorded in “ depreciation and amortization ” in the consolidated statements of income . depreciation and amortization related to our molina medicaid solutions segment is recorded within three different headings in the consolidated statements of income as follows : amortization of purchased intangibles relating to customer relationships is reported as amortization within the heading “ depreciation and amortization ; ” amortization of purchased intangibles relating to contract backlog is recorded as a reduction of “ service revenue ; ” and depreciation is recorded within the heading “ cost of service revenue . ” the following table presents all depreciation and amortization recorded in our consolidated statements of income , regardless of whether the item appears as depreciation and amortization , a reduction of revenue , or as cost of service revenue . 44 replace_table_token_13_th impairment of goodwill and intangible assets we did not record an impairment charge in 2012 . on february 17 , 2012 , our missouri health plan was notified that it was not awarded a new contract under the state 's rfp , and therefore its contract expired on june 30 , 2012. as a result , we recorded a non-cash impairment charge of approximately $ 64.6 million , or $ 1.34 per diluted share , in the fourth quarter of 2011. of the total charge , $ 58.5 million was not tax deductible , resulting in a disproportionate impact to net income and to the effective tax rate . interest expense interest expense was $ 16.8 million for the year ended december 31 , 2012 , compared with $ 15.5 million for the year ended december 31 , 2011 . interest expense includes non-cash interest expense relating to our convertible senior notes , which amounted to $ 5.9 million and $ 5.5 million for the years ended december 31 , 2012 and 2011 , respectively . income taxes income tax expense is recorded at an effective rate of 48.6 % for the year ended december 31 , 2012 , compared with 67.8 % for the year ended december 31 , 2011 . the effective rate for the year ended december 31 , 2012 is higher than our statutory rate primarily due to nondeductible expenses primarily relating to compensation and changes in the fair value of contingent consideration . the effective rate for the year ended december 31 , 2011 reflects the nondeductible nature of the majority of the missouri impairment charge and certain discrete tax benefits . year ended december 31 , 2011 compared with the year ended december 31 , 2010 fiscal year 2011 overview and highlights for the year , our net income was $ 20.8 million , or $ 0.45 per diluted share , a decrease of 66 % over 2010 . we recorded a non-cash impairment charge of approximately $ 64.6 million , or $ 1.34 per diluted share , in connection with the expiration of our missouri health plan 's contract with the state of missouri effective june 30 , 2012. absent this

because of the statutory restrictions that inhibit the ability of our health plans to transfer net assets to us , the amount of retained earnings readily available to pay dividends to our stockholders are generally limited to cash , cash equivalents and investments held by the parent company – molina healthcare , inc. such cash , cash equivalents and investments amounted to $ 46.9 million and $ 23.6 million as of december 31 , 2012 , and 2011 , respectively . this increase was primarily due to increased dividends received from our subsidiaries during 2012. the national association of insurance commissioners , or naic , adopted rules effective december 31 , 1998 , which , if implemented by the states , set minimum capitalization requirements for insurance companies , hmos , and other entities bearing risk for health care coverage . the requirements take the form of risk-based capital , or rbc , rules . michigan , new mexico , ohio , texas , utah , washington , and wisconsin have adopted these rules , which may vary from state to state . california and florida have not yet adopted naic risk-based capital requirements for hmos and have not formally given notice of their intention to do so . such requirements , if adopted by california and florida , may increase the minimum capital required for those states . as of december 31 , 2012 , our health plans had aggregate statutory capital and surplus of approximately $ 557.9 million compared with the required minimum aggregate statutory capital and surplus of approximately $ 345.7 million . all of our health plans were in compliance with the minimum capital requirements at december 31 , 2012 . we have the ability and commitment to provide additional capital to each of our health plans when necessary to ensure that statutory capital and surplus continue to meet regulatory requirements . future sources and uses of liquidity 1.125 % cash convertible senior notes due 2020 on february 15 , 2013 , we issued $ 550 million aggregate principal amount of 1.125 % cash convertible senior notes due 2020 , or the notes . the notes bear interest at a rate of 1.125 % p er year , payable semiannually in arrears on january 15 and july 15 of each year , beginning on july 15 , 2013. the notes will mature on january 15 , 2020. the notes are not convertible into our common stock or

research and development expenses the company 's research and development expenses consist primarily of salaries , payroll taxes , employee benefits , and equity-based compensation charges for those individuals involved in ongoing research and development efforts ; as well as consulting expenses , laboratory supplies , third party research and development expenses , animal studies and overhead , including facilities and depreciation costs . research and development expenses are charged to expense as incurred . the company has entered into various research and development contracts with research institutions , clinical research organizations , clinical manufacturing organizations and other companies . 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 in the accompanying consolidated balance sheets as prepaid or accrued expenses . the company records accruals for estimated ongoing research and development costs . when evaluating the adequacy of the accrued liabilities , the company analyzes progress of the services , 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 . 147 patent costs costs related to filing and pursuing patent applications are recorded as general and administrative expenses and expensed as incurred since recoverability of such expenditures is uncertain . equity-based compensation related to profits interest plan prior to the corporate reorganization in july 2020 , the company had a profits interest plan that was a liability award plan in accordance with asc topic 718 , compensation – stock compensation ( topic 718 ) . the company measured the fair value of each award on the grant date and recognized such fair value over the requisite service period ( usually the vesting period ) on a straight-line basis . the fair value of the award was remeasured at each reporting date until the award was settled , with a true-up of compensation cost for changes in fair value prorated for the portion of the requisite service period rendered . once vested , any subsequent change in fair value was recognized immediately . the fair value of any awards that expired or were forfeited or canceled for no value were adjusted to zero , as they occurred , such that any previously recorded compensation cost would be fully reversed . subsequent to the corporate reorganization and amendment of the profits interest plan by himalaya parent in october 2020 , the company will no longer reflect compensation cost and a corresponding capital contribution associated with the ongoing mark-to-market of the class b profits interests held by himalaya parent llc , but any new profits interest awards granted by himalaya parent llc to bioatla , inc. 's employees , or modifications to the existing awards made by himalaya parent llc , will result in additional compensation cost and a corresponding capital contribution in accordance with asc topic 718. stock-based compensation stock-based compensation expense represents the grant date fair value of equity awards over the requisite service period of the awards ( usually the vesting period ) on a straight-line basis . the company estimates the fair value of stock option grants using the black-scholes option pricing model . prior to the company 's initial public offering ( “ipo” ) , the fair value of rsus was based on the estimated fair value of the underlying common stock on the date of grant and , subsequent to the company 's ipo , the fair value is based on the closing sales price of the company 's common stock on the date of grant . equity award forfeitures are recognized as they occur . 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 consequences of events that have been included in the consolidated financial statements . under this method , deferred tax assets and liabilities are determined on the basis of the differences between the financial statements 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 of a change in tax rates on deferred tax assets and liabilities is recognized as income in the period that includes the enactment date . the company recognizes net deferred tax assets to the extent that the company believes these assets are more likely than not to be realized . in making such a determination , management considers all available positive and negative evidence , including future reversals of existing taxable temporary differences , projected future taxable income , exclusive of reversing temporary difference , tax-planning strategies and the results of recent operations . if management determines that the company would be able to realize its deferred tax assets in the future in excess of their net recorded amount , management would make an adjustment to the deferred tax asset valuation allowance , which would reduce the provision for income taxes . the company records uncertain tax positions on the basis of a two-step process whereby ( 1 ) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and ( 2 ) for those tax positions that meet the more-likely-than-not recognition threshold , management recognizes the largest amount of tax benefit that is more than 50 % likely to be realized upon 148 ultimate settlement with the related tax authority . the company recognizes interest and penalties related to unrecognized tax benefits within income tax expense . any accrued interest and penalties are included within the related tax liability . story_separator_special_tag the net change in our operating assets and liabilities was primarily due to an increase in deferred revenue of $ 19.8 million as we recognized as revenue only a small portion of the $ 25.0 million of upfront payment and cost reimbursements we received from beigene , a decrease in prepaid expenses of $ 0.9 million , a decrease in accounts payable and accrued expenses of $ 3.1 million and an increase in accrued interest of $ 1.3 million on our outstanding convertible debt . the $ 4.9 million change in non-cash transactions primarily consisted of a decrease in the profits interest liability of $ 6.4 million primarily due to a decrease in the fair value of the underlying awards , offset by non-cash charges of $ 0.9 million related to depreciation and amortization , $ 0.1 million related to the change in fair value of derivative liability , $ 0.4 million of non-cash interest and $ 0.2 million of deferred rent . cash used in investing activities cash used in investing activities was $ 0.6 million and $ 1.5 million for the years ended december 31 , 2020 and 2019 , respectively , related to the purchase of property and equipment . cash provided by financing activities net cash provided by financing activities was $ 271.8 million for the year ended december 31 , 2020 , which consisted primarily of $ 200.2 million of net proceeds from our initial public offering , $ 68.2 million of net 130 proceeds from our issuance of series d convertible preferred stock , $ 2.8 million of proceeds from the issuance of convertible promissory notes and $ 0.7 million of proceeds from a ppp loan . net cash provided by financing activities was $ 4.0 million for the year ended december 31 , 2019 , which consisted primarily of proceeds from the issuance of convertible notes . critical accounting policies and estimates our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which have been prepared in accordance with u.s. gaap . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements , as well as the reported revenue generated , and reported expenses incurred during the reporting periods . our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions and conditions . while our significant accounting policies are described in the note 1 to our consolidated financial statements included elsewhere in this annual report on form 10-k , we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results . accrued expenses as part of the process of preparing our consolidated financial statements , we accrue expenses as of each balance sheet date . 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 cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost . we make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time . the estimates in our accrued research and development expenses include the costs incurred for services performed by our vendors in connection with research and development activities for which we have not yet been invoiced . we periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary . we base our expenses related to research and development activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct research and development 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 research and development expense . in accruing service fees , we estimate the time period over which services will be performed and the 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 prepaid expense accordingly . advance payments for goods and services that will be used in future research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made . although we do not expect our estimates to be materially different from amounts actually incurred , if our estimates of the status and timing of services performed differ from the actual status and timing of services performed , it could result in us reporting amounts that are too high or too low in any particular period . to date , there have been no material differences between our estimates of such expenses and the amounts actually incurred . 131 collaboration revenue effective january 1 , 2019 , we adopted accounting standards update , or asu , 2014-09 , revenue from contracts with customers ( topic 606 ) , or topic 606 , using the modified retrospective method . topic 606 supersedes the revenue recognition requirements in asc topic 605 , revenue recognition , or topic 605. there was no material cumulative effect of adopting topic 606.

interest income interest income was $ 0.1 million for both the year ended december 31 , 2020 and 2019. interest expense interest expense was $ 1.4 million and $ 1.6 million for the years ended december 31 , 2020 and 2019 , respectively . the decrease of $ 0.2 million was primarily due to reduced interest expense as a result of the settlement of all of our convertible debt in july 2020 , offset by the impact of the timing of new convertible debt issuances in 2019 and 2020. change in fair value of derivative liability change in fair value of derivative liability was $ 1.6 million and $ 0.1 million for the years ended december 31 , 2020 and 2019 , respectively . the increase of $ 1.5 million was primarily due to changes in the fair value of embedded derivatives issued in connection with our outstanding convertible promissory notes . 127 extinguishment of convertible debt extinguishment of convertible debt was $ 2.9 million and $ 0 for the years ended december 31 , 2020 and 2019 , respectively . the increase of $ 2.9 million was primarily due to $ 2.7 million of losses on extinguishment we recognized in july 2020 , in connection with our corporate reorganization , when we settled all of our outstanding convertible promissory notes and recognized extinguishment losses for the difference between the fair value of the consideration given to the noteholders and the carrying value of the related convertible promissory notes . in addition , in april 2020 , we recognized $ 0.2 million of losses on extinguishment related to the amendment of the terms of certain outstanding convertible promissory notes that we concluded were extinguishments . other income ( expense ) we had minimal other expense with $ 1,000 and $ 22,000 for the years ended december 31 , 2020 and 2019 , respectively . liquidity and capital resources we have incurred aggregate net losses and negative cash flows from operations since our inception and anticipate we will continue to incur net losses for the foreseeable future . as of december 31 , 2020 , we had cash and cash equivalents of $ 238.6 million . < p style= '' margin-top:18pt ; margin-bottom:0pt ; font-size:10pt ;

the sum of those prices is then compared to the arrangement , and any difference is applied to the separate deliverable ratably . this method also establishes a selling price hierarchy for determining the selling price of a deliverable , which includes : ( i ) vendor-specific objective evidence ( “ vsoe ” ) , if available , ( ii ) third-party evidence if vsoe is not available , and ( iii ) estimated selling price if neither vsoe nor third-party evidence is available . vsoe is determined based on the value the company sells the undelivered element to a customer as a stand-alone product . revenue attributable to the undelivered elements is included in deferred revenue when the product is shipped and is recognized when the related service is performed . disposables not shipped at time of sale and installation services are typically shipped or installed within 30 days . training is included in deferred revenue when the product is shipped and is recognized when the related service is performed or upon the appropriate expiration of time offered under the agreement . deferred revenue attributable to undelivered elements , which primarily consists of training , totaled approximately $ 1.4 million and $ 1.6 million as of december 31 , 2016 and 2015 , respectively . f-10 key judgments of the company 's revenue recognition include the collectability of payment from the customer , the satisfaction of all elements of the arrangement having been delivered , and that no additional customer credits and discounts are neede d. the company evaluates the customer 's credit worthiness prior to the shipment of the product . based on the assessment of the credit information available , the company may determine the credit risk is higher than normally acceptable , and will either decli ne the purchase or defer the revenue until payment is reasonably assured . future obligations required at the time of sale may also cause the company to defer the revenue until the obligation is satisfied . although all sales are final , the company accepts returns of products in certain , limited circumstances and records a provision for sales returns based on historical experience concurrent with the recognition of revenue . the sales returns allowance is recorded as a reduction of accounts receivable and revenue . as of december 31 , 2016 and 2015 , $ 210,000 and $ 210,000 , respectively , was recorded as a reduction of accounts receivable for sales returns . extended warranty contracts , which are sold to laser and certain imaging customers , are recorded as revenue on a straight-line basis over the period of the contracts , which is typically one year . included in deferred revenue for each of the years ended december 31 , 2016 and 2015 , was approximately $ 1.5 million and $ 1.4 million , respectively , for extended warranty contracts . for sales transactions involving used laser trade-ins , the company records the purchased trade-ins as inventory at the fair value of the asset surrendered with the offset to accounts receivable . in determining the estimated fair value of used laser trade-ins , the company makes an assessment of usable parts and key components and considers the ultimate resale value of the certified pre-owned ( or “ cpo ” ) laser with applicable margins . the company sells these cpo laser trade-ins as refurbished lasers . trade-in rights are not established or negotiated with customers during the initial sales transaction of the original lasers . trade-in rights are promotional events used at management 's discretion to encourage existing laser customers to purchase new lasers . a customer is not required to trade in a laser nor is the company required to accept a trade-in . however , the promotional value offered in exchange for the trade-in laser is not offered without a laser trade-in . the transaction is treated as a monetary transaction as each sale transaction involving a customer trade-in includes significant boot of greater than 25 % of the fair value of the exchange . as a monetary transaction , the sale is recognized following the company 's laser system revenue recognition policy . there have been no sales transactions in which the cash consideration was less than 25 % of the total transaction value . the company recognizes revenue for royalties under licensing agreements for its patented technology when the product using its technology is sold . the company estimates and recognizes the amount earned based on historical performance and current knowledge about the business operations of its licensees . the company 's estimates have been consistent with amounts historically reported by the licensees . licensing revenue related to exclusive licensing arrangements is recognized concurrent with the related exclusivity period . from time to time , the company may offer sales incentives and promotions on its products . the cost of sales incentives are recorded at the date at which the related revenue is recognized as a reduction in revenue , an increase in cost of goods sold or a selling expense , as applicable , or later , in the case of incentives offered after the initial sale has occurred . provision for warranty expense the company provides warranties against defects in materials and workmanship of its laser systems for specified periods of time . for the years ended december 31 , 2016 , 2015 , and 2014 laser systems sold domestically were covered by the warranty for a period of up to two years from the date of sale by the company or the distributor to the end-user . laser systems sold internationally were covered by the warranty for a period of up to 28 months from the date of sale to the international distributor . estimated warranty expenses are recorded as an accrued liability with a corresponding provision to cost of revenue . story_separator_special_tag domestic revenues were $ 33.4 million , or 64 % of net revenue , for fiscal 2016 compared to $ 29.5 million , or 61 % of net revenue , for fiscal 2015. international revenues for fiscal 2016 were $ 18.4 million , or 36 % of net revenue , compared to $ 19.0 million , or 39 % of net revenue for fiscal 2015. the increase in period-over-period net revenue resulted from increases in domestic laser system revenue , imaging systems revenue , consumables and other revenue , and services revenue , partially offset by decreases in international laser systems revenue , im aging systems revenue , consumables and other revenue , services revenue , and domestic license and royalties revenue . our goal has been to refocus on strengthening our leadership position in dental markets worldwide through increased focus on our professional customers and their patients . we have strengthened our management team with new key personnel and invested in our sales resources both domestically and internationally . laser system net revenues increased by approximately $ 2.5 million , or 8 % , in fiscal 2016 compared to fiscal 2015. as expected , we experienced an improvement in the sales of our core laser products during fiscal 2016 as compared with the prior year . in 2016 , we continued to realize some of the changes to our sales cycle that were implemented late in 2015. imaging system net revenue increased by approximately $ 0.8 million , or 37 % , in fiscal 2016 compared to fiscal 2015. this increase was due to increased overall interest in the market in intra-oral scanning devices , and our favorable positioning as a distributor . consumables and other net revenue , which includes products such as disposable tips and shipping revenue , increased approximately $ 29,000 , or 0.4 % , in fiscal 2016 , as compared to fiscal 2015. the slight increase in consumables and other net revenue was primarily a result of auxiliary sales to our growing laser customer base . services net revenue , which consists primarily of extended warranty service contracts and advanced training programs , increased by approximately $ 74,000 , or 1 % , in fiscal 2016 , as compared to fiscal 2015. the slight increase in services revenue was primarily a result of our growing laser customer base . license fees and royalty revenue decreased by approximately $ 56,000 , or 27 % , to approximately $ 149,000 in fiscal 2016 compared to $ 205,000 in fiscal 2015 . license fees and royalty revenues are associated with intellectual property related to our laser technologies . the decrease was primarily due to the settlement of the fotona proizvodnja optoelektronskih naprav d.d . and fotona llc intellectual property litigation ( the “ fotona litigation ” ) from fiscal 2015. we anticipate license fees and royalty revenue to be consistent with fiscal 2016 for the year ending december 31 , 2017 ( “ fiscal 2017 ” ) . cost of revenue . cost of revenue in fiscal 2016 decreased by $ 1.0 million , or 3 % , to $ 31.5 million , or 61 % of net revenue , compared with cost of revenue of $ 32.5 million , or 67 % of net revenue , in fiscal 2015. the decrease in cost of revenue was mainly attributable to the increased concentration of domestic sales that typically have higher margins than our international sales and reduced warranty expenses from quality improvements . gross profit . gross profit as a percentage of revenue typically fluctuates with product and regional mix , selling prices , product costs and revenue levels . gross profit for fiscal 2016 was $ 20.3 million , or 39 % of net revenue , an increase of approximately $ 4.3 million , or 27 % , as compared with gross profit of $ 16.0 million , or 33 % of net revenue , for fiscal 2015. improvements in gross profit reflect a larger concentration of domestic laser sales , specifically the waterlase iplus , which typically have higher product margins than our international sales due to higher pricing . operating expenses . operating expenses for fiscal 2016 were $ 35.3 million , or 68 % of net revenue , a decrease of approximately $ 595,000 , or 2 % , as compared with $ 35.9 million , or 74 % of net revenue , for fiscal 2015. the year-over-year decrease in expense is primarily d ue to a $ 1.1 million decrease in payroll-related expenses . see the following expense categories for further explanations . we expect that operating expenses as a percentage of net revenue for fiscal 2017 will decrease from fiscal 2016 . 45 sales and marketing expense . sales and marketing expenses for fiscal 2016 decreased by $ 1.7 million , or 9 % , to $ 17.0 million , or 33 % of net revenue , as compared with $ 18.7 million , or 39 % of net revenue , during fiscal 2015. the decrease was primarily a result of decreased payroll and con sulting-related expenses of $ 909 ,000 , decreased media and advertising expenses of $ 643,000 , decreased supplies of $ 214,000 , and decreased commissions of $ 159 ,000. the decrease in payroll and consulting-related expenses resulted primarily fr om decreased salary expenses of $ 310,000 , a decrease of $ 202,000 in stock-based compensation due to fewer grants to existing and new employees , a decrease of $ 212,000 in consulting expenses , and a decrease of $ 148,000 in severance-related expenses associated with our internal corporate organizational restructuring changes in the second half of 2015. the decrease in media and advertising expenses re sulted primarily from decreased advertising expenses of $ 577,000 and decreased public relations materials expenses of $ 159,000 , partially offset by increased product literature expenses of $ 87,000. as we continue efforts to transform and return to revenue growth ,

we can not provide assurance that we will enter into any such equity or debt financings in the future or that the required capital will be available on acceptable terms , if at all , or that any such financing activity will not be dilutive to our stockholders . concentration of credit risk financial instruments which potentially expose us to a concentration of credit risk consist principally of cash and cash equivalents , restricted cash , and trade accounts receivable . we maintain our cash and cash equivalents and restricted cash with established commercial banks . at times , balances may exceed federally insured limits . to minimize the risk associated with trade accounts receivable , we perform ongoing credit evaluations of customers ' financial condition and maintain relationships with our customers that allow us to monitor changes in business operations so we can respond as needed . we do not , generally , require customers to provide collateral before we sell them our products . however we have required certain distributors to make prepayments for significant purchases of our products . receivables and allowance for doubtful accounts trade accounts receivable are recorded at the invoiced amount and do not bear interest . the allowance for doubtful accounts is our best estimate of the amount of probable credit losses in the existing accounts receivable . we determine the allowance based on a quarterly specific account review of past due balances over 90 days . all other balances are reviewed on a pooled basis by age of receivable . account balances are charged off against the allowance when it is probable the receivable will not be recovered . we do not have any off-balance-sheet credit exposure related to our customers . consolidated cash flows the following table summarizes our statements of cash flows for fiscal 2016 , fiscal 2015 , and fiscal 2014 ( in thousands ) : replace_table_token_7_th fiscal 2016 compared to fiscal 2015 < p

therefore the compensation committee increased named executive officer target bonuses to 75 % of base salary beginning in 2015. in 2015 , the company 's corporate goals were to : execute the company 's biopolymers business strategy ; 43 secure financing ; build a specialty materials business culture ; and maintain focus and manage the company 's cash usage rate . in early 2016 the compensation committee reviewed corporate performance for 2015 and determined that the company 's successes in manufacturing , cash management and obtaining financing were partially offset by commercial progress that was below expectations . the goal of executing the biopolymers commercial strategy were subjectively weighted more heavily than the other goals . as a result , the committee decided to base 2015 bonuses on an overall company performance rating of 80 % , as compared to 85 % for 2014. bonuses for the named executive officers were determined by applying the 2015 corporate performance rating ( 80 % ) to each individual 's target bonus amount ( 75 % of the respective base salary ) . long-term incentives after completing a review of executive equity compensation in march 2015 , the compensation committee decided to award long-term incentives in 2015 in the form of restricted stock units ( “ rsus ” ) rather than stock options , as had been the company 's previous practice . the committee concluded that , under current circumstances , rsus would provide a stronger incentive and retention tool than stock options . in determining the number of rsus to be awarded , the committee sought to provide a long-term incentive value for our named executive officers ranging from approximately 85 % to 150 % of base salary per year . because no equity incentives were granted to executives during 2014 , the 2015 grants were generally twice the annual target amount , adjusted in mr. shaulson 's case to take into account the equity awards made to him in connection with the commencement of his employment . rsus vesting in four ( 4 ) equal annual installments over a period of four ( 4 ) years from the date of grant were awarded as follows : named executive officer number of rsus joseph shaulson 201,667 johan van walsem 151,667 oliver p. peoples 105,000 44 outstanding equity awards at fiscal year-end the following table summarizes stock option and restricted stock awards held by our named executive officers at december 31 , 2015 : option awards stock awards name grant date number of securities underlying unexercised options ( # ) exercisable number of securities underlying unexercised options ( # ) unexercisable ( 1 ) option exercise price ( $ ) option expiration date number of shares or units of stock that have not vested ( # ) market value of shares or units of stock that have not vested ( $ ) ( 2 ) equity incentive plan awards : number of units that have not vested ( # ) ( 3 ) equity incentive plan awards : market value of units of stock that have not vested ( $ ) ( 2 ) ( 3 ) joseph shaulson 12/19/2013 — 191,667 $ 7.98 12/19/2023 1/2/2014 100,000 $ 154,000 4/1/2015 ( 4 ) 137,566 211,852 — $ — 4/1/2015 ( 5 ) 201,667 310,567 — $ — johan van walsem 8/21/2009 8,334 — $ 63.24 8/21/2019 — — — $ — 5/27/2010 7,500 — $ 86.94 5/27/2020 — — — $ — 5/19/2011 7,500 — $ 43.50 5/19/2021 — — — $ — 2/1/2012 14,063 937 $ 15.96 2/1/2022 — — — $ — 9/18/2012 20,833 — $ 9.30 9/18/2022 — — — $ — 5/30/2013 7,293 4,374 $ 10.14 5/30/2023 — — — $ — 7/22/2013 9,375 7,292 $ 8.88 7/22/2023 — — — $ — 4/1/2015 ( 4 ) 17,460 26,888 — $ — 4/1/2015 ( 5 ) 151,667 233,567 — $ — oliver p. peoples 5/17/2007 6,667 — $ 143.94 5/17/2017 — — — $ — 3/5/2008 6,667 — $ 90.00 3/5/2018 — — — $ — 5/28/2009 6,667 — $ 41.58 5/28/2019 — — — $ — 5/27/2010 7,500 — $ 86.94 5/27/2020 — — — $ — 5/19/2011 7,501 — $ 43.50 5/19/2021 — — — $ — 2/1/2012 14,063 937 $ 15.96 2/1/2022 — — — $ — 9/18/2012 20,833 — $ 9.30 9/18/2022 — — — $ — 5/30/2013 7,293 4,374 $ 10.14 5/30/2023 — — — $ — 4/1/2015 ( 5 ) 105,000 161,700 — $ — _ ( 1 ) all stock options that are not yet fully exercisable vest in equal quarterly installments over a period of four years from the grant date , except for mr. shaulson 's stock 45 option . mr. shaulson 's stock option was granted to him in connection with his agreement to serve as a member of the company 's board on the date of grant and as an inducement for him to accept employment with the company as its president and chief executive officer . this option has a four-year vesting schedule in which 25 % , 25 % and 50 % of the option vests on the 2 nd , 3 rd and 4 th anniversary dates , respectively , of mr. shaulson commencing employment . ( 2 ) the aggregate market value of the unvested rsus as shown in the table is based on $ 1.54 per share , the closing price per share of the company 's common stock on december 31 , 2015 . ( 3 ) these rsus were issued to mr. shaulson pursuant to his employment contract . story_separator_special_tag the decrease of $ 248 was primarily attributable to decreases in headcount , recruiting and year-end bonus expense . these reductions in employee compensation expenses were offset by approximately $ 518 of one-time severance costs associated with our restructuring undertaken during the fourth quarter of 2014 of which $ 80 was paid during 2014 and $ 438 was paid during the year ended december 31 , 2015. consulting expenses decreased to $ 351 from $ 627 for the fiscal years ended december 31 , 2014 and 2013 , respectively . the decrease of $ 276 was primarily attributable to a general reduction in use of outside consultants during 2014. professional fees decreased to $ 2,158 from $ 2,258 for the fiscal years ended december 31 , 2014 and 2013 , respectively . the decrease of $ 100 was primarily due to a reduction in accounting and audit service fees . other income ( net ) replace_table_token_9_th other income ( expense ) net , were a net income of $ 61 and net expense of $ 4 for the years ended december 31 , 2014 and 2013 , respectively . other income ( expense ) , net , during both years consisted primarily of income from our short-term investments , net of investment management and custodial fees , and realized foreign currency gains and losses resulting from foreign currency transactions . the other income during 2014 included a gain from the sale of property and equipment realized from our sale of used laboratory equipment . discontinued operations in connection with a strategic shift in our business , we decided to discontinue operations in germany and in october 2014 , we sold substantially all of the assets of our wholly-owned german subsidiary , metabolix gmbh , to a german manufacturer of engineering plastic compounds . the buyer acquired our mvera tm b5010 and b5011 products for compostable film , as well as certain inventory , certain contracts , and the mvera tm trademark . the buyer also took over the metabolix gmbh employees and office space . the purpose of this sale was to simplify our business structure and focus resources on the success of our core biopolymers business based on pha performance additives . during its fiscal year ending december 31 , 2014 , the company incurred a loss from discontinued operations of $ 2,766. included in this amount was a loss of $ 888 to write down assets held for sale to their fair market value , which was the contractual purchase price for the assets . the comparable loss from our discontinued german operation for the fiscal year ended december 31 , 2013 , was $ 1,962. liquidity and capital resources currently , we require cash to fund our working capital needs , to purchase capital assets and to pay our operating lease obligations . the primary sources of our liquidity have been : equity financing ; our former strategic alliance with adm ; government grants ; other funded research and development arrangements ; licensing revenues ; product revenues ; and interest earned on cash and short-term investments . 33 we have incurred significant expenses relating to our research and development efforts . as a result , we have incurred net losses since our inception . as of december 31 , 2015 , we had an accumulated deficit of $ 325,753 . our total unrestricted cash and cash equivalents as of december 31 , 2015 , were $ 12,269 as compared to $ 20,046 at december 31 , 2014. as of december 31 , 2015 , we had no outstanding debt . our cash and cash equivalents at december 31 , 2015 were held for working capital purposes . as of december 31 , 2015 , we had restricted cash of $ 619. restricted cash consists of $ 494 held in connection with the lease agreement for our cambridge , massachusetts facility and $ 125 held in connection with our corporate credit card program . on january 20 , 2016 , we entered into a new facility lease for approximately 30,000 square feet of office and research and development space at 19 presidential way , woburn , massachusetts . the terms of this lease required us to increase our restricted cash by setting aside an additional $ 307 of cash as a security deposit through an irrevocable letter of credit . concurrent with the new lease , we signed a lease termination agreement with the landlord of the cambridge facility . we expect that the $ 494 in restricted cash held in connection with that lease will be released during the third quarter of 2016. investments are made in accordance with our corporate investment policy , as approved by our board of directors . the primary objective of this policy is to preserve principal and investments are limited to high quality corporate debt , u.s. treasury bills and notes , money market funds , bank debt obligations , municipal debt obligations and asset-backed securities . the policy establishes maturity limits , concentration limits , and liquidity requirements . as of december 31 , 2015 , we were in compliance with this policy . with the exception of 2012 , when the company recognized $ 38,885 of deferred revenue from the terminated telles joint venture , it has recorded losses since its inception , including its fiscal year ended december 31 , 2015. as of december 31 , 2015 , the company held unrestricted cash and cash equivalents of $ 12,269 . we continue to face significant challenges and uncertainties and , as a result , our available capital resources may be consumed more rapidly than currently expected due to ( a ) lower than expected sales of our biopolymer products as a result of slow market adoption ; ( b ) increases in capital costs and operating expenses related to the expansion of pilot manufacturing or the establishment and start-up of commercial manufacturing either on our own or with

off-balance sheet arrangements as of december 31 , 2015 , we had no off-balance sheet arrangements as defined in item 303 ( a ) ( 4 ) of the securities and exchange commission 's regulation s-k. contractual obligations the company rents its facilities under operating leases , which expire at various dates through december 2026. at december 31 , 2015 , the company 's future minimum payments required under operating leases are as follows : replace_table_token_10_th our primary obligations relate to office , laboratory space and the fixed portion of certain manufacturing purchase commitments related to future biopolymer production . we currently lease approximately 28,000 square feet of office and research and development space at 21 erie street , cambridge , massachusetts . we have entered into an agreement with the landlord to terminate this lease effective july 31 , 2016. on january 20 , 2016 , we entered into a lease for approximately 30,000 square feet of office and research and development space at 19 presidential way , woburn , massachusetts . this lease 35 has a term of 10 years and six ( 6 ) months and commences on june 1 , 2016 , subject to adjustment depending on the date that renovations of the premises are substantially completed . we also lease office and laboratory space at 650 suffolk street , lowell , massachusetts where the majority of our general and administrative employees are located . our lease for this facility expires in may 2020 , with the option to renew for one five-year period . we have a one-time option to terminate the lease early effective may 2017 with appropriate advance notice . our wholly-owned subsidiary , metabolix oilseeds , inc. , located in saskatoon , saskatchewan , canada , leases approximately 2,000 square feet of office , laboratory and greenhouse space . the leases for these facilities expire during 2016. in connection with our plans to increase biopolymer

item 14. principal accounting fees and services paritz & co. p.a . ( `` paritz `` ) is the company 's principal auditing accountant firm . the company 's board of directors has considered whether the provisions of audit services are compatible with maintaining paritz 's independence . the engagement of our independent registered public accounting firm was approved by our of our board directors prior to the start of the audit of our consolidated financial statements for the years ended december 31 , 2015 . 26 the following table represents aggregate fees billed to the company for the years ended december 31 , 2015 by paritz and 2014 by pls cpa ( the former auditors ) . replace_table_token_10_th all audit work was performed by the auditors ' full time employees . part iv item 15. exhibits , financial statement schedules the following is a complete list of exhibits filed as part of this form 10-k. exhibit number corresponds to the numbers in the exhibit table of item 601 of regulation s-k. replace_table_token_11_th * filed as exhibits with the company 's s-1 registration statement filed with the securities and exchange commission ( www.sec.gov ) , dated march 6 , 2012 . ( 1 ) pursuant to rule 406t of regulation s-t , this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the securities act of 1933 , is deemed not filed for purposes of section 18 of the securities exchange act of 1934 , and otherwise is not subject to liability under these sections . 27 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 . free flow , inc. sabir saleem april 22 , 2016 sabir saleem ( chief executive officer/principal executive officer & principal accounting officer ) pursuant to the requirements of the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated . sabir saleem april 22 , 2016 sabir saleem , director fernandino ferrara april 22 , 2016 fernandino ferrara , director 28 story_separator_special_tag managements ' discussion and analysis the following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto included herein . this discussion contains forward-looking statements , such as statements relating to our financial condition , results of operations , plans , objectives , future performance and business operations . these statements relate to expectations concerning matters that are not historical facts . these forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties . although we believe our expectations are based on reasonable assumptions , they are not guarantees of future performance and there are a number of important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements . by making these forward-looking statements , we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings we make with the securities and exchange commission under the federal securities laws . our actual results may differ materially from our forward-looking statements . the independent registered public accounting firm 's report on the company 's financial statements as of december 31 , 2015 includes a `` going concern `` explanatory paragraph that describes substantial doubt about the company 's ability to continue as a going concern . plan of operations we have only recently generated limited revenues . we will need substantial additional capital to support our proposed future operations . we have limited revenues . we have no committed source for any funds as of date hereof , no representation is made that any funds will be available when needed . in the event funds can not be raised when needed , we may not be able to carry out our business plan , may never achieve sales , and could fail in business as a result of these uncertainties . results of operations for the year ended december 31 , 2015 compared to the year ended december 31 , 2015 during the year ended december 31 , 2015 , the company recognized no revenues . during the year ended december 31 , 2014 , the company recognized a revenues of $ 6,120 from its operational activities . during the year ended december 31 , 2015 , the company incurred operational expenses of $ 81,092. during the year ended december 31 , 2014 , the company incurred operational expenses of $ 42,616. the increase of approximately $ 40,000 was primarily a result of a $ 41,126 increase in marketing expenses . during the year ended december 31 , 2015 , the company recognized a net loss of $ 417,325 compared to a net loss of $ 44,018 during the year ended december 31 , 2014. the company made provision for $ 250,000 and $ 86,233 to impair the trade mark and write-off inventory respectively . story_separator_special_tag story_separator_special_tag item 14. principal accounting fees and services paritz & co. p.a . ( `` paritz `` ) is the company 's principal auditing accountant firm . the company 's board of directors has considered whether the provisions of audit services are compatible with maintaining paritz 's independence . the engagement of our independent registered public accounting firm was approved by our of our board directors prior to the start of the audit of our consolidated financial statements for the years ended december 31 , 2015 . 26 the following table represents aggregate fees billed to the company for the years ended december 31 , 2015 by paritz and 2014 by pls cpa ( the former auditors ) . replace_table_token_10_th all audit work was performed by the auditors ' full time employees . part iv item 15. exhibits , financial statement schedules the following is a complete list of exhibits filed as part of this form 10-k. exhibit number corresponds to the numbers in the exhibit table of item 601 of regulation s-k. replace_table_token_11_th * filed as exhibits with the company 's s-1 registration statement filed with the securities and exchange commission ( www.sec.gov ) , dated march 6 , 2012 . ( 1 ) pursuant to rule 406t of regulation s-t , this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the securities act of 1933 , is deemed not filed for purposes of section 18 of the securities exchange act of 1934 , and otherwise is not subject to liability under these sections . 27 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 . free flow , inc. sabir saleem april 22 , 2016 sabir saleem ( chief executive officer/principal executive officer & principal accounting officer ) pursuant to the requirements of the securities exchange act of 1934 , this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated . sabir saleem april 22 , 2016 sabir saleem , director fernandino ferrara april 22 , 2016 fernandino ferrara , director 28 story_separator_special_tag managements ' discussion and analysis the following discussion should be read in conjunction with our audited consolidated financial statements and notes thereto included herein . this discussion contains forward-looking statements , such as statements relating to our financial condition , results of operations , plans , objectives , future performance and business operations . these statements relate to expectations concerning matters that are not historical facts . these forward-looking statements reflect our current views and expectations based largely upon the information currently available to us and are subject to inherent risks and uncertainties . although we believe our expectations are based on reasonable assumptions , they are not guarantees of future performance and there are a number of important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements . by making these forward-looking statements , we do not undertake to update them in any manner except as may be required by our disclosure obligations in filings we make with the securities and exchange commission under the federal securities laws . our actual results may differ materially from our forward-looking statements . the independent registered public accounting firm 's report on the company 's financial statements as of december 31 , 2015 includes a `` going concern `` explanatory paragraph that describes substantial doubt about the company 's ability to continue as a going concern . plan of operations we have only recently generated limited revenues . we will need substantial additional capital to support our proposed future operations . we have limited revenues . we have no committed source for any funds as of date hereof , no representation is made that any funds will be available when needed . in the event funds can not be raised when needed , we may not be able to carry out our business plan , may never achieve sales , and could fail in business as a result of these uncertainties . results of operations for the year ended december 31 , 2015 compared to the year ended december 31 , 2015 during the year ended december 31 , 2015 , the company recognized no revenues . during the year ended december 31 , 2014 , the company recognized a revenues of $ 6,120 from its operational activities . during the year ended december 31 , 2015 , the company incurred operational expenses of $ 81,092. during the year ended december 31 , 2014 , the company incurred operational expenses of $ 42,616. the increase of approximately $ 40,000 was primarily a result of a $ 41,126 increase in marketing expenses . during the year ended december 31 , 2015 , the company recognized a net loss of $ 417,325 compared to a net loss of $ 44,018 during the year ended december 31 , 2014. the company made provision for $ 250,000 and $ 86,233 to impair the trade mark and write-off inventory respectively . story_separator_special_tag

the company has no material commitments for capital expenditures within the next year , however if operations are commenced , substantial capital will be needed to pay for participation , investigation , acquisition and working capital . need for additional financing the company does not have capital sufficient to meet its cash needs . the company will have to seek loans or equity placements to cover such cash needs . no commitments to provide additional funds have been made by the company 's management or other stockholders . accordingly , there can be no assurance that any additional funds will be available to the company to allow it to cover the company 's expenses as they may be incurred . significant accounting policies revenue recognition the company recognizes revenue on arrangements in accordance with securities and exchange commission staff accounting bulletin topic 13 , revenue recognition and fasb asc 605-15-25 , revenue recognition . in all cases , revenue is recognized only when the price is fixed or determinable , persuasive evidence of an arrangement exists , the service is performed and collectability is reasonably assured . earnings per share the company has adopted asc 260-10-50 , earnings per share , which provides for calculation of `` basic '' and `` diluted '' earnings per share . basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted average common shares outstanding for the period . diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity . basic and diluted losses per share were the same at the reporting dates as there were no common stock equivalents outstanding at december 31 , 2015 or december 31 ,

at december 31 , 2012 and 2011 there were no available for sale securities in a continuous unrealized loss position for greater than twelve months . the following summarizes contractual underlying maturities of the company 's available-for-sale investments at december 31 , 2012 ( in thousands ) : cost fair value due in one year or less $ 58,882 $ 58,922 due after one year through two years 35,816 35,854 $ 94,698 $ 94,776 concentration of credit risk in accordance with gaap , the company is required to disclose any significant off-balance-sheet risk and credit risk concentration . the company has no significant off-balance-sheet risk , such as foreign exchange contracts or other hedging arrangements . financial instruments that subject the company to credit risk consist of cash , cash equivalents and marketable securities . as of december 31 , 2012 , the company had cash and cash equivalents deposited in financial institutions in which the balances exceed the federal government agency insured limit of $ 250,000 by approximately $ 13.1 million . the company has not experienced any losses in such accounts and management believes it is not exposed to any significant credit risk . 43 exact sciences corporation notes to financial statements ( continued ) ( 2 ) summary of significant accounting policies ( continued ) subsequent events the company evaluates events that occur through the filing date and discloses those events or transactions that provide additional evidence with respect to conditions that existed at the date of the balance sheet . in addition , the financial statements are adjusted for any changes in estimates resulting from the use of such evidence . recent accounting pronouncements in december 2011 , the fasb issued asu no . 2011-11 , balance sheet ( topic 210 ) —disclosures about offsetting assets and liabilities . asu 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position . entities are required to disclose both gross and net information about these instruments . asu 2011-11 is effective for annual reporting periods beginning on or after january 1 , 2013 , and interim periods within those annual periods . the adoption of this asu is not expected to have a material impact on our financial statements . reclassifications certain prior year amounts have been reclassified to conform to the current year presentation in the financial statements and accompanying notes to the financial statements . ( 3 ) genzyme strategic transaction transaction summary on january 27 , 2009 , the company entered into a collaboration , license and purchase agreement ( the `` clp agreement `` ) with genzyme corporation ( `` genzyme `` ) . pursuant to the clp agreement , the company ( i ) assigned to genzyme all of its intellectual property applicable to the fields of prenatal and reproductive health ( the `` transferred intellectual property `` ) , ( ii ) granted genzyme an irrevocable , perpetual , exclusive , worldwide , fully-paid , royalty-free license to use and sublicense all of the company 's remaining intellectual property ( the `` retained intellectual property `` ) in the fields of prenatal and reproductive health ( the `` genzyme core field `` ) , and ( iii ) granted genzyme an irrevocable , perpetual , non-exclusive , worldwide , fully-paid , royalty-free license to use and sublicense the retained intellectual property in all fields other than the genzyme core field and other than colorectal cancer detection and stool-based disease detection ( the `` company field `` ) . following the transaction , the company retained rights in its intellectual property to pursue only the fields of colorectal cancer detection and stool-based detection of any disease or condition . as part of the transaction on january 27 , 2009 , the company entered into an assignment , sublicense , consent and eighth amendment to license agreement ( the `` jhu amendment `` ) with genzyme and johns hopkins university ( `` jhu `` ) ( collectively , with the licenses and assignment described herein , the `` genzyme strategic transaction `` ) , whereby the company assigned its rights under the license agreement between the company and jhu dated march 25 , 2003 , as amended ( the `` jhu agreement `` ) to genzyme . pursuant to the jhu amendment , genzyme sublicensed to the company the intellectual property subject to the jhu agreement for colorectal cancer detection and stool-based disease detection , including the beaming technology for the detection of colorectal cancer . under the jhu amendment , the company and genzyme will share in the royalty and annual payment obligations to jhu . 44 exact sciences corporation notes to financial statements ( continued ) ( 3 ) genzyme strategic transaction ( continued ) also as part of the genzyme strategic transaction , the company entered into an amended and restated license agreement ( the `` restated license `` ) with genzyme on january 27 , 2009 , which amended and restated the license agreement between the parties dated march 25 , 1999 , effective as of january 27 , 2009. pursuant to the restated license , genzyme granted to the company a non-exclusive license to use technology related to the use of certain genes , specifically apc and p53 , and methodologies related thereto . story_separator_special_tag our on-going performance obligations to genzyme under the collaboration , license and purchase agreement ( the `` clp agreement `` ) , as described below , including our obligation to deliver certain 26 intellectual property improvements to genzyme , if improvements are made during the initial five-year collaboration period , were deemed to be undelivered elements of the clp agreement on the date of closing . accordingly , we deferred the initial $ 16.65 million in cash received at closing and are amortizing that up-front payment on a straight line basis into revenue over the initial five-year collaboration period ending in january 2014. we received the first holdback amount of $ 962,000 , which included accrued interest , due from genzyme during the first quarter of 2010 and the second holdback amount of $ 934,250 , which included accrued interest , due from genzyme during the third quarter of 2010. the amounts were deferred and are being amortized on a straight-line basis into revenue over the remaining term of the collaboration at the time of receipt . in addition , genzyme purchased 3,000,000 shares of our common stock on january 27 , 2009 , for $ 2.00 per share , representing a premium of $ 0.51 per share above the closing price of our common stock on that date of $ 1.49 per share . the aggregate premium paid by genzyme over the closing price of our common stock on the date of the transaction of $ 1.53 million is deemed to be a part of the total consideration for the clp agreement . accordingly , we deferred the aggregate $ 1.53 million premium and are amortizing that amount on a straight line basis into revenue over the initial five-year collaboration period ending in january 2014. in total , we recognized approximately $ 4.1 million in license fee revenue in connection with the amortization of the up-front payments and holdback amounts from genzyme during the year ended december 31 , 2012. clinical trial accrual accruals are recorded for clinical trial patient site costs when the liability is probable and reasonably estimable . for our pivotal fda clinical trial and other sample procurement studies we undertake periodically , an accrual is made for a patient site cost once the patient has progressed past certain steps in the patient assessment and sample processing procedure . the accrual is estimated based on historical average patient reimbursement fees . management has recorded an accrual of $ 0.4 million at december 31 , 2012 and 2011 for clinical trial costs related to site payments . we do not expect that actual amounts paid for these patient costs will materially differ from the amounts accrued . stock-based compensation . all stock-based payments , including grants of employee stock options , restricted stock and restricted stock units and shares purchased under an employee stock purchase plan ( espp ) ( if certain parameters are not met ) , are recognized in the financial statements based on their fair values . the following assumptions are used in determining fair value for employee stock options and espp shares : valuation and recognition —the fair value of each option award is estimated on the date of grant using the black-scholes option-pricing model . the estimated fair value of employee stock options is recognized to expense using the straight-line method over the vesting period . expected term —the company uses the simplified calculation of expected life , described in the sec 's staff accounting bulletins 107 and 110 , as the company does not currently have sufficient historical exercise data on which to base an estimate of expected term . using this method , the expected term is determined using the average of the vesting period and the contractual life of the stock options granted . expected volatility —expected volatility is based on the company 's historical stock volatility data over the expected term of the awards . risk-free interest rate —the company bases the risk-free interest rate used in the black-scholes valuation method on the implied yield currently available on u.s. treasury zero-coupon issues with an equivalent expected term . 27 forfeitures —the company records stock-based compensation expense only for those awards that are expected to vest . a forfeiture rate is estimated at the time of grant and revised , if necessary , in subsequent periods if actual forfeitures differ from initial estimates . the fair value of each restricted stock award and restricted stock unit is determined on the date of grant using the closing stock price on that day . the fair value of each option award is estimated on the date of grant using the black-scholes option pricing model based on the assumptions in note 7 to our financial statements . tax positions a valuation allowance to reduce the deferred tax assets is reported if , based on the weight of the evidence , it is more likely than not that some portion or all of the deferred tax assets will not be realized . the company has incurred significant losses since its inception and due to the uncertainty of the amount and timing of future taxable income , management has determined that a $ 103.9 million and $ 84.6 million valuation allowance at december 31 , 2012 and 2011 is necessary to reduce the tax assets to the amount that is more likely than not to be realized . the change in valuation allowance for the current year is $ 19.3 million . due to the existence of the valuation allowance , future changes in our unrecognized tax benefits will not impact the company 's effective tax rate . recent accounting pronouncements in december 2011 , the fasb issued asu no . 2011-11 , balance sheet ( topic 210 ) —disclosures about offsetting assets and liabilities . asu 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on

net cash provided by financing activities was primarily due to a decrease in proceeds from the genzyme strategic transaction from $ 1.9 million for the year ended december 31 , 2010 to none for the year ended december 31 , 2011 , and an increase in proceeds from the exercise of common stock options from $ 0.5 million for the year ended december 31 , 2010 to $ 0.7 million for the year ended december 31 , 2011 , slightly offset by the decrease in restricted cash of $ 0.5 million during the year ended december 31 , 2010. we expect that cash and cash equivalents and marketable securities on hand at december 31 , 2012 , will be sufficient to fund our current operations for at least the next twelve months , based on current operating plans . however , since we have no current sources of material ongoing revenue , it is possible that we may need to raise additional capital to fully fund our current strategic plan , the primary goal of which is commercializing our fda approved non-invasive sdna colorectal pre-cancer and cancer screening test . if we are unable to obtain sufficient additional funds to enable us to fund our operations through the completion of such plan , our results of operations and financial condition would be materially adversely affected and we may be required to delay the implementation of our plan and otherwise scale back our operations . even if we successfully raise sufficient funds to complete our plan , we can not assure that our business will ever generate sufficient cash flow from operations to become profitable . in order to complete our clinical trial for our cologuard test , we expect to spend approximately $ 3.0 million to $ 4.0 million in 2013. expenditures include costs for personnel , consultants , lab testing and clinical trial sites . we believe we have enough cash on hand to fund these planned clinical trial expenditures . although we believe that we have sufficient capital to fund our operations for at least the next twelve months , we may not have sufficient capital to fully fund the commercial development of our cologuard test . the table

revenue from crop insurance proceeds is recorded when the amount of and the right to receive the payment can be reasonably determined . the company recorded agribusiness revenues from crop insurance proceeds related to avocados of $ 551,000 , zero and $ 1,354,000 in fiscal years 2011 , 2010 and 2009 , respectively . rental revenue - minimum rental revenues are generally recognized on a straight-line basis over the respective initial lease term . contingent rental revenues are contractually defined as to the percentage of rent received by the company and are based on fees collected by the lessee . such revenues are recognized when actual results , based on collected fees reported by the tenant , are received . the company 's rental arrangements generally require payment on a monthly or quarterly basis . real estate development revenue - the company recognizes revenue on real estate development projects in accordance with fasb asc 360-20 , real estate sales , which provides for profit to be recognized in full when real estate is sold provided that , a sale has been consummated and profit is determinable , collection of sales proceeds is estimable with the seller 's receivable not subject to subordination , risks and rewards of ownership have been transferred to the buyer and the earnings process is substantially complete with no significant seller activities or obligations required after the date of sale . to the extent the above conditions are not met , a portion or all of the profit is deferred . incidental operations may occur during the holding or development period of real estate development projects to reduce holding or development costs . incremental revenue from incidental operations in excess of incremental costs from incidental operations is accounted for as a reduction of development costs . incremental costs from incidental operations in excess of incremental revenue from incidental operations are charged to operations . during fiscal year 2011 , the company sold its one remaining arizona development project for $ 2,275,000 as described in note 7 , which was recognized as revenue in the accompanying consolidated statement of operations . 71 limoneira company notes to consolidated financial statements ( continued ) 2. summary of significant accounting policies ( continued ) advertising expense advertising costs are expensed as incurred . such costs in fiscal years 2011 , 2010 and 2009 were $ 127,000 , $ 88,000 and $ 57,000 , respectively . leases the company records rent expense for its operating leases on a straight-line basis from the lease commencement date as defined in the lease agreement until the end of the base lease term . basic and diluted net income per share basic net income per common share is calculated using the weighted-average number of common shares outstanding during the period without consideration of the dilutive effect of share-based compensation . diluted net income per common share is calculated using the diluted weighted-average number of common shares . diluted weighted-average common shares include weighted-average common shares outstanding plus the dilutive effect of share-based compensation calculated using the treasury stock method of 3,000 for fiscal year 2011 , 3,000 for fiscal year 2010 and zero for fiscal year 2009. the series b convertible preferred shares ( see note 21 ) are anti-dilutive . reclassifications certain reclassifications have been made to the prior years ' consolidated financial statements to conform to the 2011 presentation . the significant reclassifications to the consolidated balance sheet as of october 31 , 2010 were comprised of $ 161,000 of current assets of discontinued operations to notes receivable and $ 253,000 of non-current assets of discontinued operations to deferred income taxes . the significant reclassifications to the consolidated statements of operations of agribusiness costs to selling , general and administrative expenses for fiscal years 2010 and 2009 were $ 321,000 and $ 230,000 , respectively defined benefit retirement plan the company sponsors a defined benefit retirement plan that was frozen in june 2004 , and no future benefits have been accrued to participants subsequent to that time . ongoing accounting for this plan under fasb asc 715 , compensation – retirement benefits , provides guidance as to , among other things , future estimated pension expense , minimum pension liability and future minimum funding requirements . this information is provided to the company by third-party actuarial consultants . in developing this data , certain estimates and assumptions are used , including among other things , discount rate , long-term rates of return and mortality tables . changes in any of these estimates could materially affect the amounts recorded that are related to our defined benefit retirement plan . recently adopted accounting pronouncements financial accounting standards board - accounting standards update ( “ fasb asu ” ) 2009-17 , consolidations ( topic 810 ) . this asu replaces the quantitative-based risks and rewards calculation for determining which enterprise , if any , is the primary beneficiary and is required to consolidate a vie with a qualitative approach focused on identifying which enterprise has both the power to direct the activities of the vie that most significantly impact the entity 's economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the entity . in addition , asu 2009-17 requires continuous assessments of whether an enterprise is the primary beneficiary of a vie and requires enhanced disclosures about an enterprise 's involvement with a vie . asu 2009-17 was effective for the company 's fiscal year beginning november 1 , 2010 and as a result , the company analyzed its variable interest in h.m. east ridge , llc ( “ east ridge ” ) . the company determined that east ridge is a vie , but because the company is not the primary beneficiary it is not required to consolidate east ridge in its financial statements . story_separator_special_tag our effective tax rate is 24.5 % for fiscal year 2010 compared to an effective rate of 44.3 % for fiscal year 2009. the primary reasons for this change in our effective tax rate were decreases in the dividend exclusion and allowable domestic production deduction and decreases in the change in unrecognized tax benefits , net of other nondeductible items in fiscal year 2010 over the fiscal year 2009 amounts . 41 segment results of operations we evaluate the performance of our agribusiness , rental operations and real estate development segments separately to monitor the different factors affecting financial results . each segment is subject to review and evaluations related to current market conditions , market opportunities and available resources . the following table shows each segment 's results of operations for : replace_table_token_10_th fiscal year 2011 compared to fiscal year 2010 the following analysis should be read in conjunction with the previous section “ results of operations . ” agribusiness for fiscal year 2011 our agribusiness segment revenue was $ 46.1 million compared to $ 47.0 million for fiscal year 2010. the 2 % decrease of $ 0.9 million primarily reflected higher lemon revenue offset by lower avocado revenue for fiscal year 2011 compared to fiscal year 2010. the decrease in agribusiness revenue primarily consists of the following : · lemon revenue for fiscal year 2011 was $ 3.1 million higher than fiscal year 2010 . · avocado revenue for fiscal year 2011 was $ 3.9 million lower than fiscal year 2010 . · navel and valencia orange revenue in fiscal year 2011 was $ 0.3 million lower than in fiscal year 2010 . · specialty citrus and other crop revenue for fiscal year 2011 was $ 0.2 million higher than fiscal year 2010. costs associated with our agribusiness segment include packing costs , harvest costs , growing costs , costs related to the lemons we process and sell for third-party growers , and depreciation expense . for fiscal year 2011 , our agribusiness costs and expenses were $ 35.2 million compared to $ 31.1 million for fiscal year 2010. the 13 % increase of $ 4.1 million primarily consists of the following : · packing costs for fiscal year 2011 were $ 2.8 million higher than fiscal year 2010 . · harvest costs for fiscal year 2011 were $ 0.8 million lower than fiscal year 2010 . · growing costs for fiscal year 2011 were $ 0.3 million higher than fiscal year 2010 . · third-party grower costs for fiscal year 2011 were $ 1.9 million higher than fiscal year 2010 . · depreciation expense for fiscal year 2011 was $ 0.1 million lower than in fiscal year 2010 . 42 rental operations our rental operations revenue for fiscal year 2011 was $ 3.9 million compared to $ 4.0 million in fiscal year 2010 resulting in a decrease of $ 0.1 million . revenues for all three areas of this segment ( residential and commercial rentals , leased land and organic recycling ) were similar year to year . expenses in our rental operations segment for fiscal year 2011 were $ 0.1 million higher than fiscal year 2010 due to increased repairs and maintenance costs for our residential rental facilities . depreciation expense was similar year to year . real estate development our real estate development segment revenue for fiscal year 2011 was $ 0.8 million lower than fiscal year 2010. costs and expenses in our real estate development segment for fiscal year 2011 were $ 2.1 million lower than fiscal year 2010. corporate and other corporate costs and expenses include selling , general and administrative expenses and other costs not allocated to the operating segments . corporate and other costs for fiscal year 2011 were $ 1.7 million lower than fiscal year 2010. depreciation expense was similar year to year . fiscal year 2010 compared fiscal year 2009 the following analysis should be read in conjunction with the previous section “ results of operations . ” agribusiness for fiscal year 2010 our agribusiness segment revenue was $ 47.0 million compared to $ 31.0 million for fiscal year 2009. the 52 % increase of $ 16.0 million reflected higher revenue in most varieties of our crops for fiscal year 2010 compared to fiscal year 2009. the increase in agribusiness revenue primarily consists of the following : · lemon revenue for fiscal year 2010 was $ 5.9 million higher than fiscal year 2009 . · avocado revenue for fiscal year 2010 was $ 7.5 million higher than fiscal year 2009 . · navel and valencia orange revenue in fiscal year 2010 was $ 1.5 million higher than in fiscal year 2009 . · specialty citrus and other crop revenue for fiscal year 2010 was $ 1.1 million higher than fiscal year 2009 . 43 costs associated with our agribusiness segment include packing costs , harvest costs , growing costs , costs related to the lemons we process and sell for third-party growers and depreciation expense . for fiscal year 2010 , our agribusiness costs and expenses were $ 31.1 million compared to $ 27.1 million for fiscal year 2009. the 15 % decrease of $ 4.0 million primarily consists of the following : · harvest costs for fiscal year 2010 were $ 1.9 million higher than fiscal year 2009 . · growing costs for fiscal year 2010 were $ 1.1 million higher than fiscal year 2009 . · third-party grower costs for fiscal year 2010 were $ 1.4 million higher than fiscal year 2009 . · partially offsetting these increases was a $ 0.4 million decrease in packing costs in fiscal year 2010 compared to fiscal year 2009 . · depreciation expense was similar year to year at approximately $ 1.6 million . rental operations our rental operations revenue for fiscal year 2010 was $ 4.0 million compared to $ 3.8 million in fiscal year 2009 resulting in an increase of $ 0.2 million . revenues for all three

46 · accounts and notes receivable provided $ 0.2 million of operating cash flows in fiscal year 2011 compared to providing $ 0.9 million of operating cash flows in fiscal year 2010. this decrease was primarily the result of a $ 0.8 million decrease in accounts and notes receivable during fiscal year 2011 compared to a $ 1.7 million decrease in accounts and notes receivable in fiscal year 2010. this difference was primarily the result of lower agribusiness revenues in fiscal year 2011 compared to fiscal year 2010. accounts and notes receivable provided $ 0.9 million of operating cash flows in fiscal year 2010 compared to using $ 1.2 million of operating cash flows in fiscal year 2009. this increase was primarily the result of a $ 1.7 million decrease in accounts and notes receivable in fiscal year 2010 compared to a $ 1.2 million increase in accounts and notes receivable in fiscal year 2009. this difference was primarily the result of recording a $ 1.3 million estimated crop insurance claim settlement in fiscal year 2009 . · income taxes receivable balance at october 31 , 2011 was $ 1.3 million compared to $ 1.2 million at october 31 , 2010 , resulting in a corresponding decrease in operating cash flows of $ 0.1 million for fiscal year 2011. the income taxes receivable balance of zero at october 31 , 2009 resulted in a corresponding decrease in operating cash flows of $ 1.2 million for fiscal year 2010. the receivable balances at october 31 , 2011 and 2010 represent the estimated refunds due to us from the estimated tax payments made during fiscal years 2011 and 2010. comparatively , we generated a loss in fiscal year 2009 and made no estimated tax payments . · accounts payable and growers payable provided $ 0.3 million of cash from operating activities in fiscal year 2011 compared to providing zero cash from operating activities in fiscal year 2010. the increase was primarily the result of a $ 0.8 million increase in accounts payable and growers payable in fiscal year 2011 compared to a $ 0.2 million increase in accounts payable and growers payable in fiscal year 2010. this difference is primarily due to higher operating expenses in fiscal year 2011 compared to fiscal year 2010 , resulting in a corresponding higher level of payables at fiscal year-end 2011. accounts payable and growers payable provided zero cash from operating activities in fiscal year 2010 compared to using $ 0.7 million of cash from operating activities

unrealized holding gains and losses are excluded from earnings and reported in accumulated other comprehensive income ( loss ) ( aoci ) until realized . realized gains and losses on sales are computed by the specific identification method at the time of disposition and are shown separately as a component of noninterest income . securities held to maturity are carried at amortized historical cost based on management 's intention , and the company 's ability to hold them to maturity . the company classifies certain securities of state and political subdivisions as held to maturity . trading securities , acquired for subsequent sale to customers , are carried at fair value . market adjustments , fees and gains or losses on the sale of trading securities are considered to be a normal part of operations and are included in trading and investment banking income . 62 equity-method investments the company accounts for certain other investments using equity-method accounting . for non-marketable equity-method investments , the company 's proportionate share of the income or loss is recognized on a one-quarter lag . when transparency in pricing exists , other investments are considered marketable equity-method investments . for marketable equity-method investments , the company recognizes its proportionate share of income or loss as of the date of the company 's consolidated financial statements . goodwill and other intangibles goodwill is tested for impairment annually and more frequently whenever events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying value . to test goodwill for impairment , the company performs a qualitative assessment of each reporting unit . if the company determines , on the basis of qualitative factors , that the fair value of the reporting unit is more likely than not greater than the carrying amount , the quantitative impairment test is not required . otherwise , the company compares the fair value of its reporting units to their carrying amounts to determine if an impairment exists and the amount of impairment loss . an impairment loss is measured as the excess of the carrying value of a reporting unit 's goodwill over its fair value . as a result of such impairment analysis , the company has not recognized an impairment charge . no goodwill impairments were recognized in 2017 , 2016 , or 2015. other intangible assets are amortized over a period of up to 17 years and are evaluated for impairment when events or circumstances dictate . no intangible asset impairments were recognized in 2017 , 2016 , or 2015. the company does not have any indefinite lived intangible assets . premises and equipment premises and equipment are stated at cost less accumulated depreciation , which is computed primarily on the straight line method . premises are depreciated over 15 to 40 year lives , while equipment is depreciated over lives of 3 to 20 years . gains and losses from the sale of premises and equipment are included in other noninterest income and other noninterest expense , respectively . impairment of long-lived assets long-lived assets , including premises and equipment , are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or group of assets may not be recoverable . the impairment review includes a comparison of future cash flows expected to be generated by the asset or group of assets to their current carrying value . if the carrying value of the asset or group of assets exceeds expected cash flows ( undiscounted and without interest charges ) , an impairment loss is recognized to the extent the carrying value exceeds fair value . no impairments were recognized in 2017 , 2016 , or 2015. 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 consequences of events that have been included in the financial statements . under this method , deferred tax assets and liabilities are measured based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the periods in which the differences are expected to reverse . the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date . the provision for deferred income taxes represents the change in the deferred income tax accounts during the year excluding the tax effect of the change in net unrealized gain ( loss ) on securities available for sale . the company records deferred tax assets to the extent these assets will more likely than not be realized . all available evidence is considered in making such determination , including future reversals of existing taxable temporary differences , projected future taxable income , tax planning strategies and recent financial operations . a valuation allowance is recorded for the portion of deferred tax assets that do not meet the more-likely-than-not threshold , and any changes to the valuation allowance are recorded in income tax expense . the company records the financial statement effects of an income tax position when it is more likely than not , based on the technical merits , that it will be sustained upon examination . a tax position that meets the more-likely- 63 than-no t recognition threshold is measured and recorded as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority . previously recognized tax positions are derecognized in the fir st period in which it is no longer more likely than not that the tax position will be sustained . story_separator_special_tag noninterest expense noninterest expense increased in 2017 by $ 38.4 million , or 5.8 percent , compared to 2016 and increased in 2016 by $ 27.8 million , or 4.4 percent , compared to 2015. the main drivers of the increase from 2016 to 2017 were salaries and employee benefits expense , processing fees , and equipment expense . the main drivers of the increase from 2015 to 2016 were salaries and employee benefits expense , other noninterest expense , and equipment expense , offset by a decrease in legal and consulting expense . table 7 below summarizes the components of noninterest expense and the respective year-over-year changes for each category . 30 table 7 summary of noninterest expense ( in thousands ) replace_table_token_13_th salaries and employee benefits expense increased $ 23.8 million , or 6.1 percent , in 2017 and $ 22.5 million , or 6.1 percent , in 2016. the increase in both 2017 and 2016 is primarily due to higher employee base salaries , higher commissions and bonuses , and higher cost of benefits . in 2017 , salary and wage expense increased $ 9.9 million , or 4.0 percent , employee benefit expense increased $ 9.3 million , or 14.0 percent , and bonus and commission expense increased $ 4.6 million , or 6.1 percent . from 2015 to 2016 , base salaries increased by $ 10.7 million , or 4.5 percent , commissions and bonuses increased by $ 5.5 million , or 7.9 percent , and employee benefits increased by $ 6.2 million , or 10.4 percent . included within bonus and commission expense in 2016 is non-acquisition related expense of $ 4.2 million . the marquette acquisition contributed $ 8.2 million of increased salary and employee benefits expense in 2016 since it was the first full year of salary and benefits expense after the marquette acquisition . equipment expense increased $ 5.7 million , or 8.5 percent and $ 3.8 million , or 6.0 percent in 2017 and 2016 , respectively . this increase is driven by increased computer hardware and software expenses for investments for regulatory requirements , cyber security and the ongoing modernization of our core systems in both years . processing fees expense increased $ 6.3 million , or 17.6 percent , in 2017 compared to 2016 and was flat in 2016 compared to 2015. this increase in 2017 is primarily driven by investments for regulatory requirements , cyber security , and the ongoing modernization of the company 's core systems . legal and consulting expense increased $ 2.6 million , or 12.5 percent , in 2017 and decreased $ 5.4 million , or 20.6 percent in 2016. this increase in 2017 was driven by an increase of $ 1.4 million in consulting expense and an increase of $ 1.3 million in legal and professional services expense . the decrease in 2016 was driven by $ 4.8 million in legal and consulting expense related to the marquette acquisition recognized in 2015. other noninterest expense increased $ 2.2 million , or 8.5 percent and increased $ 3.3 million , or 14.7 percent , in 2017 and 2016 , respectively . the increase in 2017 was driven by increased contribution and derivative expense . the increase in 2016 was primarily driven by an increase of $ 3.1 million in fair value adjustments to the contingent consideration liabilities on acquisitions . income taxes on december 22 , 2017 , the u.s. government enacted comprehensive tax legislation commonly referred to as the tax cuts and jobs act ( the tax act ) . the tax act includes numerous changes to existing tax law , including among other things , a permanent reduction in the federal corporate income tax rate from 35 % to 21 % effective january 1 , 2018. while the tax act is expected to have a significant positive impact on the company 's after-tax results , technical corrections or other forthcoming guidance could change how provisions of the tax act are interpreted , which may impact the company 's effective tax rate and could affect the company 's deferred tax assets , tax positions and tax liabilities . income tax expense for continuing operations totaled $ 53.4 million , $ 45.0 million and $ 31.7 million in 2017 , 2016 and 2015 , respectively . these amounts equate to effective tax rates of 22.6 percent , 22.6 percent and 24.7 31 percent for 201 7 , 201 6 and 201 5 , respectively . the decrease in effective rate from 2015 to 2016 is primarily attributable to an increase in federal tax credits and a larger portion of income earned from exclud able life insurance policy gains . the effective rate for 2017 remained consistent with 2016 even after taking into consideration the effective rate impact of the tax act . the adverse rate impact of the tax act was favorably offset by a larger portion of i ncome earned from tax-exempt interest and an increase in excess tax benefits associated with stock compensation . with the adoption of accounting standards update ( asu ) no . 2016-09 , all excess tax benefits related to share-based awards were recognized in in come tax expense for 2016 and 2017. the company calculated its best estimate of the impact of the tax act in its year end income tax provision in accordance with its understanding of the tax act and the guidance available as of the date of this filing and as a result has recorded $ 3.0 million as additional income tax expense in the fourth quarter of 2017. given the complexity of the tax act , anticipated technical corrections or other forthcoming guidance , the various state income tax interpretations and the detailed analysis required , the adjustments reflected in the current and deferred tax accounts may be subject to further refinement as additional information becomes available and further analysis is performed . for further information on income taxes refer to note

the basel iii regulatory capital rules include transitional periods for various components of the rules that require full compliance for the company by january 1 , 2019 , including a capital conservation buffer requirement of 2.5 percent of risk-weighted assets for which the transitional period began on january 1 , 2016. the risk-based capital guidelines indicate the specific risk weightings by type of asset . certain off-balance sheet items ( such as standby letters of credit and binding loan commitments ) are multiplied by credit conversion factors to translate them into balance sheet equivalents before assigning them specific risk weightings . the company is also required to maintain a leverage ratio equal to or greater than 4 percent . the leverage ratio is tier 1 core capital to total average assets less goodwill and intangibles . the company 's capital position as of december 31 , 2017 is summarized in the table below and exceeded regulatory requirements . for further discussion of capital and liquidity , see the “ quantitative and qualitative disclosures about market risk – liquidity risk ” in item 7a on page 52 of this report . table 16 risk-based capital ( in thousands ) this table computes risk-based capital in accordance with current regulatory guidelines . these guidelines as of december 31 , 2017 , excluded net unrealized gains or losses on securities available for sale from the computation of regulatory capital and the related risk-based capital ratios . replace_table_token_34_th replace_table_token_35_th 42 replace_table_token_36_th ( 1 ) adjustments include a portion of goodwill and intangibles as well as unrealized gains/losses on available-for-sale securities . < font style= '' font-family : times new

exhibit registrant filing exhibit 10.47 purchase and sale agreement , dated as of november 30 , 2001 , as amended through and including amendment no . 3 thereto dated august 26 , 2010 , by and between ugi energy services , inc. and energy services funding corporation . ugi form 10-k ( 9/30/10 ) 10.47 10.48 amendment no . 4 dated as of october 1 , 2013 to purchase and sale agreement dated as of november 30 , 2001 by and between ugi energy services , llc and energy services funding corporation . ugi form 10-k ( 9/30/13 ) 10.73 10.49 amended and restated credit agreement , dated as of december 18 , 2012 , among ugi energy services , inc. , as borrower , and jpmorgan chase bank , n.a . , as administrative agent , pnc bank , national association , as syndication agent , and wells fargo bank , national association , as documentation agent . ugi form 8-k ( 12/18/12 ) 10.1 10.50 amendment no . 1 , dated as of march 15 , 2013 , to amended and restated credit agreement , dated as of december 18 , 2012 , among ugi energy services , inc. , as borrower , and jpmorgan chase bank , n.a . , as administrative agent , pnc bank , national association , as syndication agent , and wells fargo bank , national association , as documentation agent . ugi form 10-q ( 3/31/13 ) 10.1 10.51 fss service agreement no . 79028 effective as of december 1 , 2014 by and between columbia gas transmission , llc and ugi utilities , inc. utilities form 10-k ( 9/30/14 ) 10.16 10.52 sst service agreement no . 79133 effective as of december 1 , 2014 by and between columbia gas transmission , llc and ugi utilities , inc. utilities form 10-k ( 9/30/14 ) 10.19 10.53 gas supply and delivery service agreement between ugi energy services , llc and ugi penn natural gas , inc. , effective november 1 , 2015. utilities form 10-k ( 9/30/15 ) 10.18 73 incorporation by reference exhibit no . exhibit registrant filing exhibit 10.54 contingent residual support agreement dated as of january 12 , 2012 , among energy transfer partners , l.p. , amerigas finance llc , amerigas finance corp. , amerigas partners , l.p. , and for certain limited purposes only , ugi corporation . amerigas partners , l.p. form 8-k ( 1/11/12 ) 10.1 10.55 amendment to contingent residual support agreement dated as of january 12 , 2012 , among energy transfer partners , l.p. , amerigas finance llc , amerigas finance corp. , amerigas partners , l.p. , and for certain limited purposes only , ugi corporation , dated as of march 20 , 2013. amerigas partners , l.p. form 10-q ( 3/31/13 ) 10.1 10.56 unitholder agreement , dated as of january 12 , 2012 , by and among heritage etc , l.p. , amerigas partners , l.p. , and , for limited purposes , energy transfer partners , l.p. , energy transfer partners gp , l.p. , and energy transfer equity , l.p. amerigas partners , l.p. form 8-k ( 1/11/12 ) 10.2 10.57 amended and restated credit agreement dated as of june 18 , 2014 by and among amerigas propane , l.p. , as borrower , amerigas propane , inc. , as guarantor , wells fargo securities , llc , as sole lead arranger and sole book manager , and the other financial institutions from time to time party thereto . amerigas form 8-k ( 6/18/14 ) 10.1 74 incorporation by reference exhibit no . exhibit registrant filing exhibit 10.58 credit agreement , dated as of march 27 , 2015 among ugi utilities , inc. , as borrower , pnc bank , national association , as administrative agent , citizens bank of pennsylvania , as syndication agent , pnc capital markets llc and citizens bank , n.a . , as joint lead arrangers and joint bookrunners , and pnc bank , national association , citizens bank of pennsylvania , citibank , n.a . , credit suisse ag , cayman islands branch , jpmorgan chase bank , n.a . , wells fargo bank , national association , the bank of new york mellon , bank of america , n.a . , and the other financial institutions from time to time parties thereto . utilities form 8-k ( 3/27/15 ) 10.1 10.59 senior facilities agreement dated april 30 , 2015 by and among ugi france , as borrower , guarantor and security grantor , natixis , as facility agent and security agent , barclays bank plc , bnp paribas , caisse régionale de crédit agricole mutuel de paris et d'ile de france , crédit lyonnais sa , ing bank n.v. ( acting through its french branch ) , société générale corporate & investment banking , and natixis , as mandated lead arrangers , underwriters and bookrunners , and hsbc france , as senior mandated lead arranger . ugi form 10-q ( 6/30/15 ) 10.1 10.60 first amendment , dated as of november 18 , 2015 , to trademark license agreement , dated april 19 , 1995 , by and among ugi corporation , amerigas , inc. , amerigas propane , inc. , amerigas partners , l.p. , and amerigas propane , l.p. amerigas partners , l.p. form 10-k ( 9/30/15 ) 10.40 14 code of ethics for principal executive , financial and accounting officers . ugi form 10-k ( 9/30/03 ) 14 * 21 subsidiaries of the registrant . * 23.1 consent of ernst & young llp 75 incorporation by reference exhibit no . exhibit registrant filing exhibit * 23.2 consent of pricewaterhousecoopers llp * 31.1 certification by the chief executive officer relating to the registrant 's report on form 10-k for the fiscal year ended september 30 , 2015 pursuant to section 302 of the sarbanes-oxley act of 2002 . story_separator_special_tag gas utility 's core market customers comprise firm- residential , commercial and industrial ( “ retail core-market ” ) customers who purchase their gas from gas utility and , to a much lesser extent , residential and small commercial customers who purchase their gas from alternate suppliers . gas utility revenues decreased $ 44.2 million in fiscal 2015 principally reflecting lower revenues from off-system sales ( $ 31.8 million ) and lower revenues from core market customers ( $ 7.6 million ) . the decrease in core market revenues principally reflects the effects of lower average purchased gas cost ( “ pgc ” ) rates during fiscal 2015 partially offset by the slightly higher core market throughput . increases or decreases in retail core-market revenues and cost of sales principally result from changes in retail core-market volumes and the level of gas costs collected through the pgc recovery mechanism . under the pgc recovery mechanism , gas utility records the cost of gas associated with sales to retail core-market customers at amounts included in pgc rates . the difference between actual gas costs and the amounts included in rates is deferred on the balance sheet as a regulatory asset or liability and represents amounts to be collected from or refunded to customers in a future period . as a result of this pgc recovery mechanism , increases or decreases in the cost of gas associated with retail core-market customers have no direct effect on retail 38 core-market margin . gas utility 's cost of sales was $ 448.6 million in fiscal 2015 compared with $ 496.8 million in fiscal 2014 principally reflecting the effects of the lower off-system sales ( $ 31.8 million ) and the effects on retail core-market cost of sales of the lower average pgc rates partially offset by slightly higher core market throughput . fiscal 2015 gas utility total margin increased $ 4.0 million principally reflecting higher core market total margin ( $ 4.3 million ) on the higher core market sales and higher large firm delivery service total margin ( $ 5.7 million ) . these increases were partially offset principally by lower margin from interruptible customers ( $ 7.0 million ) . gas utility operating income and income before income taxes during fiscal 2015 decreased $ 9.7 million and $ 12.2 million , respectively . the $ 9.7 million decrease in gas utility operating income , notwithstanding the $ 4.0 million increase in total margin , principally reflects higher operating and administrative expenses and higher depreciation expense partially offset by an increase in other operating income . fiscal 2015 operating and administrative expenses were higher than in fiscal 2014 principally reflecting , among other things , higher fiscal 2015 distribution system expenses ( $ 4.8 million ) , and higher employee benefits , uncollectible accounts and other general administrative expenses . gas utility depreciation expense increased $ 4.1 million reflecting the effects of greater distribution system capital expenditures . other operating income increased $ 3.4 million reflecting , among other things , incremental income from construction services . the $ 12.2 million decrease in gas utility income before income taxes reflects the lower operating income ( $ 9.7 million ) and higher long-term debt interest expense . replace_table_token_13_th ( a ) amounts are net of intercompany revenues between midstream & marketing 's energy services and electric generation segments . ( b ) total margin represents total revenues less total cost of sales . amounts exclude net pre-tax losses on commodity derivative instruments not associated with current-period transactions of $ 42.9 million and $ 8.5 million during fiscal 2015 and fiscal 2014 , respectively . midstream & marketing fiscal 2015 total revenues were $ 264.3 million lower than fiscal 2014 principally reflecting lower natural gas ( $ 202.0 million ) , retail power ( $ 44.9 million ) , peaking ( $ 12.2 million ) and electric generation revenues partially offset by higher natural gas gathering revenues . the decrease in natural gas revenues principally reflects lower wholesale and retail natural gas prices during fiscal 2015. the lower retail power revenues principally reflect lower sales volumes and , to a lesser extent , lower average prices . in addition , fiscal 2015 total capacity management revenues were slightly below fiscal 2014. energy services capacity management revenues continued to benefit from significant locational basis differences between marcellus and non-marcellus delivery points in fiscal 2015 although not as extreme as those experienced during the volatile temperature conditions experienced in january and february 2014. midstream & marketing cost of sales decreased to $ 820.0 million in fiscal 2015 compared to $ 1,076.7 million in fiscal 2014 principally reflecting lower natural gas ( $ 194.8 million ) , retail power ( $ 52.4 million ) and peaking ( $ 7.7 million ) cost of sales . midstream & marketing total margin decreased $ 7.6 million in fiscal 2015 principally reflecting lower natural gas marketing total margin ( $ 7.1 million ) , lower peaking total margin ( $ 4.4 million ) , lower capacity management total margin ( $ 4.1 million ) and slightly lower electric generation total margin . these declines were partially offset by higher total margin from retail power ( $ 7.5 million ) and higher natural gas gathering total margin ( $ 3.5 million ) . the decline in natural gas marketing total margin principally reflects the effects of lower average unit margins . the lower peaking total margin principally reflects lower fiscal 2015 natural gas prices . the higher retail power total margin reflects the effects of higher unit margins while the increase in natural gas gathering total margin reflects incremental margin from the expansion of our natural gas gathering system in the marcellus shale region of northern pennsylvania . midstream & marketing operating income and income before income taxes during fiscal 2015 decreased $ 13.8 million and $ 13.0 million , respectively , principally reflecting the previously mentioned decrease in total margin (

included in these amounts are incentive distributions received by the general partner during fiscal 2015 , fiscal 2014 and fiscal 2013 of $ 30.4 million , $ 23.9 million and $ 19.3 million , respectively ( see note 15 to consolidated financial statements ) . during fiscal 2015 , fiscal 2014 and fiscal 2013 , our principal business units paid cash dividends and made other cash payments to ugi and its subsidiaries as follows : replace_table_token_19_th dividends and distributions on april 28 , 2015 , ugi 's board of directors approved an increase in the quarterly dividend rate on ugi common stock to $ 0.2275 per common share , equal to $ 0.91 on an annualized basis . the dividend rate reflects an approximately 4.6 % increase from the previous quarterly rate of $ 0.2175. the new quarterly dividend rate was effective with the dividend payable on july 1 , 2015 , to shareholders of record on june 15 , 2015. on april 27 , 2015 , the general partner 's board of directors approved an increase in the quarterly dividend rate on amerigas partners common units to $ 0.92 per common unit , equal to $ 3.68 per common unit on an annualized basis . the distribution reflects a 4.5 % increase from the previous quarterly rate of $ 0.88. the new quarterly rate was effective with the distribution payable on may 18 , 2015 , to unitholders of record on may 11 , 2015. repurchase of common stock in january 2014 , the ugi board of directors authorized a share repurchase program for up to 15 million shares of ugi corporation common stock . the authorization permits the execution of the share repurchase program over a four-year period . pursuant to 45 < a

when performing the impairment review , we determine the carrying amount of each reporting unit by assigning assets and liabilities , including the existing goodwill , to those reporting units . a reporting unit is defined as an operating segment or one level below an operating segment ( referred to as a component ) . a component of an operating segment is deemed a reporting unit if the component constitutes a business for which discrete financial information is available , and segment management regularly reviews the operating results of that component . we have a single reporting unit . to evaluate whether goodwill is impaired , we conduct a two-step quantitative goodwill impairment test . in the first step we compare the estimated fair value of the reporting unit to which the goodwill is assigned to the reporting unit 's carrying amount , including goodwill . we estimate the fair value of our reporting unit based on income and market approaches . under the income approach , we calculate the fair value of a reporting unit based on the present value of estimated future cash flows . under the market approach , we estimate the fair value based on market multiples of enterprise value to ebitda for comparable companies . if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit , then we perform the second step of the impairment test in order to determine the implied fair value of the reporting unit 's goodwill . to calculate the implied fair value of the reporting unit 's goodwill , the fair value of the reporting unit is first allocated to all of the other assets and liabilities of that unit based on their fair values . the excess of the reporting unit 's fair value over the amount assigned to its other assets and liabilities is the implied fair value of goodwill . an impairment loss would be recognized equal to the amount by which the carrying value of goodwill exceeds its implied fair value . see notes 7 and 21 for further information concerning goodwill . long-lived and intangible assets impairment intangible assets consist principally of distribution rights , patents , trademarks , trade names , developed and core technologies , capitalized software development costs ( see also note 2 under the caption capitalized software development costs ) and customer relationships . capitalized amounts related to patents represent external legal costs for the application and maintenance of patents . intangible assets are amortized using the straight-line method over their estimated period of benefit , ranging from one to fifteen years . we assess the impairment of long-lived assets and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable . factors considered important which may trigger an impairment review include the following : ( 1 ) significant underperformance relative to expected historical or projected future operating results ; ( 2 ) significant changes in the manner or use of the assets or strategy for the overall business ; ( 3 ) significant negative industry or economic trends and ( 4 ) a significant decline in our stock price for a sustained period . we conduct an impairment review when we determine that the carrying value of a long-lived or intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment . the asset is impaired if its carrying value exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset . in assessing recoverability , we must make assumptions regarding estimated future cash flows and other factors . the impairment loss is the amount by which the carrying value of the asset exceeds its fair value . we estimate fair value utilizing the projected discounted cash flow method and a discount rate determined by our management to be commensurate with the risk inherent in our current business model . when calculating fair value , we must make assumptions regarding estimated future cash flows , discount rates and other factors . see notes 6 and 15 for further information concerning long-lived assets . see notes 7 and 21 for further information concerning intangible assets . capitalized software development costs costs incurred to develop software for resale are expensed when incurred as research and development until technological feasibility has been established . we have determined that technological feasibility for our products is typically established when 44 universal electronics inc. notes to consolidated financial statements december 31 , 2012 a working prototype is complete . once technological feasibility is established , software development costs are capitalized until the product is available for general release to customers . capitalized software development costs are amortized on a product-by-product basis . amortization is recorded in cost of sales and is the greater of the amounts computed using : a. the net book value at the beginning of the period multiplied by the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product ; or b. the straight-line method over the remaining estimated economic life of the product including the period being reported on . the amortization of capitalized software development costs begins when the related product is available for general release to customers . the amortization periods normally range from one to two years . we compare the unamortized capitalized software development costs of a product to its net realizable value at each balance sheet date . the amount by which the unamortized capitalized software development costs exceed the product 's net realizable value is written off . the net realizable value is the estimated future gross revenues of a product reduced by its estimated completion and disposal costs . story_separator_special_tag this improvement is primarily due to an increase in units produced internally versus units produced by third-party manufacturers . gross profit in 2012 was also positively affected by us entering into a licensing agreement with a customer in the gaming industry , as well as the signing of a long-term , confidential settlement and license agreement with logitech . compared to 2011 , this favorability was partially offset by pricing pressure from customers . research and development ( `` r & d `` ) expenses . r & d expenses increased 15 % to $ 14.2 million in 2012 from $ 12.3 million in 2011 . the increase is due to additional labor dedicated to general r & d activities in an effort to continue to develop new products and technologies . 27 selling , general and administrative ( `` sg & a `` ) expenses . sg & a expenses increased 2 % to $ 93.1 million in 2012 from $ 91.2 million in 2011 . legal expenses increased by $ 1.3 million as a result of litigation costs related to protecting our intellectual property . employee bonus expense increased by $ 3.2 million . partially offsetting these expense increases was a $ 2.5 million favorable currency effect due primarily to the euro weakening compared to the u.s. dollar . interest income ( expense ) , net . net interest expense was $ 0.2 million in 2012 compared to $ 0.3 million in 2011 . the decrease in interest expense was due to lower credit needs during 2012 , primarily as a result of positive operating cash flows which allowed for the paydown of debt associated with the 2010 acquisition of enson . other income ( expense ) , net . net other expense was $ 1.4 million in 2012 compared to net other expense of $ 1.1 million in 2011 . this increase was driven by a higher amount of foreign currency losses in 2012 , driven by fluctuations in the foreign currency rates relating to the argentinian peso , brazilian real , chinese yuan renminbi and euro . income tax expense . income tax expense was $ 8.1 million in 2012 compared to $ 5.3 million in 2011 and our effective tax rate was 32.8 % in 2012 compared to 20.9 % in 2011 . the increase in our effective tax rate was due primarily to a $ 3.9 million ( $ 2.6 million net of federal benefit ) valuation allowance that we recorded in 2012 against our deferred tax assets related to california research and experimentation credits . at december 31 , 2012 , we believed it was more likely than not that these deferred tax assets would not be realized . in addition , as the result of a tax law change in china , approximately $ 0.6 million of deferred tax assets were no longer valid resulting in their write-down . year ended december 31 , 2011 compared to year ended december 31 , 2010 ( `` 2010 `` ) net sales . net sales for 2011 were $ 468.6 million , an increase of 41.2 % compared to $ 331.8 million in 2010. net income for 2011 was $ 19.9 million or $ 1.31 per diluted share compared to $ 15.1 million or $ 1.07 per diluted share in 2010. replace_table_token_8_th net sales in our business lines ( subscription broadcasting , oem , and computing companies ) were 90 % of net sales in 2011 compared to 85 % in 2010. net sales in our business lines in 2011 increased by 49 % to $ 421.4 million from $ 282.9 million in 2010. this increase in net sales resulted primarily from the november 2010 acquisition of enson , which added several significant customers and contributed $ 150.1 million of net sales to the business category during 2011 compared to $ 25.0 million during 2010. excluding the net sales from enson , business category sales increased by $ 13.4 million . this was primarily due to the increase of sales to the latin america subscription broadcasting market and the acquisition of new domestic customers in our business category during 2011. net sales in our consumer lines ( one for all ® retail , private label , custom installers , and direct import ) were 10 % of net sales in 2011 compared to 15 % in 2011. net sales in our consumer lines in 2011 decreased by 4 % to $ 47.2 million from $ 48.9 million in 2010. net sales in north american retail decreased by $ 1.7 million , or 35 % , from $ 4.8 million in 2010 to $ 3.1 million in 2011. in addition , our custom installer sales decreased by $ 2.2 million , from $ 2.9 million in 2010 to $ 0.7 million in 2011. partially offsetting these decreases was a $ 2.2 million increase in international retail sales , from $ 41.2 million in 2010 to $ 43.4 million in 2011. the 2011 net sales in our consumer lines were positively impacted by the strengthening of the euro and the british pound compared to the u.s. dollar , which resulted in an increase in net sales of approximately $ 1.3 million . net of the favorable currency effect , international retail sales increased by $ 0.8 million due primarily to the analog to digital transition that took place in some european countries . gross profit . gross profit in 2011 was $ 130.1 million compared to $ 103.8 million in 2010. gross profit as a percent of sales decreased to 27.8 % in 2011 from 31.3 % in 2010 , due primarily to our sales mix , as a higher percentage of our total sales was comprised of our lower margin business category . this shift in sales composition was expected as a result of our acquisition of enson , which sells exclusively within the business category . in addition , during 2011 , customers gravitated

during 2012 and 2011 , cash used for investing activities consisted of our investments in property , plant , and equipment as well as internally developed patents . during 2010 , our $ 49.2 million time deposit investment matured , which was initially entered into during 2009. the cash proceeds from the time deposit were used to purchase enson during 2010 , which amounted to a $ 74.3 million cash outflow net of cash acquired . please refer to `` item 8. financial statements and supplementary data — notes to consolidated financial statements — notes 7 and 21 '' for additional disclosure regarding our acquisition of enson . net cash used for financing activities was $ 17.6 million during 2012 compared to net cash used for financing activities of $ 26.3 million during 2011 and net cash provided by financing activities of $ 23.3 million during 2010 . during 2012 , we made net debt payments of $ 16.4 million compared to $ 18.6 million in 2011. in 2010 , we issued $ 41.0 million of debt in order to fund the acquisition of enson , of which we repaid $ 9.8 million by december 31 , 2010. proceeds from stock option exercises were $ 2.2 million during 2012 compared to proceeds of $ 1.7 million and $ 2.0 million during 2011 and 2010 , respectively . in addition , we purchased 200,847 shares of our common stock at a cost of $ 3.5 million during 2012 , compared to 456,964 and 505,692 shares at a cost of $ 9.8 million and $ 10.1 million during < font

pursuant to the amendment , which was effective as of january 2 , 2020 , the maturity date of the 2018 notes was amended from january 2 , 2020 to february 8 , 2021 , and the holders waived any defaults that might have occurred prior to the date of the amendment . f- 12 vision hydrogen corporation notes to consolidated financial statements december 31 , 2020 and 2019 as a result of these changes , management determined debt extinguishment which was applied and the new notes were recorded at their fair value resulting in a discount of approximately $ 40,000 and a gain on extinguishment of this amount recorded to additional paid in capital . may 18 , 2020 purchase and sale agreement on may 18 , 2020 , the company 's board of directors authorized the company , in accordance with nevada statute 78.565 , to complete and execute the may 18 , 2020 purchase and sale agreement between the company and turquino providing for the company 's sale of 100 % of pride 's outstanding stock pride to turquino in return for turquino 's assumption of the hidalgo notes and the doyle notes and the debt obligations and accrued interest related thereto ( the “ agreement ” ) . in conjunction therewith , hidalgo and doyle assigned the notes to turquino , at which time turquino became responsible for the debt obligations upon the notes . the company has no further note obligations to hidalgo or doyle , and it reduced its debt by approximately $ 600,000 or 65 % of the corporate debt obligations . pursuant to nevada statute section 78.565 , approval of the agreement only required the approval of the board of directors and did not require shareholder approval . the agreement provides that the parties mutually release one another and discharge and release the other party ( and their respective current and former officers , directors , employees , shareholders , note holders , attorneys , assigns , agents , representatives , predecessors and successors in interest ) , from any and all claims , demands , obligations , or causes of action . hidalgo , our chief executive officer , and a managing member of turquino , is a related party in connection with the exchange agreement , the notes , and the agreement . on june 19 , 2020 , the company entered into a promissory note with judd brammah , a director of the company , for a principal amount up to $ 230,332 bearing interest with interest at 6 % per annum . the entire principal and interest upon the promissory note are due on june 19 , 2021. the proceeds from the note was used to pay accrued expenses of the company . effective july 17 , 2020 , judd brammah lent the company $ 50,000 at 6 % per annum payable on the due date , june 19 , 2021. effective july 22 , 2020 , judd brammah lent the company $ 299,900 at 6 % per annum payable on the due date of june 19 , 2021. the company accrued and expensed $ 16,515 in interest on these notes in 2020 . 4. significant concentrations of credit risk cash is maintained at an authorized deposit-taking institution ( bank ) incorporated in both the united states and australia and is insured by the u.s. federal deposit insurance corporation and australian securities & investments commission up to $ 250,000 and approximately $ 186,000 in total , respectively . as of december 31 , 2020 and december 31 , 2019 , the balance was fully covered under the $ 250,000 threshold in the united states . in australia , the balance was $ 10,563 in excess of the insured limit at december 31 , 2019 which is included in current assets held for sale on the balance sheet . credit risk for trade accounts is concentrated as well because substantially all of the balances are receivable from entities located within certain geographic regions . to reduce credit risk , the company performs ongoing credit evaluations of its customers ' financial conditions but does not generally require collateral . there were no accounts receivable as of december 31 , 2020. as of december 31 , 2019 , one of the company 's accounts receivable was due from one customer at approximately 13 % , which is included in current assets held for sale on the balance sheet . 5. major customers due to the sale of pride and pvbj the company had no major customers for the year ended december 31 , 2020. during the year ended december 31 , 2019 , there was one customer with a concentration of 10 % or higher of the company 's revenue , at 14 % , which is included in discontinued operations on the income statement . 6. uncompleted contracts costs , estimated earnings , and billings on uncompleted contracts are summarized as follows as of december 31 , 2020 and 2019 , which are included in current assets and liabilities held for sale on the balance sheet . replace_table_token_9_th f- 13 vision hydrogen corporation notes to consolidated financial statements december 31 , 2020 and 2019 7. leases operating leases the company maintains its principal office at 95 christopher columbus drive , 16 th floor jersey city , nj 07302. the company moved in october 2020 and it 's office is in a shared office space provider , at a cost of $ 99 per month and currently the lease is month-to-month . as of december 31 , 2020 , the company had no operating leases except as noted above . story_separator_special_tag in order to achieve our new strategic business model , we decided to sell both our subsidiaries because they were not producing enough profit and were not a strategic fit with our goal of developing the market for hydrogen energy systems . further , the hydrogen energy market for residential users was not developing at all based on cost inefficiencies , and debt levels were beginning to impact us adversely . beginning in march 2020 , the following steps were undertaken to implement the business transition plan : ● march 2020 - commenced discussions with investor regarding financing options for our company and strategic acquisitions . ● april 21 , 2020 - concluded the disposition of the pvbj subsidiary ● may 2020 - commenced discussions and diligence for an investment in a hydrogen production project in the netherlands , known as volt h2 ● may 18 , 2020 - concluded the disposition of the pride group subsidiary ● july 2020 - concluded 2nd and 3rd tranches of debt financing with proceeds earmarked for an investment in volt h2 . ● august 12 , 2020 - concluded acquisition of an equity interest in volt h2 ● september 30 , 2020 – moved the company 's headquarters from dallas , texas to jersey city , new jersey ● october 6 , 2020 – changed the company name to vision hydrogen corporation and effected a twenty-for-one reverse stock split of our outstanding common stock ● january 2021 – closed on the sale of 12,500,000 shares of common stock in a registered offering , resulting in gross proceeds of $ 2.5 million . 19 with the initial investment into the hydrogen production market via volt h2 , the first step in transitioning our hydrogen business focus has been completed . we now will continue to operate the business in a manner that is aligned with our primary hydrogen business strategy . discontinued operations on april 21 , 2020 , our board of directors authorized our resale of pvbj back to pvbj pursuant to the terms as follows : ( a ) benis holdings llc applied the $ 221,800 earn-out liability as consideration towards the purchase of pvbj ; ( b ) paul benis applied the remaining salary due to him , as prorated from the closing date to the expiration date of the employment agreement ( january 31 , 2021 ) , to the purchase of pvbj by benis holdings llc as additional consideration thereof , and we have no further salary obligation to paul benis , who resigned as our executive officer ; and ( c ) as additional consideration for the purchase of pvbj by benis holdings llc , pvbj continues to be responsible for the line of credit ( refer to note 15 ) . on may 18 , 2020 , in accordance to nevada statute 78.565 , we completed and executed the may 18 , 2020 purchase and sale agreement between us and turquino providing for our sale of 100 % of pride 's outstanding stock pride to turquino in return for turquino 's assumption of the hidalgo notes and the doyle notes and the debt obligations and accrued interest related thereto ( the “ agreement ” ) . in conjunction therewith , hidalgo and doyle assigned the notes to turquino , at which time turquino became responsible for the debt obligations upon the notes , we have no further note obligations to hidalgo or doyle , and we reduced our debt by approximately $ 600,000 or 65 % of the corporate debt obligations . pursuant to nevada statute section 78.565 , approval of the agreement only required the approval of the board of directors and did not require shareholder approval . the agreement provides that the parties mutually release one another and discharge and release the other party ( and their respective current and former officers , directors , employees , shareholders , note holders , attorneys , assigns , agents , representatives , predecessors and successors in interest ) , from any and all claims , demands , obligations , or causes of action . hidalgo , our chief executive officer , and a managing member of turquino , are related parties in connection with the exchange agreement , the notes , and the agreement . december 31 , 2020 pvbj proceeds on sale ( earn-out payable exchange ) $ 214,074 less : net asset value ( 1,383,440 ) loss on disposal of assets $ ( 1,169,366 ) pride proceeds on sale ( debt forgiveness ) $ 500,321 less net asset value ( 120,380 ) gain on disposal of assets $ 379,941 results of operations for the years ended december 31 , 2020 and 2019 revenue and cost of revenue we had no revenue or cost of revenue for the years ended december 31 , 2020 and 2019. general and administrative expenses during the year ended december 31 , 2020 , our total operating expenses were $ 311,228. this was comprised of $ 100,300 of accounting fees related to audit , consulting and tax costs , $ 97,500 in management disbursements , $ 62,500 for gross payroll , $ 41,706 of legal fees , $ 33,213 of dues and subscription fees , which pertained to transfer agent , press release , edgar fees and otc market annual listing fees , $ 18,820 of directors and officers insurance liability , $ 10,000 in director fees , $ 9,193 in miscellaneous expenses , $ 7,993 of stock-based compensation , $ 5,721 of amortization and $ 4,782 of payroll taxes , offset by a credit of $ 80,500 for write-offs due to settlements . during the year ended december 31 , 2019 , our total operating expenses were $ 528,283. this was comprised of $ 150,000 for gross payroll , $ 98,451 of accounting fees related to audit , consulting and tax costs , $ 80,500 in management disbursements , $ 58,000 of legal fees , $ 25,669 of dues and

in october 2020 , we filed a registration statement on form s-1 with the securities and exchange commission , whereby we registered 12.5 million shares of our common stock for sale as a company offering . the registration statement was declared effective in october 2020. in january 2021 , we sold all of the shares for gross proceeds of $ 2.5 million . our future capital requirements will depend on a number of factors , including the progress of our sales and marketing of our services , the timing and outcome of potential acquisitions , the costs involved in operating as a public reporting company , the status of competitive services , the availability of financing and our success in developing markets for our services . we believe our existing cash will be sufficient to fund our operating expenses and capital equipment requirements for at least the next 12 months . critical accounting policies please refer to note 2 in the accompanying financial statements for our policies . recent accounting pronouncements please refer to note 14 in the accompanying financial statements . management does not believe there would have been a material effect on the accompanying financial statements had any other recently issued , but not yet effective , accounting standards been adopted in the current period .

for software license arrangements in which the company grants the customer a right to exchange the original software product for specified future software products with more than minimal differences in features , functionality , and or price , during the license term , revenue is recognized upon the earlier of delivery of the additional software products or at the time the exchange right lapses . for customers granted a right to exchange the original software product for specified future software products where the company has determined price , feature , and functionality differences are minimal , the exchange right is accounted for as a like-kind exchange and revenue is recognized upon delivery of the currently licensed product . for software license arrangements in which the customer is charged variable license fees based on usage of the product , the company recognizes revenue as usage occurs over the term of the licenses , provided all other revenue recognition criteria have been met . effective july 2013 , the company establishes vsoe of fair value of pcs by reference to stated renewals for all identified marked segments . the company continues to consider factors such as whether the period of the initial pcs term is relatively long when compared to the term of the software license or whether the pcs renewal is significantly below the company 's normal pricing practices . in determining whether pcs pricing is significantly below the company 's normal pricing practice , the company considers the population of stated renewal rates that are within a reasonably narrow range of the median within the identified market segment over the trailing 12 month period . the change in estimation methodology does not have a material effect on our financial statements . 61 certain of the company 's software license arrangements include pcs terms that fail to achieve vsoe of fair value due to non-substantive renewal periods , or contain a range of possible non-substantive pcs renewal amounts . for these arrangements , vsoe of fair value of pcs does not exist and revenues for the software license , pcs and services , if applicable , are considered to be one accounting unit and are therefore recognized ratably over the longer of the contractual service term of pcs term once the delivery of both services has commenced . the company typically classifies revenues associated with these arrangements in accordance with the contractually specified amounts , which approximate fair value assigned to the various elements , including software license , maintenance and services , if applicable . this allocation methodology has been applied to the following amounts included in revenues in the consolidated statements of income from arrangements for which vsoe of fair value does not exist for each undelivered element ( in thousands ) : replace_table_token_23_th maintenance . the company typically enters into multi-year time-based software license arrangements that vary in length but are generally five years . these arrangements include an initial ( bundled ) pcs term of one year with subsequent renewals for additional years within the initial license period . effective july 2013 , the company establishes vsoe of the fair value of pcs by reference to stated renewals for all identified market segments . for arrangements in which the company looks to substantive renewal rates to evidence vsoe of fair value of pcs and in which the pcs renewal rate and term are substantive , vsoe of fair value of pcs is determined by reference to the stated renewal rate . for these arrangements , pcs revenues are recognized ratably over the pcs term specified in the contract . in arrangements where vsoe of fair value of pcs can not be determined ( for example , a time-based software license with a duration of one year or less or when the range of possible pcs renewal amounts is not sufficiently narrow or is significantly below the company 's normal pricing practices ) , the company recognizes revenue for the entire arrangement ratably over the longer of the initial pcs term or the services term ( if any ) . for those arrangements that meet the criteria to be accounted for under contract accounting , the company determines whether vsoe of fair value exists for the pcs element . for those arrangements in which vsoe of fair value exists for the pcs element , pcs is accounted for separately and the balance of the arrangement is accounted for under asc 985-605. for those arrangements in which vsoe of fair value does not exist for the pcs element all revenue is deferred until such time as the services are complete . once services are complete , revenue is then recognized ratably over the remaining pcs period . services . the company provides various professional services to customers , primarily project management , software implementation and software modification services . revenues from arrangements to provide professional services are generally recognized as the related services are performed . for those arrangements in which services revenue is deferred and the company determines that the direct costs of services are recoverable , such costs are deferred and subsequently expensed in proportion to the related services revenue as it is recognized . for those arrangements that are accounted for under contract accounting , the company accumulates and defers all direct and indirect costs allocable to the arrangement . for those arrangements that are not accounted for under contract accounting , the company accumulates and defers all direct and incremental costs attributable to the arrangement . hosting . effective january 1 , 2011 , the company adopted on a prospective basis for all new or materially modified arrangements entered into on or after that date , the amended accounting guidance for multiple-deliverable revenue arrangements and the amended guidance related to the scope of existing software revenue recognition guidance . story_separator_special_tag maintenance revenue during the year ended december 31 , 2013 , as compared to the same period in 2012 increased $ 46.1 million , or 23.1 % , of which $ 1.3 million , or 0.1 % , was due to the addition of orcc . maintenance revenue increased in the americas , emea and asia/pacific reportable segments by $ 14.0 million , $ 23.1 million and $ 9.0 million , respectively . increases in maintenance revenue are primarily driven by increases in our customer installation base , expanded product usage from existing customers , and increased adoption of our enhanced support services programs . services revenue services revenue includes fees earned through implementation services , professional services and facilities management services . implementation services include product installations , product configurations , and retrofit custom software modifications ( “csms” ) . professional services include business consultancy , technical consultancy , on-site support services , csms , product education , and testing services . these services include new customer implementations as well as existing customer migrations to new products or new releases of existing products . during the period in which non-essential services revenue is being deferred , direct and incremental costs related to the performance of these services are also being deferred . during the period in which essential services revenue is being deferred , direct and indirect costs related to the performance of these services are also being deferred . 34 services revenue during the year ended december 31 , 2013 as compared to the same period in 2012 decreased by $ 9.5 million , or 7.2 % . implementation and professional services decreased in the emea and asia/pacific reportable segment by $ 9.4 million and $ 5.0 million , respectively , partially offset by an increase in the americas reportable segment of $ 4.9 million . services revenue in the americas reportable segment increased $ 0.9 million due to the addition of orcc . hosting revenue hosting revenue includes fees earned through hosting and on-demand arrangements . all revenue from hosting and on-demand arrangements that does not qualify for treatment as separate units of accounting , which include set-up fees , implementation or customization services , and product support services , are included in hosting revenue . for 2013 , hosting revenue also includes fees paid by our clients as a part of the acquired ebpp products . fees may be paid by our clients or directly by their customers and may be a percentage of the underlying transaction amount , a fixed fee per executed transaction or a monthly fee for each customer enrolled . hosting revenue during the year ended december 31 , 2013 as compared to the same period in 2012 increased $ 149.6 million , or 132.0 % , of which $ 141.8 million , or 125.1 % , was due to the addition of orcc and opay . the remaining increase is attributed to new customers adopting our on-demand or hosted offerings and existing customers adding new functionality or services . operating expenses replace_table_token_8_th total operating expenses for the year ended december 31 , 2013 increased $ 149.7 million , or 25.3 % , as compared to the same period of 2012. included in operating expenses for the year ended december 31 , 2013 were approximately $ 108.1 million and $ 22.9 million of operating expenses from the addition of orcc and opay , respectively . there were approximately $ 26.2 million and $ 31.5 million of significant transaction related expenses incurred in the years ended december 31 , 2013 , and december 31 , 2012 , respectively . significant transaction related expenses for the year ended december 31 , 2013 included $ 10.6 million of personnel related charges and $ 15.6 million of professional and other expenses related to the acquisition of orcc and opay . excluding these expenses , total operating expenses increased $ 24.0 million in the year ended december 31 , 2013 compared to the same period in 2012 primarily due to the inclusion of s1 operations for a full twelve months . cost of license the cost of license for our products sold includes third-party software royalties as well as the amortization of purchased and developed software for resale . in general , the cost of license for our products is minimal because we internally develop most of the software components , the cost of which is reflected in research and development expense as it is incurred as technological feasibility coincides with general availability of the software components . cost of license increased $ 1.7 million , or 7.3 % in the twelve months ended december 31 , 2013 compared to the same period in 2012 primarily due to an increase in third party royalty fees . cost of maintenance , services and hosting cost of maintenance , services and hosting includes costs to provide hosting services and both the costs of maintaining our software products as well as the service costs required to deliver , install and support software at customer sites . maintenance costs include the efforts associated with providing the customer with upgrades , 24-hour help desk , post go-live ( remote ) support and production-type support for software that was previously installed at a customer location . service costs include human resource costs and other incidental costs such as travel and training required for both pre go-live and post go-live support . such efforts include project management , delivery , product customization and implementation , installation support , consulting , configuration , and on-site support . hosting costs related to the acquired ebpp products include payment card interchange fees , assessments payable to banks and payment card processing fees . 35 cost of maintenance , services , and hosting increased $ 116.5 million , or 57.6 % in the twelve months ended december 31 , 2013 compared to the same period in 2012. there were $ 79.4 million and $ 18.8 million of orcc

in 2012 , we received proceeds of $ 295.0 million from our credit agreement to partially fund our purchase of s1 . we received an additional $ 24.0 million from the revolving portion of our credit agreement , which we subsequently used to partially fund the repurchase of 2,492,600 common stock warrants from ibm for $ 29.6 million . we received $ 11.9 million from ibm for the exercise of 11,470 common stock warrants at $ 27.50 and 350,000 at $ 33.00 per share . there are no warrants outstanding at december 31 , 2012. we repaid $ 13.8 million and $ 6.0 million of the term credit facility and revolving credit facility , respectively , during the year ended december 31 , 2012. in addition , in 2012 we received proceeds of $ 21.7 million , including corresponding excess tax benefits , from the exercises of stock options and the issuance of common stock under our 1999 employee stock purchase plan , as amended , and used $ 57.8 million for the repurchases of common stock and $ 3.3 million for the repurchase of restricted stock for tax withholdings . we also made payments to third-party institutions , primarily related to other debt and capital leases , totaling $ 8.2 million . debt credit agreement as of december 31 , 2013 , we had $ 455.4 million and $ 300.0 million outstanding under the term portion of credit agreement and our senior notes , respectively , with up to $ 250.0 million of unused borrowings under the revolving credit facility portion of the credit agreement , as amended . the amount of unused borrowings actually available varies in accordance with the terms of the agreement . the credit agreement contains certain affirmative and negative covenants , including limitations on the incurrence of indebtedness , asset dispositions , acquisitions , investments , dividends and other restricted payments , liens and transactions with affiliates . the credit agreement also contains financial covenants relating to maximum permitted leverage ratio and the minimum fixed charge coverage ratio . the credit agreement does not contain any subjective acceleration features and does not have any required payment or principal reduction schedule and is included as a long-term liability in our consolidated balance sheet .

class c units are owned by rare earth or other affiliates of mr. wirth and have the lowest priority for distributions from the albuquerque entity . priority distributions of $ 700 per unit per year were cumulative until december 31 , 2015 ; however , after december 31 , 2015 class a unit holders continue to hold a preference on distributions over class b and class c unit holders . if certain triggering events related to the albuquerque entity occur prior to the payment of all accumulated distributions to its members , such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds to the members . in the event that funds generated from a triggering event are insufficient to pay the total amount of all such accumulated distributions owed to the members , all class a members will participate pro rata in the funds available for distribution to them until paid in full , then class b , and then class c. after all investors have received their initial capital plus a 7 % per annum simple return , any additional profits will be allocated 50 % to rare earth , with the remaining 50 % allocated proportionately to all unit classes . rare earth received a restructuring fee of $ 128,000 , conditioned upon and arising from the sale of the first 100 units in the albuquerque entity following the december 31 , 2013 restructuring . the albuquerque entity plans to use its best efforts to pay the discretionary priority distributions . the trust does not guarantee and is not otherwise obligated to pay the cumulative discretionary priority distributions . innsuites hotels will continue to provide management , licensing and reservation services to the albuquerque , new mexico property . during the fiscal year ended january 31 , 2017 , there were no class a units of the albuquerque entity sold . as of january 31 , 2017 , the trust held a 50.91 % ownership interest , or 279 class b units , in the albuquerque entity , mr. wirth and his affiliates held a 0.18 % interest , or 1 class c unit , and other parties held a 48.91 % interest , or 268 class a units . as of january 31 , 2017 , the albuquerque entity has discretionary priority return payments to unrelated unit holders of approximately $ 142,000 , to the trust of approximately $ 146,000 , and to mr. wirth and his affiliates of approximately $ 500 . as of february 1 , 2016 , the trust no longer accrues for these distributions as the preference period has expired . 4. sale of ownership interests in tucson hospitality properties subsidiary on february 17 , 2011 , the partnership entered into a restructuring agreement with rare earth to allow for the sale of non-controlling interest units in tucson hospitality properties , lp ( the “ tucson entity ” ) , which operates the tucson oracle hotel property , then wholly-owned by the partnership . under the agreement , rare earth agreed to either purchase or bring in other investors to purchase up to 250 units , which represents approximately 41 % of the outstanding limited partnership units in the tucson entity , on a post-transaction basis , and the parties agreed to restructure the limited partnership agreement of the tucson entity . the board of trustees approved this restructuring on january 31 , 2011 . 38 on october 1 , 2013 , the partnership entered into an updated restructured limited partnership agreement with rare earth to allow for the sale of additional interest units in the tucson entity for $ 10,000 per unit . under the agreement , rare earth agreed to either purchase or bring in other investors to purchase up to 160 ( and potentially up to 200 if the overallotment is exercised ) units . under the terms of the updated restructuring agreement , the partnership agreed to hold at least 50.1 % of the outstanding limited partnership units in the tucson entity , on a post-transaction basis , and intends to maintain this minimum ownership percentage through the purchase of units under this offering . the board of trustees approved this restructuring on september 14 , 2013. the limited partnership interests in the tucson entity are allocated to three classes with differing cumulative discretionary priority distribution rights through june 30 , 2016. class a units are owned by unrelated third parties and have first priority for distributions . class b units are owned by the partnership and have second priority for distributions . class c units are owned by rare earth or other affiliates of mr. wirth and have the lowest priority for distributions from the tucson entity . priority distributions of $ 700 per unit per year are cumulative until june 30 , 2016 ; however , after june 30 , 2016 class a unit holders continue to hold a preference on distributions over class b and class c unit holders . if certain triggering events related to the tucson entity occur prior to the payment of all accumulated distributions to its members , such accumulated distributions will be paid out of any proceeds of the event before general distribution of the proceeds to the members . in the event that funds generated from a triggering event are insufficient to pay the total amount of all such accumulated distributions owed to the members , all class a members will participate pro rata in the funds available for distribution to them until paid in full , then class b , and then class c. after all investors have received their initial capital plus a 7 % per annum simple return , any additional profits will be allocated 50 % to rare earth , with the remaining 50 % allocated proportionately to all unit classes . story_separator_special_tag for fiscal year 2018 capital expenditures , we plan on spending less on capital improvements as we have sold our oldest and largest hotel which required significant amounts of capital improvements and our ontario , california property completed a renovation during the fiscal year ending january 31 , 2016. repairs and maintenance were charged to expense as incurred and approximated $ 981,000 and $ 1,038,000 for fiscal years 2017 and 2016 , respectively . we have minimum debt payments , net of debt discounts , of approximately $ 3,204,000 and approximately $ 818,000 due during fiscal years 2018 and 2019 , respectively . minimum debt payments due during fiscal year 2017 include approximately $ 511,000 of mortgage notes payable , approximately $ 1,603,000 notes payable to bank , approximately $ 145,000 notes payable – related party , approximately $ 379,000 lendings from affiliates – related party , and approximately $ 566,000 of secured promissory notes outstanding to unrelated third parties arising from the shares of beneficial interest and partnership unit repurchases and borrowings against our future credit card receivables . we may seek to negotiate additional credit facilities or issue debt instruments . any debt incurred or issued by us may be secured or unsecured , long-term , medium-term or short-term , bear interest at a fixed or variable rate and be subject to such other terms as we consider prudent . sale of ownership interests in albquerque , ontario , yuma and tucson subsidiaries see notes 3 , 4 , 5 , 6 , and 7 of the trust 's consolidated financial statements for a detailed discussion of the sale of ownership interests in the trust 's subsidiaries . 15 compliance with continued listing standards of nyse mkt on september 19 , 2014 , the nyse mkt notified the trust that it was not in compliance with section 1003 ( a ) ( i ) of the nyse mkt company guide since it reported shareholders ' equity of less than $ 2.0 million at july 31 , 2014 and had incurred losses in two of its three fiscal years ended january 31 , 2014. the nyse mkt previously accepted the trust 's equity expansion compliance plan and granted the trust an extension of time until december 29 , 2015 to comply with sections 1003 ( a ) ( i ) , 1003 ( a ) ( ii ) and 1003 ( a ) ( iii ) of the nyse mkt company guide . on january 18 , 2016 , we received a letter from the nyse mkt informing us that we are no longer out of compliance with the nyse mkt continued listed standards . specifically , we had resolved the continued listing deficiencies with respect to sections 1003 ( a ) ( i ) , 1003 ( a ) ( ii ) and 1003 ( a ) ( iii ) of the nyse mkt company guide . our shareholders equity as of december 31 , 2015 met the nyse mkt 's minimum requirement of $ 6 million . on january 19 , 2017 , the trust received a letter from the nyse mkt informing the trust that the staff of the nyse mkt 's corporate compliance department had determined that the trust is not in compliance with section 1003 ( a ) ( iii ) of the nyse mkt company guide due to the trust having stockholders ' equity of less than $ 6.0 million and net losses from continuing operations in its five most recent fiscal years ended january 31 , 2016. the nyse mkt 's letter informed the trust that , to maintain its listing , it must submit a plan of compliance by february 20 , 2017 , addressing how it intends to regain compliance with the nyse mkt 's continued listing standards within the maximum potential 18-month plan period available ( the “ plan period ” ) . elements of the compliance plan may include the sale of one or more of its assets ( management believes iht hotels have a much lower book value than market value ) , sale of additional trust stock at market value , sale of minority interest in specific hotel properties and or anticipated continuation of the current operational upward current trends in hotel gross operating profits . as part of the plan of regaining compliance with the nyse mkt 's continued listing standards , ibc hotels , plans to explore financial and strategic options for the subsidiary and has hired viant capital , an investment banker , to assist . iht continues to monitor its stockholders ' equity and is reviewing potential actions that can and are being taken to increase its stockholders ' equity and to maintain compliance with the nyse mkt 's listing standards . on march 31 , 2017 , the trust received a letter from the nyse mkt informing the trust that the nyse mkt regulation staff accepted the trust 's equity enhancement plan ( the “ plan ” ) and granted a plan period through january 19 , 2018. the nyse mkt regulation staff will review the trust periodically for compliance with the initiatives outlined in the plan . failure to make progress consistent with the plan or to regain compliance with continued listing standards by the end of the plan period could result in the trust being delisted from the nyse mkt . non-gaap financial measures the following non-gaap presentations of earnings before interest , taxes , depreciation and amortization ( “ ebitda ” ) and funds from operations ( “ ffo ” ) are made to assist our investors in evaluating our operating performance . adjusted ebitda is defined as earnings before minority interest , interest expense , amortization of loan costs , interest income , income taxes , depreciation and amortization , and non-controlling interests in the trust . we present adjusted ebitda because we believe these measurements ( a ) more accurately reflect the ongoing performance of our

changes in the adjustments to reconcile net loss and net income for the years ended january 31 , 2017 and 2016 , respectively , consist primarily of hotel property depreciation , gain on disposal of assets , and changes in assets and liabilities . hotel property depreciation was approximately $ 2,094,000 during fiscal year 2017 compared to approximately $ 1,178,000 during fiscal year 2016 , an increase of $ 916,000 as the trust recognized the additional depreciation of the hotel properties during the time the properties were reported as held for sale . during fiscal year 2016 , the trust had a gain on disposal of assets of approximately $ 2,352,000 which increased the net cash used in operating activities . changes in assets and liabilities for accounts receivable , prepaid expenses and other assets and accounts payable and accrued expenses totaled approximately ( $ 553,000 ) and approximately $ 99,000 for the fiscal years ended january 31 , 2017 and 2016 , respectively . this significant decrease in changes in assets and liabilities for the fiscal year ended january 31 , 2017 compared to the fiscal year ended january 31 , 2016 was due to increased accounts receivables generated by ibc hotels and prepaid expenses and other asset due to additional revenues . net cash used in investing activities totaled approximately $ 903,000 for the year ended january 31 , 2017 compared to net cash provided by investing activities of approximately $ 654,000 for the year ended january 31 , 2016. the decrease in net cash provided by investing activities during fiscal year 2017 was due to the cash received from the sale of our tucson st. mary 's hotel property offset by the purchase of the international vacation hotels ( “ ivh ” ) assets in fiscal year 2016. in addition , a significant decrease in net cash provided by investing activities occurred in fiscal year 2017 as the collections of advances to affiliates – related party was approximately $ 2,231,000 in fiscal year

discounts are accreted into interest expense on the effective yield or interest method , based upon a comparison of actual and expected cash flows , through the expected maturity date of the financing . see note 10 for additional information . derivatives and hedging activities — all derivatives are recognized as either assets or liabilities on the balance sheet and measured at fair value . the company reports the fair value of derivative instruments gross of cash paid or received pursuant to credit support agreements and fair value is reflected on a net counterparty basis when the company believes a legal right of offset exists under an enforceable netting agreement . changes in fair value are recorded in net income . derivative transactions are entered into by the company solely for risk management purposes in the ordinary course of business . subsequent to the prepayment of the traditional golf term loan in december 2018 , the company unwound the interest rate cap . at december 31 , 2018 , the company had no derivatives or hedging activities . stock-based compensation expense — the company maintains an equity incentive plan under which non-qualified stock options , incentive stock options , and restricted stock units or rsus are granted to employees and non-employee directors . stock-based compensation expense for stock options is recognized on a straight-line basis through the vesting date of the option . rsus are expensed based on the fair value on the date of grant and amortized on a straight-line basis through the vesting date . the fair value of rsus is estimated using the stock price on the date of grant . all stock-based compensation expense is recorded as general and administrative expense in the consolidated statement of operations . see note 11 for additional information . management fee and termination payment to affiliate — these represent amounts due or paid to the former manager pursuant to the management agreement or the termination of the existing management agreement . for further information , see note 12. balance sheet measurement property and equipment , net — real estate and related improvements are recorded at cost less accumulated depreciation . costs that both materially add value to an asset and extend the useful life of an asset by more than a year are capitalized . the company capitalizes to construction in progress , certain costs related to properties under construction . capitalization begins when the activities related to development have begun and ceases when activities are substantially complete and the asset is available for use . capitalized costs include development , construction-related costs and interest expense . depreciation is calculated using the straight-line method based on the lesser of the following estimated useful lives or the lease term : buildings and improvements 10-30 years capital leases - equipment 3-7 years furniture , fixtures , and equipment 2-7 years long-lived assets to be disposed of by sale , which meet certain criteria , are reclassified to real estate held-for-sale and measured at the lower of their carrying amount or fair value less costs of sale . the company suspends depreciation and amortization for assets held-for-sale . subsequent changes to the estimated fair value less costs to sell could impact the measurement of assets held-for-sale . decreases are recognized as an impairment loss and recorded in `` impairment `` on the consolidated statements of operations . to the extent the fair value increases , any previously reported impairment is reversed . real estate held-for-sale is recorded in “ real estate assets , held-for-sale , net ” and “ real estate liabilities , held-for-sale ” on the consolidated balance sheets . entertainment golf entertainment golf includes land , buildings , furniture , fixtures and equipment and leasehold improvements including building and land improvements . 56 drive shack inc. and subsidiaries notes to consolidated financial statements december 31 , 2018 , 2017 and 2016 ( dollars in tables in thousands , except per share data ) traditional golf with respect to traditional golf course improvements ( included in buildings and improvements ) , costs associated with construction , significant replacements , permanent landscaping , sand traps , fairways , tee boxes or greens are capitalized . all other asset-related costs that do not meet these criteria , such as minor repairs and routine maintenance , are expensed as incurred . the company leases certain golf carts and other equipment that are classified as capital leases . the value of capital leases is recorded as an asset on the balance sheet , along with a liability related to the present value of associated payments . depreciation of capital lease assets is calculated using the straight-line method over the shorter of the estimated useful lives or the expected lease terms . the cost of equipment under capital leases is recorded in `` property and equipment , net of accumulated depreciation `` on the consolidated balance sheets . payments under the leases are treated as reductions of the obligations under capital leases , with a portion being recorded as interest expense under the effective interest method . intangibles , net — intangible assets and liabilities consist primarily of leasehold advantages ( disadvantages ) , management contracts , membership base and internally-developed software . a leasehold advantage ( disadvantage ) exists to the company when it pays a contracted rent that is below ( above ) market rents at the date of an acquisition transaction . the value of a leasehold advantage ( disadvantage ) is calculated based on the differential between market and contracted rent , which is tax effected and discounted to present value based on an after-tax discount rate corresponding to each property , and is amortized over the term of the underlying lease agreement . the management contract intangible represents the company 's golf course management contracts for both leased and managed properties . story_separator_special_tag 0.5 million decrease in loss on extinguishment of debt due to fewer write-offs of traditional golf liabilities ; partially offset by decreases in collateral management fee income and decreases from the disposal of legacy assets . 35 liquidity and capital resources overview liquidity is a measurement of our ability to meet potential cash requirements , including ongoing commitments to repay borrowings and fund capital for our entertainment and traditional golf businesses and other general business needs . our primary sources of funds for liquidity consist of cash on hand , sales or repayments of assets ( including sales of our owned golf properties ) , and potential issuance of new debt or equity securities , when feasible . we have the ability to publicly or privately issue common stock , preferred stock , depository shares , debt securities and warrants , subject to market and other conditions . sources of liquidity and uses of capital as of the date of this filing , we believe we have sufficient assets , which include unrestricted cash , to satisfy all of our short-term recourse liabilities . our junior subordinated notes payable are long-term obligations . with respect to the next 12 months , we expect that our cash on hand combined with our other primary sources of funds for liquidity will be sufficient to satisfy our anticipated liquidity needs with respect to our current portfolio , including related financings , capital expenditures for our entertainment and traditional golf businesses , working capital needs and operating expenses . however , we may have additional cash requirements with respect to executing our strategic objectives for our entertainment golf business and incremental investments related to our traditional golf business . in addition to our available cash , we may elect to meet the cash requirements of these incremental investments through proceeds from the monetization of our assets or from additional borrowings , equity offerings or other means . while it is inherently more difficult to forecast beyond the next 12 months , we currently expect to meet our long-term liquidity requirements , specifically the repayment of our debt obligations and capital expenditures , through our cash on hand and , if needed , additional borrowings , proceeds from equity offerings and the sale or refinancing of our assets . we continually monitor market conditions for financing opportunities , and at any given time , we may enter into or pursue one or more of the transactions described above . these short-term and long-term expectations are forward-looking and subject to a number of uncertainties and assumptions , which are described below under “ –factors that could impact our liquidity , capital resources and capital obligations ” as well as part i , item 1a . “ risk factors . ” if our assumptions about our liquidity prove to be incorrect , we could be subject to a shortfall in liquidity in the future , and this shortfall may occur rapidly and with little or no notice , which would limit our ability to address the shortfall on a timely basis . cash flows provided by operations constitute a critical component of our liquidity . essentially , our cash flows provided by operations is equal to ( i ) net cash flows received from our entertainment and traditional golf businesses , plus ( ii ) the net cash flows from our security investments , including principal and sales proceeds , less ( iii ) entertainment golf and traditional golf operating expenses , management fees , professional fees , insurance and other expenses , less ( iv ) employee wage and benefit expenses , less ( v ) interest on the junior subordinated notes payable and less ( vi ) preferred dividends . our cash flows provided by operations differs from our net income ( loss ) due to these primary factors : ( i ) accretion of discount on our real estate securities and loans ( including the accrual of interest payable at maturity ) and deferred financing costs , ( ii ) amortization of favorable and unfavorable leasehold intangibles‎ from the acquisition of the traditional golf business in december 2013 , ( iii ) accretion of the golf membership deposit liabilities in interest expense , ( iv ) recognition of deferred revenue from initiation fee deposits , ( v ) amortization of prepaid golf membership dues , ( vi ) gains and losses from sales of assets , ( vii ) other-than-temporary impairment on our investments , as well as impairments of traditional golf properties , ( viii ) unrealized gains or losses on our investments , ( ix ) non-cash gains or losses associated with our early extinguishment of debt , ( x ) non-cash gains on deconsolidation , and ( xi ) depreciation and amortization on our assets . the sources of our distributions are net cash provided by operating activities , net cash provided by investing activities and cash equivalents as they represent the return on our real estate debt investments and golf-related real estate and operations . the company has paid preferred dividends of $ 5.6 million in fiscal year 2018 and our board of directors elected not to declare common stock dividends for fiscal year 2018 to retain capital for growth . for the year ended december 31 , 2018 , the company reported net cash used in operating activities of $ 7.2 million , net cash provided by investing activities of $ 25.9 million , net cash used in financing activities of $ 109.6 million and cash and cash equivalents of $ 79.2 million as of december 31 , 2018 . as a result of our revocation of reit election , effective january 1 , 2017 , we are no longer subject to the distribution requirements applicable to reits . the timing and amount of distributions are in the sole discretion of our board of directors , which considers our earnings , financial performance and condition , debt service obligations

investing activities investing activities provided $ 25.9 million , provided $ 656.6 million , and used $ 150.3 million during the years ended december 31 , 2018 , 2017 and 2016 , respectively . uses of cash flows from investing activities consisted primarily of the investments made in entertainment golf venues , traditional golf properties , real estate securities and payments for settlement of derivatives . proceeds 39 from cash flows from investing activities consisted primarily of sale of investments , repayments from loans and securities , settlement of derivatives and sales of property and equipment . financing activities financing activities used $ 109.6 million , used $ 617.0 million , and provided $ 237.4 million during the years ended december 31 , 2018 , 2017 and 2016 , respectively . proceeds from cash flow from financing consisted primarily of borrowings under debt obligations , the return of margin deposits under repurchase agreements and derivatives , and deposits received on golf memberships . uses of cash flow from financing activities included the repayment of debt obligations , deposits made on margin calls related to our repurchase agreements and derivatives , and the payment of financing costs , the payment of common and preferred dividends . see the consolidated statements of cash flows in our consolidated financial statements included in “ financial statements and supplementary data ” for a reconciliation of our cash position for the periods described herein . < font

” capitalized costs are generally amortized over the estimated useful life of three years . costs incurred related to the conceptual design and maintenance of internal-use software are expensed as incurred . website development activities include planning , design and development of graphics and content for new websites and operation of existing sites . costs incurred that involve providing additional functions and features to the website are capitalized . costs associated with website planning , maintenance , content development and training are expensed as incurred . capitalized costs are generally amortized over the estimated useful life of three years . we capitalized $ 2.3 million , $ 1.5 million and $ 3.9 million during the years ended december 31 , 2012 , 2013 and 2014 , respectively , related to internally developed software and website development costs . amortization expense of amounts capitalized was $ 2.1 million , $ 2.3 million and $ 2.4 million for the years ended december 31 , 2012 , 2013 and 2014 , respectively . accounting for advertising and promotional cost costs of media advertising and associated production costs are expensed as incurred and amounted to approximately $ 10.5 million , $ 10.0 million and $ 10.2 million for each of the years ending december 31 , 2012 , 2013 , and 2014 , respectively . accounting for amortizable intangible assets intangible assets are recorded at cost less accumulated amortization . typically , intangible assets are acquired in conjunction with the acquisition of radio stations , internet businesses and publishing entities . these intangibles are amortized using the straight-line method over the following estimated useful lives : category life customer lists and contracts lesser of 5 years or life of contract favorable and assigned leases life of the lease domain and brand names 5 to 7 years internally developed software 3 to 5 years customer relationships 1 to 3 years other amortizable intangible assets 5 to 10 years the carrying value of our amortizable intangible assets are evaluated periodically in relation to the operating performance and anticipated future cash flows of the underlying radio stations and businesses for indicators of impairment . in accordance with fasb asc topic 360 “ property , plant and equipment , ” when indicators of impairment are present and the undiscounted cash flows estimated to be generated from these assets are less than the carrying amounts of these assets , an adjustment to reduce the carrying value to the fair market value of these assets is recorded , if necessary . no adjustments to the carrying amounts of our amortizable intangible assets were necessary during the years ended december 31 , 2012 , 2013 or 2014. goodwill and other indefinite-lived intangible assets approximately 71 % of our total assets as of december 31 , 2014 consist of indefinite-lived intangible assets , such as broadcast licenses , goodwill and mastheads , the value of which depends significantly upon the operating results of our businesses . in the case of our radio stations , we would not be able to operate the properties without the related fcc license for each property . broadcast licenses are renewed with the fcc every eight years for a nominal cost that is expensed as incurred . we continually monitor our stations ' compliance with the various regulatory requirements . historically , all of our broadcast licenses have been renewed at the end of their respective periods , and we expect that all broadcast licenses will continue to be renewed in the future . accordingly , we consider our broadcast licenses to be indefinite-lived intangible assets in accordance with fasb asc topic 350 , intangibles – goodwill and other . broadcast licenses account for approximately 94 % of our indefinite-lived intangible assets . goodwill and magazine mastheads account for the remaining 6 % . we do not amortize goodwill or other indefinite-lived intangible assets , but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired . 104 we complete our annual impairment tests in the fourth quarter of each year . we believe that our estimate of the value of our broadcast licenses , mastheads , and goodwill is a critical accounting estimate as the value is significant in relation to our total assets , and our estimates incorporate variables and assumptions that are based on past experiences and judgment about future operating performance of our markets and business segments . if actual future results are less favorable than the assumptions and estimates we used , we are subject to future impairment charges , the amount of which may be material . the fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk . the unobservable inputs are defined in fasb asc topic 820 fair value measurements and disclosures as level 3 inputs discussed in detail in note 8 to our consolidated financial statements included in this annual report on form 10-k. gain or loss on the sale or disposal of assets we record gains or losses on the sale or disposal of assets equal to the proceeds , if any , as compared to the net book value . exchange transactions are accounted for in accordance with fasb asc topic 845 “ non-monetary transactions . ” for the year ended december 31 , 2012 , we recorded a $ 0.2 million pre-tax gain on the sale of wbzs-am in pawtucket , rhode island and a $ 0.6 million gain from insurance proceeds for repairs of storm damage in our new york market , partially offset by various fixed asset and equipment disposals including an additional loss associated with the write-off of a receivable from a prior station sale . story_separator_special_tag on january 10 , 2014 , we acquired and began operating humanevents.com , redstate.com , eagle financial publications and eagle wellness . during 2013 , we acquired christnotes.org , godupdates.org as well as twitchy.com on december 10 , 2013. digital advertising revenue , net of agency commissions , increased $ 3.5 million , of which $ 3.2 million was related to our acquisitions that include humanevents.com and redstate.com as well as our december 10 , 2013 acquisition of twitchy.com . the remaining $ 0.3 million increase was based on higher sales volumes . increases in digital streaming revenue of $ 0.4 million reflect an increase in volume of streaming content from our christian content websites . digital subscription revenue is a new revenue stream from our acquisitions of eagle financial publications . we issue digital newsletters that provide market analysis and investment advice for individual subscribers from financial commentators . increases in digital download revenues reflect a $ 0.2 million increase in the use of services on our websites , including churchstaffing.com and christianjobs.com within our church product division offset by a $ 0.3 million decline in the number of downloads from our sermonspice.com website due to an increase in competition from other providers that offer subscription options . our e-commerce revenue reflects a $ 2.2 million increase from sales generated by eagle wellness products offset by a $ 0.2 million decline in the number of books and dvd 's sold through our station websites . 56 net publishing revenue replace_table_token_14_th the following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source . replace_table_token_15_th revenue from book sales increased $ 10.1 million with $ 10.0 million from regnery publishing , which we acquired on january 10 , 2014. regnery publishing generated $ 15.8 million in gross sales reported net of estimated sales returns and allowances of $ 5.8 million . xulon press book sales were $ 3.7 million for the year ending december 31 , 2013 compared to $ 3.6 million for the same period of the prior year . e-book sales of $ 2.7 million for the year ending december 31 , 2014 , were generated from regnery publishing . self-publishing fees from xulon press increased $ 0.8 million due to an increase in the number of authors utilizing these services . our ability to cross-promote xulon press to authors that are not selected for publishing through regnery is expected to benefit our publishing division . print magazine revenue remains challenged with a $ 0.2 million decline in subscription revenue and a $ 0.2 million decline in advertising revenues based on lower distribution levels . as of december 2014 , we have discontinued printing and distributing townhall magazine , the content of which will only be available in the future in an online version . we continue to explore cost reductions in this segment to offset the eroding revenue base . broadcast operating expenses replace_table_token_16_th broadcast operating expenses reflect higher variable costs associated with the increase in broadcast revenues . increases include $ 3.5 million in personnel-related costs including sales-based commissions , $ 2.5 million in advertising and event costs , $ 1.0 million in professional services , $ 0.8 million in facility-related costs , $ 0.4 million of travel costs , $ 0.2 million in music license fees , and $ 0.2 million in production and programing expenses . the increase in broadcast operating expenses on a same-station basis reflects these items net of the impact of start-up costs associated with format changes and station launches . digital media operating expenses replace_table_token_17_th 57 increases in digital media operating expenses include $ 7.4 million of operating costs incurred by the eagle entities acquired on january 10 , 2014. while these increases in operating expenses are consistent with our strategic acquisitions , we continue to seek cost effective ways to reduce our overhead costs and expenses . across all other digital platforms , we incurred higher variable costs consistent with the higher revenue generated from this segment . increases include $ 2.3 million in personnel related costs including sales-based commissions , $ 0.8 million in streaming and hosting expenses , $ 0.2 million in professional services and $ 0.1 million in advertising expenses that were partially offset by a $ 0.2 million decline in bad debt expenses due to increase in collections and a $ 0.2 million decline in royalties in line with the decrease in digital downloads from our sermonspice.com website . publishing operating expenses replace_table_token_18_th regnery publishing , which we acquired on january 10 , 2014 , generated $ 12.1 million of operating expenses including royalties of $ 3.9 million and cost of sales of $ 3.7 million . the remaining operating expenses of regnery publishing included personnel and facility related costs . while these increases in operating expenses are consistent with our strategic acquisitions , we continue to seek cost effective ways to reduce our overhead costs and expenses . xulon press incurred higher variable costs associated with their revenue growth , including an increase of $ 0.4 million in personnel-related costs from an increases in the number of employees and in the number of hours worked to meet production demands and a $ 0.1 million increase in advertising expenses that were offset by a $ 0.2 million decline in bad debt expenses due to an increase in collection activity . our print magazines , which remain challenged with generating revenue , saw a decline in operating expenses of $ 0.3 million including $ 0.2 million in printing and mailing costs and $ 0.1 million in personnel related costs . unallocated corporate expenses replace_table_token_19_th unallocated corporate expenses include shared services , such as accounting and finance , human resources , legal , tax and treasury that are not specific to any one of our operating segments . increases in these costs over the same period of the prior year include $ 1.0 million in personnel-related costs that includes $ 0.2

the term loan b has a term of seven years , maturing in march 2020. during this term , the principal amount may be increased by up to an additional $ 60.0 million , subject to the terms and conditions of the credit agreement . we are required to make principal payments of $ 750,000 per quarter which began on september 30 , 2013 for the term loan b. prepayments may be made against the outstanding balance of our term loan b. each repayment of the outstanding term loan b is applied ratably to each of the next four principal installments thereof in the direct order of maturity and thereafter to the remaining principal balance in reverse order of maturity . we have made prepayments on our term loan b , including interest through the date of the as follows : replace_table_token_68_th 85 the revolver has a term of five years , maturing in march 2018. we report outstanding balances on our revolver as short-term based on use of the revolver to fund ordinary and customary operating cash needs with repayments made frequently . we believe that the borrowing capacity under our term loan b and revolver allows us to meet our ongoing operating requirements , fund capital expenditures and satisfy our debt service requirements for at least the next twelve months . borrowings under the term loan b may be made at libor ( subject to a floor of 1.00 % ) plus a spread of 3.50 % or wells fargo 's base rate plus a spread of 2.50 % . borrowings under the revolver may be made at libor or wells fargo 's base rate plus a spread determined by reference to our leverage ratio , as set forth in the pricing grid below . if an event of default occurs under the credit agreement , the applicable interest rate may increase by 2.00 % per annum . at december 31 , 2014 , the blended interest rate on amounts outstanding under the term loan b and revolver was 5.05 % . replace_table_token_69_th < p style= '' font : 10pt times