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gross profit for plant nutrition north america was favorably impacted by higher sales volumes and lower per-unit product costs , which were partially offset by increased per-unit shipping and handling costs and higher depreciation expense during 2017. a $ 61.6 million decrease in salt segment gross margin partially offset the combined plant nutrition business ' increase . the decrease resulted from lower sales volumes , increased per-unit product and increased shipping and handling costs , and higher depreciation expense . gross profit & gross margin commentary : 2015 – 2016 gross profit : decreased 9 % , or $ 30.6 million ; gross margin decreased 4 percentage points to 26 % from 30 % salt gross profit declined $ 17.1 million primarily due to reduced sales prices and higher per-unit production costs . the decrease was partially offset by lower logistics costs . the plant nutrition business , on a combined basis , contributed $ 10.8 million to the decrease in gross profit primarily due to lower average sales prices realized in our plant nutrition north america segment , partially offset by the inclusion of the results from produquímica following the acquisition in october 2016. in addition , plant nutrition north america experienced higher per-unit shipping and handling costs . other expenses and income commentary : 2016 – 2017 sg & a : increased $ 42.5 million , which represented a 1.3 percentage points of sales increase to 12.3 % from 11.0 % the increase in sg & a expense was primarily due to the full year inclusion of produquímica in our operating results in 2017 and approximately $ 2 million in higher corporate depreciation related to a significant software system upgrade . in addition , we incurred charges of approximately $ 2 million related to ongoing restructuring activities primarily impacting corporate sg & a . interest expense : increased $ 18.8 million to $ 52.9 million the increase was primarily due to our higher aggregate debt level driven by the acquisition of produquímica , which was partially offset by lower interest rates due to the refinancing of our term loans and revolving credit facility in april 2016. net ( earnings ) loss in equity investee : increased from a loss of $ 1.4 million to earnings of $ 0.8 million the $ 0.8 million of earnings in 2017 represents our share of fermavi eletroquímica ltda . 's ( “ fermavi ” ) net earnings . as a result of the full acquisition of produquímica , we hold a 50 % interest in fermavi , which was previously held by produquímica . the $ 1.4 million loss in 2016 was primarily comprised of our share of produquímica 's net loss based on our initial 35 % equity interest in produquímica prior to the full acquisition . gain from remeasurement of equity method investment we recognized a gain of $ 59.3 million in 2016 related to our previously held equity investment in produquímica , which was remeasured to fair value upon our full acquisition of the business in october 2016. other expense ( income ) , net : increased $ 3.3 million to $ 4.4 million the increase was primarily due to foreign exchange losses of $ 7.1 million in 2017 , compared to losses of $ 0.1 million in 2016. the increase was partially offset by the inclusion of $ 3.0 million of refinancing fees in 2016 and increased interest income in 2017. income tax expense : increased $ 25.4 million to $ 60.0 million income tax expense and our income tax rate increased in 2017 due to the impact of u.s. tax reform , which resulted in an increase in tax expense of $ 46.8 million , and due to a tax settlement agreement . these increases were partially offset by the release of valuation allowances related to our brazil business . our effective tax rate was 58 % in 2017 and 18 % in 2016. our effective tax rates were impacted by u.s. tax reform and a tax settlement agreement in 2017 and the non-taxable gain recognized from the remeasurement of our previously held equity investment in produquímica in 2016. replace_table_token_38_th compass minerals international , inc. our income tax provision in both periods differs from the u.s. statutory rate primarily due to u.s. statutory depletion , domestic manufacturing deductions , state income taxes , foreign income , mining and withholding taxes and interest expense recognition differences for tax and financial reporting purposes . other expenses and income commentary : 2015 – 2016 sg & a : increased $ 16.2 million , which represented a 1.1 percentage points of sales increase to 9.9 % from 11.0 % the increase in expense was due to the inclusion of produquímica 's results and higher expenses in our plant nutrition north america segment due to the $ 3.1 million partial impairment of our wolf trax trade name and corporate restructuring costs . this increase was partially offset by a decrease of $ 2.0 million in corporate professional services and a decrease of $ 1.8 million in marketing expenses in our plant nutrition north america and salt segments . interest expense : increased $ 12.6 million to $ 34.1 million the increase was primarily due to our higher aggregate debt level driven by the acquisition of produquímica , which was partially offset by lower interest rates due to the refinancing of our term loans and revolving credit facility in april 2016. net ( earnings ) loss in equity investee : loss of $ 1.4 million the $ 1.4 million in 2016 was primarily comprised of our share of produquímica 's net loss based on our initial 35 % equity interest in produquímica prior to the full acquisition . story_separator_special_tag net cash flows provided by operating activities were $ 167.3 million . » net earnings were $ 162.7 million which included a non-cash remeasurement gain of $ 59.3 million related to the acquisition of produquímica . » non-cash depreciation and amortization expense was $ 90.3 million . » working capital items were a use of operating cash flows of $ 31.7 million . net cash flows provided by operating activities were $ 137.9 million . » net earnings were $ 159.2 million . » non-cash depreciation and amortization expense was $ 78.3 million . » working capital items were a use of operating cash flows of $ 111.0 million . investing activities : net cash flows used by investing activities were $ 119.0 million . » included $ 114.1 million of capital expenditures . net cash flows used by investing activities were $ 467.8 million . » included $ 182.2 million of capital expenditures and cash payments of $ 4.7 million relating to our previously held equity investment and $ 277.7 million for the full acquisition of produquímica . net cash flows used by investing activities were $ 335.4 million . » included $ 217.6 million of capital expenditures and an equity investment of $ 116.4 million . financing activities : net cash flows used by financing activities were $ 73.4 million . » included net proceeds from issuance of debt of $ 38.7 million , payments of dividends of $ 97.5 million and payments of $ 14.7 million related to contingent consideration from the produquímica acquisition . net cash flows provided by financing activities were $ 314.6 million . » included net proceeds from issuance of debt of $ 416.7 million , payments of dividends of $ 94.1 million and payments of $ 8.5 million related to the refinancing of debt . net cash flows provided by financing activities were $ 14.2 million . » primarily related to new debt used to finance the produquímica investment of $ 100 million , partially offset by the payment of dividends of $ 89.4 million . replace_table_token_46_th compass minerals international , inc. story_separator_special_tag style= `` font-family : inherit ; font-size:8pt ; `` > we lease property and equipment under non-cancelable operating and capital leases for varying periods . ( c ) we have contracts to purchase certain amounts of electricity , equipment and raw materials . in addition , we have minimum throughput commitments in certain depots and warehouses . ( d ) note 8 to our consolidated financial statements provides additional information . ( e ) note 11 to our consolidated financial statements provides additional information . sensitivity analysis related to ebitda and adjusted ebitda management uses a variety of measures to evaluate our performance . while our consolidated financial statements , taken as a whole , provide an understanding of our overall results of operations , financial condition and cash flows , we analyze components of the consolidated financial statements to identify certain trends and evaluate specific performance areas . in addition to using u.s. generally accepted accounting principles ( “ gaap ” ) financial measures , such as gross profit , net earnings and cash flows generated by operating activities , management uses ebitda and adjusted ebitda . both ebitda and adjusted ebitda are non-gaap financial measures used to evaluate the operating performance of our core business operations because our resource allocation , financing methods and cost of capital , and income tax positions are managed at a corporate level , apart from the activities of the operating segments , and the operating facilities are located in different taxing jurisdictions , which can cause considerable variation in net earnings . we also use ebitda and adjusted ebitda to assess our operating performance and return on capital against other companies , and to evaluate potential acquisitions or other capital projects . ebitda and adjusted ebitda are not calculated under u.s. gaap and should not be considered in isolation or as a substitute for net earnings , cash flows or other financial data prepared in accordance with u.s. gaap or as a measure of our overall profitability or liquidity . ebitda and adjusted ebitda exclude interest expense , income taxes and depreciation and amortization , each of which are an essential element of our cost structure and can not be eliminated . furthermore , adjusted ebitda excludes other cash and non-cash items , including restructuring costs , refinancing costs and other ( income ) expense . our borrowings are a significant component of our capital structure and interest expense is a continuing cost of debt . we are also required to pay income taxes , a required and ongoing consequence of our operations . we have a significant investment in capital assets and depreciation and amortization reflect the utilization of those assets in order to generate revenues . consequently , any measure that excludes these elements has material limitations . while ebitda and adjusted ebitda are frequently used as measures of operating performance , these terms are not necessarily comparable to similarly titled measures of other companies due to the potential inconsistencies in the method of calculation . replace_table_token_49_th compass minerals international , inc. the calculation of ebitda and adjusted ebitda as used by management is set forth in the table below ( in millions ) . replace_table_token_50_th in 2017 , we incurred charges of $ 4.3 million related to ongoing restructuring activities . key adjustments in 2016 included a gain of $ 59.3 million related to the remeasurement of our previously held equity investment in produquímica ( see note 3 to our consolidated financial statements ) and $ 8.4 million of costs in connection with the acquisition of produquímica , primarily related to the step-up of finished goods inventory to fair value , which was recorded in product cost as the inventory was sold . in the fourth quarter of 2016 , we also partially wrote-down a trade name acquired in our wolf trax acquisition . ebitda also includes other

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capital resources we believe our primary sources of liquidity will continue to be cash flow from operations and borrowings under our revolving credit facility . we believe that our current banking syndicate is secure and believe we will have access to our entire revolving credit facility . we expect that ongoing requirements for debt service and committed or sustaining capital expenditures will primarily be funded from these sources . our debt service obligations could , under certain circumstances , materially affect our financial condition and prevent us from fulfilling our debt obligations . see item 1a. , “ risk factors – our indebtedness and ability to pay our indebtedness could adversely affect our business and financial condition. ” furthermore , cmi is a holding company with no operations of its own and is dependent on its subsidiaries for cash flow . as discussed in note 9 to our consolidated financial statements , at december 31 , 2017 , we had $ 1.37 billion of outstanding indebtedness consisting of $ 250.0 million under our 4.875 % notes , $ 1.01 billion of borrowings outstanding under our senior secured credit facilities ( consisting of term loans and a revolving credit facility ) , including $ 168.9 million borrowed against our revolving credit facility , and $ 112.9 million of debt related to our produquímica business in brazil . letters of credit totaling $ 8.4 million as of december 31 , 2017 , reduced available borrowing capacity under the revolving credit facility to $ 122.7 million .

the european commission , or ec , has granted orphan medicinal product designation to edasalonexent for the treatment of dmd . we initiated a global phase 3 trial of edasalonexent for the treatment of dmd in september 2018 , which we refer to as the polarisdmd trial . the polarisdmd trial is designed to evaluate the efficacy and safety of edasalonexent for registration purposes , with top-line results expected in the second quarter of 2020. our goal is to submit a new drug application for edasalonexent for the treatment of dmd in early 2021. polarisdmd is currently enrolling patients with enrollment expected to be completed in 2019. the trial design was informed by discussions with the fda , as well as input from treating physicians , families of boys affected by dmd and patient advocacy organizations . the polarisdmd trial is a randomized , double-blind , placebo-controlled trial , and we anticipate enrolling approximately 125 patients between the ages of four and seven ( up to eighth birthday ) , regardless of mutation type , who have not been on steroids for at least six months . the primary efficacy endpoint is change in north star ambulatory assessment , or nsaa , score after 12 months of treatment with edasalonexent compared to placebo . key secondary endpoints are the age-appropriate timed function tests : time to stand , 4-stair climb and 10-meter walk/run . assessments of growth , cardiac and bone health are also included in the trial . this month , we are initiating a new open-label extension trial called the galaxydmd trial , in which we plan to enroll all of the boys currently participating in the movedmd open-label extension , and which will also provide the boys who complete the 12-month polarisdmd trial with the opportunity to receive open-label edasalonexent treatment . the galaxydmd trial is designed to provide longer term safety data to support registration filings . our movedmd phase 1/2 trial enrolled ambulatory boys four to seven years old with a genetically confirmed diagnosis of dmd who were steroid naive or had not used steroids for at least six months prior to the trial . boys enrolled in the trial were not limited to any specific dystrophin mutations and the 31 boys in the trial had 26 different dystrophin mutations . the movedmd trial was designed to be conducted in three sequential parts , phase 1 and phase 2 , both of which are completed , and an open-label extension , which is on-going . in phase 1 of the movedmd trial , we assessed the safety , tolerability and pharmacokinetics of edasalonexent in 17 patients , following seven days of dosing , and 82 we reported in january 2016 that all three doses of edasalonexent tested were generally well tolerated with no safety signals observed and there were no serious adverse events and no drug discontinuations . in the phase 2 portion of the trial , we assessed the effects of edasalonexent using magnetic resonance imaging , or mri , t2 as an early biomarker at 12 weeks , and announced in january 2017 that the primary efficacy endpoint of average change from baseline to week 12 in the mri t2 composite measure of lower leg muscles for the pooled edasalonexent treatment groups compared to placebo was not met , although we observed directionally positive results in the 100/mg/kg/day edasalonexent treatment group that were not statistically significant . subsequently , in the open-label extension of the movedmd trial , we observed statistically significant improvement in the rate of change in lower leg composite mri t2 through 12 , 24 , 36 and 48 weeks on 100 mg/kg of edasalonexent treatment compared to the off-treatment control period . we have completed key efficacy and safety assessments from the movedmd trial . in the ongoing open-label extension of the movedmd trial through 72 weeks of oral 100 mg/kg/day edasalonexent treatment , we observed preserved muscle function and consistent improvements in all four assessments of muscle function : nsaa score , time to stand , 4-stair climb and 10-meter walk/run , compared to the rates of change in the control period for boys prior to receiving edasalonexent treatment . additionally , supportive changes in non-effort-based measures of muscle health were seen , supporting the durability of edasalonexent treatment effects . specifically , we observed , in the 100 mg/kg/day treatment group , that all four muscle enzymes tested ( creatine kinase , alanine aminotransferase , aspartate aminotransferase and lactate dehydrogenase ) were significantly decreased compared to baseline following edasalonexent treatment at 12 weeks and later time points through 72 weeks ( p < 0.05 ) . through 72 weeks of treatment , edasalonexent continued to be well tolerated with no safety signals observed in the movedmd trial . boys treated with edasalonexent continued to follow age-appropriate growth curves with age-appropriate increases in weight and height and overall body mass index trended down to age-normative values . we also observed that the heart rate of the boys significantly decreased toward age-normative values with over a year and a half period of edasalonexent treatment . in addition to edasalonexent , we have developed cat-5571 as a potential treatment for cystic fibrosis , or cf . cat-5571 is an oral small molecule that is designed to activate autophagy , a mechanism for recycling cellular components and digesting pathogens , which is important for host defenses and is depressed in cf . we have completed investigational new drug , or ind , application-enabling activities for cat-5571 . story_separator_special_tag general and administrative expenses general and administrative expenses increased by $ 0.4 million to $ 9.3 million for the year ended december 31 , 2018 from $ 8.9 million for the year ended december 31 , 2017 , an increase of 5 % . the increase in general and administrative expenses was attributable to a $ 0.8 million increase in employee compensation due to one-time performance bonuses awarded to general and administrative employees that were not awarded bonuses in 2017 , a $ 0.1 million increase in the general and administrative portion of insurance and facilities expense , and a $ 0.1 million increase in delaware franchise tax . these increases were partially offset by a $ 0.6 million decrease in consulting and professional services due to cost cutting associated with a strategic shift and restructuring . other income ( expense ) , net other income ( expense ) , net increased by $ 0.8 million for the year ended december 31 , 2018 compared to the year ended december 31 , 2017 due to a decrease in interest expense of $ 0.4 million due to principal payments made on our credit facility , an increase in other income of $ 0.1 million due 88 partially to the net gain realized on assets sold in consolidation of our facilities and an increase of $ 0.3 million in interest and investment income due to an increase in our interest-bearing assets following our june 2018 financing . story_separator_special_tag the number and characteristics of future product candidates that we pursue and their development requirements ; the outcome , timing and costs of seeking regulatory approvals ; the costs of commercialization activities for any of our product candidates that receive marketing approval to the extent such costs are not the responsibility of any future collaborators , including the costs and timing of establishing product sales , marketing , distribution and manufacturing capabilities ; subject to receipt of marketing approval , revenue , if any , received from commercial sales of our product candidates ; our headcount growth and associated costs as we expand our research and development and establish a commercial infrastructure ; the costs of preparing , filing and prosecuting patent applications , maintaining and protecting our intellectual property rights and defending against intellectual property related claims ; and the costs of operating as a public company . identifying potential product candidates and conducting preclinical testing and clinical trials is a time-consuming , expensive and uncertain process that takes years to complete , and we may never generate the necessary data or results required to obtain marketing approval and achieve product sales . in addition , our product candidates , if approved , may not achieve commercial success . our commercial revenues , if any , will be derived from sales of medicines that we do not expect to be commercially available for several years , if at all . accordingly , we will need to continue to rely on additional financing to achieve our business objectives . adequate additional financing may not be available to us on acceptable terms , or at all . until such time , if ever , as we can generate substantial product revenues , we expect to finance our cash needs through a combination of equity offerings , debt financings , collaborations , strategic alliances and licensing arrangements . we do not have any committed external source of funds . to the extent that we raise additional capital through the sale of equity or convertible debt securities , our stockholders ' ownership interests will be diluted , and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders ' rights . additional debt financing , if available , would result in increased fixed payment obligations and may involve agreements that include restrictive covenants that limit our ability to take specific actions , such as incurring additional debt , making capital expenditures or declaring dividends , that could adversely impact our ability to conduct our business . if we raise funds through collaborations , strategic alliances or licensing arrangements with third parties , we may have to relinquish valuable rights to our technologies , future revenue streams , research programs or product candidates or to grant licenses on terms that may not be favorable to us . if we are unable to raise additional funds through equity or debt financings when needed , we may be required to delay , limit , reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves . 91 cash flows comparison of the years ended december 31 , 2018 and 2017 the following table provides information regarding our cash flows for the years ended december 31 , 2018 and 2017 ( in thousands ) : replace_table_token_3_th net cash used in operating activities net cash used in operating activities was $ 23.5 million for the year ended december 31 , 2018 and consisted primarily of a net loss of $ 25.9 million adjusted for non-cash items , including stock-based compensation expense of $ 1.8 million , depreciation and amortization expense of $ 0.1 million , other non-cash items of $ 0.1 million and a net decrease in operating assets of $ 0.7 million , which resulted primarily from increases in accounts payable and accrued expenses . these were partially offset by a gain on disposal of property and equipment of $ 0.3 million . net cash used in operating activities was $ 26.8 million for the year ended december 31 , 2017 and consisted primarily of a net loss of $ 27.4 million adjusted for non-cash items , including stock-based compensation expense of $ 2.0 million , depreciation and amortization expense of $ 0.3 million , non-cash interest expense of $ 0.2 million , and a net increase in operating assets of $ 1.9 million , which resulted

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liquidity and capital resources from our inception through december 31 , 2018 , we have raised an aggregate of $ 245.2 million , of which $ 92.9 million was from private placements of preferred stock , $ 69.0 million represented gross proceeds from our ipo , $ 11.5 million represented gross proceeds from our september 2016 registered direct offering , $ 19.0 million represented gross proceeds from our atm offering programs , $ 42.0 million represented gross proceeds from our june 2018 financing , $ 10.0 million was from a secured debt financing and $ 0.8 million was from common stock option and warrant exercises . as of december 31 , 2018 , we had $ 37.6 million in cash , cash equivalents and short-term investments . following december 31 , 2018 , we raised an additional $ 20.0 million in gross proceeds from our february 2019 financing and $ 2.1 million in gross proceeds under our atm offering program we have not generated any revenue from product sales to date . we have incurred significant annual net operating losses in every year since our inception and expect to incur net operating losses in 2019 and for the foreseeable future . as of december 31 , 2018 , we had an accumulated deficit of $ 197.3 million . we expect to continue to incur significant expenses and operating losses for the next several years . our net losses may fluctuate significantly from quarter to quarter and year to year . we anticipate that our expenses will increase significantly if and to the extent that we continue to develop and conduct clinical trials with respect to edasalonexent and other product candidates ; initiate and continue research , preclinical and clinical development efforts for our other product candidates and potential product candidates ; maintain , expand and protect our intellectual property portfolio ; establish a commercial infrastructure to support the marketing and sale of certain of our product candidates ; hire additional personnel , such as clinical , regulatory , quality control and scientific personnel ; and operate as a public company .

in 2012 the fulfill program generated $ 1.4 million of 22 operating income . we expect the contribution of our fulfill program to generate operating income between $ 2.5 million and $ 3.0 million in 2013. the refractory segment introduced a new , fourth generation lacam ® laser measurement system and expect additional lacam ® sales in 2013. we also signed an agreement with united steel company b.s.c . ( sulb ) to perform all refractory maintenance at a greenfield steel mill in bahrain that started up in the third quarter of 2012. minteq , working with other refractory companies , is responsible for coordinating refractory maintenance of the steel furnaces and other steel production vessels . we generated approximately $ 3 million in revenue from this contract in 2012 and we expect to generate between $ 8 million- $ 10 million per year of revenue over the 3 year term of the contract . the company 's balance sheet as of december 31 , 2012 continues to be very strong . cash , cash equivalents and short-term investments at december 31 , 2012 were approximately $ 468 million . our cash flows from operations were approximately $ 139 million in 2012. in addition , we had available lines of credit of $ 183.5 million , our debt to equity ratio was 0.10 , and our current ratio was 3.1. we face some significant risks and challenges in the future : · the industries we serve , primarily paper , steel , construction and automotive , have been adversely affected by the uncertain global economic climate , primarily in europe . although these markets have stabilized , our global business could be adversely affected by further decreases in economic activity . our refractories segment primarily serves the steel industry . although north american production improved slightly in 2012 as compared with the prior year , we saw declines in european steel production and it remains below 2008 levels . in the paper industry , which is served by our paper pcc product line , 2012 production levels for printing and writing papers within north america and europe , our two largest markets were 5 % and 4 % below the prior year . in addition , our processed minerals and specialty pcc product lines are affected by the domestic building and construction markets and the automotive market . housing starts in 2012 averaged approximately 781 thousand units , and were up 28 % from 2011 levels . housing starts were at a peak rate of 2.1 million units in 2005 . · some of our customers may experience mill shutdowns due to further consolidations , or may face liquidity issues , or bankruptcy , which could deteriorate the aging of our accounts receivable , increase our bad debt exposure and possibly trigger impairment of assets or realignment of our businesses . · consolidations and rationalizations in the paper and steel industries concentrate purchasing power in the hands of fewer customers , increasing pricing pressure on suppliers such as us . · most of our paper pcc sales are subject to long-term contracts that may be terminated pursuant to their terms , or may be renewed on terms less favorable to us . · we are subject to volatility in pricing and supply availability of our key raw materials used in our paper pcc product line and refractory product line . · we continue to rely on china for a portion of our supply of magnesium oxide in the refractories segment , which may be subject to uncertainty in availability and cost . · fluctuations in energy costs have an impact on all of our businesses . · changes in the fair market value of our pension assets , rates of return on assets , and discount rates could continue to have a significant impact on our net periodic pension costs as well as our funding status . · as we expand our operations abroad we face the inherent risks of doing business in many foreign countries , including foreign exchange risk , import and export restrictions , and security concerns . · the company 's operations , particularly in the mining and environmental areas ( discharges , emissions and greenhouse gases ) , are subject to regulation by federal , state and foreign authorities and may be subject to , and presumably will be required to comply with , additional laws , regulations and guidelines which may be adopted in the future . during the second quarter of 2011 , m-real corporation announced plans to divest its alizay paper mill in france . since that time , the mill has not been operating . in january 2013 , double a paper company announced it had acquired the alizay mill . while there can be no assurance , we expect to negotiate a contract and the paper mill to resume operations in the second half of 2013. in 2011 , sales from our alizay mill were approximately $ 7 million . during the third quarter of 2011 , newpage corporation filed for chapter 11 bankruptcy protection . in 2012 , the company did business with five newpage mills , including operating three satellite pcc facilities at newpage locations . in december 2012 , newpage emerged from the bankruptcy process and the company continues to supply pcc to these mills . annual sales to newpage locations in 2012 were approximately $ 22 million . the company has evaluated these facilities for impairment of assets and , based upon the information currently available and probability-weighted cash flows of various potential outcomes , has determined that no impairment charge was required in the fourth quarter . 23 outlook looking forward , we remain cautious about the state of the global economy , particularly in europe , and the impact it will have on our product lines . story_separator_special_tag · allowance for doubtful accounts : substantially all of our accounts receivable are due from companies in the paper , construction and steel industries . accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future . such allowance is established through a charge to the provision for bad debt expenses . we recorded bad debt expenses of $ 1.0 million , $ 0.9 million and $ 0.1 million in 2012 , 2011 and 2010 , respectively . in addition to specific allowances established for bankrupt customers , we also analyze the collection history and financial condition of our other customers considering current industry conditions and determine whether an allowance needs to be established or adjusted . · property , plant and equipment , goodwill , intangible and other long-lived assets : property , plant and equipment are depreciated over their useful lives . useful lives are based on management 's estimates of the period that the assets can generate revenue , which does not necessarily coincide with the remaining term of a customer 's contractual obligation to purchase products made using those assets . our sales of pcc are predominately pursuant to long-term evergreen contracts , initially ten years in length , with paper mills at which we operate satellite pcc plants . the terms of many of these agreements have been extended , often in connection with an expansion of the satellite pcc plant . failure of a pcc customer to renew an agreement or continue to purchase pcc from our facility could result in an impairment of assets or accelerated depreciation at such facility . · valuation of long-lived assets , goodwill and other intangible assets : we assess the possible impairment of long-lived assets and identifiable amortizable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable . goodwill is reviewed for impairment at least annually . factors we consider important that could trigger an impairment review include the following : 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 ; significant negative industry or economic trends ; market capitalization below invested capital . the goodwill balance for each reporting unit as of december 31 , 2012 and 2011 , respectively , was as follows : replace_table_token_20_th annually , the company performs a qualitative assessment for each of its reporting units to determine if the two step process for impairment testing is required . if the company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount , the company then evaluates the recoverability of goodwill using a two-step impairment test approach at the reporting unit level . step one involves a ) developing the fair value of total invested capital of each reporting unit in which goodwill is assigned ; and b ) comparing the fair value of total invested capital for each reporting unit to its carrying amount , to determine if 29 there is goodwill impairment . should the carrying amount for a reporting unit exceed its fair value , then the step one test is failed , and the magnitude of any goodwill impairment is determined under step two . the amount of impairment loss is determined in step two by comparing the implied fair value of reporting unit goodwill with the carrying amount of goodwill . the company has three reporting units ; pcc , processed minerals and refractories . we identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and management regularly reviews the operating results of those components . in the fourth quarter of 2012 , the company performed a qualitative assessment of each of its reporting units and determined it was not more likely than not that the fair value of each of its reporting units was less than their carrying values . · accounting for income taxes : as part of the process of preparing our consolidated financial statements , we are required to estimate our income taxes in each of the jurisdictions in which we operate . this process involves estimating current tax expense together with assessing temporary differences resulting from differing treatments of items for tax and accounting purposes . these differences result in deferred tax assets and liabilities , which are included in the consolidated balance sheet . we must then assess the likelihood that our deferred tax assets will be recovered from future taxable income , and to the extent we believe that recovery is not likely , we must establish a valuation allowance . to the extent we establish a valuation allowance or change this allowance in a period , we must include an expense within the tax provision in the consolidated statements of operations . deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years . such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities , as well as from net operating loss . we evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources , including reversal of taxable temporary differences and forecasted operating earnings . these sources of income inherently rely heavily on estimates . we use our historical experience and business forecasts to provide insight . amounts recorded for deferred tax assets , net of valuation allowances , were $ 47.5 million and $ 44.4 million at december 31 , 2012 and 2011 , respectively . such year-end 2012 amounts are expected to be fully recoverable within the applicable statutory expiration periods . to the extent we do not consider it more likely than not that a deferred tax asset will be recovered , a

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liquidity and capital resources cash flows provided from operations in 2012 were used principally to fund $ 52.1 million of capital expenditures , and repurchase $ 25.9 million in treasury shares . cash provided from operating activities totaled $ 139.9 million in 2012 as compared with $ 133.7 million in 2011. the increase in cash from operating activities was primarily due to higher net income and lower income tax payments which were partially offset by increased pension plan funding . included in cash flow from operations was pension plan funding of approximately $ 17.0 million , $ 6.6 million and $ 8.5 million for the years ended december 31 , 2012 , 2011 and 2010 , respectively . trade working capital is defined as trade accounts receivable , trade accounts payable and inventories . our total days of trade working capital increased to 59 days from 55 days in 2011 primarily due to higher receivables and lower payables in our refractories segment . the funding status of the company 's pension plans was approximately 66 % at december 31 , 2012 and we have met all minimum funding requirements . the funding status at december 31 , 2011 was 70 % . the reduction in our funding status was due to a large increase in the projected benefit obligation from a change in the discount rate . in 2011 , the company 's board of directors authorized the company 's management to repurchase , at its discretion , up to $ 75 million of additional shares over a two-year period . as of december 31 , 2012 , 633,575 shares have been repurchased under this program for $ 30.7 million , or an average price of approximately $ 48.38 per share . on january 23 , 2013 , the company 's board of directors declared a regular quarterly dividend on its common stock of $ 0.05 per share .

combined sales to academic and governmental customers increased 2 % in 2019 and 8 % in 2018 , with the effect of foreign currency translation decreasing sales by 1 % in 2019 and increasing sales by 1 % in 2018. sales to academic and governmental customers are highly dependent on when institutions receive funding to purchase our instrument systems and , as such , sales growth rates can vary significantly from period to period . operating income was $ 708 million in 2019 , a decrease of 4 % as compared to 2018. this decrease can be attributed to lower sales volume , the effect of foreign currency translation and $ 10 million of severance-related costs in connection with a reduction in workforce that occurred in early 2019 , offset by lower variable incentive compensation costs . 27 operating income increased 12 % in 2018 as compared to 2017. this increase was primarily a result of the effect of higher sales volume achieved in 2018 , as well as the effect of approximately $ 33 million of facility closure , litigation and intellectual property payment charges from 2017 that did not recur in 2018. the company 's effective tax rates were 12.7 % , 13.0 % and 96.8 % for 2019 , 2018 and 2017 , respectively . net income per diluted share was $ 8.69 , $ 7.65 and $ 0.25 in 2019 , 2018 and 2017 , respectively . in 2018 , the company settled a pension plan obligation and incurred a $ 46 million expense which reduced the net income per diluted share by $ 0.39. in 2017 , the company incurred a $ 550 million income tax provision related to the 2017 tax cuts and jobs act ( “ 2017 tax act ” ) which reduced the net income per diluted share by $ 6.82 , and excluding the 2017 tax act income tax provision , the company 's effective tax rate in 2017 would have been 11.0 % . the company generated $ 643 million , $ 604 million and $ 698 million of net cash flows from operations in 2019 , 2018 and 2017 , respectively . the increase in operating cash flow in 2019 was primarily a result of payments made in 2018 that did not recur , including $ 103 million of income tax payments made in the u.s. relating to the company 's estimated 2017 transition tax liability and 2018 estimated tax payments , a $ 15 million litigation settlement payment and $ 11 million of contributions to certain defined benefit pension plans . included in the 2019 net cash flow from operations is $ 29 million of income tax payments made in the u.s. in relation to the 2017 transition tax liability . over the next three years , the company is required to make annual u.s. federal tax payments of approximately $ 38 million to tax authorities in connection with the company 's estimated remaining transition tax liabilities of $ 404 million under the 2017 tax act . the final 60 % of the total liability is required to be paid over a three-year period beginning in 2023. cash flows used in investing activities included capital expenditures related to property , plant , equipment and software capitalization of $ 164 million , $ 96 million and $ 85 million in 2019 , 2018 and 2017 , respectively . in 2019 , $ 68 million of capital expenditures paid related to the expansion of the company 's precision chemistry consumable operations in the u.s. the company has incurred $ 85 million of costs for this facility through the end of 2019. in 2018 , the company acquired the sole intellectual property rights to the desorption electrospray ionization ( “ desi ” ) imaging technology for $ 30 million in cash and a future contractual obligation to pay a minimum royalty of $ 3 million over the remaining life of the patent . desi is a mass spectrometry imaging technique that is used to develop medical therapies . in january 2019 , the company 's board of directors authorized the company to repurchase up to $ 4 billion of its outstanding common stock over a two-year period . during 2019 , 2018 and 2017 , the company repurchased 11.1 million , 6.8 million and 1.8 million shares of the company 's outstanding common stock at a cost of $ 2.5 billion , $ 1.3 billion and $ 323 million , respectively , under the january 2019 authorization and other previously announced programs . as of december 31 , 2019 , the company has a total of $ 1.7 billion authorized for future repurchases . the company believes that it has the financial flexibility to fund these share repurchases given current cash and investment levels and debt borrowing capacity , as well as to invest in research , technology and business acquisitions to further grow the company 's sales and profits . in september 2019 , the company issued fixed interest rate senior unsecured notes with an aggregate principal amount of $ 500 million , of which $ 200 million of the outstanding notes matures in seven years and the remaining $ 300 million matures in 10 years . the company used the proceeds from the issuance of these senior unsecured notes to repay other outstanding debt and for general corporate purposes . during 2019 and 2018 , the company entered into $ 260 million and $ 300 million , respectively , of u.s.-to-euro interest rate cross-currency swap agreements that hedge the company 's net investment in its euro denominated net assets , bringing the total currency interest rate cross-currency swap agreement notional value to $ 560 million at december 31 , 2019. as a result of entering into these agreements , the company lowered its net interest expense by $ 12 million and $ 3 million during 2019 and 2018 , respectively . story_separator_special_tag contractual obligations and commercial commitments the following is a summary of the company 's known contractual obligations as of december 31 , 2019 ( in thousands ) : replace_table_token_10_th ( 1 ) does not include normal purchases made in the ordinary course of business and uncertain tax positions discussed below . ( 2 ) the interest rates applicable to the 2017 credit agreement are , at the company 's option , equal to either the alternate base rate ( which is a rate per annum equal to the greatest of ( a ) the prime rate in effect on such day , ( b ) the federal reserve bank of new york rate on such day plus 1/2 of 1 % per annum and ( c ) the adjusted libo rate on such day ( or if such day is not a business day , the immediately preceding business day ) for a deposit in u.s. dollars with a maturity of one month plus 1 % per annum ) or the applicable 1 , 2 , 3 or 6 month adjusted libo rate or euribo rate for euro-denominated loans , in each case , plus an interest rate margin based upon the company 's leverage ratio , which can range between 0 and 12.5 basis points for alternate base rate loans and between 80 and 112.5 basis points for libo rate or euribo rate loans . the facility fee on the 2017 credit agreement ranges between 7.5 and 25 basis points per annum , based on the leverage ratio , of the amount of the revolving facility commitments and the outstanding term loan . the 2017 credit agreement requires that the company comply with an interest coverage ratio test of not less than 3.50:1 as of the end of any fiscal quarter for any period of four consecutive fiscal quarters and a leverage ratio test of not more than 3.50:1 as of the end of any fiscal quarter . in addition , the 2017 credit agreement includes negative covenants , affirmative covenants , representations and warranties and events of default that are customary for investment grade credit facilities . as of december 31 , 2019 , the company was in compliance with all such covenants . 36 the following is a summary of the company 's known commercial commitments as of december 31 , 2019 ( in thousands ) : replace_table_token_11_th from time to time , the company and its subsidiaries are involved in various litigation matters arising in the ordinary course of business . the company believes it has meritorious arguments in its current litigation matters and believes any outcome , either individually or in the aggregate , will not be material to the company 's financial position or results of operations . the company has long-term liabilities for deferred employee compensation , including pension and supplemental executive retirement plans . the payments related to the supplemental retirement plan are not included above since they are dependent upon when the employee retires or leaves the company and whether the employee elects lump-sum or annuity payments . during fiscal year 2020 , the company expects to contribute approximately $ 3 million to $ 6 million to the company 's defined benefit plans . the company has contingent consideration for an earnout pertaining to its july 2014 acquisition of the net assets of medimass research , development and service kft . ( “ medimass ” ) . the earnout payments are not included above since they are dependent upon many factors that can not be predicted with any certainty . the estimated fair value of the contingent consideration as of december 31 , 2019 is $ 3 million . the company licenses certain technology and software from third parties . future minimum license fees payable under existing license agreements as of december 31 , 2019 are immaterial . the company enters into licensing arrangements with third parties that require future milestone or royalty payments contingent upon future events . upon the achievement of certain milestones in existing agreements , the company could make additional future payments of up to $ 7 million , as well as royalties on future net sales . it is not possible to predict with reasonable certainty whether these milestones will be achieved or the timing for achievement . as a result , these potential payments are not included in the table above . the company has not paid any dividends and has no plans , at this time , to pay any dividends in the future . off-balance sheet arrangements the company has not created , and is not party to , any special-purpose or off-balance sheet entities for the purpose of raising capital , incurring debt or operating parts of its business that are not consolidated ( to the extent of the company 's ownership interest therein ) into the consolidated financial statements . the company has not entered into any transactions with unconsolidated entities whereby it has subordinated retained interests , derivative instruments or other contingent arrangements that expose the company to material continuing risks , contingent liabilities or any other obligation under a variable interest in an unconsolidated entity that provides financing , liquidity , market risk or credit risk support to the company . the company enters into standard indemnification agreements in its ordinary course of business . pursuant to these agreements , the company indemnifies , holds harmless and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party , generally the company 's business partners or customers , in connection with patent , copyright or other intellectual property infringement claims by any third party with respect to its current products , as well as claims relating to property damage or personal injury resulting from the performance of services by the company or its subcontractors . the maximum potential amount of future payments the company could be required to make under these indemnification agreements is unlimited

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cash flow from operating activities net cash provided by operating activities was $ 643 million , $ 604 million and $ 698 million in 2019 , 2018 and 2017 , respectively . the changes within net cash provided by operating activities include the following significant changes in the sources and uses of net cash provided by operating activities , aside from the changes in net income : the changes in accounts receivable were primarily attributable to timing of payments made by customers and timing of sales . days sales outstanding was 77 days at december 31 , 2019 , 74 days at december 31 , 2018 and 71 days at 2017 . 33 the changes in inventory were primarily attributable to new product launches and the increase in safety stock in advance of brexit . the changes in accounts payable and other current liabilities were the result of timing of payments to vendors . in addition , the change in 2019 as compared to 2018 includes $ 29 million and $ 103 million , respectively , of income tax payments made in the u.s. relating to the company 's estimated 2017 tax reform liability and 2018 estimated income tax payments and a $ 15 million litigation settlement payment . net cash provided from deferred revenue and customer advances results from annual increases in new service contracts as a higher installed base of customers renew annual service contracts . other changes were attributable to variation in the timing of various provisions , expenditures , prepaid income taxes and accruals in other current assets , other assets , other liabilities , and income tax expenses related to the 2017 tax act . in addition , in 2018 , the company made $ 11 million of contributions to certain defined benefit pension plans .

the timing and amount of these investments vary based on the rate at which we add new clients , add new personnel and scale our application development and other activities . many of these investments will occur in advance of experiencing any direct benefit from them which will make it difficult to determine if we are effectively allocating our resources . we expect these investments to increase our costs on an absolute basis , but as we grow our number of clients and our related revenues , we anticipate that we will gain economies of scale and increased operating leverage . as a result , we expect our gross and operating margins will improve over the long term . as our business has grown , we have become increasingly subject to the risks arising from adverse changes in domestic and global economic conditions . if general economic conditions were to deteriorate further , including declines in private sector employment growth and business productivity , increases in the unemployment rate and changes in interest rates , we may experience delays in our sales cycles , increased pressure from prospective customers to offer discounts and increased pressure from existing customers to renew expiring recurring revenue agreements for lower amounts . our interest income on funds held for clients continues to be negatively impacted by historically low interest rates . 32 our operating subsidiary paylocity corporation was incorporated in july 1997 as an illinois corporation . in november 2013 , we formed paylocity holding corporation , a delaware corporation , of which paylocity corporation is now a wholly-owned subsidiary . paylocity holding corporation had no operations prior to the restructuring . all of our business operations have historically been , and are currently , conducted by paylocity corporation , and the financial results presented herein are entirely attributable to the results of its operations . key metrics we regularly review a number of metrics , including the following key metrics , to evaluate our business , measure our performance , identify trends affecting our business , formulate financial projections and make strategic decisions . recurring revenue growth our recurring revenue model and high annual revenue retention rates provide significant visibility into our future operating results and cash flow from operations . this visibility enables us to better manage and invest in our business . recurring revenue , which is comprised of recurring fees and interest income on funds held for clients , increased from $ 72.8 million in fiscal 2013 to $ 101.9 million in fiscal 2014 , representing a 40 % year-over-year increase . recurring revenue increased from $ 101.9 million in fiscal 2014 to $ 144.1 million in fiscal 2015 , representing a 41 % year-over-year increase . recurring revenue represented 94 % of total revenue in each of the fiscal years ended 2013 , 2014 , and 2015. client count growth we believe there is a significant opportunity to grow our business by increasing our number of clients . we have increased our number of clients from approximately 6,850 as of june 30 , 2013 to approximately 10,350 as of june 30 , 2015 , representing a compound annual growth rate of approximately 23 % . the table below sets forth our client count for the periods indicated , rounded to the nearest fifty . replace_table_token_6_th the rate at which we add clients is highly variable period-to-period and highly seasonal as many clients switch solutions during the first calendar quarter of each year . although many clients have multiple divisions , segments or locations , we only count such clients once for these purposes . annual revenue retention rate our annual revenue retention rate has been in excess of 92 % during each of the past three fiscal years . we calculate our annual revenue retention rate as our total revenue for the preceding 12 months , less the annualized value of revenue lost during the preceding 12 months , divided by our total revenue for the preceding 12 months . we calculate the annualized value of revenue lost by summing the recurring fees paid by lost clients over the previous twelve months prior to their termination if they have been a client for a minimum of twelve months . for those lost clients who became clients within the last twelve months , we sum the recurring fees for the period that they have been a client and then annualize the amount . we exclude interest income on funds held for clients from the revenue retention calculation . we believe that our annual revenue retention rate is an important metric to measure overall client satisfaction and the general quality of our product and service offerings . recurring fees from new clients we calculate recurring fees from new clients as the percentage of year-to-date recurring fees from all clients on our solutions which had not been on or used any of our solutions for a full year as of the start of the current fiscal year . we believe recurring fees from new clients is an important metric to measure the expansion of our existing client base as well as the growth in our client base . our recurring fees from new clients for fiscal 2013 and 2014 were 44 % and for fiscal 2015 was 45 % . adjusted gross profit , adjusted recurring gross profit and adjusted ebitda we disclose adjusted gross profit , adjusted recurring gross profit and adjusted ebitda because we use them to evaluate our performance , and we believe adjusted gross profit , adjusted recurring gross profit and adjusted ebitda assist in the comparison of our performance across reporting periods by excluding certain items that we do not believe are indicative of our core operating performance . we believe these metrics are used in the financial community , and we present it to enhance investors ' understanding of our operating performance and cash flows . story_separator_special_tag the increase was also attributable to $ 0.8 million of stock-based compensation associated with our broad based ipo grant to all employees . research and development replace_table_token_14_th research and development for the year ended june 30 , 2015 increased by $ 9.5 million , or 92 % , to $ 19.9 million from $ 10.4 million for the year ended june 30 , 2014. research and development costs increased in fiscal 2015 primarily due to $ 7.5 million of additional employee-related expenses related to 64 additional development personnel and $ 2.2 million of stock-based compensation associated with our equity incentive plan . this was offset by an increase of $ 0.2 million in our capitalized internal-use software costs . research and development for the year ended june 30 , 2014 increased by $ 3.5 million , or 52 % , to $ 10.4 million from $ 6.8 million for the year ended june 30 , 2013. research and development costs increased in fiscal 2014 primarily due to $ 5.1 million of additional employee-related expenses related to 27 additional development personnel , $ 0.6 million of stock-based compensation associated with our broad based ipo grant to all employees and $ 0.5 million related to the one-time founder funded bonus pay-outs . this was offset by an increase of $ 2.7 million in our capitalized internal-use software costs as we developed significant additional functionality in our human capital management applications during the year . general and administrative replace_table_token_15_th general and administrative expenses for the year ended june 30 , 2015 increased by $ 10.8 million , or 49 % , to $ 32.8 million from $ 22.0 million for the year ended june 30 , 2014. general and administrative expenses increased primarily as a result of $ 5.0 million of additional employee-related expenses relating to 30 additional personnel , $ 2.0 million of additional stock-based 39 compensation costs , $ 1.5 million of increased occupancy costs incurred as a result of our requirement for additional office space , $ 0.8 million of amortization expense of the customer relationship and non-compete intangibles associated with acquisitions of both of our resellers , $ 0.7 million of increased insurance costs associated with being a public company , and $ 0.3 million in additional professional fees . general and administrative expenses for the year ended june 30 , 2014 increased by $ 9.9 million , or 82 % , to $ 22.0 million from $ 12.1 million for the year ended june 30 , 2013. general and administrative expenses increased primarily as a result of $ 4.3 million of additional employee-related expenses relating to 18 additional personnel , $ 2.1 million of additional stock-based compensation costs associated with ipo related grants of options and restricted stock units , $ 1.7 million in additional professional fees and $ 0.6 million of increased occupancy costs incurred as a result of our requirement for additional office space . other income ( expense ) replace_table_token_16_th * not meaningful other income ( expense ) for the year ended june 30 , 2015 decreased by $ 0.1 million as compared to the year ended june 30 , 2014. other income for the year ended june 30 , 2015 primarily consists of interest income earned on our cash and cash equivalents partially offset by loss on the disposal of property and equipment . other income ( expense ) for the year ended june 30 , 2014 increased by $ 0.2 million as compared to the year ended june 30 , 2013. other income for the year ended june 30 , 2014 primarily consisted of interest income earned on our cash and cash equivalents , partially offset by interest expense incurred on our note payable and other debt , which was repaid in full in march 2014. income tax ( benefit ) expense replace_table_token_17_th * not meaningful income tax ( benefit ) expense for the year ended june 30 , 2015 decreased by $ 0.2 million , as compared to the year ended june 30 , 2014 primarily due to the recognition of a deferred tax asset valuation allowance during the year ended june 30 , 2014 related to net deferred tax balances generated in prior years . income tax ( benefit ) expense for the year ended june 30 , 2014 increased by $ 0.9 million , as compared to the year ended june 30 , 2013 primarily due to the expiration of federal research and development tax credit allowances resulting in a $ 0.5 million decline in amount claimed and an increase in non-deductible expenses as a result of our growing business . the company also recognized a valuation allowance as of june 30 , 2014 on substantially all of its net deferred tax assets , many of which were generated in the three month period ended june 30 , 2014 , given its determination that it was more likely than not that the company would not recognize the benefits of its net operating loss carryforwards prior to their expiration . see note 11 of the notes to consolidated financial statements included in part ii , item 8 : “financial statements and supplementary data” of this annual report on form 10-k for further details on the valuation allowance and a reconciliation of the u.s. federal statutory rate to the effective tax rate . critical accounting policies and significant judgments and estimates in preparing our financial statements and accounting for the underlying transactions and balances in accordance with gaap , we apply various accounting policies that require our management to make estimates , judgments and assumptions that affect the amounts reported in our financial statements . we consider the policies discussed below as critical to understanding our financial statements , as their application places the most significant demands on management 's judgment . management bases its estimates , judgments and assumptions on historical experience , current economic and industry conditions and on various other factors deemed to be reasonable under the circumstances ,

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cash flows the following table sets forth data regarding cash flows for the periods indicated : replace_table_token_20_th operating activities net cash provided by operating activities was $ 6.2 million , $ 7.2 million and $ 11.1 million for the years ended june 30 , 2013 , 2014 and 2015 , respectively . the increase in net cash provided by operating activities from fiscal 2014 to fiscal 2015 was primarily due to improved operating results after adjusting for non-cash items including stock-based compensation and depreciation and amortization . the increase in net cash provided by operating activities from fiscal 2013 to fiscal 2014 was the primarily the result of the change of $ 2.3 million in operating assets and liabilities partially offset by the increase in net loss and increases in non-cash items including stock-based compensation and depreciation and amortization . investing activities net cash used in investing activities was $ 98.6 million , $ 78.8 million and $ 199.2 million , for the years ended june 30 , 2013 , 2014 and 2015 , respectively . changes in net cash used in investing activities are significantly influenced by the amount of funds held for clients at the end of a reporting period . changes in the amount of funds held for client from period to period will vary substantially . our payroll processing activities involves the movement of significant funds from the account of an employer to employees and relevant taxing authorities . during the year ended june 30 , 2015 we processed almost $ 54 billion in payroll transactions .

we charge customers for our consulting services on a time-and-materials basis and we recognize that revenue as services are performed . we typically invoice customers annually in advance for annual and multi-year subscriptions and invoice in advance or on a time-and-materials basis for professional services . we record amounts invoiced for portions of annual subscription periods that have not occurred or services that have not been performed as deferred revenue on our consolidated balance sheet . we sell our solutions primarily through our direct sales force , which leverages our relationships with technology vendors , professional services firms and business process outsourcers . in particular , our solution integrates with sap 's erp solutions . in the fourth quarter of 2018 , sap became part of the reseller channel that we use in the ordinary course of business . sap has the ability to resell our solutions , as an sap solution-extension ( “ solex ” ) , for which we receive a percentage of the revenues . our ability to maximize the lifetime value of our customer relationships will depend , in part , on the willingness of customers to purchase additional user licenses and products from us . we rely on our sales and customer 39 success teams to support and grow our existing customers by maintaining high customer satisfaction and educating customers on the value all our products provide . the length of our sales cycle depends on the size of a potential customer and contract , as well as the type of solution or product being purchased . the sales cycle for our global enterprise customers is generally longer than that of our mid-market customers . in addition , the length of the sales cycle tends to increase for larger contracts and for more complex , strategic products like intercompany hub . as we continue to focus on increasing our average contract size and selling more strategic products , we expect our sales cycle to lengthen and become less predictable , which could cause variability in our results for any particular period . we have historically signed a high percentage of agreements with new customers , as well as renewal agreements with existing customers , in the fourth quarter of each year and usually during the last month of the quarter . this can be attributed to buying patterns typical in the software industry . as the terms of most of our customer agreements are measured in full year increments , agreements initially entered into during the fourth quarter or last month of any quarter will generally come up for renewal at that same time in subsequent years . this seasonality is reflected in our revenues , though the impact to overall annual or quarterly revenues is minimal due to the fact that we recognize subscription revenue ratably over the term of the customer contract . for the years ended december 31 , 2020 , 2019 , and 2018 , we had revenues totaling $ 351.7 million , $ 289.0 million , and $ 227.8 million , respectively , and we incurred net losses attributable to blackline , inc. of $ 46.9 million , $ 32.5 million , and $ 28.7 million , respectively . covid-19 update in december 2019 , the emergence of a novel coronavirus , or covid-19 , was reported and in march 2020 , the world health organization , or who , characterized covid-19 as a pandemic . we responded to the pandemic by creating an executive task force to monitor the covid-19 situation daily , immediately restricted non-essential travel and enabled work-from-home protocols . shortly thereafter , and in line with guidance provided by government agencies and international organizations , we restricted all travel , mandated a work-from-home policy across our global workforce , and moved all in-person customer-facing events to virtual ones . we expect these restrictions to stay in effect during the first half of 2021. we also responded with covid-19 customer-relief programs to help our community of global accounting and finance professionals in these challenging times . we have offered free access to our entire training library . we also offered the task management and reporting modules complimentary for six months to existing customers to enable a more effective remote close . in addition , we announced complimentary coaching sessions with our existing customers . we have been recognized by the stevie international business awards and the ceo world awards for our commitment to helping ensure business continuity and fostering well-being for both customers and employees in response to , and throughout the covid-19 pandemic . we have continued to see purchasing decisions being deferred due to covid-19 and a reduction on new business pipeline and large deals . moreover , we have experienced and expect to continue to experience delays in deals in emea and north america mid-market , as well as large digital transformation deals . we further expect delays in deals arising out of our sap partnership , all which will impact our customers and prospects , and our financial results for fiscal 2021. we have also seen a decrease in travel-related expenses and advertising and trade show expenses . the broader implications of the global emergence of covid-19 on our business , operating results , and overall financial performance remain uncertain and depend on certain developments , including the duration and spread of the outbreak , impact on our customers and our sales cycles , impact on our partners and employees , and impact on the economic environment and financial markets , all of which are uncertain and can not be predicted . we are conducting business as usual with certain limitations to employee travel , employee work locations , and marketing events , among other modifications . we have observed other companies taking precautionary and preemptive actions to address covid-19 , and the effects it has had and is expected to have on business and the economy . story_separator_special_tag 46 research and development replace_table_token_10_th the increase in research and development expenses for the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , was primarily due to a $ 14.9 million increase in salaries , benefits , and stock-based compensation ; a $ 2.7 million increase in computer software expenses ; and a $ 1.8 million increase in professional services expense . these increases were partially offset by a $ 5.6 million increase in capitalized software costs , which resulted in a decrease in net expenses , and a $ 0.6 million decrease in travel-related costs . the increase in salaries , benefits , and stock-based compensation was primarily driven by a 33 % increase in average headcount from the year ended december 31 , 2019 to the year ended december 31 , 2020. the increase in computer software expenses was primarily driven by our migration to the public cloud and the purchase of additional software licenses driven by an increase in average research and development headcount . the increase in professional services expense was primarily driven by external consultant fees as part of our investment in products , features , and functionality buildouts . capitalized software costs increased due to significant new enhancement initiatives related to the functionality of our solutions . travel-related expenses decreased primarily as a result of covid-19 travel restrictions . general and administrative replace_table_token_11_th the increase in general and administrative expenses for the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , was primarily due to an $ 8.8 million increase in salaries , benefits , and stock-based compensation ; $ 4.7 million of transaction-related costs ; and a $ 2.2 million increase in professional services expense . these increases were partially offset by a $ 0.8 million decrease in travel-related expenses . the increase in salaries , benefits , and stock-based compensation was primarily driven by an 18 % increase in average headcount from the year ended december 31 , 2019 to the year ended december 31 , 2020. transaction-related costs in the period related to the rimilia acquisition , which closed in october 2020. travel-related expenses decreased primarily as a result of covid-19 travel restrictions . interest income year ended december 31 , change 2020 2019 $ % ( in thousands , except percentages ) interest income $ 4,502 $ 6,128 $ ( 1,626 ) ( 27 ) % the decrease in interest income during the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , was primarily due to a decrease in average interest rates , partially offset by interest earned on higher cash balances in the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 . 47 interest expense year ended december 31 , change 2020 2019 $ % ( in thousands , except percentages ) interest expense $ 23,311 $ 8,650 $ 14,661 169 % the increase in interest expense during the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , was primarily due to increased amortization of the debt discount on the notes . the notes were issued in the third quarter of 2019 and , as such , there was less amortization in 2019 as compared to a full year in 2020. the increase was also , to a lesser extent , related to increased interest accrued during the period on the outstanding balance on the notes in the year ended december 31 , 2020 , compared to the year ended december 31 , 2019. provision for income taxes replace_table_token_12_th we are subject to federal and state income taxes in the united states and taxes in foreign jurisdictions . for the year ended december 31 , 2020 , our annual estimated effective tax rate differed from the u.s. federal statutory rate of 21 % primarily as a result of state taxes , foreign taxes , and changes in our valuation allowance for domestic income taxes . for the years ended december 31 , 2020 and 2019 , we recorded $ 0.7 million and $ 1.7 million in income tax expense , respectively . the decrease in income tax expense for the year ended december 31 , 2020 , compared to the year ended december 31 , 2019 , was attributable to 2020 tax benefits associated with our international operations . for the year ended december 31 , 2020 , we continued to maintain a full valuation allowance on our u.s. federal and state net deferred tax assets as it was more likely than not that those deferred tax assets will not be realized . liquidity and capital resources at december 31 , 2020 , our principal sources of liquidity were an aggregate of $ 542.6 million of cash and cash equivalents and marketable securities , which primarily consist of short-term , investment-grade u.s. treasury securities , corporate bonds , and commercial paper . in october 2020 , we completed the acquisition of rimilia and paid $ 121.4 million . we had $ 500.0 million aggregate principal amount of notes outstanding at december 31 , 2020. during the quarter ended december 31 , 2020 , the stock price condition allowing holders of the notes to convert was met . as a result , holders have the option to convert their notes at any time during the calendar quarter ending march 31 , 2021. we have the ability to settle the notes in cash , shares of our common stock , or a combination of cash and shares of our common stock at our election . from january 1 , 2021 , through the date of this filing , we have not received any conversion requests for our notes . it is our current intent to settle any such conversions through combination settlement , which involves repayment of the principal portion in

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net cash provided by operating activities our net loss and cash flows from operating activities are significantly influenced by our investments in headcount and infrastructure to support anticipated growth . in recent periods , our net loss has generally been significantly greater than our use of cash for operating activities due to our subscription-based revenue model in which billings occur in advance of revenue recognition , as well as the substantial amount of non-cash charges which we incur . non-cash charges primarily include depreciation and amortization , stock-based compensation , non-cash lease expense , amortization of debt discount and issuance costs , and deferred taxes . for the year ended december 31 , 2020 , cash provided by operations was $ 54.7 million , resulting from net non-cash expenses of $ 97.5 million , partially offset by our net loss of $ 39.4 million and net cash flow used as a result of changes in operating assets and liabilities of $ 3.4 million . the $ 3.4 million of net cash flows used as a result of changes in our operating assets and liabilities reflected the following : a $ 12.4 million increase in other assets ; a $ 5.7 million increase in accounts receivable ; a $ 5.3 million increase in prepaid expenses and other current assets ; a $ 5.0 million decrease in operating lease liabilities ; and a $ 4.4 million decrease in accounts payable . these changes in our operating assets and liabilities were partially offset by the following : a $ 26.4 million increase in deferred revenue as a result of the growth of our customer and user bases ; and a $ 3.1 million increase in accrued expenses and other current liabilities . for the year ended december 31 , 2019 , cash provided by operations was $ 29.7 million , resulting from net non-cash expenses of $ 68.2 million , partially offset by our net loss of $ 32.1 million and net cash flow used as a result of changes in operating assets and liabilities of $ 6.3 million .

new risk factors emerge from time to time and it is not possible for management to predict all such risk factors , nor can we assess the impact of all such risk factors on our business or the extent to which any factor , or combination of factors , may cause actual results to differ materially from those contained in any forward-looking statements . given these risks and uncertainties , investors should not place undue reliance on forward-looking statements as a prediction of actual results . investors should also refer to our quarterly reports on form 10-q for future periods and current reports on form 8-k as we file them with the sec , and to other materials we may furnish to the public from time to time through forms 8-k or otherwise . overview we are an externally advised and managed real estate investment company that owns a diverse portfolio of income-producing properties and land held for development . the company 's portfolio of income-producing properties includes residential apartment communities , office buildings and other commercial properties . our investment strategy includes acquiring existing income-producing properties as well as developing new properties on land already owned or acquired for a specific development project . we acquire land primarily in in-fill locations or high-growth suburban markets . we are an active buyer and seller of real estate and during 2015 we acquired $ 130 million and sold $ 118 million of land and income-producing properties . as of december 31 , 2015 , we owned 7,983 units in 48 residential apartment communities , eight commercial properties comprising approximately 1.9 million rentable square feet , and a golf course . in addition , we own 3,665 acres of land held for development . the company currently owns income-producing properties and land in ten states as well as in the u.s. virgin islands . 20 we finance our acquisitions primarily through operating cash flow , proceeds from the sale of land and income-producing properties and debt financing primarily in the form of property-specific first-lien mortgage loans from commercial banks and institutional lenders . we finance our development projects principally with short-term , variable interest rate construction loans that are converted to long-term , fixed rate amortizing mortgages when the development project is completed and occupancy has been stabilized . the company will , from time to time , also enter into partnerships with various investors to acquire income-producing properties or land and to sell interests in certain of its wholly-owned properties . when the company sells assets , it may carry a portion of the sales price generally in the form of a short-term , interest bearing seller-financed note receivable . the company generates operating revenues primarily by leasing apartment units to residents and leasing office , retail and industrial space to commercial tenants . the company has historically engaged in and may continue to engage in certain business transactions with related parties , including but not limited to asset acquisition and dispositions . transactions involving related parties can not be presumed to be carried out on an arm 's length basis due to the absence of free market forces that naturally exist in business dealings between two or more unrelated entities . related party transactions may not always be favorable to our business and may include terms , conditions and agreements that are not necessarily beneficial to or in our best interest . since april 30 , 2011 , pillar is the company 's external advisor and cash manager under a contractual arrangement that is reviewed annually by our board of directors . pillar 's duties include , but are not limited to , locating , evaluating and recommending real estate and real estate-related investment opportunities . pillar also arranges , for tci 's benefit , debt and equity financing with third party lenders and investors . pillar also serves as an advisor and cash manager to arl and iot . as the contractual advisor , pillar is compensated by tci under an advisory agreement that is more fully described in part iii , item 10 . “ directors , executive officers and corporate governance – the advisor ” . tci has no employees . employees of pillar render services to tci in accordance with the terms of the advisory agreement . effective since january 1 , 2011 , regis manages our commercial properties and provides brokerage services . regis is entitled to receive a fee for its property management and brokerage services . see part iii , item 10 . “ directors , executive officers and corporate governance – property management and real estate brokerage ” . the company contracts with third-party companies to lease and manage our apartment communities . critical accounting policies we present our financial statements in accordance with generally accepted accounting principles in the united states ( “ gaap ” ) . the accompanying consolidated financial statements include our accounts , our subsidiaries , generally all of which are wholly-owned , and all entities in which we have a controlling interest . arrangements that are not controlled through voting or similar rights are accounted for as a variable interest entity ( vie ) , in accordance with the provisions and guidance of asc topic 810 “ consolidation ” , whereby we have determined that we are a primary beneficiary of the vie and meet certain criteria of a sole general partner or managing member as identified in accordance with emerging issues task force ( “ eitf ” ) issue 04-5 , investor 's accounting for an investment in a limited partnership when the investor is the sole general partner and the limited partners have certain rights ( “ eitf 04-5 ” ) . story_separator_special_tag the acquired property portfolio consists of properties that we acquired but have not held for the entire period for both periods being compared . developed properties in the lease-up phase consist of completed projects that are being leased-up . as we complete each phase of the project , we lease-up that phase and include those revenues in our continued operations . once a developed property becomes leased-up ( 80 % or more ) and is held the entire period for both years under comparison , it is considered to be included in the same property portfolio . income-producing properties that we have sold during the year are reclassified to discontinued operations for all periods presented . the other segment consists of revenue and operating expenses related to the notes receivable and corporate entities . the following discussion is based on our consolidated statements of operations for the twelve months ended december 31 , 2015 , 2014 , and 2013 as included in item 8 . “ financial statements and supplementary data ” . the prior year 's property portfolios have been adjusted for subsequent sales . continuing operations relates to income-producing properties that were held during those years as adjusted for sales in the subsequent years . 24 at december 31 , 2015 , 2014 and 2013 , we owned or had interests in a portfolio of 57 , 45 and 45 income-producing properties , respectively . the total property portfolio represents all income-producing properties held as of december 31 for the year presented . sales subsequent to year end represent properties that were held as of year-end for the years presented , but sold in subsequent years . continued operations represents all properties that have not been reclassed to discontinued operations as of december 31 , 2015 for the year presented . the table below shows the number of income-producing properties held by year : replace_table_token_10_th comparison of the year ended december 31 , 2015 to the same year ended 2014 : for the twelve months ended december 31 , 2015 , we reported net loss applicable to common shares of ( $ 8.5 ) million or ( $ 0.98 ) per diluted earnings per share , as compared to a net income applicable to common shares of $ 40.6 million or $ 4.74 per diluted earnings per share for the same year ended 2014. the current year net loss applicable to common shares of ( $ 8.5 ) million includes gain on land sales of $ 18.9 million and net income from discontinued operations of $ .9 million , as compared to the prior year net income applicable to common shares of $ 40.6 million which includes gain on land sales of $ 0.6 million and net income from discontinued operations of $ 37.9 million . revenues rental and other property revenues were $ 102.2 million for the twelve months ended december 31 , 2015. this represents an increase of $ 26.3 million , as compared to the prior year revenues of $ 75.9 million . this increase in revenues is mainly due to the addition of several properties to the apartment portfolio and the commercial portfolio . the change by segment is reflected in an increase in the apartment portfolio of $ 16.1 million and an increase in the commercial portfolio of $ 10.2 million . our apartment portfolio continues to excel in the current economic conditions with occupancies averaging over 94 % and increasing rental rates . we have been able to surpass expectations due to the high-quality product offered , strength of our management team and our commitment to our tenants . the increase in the commercial segment is due to a high rise in the occupancy rate of the commercial complexes , in 2015 the average occupancy rate was over 86 % . our commercial portfolio is performing significantly better than in previous periods and we anticipate that it will continue to improve as the company has been successful in attracting high-quality tenants and expects to continue to see the benefits of those new leases in the future . we continue to work aggressively to attract new tenants and strive for continuous improvement of our properties in order to maintain our existing tenants . expenses property operating expenses were $ 52.3 million for the twelve months ended december 31 , 2015 . this represents an increase of $ 12.9 million , as compared to the prior year operating expenses of $ 39.4 million . this change , by segment , is an increase in the apartment portfolio of $ 8.3 million and an increase in the commercial portfolio of $ 4.6 million . within the apartment portfolio there was an increase of $ 5.9 million in the acquired properties portfolio and an increase of $ 2.4 million in the same property portfolio . within the commercial portfolio there was an increase of $ 3.6 million in the acquired properties portfolio and an increase of $ 1.0 million in the same store properties . the increase in the apartment portfolio was due to the acquisition of new properties throughout the year . the increase in the commercial portfolio was due to an acquisition of a property within the year and an increase in real estate taxes . depreciation and amortization expenses were $ 21.3 million for the twelve months ended december 31 , 2015. this represents an increase of $ 3.9 million as compared to prior year depreciation of $ 17.4 million . within the apartment and commercial portfolios , the majority of this change is due to the acquisition of new properties and an increase in tenant improvements and repairs projects . general and administrative expenses were $ 5.5 million dollars for the twelve months ended december 31 , 2015. this represents a decrease of $ 1.7 million , as compared to the prior year general and administrative expenses of $ 7.2 million . this change is mainly due to a decrease in the

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cash flow summary the following summary discussion of our cash flows is based on the consolidated statements of cash flows in part ii , item 8 . “ consolidated financial statements and supplementary data ” and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below ( dollars in thousands ) : replace_table_token_13_th the primary use of cash for operations is daily operating costs , general and administrative expenses , advisory fees , and land holding costs . our primary source of cash from operating activities is from rental income on properties . our primary cash outlays for investing activities are for construction and development , acquisition of land and income-producing properties , and capital improvements to existing properties . our primary sources of cash from investing activities are from the proceeds on the sale of land and income-producing properties . we received more proceeds from land sales in the current period than in the prior period . in addition , we acquired 12 residential properties and one commercial property . our primary sources of cash from financing activities are from proceeds on notes payables . our primary cash outlays are for recurring debt payments and payments on maturing notes payable . the proceeds from new financings in the current period allowed us to pay down more debt , as compared to the prior period .

critical accounting policies revenue recognition we generate our revenue from three different types of contractual arrangements : cost-plus-fee contracts , fixed price contracts and cost reimbursable grants . costs consist primarily of actual internal labor charges and external subcontractor costs incurred plus an allocation of applied fringe benefits , overhead and general and administrative expenses as defined in the contract . revenues on cost-plus-fee contracts are recognized in an amount equal to the costs incurred during the period plus an estimate of the applicable fee earned . the estimate of the applicable fee earned is determined by reference to the contract : if the contract defines the fee in terms of risk-based milestones and specifies the fees to be earned upon the completion of each milestone , then the fee is recognized when the related milestones are earned under the “ milestone method of revenue recognition ” . otherwise , we compute fee income earned in a given period by using a proportional performance method based on costs incurred during the period as compared to total estimated project costs and application of the resulting fraction to the total project fee specified in the contract . under the milestone method of revenue recognition , substantive milestone payments , including milestone payments for fees , contained in research and development arrangements under our contracts with the u.s. government are recognized as revenue when : ( i ) the milestones are achieved ; ( ii ) no further performance obligations with respect to the milestone exist ; ( iii ) collection is reasonably assured ; and ( iv ) substantive effort was necessary to achieve the milestone . milestones are considered substantive if all of the following conditions are met : ( 1 ) it is commensurate with either our performance to meet the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from our performance to achieve the milestone , ( 2 ) it relates solely to past performance , and ( 3 ) the value of the milestone is reasonable relative to all the deliverables and payment terms ( including other potential milestone consideration ) within the arrangement . if a milestone is deemed not to be substantive , the company recognizes the portion of the milestone payment as revenue that correlates to work already performed ; the remaining portion of the milestone payment is deferred and recognized as revenue as the company completes its performance obligations . for fixed price contracts with the u.s. government without substantive milestones as described above , revenue is recognized under the percentage-of-completion method in accordance with the applicable accounting guidance for long term contracts . the percentage-of completion method recognizes income as the contract progresses ; recognition of revenue and profits generally related to the costs incurred in providing the services required under the contract . the use of the percentage-of completion method depends on the ability to make reasonable dependable estimates . the fact that circumstances may necessitate frequent revision of estimates does not indicate that the estimates are unreliable for the purpose for which they are used . estimating is an integral part of our business activities , and we may have to revise estimates on contracts continually as the work progresses . 39 we analyze each cost reimbursable grant to determine whether we should report such reimbursements as revenue or as an offset to our expenses incurred . in 2011 and 2010 , we recorded approximately $ 0.7 million and $ 2.9 million , respectively , of costs reimbursed by the government as an offset to research and development expenses . our revenue-generating contracts may include multiple elements , including one or more of up-front license fees , research payments , and milestone payments . in these situations , we allocate the total contract price to the multiple elements based on their relative fair values and recognize revenue for each element according to its characteristics . as revenue is recognized in accordance with the terms of the contracts , related amounts are recorded as unbilled accounts receivable , the primary component of “ other receivables ( including unbilled receivables ) ” in our consolidated balance sheets . as specific contract invoices are generated and sent to our customers , invoiced amounts are transferred out of unbilled accounts receivable and into billed accounts receivable . invoicing frequency and payment terms for cost-plus-fee contracts with our customers are defined within each contract , but are typically monthly invoicing with 30 to 60 day payment cycles . at december 31 , 2011 , unbilled accounts receivable were $ 3.0 million . research and development expenses research and development costs are expensed as incurred ; advance payments are deferred and expensed as performance occurs . research and development costs include salaries , facilities expense , overhead expenses , material and supplies , pre-clinical expense , clinical trials and related clinical manufacturing expenses , stock-based compensation expense , contract services and other outside services . share-based payments we have a long-term incentive plan ( the “ ltip ” ) under which options to purchase shares of our common stock may be granted to employees , consultants and directors at a price no less than the quoted market value on the date of grant . the ltip also provides for awards in the form of stock appreciation rights , restricted or unrestricted stock awards , stock-equivalent units or performance-based stock awards . we account for share-based awards to employees and non-employee directors pursuant to fasb asc topic 718 , compensation – stock compensation , which requires that compensation cost resulting from share-based payment transactions be recognized in the financial statements at fair value over the service period . story_separator_special_tag 41 research and development expenses for the years ended december 31 , 2011 and 2010 were attributable to research programs as follows : replace_table_token_3_th for the year ended december 31 , 2011 , research and development expenses increased $ 0.3 million from the prior year . this change was primarily due to the increased technical activity and the achievement of key technical milestones on our sparvax program and the completion of the phase i valortim ® dose escalation clinical trial partially offset by a decrease in development expenses related to the clinical nerve agent protectants program as a result of the december 31 , 2010 shut down of the protexia ® program . general and administrative expenses general and administrative functions include executive management , finance and administration , government affairs and regulations , corporate development , human resources , legal , and compliance . for each function , we may incur expenses such as salaries , supplies and third-party consulting and other external costs and non-cash expenditures such as expense related to stock option and restricted share awards . an allocation of facilities , utilities and other administrative overhead is also included in general and administrative expenses . expenses associated with general and administrative functions were approximately $ 14.3 million and $ 18.0 million for the years ended december 31 , 2011 and 2010 , respectively . the decrease for the year ended december 31 , 2011 from the prior year period was a result of a $ 3.0 million reduction in bad debt expense , a property loss insurance reimbursement of $ 1.4 million partially offset by an increase in non-cash stock compensation expenses as well as taxes and other expenses . the bad debt expenses in 2010 consisted primarily of provisions associated with an invoice to our u.s. government customer for the work at avecia as well as the wind down of the third generation anthrax vaccine program . depreciation and intangible amortization ( including impairment charges ) depreciation and amortization expenses were approximately $ 0.5 million and $ 5.7 million for the years ended december 31 , 2011 and 2010 , respectively . these expenses are lower in 2011 primarily as a result of the impairment charge taken in december 2010 of $ 4.6 million with the closing of our canadian operations . other income ( expense ) other income ( expense ) primarily consists of income on our investments , interest expense on our debt and other financial obligations , changes in market value of our derivative financial instruments , and foreign currency transaction gains or losses . we incurred interest expense of approximately $ 0.1 million and $ 5.9 million for the years ended december 31 , 2011 and 2010 , respectively . interest expense for 2011 primarily relate to the settlement with avecia for termination of a subcontract agreement with that organization . interest expense for 2010 relates primarily to interest on our then-outstanding convertible notes , including the amortization of the debt discount arising from the allocation of fair value to the warrants issued in connection with such notes . in november and december 2010 , our outstanding 10 % convertible notes were converted into shares of common stock ( with one note being redeemed for cash ) . gain on sale of assets held for sale of $ 0.8 million was the result of the sale of land and buildings associated with our canadian operations , which were closed in 2010 . 42 the change in the fair value of our derivative instruments was a decrease of our liability of approximately $ 7.1 million for the year ended december 31 , 2011 compared to an increase of our liability of approximately $ 5.5 million for the year ended december 31 , 2010. the fair value of these derivative instruments is estimated using the black-scholes option pricing model . the decrease in fair value realized as of december 31 , 2011 was primarily the result of the decrease in pharmathene 's stock price from $ 4.23 per share on december 31 , 2010 to $ 1.27 per share on december 31 , 2011. liquidity and capital resources overview our primary cash requirements for 2012 are to fund our operations ( including our research and development programs ) and support our general and administrative activities . our future capital requirements will depend on many factors , including , but not limited to , timing , amount and profitability of sales of st-246 , if any ; the progress of our research and development programs ; the progress of pre-clinical and clinical testing ; the time and cost involved in obtaining regulatory approval ; the cost of filing , prosecuting , defending and enforcing any patent claims and other intellectual property rights ; changes in our existing research relationships ; competing technological and marketing developments ; our ability to establish collaborative arrangements and to enter into licensing agreements and contractual arrangements with others ; and any future change in our business strategy . these cash requirements could change materially as a result of shifts in our business and strategy . during 2011 and the first quarter 2012 , we implemented certain cost reduction activities that we believe will reduce our net operating cash needs for 2012 and 2013 significantly as compared to 2010 and 2011. as a result we currently anticipate that our current cash on hand and collection of accounts receivables at december 31 , 2011 as well as cash to be collected from 2012 contract revenue under contracts currently in place will be sufficient to meet pharmathene 's ongoing expenses and capital requirements through 2012 and into year 2013. since our inception , we have not generated positive cash flows from operations . to bridge the gap between payments made to us under our government contracts and grants and our operating and capital needs , we have had to rely on a variety of financing sources , including the issuance of equity

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sources and uses of cash cash , restricted cash and cash equivalents were approximately $ 11.3 million and $ 11.9 million at december 31 , 2011 and 2010 , respectively . the $ 0.6 million decrease at december 31 , 2011 was primarily due to a combination of a loss from operations of $ 11.7 million , of which $ 3.0 million were noncash , substantially offset by net proceeds of $ 5.8 million from a registered direct public offering of common stock and warrants , as well as $ 1.8 million related to the sale of assets in canada . in april , july and november 2010 , we completed various public offerings of common stock and warrants . in november and december 2010 , our outstanding 10 % convertible notes were converted into shares of common stock ( with one note being redeemed for cash ) . operating activities net cash used in operating activities was approximately $ 7.8 million and $ 14.9 million for the years ended december 31 , 2011 and 2010 , respectively . in 2011 , pharmathene received an insurance recovery of $ 1.4 million , which has been recorded as an offset to operating expenses .

see notes 4 and 5 to the consolidated financial statements for further discussion related to this note purchase and bankruptcy . acquisition pipeline the company has three properties under definitive purchase agreements for an aggregate purchase price of approximately $ 16.8 million with expected returns ranging from approximately 9.0 % to 9.6 % . the company anticipates these properties will close during the first quarter of 2018. however , the company is currently performing due diligence procedures customary for these types of transactions and can not provide assurance as to the timing of when , or whether , these transactions will actually close . the company also has three properties under definitive purchase agreements , to be acquired after completion and occupancy , for an aggregate expected purchase price of approximately $ 40.4 million . the company expects to close on one of these properties sometime in the first half of 2018 and expects to close on the remaining two properties sometime in the second half of 2018. the company 's expected aggregate return on these investments ranges up to approximately 11 % . however , the company can not provide assurance as to the timing of when , or whether , these transactions will actually close . the company anticipates funding these investments with cash from operations , through proceeds from its credit facility or from net proceeds from additional debt or equity offerings . purchase option provisions certain of the company 's leases provide the lessee with a purchase option or a right of first refusal to purchase the leased property . the purchase option provisions require the lessee to purchase the leased property at an amount greater than the company 's gross investment in the leased property at the time of the purchase . no purchase options were exercised during the year ended december 31 , 2017 . the company had approximately $ 6.3 million in two real estate properties at december 31 , 2017 with purchase options that are exercisable during 2018 . equity offering in july 2017 , the company completed a public offering of 4,887,500 shares of its common stock , including 637,500 shares of common stock issued in connection with the exercise in full of the underwriters ' option to purchase additional shares , and received net proceeds of approximately $ 108.6 million after deducting underwriting discount and commissions and offering expenses paid by the company . proceeds from the offering were used to repay the outstanding balance on our revolving credit facility totaling $ 58.0 million and for additional investments . see note 7 to the consolidated financial statements . second amended and restated credit facility on march 29 , 2017 , we entered into a second amended and restated credit facility ( as amended and restated , the `` credit facility `` ) . the credit facility provides for a $ 150.0 million revolving credit facility ( the `` revolving credit facility `` ) and $ 100.0 million in term loans ( the `` term loans `` ) . the credit facility , through the accordion feature , allows borrowings up to a total of $ 450.0 million , including the ability to add and fund additional term loans . the revolving credit facility matures on august 9 , 2019 and includes two 12-month options to extend the maturity date of the revolving credit facility , subject to the satisfaction of certain conditions . the term loans include a five-year term loan facility in the aggregate principal amount of $ 50.0 million ( the `` 5-year term loan `` ) which matures on march 29 , 2022 and a seven-year term loan facility in the aggregate principal amount of $ 50.0 million ( the `` 7-year term loan `` ) which matures on march 29 , 2024 . upon closing of the credit facility on march 29 , 2017 , the 46 company borrowed $ 30.0 million under each of the 5-year term loan and the 7-year term loan . each of the 5-year term loan and 7-year term loan has a delayed draw feature that is available in up to three draws within 15 months from march 29 , 2017 , subject to a minimum draw of $ 10.0 million and pro forma compliance . see note 5 to the consolidated financial statements . lease expirations we expect that approximately 5 % to 15 % of our leases will expire in each year , given that our leases are generally three to fifteen year leases with physicians or other healthcare providers . based on annualized rent , approximately 9.1 % expire in 2018. management expects that many of the tenants will renew their leases , but in cases where they do not renew , the company believes it will generally be able to re-lease the space to existing or new tenants without significant loss of rental income . contractual obligations the company 's material contractual obligations at december 31 , 2017 are included in the table below . at december 31 , 2017 , the company had no long-term capital lease or purchase obligations . replace_table_token_4_th ( 1 ) the amounts shown include interest at the weighted average interest rate at december 31 , 2017 and the unused fee interest assuming the credit facility remains at $ 34.0 million through its maturity . ( 2 ) the amounts shown include interest at the current fixed rates through the in-place cash flow hedges , and the ticking fees ( or unused interest ) assuming the term loans remain at $ 60.0 million outstanding through maturity . off-balance sheet arrangements we have no off-balance sheet arrangements that are reasonably like to have a material effect on the company 's consolidated financial condition , results of operations or liquidity . inflation we believe inflation will have a minimal impact on the operating performance of our properties . many of our lease agreements contain provisions designed to mitigate the adverse impact of inflation . story_separator_special_tag an acquisition accounted for as a business combination is recorded at fair value and related closing costs are expensed as incurred . an acquisition accounted for as an asset acquisition is recorded at its purchase price , inclusive of acquisition costs , which is allocated among the acquired assets and assumed liabilities based upon their relative fair values at the date of acquisition . the company adopted accounting standards update ( `` asu `` ) no . 2017-01 , business combinations ( topic 805 ) : clarifying the definition of a business , on january 1 , 2017 , and company expects that substantially all of its acquisitions will be accounted for as asset acquisitions . 55 the allocation of real estate property acquisitions may include land and land improvements , building and building improvements , personal property , and identified intangible assets and liabilities ( consisting of above- and below-market leases , in-place leases , and tenant relationships ) based on the evaluation of information and estimates available at that date , and we allocate the purchase price based on these assessments . we make estimates of the acquisition date fair value of the tangible and intangible assets and acquired liabilities using information obtained from multiple sources as a result of pre-acquisition due diligence , tax records , and other sources . based on these estimates , we recognize the acquired assets and liabilities at their estimated fair values . we expense transaction costs associated with business combinations in the period incurred . the fair value of tangible property assets acquired considers the value of the property as if vacant determined by comparable sales and other relevant data . the determination of fair value involves the use of significant judgment and estimation . we value land based on various inputs , which may include internal analysis of recently acquired properties , existing comparable properties within our portfolio , or third party appraisals or valuations based on comparable sales . in recognizing identified intangible assets and liabilities of an acquired property , the value of above- or below-market leases is estimated based on the present value ( using a discount rate which reflects the risks associated with the leases acquired ) of the difference between contractual amounts to be received pursuant to the leases and management 's estimate of market lease rates measured over a period equal to the estimated remaining term of the lease . in the case of a below-market lease , the company would also evaluate any renewal options associated with that lease to determine if the intangible should include those periods . the capitalized above-market or below-market lease intangibles are amortized as a reduction from or an addition to rental income over the estimated remaining term of the respective leases . in determining the value of in-place leases and tenant relationships , management considers current market conditions and costs to execute similar leases in arriving at an estimate of the carrying costs during the expected lease-up period from vacant to existing occupancy . in estimating carrying costs , management includes real estate taxes , insurance , other property operating expenses , estimates of lost rental revenue during the expected lease-up periods , and costs to execute similar leases , including leasing commissions . the values assigned to in-place leases and tenant relationships are amortized over the estimated remaining term of the lease . if a lease terminates prior to its scheduled expiration , all unamortized costs related to that lease are written off . asset impairments the company may need to assess the potential for impairment of identifiable , definite-lived , intangible assets and long-lived assets , including real estate properties , whenever events occur or a change in circumstances indicates that the carrying value might not be fully recoverable . indicators of impairment may include significant under-performance of an asset relative to historical or expected operating results ; significant changes in the company 's use of assets or the strategy for its overall business ; plans to sell an asset before its depreciable life has ended ; the expiration of a significant portion of leases in a property ; or significant negative economic trends or negative industry trends for the company or its operators . in addition , the company 's review for possible impairment may include those assets subject to purchase options and those impacted by casualties , such as tornadoes and hurricanes . if management determines that the carrying value of the company 's assets may not be fully recoverable based on the existence of any of the factors above , or others , management would measure and record an impairment charge based on the estimated fair value of the property or the estimated fair value less costs to sell the property . revenue recognition the company derives most of its revenues from its real estate property and mortgage and other notes portfolio . the company 's rental and mortgage and other notes interest income is recognized based on contractual arrangements with its tenants and borrowers . the company recognizes rental revenue when it is realized or realizable and earned , in accordance with asc 840 , leases , or asc 840. there are four criteria that must all be met before a company may recognize revenue , including persuasive evidence of an arrangement exists , delivery has occurred or services have been rendered ( i.e . , the tenant has taken possession of and controls the physical use of the leased asset ) , the price has been fixed or is determinable , 56 and collectability is reasonably assured . asc 840 also requires that rental revenue , less lease inducements , be recognized on a straight-line basis over the term of the lease . recognizing rental revenue on a straight-line basis for leases may result in recognizing revenue in amounts more or less than amounts currently due from tenants . if management determines that the collectability of straight-line rents is not

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sources and uses of cash the company derives most of its revenues from its real estate property and mortgage notes portfolio , collecting rental income , operating expense reimbursements and mortgage interest based on contractual arrangements with its tenants and borrowers . these sources of revenue represent our primary source of liquidity to fund our dividends , 51 general and administrative expenses , property operating expenses , interest expense on our credit facility and other expenses incurred related to managing our existing portfolio and investing in additional properties . to the extent additional resources are needed , the company will fund its investment activity generally through equity or debt issuances either in the public or private markets or through proceeds from our credit facility . the company expects to meet its liquidity needs through cash on hand , cash flows from operations and cash flows from sources discussed above . the company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements . the company can not , however , be certain that these sources of funds will be available at a time and upon terms acceptable to the company in sufficient amounts to meet its liquidity needs . operating activities cash flows provided by operating activities for the years ended december 31 , 2017 , 2016 and 2015 were approximately $ 22.1 million , $ 14.9 million , and $ 3.0 million , respectively . cash flows provided by operating activities for the years ended december 31 , 2017 , 2016 and 2015 were generally provided by contractual rents and mortgage interest , net of property operating expenses not reimbursed by the tenants and general and administrative expenses . investing activities cash flows used in investing activities for the years ended december 31 , 2017 , 2016 and 2015 were approximately $ 147.6 million , $ 117.1 million , and $ 140.6 million , respectively . during 2017 , the company invested in 28 real estate properties and acquired a property adjacent to its corporate office for cash consideration of approximately $ 133.5 million , and funded or purchased notes totaling approximately $ 13.8 million .

we intend the discussion of our financial condition and results of operations that follows to provide information that will assist the reader in understanding our consolidated financial statements , the changes in certain key items in those financial statements from year to year , and the primary factors that accounted for those changes , as well as how certain accounting principles , policies and estimates affect our consolidated financial statements . this discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this document . key components of our results of operations revenue gross premiums written . gross premiums written represent , with respect to a period , the sum of assumed premiums written ( premiums from policies that we assumed from citizens , net of opt-outs , as well as policies acquired from ssic ) plus direct premiums written ( premiums from subsequent renewals of citizens ' policies and voluntary policies written during the period , net of any midterm cancellations ) , in each case prior to ceding premiums to reinsurers . gross premiums earned . gross premiums earned represent the total premiums earned during a period from policies assumed from citizens , net of opt-outs , as well as policies acquired from ssic , subsequent renewals of such policies and voluntary policies . premiums associated with assumed policies are earned ratably over the remaining term of the policy and premiums associated with voluntary and renewed policies are earned ratably over the twelve-month term of the policy . ceded premiums . ceded premiums represent the cost of our reinsurance during a period . we recognize the cost , excluding premiums ceded to osprey , of our reinsurance program ratably over the twelve month term of the arrangement . in most cases , our reinsurance contracts are effective june 1 and run through may 31 of the following year . net premiums earned . net premiums earned reflect gross premiums earned less ceded premiums during the period . 34 retroactive reinsurance income . retroactive reinsurance income represents the income , net of associated losses and loss adjustment expenses , arising from the retroactive reinsurance agreement we entered in connection with our assumption of approximately 39,000 policies from citizens in june 2013. under this retroactive reinsurance agreement , we realized income equal to the earned premiums , net of associated losses and loss adjustment expenses , from such polices for the period from january 1 , 2013 through may 31 , 2013 with no corresponding reinsurance costs . the earned premiums for the period from june 1 , 2013 through june 27 , 2013 ( the date the assumption agreement ) are effective ) are included in gross premiums written for the year ended december 31 , 2013. the retroactive reinsurance agreement , which was a key element of our decision to enter into an assumption transaction at the outset of hurricane season , is not typical of our assumption transactions with citizens . the typical assumption transaction with citizens provides for the assumption of unearned premiums as of the effective date of the transaction , and does not result in the transfer of earned premiums and losses and loss adjustment expenses for prior periods . we do not expect to enter into similar retroactive arrangements with citizens in connection with future policy assumptions . net investment income . net investment income represents interest earned from fixed maturity securities , short term securities and other investments , dividends on equity securities , and the gains or losses from the sale of investments . other revenue . other revenue represents rental income due under non-cancelable leases for space at our commercial property in clearwater , florida that we acquired in april 2013 , and all policy and pay-plan fees . florida law allows insurers to charge policyholders a $ 25 policy fee on each policy written ; these fees are not subject to refund , and we recognize the income immediately when collected . we also charge pay-plan fees to policyholders that pay their premium in more than one installment and record the fees as income when collected . expenses losses and loss adjustment expenses . losses and loss adjustment expenses reflect losses paid , expenses paid to resolve claims , such as fees paid to adjusters , attorneys and investigators , and changes in our reserves for unpaid losses and loss adjustment expenses during the period , in each case net of losses ceded to reinsurers . our reserves for unpaid losses and loss adjustment expenses represent the estimated ultimate cost of resolving all reported claims plus all losses we incurred related to insured events that we assume have occurred as of the reporting date , but that policyholders have not yet reported to us ( which are commonly referred to as incurred but not reported , or “ibnr” ) . we estimate our reserves for unpaid losses using individual case-based estimates for reported claims and actuarial estimates for ibnr losses . we continually review and adjust our estimated losses as necessary based on industry development trends , our evolving claims experience and new information obtained . if our unpaid losses and loss adjustment expenses are considered deficient or redundant , we increase or decrease the liability in the period in which we identify the difference and reflect the change in our current period results of operations . policy acquisition costs . policy acquisition costs consist of the following items : ( i ) commissions paid to outside agents at the time of policy issuance , ( ii ) policy administration fees paid to a third-party administrator at the time of policy issuance , ( iii ) premium taxes and ( iv ) inspection fees . we recognize policy acquisition costs ratably over the term of the underlying policy . until renewed , policies assumed from citizens have no associated policy acquisition costs . story_separator_special_tag our initial estimate for each claim is based upon the judgment of our claims professionals who are familiar with property and liability losses associated with the coverage offered by our policies . then , our claims personnel perform an evaluation of the type of claim involved , the circumstances surrounding each claim and the policy provisions relating to the loss and adjust the reserve as necessary . as claims mature , we increase or decrease the reserve estimates as deemed necessary by our claims department based upon additional information we receive regarding the loss , the results of on-site reviews and any other information we gather while reviewing the claims . ibnr reserves —our ibnr reserves include true ibnr reserves plus “bulk” reserves . true ibnr reserves represent amounts related to claims for which a loss occurred on or before the date of the financial statements but which have not yet been reported to us . bulk reserves represent additional amounts that can not be allocated to particular claims , but which are necessary to estimate ultimate losses on known claims . we estimate our ibnr reserves by projecting our ultimate losses using industry accepted actuarial methods and then deducting actual loss payments and case reserves from the projected ultimate losses . we review and adjust our ibnr reserves on a quarterly basis based on information available to us at the balance sheet date . when we establish our reserves , we analyze various factors such as the evolving historical loss experience of the insurance industry as well as our experience , claims frequency and severity , our business mix , our claims processing procedures , legislative enactments , judicial decisions and legal developments in imposition of damages , and general economic conditions , including inflation . a change in any of these factors from the assumptions implicit in our estimates will cause our ultimate loss experience to be better or worse than indicated by our reserves , and the difference could be material . due to the interaction of the foregoing factors , there is no precise method for evaluating the impact of any one specific factor in isolation , and an element of judgment is ultimately required . due to the uncertain nature of any projection of the future , the ultimate amount we will pay for losses will be different from the reserves we record . we determine our ultimate loss reserves by selecting a point estimate within a relevant range of indications that we calculate using generally accepted actuarial techniques . our selection of the point estimate is influenced by the analysis of our paid losses and incurred losses since inception , as well as industry information relevant to the population of exposures drawn from citizens . at our current level of experience , industry information strongly influences the basis for estimates of claims related factors . we expect that our loss experience will be of growing significance in future periods . our independent actuary evaluated the adequacy of our reserves as of december 31 , 2014 and concluded that total reserves ranging from a low of $ 45.3 million to a high of $ 51.9 million would meet the requirements of the insurance laws of florida , be consistent with reserves computed in accordance with accepted loss reserving standards and principles , and make a reasonable provision for all unpaid loss and loss adjustment expense obligations under the terms of our contracts and agreements . in addition to $ 21.4 million of recorded case reserves , we recorded $ 30.1 million of ibnr reserves as of december 31 , 2014 to achieve overall reserves of $ 51.5 million . the process of establishing our reserves is complex and inherently imprecise , as it involves using judgment that is affected by many variables . we believe a reasonably likely change in almost any of the factors we evaluate as part of our loss reserve analysis could have an impact on our reported results , financial position and liquidity . the following table quantifies the pro-forma impact of hypothetical changes in our loss reserves on our net income , stockholders ' equity and liquidity as of and for the year ended december 31 , 2014 ( in thousands ) . replace_table_token_9_th ( 1 ) adjusted cash , cash equivalents and investments is intended to present a measure of future liquidity and consists of cash , cash equivalents and investments , less loss reserves , net of taxes , assuming a 38.575 % tax rate . 42 policy acquisition costs . we incur policy acquisition costs that vary with , and are directly related to , the production of new business . policy acquisition costs consist of the following four items : ( i ) commissions paid to outside agents at the time of policy issuance , ( ii ) policy administration fees paid to a third-party administrator at the time of policy issuance , ( iii ) premium taxes and ( iv ) inspection fees . we capitalize policy acquisition costs to the extent recoverable , then we amortize those costs over the contract period of the related policy . at each reporting date , we determine whether we have a premium deficiency . a premium deficiency would result if the sum of our expected losses , deferred policy acquisition costs and policy maintenance costs ( such as costs to store records and costs incurred to collect premiums and pay commissions ) exceeded our related unearned premiums plus investment income . should we determine that a premium deficiency exists , we would write off the unrecoverable portion of deferred policy acquisition costs . reinsurance . we follow industry practice of reinsuring a portion of our risks . reinsurance involves transferring , or “ceding” , all or a portion of the risk exposure on policies we write to another insurer , known as a reinsurer . to the extent that our reinsurers are unable to meet the obligations

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liquidity and capital resources as of december 31 , 2014 , we had $ 160.5 million of cash and cash equivalents , which primarily consisted of cash and money market accounts . we intend to hold substantial cash balances during hurricane season to meet seasonal liquidity needs and the collateral requirements of osprey re ltd , our captive reinsurance company described below . we also had $ 4.3 million in restricted cash to meet our contractual obligations related to the cat bonds issued by citrus re . osprey is required to maintain a collateral trust account equal to the risk that it assumes from heritage p & c , less amounts collateralized through a letter of credit . in december , the floir approved the removal of $ 45 million from the collateral trust account following the end of the 2014 hurricane season . as of december 31 , 2014 , $ 5.0 million was held in osprey 's trust account and an additional $ 5 million was collateralized with a letter of credit . at december 31 , 2014 , the company and the floir deemed $ 10 million to be sufficient to satisfy osprey 's reinsurance obligations from non-hurricane catastrophic events . further , $ 35.0 million of the $ 45.0 million that was removed from the collateral trust accounts was contributed as paid in surplus , to heritage property & casualty . although we can provide no assurances , we believe that we maintain sufficient liquidity to pay heritage p & c 's claims and expenses , as well as to satisfy commitments in the event of unforeseen events such , inadequate premium rates , or reserve deficiencies . we maintain a comprehensive reinsurance program at levels management considers adequate to diversify risk and safeguard our financial position . as of december 31 , 2014 , we had 29,794,960 shares of common stock outstanding , and warrants and options to purchase 1,685,923 shares of common stock , reflecting total paid-in capital of $ 188.3 million as of such date . we believe our current capital resources , together with cash provided from our operations , will be sufficient to meet currently anticipated working capital requirements .

cost reduction efforts remain an important part of our normal ongoing operations and are expected to generate savings without compromising overall product quality and service levels . business environment the semiconductor business environment is highly volatile , driven by internal dynamics , both cyclical and seasonal , in addition to macroeconomic forces . over the long term , semiconductor consumption has historically grown , and is forecast to continue to grow . this growth is driven , in part , by regular advances in device performance and by price declines that result from improvements in manufacturing technology . in order to exploit these trends , semiconductor manufacturers , both integrated device manufacturers ( “ idms ” ) and osats , periodically invest aggressively in latest generation capital equipment . this buying pattern often leads to periods of excess supply and reduced capital spending - the so called semiconductor cycle . within this broad semiconductor cycle there are also , generally weaker , seasonal effects that are specifically tied to annual , end-consumer purchasing patterns . typically , semiconductor manufacturers prepare for heightened demand by adding or replacing equipment capacity by the end of the september quarter . occasionally , this results in subsequent reductions in the december quarter . this annual seasonality can occasionally be 24 overshadowed by effects of the broader semiconductor cycle . macroeconomic factors also affect the industry , primarily through their effect on business and consumer demand for electronic devices , as well as other products that have significant electronic content such as automobiles , white goods , and telecommunication equipment . our equipment segment is primarily affected by the industry 's internal cyclical and seasonal dynamics in addition to broader macroeconomic factors that positively and negatively affect our financial performance . the sales mix of idm and osat customers in any period also impacts financial performance , as changes in this mix can affect our products ' average selling prices and gross margins due to differences in volume purchases and machine configurations required by each customer type . our expendable tools segment is less volatile than our equipment segment . expendable tools sales are more directly tied to semiconductor unit consumption rather than capacity requirements and production capability improvements . we continue to position our business to leverage our research and development leadership and innovation and to focus our efforts on mitigating volatility , improving profitability and ensuring longer-term growth . we remain focused on operational excellence , expanding our product offerings and managing our business efficiently throughout the business cycles . our visibility into future demand is generally limited , forecasting is difficult , and we generally experience typical industry seasonality . to limit potential adverse cyclical , seasonal and macroeconomic effects on our financial position , we have de-leveraged and strengthened our balance sheet . as of september 27 , 2014 , our total cash , cash equivalents and investments were $ 597.1 million , a $ 72.1 million increase from the prior fiscal year end . we believe this strong cash position will allow us to continue to invest in product development and pursue organic and non-organic opportunities . on august 14 , 2014 , the company 's board of directors authorized a program ( the `` program `` ) to repurchase up to $ 100 million of the company 's common stock on or before august 14 , 2017 . the company has entered into a written trading plan under rule 10b5-1 of the exchange act , to facilitate repurchases under the program . the program may be suspended or discontinued at any time and will be funded using the company 's available cash . under the program , shares may be repurchased through open market and or privately negotiated transactions at prices deemed appropriate by management . the timing and amount of repurchase transactions under the program will depend on market conditions as well as corporate and regulatory considerations . during the year ended september 27 , 2014 , the company repurchased a total of 43.5 thousand shares of common stock at a cost of $ 0.6 million under the program . as of september 27 , 2014 , our remaining stock repurchase authorization under the program was approximately $ 99.4 million . technology leadership we compete largely by offering our customers among the most advanced equipment and expendable tools available for the wire and wedge bonding processes . our equipment is typically the most productive and has the highest levels of process capability , and as a result , has a lower cost of ownership compared to other equipment in its market . our expendable tools are designed to optimize the performance of the equipment in which they are used . we believe our technology leadership contributes to the strong market positions of our ball bonder , wedge bonder and expendable tools products . to maintain our competitive advantage , we invest in product development activities designed to produce a stream of improvements to existing products and to deliver next-generation products . these investments often focus as much on improvements in the semiconductor assembly process as on specific pieces of assembly equipment or expendable tools . in order to generate these improvements , we often work in close collaboration with customers , end users , and other industry members . in addition to producing technical advances , these collaborative development efforts strengthen customer relationships and enhance our reputation as a technology leader and solutions provider . in addition to gold , silver alloy wire and aluminum wire , our leadership in the industry 's use of copper wire for the bonding process is an example of the benefits of our collaborative efforts . by working with customers , material suppliers , and other equipment suppliers , we have developed a series of robust , high-yielding production processes , which have made copper wire widely accepted and significantly reduced the cost of assembling an integrated circuit . story_separator_special_tag we establish reserves for estimated warranty expense when revenue for the related equipment is recognized . the reserve for estimated warranty expense is based upon historical experience and management 's estimate of future expenses . conditions of acceptance : sales of our consumable products generally do not have customer acceptance terms . in certain cases , sales of our equipment have customer acceptance clauses which may require the equipment to perform in accordance with customer specifications or when installed at the customer 's facility . in such cases , if the terms of acceptance are satisfied at our facility prior to shipment , the revenue for the equipment will be recognized upon shipment . if the terms of acceptance are satisfied at our customers ' facilities , the revenue for the equipment will not be recognized until acceptance , which typically consists of installation and testing , is received from the customer . shipping and handling costs billed to customers are recognized in net revenue . shipping and handling costs paid by us are included in cost of sales . allowance for doubtful accounts we maintain allowances for doubtful accounts for estimated losses resulting from our customers ' failure to make required payments . if the financial condition of our customers were to deteriorate , resulting in an impairment of their ability to make payments , additional allowances may be required . we are subject to concentrations of customers and sales to concentrated geographic locations , which could also impact the collectability of certain receivables . if global economic conditions deteriorate or political conditions were to change in some of the countries where we do business , it could have a significant impact on our results of operations , and our ability to realize the full value of our accounts receivable . inventories inventories are stated at the lower of cost ( on a first-in first-out basis ) or market value . we generally provide reserves for obsolete inventory and for inventory considered to be in excess of demand . demand is generally defined as 18 months forecasted future consumption for equipment , 24 months forecasted future consumption for all spare parts , and 12 months forecasted future consumption for expendable tools . forecasted consumption is based upon internal projections , historical sales volumes , customer order activity and a review of consumable inventory levels at customers ' facilities . we communicate forecasts of our future consumption to our suppliers and adjust commitments to those suppliers accordingly . if required , we reserve the difference between the carrying value of our inventory and the lower of cost or market value , based upon assumptions about future consumption , and market conditions . if actual market conditions are less favorable than projections , additional inventory reserves may be required . accounting for impairment of goodwill the company operates two reportable segments : equipment and expendable tools . goodwill was recorded in 2009 for the acquisition of orthodyne electronics inc. , which added wedge bonder products to the equipment business . accounting standard update 2011-08 , testing goodwill for impairment provides companies with the option to 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 value . if , after assessing the qualitative factors , a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value , then performing the two-step impairment test is unnecessary . however , if a company concludes otherwise , then it is required to perform the first step of the two-step goodwill impairment test . if the carrying value of a reporting 31 unit exceeds its fair value in the first step of the test , then a company is required to perform the second step of the goodwill impairment test to measure the amount of the reporting unit 's goodwill impairment loss , if any . in fiscal 2013 and 2014 , we chose to bypass the qualitative assessment and proceed directly to performing the quantitative evaluation of the fair value of the reporting unit , to compare against the carrying value of the reporting unit . as part of our annual evaluation of the goodwill , we perform an impairment test of our goodwill in the fourth quarter of each fiscal year to coincide with the completion of our annual forecasting process and refreshing of our business outlook processes . on an ongoing basis , we monitor whether a `` triggering `` event has occurred that may have the effect of reducing the fair value of a reporting unit below its respective carrying value . adverse changes in expected operating results and or unfavorable changes in other economic factors used to estimate fair values could result in a non-cash impairment charge in the future . impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions . future events and changing market conditions may impact our assumptions as to prices , costs , growth rates or other factors that may result in changes in our estimates of future cash flows . although we believe the assumptions we have used in testing for impairment are reasonable , significant changes in any one of our assumptions could produce a significantly different result . indicators of potential impairment may lead us to perform interim goodwill impairment assessments , including significant and unforeseen customer losses , a significant adverse change in legal factors or in the business climate , a significant adverse action or assessment by a regulator , a significant stock price decline , unforeseen changes in technology or unanticipated competition . for further information on goodwill and other intangible assets , see note 3 to our consolidated financial statements included in item 8. income taxes in accordance with asc no . 740 , income taxes ,

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cash and cash equivalents $ 587,981 $ 521,788 $ 66,193 percentage of total assets 62.3 % 60.5 % the following table reflects summary consolidated statement of cash flow information for fiscal 2014 and 2013 : replace_table_token_24_th fiscal 2014 continuing operations net cash provided by operating activities was primarily the result of net income of $ 63.0 million , non-cash adjustments of $ 33.6 million and offset by the working capital changes of $ 14.1 million . the change in working capital was primarily driven by an increase in inventories of $ 14.6 million and an increase in accounts receivable of $ 9.3 million . this was partially offset by a decrease in prepaid expenses and other current assets of $ 8.9 million and a decrease in accounts payable of $ 1.0 million . the increase in inventories was due to higher inventories held at year-end in anticipation of a scheduled scale down of manufacturing activity in the first quarter of fiscal 2015. the higher accounts receivable were due to higher sales in the fourth quarter of fiscal 2014. the reduction in prepaid expenses and other current assets was due to net refunds of a $ 2.7 million deposit in relation to the agreement to develop and lease ( the “ adl ” ) following the execution of the lease agreement , and a reduction of $ 6.3 million due to tax refunds . net cash used in investing activities was primarily the purchase of short-term investments of $ 18.2 million and capital expenditures of $ 10.1 million offset by the maturity of short-term investments of $ 12.4 million . net cash used in financing activities was primarily the reversal of excess tax benefits from stock-based compensation arrangements of $ 0.8 million and the repurchase of common stock of $ 0.4 million offset by proceeds from the exercise of stock options of $ 1.0 million . fiscal 2013 continuing operations net cash provided by operating activities was due primarily to net income of $ 59.4 million plus non-cash adjustments of $ 35.5 million contributed to net cash provided by continuing operations . net cash used by investing activities was primarily capital expenditures of $ 17.2

- 33 - effective february 1 , 2017 , we entered into an exclusive oem distribution agreement with esthetic education , llc to be the exclusive marketer and seller of private label versions of the skinstylus® microsystem and associated parts under the name of stratapen . this three-year agreement has minimum annual sales requirements for renewal . the company does not expect to meet the criteria for renewal . during 2017 we entered into an agreement to license the nordlys product line from ellipse a/s . in 2018 , following the financing , we determined we would no longer market the line and the agreement was terminated . for 2017 quarterly sales of the nordlys product line were $ 0 , $ 391 , $ 118 , $ 698 for the first through fourth quarters of 2017 , respectively . for 2018 quarterly sales were $ 218 , $ 59 , $ 57 and $ 75 for the first through fourth quarters of 2018 , respectively . we discontinued carrying the nordlys product line and the distribution agreement with ellipse a/s was terminated on may 31 , 2018. key technology xtrac® excimer laser . xtrac received fda clearance in 2000 and has since become a widely recognized treatment among dermatologists for psoriasis and other skin diseases . the xtrac excimer laser delivers ultra-narrowband ultraviolet b ( “ uvb ” ) light to affected areas of skin . following a series of treatments typically performed twice weekly , psoriasis remission can be achieved , and vitiligo patches can be re-pigmented . xtrac is endorsed by the national psoriasis foundation , and its use for psoriasis is covered by nearly all major insurance companies , including medicare . we estimate that more than half of all major insurance companies now offer reimbursement for vitiligo as well , a figure that is increasing . in the third quarter of 2018 we announced the fda granted clearance for our multi micro dose ( mmd ) tip for our xtrac excimer laser . the mmd tip accessory is indicated for use in conjunction with the xtrac laser system to filter the narrow band uvb ( “ nb-uvb ” ) light at delivery in order to calculate and individualize the maximum non-blistering dose for a particular patient . in the third quarter of 2018 we announced the launch of our s3 , the next generation xtrac . the s3 is smaller , faster and has a smart user interface . vtrac® lamp . vtrac received fda clearance in 2005 and provides targeted therapeutic efficacy demonstrated by excimer technology with the simplicity of design and reliability of a lamp system . stratapen® . stratapen uses the patent-pending biolock cartridge . the biolock needle depth can be adjusted during the course of the procedure to accommodate different treatment areas and can easily maneuver around facial contours and delicate features , such as the eyes , nose and mouth . recent developments equity financing on march 30 , 2018 , we entered into multiple agreements in order to obtain $ 17.0 million of equity financing from the following sources : on may 29 , 2018 , we completed the sale and issuance ( the “ financing ” ) of 15,740,741 shares of the company 's common stock , subject to customary post-closing adjustments , to accelmed growth partners l.p. ( `` accelmed `` ) , broadfin capital llc ( `` broadfin `` ) , sabby management llc ( `` sabby `` ) , gohan investments , ltd. and dr. dolev rafaeli , our president and chief executive officer , for gross proceeds of $ 17.0 million at a per share price of $ 1.08. the various stock purchase agreements were entered into on march 30 , 2018 ( collectively , the “ spas ” ) . we incurred $ 2.3 million of costs related to the financing during the year ended december 31 , 2018 , which have been offset against the proceeds in the accompanying financial statements . these costs included $ 500 to accelmed for legal fees , consulting and due diligence costs related to the stock purchase agreement . in addition , we incurred placement agent fees in the amount of $ 1.4 million , among other costs directly related to the financing . - 34 - in further consideration of entering into their respective stock purchase agreements , sabby and broadfin have each entered into separate agreements restricting their abilities to sell their holdings ( the “ leak-out agreements ” ) . under the terms of each of the respective leak-out agreements , the stockholder agreed that from the later of ( a ) the date that the approval by the shareholders of the transactions is deemed effective and ( b ) the closing of the transactions contemplated pursuant to the spa , the stockholder shall not sell dispose or otherwise transfer , directly or indirectly , ( including , without limitation , any sales , short sales , swaps or any derivative transactions that would be equivalent to any sales or short positions ) any shares of common stock of the company held by the stockholder on the date hereof or issuable to the stockholder upon conversion of shares of the company 's series c convertible preferred stock held by the stockholder on the date hereof , ( a ) if prior to april 1 , 2019 , at a price per share of the company 's common stock less than $ 1.296 , subject to adjustment for reverse and forward stock splits and the like , or ( b ) thereafter , at a price per share reflecting less than the price set forth on the schedule in the leak-out agreements subject to adjustment for reverse and forward stock splits and the like , unless , ( 1 ) in the case of either clause ( a ) or ( b ) , otherwise approved by the company 's board of directors , story_separator_special_tag considerable management judgment is necessary to assess recoverable amounts of intangible assets and measure fair value of the intangible assets that were impaired as such measurements involve estimation of future revenues , royalty rates , profit margins and other cash flows . changes in our actual results and or estimates or any of our other assumptions used in our analysis could result in a different conclusion . income taxes as part of the process of preparing our consolidated financial statements , we are required to estimate our income taxes in each of the jurisdictions in which we operate . this process requires us to estimate our actual current tax exposure and make an assessment of temporary differences resulting from differing treatment of items , for tax and accounting purposes . these differences result in deferred tax assets and liabilities , which are included within our consolidated balance sheet . we must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and , to the extent we believe that recovery is not more likely than not , we establish a valuation allowance . to the extent we establish a valuation allowance or increase this allowance in a period , we must include an expense within the tax provision in the consolidated statement of operations and comprehensive loss . significant management judgment is required in determining any valuation allowance recorded against our deferred tax assets . in the event that we generate taxable income in the jurisdictions in which we operate and in which we have net operating loss carry-forwards , we may be required to adjust our valuation allowance . - 38 - asc topic 740-10 requires that we recognize in our financial statements the impact of a tax position , if that position will more likely than not be sustained upon examination , based on the technical merits of the position , without regard to the likelihood that the tax position may be challenged . if an uncertain tax position meets the “ more-likely-than-not ” threshold , the largest amount of tax benefit , that is greater than 50 % , likely to be recognized upon ultimate settlement with the taxing authority is recorded . we do not have any uncertain tax positions or accrued penalties and interest . if such matters were to arise , we would recognize interest and penalties related to income tax matters in income tax expense . stock-based compensation we account for stock based compensation to employees in accordance with the “ share-based payment ” accounting standard . the standard requires estimating the fair value of equity-based payment awards on the date of grant using an option-pricing model . the value of the award is recognized as an expense over the requisite service periods in our consolidated statements of operations and comprehensive loss . for performance-based awards , we recognize the expense only if we deem it probable that the vesting condition will occur . there were no performance awards granted in 2018 or 2017. the fair value of employee stock options is estimated using a black-scholes valuation model . compensation costs are recognized over the requisite service period . total stock-based compensation expense was $ 904 and $ 186 for the years ended december 31 , 2018 and 2017 , respectively . fair value measurements we measure fair value in accordance with financial accounting standards board accounting standards codification 820 , fair value measurements and disclosures ( “ asc topic 820 ” ) . asc topic 820 defines fair value , establishes a framework and gives guidance regarding the methods used for measuring fair value , and expands disclosures about fair value measurements . fair value is an exit price , representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants . as such , fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability . as a basis for considering such assumptions there exists a three-tier fair-value hierarchy , which prioritizes the inputs used in measuring fair value . our derivative financial instruments were measured using significant unobservable inputs ( level 3 ) . results of operations ( the following financial data , in this narrative , are expressed in thousands , except for the earnings per share and per treatment . amounts have been revised to give effect to the restatements of the 2017 financial statements as described in note 2 to the consolidated financial statements . ) revenues the following table presents revenues from our three segments for the periods indicated below : replace_table_token_1_th dermatology recurring procedures revenues from dermatology recurring procedures for the year ended december 31 , 2018 was $ 21,053 which approximates 300,000 treatments , with prices from $ 65 to $ 95 per treatment . revenues from dermatology recurring procedures for the year ended december 31 , 2017 was $ 22,954 which approximates 328,000 treatments , with prices from $ 65 to $ 95 per treatment . - 39 - increases in procedures are dependent upon building market acceptance through marketing programs with our physician partners and their patients to show that the xtrac procedures will be of clinical benefit and will be generally reimbursed by insurers . we believe that several factors have had a negative impact on the prescribed use of xtrac treatments for psoriasis and vitiligo patients . specifically , we believe that there is a lack of awareness of the positive effects of xtrac treatments among both sufferers and providers ; and the treatment regimen which can sometimes require up to 12 or more treatments has limited xtrac use to certain patient populations . therefore , we have initiated a direct to patient program for xtrac advertising in the united states , targeting psoriasis and vitiligo patients through a variety of media including television and radio ; and

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liquidity and capital resources as of december 31 , 2018 , we had $ 14,595 of working capital compared to $ 279 as of december 31 , 2017 ( as restated ) . cash and cash equivalents were $ 16,487 as of december 31 , 2018 , as compared to $ 4,069 , as of december 31 , 2017. working capital at march 31 , june 30 , and september 30 , 2017 , as restated , was $ 111 , $ ( 78 ) , $ 991 , respectively . working capital at march 31 , june 30 , and september 30 , 2018 , as restated , was $ ( 1,270 ) , $ 13,176 , $ 13,259 , respectively . on december 30 , 2015 , we entered into a $ 12,000 credit facility pursuant to a credit agreement and related financing documents with midcap and the lenders listed therein . our obligations under the credit facility are secured by a first priority lien on all of our assets . on may 29 , 2018 , we entered into a fourth amendment to credit and security agreement with midcap , pursuant to which the company repaid $ 3.0 million in principal of the existing $ 10.6 million credit facility established with midcap in 2015. the terms of the credit facility have been amended to impose less restrictive covenants and lower prepayment fees for the company and extended the maturity date to may 2022. the agreement modified the principal payments including a period of 18 months where there are no principal payments due . the company was in compliance with its covenants as of december 31 , 2018. on april 30 , july 15 , august 26 , and october 15 , 2019 , we received a waiver from midcap as administrative agent for the lenders who are party to the agreement , wherein the lenders waived all our compliance defaults with the obligation to deliver audited financial statements within 120 days of our year-end pursuant to the agreement .

our applied technologies business unit has an array of web and mobile applications and payment technologies , such as mvc , chip and gsm licensing and vtu , and has deployed solutions in many countries , including south africa , namibia , nigeria , malawi , cameroon , the philippines , india and colombia . sources of revenue we generate our revenues by charging transaction fees to government agencies , merchants , financial service providers , utility providers , bill issuers , employers ; and cardholders ; by providing loans and insurance products and by selling hardware , licensing software and providing related technology services . we have structured our business and our business development efforts around four related but separate approaches to deploying our technology . in our most basic approach , we act as a supplier , selling our equipment , software , and related technology to a customer . the revenue and costs associated with this approach are reflected in our financial inclusion and applied technologies segment . 39 we have found that we have greater revenue and profit opportunities , however , by acting as a service provider instead of a supplier . in this approach we own and operate the ueps ourselves , charging one-time and on-going fees for the use of the system either on a fixed or ad valorem basis . this is the case in south africa , where we distribute welfare grants on behalf of the south african government on a fixed fee basis , provide bank accounts on a fixed fee basis , but charge a fee on an ad valorem basis for goods and services purchased using our smart card . the revenue and costs associated with this approach are reflected in our south african transaction processing and financial inclusion and applied technologies segments . because our smart cards are designed to enable the delivery of more advanced services and products , we are also willing to supply those services and products directly where the business case is compelling . for instance , we provide short-term loans to our smart card holders . this is an example of the third approach that we have taken . here we can act as the principal in operating a business that can be better delivered through our ueps . the revenue and costs are reflected in our financial inclusion and applied technologies segment . in south africa , we also generate fees from debit and credit card transaction processing , the provision of value-added services such as bill payments , mobile top-up and prepaid utility sales , and from providing a payroll transaction management service . the revenue and costs associated with these services are reflected in our south african transaction processing and financial inclusion and applied technologies segments . through ksnet , we earn most of our revenue from payment processing services we provide to approximately 240,000 merchants and to card issuers in south korea through our value-added-network . through ipg we generate fee revenue through the provision of payment service provider and card issuing and acquiring services in primarily germany , china and the u.s. we also generate fees from our customers who utilize our vcpay technology to generate a unique , one-time use prepaid virtual card number to securely purchase goods and services or perform bill payments in any card-not-present environment . the revenue and costs at of all of these businesses are reflected in our international transaction processing segment . finally , we have investments , business partnerships or joint ventures to introduce our financial technology solutions to markets such as bank frick in europe , finbond in south africa and north america , onefi in nigeria and mobikwik in india . in these situations , we take an equity position in the business while also acting as a supplier of technology . in evaluating these types of opportunities , we seek to maintain a highly disciplined approach , carefully selecting partners , participating closely in the development of the business plan and remaining actively engaged in the management of the new business . in most instances , the joint venture or partnership has a license to use our proprietary technologies in the specific territory , including the back-end system . we believe that this flexible approach enables us to drive adoption of our solution while capturing the value created by the implementation of our technology . developments during fiscal 2018 cps and sassa contract termination on march 23 , 2018 , the constitutional court ordered a six-month extension of our current contract with sassa , for the payment of grants in cash at pay points only , on the same terms and conditions as the contract that was due to expire on march 31 , 2018. accordingly , we have continued to pay grant recipients at pay points . while the court order was silent regarding the payment of the other 9.1 million grant recipients who access their grants utilizing pin or by biometric verification at pos and atms , we have continued to support the bank accounts that underpin these grant payments . as sassa is no longer paying us a service fee for the management of these accounts with effect from april 1 , 2018 , grant recipients now bear the cost for the fees associated with these accounts . sassa has indicated that grant recipients will be encouraged to open a commercial bank account of their choice in the future , including the special account offered by sapo for grant recipients . sassa reported in its september 2018 filing with the constitutional court the sassa ceo reported that 5,475,752 new sassa/sapo payment cards have been issued . the constitutional court further ordered that we may approach the national treasury to investigate and make a recommendation regarding the price to be paid for our contracted services during the six-month period . story_separator_special_tag the results of our impairment tests during fiscal 2018 indicated that the fair value of our reporting units exceeded their carrying values and therefore our reporting units were not at risk of potential impairment , with the exception of the $ 19.9 million of goodwill impaired during the third quarter of fiscal 2018 and goodwill of $ 1.1 million allocated to a business that ceased trading during the year . intangible assets acquired through acquisitions the fair values of the identifiable intangible assets acquired through acquisitions were determined by management using the purchase method of accounting . we completed acquisitions during fiscal 2018 , 2017 and 2016 where we identified and recognized intangible assets . we have used the relief from royalty method , the multi-period excess earnings method , the income approach and the cost approach to value acquisition-related intangible assets . in so doing , we made assumptions regarding expected future revenues and expenses to develop the underlying forecasts , applied contributory asset charges , discount rates , exchange rates , cash tax charges and useful lives . the valuations were based on information available at the time of the acquisition and the expectations and assumptions that have been deemed reasonable by us . no assurance can be given , however , that the underlying assumptions or events associated with such assets will occur as projected . for these reasons , among others , the actual cash flows may vary from forecasts of future cash flows . to the extent actual cash flows vary , revisions to the useful life or impairment of intangible assets may be necessary . valuation and impairment of marketable securities our investments in available-for-sale equity securities are reported at fair value . unrealized gains and losses related to changes in the fair value of available-for-sale equity securities are recognized in accumulated other comprehensive income , net of tax . changes in the fair value of available-for-sale equity securities impact our reported net income only when such securities are sold or an other-than-temporary impairment is recognized . realized gains and losses on the sale of equity securities will be calculated with reference to its original cost . we regularly review the carrying value of our available-for-sale equity securities to determine whether it is other-than-temporarily impaired , which would require us to record an impairment charge in the period in which such determination is made . in making this determination , we consider , among other things , the extent and the duration of the decline ; the reasons for the decline in value ( i.e . credit event , currency or interest-rate related ) ; and the financial condition of and near term-prospects of the issuer of the security . our assessment of whether an equity security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security , which would have an adverse impact on our financial condition and operating results . deferred taxation we estimate our tax liability through the calculations done for the determination of our current tax liability , together with assessing temporary differences resulting from the different treatment of items for tax and accounting purposes . these differences result in deferred tax assets and liabilities which are disclosed on our balance sheet . 44 management then has to assess the likelihood that deferred tax assets are more likely than not to be realized in the foreseeable future . a valuation allowance is created if it is determined that a deferred tax asset will not be realized in the foreseeable future . any change to the valuation allowance would be charged or credited to income in the period such determination is made . in assessing the need for a valuation allowance , historical levels of income , expectations and risks associated with estimates of future taxable income and ongoing prudent and practicable tax planning strategies are considered . during fiscal 2018 , we recorded a net decrease of $ 22.9 million to our valuation allowance and during fiscal 2017 and 2016 , respectively , we recorded a net increase of $ 0.1 million and $ 16.3 million to our valuation allowance . as of june 30 , 2018 and 2017 , the valuation allowance related to deferred tax assets was $ 16.1 million and $ 39.0 million , respectively . stock-based compensation management is required to make estimates and assumptions related to our valuation and recording of stock-based compensation charges under current accounting standards . these standards require all share-based compensation to employees to be recognized in the statement of operations based on their respective grant date fair values over the requisite service periods and also requires an estimation of forfeitures when calculating compensation expense . we utilize the cox ross rubinstein binomial model to measure the fair value of stock options granted to employees and directors . we have also utilized a bespoke adjusted monte carlo simulation discounted cash flow model to measure the fair value of restricted stock with market conditions granted to employees and directors . the stock-based compensation cost related to these valuations has been recognized on a straight line basis . these valuation models require estimates of a number of key valuation inputs including expected volatility , expected dividend yield , expected term and risk-free interest rate . our management has estimated forfeitures based on historic employee behavior under similar compensation plans . the fair value of stock options is affected by the assumptions selected . net stock-based compensation expense from continuing operations was $ 2.6 million , $ 2.0 million and $ 3.6 million for fiscal 2018 , 2017 and 2016 , respectively . accounts receivable and allowance for doubtful accounts receivable we maintain an allowance for doubtful accounts receivable related to our financial inclusion and applied technologies and international transaction-based activities segments with respect to sales or rental of hardware , support and maintenance services provided ; or sale of licenses to customers

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cash flows from operating activities cash flows from operating activities for fiscal 2018 increased to $ 132.6 million ( zar 1.7 billion ) from $ 97.2 million ( zar 1.3 billion ) for fiscal 2017. excluding the impact of interest received , interest paid on our korean and south africa debt and taxes presented in the table below , the increase relates primarily to the receipt of certain working capital loans outstanding , offset partially by the expansion of our south african lending book and weaker trading activity during fiscal 2018 compared to 2017. during fiscal 2018 , we paid interest of $ 7.2 million and $ 0.4 million , respectively , under our south african and south korean debt facilities . cash flows from operating activities for fiscal 2017 decreased to $ 97.2 million ( zar 1.3 billion ) from $ 116.6 million ( zar 1.7 billion ) for fiscal 2016. excluding the impact of interest received , interest paid under our korean debt and taxes presented in the table below , the decrease relates primarily to the growth of masterpayment 's working capital finance offering and the separation payment made to our former chief executive officer , offset by an increase in cash from operating activities resulted from improved trading activity during fiscal 2017. during fiscal 2017 , we paid interest of $ 1.5 million under our south korean debt facility . during fiscal 2018 , we made a first provisional tax payment of $ 17.7 million ( zar 231.2 million ) and a second provisional tax payment of $ 17.0 million ( zar 225.9 million ) related to our 2018 tax year in south africa . we also paid taxes totaling $ 4.9 million in other tax jurisdictions , primarily south korea . during fiscal 2017 , we made a first provisional tax payment of $ 18.2 million ( zar 252.0 million ) and a second provisional tax payment of $ 17.2 million ( zar 221.7 million ) related to our 2017 tax year in south africa . we paid dividend withholding taxes of $ 1.5 million ( zar 21.3 million ) .

events provides it , supply chain , digital marketing and business professionals the opportunity to attend various symposia , conferences and exhibitions to learn , contribute and network with their peers . from our flagship symposium/itxpo series , to summits focused on specific technologies and industries , to experimental workshop-style seminars , our events distill the latest gartner research into applicable insight and advice . 17 business measurements we believe the following business measurements are important performance indicators for our business segments : business segment business measurements research contract value represents the value attributable to all of our subscription-related research products that recognize revenue on a ratable basis . contract value is calculated as the annualized value of all subscription research contracts in effect at a specific point in time , without regard to the duration of the contract . client retention rate represents a measure of client satisfaction and renewed business relationships at a specific point in time . client retention is calculated on a percentage basis by dividing our current clients , who were also clients a year ago , by all clients from a year ago . client retention is calculated at an enterprise level , which represents a single company or customer . wallet retention rate represents a measure of the amount of contract value we have retained with clients over a twelve-month period . wallet retention is calculated on a percentage basis by dividing the contract value of clients , who were clients one year ago , by the total contract value from a year ago , excluding the impact of foreign currency exchange . when wallet retention exceeds client retention , it is an indication of retention of higher-spending clients , or increased spending by retained clients , or both . wallet retention is calculated at an enterprise level , which represents a single company or customer . consulting consulting backlog represents future revenue to be derived from in-process consulting , measurement and strategic advisory services engagements . utilization rate represents a measure of productivity of our consultants . utilization rates are calculated for billable headcount on a percentage basis by dividing total hours billed by total hours available to bill . billing rate represents earned billable revenue divided by total billable hours . average annualized revenue per billable headcount represents a measure of the revenue generating ability of an average billable consultant and is calculated periodically by multiplying the average billing rate per hour times the utilization percentage times the billable hours available for one year . events number of events represents the total number of hosted events completed during the period . number of attendees represents the total number of people who attend events . 18 executive summary of operations and financial position we have executed a consistent growth strategy since 2005 to drive double-digit annual revenue and earnings growth . the fundamentals of our strategy include a focus on creating extraordinary research content , delivering innovative and highly differentiated product offerings , building a strong sales capability , providing world class client service with a focus on client engagement and retention , and continuously improving our operational effectiveness . we had total revenues of $ 2.163 billion in 2015 , an increase of 7 % over 2014 on a reported basis and 13 % adjusted for the impact of foreign currency exchange . diluted earnings per share increased to $ 2.06 per share in 2015 from $ 2.03 per share in 2014. research revenues rose 10 % year-over-year , to $ 1.583 billion in 2015 , and the contribution margin was 69 % , the same as 2014. at december 31 , 2015 , research contract value was $ 1.761 billion , an increase of 10 % over december 31 , 2014 on a reported basis and 14 % adjusted for the impact of foreign currency exchange . both client and wallet retention remained strong , at 84 % and 105 % , respectively , at december 31 , 2015. consulting revenues in 2015 decreased 6 % when compared to 2014 but were flat when adjusted for the foreign exchange impact . the gross contribution margin was 33 % in 2015 compared to 34 % in 2014. consultant utilization declined by 2 points in 2015 , to 66 % . we had 606 billable consultants at december 31 , 2015 compared to 535 at year-end 2014. backlog increased 15 % year-over-year , to $ 117.7 million at december 31 , 2015 , which is the highest in the company 's history . events revenues increased 11 % year-over-year , to $ 251.8 million . adjusted for the foreign currency impact , events revenues increased 18 % . the segment contribution margin was 52 % in 2015 , a 3 point increase over 2014. we held 65 events in 2015 compared to 61 in 2014 , while the number of attendees increased 7 % year-over-year , to 52,595. for a more detailed discussion of our results , see the segment results section below . cash flow from our operating activities was $ 345.6 million in 2015. we ended 2015 with $ 373.0 million in cash and cash equivalents while $ 656.0 million was available for borrowing under the revolving credit line . we believe that we have adequate liquidity to meet our currently anticipated needs . we continue to focus on maximizing shareholder value . during 2015 we repurchased 6.2 million of our outstanding common shares , and we also acquired nubera ebusiness s.l . , based in barcelona , spain ( `` nubera `` ) , and capterra , inc. , based in arlington , virginia ( `` capterra `` ) , both of which help organizations find the right business software to meet their needs . note 2 - acquisitions in the notes to the consolidated financial statements included in this annual report on form 10-k provides additional information regarding these acquisitions . story_separator_special_tag the following table presents total revenues by geographic region for the twelve months ended ( in thousands ) : replace_table_token_8_th the following table presents our revenues by segment for the twelve months ended ( in thousands ) : replace_table_token_9_th cost of services and product development ( “ cos ” ) expense increased 12 % in 2014 compared to 2013 , or $ 84.4 million , to $ 797.9 million compared to $ 713.5 million in 2013. the impact of foreign currency exchange for the full year was not significant . the increase was primarily due to higher payroll and related benefits costs from additional headcount , which increased 12 % . the headcount increase reflects our continued investment in our research business and includes the additional employees resulting from the 2014 acquisitions . cos as a percentage of revenues was 39 % in the 2014 period compared to 40 % in the 2013 period . 24 selling , general and administrative ( “ sg & a ” ) expense increased by $ 115.6 million in 2014 , or 15 % , to $ 876.1 million compared to $ 760.5 million in 2013. excluding the favorable impact of foreign currency exchange , sg & a expense increased 16 % year-over-year . the increase was primarily due to higher payroll and related benefits costs from additional headcount , higher sales commissions , and merit salary increases . the increased headcount includes our investment in additional quota-bearing sales associates , which increased to 1,881 at december 31 , 2014 , a 14 % increase over year-end 2013. depreciation expense increased 8 % in 2014 compared to 2013 , which reflects our additional investment in fixed assets . amortization of intangibles increased 51 % year-over-year due to the intangibles arising from the 2014 acquisitions . acquisition and integration charges was $ 21.9 million in 2014 compared to $ 0.3 million in 2013. these charges are directly-related to our acquisitions and primarily include amounts accrued for payments contingent on the achievement of certain employment conditions , legal , consulting , and severance costs . operating income increased $ 10.7 million year-over-year , or 4 % , to $ 286.2 million in 2014 from $ 275.5 million in 2013. the increased operating income was attributable to higher segment contributions from our research and events businesses . operating income as a percentage of revenues was 14 % in 2014 and 15 % in 2013. interest expense , net increased 23 % year-over-year due to additional borrowings in the 2014 period . other expense , net was $ 0.6 million in 2014 and $ 0.2 million in 2013. these expenses primarily consisted of net foreign currency exchange gains and losses . provision for income taxes was $ 90.9 million in 2014 compared to $ 83.6 million in 2013 and the effective tax rate was 33.1 % for 2014 compared to 31.4 % for 2013. the higher effective tax rate in 2014 was primarily due to the impact of certain favorable items in 2013 , as well as the unfavorable mix of pretax income by jurisdiction in 2014 which was partially offset by foreign tax credit benefits in 2014. the favorable items in 2013 included the enactment of certain beneficial legislation in 2013 , the release of tax reserves due to audit settlements , and increased tax exempt income . during 2014 , the internal revenue service closed its audit of the company 's 2011 and 2010 federal income tax returns . the resolution of the audit did not have a material adverse effect on the company 's consolidated financial position , cash flows , or results of operations . net income was $ 183.8 million in 2014 and $ 182.8 million in 2013 , an increase of 1 % , as the increased operating income in 2014 was substantially offset by additional income tax charges . diluted earnings per share increased 5 % year-over-year , to $ 2.03 in 2014 , primarily due to a lower number of weighted-average shares outstanding . 25 segment results we evaluate reportable segment performance and allocate resources based on gross contribution margin . gross contribution is defined as operating income excluding certain cost of services and product development charges , sg & a , depreciation , acquisition and integration charges , and amortization of intangibles . gross contribution margin is defined as gross contribution as a percentage of revenues . the following sections present the results of our three business segments as of and for the three years-ended december 31 , 2015. research the following table presents the financial results and business measurements of our research segment for the twelve months ended december 31 : replace_table_token_10_th ( 1 ) dollars in thousands . 2015 versus 2014 research segment revenues increased 10 % in 2015 compared to 2014. excluding the unfavorable impact of foreign currency , research revenues increased 16 % in 2015. the segment gross contribution margin was 69 % in both annual periods . the contribution margin remained at 69 % in spite of a 12 % increase in segment headcount , mostly driven by new hires but also to a lesser extent the additional employees resulting from our acquisitions . the overall headcount increase reflects our continuing investment in this business . research contract value increased 10 % in 2015 to $ 1.761 billion , and increased 14 % year-over-year adjusted for the impact of foreign currency exchange . the growth in contract value was broad-based , with every region , client size , and industry sector growing at double-digit rates , with the exception of the energy and utilities sector , which still increased year-over-year but at a slower rate . the number of our research client enterprises increased by 8 % in 2015 , to 10,796. both client retention and wallet retention remained strong , at 84 % and 105 % respectively , as of december 31 , 2015 . 2014 versus 2013 research segment revenues in 2014

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liquidity and capital resources we had $ 373.0 million of cash and cash equivalents at december 31 , 2015 and $ 656.0 million of available borrowing capacity under our 2014 credit agreement . in addition , the 2014 credit agreement contains an expansion feature by which the company may borrow up to an additional $ 500.0 million in the aggregate under certain conditions . we believe that our consistently strong operating cash flow , as well as our existing cash balances and our available borrowing capacity under our 2014 credit agreement , provide us with adequate liquidity to meet our currently anticipated needs . however , should we need to borrow additional amounts , we believe we would be able to do so on reasonable terms . we had operating cash flow of $ 345.6 million in 2015. in addition , we also borrowed an additional $ 420.0 million on a net basis under our 2014 credit agreement . during 2015 we used $ 196.2 million in cash to acquire other businesses and we also used $ 509.0 million in cash to repurchase our common shares . we currently have a $ 1.2 billion board approved authorization to repurchase the company 's common stock , and as of december 31 , 2015 , approximately $ 1.1 billion of this authorization remains . we have historically generated significant cash flows from our operating activities . our operating cash flow has been continuously enhanced by the leverage characteristics of our subscription-based business model as well as our focus on operational efficiencies .

repayment of our existing and any future debt ; and the impact of legislative or regulatory determinations or changes by federal , state and local , and foreign authorities , including taxing authorities . in addition , other risks and uncertainties not presently known to us or that we consider immaterial could affect the accuracy of any such forward-looking statements . the list of factors above is illustrative , but by no means exhaustive . all 24 forward-looking statements should be evaluated with the understanding of their inherent uncertainty . additional risks and uncertainties include those described in the sections entitled “ risk factors ” and “ management 's discussion and analysis of financial condition and results of operations ” in this report , as updated from time to time in the company 's public filings . non-gaap financial measures while the company reports financial results in accordance with accounting principles generally accepted in the u.s. ( “ gaap ” ) , this discussion includes non-gaap measures . these non-gaap measures , such as adjusted net earnings , adjusted net earnings per diluted share , operating results , organic net sales , gross margin , sg & a as a percent of net sales ( exclusive of spin costs , restructuring related charges and integration expenses ) , advertising and promotional expense as a percent of net sales and other comparison changes , the costs associated with restructuring and other initiatives , costs associated with the spin-off transaction , cost of early debt retirement , certain charges related to the venezuela deconsolidation , changes to our international go to market strategy , costs associated with acquisition integration , adjustments to prior year tax accruals and certain other items as outlined in this announcement , are not in accordance with , nor are they a substitute for gaap measures . additionally , we are unable to provide a reconciliation of forward-looking non-gaap measures due to uncertainty regarding future restructuring related charges , spin-off related charges , the impact of fluctuations in foreign currency movements and the cost of raw materials . the company believes these non-gaap measures provide a meaningful comparison to the corresponding historical or future period and assist investors in performing analysis consistent with financial models developed by research analysts . investors should consider non-gaap measures in addition to , not as a substitute for , or superior to , the comparable gaap measures . the separation on july 1 , 2015 , edgewell personal care company completed the previously announced separation of its business ( the spin-off or spin ) into two separate independent public companies , energizer holdings , inc. ( energizer or the company ) and edgewell personal care company ( edgewell ) . to effect the separation , edgewell undertook a series of transactions to separate net assets and legal entities . as a result of these transactions , energizer now holds the household products ' product group and edgewell holds the personal care product group . as a result of the spin-off , energizer now operates as an independent , publicly traded company on the new york stock exchange trading under the symbol `` enr . `` in conjunction with the spin-off , on july 1 , 2015 , edgewell distributed 62,193,281 shares of energizer holdings , inc. common stock to edgewell shareholders . under the terms of the spin-off of the household products business , edgewell common stockholders of record as of the close of business on june 16 , 2015 , the record date for the distribution , received one share in energizer holdings , inc. , for each share of edgewell common stock they held . edgewell completed the distribution of energizer common stock to its shareholders on july 1 , 2015 , the distribution date . edgewell structured the distribution to be tax-free to its u.s. shareholders for u.s. federal income tax purposes . energizer 's first three fiscal quarters of 2015 as well as all of 2014 and 2013 are based on carve out financial data . net sales , gross profit , advertising & promotion ( a & p ) and research & development ( r & d ) spending are directly attributable to our business . however , certain selling , general , and administrative expense ( sg & a ) , interest expense and spin-off and restructuring related charges are allocated from edgewell and not necessarily representative of energizer 's stand-alone results or expected future results of energizer as an independent company . energizer 's fourth fiscal quarter 2015 was our first quarter with stand-alone financial data . overview general energizer , through its worldwide operating subsidiaries , is one of the world 's largest manufacturers and marketers of primary batteries and lighting products . energizer manufactures , markets and or licenses one of the most extensive product portfolios of household batteries , specialty batteries and portable lights . energizer is the beneficiary of over 100 years of expertise in the battery and portable lighting products industries . its brand names , energizer and eveready , have worldwide recognition for innovation , quality and dependability , and are marketed and sold around the world . 25 energizer has a long history of innovation within our categories . since our commercialization of the first dry-cell battery in 1893 and the first flashlight in 1899 , we have been committed to developing and marketing new products to meet evolving consumer needs and consistently advancing battery technology as the universe of devices powered by batteries has evolved . over the past 100+ years we have developed or brought to market : the first flashlight ; the first mercury-free alkaline battery ; the first mercury-free hearing aid battery ; energizer ultimate lithium , the world 's longest-lasting aa and aaa battery for high-tech devices ; and energizer ecoadvanced , the world 's first high performance aa battery made with 4 % recycled batteries . story_separator_special_tag partially offsetting this expense were pre-tax losses in high tax rate jurisdictions driven by spin costs of $ 137.2 , interest payments as a result of the early debt retirement of $ 26.7 and restructuring charges of $ 13.0. excluding the tax impact of these specific or unusual items , the non-gaap effective tax rate for fiscal year 2015 was 27.0 % , consistent with fiscal year 2014. for fiscal 2014 , the effective tax rate was 26.9 % , which was favorably impacted by costs related to the separation and the 2013 restructuring project . both of these charges were primarily incurred in the u.s. , which resulted in a higher tax benefit as compared to our overall global effective tax rate . excluding the impact of these items , the non-gaap effective tax rate for fiscal year 2014 was 27.5 % . this rate was more favorable versus the prior year due to the mix of countries from which earnings were derived as foreign earnings increased in lower tax rate countries , most significantly singapore . for fiscal 2013 , the effective tax rate was 29.1 % , which was favorably impacted by costs associated with our 2013 restructuring project that have been primarily incurred in the u.s. , which has resulted in a higher tax benefit as compared to our overall global effective tax rate , and to a lesser extent , the favorable impact of items such as the retroactive reinstatement of the r & d credit . excluding the impact of these specific items , the non-gaap effective tax rate for fiscal year 2013 was 31.7 % . energizer 's effective tax rate is highly sensitive to the mix of countries from which earnings or losses are derived . declines in earnings in lower tax rate countries , earnings increases in higher tax rate countries , repatriation of foreign earnings or foreign operating losses in the future could increase future tax rates . venezuela deconsolidation charge venezuelan exchange control regulations have resulted in an other-than-temporary lack of exchangeability between the venezuelan bolivar and u.s. dollar , and have restricted our venezuelan operations ' ability to pay dividends and settle intercompany obligations . the severe currency controls imposed by the venezuelan government have significantly limited energizer 's ability to realize the benefits from earnings of energizer 's venezuelan operations and access the resulting liquidity provided by those earnings . energizer expects that this condition will continue for the foreseeable future . this lack of exchangeability has resulted in a lack of control over our venezuelan subsidiaries for accounting purposes . we deconsolidated our venezuelan subsidiaries on march 31 , 2015 and began accounting for our investment in our venezuelan operations using the cost method of accounting . subsequent to march 31 , 2015 , our financial results will not include the operating results of our venezuelan operations . instead , we will record revenue for sales of inventory to our venezuelan operations in our consolidated financial statements to the extent cash is received . further , dividends from our venezuelan subsidiaries will be recorded as other income upon receipt of the cash . included within the results for the twelve months ended september 30 , 2015 , for venezuela are net sales of $ 8.5 and segment profit of $ 2.5. see further discussion in `` segment results `` below . as a result of deconsolidating its venezuelan subsidiaries at march 31 , 2015 , edgewell recorded a one-time charge of $ 144.5 in the second quarter of 2015 , of which $ 65.2 was allocated to energizer based on the venezuelan operations being distributed as part of energizer . this charge included : foreign currency translation losses previously recorded in accumulated other comprehensive income , of which $ 16.2 was allocated to energizer the write-off of edgewell 's venezuelan operations ' cash balance , of which $ 44.6 was allocated to energizer , ( at the 6.30 per u.s. dollar rate ) the write-off of edgewell 's venezuelan operations ' other net assets , of which $ 4.4 was allocated to energizer 31 spin costs prior to the spin on july 1 , 2015 , edgewell incurred costs to evaluate , plan and execute the spin transaction , and energizer was allocated a pro rata portion of those costs . edgewell 's total spin costs through the close of the separation were $ 358 on a pre-tax basis . through the close of the separation , energizer 's allocation of these spin costs were approximately $ 167.0 on a pre-tax basis ; including $ 104.2 recorded in sg & a , $ 36.0 of spin restructuring charges and $ 26.7 of cost of early debt retirement recorded in interest expense . the allocated amounts in sg & a included $ 82.9 and $ 21.3 recorded in fiscal 2015 and 2014 , respectively . the spin restructuring and cost of early debt retirement were recorded fully in fiscal 2015. since july 1 , 2015 , energizer has incurred additional costs associated with the spin . these costs have been recorded on an actual basis as incurred . total costs incurred since the legal separation occurred was $ 18.3 ; including $ 14.7 recorded in sg & a , $ 0.5 recorded in cost of products sold , and $ 3.1 of spin restructuring charges . in addition , energizer incurred tax related spin costs in foreign jurisdictions of $ 9.6 during fiscal 2015 which were capitalized into additional paid in capital . total fiscal year 2015 spin related costs were $ 163.9 including $ 97.6 recorded in sg & a , $ 0.5 recorded in cost of products sold , $ 39.1 of spin restructuring and $ 26.7 of the cost of early debt retirement recorded in interest expense . on a project-to-date basis , charges were $ 185.2 , inclusive of the cost of early debt retirement . energizer expects to incur $ 10 to

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net cash used by investing activities was $ 38.8 , $ 22.8 , and $ 16.8 in fiscal years 2015 , 2014 and 2013 , respectively . the primary driver of the change in net cash used by investing activities versus the prior years was due to the timing of capital expenditures as there was less activity during the time of our 2013 restructuring program . capital expenditures were $ 40.4 , $ 28.4 , and $ 17.8 in fiscal years 2015 , 2014 and 2013 , respectively . the ramp up in capital expenditures in fiscal 2015 was primarily due to it spending associated with the separation . these capital expenditures were funded by cash flow from operations . see note 21 , segments , of the notes to consolidated financial statements for capital expenditures by segment . investing cash outflows of approximately $ 35 to $ 45 are anticipated in fiscal 2016 with a large percentage of the disbursements for capital expenditures relating to maintenance , product development and cost reduction investments . total capital expenditures are expected to be financed with funds generated from operations . financing activities net cash from financing activities was $ 309.2 in 2015 and net cash used by financing activities was $ 185.5 and $ 301.2 in fiscal years 2014 and 2013 , respectively .

we made this determination based on how we manage our operations and the information provided to our chief operating decision maker who is our chief executive officer . in june 2007 , we entered into a license and research collaboration agreement and separate supply agreement with merck related to our i-vation ™ ta intravitreal implant . under the terms of the merck agreements , we received an upfront license fee of $ 20.0 million and were eligible to receive up to an additional $ 288.0 million in fees and development milestones associated with the successful product development and attainment of appropriate u.s. and eu regulatory approvals , as well as payment for our research and development activities . in september 2008 , following a strategic review of merck 's business and product development portfolio , merck gave notice to surmodics that it was terminating the collaborative license and research agreement , as well as the supply agreement entered into in june 2007. this decision was not based on any concerns about the safety or efficacy of the i-vation system . the termination was effective in december 2008 , and we recognized revenue related to the termination of approximately $ 45.0 million in fiscal 2009 , principally from amounts that previously had 32 been deferred and amortized under the accounting treatment required by accounting guidance for revenue arrangements with multiple deliverables . the $ 45.0 million included a $ 9.0 million milestone payment from merck associated with the termination of the triamcinolone acetonide development program . overview of research and development activities we manage our customer-sponsored r & d programs ( “customer r & d” ) , based largely on the requirements of our customers . in this regard , our customers typically establish the various measures and metrics that are used to monitor a program 's progress , including key deliverables , milestones , timelines , and an overall program budget . the customer is ultimately responsible for deciding whether to continue or terminate a program , and does so based on research results ( relative to the above measures and metrics ) and other factors , including their own strategic and or business priorities . customer r & d programs are mainly in our medical device and pharmaceuticals segments and the processes do not differ significantly . for our internal r & d programs ( included in “other r & d” ) in our three segments , we utilize r & d review committees to prioritize these programs based on a number of factors , including a program 's strategic fit , commercial impact , potential competitive advantage , technical feasibility , and the amount of investment required . the measures and metrics used to monitor a program 's progress varies based on the program , and typically includes many of the same factors discussed above with respect to our customer r & d programs . we typically make decisions to continue or terminate a program based on research results ( relative to the above measures and metrics ) and other factors , including our own strategic and or business priorities , and the amount of additional investment required . with respect to cost components , r & d expenses in each of our three segments consist of labor , materials and overhead costs ( utilities , depreciation , indirect labor , etc . ) for both customer r & d and other r & d programs . we manage our r & d organization in a flexible manner , balancing workloads/resources between customer r & d and other r & d programs primarily based on the level of customer program activity . therefore , costs incurred for customer r & d and other r & d can shift as customer activity increases or decreases . as a result of the recent economic conditions , some customers have delayed , slowed or cancelled development projects , which has affected the r & d expense mix between customer r & d and other r & d . critical accounting policies the discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the u.s. ( “gaap” ) . the preparation of these financial statements is based in part on the application of significant accounting policies , many of which require management to make estimates and assumptions ( see note 2 to the consolidated financial statements ) . actual results may differ from these estimates under different assumptions or conditions and could materially impact our results of operations . we believe the following are critical areas in the application of our accounting policies that currently affect our financial condition and results of operations . revenue recognition . in accordance with accounting guidance , revenue is recognized when all of the following criteria are met : ( 1 ) persuasive evidence of an arrangement exists ; ( 2 ) shipment has occurred or delivery has occurred if the terms specify destination ; ( 3 ) the sales price is fixed or determinable ; and ( 4 ) collectability is reasonably assured . when there are additional performance requirements , revenue is recognized when all such requirements have been satisfied . under revenue arrangements with multiple deliverables , the company recognizes each separable deliverable as it is earned . the company licenses technology to third parties and collects royalties . royalty revenue is generated when a customer sells products incorporating the company 's licensed technologies . royalty revenue is recognized as our licensees report it to us , and payment is typically submitted concurrently with the report . for stand-alone license agreements , up-front license fees are recognized over the term of the related licensing agreement . minimum royalty fees are recognized in the period earned . story_separator_special_tag based on our analysis , we utilized the guideline public company method to support the valuation of the reporting units in fiscal 2010. based on the goodwill analysis performed as of august 31 , 2010 , the $ 13.8 million of goodwill in the surmodics pharmaceuticals reporting unit failed step 1 of the impairment test , and step 2 of the impairment test indicated that goodwill was fully impaired . the indicated excess in fair value over carrying value of the company 's in vitro diagnostics reporting unit in step 1 of the impairment test at august 31 , 2010 was approximately 82 % and as such the $ 8.0 million of goodwill related to this reporting unit was not impaired . to the extent that actual results or other assumptions about future economic conditions or potential for our growth and profitability in this business changed , it is possible that our conclusion regarding the goodwill could change , which could have a material effect on our financial position and results of operations . the surmodics drug 37 delivery and hydrophilic coatings operations do not have any goodwill and were included in the fiscal 2010 analysis to assist in reconciling the fair value of all reporting units to the company 's market capitalization at august 31 , 2010. see note 2 to the consolidated financial statements for further information . we did not record any goodwill impairment charges during fiscal 2009. investments . investments consist principally of u.s. government and government agency obligations and mortgage-backed securities and are classified as available-for-sale or held-to-maturity at september 30 , 2011. our investment policy calls for no more than 5 % of investments be held in any one credit issue , excluding u.s. government and government agency obligations . available-for-sale investments are reported at fair value with unrealized gains and losses excluded from operations and reported as a separate component of stockholders ' equity , except for other-than-temporary impairments , which are reported as a charge to current operations and result in a new cost basis for the investment . our evaluation of the available-for-sale investments resulted in no loss recognition in fiscal 2011 , 2010 or 2009. investments for which management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost . if there was an other-than-temporary impairment in the fair value of any individual security classified as held-to-maturity , the company would write down the security to fair value with a corresponding adjustment to other income ( loss ) . interest on debt securities , including amortization of premiums and accretion of discounts , is included in other income ( loss ) . realized gains and losses from the sales of debt securities , which are included in other income ( loss ) , are determined using the specific identification method . see notes 2 and 3 to the consolidated financial statements for further information . income tax accruals and valuation allowances . when preparing the consolidated financial statements , we are required to estimate the income tax obligations in each of the jurisdictions in which we operate . this process involves estimating the actual current tax obligations based on expected income , statutory tax rates and tax planning opportunities in the various jurisdictions . in the event there is a significant unusual or one-time item recognized in the results of operations , the tax attributable to that item would be separately calculated and recorded in the period the unusual or one-time item occurred . tax law requires certain items to be included in our tax return at different times than the items are reflected in our results of operations . as a result , the annual effective tax rate reflected in our results of operations is different than that reported on our tax return ( i.e . , our cash tax rate ) . some of these differences are permanent , such as expenses that are not deductible in our tax return , and some are temporary differences that will reverse over time , such as depreciation expense on capital assets . these temporary differences result in deferred tax assets and liabilities , which are included in our consolidated balance sheets . deferred tax assets generally represent items that can be used as a tax deduction or credit in our tax returns in future years , for which we have already recorded the expense in our consolidated statements of operations . we must assess the likelihood that our deferred tax assets will be recovered from future taxable income , and to the extent we believe that recovery is not likely , we must establish a valuation allowance against those deferred tax assets . deferred tax liabilities generally represent items for which we have already taken a deduction in our tax return , but we have not yet recognized the items as expense in our results of operations . significant judgment is required in evaluating our tax positions , and in determining our provision for income taxes , our deferred tax assets and liabilities and any valuation allowance recorded against our deferred tax assets . we had total deferred tax assets in excess of total deferred tax liabilities of $ 9.4 million as of september 30 , 2011 and $ 2.9 million as of september 30 , 2010 , including valuation allowances of $ 7.7 million as of september 30 , 2011 and $ 6.5 million as of september 30 , 2010. the valuation allowances related to impairment losses on investments were recorded because the company does not currently foresee future capital gains within the allowable carryforward and carryback periods to offset these capital losses when they are recognized . as such , no tax benefit has been recorded in the consolidated statements of operations . in addition , we recorded a valuation allowance related to state net operating losses based on the uncertainty regarding the realization of the net operating losses in

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liquidity and capital resources operating activities . as of september 30 , 2011 , the company had working capital of $ 42.7 million , of which $ 38.4 million consisted of cash , cash equivalents and short-term investments . working capital increased 46 $ 12.9 million from the september 30 , 2010 level , driven principally by higher cash and short-term investment balances , offset by higher accrued compensation and other current liabilities . our cash , cash equivalents and short-term and long-term investments totaled $ 68.2 million at september 30 , 2011 , an increase of $ 11.4 million from $ 56.8 million at september 30 , 2010. the increase was principally driven by cash generated from operations less payments related to a prior acquisition . the company 's investments principally consist of u.s. government and government agency obligations and investment grade , interest-bearing corporate and municipal debt securities with varying maturity dates , the majority of which are five years or less . the company 's policy requires that no more than 5 % of investments be held in any one credit issue , excluding u.s. government and government agency obligations . the primary investment objective of the portfolio is to provide for the safety of principal and appropriate liquidity while meeting or exceeding a benchmark ( “merrill lynch 1-3 year government-corporate index” ) total rate of return . management plans to continue to direct its investment advisors to manage the company 's investments primarily for the safety of principal for the foreseeable future as it assesses other investment opportunities and uses of its investments . the company had positive cash flows from operating activities of approximately $ 20.0 million in fiscal 2011 , compared with $ 22.0 million in fiscal 2010. the following table depicts our cash flows from operations for each of fiscal 2011 and 2010 : replace_table_token_8_th net cash provided by operating activities decreased $ 2.1 million in fiscal 2011 compared with fiscal 2010. this decrease was driven by continued lower cypher ® stent royalties , which declined $ 2.7 million compared with fiscal 2010 , as well as to $ 1.3 million higher restructuring related payments . investing activities .

while we believe that we have a reasonable basis for each forward-looking statement contained in this annual report , we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future , about which we can not be certain . we undertake no obligation to publicly update any forward-looking statements , whether as a result of new information , future events or otherwise . you are advised , however , to consult any further disclosures we make on related subjects in our quarterly reports on form 10-q , current reports on form 8-k , and our website . overview we are a biopharmaceutical company principally focused on developing genetically-targeted therapies for cardiovascular diseases . our lead product candidate is gencaro ( bucindolol hydrochloride ) , a pharmacologically unique beta-blocker and mild vasodilator that we plan to evaluate in a new clinical trial for the treatment of atrial fibrillation , or af , in patients with heart failure and left ventricular dysfunction , or hfref . we have identified common genetic variations in receptors in the cardiovascular system that we believe interact with gencaro 's pharmacology and may predict patient response to the drug . we believe that that gencaro has potential efficacy in reducing or preventing af , and this efficacy may be genetically regulated . we plan to test this hypothesis in a clinical trial of gencaro , known as genetic-af . we have created an adaptive design for genetic-af . we anticipate that the trial will be initiated as a phase 2b study in approximately 200 patients with recent on set , persistent af comparing gencaro to toprol xl for prevention of af in patients with hfref . depending on the results of the phase 2b portion , the trial may then be expanded to a phase 3 study by enrolling an estimated additional 420 patients . we expect that our genetic-af trial will begin enrolling patients in the first quarter of 2014 , and we project the phase 2b study will take approximately two and one-half years to complete from the time the first patient is enrolled until the planned dsmb interim analysis of data from the initial 200 patients . we have been granted patents in the u.s. , europe , and other jurisdictions for methods of treating af and hf patients with gencaro based on genetic testing , which we believe may provide market exclusivity for these uses of gencaro into at least 2026 in the u.s. and into 2025 in europe . in addition , we believe that if gencaro is approved , a gencaro patent will be eligible for patent term extension based on our current clinical trial plans which , if granted , may provide market exclusivity for gencaro into 2029 or 2030 in the u.s. and europe . to support the continued development of gencaro , we completed public equity offerings during 2013 that raised approximately $ 19.3 million in net proceeds . in february 2014 , we completed a public equity offering of approximately $ 7.9 million in net proceeds as additional funds for the planned phase 2b portion of the trial and to support our ongoing operations . in light of the significant uncertainties regarding clinical development timelines and costs for developing drugs such as gencaro , we will need to raise a significant amount of additional capital to finance the completion of genetic-af and our ongoing operations . we anticipate that our current cash and cash equivalents , including the net proceeds from our february 2014 equity offering , will be sufficient to fund our operations , at our projected cost structure , through at least the end of 2015. however , changing circumstances may cause us to consume capital significantly faster or slower than we currently anticipate . we have based these estimates on assumptions that may prove to be wrong , and we could exhaust our available financial resources sooner than we currently anticipate . results of operations research and development expenses research and development , or r & d , expense is comprised of clinical , regulatory , and manufacturing process development activities and costs . our research and development expenses totaled $ 2.9 million for the year ended december 31 , 2013 as compared to $ 1.1 million for 2012 , an increase of approximately $ 1.8 million . during 2013 , our r & d efforts and costs were almost entirely related to the development of gencaro . clinical expense increased approximately $ 590,000 for the year ended december 31 , 2013. the increase is primarily due to project initiation costs for cro and similar service providers that we have engaged for our planned genetic-af clinical trial . we have also added staff during the year to initiate and oversee our planned genetic-af clinical trial project . regulatory and manufacturing process costs increased approximately $ 1.2 million for the year ended december 31 , 2013 compared to the year-ended december 31 , 2012. approximately $ 738,000 of the increase is due to costs incurred for development and production of clinical trial materials , and costs for acquiring the active comparator drug product . our regulatory costs increased approximately $ 351,000 in this same period , which includes costs paid by us to labcorp for development of the diagnostic test for use in our planned genetic-af clinical trial and includes costs of regulatory audits of suppliers to be used in such clinical trial . a portion of the additional costs is attributable to personnel costs as we have increased staff during the year to prepare the clinical trial . story_separator_special_tag r & d expense in 2014 will be substantially higher than 2013 if we initiate our genetic-af clinical trial and begin enrolling patients . 36 general and administrative expenses general and administrative expenses , or g & a , primarily consist of personnel costs , consulting and professional fees , insurance , facilities and depreciation expenses , and various other administrative costs . g & a expenses were $ 4.0 million for the year ended december 31 , 2013 , compared to $ 3.2 million for 2012 , an increase of approximately $ 800,000. the change included increased personnel , consulting , and board advisory costs of approximately $ 546,000 that were primarily attributable to performance bonuses earned and personnel we returned from furlough during the year to assist in our financing efforts and to support our planned initiation of the genetic-af clinical trial . legal , accounting and other professional services of accounted for approximately $ 168,000 of the change and were primarily attributable to our special shareholder meeting held in the first quarter of 2013 and to our financing efforts completed during 2013. g & a expenses in 2014 are expected to be higher than in 2013 as we increase administrative activities to support initiating our genetic-af clinical trial . interest and other income interest and other income was $ 5,000 for the year ended december 31 , 2013 as compared to $ 2,000 for 2012 , resulting in an increase of $ 3,000. this is due to the increase in cash balances resulting from our june 2013 sale of equity securities . interest income was nominal in both years due to low investment yields . we expect interest income to continue to be nominal in 2014. interest and other expense interest and other expense was $ 4,000 for the year ended december 31 , 2013 , as compared to $ 3,000 for 2012. the amounts and related change between years are nominal to our overall operations . based on our current capital structure , interest expense for 2014 is expected to be comparable to 2013. liquidity and capital resources story_separator_special_tag style= `` margin-bottom:0pt ; margin-top:6pt ; font-size:10pt ; ; `` > recruitment of sufficient clinical trial sites , enrollment of patients and enrollment at a rate consistent with our projected timeline ; our ability to control costs associated with the clinical trial and our operations ; our ability to retain the listing of our common stock on the nasdaq capital market ; the market price of our stock and the availability and cost of additional equity capital from existing and potential new investors ; general economic and industry conditions affecting the availability and cost of capital ; the costs of filing , prosecuting , defending and enforcing any patent claims and other intellectual property rights ; and the terms and conditions of our existing collaborative and licensing agreements . the sale of additional equity or convertible debt securities will be necessary for us to complete both phase 2b and phase 3 of the genetic-af clinical trial and submit for fda approval of gencaro . such financing would likely result in additional dilution to our existing stockholders . if we raise additional funds through the incurrence of indebtedness , the obligations related to such indebtedness would be senior to rights of holders of our capital stock and could contain covenants that would restrict our operations . we anticipate that our current cash and cash equivalents , including the approximately $ 7.9 million of net proceeds from our february 2014 equity offering , will be sufficient to fund our operations , at our projected cost structure , through at least the end of 2015 . however , our forecast of the period of time through which our financial resources will be adequate to support our current and forecasted operations could vary materially . critical accounting policies and estimates a critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management 's most difficult , subjective or complex judgments , often as a result of the need to make estimates about the effect of matters that are inherently uncertain . while our significant accounting policies are described in note 1 of “ notes to consolidated financial statements ” included within item 8 in this report , we believe the following critical accounting policy affected our most significant judgments , assumptions , and estimates used in the preparation of our consolidated financial statements and , therefore , is important in understanding our financial condition and results of operations . accrued expenses as part of the process of preparing our financial statements , we are required to estimate accrued expenses . this process involves identifying services that third parties have performed on our behalf and estimating the level of service performed and the associated cost incurred for these services as of the balance sheet date . examples of estimated accrued expenses include contract service fees , such as fees payable to contract manufacturers in connection with the production of materials related to our drug product , and professional service fees , such as attorneys , consultants , and clinical research organizations . we develop estimates of liabilities using our judgment based upon the facts and circumstances known at the time . off-balance sheet arrangements we have not participated in any transactions with unconsolidated entities , such as special purpose entities , which would have been established for the purpose of facilitating off-balance sheet arrangements . indemnifications in the ordinary course of business , we enter into contractual arrangements under which we may agree to indemnify certain parties from any losses incurred relating to the services they perform on our behalf or for losses arising from certain events as defined within the particular contract . such indemnification obligations may not be subject to maximum loss clauses . we have entered into indemnity agreements with each of our directors , officers and

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cash and cash equivalents december 31 , 2013 december 31 , 2012 cash and cash equivalents $ 16,756 $ 2,920 cash flows from operating , investing and financing activities replace_table_token_4_th net cash used in operating activities for the year ended december 31 , 2013 increased nearly $ 1.2 million compared with the 2012 period due to increased r & d and sg & a expenses discussed above . net cash provided by financing activities of approximately $ 19.2 million for the year ended december 31 , 2013 is comprised of approximately $ 19.3 million of net proceeds from the sales of our preferred and common stock , less $ 174,000 in payments made on a vendor financing arrangement . net cash provided by financing activities of approximately $ 1.1 million for the year ended december 31 , 2012 is comprised of approximately $ 1.2 million of net proceeds from the sales of our common stock , less $ 134,000 in payments made on a vendor financing arrangement . sources and uses of capital our primary sources of liquidity to date have been capital raised from issuances of shares of our preferred and common stock and funds provided by the merger with nuvelo . the primary uses of our capital resources to date have been to fund operating activities , including research , clinical development and drug manufacturing expenses , license payments , and spending on capital items . 37 we completed three equity-financing transactions in 2013 and raised approximately $ 19.3 million , net of offering costs . on january 22 , 2013 , we sold approximately $ 1 million of our common stock and warrants for common stock in a private placement transaction with accredited investors including our chief executive officer . we issued 356,430 shares of common stock together with warrants to purchase 249,501 shares of common stock . the net proceeds , after deducting placement agent fees and other offering expenses , were approximately $ 805,000. each unit , consisting of a share of common stock and a warrant to purchase 0.70 shares of common stock , was sold at a purchase price of $ 2.81 per unit .

on december 26 , 2013 , the frb approved the company 's request to pay outstanding cumulative dividends on its series a preferred stock . these deferred dividends were paid by the company on february 18 , 2014 . 15 index a summary of our results of operations and financial condition and select metrics is included in the following table : replace_table_token_3_th as a bank holding company , management focuses on key ratios in evaluating the company 's financial condition and results of operations . in the current economic environment , key ratios regarding asset credit quality and efficiency are more informative as to the financial condition of the company than those utilized in a more normal economic period such as return on equity and return on assets . asset quality for all banks and bank holding companies , asset quality plays a significant role in the overall financial condition of the institution and results of operations . the company measures asset quality in terms of nonaccrual loans as a percentage of gross loans , and net charge-offs as a percentage of average loans . net charge-offs are calculated as the difference between charged-off loans and recovery payments received on previously charged-off loans . the following table summarizes asset quality metrics : replace_table_token_4_th asset and deposit growth the ability to originate new loans and attract new deposits is fundamental to the company 's asset growth . the company 's assets and liabilities are comprised primarily of loans and deposits . total assets increased to $ 539.0 million at december 31 , 2013 from $ 532.1 million at december 31 , 2012. total loans including net deferred fees and unearned income increased by $ 12.8 million , or 2.9 % , to $ 462.0 million as of december 31 , 2013 compared to december 31 , 2012. total deposits increased slightly to $ 436.1 million as of december 31 , 2013 from $ 434.2 million as of december 31 , 2012 . 16 index results of operatons the following table sets forth a summary financial overview for the comparable years : replace_table_token_5_th 17 index interest rates and differentials the following table illustrates average yields on interest-earning assets and average rates on interest-bearing liabilities for the periods indicated : replace_table_token_6_th ( 1 ) includes nonaccrual loans . ( 2 ) net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and liabilities . the amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities and the interest rate earned on those interest-earning assets compared to the interest rate paid on those interest-bearing liabilities . net interest margin is computed by dividing net interest income by total average earning assets . it is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets . to maintain its net interest margin , the company must manage the relationship between interest earned and paid . ( 3 ) net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities . ( 4 ) certain amounts have been reclassified to conform to the current year presentation . 18 index replace_table_token_7_th ( 1 ) includes nonaccrual loans . ( 2 ) net interest income is the difference between the interest and fees earned on loans and investments and the interest expense paid on deposits and liabilities . the amount by which interest income will exceed interest expense depends on the volume or balance of earning assets compared to the volume or balance of interest-bearing deposits and liabilities and the interest rate earned on those interest-earning assets compared to the interest rate paid on those interest-bearing liabilities .. net interest margin is computed by dividing net interest income by total average earning assets . it is used to measure the difference between the average rate of interest earned on assets and the average rate of interest that must be paid on liabilities used to fund those assets . to maintain its net interest margin , the company must manage the relationship between interest earned and paid . ( 3 ) net interest spread represents average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities . ( 4 ) certain amounts have been reclassified to conform to the current year presentation . 19 index the table below sets forth the relative impact on net interest income of changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the company on such assets and liabilities . for purposes of this table , nonaccrual loans have been included in the average loan balances . replace_table_token_8_th ( 1 ) changes due to both volume and rate have been allocated to volume changes . comparison of interest income , interest expense and net interest margin the company 's primary source of revenue is interest income . interest income for the year ended december 31 , 2013 was $ 27.9 million a decrease from $ 31.4 million and $ 36.5 million , respectively for the years ended december 31 , 2012 and 2011. the majority of the declines in interest income resulted from lower average earning assets and decreased yields in 2013 compared to 2012 and 2011. the decrease in average earning assets was the result of strategic planning to reduce the balance sheet and problem assets . the yield on interest-earning assets for 2013 compared to 2012 and 2011 decreased to 5.34 % mostly due to decreased yields on loans . story_separator_special_tag the loans are serviced internally and are originated under one of two programs : fixed rate loans written for terms of 10 to 25 years ; and adjustable rate loans written for a terms of 25 to 30 years with the initial interest rates fixed for the first 5 or 10 years and then adjusting annually subject to caps and floors . heloc the bank provides lines of credit collateralized by residential real estate , home equity lines of credit ( “ heloc ” ) , for consumer related purposes . typically , helocs are collateralized by a second deed of trust . the combined loan-to-value , first trust deed and second trust deed , are not to exceed 75 % on all new helocs . other installment loans installment loans consist of automobile and general-purpose loans made to individuals . 26 index the following table sets forth the amount of loans outstanding by type of loan as of december 31 , 2013 that were contractually due in one year or less , more than one year and less than five years , and more than five years based on remaining scheduled repayments of principal . lines of credit or other loans having no stated final maturity and no stated schedule of repayments are reported as due in one year or less . the tables also present an analysis of the rate structure for loans within the same maturity time periods . actual cash flows from these loans may differ materially from contractual maturities due to prepayment , refinancing or other factors . replace_table_token_14_th at december 31 , 2013 , total loans consisted of 77.8 % with floating rates and 22.2 % with fixed rates . the following table presents total gross loans based on remaining scheduled contractual repayments of principal as of the periods indicated : replace_table_token_15_th concentrations of lending activities the company 's lending activities are primarily driven by the customers served in the market areas where the company has branch offices in the central coast of california . the company monitors concentrations within five broad categories : geography , industry , product , call code , and collateral . the company grants manufactured housing , commercial , sba , construction , real estate and consumer loans to customers through branch offices located in the company 's primary markets . the company 's business is concentrated in these areas and the loan portfolio includes significant credit exposure to the manufactured housing and commercial real estate markets of these areas . as of december 31 , 2013 and 2012 , manufactured housing comprised 36.3 % and 38.3 % , respectively of total loans . the company performs a monthly analysis of the manufactured housing loan portfolio which includes weighted average and stratification of various components of credit quality , including loan-to-value , borrower fico score , loan maturity , debt-to-income ratio , loan amount , mobile home age , mobile home park and location . this concentration is somewhat mitigated by the fact that the portfolio consists of 1,786 individual borrowers as of december 31 , 2013 in over 50 mobile home parks . the bank analyzes these concentrations on a quarterly basis and reports the risk related to concentrations to the board of directors . management believes the systems in place coupled with the diversity of the portfolios are adequate to mitigate concentration risk . as of december 31 , 2013 and 2012 , commercial real estate loans accounted for approximately 30.1 % and 27.3 % of total loans , respectively . approximately 62.2 % and 59.1 % of these commercial real estate loans were owner-occupied at december 31 , 2013 and 2012 , respectively . substantially all of these loans are secured by first liens with an average loan to value ratios of 48.5 % and 47.8 % at december 31 , 2013 and 2012 , respectively . the company was within established policy limits at december 31 , 2013 and 2012 . 27 index interest reserves interest reserves are generally established at the time of the loan origination as an expense item in the budget for a construction and land development loan . the company 's practice is to monitor the construction , sales and or leasing progress to determine the feasibility of ongoing construction and development projects . if , at any time during the life of the loan , the project is determined not to be viable , the company discontinues the use of the interest reserve and may take appropriate action to protect its collateral position via renegotiation and or legal action as deemed appropriate . at december 31 , 2013 , the company had five loans with an outstanding balance of $ 5.7 million with available interest reserves of $ 0.1 million . impaired loans a loan is considered impaired when , based on current information ; it is probable that the company will be unable to collect the scheduled payments of principal and or interest under the contractual terms of the loan agreement . factors considered by management in determining impairment include payment status , collateral value and the probability of collecting scheduled principal and or interest payments . loans that experience insignificant payment delays or payment shortfalls generally are not classified as impaired . management determines the significance of payment delays or payment shortfalls on a case-by-case basis . when determining the possibility of impairment , management considers the circumstances surrounding the loan and the borrower , including the length of the delay , the reasons for the delay , the borrower 's prior payment record and the amount of the shortfall in relation to the principal and interest owed . for collateral-dependent loans , the company uses the fair value of collateral method to measure impairment . all other loans are measured for impairment based on the present value of future cash flows . impairment is measured on a loan-by-loan basis for all loans in the portfolio . a

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liquidity liquidity is the ongoing ability to accommodate liability maturities and deposit withdrawals , fund asset growth and business operations , and meet contractual obligations through unconstrained access to funding at reasonable market rates . liquidity management involves forecasting funding requirements and maintaining sufficient capacity to meet the needs and accommodate fluctuations in asset and liability levels due to changes in our business operations or unanticipated events . the ability to have readily available funds sufficient to repay fully maturing liabilities is of primary importance to depositors , creditors and regulators . our liquidity , represented by cash and amounts due from banks , federal funds sold and non-pledged marketable securities , is a result of our operating , investing and financing activities and related cash flows . in order to ensure funds are available when necessary , on at least a quarterly basis , we project the amount of funds that will be required , and we strive to maintain relationships with a diversified customer base . liquidity requirements can also be met through short-term borrowings or the disposition of short-term assets . the company has federal funds borrowing lines at correspondent banks totaling $ 10 million . in addition , loans and securities are pledged to the fhlb providing $ 61.4 million in available borrowing capacity as of december 31 , 2013. loans and securities pledged to the frb discount window provided $ 123.9 million in borrowing capacity . as of december 31 , 2013 , there were no outstanding borrowings from the frb . 37 index the company has established policies as well as analytical tools to manage liquidity . proper liquidity management ensures that sufficient funds are available to meet normal operating demands in addition to unexpected customer demand for funds , such as high levels of deposit withdrawals or increased loan demand , in a timely and cost effective manner . the most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of core deposits . ultimately , public confidence is gained through profitable operations , sound credit quality and a strong capital position .

operating income as a percentage of sales for fiscal year 2015 was 1.5 percent compared to 3.0 percent for fiscal year 2014 . the decrease in operating income as a percentage of net sales was primarily due to a decrease in gross profit as discussed above . net income for fiscal year 2015 was $ 4.3 million or $ 0.38 per diluted share , as compared to net income of $ 7.6 million or $ 0.67 per diluted share for fiscal year 2014 . the decrease in net income for fiscal year 2015 as compared to fiscal year 2014 was primarily due to a decrease in sales from longstanding customers and an increase in interest expense , partially offset by the positive impact of the ayrshire acquisition . 19 we maintain a strong balance sheet with a current ratio of 2.1 and a debt to equity ratio of 0.43 . total cash provided by operating activities as defined on our cash flow statement was $ 7.7 million during fiscal year 2015 . we maintain sufficient liquidity for our expected future operations . as of june 27 , 2015 , we had $ 11.6 million outstanding on our revolving line of credit with wells fargo bank , n.a . as a result , $ 18.0 million remained available to borrow as of june 27 , 2015 . we believe cash flow from operations , our borrowing capacity , our accounts receivable sale program , and equipment lease financing should provide adequate capital for planned growth over the long term . results of operations comparison of the fiscal year ended june 27 , 2015 with the fiscal year ended june 28 , 2014 the following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales . the financial information and discussion below should be read in conjunction with the consolidated financial statements and notes contained in this annual report . replace_table_token_6_th net sales the increase in net sales from prior year was primarily driven by an approximate $ 124.6 million increase in revenue related to ayrshire and by an approximate $ 17.3 million increase in revenues related to new program wins , partially offset by an approximate $ 7.0 million decrease in revenue related to decreased demand from current customer programs and an approximate $ 6.3 million decrease in revenue related to program losses . the following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2015 and 2014 : replace_table_token_7_th we provide services to customers in a number of industries and produce a variety of products for our customers in each industry . as we continue to diversify our customer base and win new customers , we will continue to see a change in the industry concentrations of our revenue . sales to foreign locations outside the united states represented 30.4 percent and 35.3 percent of our total net sales in fiscal years 2015 and 2014 , respectively . 20 cost of sales total cost of sales as a percentage of net sales was 92.3 percent and 91.2 percent in fiscal years 2015 and 2014 , respectively . total cost of materials as a percentage of net sales was approximately 64.6 percent and 64.5 percent in fiscal years 2015 and 2014 , respectively . the change from year-to-year was relatively flat and resulted from an increase in material cost as a percentage of net sales from certain customers which were partially offset by the lower material costs as a percentage of net sales from ayrshire customers . production and support costs as a percentage of net sales were 27.7 percent and 26.7 percent in fiscal years 2015 and 2014 , respectively . the increase in fiscal year 2015 is primarily related to inefficiencies associated with ramping production of new products that resulted in higher than expected operating expenses during the first quarter of fiscal year 2015. we provide a reserve for obsolete and non-saleable inventories based on specific identification of inventory against current demand and recent usage . the amounts charged to expense for these inventories were approximately $ 0.5 million and $ 0.3 million in fiscal years 2015 and 2014 , respectively . we provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns . warranty expense is related to workmanship claims on keyboards and ems products . the amounts charged to expense are determined based on an estimate of warranty exposure . the net warranty expense was approximately $ 115,000 and $ 35,000 in fiscal years 2015 and 2014 , respectively . gross profit gross profit as a percentage of net sales was 7.7 percent and 8.8 percent in fiscal years 2015 , and 2014 , respectively . the 1.1 percentage point decrease in gross profit as a percentage of net sales during fiscal year 2015 as compared to fiscal year 2014 is primarily related to a 1.0 percentage point increase in certain overhead costs and a 0.1 percentage point increase in material costs . changes in gross profit margins reflect the impact of a number of factors that can vary from period to period , including product mix , start-up costs and efficiencies associated with new programs , product life cycles , sales volumes , capacity utilization of our resources , management of inventories , component pricing and shortages , end market demand for customers ' products , fluctuations in and timing of customer orders , and competition within the ems industry . these and other factors can cause variations in operating results . there can be no assurance that gross margins will not decrease in future periods . we took early pay discounts to suppliers that totaled approximately $ 1.5 million and $ 1.1 million in fiscal years 2015 and 2014 , respectively . story_separator_special_tag income taxes income tax expense includes u.s. and international income taxes and the provision for u.s. taxes on undistributed earnings of foreign subsidiaries not deemed to be permanently invested . we do not record u.s. tax liabilities on undistributed earnings of international subsidiaries that are deemed to be permanently reinvested . certain income and expenses are not reported in tax returns and financial statements in the same year . the tax effect of such temporary differences is reported as deferred income taxes . the deferred income taxes are classified as current or long-term based on the classification of the related asset or liability . the most significant areas involving management judgments include deferred income tax assets and liabilities , uncertain tax positions , and research and development tax credits . our estimates of the realization of the deferred tax assets related to our tax credits are based upon our estimates of future taxable income which may change . stock-based compensation stock-based compensation is accounted for according to financial accounting standards board ( fasb ) accounting standards codification ( asc ) 718 , compensation—stock compensation . asc 718 requires us to expense the fair value of employee stock options , stock appreciation rights and other forms of stock-based compensation . under the fair value recognition provisions of asc 718 , share-based compensation cost is estimated at the grant date based upon the fair value of the award and is recognized as expense ratably over the requisite service period of the award ( generally the vesting period ) . determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment , including estimating the expected life of the share-based award , the expected stock price volatility over the expected life of the share-based award and forfeitures . to determine the fair value of stock based awards on the date of grant we use the black-scholes option-pricing model . inherent in this model are assumptions related to expected stock price volatility , option life , risk-free interest rate and dividend yield . the risk-free interest rate is a less-subjective assumption as it is based on factual data derived from public sources . we use a dividend yield of zero as we have never paid cash dividends and have no intention to pay cash dividends in the foreseeable future . the expected stock price volatility and option life assumptions require a greater level of judgment . our expected stock-price volatility assumption is based upon the historical volatility of our stock which is obtained from public data sources . the expected life represents the weighted average period of time that share-based awards are expected to be outstanding , giving consideration to vesting schedules and historical exercise patterns . we determine the expected life assumption based upon the exercise and post-vesting behavior that has been exhibited historically , adjusted for specific factors that may influence future exercise patterns . if expected volatility or expected life were to increase , that would result in an increase in the fair value of our stock options which would result in higher compensation charges , while a decrease in volatility or the expected life would result in a lower fair value of our stock option awards resulting in lower compensation charges . we estimate forfeitures for all of our awards based upon historical experience of stock-based pre-vesting forfeitures . we believe that our estimates are based upon outcomes that are reasonably likely to occur . if actual forfeitures are higher than our estimates it would result in lower compensation expense and to the extent the actual forfeitures are lower than our estimate we would record higher compensation expense . impairment of long-lived assets long-lived assets , such as property , plant , and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . the recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset . if the carrying amount of an asset exceeds its estimated undiscounted future cash flows , an impairment charge would be recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset . 28 derivatives and hedging activity derivatives are recognized on the balance sheet at their estimated fair value . on the date a derivative contract is entered into , the company designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ( a “ cash flow ” hedge ) . the company does not enter into derivatives for speculative purposes . changes in the fair value of a derivative that qualifies as a cash flow hedge are recorded in “ accumulated other comprehensive income ” , until earnings are affected by the variability of cash flows . see note 11 of the company 's consolidated financial statements for additional information . long-term incentive compensation accrual long-term incentive compensation is recognized as expense ratably over the requisite service period of the award which is generally three years . the board of directors approve target performance measures for the three year period for each of the company 's officers and non-employee directors . performance measures are based on a combination of sales growth targets and return on invested capital targets . no cash awards will be made to participants if actual company performance does not exceed the minimum target performance measures . the calculation used to determine the necessary accrual uses a combination of actual results and projected results . we believe that our estimates are based upon outcomes that are reasonably likely to occur . these estimates and assumptions are based on historical results as well as future expectations . actual results could vary from

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capital resources and liquidity operating cash flow net cash provided by operating activities for fiscal year 2015 was $ 7.7 million compared to net cash provided by operating activities of $ 1.5 million and $ 29.3 million in fiscal years 2014 and 2013 , respectively . the working capital year-over-year change is primarily related to an $ 18.0 million increase in accounts payable , offset by a $ 14.7 million increase in inventory and a $ 2.1 million increase in accounts receivable after the $ 7.3 million impact of factoring . the working capital changes during fiscal year 2014 were primarily due to a $ 10.5 million increase in inventory , a $ 2.7 million increase in accounts receivable , partially offset by a $ 6.1 million increase in accounts payable . the working capital changes during fiscal year 2013 are primarily due to a $ 13.3 million decrease in inventory and a $ 13.6 million decrease in accounts receivable , which were partially offset by a $ 16.6 million decrease in accounts payable . accounts receivable fluctuates based on the timing of shipments , terms offered and collections . in addition , accounts receivable will fluctuate based upon the amount of accounts receivable sold under our trade accounts receivable purchase program . during fiscal year 2015 , we received cash proceeds of $ 7.3 million from accounts receivable sold to wfb , which are not included on our consolidated balance sheet . the company did not have the trade accounts receivable purchase program during fiscal year 2014 . we purchase inventory based on customer forecasts and orders , and when those forecasts and orders change , the amount of inventory may also fluctuate . accounts payable fluctuates with changes in inventory levels , volume of inventory purchases , negotiated supplier terms , and taking advantage of early pay discounts . investing cash flow cash flows used in investing activities were $ 48.1 million , $ 13.8 million , and $ 3.3 million in fiscal years 2015 , 2014 and 2013 , respectively .

the eos technology informs the entire surgical process by capturing a calibrated , full-body image in a standing ( weight-bearing ) position , enabling precise measurement of anatomical angles and dimensions . the resulting imaging drives a more accurate understanding of patient alignment during diagnosis , elevates the likelihood of surgical goal fulfillment by integrating a fully informed plan into surgery , and enables a post-operative assessment against the original surgical plan we believe the addition of eos imaging will advance our alphainformatix platform , providing capabilities in surgical planning , patient-specific implants , intraoperative alignment reconciliation , and other intraoperative functionalities resulting in a platform distinctively equipped to address the requirements of spine surgery . we expect the transaction to close in the third quarter of 2020. revenue and expense components the following is a description of the primary components of our revenues and expenses : revenues . we derive our revenues primarily from the sale of spinal surgery implants used in the treatment of spine disorders . spinal implant products include pedicle screws and complementary implants , interbody devices , plates , and tissue-based materials . our revenues are generated by our direct sales force and independent distributors . our products are requested directly by surgeons and shipped and billed to hospitals and surgical centers . currently , most of our business is conducted with customers within markets in which we have experience and with payment terms that are customary to our business . we may defer revenues until the time of collection if circumstances related to payment terms , regional market risk or customer history indicate that collectability is not certain . cost of revenues . cost of revenues consists of direct product costs , royalties , milestones and the amortization of purchased intangibles . our product costs consist primarily of direct labor , overhead , and raw materials and components . the product costs of 44 certain of our biologics products include the cost of procuring and processing human tissue . we incur royalties related to the technologies that we license from others and the pr oducts that are developed in part by surgeons with whom we collaborate in the product development process . amortization of purchased intangibles consists of amortization of developed product technology . research and development expenses . research and development expense consists of costs associated with the design , development , testing , and enhancement of our products . research and development expense also includes salaries and related employee benefits , research-related overhead expenses , fees paid to external service providers in both cash and equity , and costs associated with our scientific advisory board and executive surgeon panels . sales , general and administrative expenses . sales , general and administrative expense consists primarily of salaries and related employee benefits , sales commissions and support costs , depreciation of our surgical instruments , regulatory affairs , quality assurance costs , professional service fees , travel , medical education , trade show and marketing costs , insurance and legal expenses . litigation-related expenses . litigation-related expenses are costs incurred for our ongoing litigation , primarily with nuvasive , inc. transaction-related expenses . reflects the recognition of transaction expense incurred as part of the safeop acquisition . gain on settlement . gain on settlement consists of a gain of approximately $ 6.2 million for the year ended december 31 , 2018 as a result of the settlement agreement with elite medical holdings and pac 3 surgical , pursuant to which we made a cash payment of $ 0.4 million as the final and total compensation under the collaboration and related amendment . the gain reflects the reversal of accrued obligations previously recorded under the collaboration . restructuring expenses . restructuring expense consists of severance , social plan benefits and related taxes in connection with our ongoing cost rationalization efforts , including the termination of our manufacturing operations in california in 2017. other expense , net . other expense , net includes interest income , interest expense , gains and losses from foreign currency exchanges and other non-operating gains and losses . income tax benefit . income tax benefit from continuing operations primarily consists of release of the valuation allowance from the safeop acquisition , partially offset by state taxes . sale of international business on september 1 , 2016 , we completed the sale of our international distribution operations and agreements , including our wholly-owned subsidiaries in japan , brazil , australia , china and singapore and substantially all of the assets of our other sales operations in the united kingdom and italy , to an affiliate of globus ( “ globus transaction ” ) . following the closing of the globus transaction , we now operate in the u.s. market only and are restricted from marketing and selling our products in foreign markets pursuant to the terms and conditions , and for the time periods , set forth in the definitive documents related to the globus transaction . 45 results of operations the first table below sets forth our statements of operations data for the periods presented . our historical results are not necessarily indicative of the operating results that may be expected in the future . replace_table_token_1_th replace_table_token_2_th 46 year ended december 31 , 2019 compared to the year ended december 31 , 2018 total revenues . total revenues increased by $ 21.7 million , or 23.7 % , primarily due to sales growth from strategic distribution channels and new product launches . revenue from u.s. products increased by $ 24.6 million , or 29.4 % . story_separator_special_tag the present value of lease payments is determined by using the incremental borrowing rate for operating leases determined by using the incremental borrowing rate of interest that we would pay to borrow on a c ollateralized basis an amount equal to the lease payments in a similar economic environment . we applied the new guidance to our existing facility lease at the time of adoption and recognized a right-of-use asset of $ 2.4 million and operating lease liabilit y of $ 2.9 million , during the first period of adoption , and recorded a reversal of the previous deferred rent balance under the previous lease guidance of approximately $ 0.6 million . we entered into another facility lease for smaller office space during th e third quarter of 2019 and also applied this guidance to create an additional rou asset and operating lease liability . the two leases are presented together on the company 's consolidated balance sheet . rent expense for operating leases is recognized on a straight-line basis over the reasonably assured lease term based on the total lease payments and is included in research and development and general and administrative expenses in the statements of operations and comprehensive loss . valuation of intangible assets we assess the impairment of our intangible assets annually in december or whenever business conditions change and an earlier impairment indicator arises . this assessment requires us to make assumptions and judgments regarding the carrying value of these assets . these assets are considered to be impaired if we determine that their carrying value may not be recoverable based upon our assessment of certain events or changes in circumstances , including the following : a determination that the carrying value of such assets can not be recovered through undiscounted cash flows ; loss of legal ownership or title to the assets ; significant changes in our strategic business objectives and utilization of the assets ; or the impact of significant negative industry or economic trends . if the assets are considered to be impaired , the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets . significant management judgment is required in estimating the fair value of our intangible assets . warrants to purchase common stock warrants are accounted for in accordance with the applicable accounting guidance provided in asc 815 - derivatives and hedging as either derivative liabilities or as equity instruments depending on the specific terms of the agreements . liability-classified instruments are recorded at fair value at each reporting period with any change in fair value recognized as a component of change in fair value of derivative liabilities in the consolidated statements of operations . we estimate liability classified instruments using the black scholes model , which requires management to develop assumptions and inputs that have significant impact on such valuations . during each reporting period , we evaluate changes in facts and circumstances that could impact the classification of warrants from liability to equity , or vice versa . stock-based compensation we account for stock-based compensation under provisions which require that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period . the amount of expense recognized during the period is affected by subjective assumptions , including estimates of our future volatility , the expected term for our stock options , the number of options expected to ultimately vest , and the timing of vesting for our share-based awards . 53 we use a black-sc holes option-pricing model to estimate the fair value of our stock option awards . the calculation of the fair value of the awards using the black-scholes option-pricing model is affected by our stock price on the date of grant as well as assumptions regard ing the following : estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the award . our estimated volatility through december 31 , 2019 was based on our actual historical volatility . an increase in the estimated volatility would result in an increase to our stock-based compensation expense . the expected term represents the period of time that awards granted are expected to be outstanding . our estimated expected term through december 31 , 2019 was calculated using a weighted-average term based on historical exercise patterns and the term from option grant date to exercise for the options granted within the specified date range . an increase in the expected term would result in an increase to our stock-based compensation expense . the risk-free interest rate is based on the yield curve of a zero-coupon u.s. treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award . an increase in the risk-free interest rate would result in an increase to our stock-based compensation expense . the assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future . we use historical data to estimate the number of future stock option forfeitures . share-based compensation recorded in our consolidated statements of operations is based on awards expected to ultimately vest and has been reduced for estimated forfeitures . our estimated forfeiture rates may differ from our actual forfeitures which would affect the amount of expense recognized during the period . we account for stock option grants to non-employees under provisions which require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered . stock-based compensation expense of awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met . determining the likelihood and timing of achieving performance conditions is

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liquidity and capital resources at each reporting period , we evaluate whether there are conditions or events that raise substantial doubt about the company 's ability to continue as a going concern within one year after the date that the financial statements are issued . our evaluation entails analyzing prospective operating budgets and forecasts for expectations of cash needs and comparing those needs to the current cash and cash equivalent balances , and availability under existing credit facilities . we are required to make certain additional disclosures if it concludes substantial doubt exists and it is not alleviated by our plans or when those plans alleviate substantial doubt about the company 's ability to continue as a going concern . 48 we hav e experienced negative operating cash flows for all historical periods presented and we expect these losses to continue into the foreseeable future as we continue to incur costs related to the execution of our operating plan and introduction of new product s. our annual operating plan projects that existing working capital at december 31 , 2019 of $ 71.9 million ( including cash of $ 47.1 million ) , along with available draws on our working capital credit line with midcap and an additional $ 20 million in availabl e borrowings under our credit facility with squadron medical finance solutions llc ( “ squadron ” ) , allows us to fund our operations through at least one year subsequent to the date the financial statements are issued . as more fully described in note 5 , our existing credit agreements with midcap and squadron ( collectively , the “ current lenders ” ) include a financial covenant that requires the company to maintain a minimum cash balance of $ 5.0 million . the minimum cash covenant converts to a minimum fixed charge coverage ratio beginning april 30 , 2020. we expect that we will be unable to meet the fixed charge covenant at that time .

million under our amended and restated $ 1.35 billion revolving credit facility ( the “ryerson credit facility” ) as part of the funding of these transactions . industry and operating trends we purchase large quantities of metal products from primary producers and sell these materials in smaller quantities to a wide variety of metals-consuming industries . more than one-half of the metals products sold are processed by us by burning , sawing , slitting , blanking , cutting to length or other techniques . we sell our products and services to many industries , including industrial equipment manufacturing , industrial fabrication , electrical machinery production , transportation equipment manufacturing , heavy equipment manufacturing and oil and gas . revenue is recognized upon delivery of product to customers . the timing of shipment is substantially the same as the timing of delivery to customers given the proximity of our distribution sites to our customers . 27 sales , cost of materials sold , gross profit and operating expense control are the principal factors that impact our profitability : net sales . our sales volume and pricing is driven by market demand , which is largely determined by overall industrial production and conditions in specific industries in which our customers operate . sales prices are also primarily driven by market factors such as overall demand and availability of product . our net sales include revenue from product sales , net of returns , allowances , customer discounts and incentives . cost of materials sold . cost of materials sold includes metal purchase and in-bound freight costs , third-party processing costs and direct and indirect internal processing costs . the cost of materials sold fluctuates with our sales volume and our ability to purchase metals at competitive prices . increases in sales volume generally enable us both to improve purchasing leverage with suppliers , as we buy larger quantities of metals inventories , and to reduce operating expenses per ton sold . gross profit . gross profit is the difference between net sales and the cost of materials sold . our sales prices to our customers are subject to market competition . achieving acceptable levels of gross profit is dependent on our acquiring metals at competitive prices , our ability to manage the impact of changing prices and efficiently managing our internal and external processing costs . operating expenses . optimizing business processes and asset utilization to lower fixed expenses such as employee , facility and truck fleet costs which can not be rapidly reduced in times of declining volume , and maintaining low fixed cost structure in times of increasing sales volume , have a significant impact on our profitability . operating expenses include costs related to warehousing and distributing our products as well as selling , general and administrative expenses . the metals service center industry is generally considered cyclical with periods of strong demand and higher prices followed by periods of weaker demand and lower prices due to the cyclical nature of the industries in which the largest consumers of metals operate . however , domestic metals prices are volatile and remain difficult to predict due to its commodity nature and the extent which prices are affected by interest rates , foreign exchange rates , energy prices , international supply/demand imbalances , surcharges and other factors . 28 results of operations replace_table_token_9_th comparison of the year ended december 31 , 2014 with the year ended december 31 , 2013 net sales net sales increased 4.7 % to $ 3.6 billion in 2014 as compared to $ 3.5 billion in 2013. average selling price increased 5.4 % while tons sold decreased 0.7 % reflecting stable economic conditions in the metals market in 2014 compared to 2013. the average selling price per ton increased in 2014 to $ 1,790 from $ 1,698 in 2013. average selling prices per ton increased for most of our product lines in 2014 with the largest increase in our stainless steel plate , carbon steel plate and carbon steel flat product lines . tons sold in 2014 decreased for our carbon steel flat and aluminum long product lines , offset by increased tons sold for our aluminum sheet and aluminum plate product lines . tons sold per ship day were 8,032 in 2014 as compared to 8,087 in 2013. cost of materials sold cost of materials sold increased 6.5 % to $ 3.0 billion in 2014 compared to $ 2.8 billion in 2013. the increase in cost of materials sold in 2014 compared to 2013 was primarily due to an increase in the average cost of materials sold per ton . the average cost of materials sold per ton increased to $ 1,497 in 2014 from $ 1,396 in 2013. the average cost of materials sold for our carbon steel flat , carbon steel plate and stainless steel flat product lines increased more than our other products , in line with the change in average selling price per ton . during 2014 , lifo expense was $ 42 million related to increases in pricing for all product lines . during 2013 , lifo income was $ 33 million related to decreases in pricing for all product lines . 29 gross profit gross profit as a percentage of sales decreased to 16.4 % in 2014 compared to 17.8 % in 2013 due to , among other things , an increase in cost of materials sold , as discussed above . story_separator_special_tag on december 17 , 2014 , ryerson inc. merged with and into jt ryerson , with jt ryerson as the surviving corporation . jt ryerson assumed all debts , obligations , and liabilities of ryerson , including all obligations and liabilities of ryerson with respect to the 2017 and 2018 notes . the 2017 notes bear interest at a rate of 9 % per annum . the 2018 notes bear interest at a rate of 11.25 % per annum . the 2017 notes are fully and unconditionally guaranteed on a senior secured basis and the 2018 notes are fully and unconditionally guaranteed on a senior unsecured basis by all of our existing and future domestic subsidiaries that are co-borrowers or guarantee obligations under the ryerson credit facility . the 2017 notes and related guarantees are secured by a first-priority lien on substantially all of our and our guarantors ' present and future assets located in the united states ( other than receivables , inventory , related general intangibles , certain other assets and proceeds thereof ) , subject to certain exceptions and customary permitted liens . the 2017 notes and related guarantees are secured on a second-priority basis by a lien on the assets that secure our obligations under the ryerson credit facility . the 2018 notes are not secured . the 2017 and 2018 notes contain customary covenants that , among other things , limit , subject to certain exceptions , our ability , and the ability of our restricted subsidiaries , to incur additional indebtedness , pay dividends on our capital stock or repurchase our capital stock , make investments , sell assets , engage in acquisitions , mergers or consolidations or create liens or use assets as security in other transactions . subject to certain exceptions , jt ryerson may only pay dividends to ryerson holding to the extent of 50 % of future net income , once prior losses are offset . the 2017 notes will become redeemable by the company , in whole or in part , at any time on or after april 15 , 2015 ( the “2017 redemption date” ) and the 2018 notes will become redeemable , in whole or in part , at any time on or after october 15 , 2015 ( the “2018 redemption date” ) , in each case at specified redemption prices . the 2017 and 2018 notes are redeemable prior to such dates , as applicable , at a redemption price equal to 100 % of the principal amount , together with accrued and unpaid interest , if any , to the redemption date , plus a make-whole premium . additionally , we may redeem up to 35 % of each of the 2017 and 2018 notes prior to the 2017 redemption date or 2018 redemption date , as applicable , with net cash proceeds from certain equity offerings at a price equal to ( a ) 109.000 % , with respect to the 2017 notes and ( b ) 111.250 % , with respect to the 2018 notes , of the principal amount thereof , plus any accrued and unpaid interest . on august 13 , 2014 , ryerson holding completed an initial public offering of 11 million shares of common stock at a price to the public of $ 11.00 per share . net proceeds from the offering were used to redeem $ 99.5 million in aggregate principal amount of the 2018 notes and pay redemption premiums of $ 11.2 million , which were recorded within other income and ( expense ) , net . as of december 31 , 2014 , $ 200.5 million of the original outstanding principal amount of the 2018 notes remain outstanding . if a change of control occurs , jt ryerson must offer to purchase the 2017 and 2018 notes at 101 % of their principal amount , plus accrued and unpaid interest . pursuant to registration rights agreements relating to the 2017 and 2018 notes , we agreed to file with the sec by july 7 , 2013 , registration statements with respect to offers to exchange each of the 2017 and 2018 notes for new issues of our debt securities registered under the securities act , with terms substantially identical to those of the 2017 and 2018 notes and to consummate such exchange offers no later than october 5 , 2013. ryerson completed the exchange offer on september 10 , 2013. as a result of completing the exchange offer , ryerson satisfied its obligation under the registration rights agreements covering each of the 2017 and 2018 notes . 35 ryerson holding notes as of november 1 , 2012 , all of the ryerson holding notes were repurchased or redeemed and cancelled . the company recorded a $ 15.6 million loss on the repurchase and cancellation of debt related to the ryerson holding notes within other income and ( expense ) , net on the consolidated statements of operations . 2014 and 2015 notes as of november 1 , 2012 , all of the ryerson notes were repurchased or redeemed and cancelled . the company recorded a $ 17.2 million loss on the repurchase and cancellation of debt related to the ryerson notes within other income and ( expense ) , net on the consolidated statements of operations . foreign debt at december 31 , 2014 , ryerson china 's total foreign borrowings were $ 23.6 million , which were owed to banks in asia at a weighted average interest rate of 4.4 % and secured by inventory and property , plant and equipment . at december 31 , 2013 , ryerson china 's total foreign borrowings were $ 25.7 million , which were owed to banks in asia at a weighted average interest rate of 4.3 % and secured by inventory and property , plant and equipment . availability under the foreign credit lines was $ 12 million and $ 22 million at december 31

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liquidity and capital resources the company 's primary sources of liquidity are cash and cash equivalents , cash flows from operations and borrowing availability under the $ 1.35 billion revolving credit facility agreement ( as amended and restated , the “ryerson credit facility” ) that matures on the earlier of ( a ) april 3 , 2018 or ( b ) august 16 , 2017 ( 60 days prior to the scheduled maturity date of the 2017 notes ) , if the 2017 notes are then outstanding . its principal source of operating cash is from the sale of metals and other materials . its principal uses of cash are for payments associated with the procurement and processing of metals and other materials inventories , costs incurred for the warehousing and delivery of inventories and the selling and administrative costs of the business , capital expenditures , and for interest payments on debt . the following table summarizes the company 's cash flows : replace_table_token_10_th the company had cash and cash equivalents at december 31 , 2014 of $ 60.0 million , compared to $ 74.4 million at december 31 , 2013 and $ 71.2 million at december 31 , 2012. the company had $ 1,259 million , $ 1,295 million and $ 1,305 million of total debt outstanding , a debt-to-capitalization ratio of 111 % , 109 % and 129 % and $ 245 million , $ 234 million and $ 293 million available under the ryerson credit facility at december 31 , 2014 , 2013 and 2012 , respectively . the company had total liquidity ( defined as cash and cash equivalents , marketable securities and availability under the ryerson credit facility and foreign debt facilities ) of $ 328 million , $ 351 million and $ 406 million at december 31 , 2014 , 2013 and 2012 , respectively . total liquidity is not a u.s. generally accepted accounting principles ( “gaap” ) financial measure . we believe that total liquidity provides additional information for measuring our ability to fund our operations .

natural gas throughput midstream holdings must continually obtain additional supplies of natural gas to maintain or increase throughput on its systems . midstream holdings ' ability to maintain existing supplies of natural gas and obtain additional supplies is primarily impacted by its acreage dedication and the level of successful drilling activity by devon and , to a lesser extent , the acreage dedications with and successful drilling by other producers . items affecting comparability of midstream holdings ' financial results the historical financial results of the predecessor discussed below may not be comparable to midstream holdings ' future financial results for the following reasons : · the predecessor 's historical assets comprised all of devon 's u.s. midstream assets and operations . however , only its assets serving the barnett , cana-woodford and arkoma-woodford shales , as well as the 38.75 % economic interest in gulf coast fractionators , were contributed to midstream holdings in connection with the consummation of the merger . these assets generated approximately 96 % of the predecessor 's net income from continuing operations for year ended december 31 , 2013 . · midstream holdings has entered into new agreements with devon pursuant to which midstream holdings provides services under fixed-fee arrangements and no longer takes title to the natural gas gathered and processed or the ngls it fractionates . · the predecessor 's historical combined financial statements include u.s. federal and state income tax expense . due to midstream holdings ' status as a partnership , the 50 % interest in midstream holdings that is owned directly by the partnership will not be subject to u.s. federal income tax and certain state income taxes in the future . · all historical affiliated transactions related to midstream holdings ' continuing operations were net settled within its combined financial statements because these transactions related to devon and were funded by devon 's working capital . in the future , all of midstream holdings ' transactions will be funded by its working capital . this will impact the comparability of its cash flow statements , working capital analysis and liquidity discussion . general trends and outlook natural gas and ngl supply and demand midstream holdings ' gathering and processing operations are generally dependent upon natural gas production from devon 's upstream activity in its areas of operation . the significant decline in natural gas prices as a result of significant new supplies of domestic natural gas production has caused a related decrease in dry natural gas drilling by many producers in the united states . depressed oil and natural gas prices could affect production rates over time and levels of investment by devon and third parties in exploration for and development of new oil and natural gas reserves . in addition , there is a natural decline in production from existing wells that are connected to midstream holdings ' gathering systems . midstream holdings believes devon 's five-year minimum volume commitments substantially reduce midstream holdings ' volumetric risk over that period of time . after the expiration of these five-year minimum volume commitments , a material decline in the volume of natural gas that midstream holdings gathers and transports on its systems would result in a material decline in its total operating revenues and cash flows . although midstream holdings expects that devon will continue to devote substantial resources to the development of the barnett and cana-woodford shales , it has no control over this activity and devon has the ability to reduce or curtail such development at its discretion . rising operating costs and inflation the current level of exploration , development and production activities across the united states has resulted in increased competition for personnel and equipment . this competition has caused , and midstream holdings believes it will continue to cause , increases in the prices it pays for labor , supplies and property , plant and equipment . an increase in the general level of prices in the economy could have a similar effect on the operating costs midstream holdings incurs . midstream holdings will 45 attempt to recover increased costs from its customers , but there may be a delay in doing so or it may be unable to recover all these costs . to the extent midstream holdings is unable to procure necessary supplies or recover higher costs , its operating results will be negatively impacted . regulatory compliance the regulation of natural gas gathering and transportation activities by ferc and other federal and state regulatory agencies , including the dot , has a significant impact on midstream holdings ' business . for example , phmsa has established pipeline integrity management programs that require more frequent inspections of pipeline facilities and other preventative measures , which may increase midstream holdings ' compliance costs and increase the time it takes to obtain required permits . additionally , increased regulation of oil and natural gas producers , including regulation associated with hydraulic fracturing , could reduce regional supply of oil and natural gas and therefore throughput on midstream holdings ' gathering systems . results of predecessor 's operations the following schedule presents the predecessor 's historical combined key operating and financial metrics . replace_table_token_7_th since 2011 , operating margin has consistently improved as a result of production growth . the largest contributors to rising production have been midstream holdings ' cana , bridgeport rich , and acacia systems , with daily throughput growth of 83 % , 6 % , and 6 % , respectively , from 2011 to 2013. this growth is the result of devon and other producers developing liquids-rich natural gas production in the cana-woodford and barnett shales . however , overall growth has been limited by throughput declines for the predecessor 's other systems , which are the result of natural gas price decreases . story_separator_special_tag this formula uses an equal weighting of revenues , employee compensation and gross property , plant and equipment balances to determine amounts to be allocated to midstream holdings and other devon affiliates . these cost allocations are affected by the amount of costs devon incurs for its centralized overhead and operating activities and the allocation methodologies chosen . determining the amount of costs devon incurs for its centralized overhead and operating activities generally does not require significant judgment by management because such costs are readily identifiable . although there are a number of alternative methodologies for allocating devon 's centralized overhead and operating costs , management believes the allocation methodologies used are based on assumptions that are reasonable . however , if certain costs were allocated using different methodologies , midstream holdings ' profitability and financial condition could change significantly . depreciation of property , plant and equipment midstream holdings ' depreciation calculations include estimates of salvage value and useful lives . as estimates of salvage values decrease , the amount of depreciation recognized in successive periods and over the estimated useful life of pp & e increases . midstream holdings estimates salvage values to be near zero at the end of the asset 's useful life . similar to salvage value estimates , as estimates of useful lives decrease , the amount of depreciation recognized in successive periods increases . however , useful life estimates have no impact on the amount of depreciation recognized over the life of pp & e . for assets subject to the straight-line method of calculating depreciation , midstream holdings utilizes estimated useful lives ranging from three to 25 years . these estimates are based on the historical usage of similar assets . for assets subject to the units-of-production basis of calculating depreciation , useful lives are estimated based on proved oil , natural gas and ngl reserve estimates from the fields being serviced by those assets . estimates of reserves are forecasts based on engineering data , projected future rates of production and the timing of future expenditures . the process of estimating oil , natural gas and ngl reserves requires substantial judgment , resulting in imprecise determinations , particularly for new discoveries . different reserve engineers may make different estimates of reserve quantities based on the same data . however , based on historical experience , such differences are not expected to be material . 49 impairment of property , plant & equipment midstream holdings evaluates property , plant & equipment ( pp & e ) for potential impairment annually and more frequently when events or changes in circumstances indicate that the carrying amount of midstream holdings ' pp & e may not be recoverable from estimated future cash flows . midstream holdings determines pp & e fair values from estimated discounted future net cash flows . the estimated cash flows can be significantly affected by the inputs used in the calculations , such as future throughput volumes , natural gas and ngl prices , operating costs , useful lives and discount rates . different assumptions and judgments could be used to determine the cash flow inputs . there are also alternative valuation techniques that could be used to estimate fair value . there are a number of inter-related inputs that can affect discounted cash flows . due to the number of inter-related inputs , it is impractical to provide specific quantitative analyses of potential changes in these estimates . however , general analyses can be provided for the most significant inputs which include current and projected throughput and current and projected natural gas and ngl prices . as such inputs decrease , the cash flows will generally change in a like manner and would increase the likelihood of a pp & e impairment charge . a pp & e impairment would have no direct effect on midstream holdings ' operating margin or liquidity . however , it would adversely affect midstream holdings ' net income . goodwill valuation midstream holdings has one reporting unit with goodwill , which requires management to estimate the fair value of the reporting unit and evaluate goodwill for potential impairment . midstream holdings tests goodwill annually in the fourth quarter of each year and more frequently when an event occurs or circumstances change that would more likely than not reduce the fair value of midstream holdings ' reporting unit below its carrying amount . because quoted market prices are not available for midstream holdings ' reporting unit , midstream holdings estimates its fair value using valuation analyses based on values of comparable companies and comparable transactions . in a comparable companies analysis , midstream holdings reviews the public stock market trading multiples for selected publicly-traded midstream companies with comparable financial and operating characteristics . these characteristics are market capitalization , location of midstream operations and the characterization of such operations that are deemed to be similar to ours . in a comparable transactions analysis , midstream holdings reviews certain acquisition multiples for selected recent midstream company or asset package transactions . the fair value of midstream holdings ' reporting unit is then estimated by applying the average multiple determined from the two valuation techniques described above to current year projected cash flow . as these valuation multiples decrease , the estimated fair value of the reporting unit would decrease . as a result , the likelihood of a goodwill impairment charge would increase . there are a number of inter-related inputs which can affect the valuation multiples . due to the number of inter-related inputs , it is impractical to provide specific quantitative analyses of potential changes in these estimates . however , general analyses can be provided for the most significant inputs which include current and projected throughput and current and projected natural gas and ngl prices . as such inputs decrease , the trading multiples will generally change in a like manner and would increase the likelihood of a goodwill impairment charge . a

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liquidity and capital resources midstream holdings ' sources and uses of cash the following schedule presents midstream holdings ' sources and uses of cash : replace_table_token_12_th 50 midstream holdings ' sources and uses of cash—continuing operations . operating cash flow has been a significant source of liquidity . generally , operating cash flow will increase or decrease due to the same factors that cause increases and decreases in operating margin . consequently , changes in operating cash flow since 2011 are primarily driven by the fluctuations in volume and price described previously in results of operations . historically , operating cash flow has been used to fund capital expenditures . since 2011 , the predecessor completed several capital expansion activities , including the expansions of the cana system and barnett assets in 2013. because midstream holdings ' continuing operations had no separate cash accounts , the owner contributions and distributions represent the net amount of all transactions that were settled with adjustments to equity . other , net uses and sources since 2011 largely pertain to the predecessor 's equity investment in gulf coast fractionators . during the years ended december 31 , 2012 and 2011 , the predecessor made contributions related to this investment of $ 16.8 million and $ 21.1 million , respectively . midstream holdings ' sources and uses of cash—discontinued operations . operating cash flow has decreased since 2011 largely due to declining throughput resulting from asset divestitures . in 2013 , the predecessor sold its controlling interest in its assets and operations located in wyoming for approximately $ 148 million . in 2012 , the predecessor sold the west johnson county system for $ 87 million . the predecessor also received proceeds in 2013 and 2010 for other minor divestitures . these divestitures also contributed to the general decline in capital expenditures since 2011. during the years ended 2013 and 2011 , the predecessor made cash distributions to non-controlling interests of $ 2.9 million , $ 5.4 million , respectively . during the year ended 2012 , the predecessor received cash contributions from non-controlling interests of $ 2.3 million , respectively .

gross margin from services in 2020 covered 6 % of our total operating costs and expenses in 2020. gross profit from services was 39 % higher in 2020 than in 2019 due to the revenues generated through covid-19 testing that began at the end of may 2020. covid-19 testing is a relatively new business activity , and 96 % of covid-19 testing revenues in 2020 were obtained under 30-day renewable testing agreements with multiple nursing home and pharmacy facilities in the state of new york controlled by a single company . on march 26 , 2021 , we were advised by the company that controls the new york nursing homes and pharmacy facilities we service that the state of new york is allowing on-site employee testing and that on-site testing will be implemented for the new york facilities we service , which will likely have the effect of substantially diminishing our revenues from covid-19 testing after the first quarter of 2021. we are a relatively unknown testing laboratory , so we have relied on word of mouth and management relationships to connect with prospects and vied for new business on the basis of price and service , and we can not predict how well this marketing approach will work in finding new customers for arches ' testing services . even if we are able to find new customers for the covid-19 testing business there remain substantial uncertainties around the covid-19 testing business due to rapid developments in testing and vaccines . our net losses may fluctuate significantly from quarter-to-quarter and year-to-year , depending upon the timing of our clinical trials and our expenditures for satisfying all the conditions of obtaining fda market approval for skinte . cash used to fund operating expenses is impacted by the timing of when we pay these expenses , as reflected in the change in our accounts payable and accrued research and development and other current liabilities . recent developments capital formation we raised capital in december 2020 and january 2021 to fund our operations . we previously reported in november 2020 that at september 30 , 2020 , our cash and cash equivalents totaled $ 23.186 million , which would not be adequate to fund our operations beyond the first quarter of 2021. we embarked on a plan to raise capital to fund our operations that began with a restructuring in november 2020 of warrants sold in a public offering in february 2020 , which we believed had a chilling effect on our ability to attract institutional investors and depressed the public trading price of our common stock . 39 after the warrant restructuring we sold 5,450,000 shares of common stock , pre-funded warrants to purchase up to 5,238,043 shares of common stock ( with an exercise price of $ 0.001 ) , and accompanying common warrants to purchase up to 10,688,043 shares of common stock to a single healthcare-dedicated institutional investor in a registered direct offering . each common share and pre-funded warrant were sold together with a common warrant . the combined offering price of each common share and accompanying common warrant was $ 0.7485 and for each pre-funded warrant and accompanying common warrant was $ 0.7475. the pre-funded warrants were subsequently exercised in january 2021 and the net proceeds we received from the offering were $ 7.2 million . in january 2021 , the holder of the common warrants exercised all 10,688,043 warrants at an exercise price of $ 0.624 per share resulting in gross proceeds of $ 6.7 million . in exchange for the agreement of the holder to exercise those common warrants we issued to the holder new common stock purchase warrants at a price of $ 0.125 per new warrant to purchase up to 8,016,033 shares of common stock at an exercise price of $ 1.20 per share . gross proceeds from the sale of the new warrants was $ 1.0 million . also in january 2021 we sold to the same institutional investor who participated in the december registered direct offering 6,670,000 shares of common stock , pre-funded warrants to purchase up to 2,420,910 shares of common stock ( with an exercise price of $ 0.001 ) , and accompanying common warrants to purchase up to 9,090,910 shares of common stock in another registered direct offering . each common share and pre-funded warrant were sold together with a common warrant . the combined offering price of each common share and accompanying common warrant was $ 1.10 and for each pre-funded warrant and accompanying common warrant was $ 1.099. the pre-funded warrants were subsequently exercised so the gross proceeds of the offering were $ 10.0 million . the common warrants sold in the registered direct offering have an exercise price of $ 1.20 per share . we believe this capital infusion from the foregoing offerings will enable us to fund our ind filing and the start of at least two clinical trials under the bla for skinte . business effects of covid-19 the current covid-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees , patients , clinicians , communities , and business operations , as well as the u.s. economy and financial markets . the full extent to which the covid-19 pandemic will directly or indirectly impact the timing and cost of pursuing fda approval of skinte under a bla is highly uncertain and can not be accurately predicted . we will need to engage contract research organizations ( “ cros ” ) for our future clinical trials and the covid-19 pandemic and response efforts may have an impact on the ability of cros to timely perform the trials we need for skinte . we saw a decrease in skinte cases in march 2020 and procedures scheduled for april 2020 postponed or not being scheduled , which was a trend we expected would continue and adversely affect our results of operations . story_separator_special_tag as a result of our decision to file an ind for skinte and the disturbing trend in skinte cases , in may 2020 we reduced our workforce within our regenerative medicine business segment , which is engaged primarily in the commercialization of skinte . we also refocused our commercialization effort on the territories where we have current and repeat users of skinte , and this new focus resulted in a quarter over quarter increase in the average wound size treated and a concomitant increase in revenues , which we did not expect . in the contract services segment covid-19 had a significant adverse effect on pre-clinical research business from march through the end of 2020 , so we expected our contract services business would also suffer as a result of covid-19 . however , we unexpectedly received inquiries in april 2020 from third parties acquainted with our management team regarding our laboratory and its ability to perform covid-19 testing , which we attribute to the surge in covid-19 testing throughout the united states and what we believe to be a lack of laboratory testing capacity to meet the surging demand . management evaluated arches ' resources and found that it has the capability of performing molecular polymerase chain reaction testing for covid-19 . management decided that covid-19 testing offered an opportunity to use existing resources to generate additional revenue in the contract services segment and thereby help defray our operating expenses . we began providing covid-19 testing services at the end of may 2020 , and from then to the end of 2020 covid-19 testing generated $ 4.3 million in net revenues . these developments notwithstanding , there is great uncertainty around the covid-19 pandemic that makes it impossible to accurately predict how the pandemic may directly or indirectly impact our business , results of operations , liquidity , and financial condition 40 the covid-19 pandemic has caused us to modify our business practices including , but not limited to , curtailing or modifying employee travel , moving to partial remote work , and cancelling physical participation in meetings , events , and conferences . we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees , patients , clinicians , and business partners . the majority of our office-based employees have been working from home since march 2020 , while ensuring essential staffing levels to support our operations remain in place , including maintaining key personnel in our laboratories . story_separator_special_tag general and administrative expenses general and administrative expenses decreased by 56 % in 2020 to $ 27.557 million . in addition to reductions in salary and benefits and stock compensation costs from 2019 , travel and related costs decreased to $ 0.243 million in 2020 from $ 1.318 million in 2019. expenses for our leased facilities were $ 2.094 million in 2020. lease expenses for our corporate office facility was $ 0.357 million in 2020 , which will not recur in 2021 because the lease expired in 2020. our lease expense for our manufacturing facility in utah was $ 1.251 million in 2020 , and we remain obligated under the terms of the lease for that facility until the end of november 2022. sales and marketing sales and marketing expenses decreased by 49 % in 2020 to $ 8.719 million . in addition to reductions in salary and benefits and stock compensation costs from 2019 , promotional consulting and expense was reduced to $ 0.834 million in 2020 from $ 5.270 in 2019 , and travel and related costs decreased to $ 0.444 million in 2020 from $ 1.440 million in 2019 . 42 restructuring and other charges we recorded $ 3.834 million in restructuring and other charges in 2020. the main components of the restructuring charges are capitalized costs in the amount of $ 0.518 million for the development of a vivarium project at our salt lake city facility we abandoned in 2020 , abandonment of equipment purchased in prior periods in the amount of $ 1.014 million , and severance payments in the amount of $ 1.025 million associated with the reduction of personnel in 2020. in addition , when we were pursuing an aggressive commercialization plan for skinte in 2019 we entered into a lease agreement for establishing a manufacturing node at the joseph m. still burn center in augusta , georgia . the node lease has a term of five years and a monthly base rent of $ 10,286. in 2020 we spent $ 0.606 million on node operations , including rent of $ 0.119 million . in the fourth quarter of 2020 we decided to abandon operations at the node , which resulted in the recognition of a charge in the amount of $ 1.175 million comprised of equipment , leasehold improvements , and a right of use asset . we continue to make payments on the lease for the node and are seeking opportunities to sublease the space . other income ( expense ) , net – change in fair value of common stock warrants we have issued and outstanding warrants classified as liabilities . the amount of the liabilities attributable to the warrants are remeasured as of the end of each fiscal quarter and adjusted accordingly through an increase or decrease recorded on our consolidated statement of operations for the period . at december 31 , 2020 , the total common stock warrant liability was $ 5.975 million reflecting a fair value change of $ 2.914 million under other income . critical accounting policies and estimates for a description of our significant accounting policies , see note 2 to our consolidated financial statements . revenue recognition . with respect to revenue recognition in contract services provided by ibex , revenues generally consist of a single performance obligation that ibex satisfies over time using an input method based on costs incurred to date relative to the total costs expected

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liquidity and capital resources as of december 31 , 2020 , we had $ 25.5 million in cash and cash equivalents , and working capital of approximately $ 22.7 million . in january 2021 , we raised an additional $ 17.7 million in gross proceeds before offering expenses in a registered direct offering and through a warrant exercise agreement . we believe the net revenues we generate internally together with the cash and cash equivalents on our balance sheet will fund our business activities through the end of 2021 and into the third quarter of 2022. in the fourth quarter of 2020 cash used in operating activities was $ 5.6 million , or an average of $ 1.9 million per month . after our ind is filed and then accepted by the fda , we will move to begin clinical trials as soon as possible . preliminary estimates indicate one clinical trial could cost approximately $ 5.0 million over two years , and we believe we will need to conduct at least two clinical trials for skinte . clinical trials are the major expense we see in the near and long term , and while we are pursuing clinical trials we will continue to incur the costs of maintaining our business . in addition to clinical trials , the most significant uses of cash to maintain our business going forward are compensation and costs of occupying our facilities . if we need to discontinue commercial sales of skinte , we will lose net revenues from the sale of skinte , but we will also focus on eliminating operating expenses related to the skinte service .

specifically , they entitle us to receive 13.0 % of all cash distributed in a quarter after each unit has received $ 0.25 for that quarter , 23.0 % of all cash distributed after each unit has received $ 0.3125 for that quarter and 48.0 % of all cash distributed after each unit has received $ 0.375 for that quarter . since we control the general partner interest in the partnership , we reflect our ownership interest in the partnership on a consolidated basis , which means that our financial results are combined with the partnership 's financial results and the results of our other subsidiaries . our consolidated results of operations are derived from the results of operations of the partnership and also include our deferred taxes , interest of non-controlling partners in the partnership 's net income , interest income ( expense ) and general and administrative expenses not reflected in the partnership 's results of operations . accordingly , the discussion of our financial position and results of operations in this “ management 's discussion and analysis of financial condition and results of operations ” primarily reflects the operating activities and results of operations of the partnership . the partnership primarily focuses on providing midstream energy services , including gathering , processing , transmission , fractionation , condensate stabilization , brine services and marketing , to producers of natural gas , ngls , crude oil and condensate . the partnership 's midstream energy asset network includes approximately 9,400 miles of pipelines , 16 natural gas processing plants , seven fractionators , 3.2 million barrels of ngl cavern storage , 19.1 bcf of natural gas storage , rail terminals , barge terminals , truck terminals and a fleet of approximately 150 trucks . the partnership manages and reports its activities primarily according to the nature of activity and geography . the partnership has five reportable segments : ( 1 ) texas , which includes the partnership 's natural gas gathering , processing and transmission activities in north texas and the permian basin in west texas ; ( 2 ) oklahoma , which includes the partnership 's natural gas gathering , processing and transmission activities in cana-woodford and arkoma-woodford shale areas ; ( 3 ) louisiana , which includes the partnership 's natural gas pipelines , 59 natural gas processing plants and ngl assets located in louisiana ; ( 4 ) crude and condensate , which includes the partnership 's ohio river valley ( “ orv ” ) crude oil , condensate and brine disposal activities in the utica and marcellus shales , its equity interests in e2 energy services , llc , e2 appalachian compression , llc and e2 ohio compression , llc ( collectively , “ e2 ” ) , its crude oil operations in the permian basin and its crude oil activities associated with the victoria express pipeline and related truck terminal and storage assets ( “ vex ” ) located in the eagle ford shale ; and ( 5 ) corporate , which includes the partnership 's unconsolidated affiliate investments in howard energy partners ( “ hep ” ) , in the eagle ford shale , its contractual right to the economic burdens and benefits associated with devon 's ownership interest in gcf in south texas and our general partnership property and expenses . the partnership manages its operations by focusing on gross operating margin because the partnership 's business is generally to gather , process , transport or market natural gas , ngls , crude oil and condensate using its assets for a fee . the partnership earns its fees through various contractual arrangements , which include stated fixed-fee contract arrangements or arrangements where the partnership purchases and resells commodities in connection with providing the related service and earns a net margin for its fees . while the partnership 's transactions vary in form , the essential element of each transaction is the use of its assets to transport a product or provide a processed product to an end-user at the tailgate of the plant , barge terminal or pipeline . the partnership defines gross operating margin as operating revenue minus cost of sales . gross operating margin is a non-gaap financial measure and is explained in greater detail under “ non-gaap financial measures ” under “ item 6. selected financial data . ” approximately 96 % of the partnership 's gross operating margin ( revenues less cost of sales ) was derived from fee-based services with no direct commodity exposure for the year ended december 31 , 2015. the partnership reflects revenue as “ product sales ” and “ midstream services ” on the consolidated statements of operations . the partnership 's gross operating margins are determined primarily by the volumes of natural gas gathered , transported , purchased and sold through its pipeline systems , processed at its processing facilities , the volumes of ngls handled at its fractionation facilities , the volumes of crude oil and condensate handled at its crude terminals , the volumes of crude oil and condensate gathered , transported , purchased and sold and the volume of brine disposed and the volume of condensate stabilized . the partnership generates revenues from seven primary sources : transporting natural gas and ngls on the pipeline systems it owns ; processing natural gas at its processing plants ; fractionating and marketing recovered ngls ; providing compression services ; providing crude oil and condensate transportation and terminal services ; providing condensate stabilization services ; and providing brine disposal services . the partnership typically gathers or transports gas owned by others through its facilities for a fee . the partnership also buys natural gas from a producer , plant or shipper at either a fixed discount to a market index or a percentage of the market index , then transports and resells the natural gas at the same market index . story_separator_special_tag the vex pipeline is a 60-mile multi-grade crude oil pipeline with a current capacity of approximately 90,000 bbls/d . other vex assets at the destination of the pipeline include an eight-bay truck unloading terminal , 200,000 barrels of above-ground storage and rights to barge loading docks . issuance of the partnership 's common units equity distribution agreement . in november 2014 , the partnership entered into an equity distribution agreement ( the “ bmo eda ” ) with bmo capital markets corp. and certain other sales agents to sell up to $ 350.0 million in aggregate gross sales of the partnership 's common units from time to time through an “ at the market ” equity offering program . the partnership may also sell common units to any sales agent as principal for the sales agent 's own account at a price agreed upon at the time of sale . the partnership has no obligation to sell any of the common units under the bmo eda and may at any time suspend solicitation and offers under the bmo eda . for the year ended december 31 , 2015 the partnership sold an aggregate of 1.3 million common units under the bmo eda , generating proceeds of approximately $ 24.4 million ( net of approximately $ 0.3 million of commissions ) . the partnership used the net proceeds for general partnership purposes . as of december 31 , 2015 , approximately $ 317.0 million of common units remain available to be issued under the bmo eda . private placement of common units . on october 29 , 2015 , the partnership issued 2,849,100 common units with an offering price of $ 17.55 per common unit to our subsidiary for aggregate consideration of approximately $ 50.0 million in a private placement transaction , which the partnership used for general partnership purposes . issuance of preferred units . on january 7 , 2016 , the partnership issued an aggregate of 50,000,000 series b cumulative convertible preferred units representing limited partner interests , ( the “ preferred units ” ) to enfield holdings , l.p. ( “ enfield ” ) in a private placement ( the “ private placement ” ) for a cash purchase price of $ 15.00 per preferred unit ( the “ issue price ” ) , resulting in net proceeds of approximately $ 725.3 million after fees and deductions . proceeds from the private placement were used to fund the tall oak acquisition . the preferred units are convertible into the partnership 's common units on a one-for-one basis , subject to certain adjustments , at any time after the record date for the quarter ending june 30 , 2017 ( a ) in full , at the partnership 's option , if the volume weighted average price of a common unit over the 30-trading day period ending two trading days prior to the conversion date ( the “ conversion vwap ” ) is greater than 150 % of the issue price or ( b ) in full or in part , at enfield 's option . in addition , upon certain events involving a change of control of the general partner or the managing member , all of the preferred units will automatically convert into a number of common units equal to the greater of ( i ) the number of common units into which the preferred units would then convert and ( ii ) the number of preferred units to be converted multiplied by an amount equal to ( x ) 140 % of the issue price divided by ( y ) the conversion vwap . 63 enfield will receive a quarterly distribution , subject to certain adjustments , equal to ( x ) during the quarter ending march 31 , 2016 through the quarter ending june 30 , 2017 , an annual rate of 8.5 % on the issue price payable in-kind in the form of additional preferred units and ( y ) thereafter , at an annual rate of 7.5 % on the issue price payable in cash ( the “ cash distribution component ” ) plus an in-kind distribution equal to the greater of ( a ) an annual rate of 1.0 % of the issue price and ( b ) an amount equal to ( i ) the excess , if any , of the distribution that would have been payable had the preferred units converted into common units over the cash distribution component , divided by ( ii ) the issue price . results of operations the table below sets forth certain financial and operating data for the periods indicated . we manage our operations by focusing on gross operating margin which we define as operating revenue less cost of purchased gas , ngls , condensate and crude oil as reflected in the table below . items affecting comparability of our financial results our historical financial results discussed below may not be comparable to our future financial results , and our historical financial results for the years ended december 31 , 2015 , 2014 and 2013 may not be comparable for the following reasons : in connection with the business combination , the partnership entered into new agreements with devon that were effective on march 1 , 2014 pursuant to which the partnership provides services to devon under fixed-fee arrangements in which the partnership does not take title to the natural gas gathered or processed or the ngls it fractionates . prior to the effectiveness of these agreements , the predecessor provided services to devon under a percent-of-proceeds arrangement in which it took title to the natural gas it gathered and processed and the ngls it fractionated . prior to march 7 , 2014 , our financial results only included the assets , liabilities and operations of our predecessor . beginning on march 7 , 2014 , our financial results also consolidate the assets , liabilities and operations of the legacy business of

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cash flows from investing activities . net cash used in investing activities was $ 1,097.3 million , $ 1,148.6 million and $ 243.2 million for the years ended december 31 , 2015 , 2014 and 2013 , respectively . our primary use of cash related to investing activities for the years ended december 31 , 2015 , 2014 and 2013 was acquisition costs and capital expenditures , net of accrued amounts , and an investment in unconsolidated affiliate investments as follows ( in millions ) : replace_table_token_14_th growth capital expenditures decreased $ 228.9 million for the year ended december 31 , 2015 as compared to the year ended december 31 , 2014. the decrease is primarily attributable to a decrease in capital expenditures of $ 281.2 million related to the partnership 's cajun sibon expansion project , which went into service in september 2014. this decrease is offset by an increase in capital expenditures of $ 46.7 million related to the partnership 's e2 and orv assets . growth capital expenditures increased $ 578.1 million for the year ended december 31 , 2014 as compared to the year ended december 31 , 2013. the increase is primarily attributable to the partnership 's cajun sibon expansion project and bearkat natural gas processing facility both of which went into service in september 2014. maintenance capital expenditures increased $ 5.2 million for the year ended december 31 , 2015 compared to the year ended december 31 , 2014. the increase is primarily attributable to compressor overhauls and repairs in the partnership 's texas and oklahoma segments .

18 we believe the web application development market in north america and europe is growing and fragmented . we believe established yet small web application development companies have the ability to market , sell and install our iapps product suite in their local metropolitan markets . we believe these companies also have a .net customer base and a niche presence in the local markets in which they operate . we believe there is an opportunity for us to acquire companies that specialize in web application development that are based in large north american cities in which we currently do not operate . we believe that by acquiring certain of these companies and applying our business practices and efficiencies , we can accelerate our time to market of the iapps product suite . we did not complete any acquisitions during the fiscal year ended september 30 , 2011. however , on october 3 , 2011 , we completed the acquisition of magnetic corporation ( “ magnetic ” ) , a tampa , florida based web technology company . the company acquired all of the outstanding capital stock of magnetic for consideration consisting of ( i ) $ 150 thousand in cash ( ii ) assumption of $ 130 thousand of indebtedness and ( iii ) contingent consideration of up to $ 600 thousand in cash and 166,666 shares of bridgeline digital common stock . the contingent consideration is payable quarterly over the 12 consecutive calendar quarters following the acquisition , contingent upon the acquired business achieving certain quarterly revenue and quarterly operating income targets during the period . the contingent common stock has been issued and is being held in escrow pending satisfaction of the applicable targets . to the extent that either the quarterly revenue targets or the quarterly operating income targets are not met in a particular quarter , the earn-out period will be extended for up to four additional quarters . we expect to make additional acquisitions in the foreseeable future . we believe these acquisitions are consistent with our iapps product suite distribution strategy and growth strategy by providing bridgeline with new geographical distribution opportunities , an expanded customer base , an expanded sales force and an expanded developer force . in addition , integrating acquired companies into our existing operations allows us to consolidate the finance , human resources , legal , marketing , research and development of the acquired businesses with our own internal resources , hence reducing the aggregate of these expenses for the combined businesses and resulting in improved operating results . customer information we had 532 customers at september 30 , 2011 and of these customers approximately 71 % paid us a recurring monthly subscription fee or a recurring monthly managed service fee . approximately 70 % of our customers in fiscal 2010 continued to be revenue generating customers in fiscal 2011 , demonstrating a deep customer traction model . summary of results of operations total revenue for the fiscal year ended september 30 , 2011 ( “ fiscal 2011 ” ) increased 11 % compared with total revenue for the fiscal year ended september 30 , 2010 ( “ fiscal 2010 ” ) . loss from operations for fiscal 2011 was ( $ 547 ) thousand compared with loss from operations of ( $ 239 ) thousand for fiscal 2010. we had a net loss for fiscal 2011 of ( $ 782 ) thousand compared with a net loss of ( $ 377 ) thousand for fiscal 2010. loss per share for fiscal 2011 was ( $ 0.06 ) compared with loss per share of ( $ 0.03 ) for fiscal 2010. in fiscal 2010 , we completed two acquisitions . we acquired tmx interactive , inc. ( now bridgeline philadelphia ) on may 11 , 2010 and e.magination network , llc . ( now bridgeline baltimore ) on july 09 , 2010. the results of operations for these two acquisitions are included in our results of operations from the date of acquisition . highlights of fiscal 2011 highlights of fiscal 2011 include the achievement of record revenues , record iapps license sales and key iapps product releases and updates : · in fiscal 2011 , bridgeline digital achieved record revenues of $ 26.3 million , an 11 % increase compared to fiscal 2010 . · in fiscal 2011 , bridgeline digital had a record number of iapps licenses sold within a fiscal year . the company sold 213 new iapps licenses during fiscal 2011 , a 47 % increase when compared to fiscal 2010 . · iapps version 4.6 – in the third quarter of fiscal 2011 , bridgeline released iapps version 4.6 providing multiple feature enhancements to iapps analyzer and various key updates to iapps content manager and iapps marketier . 19 replace_table_token_1_th 20 revenue our revenue is derived from three sources : ( i ) web application development services ( ii ) managed service hosting and ( iii ) subscription and perpetual licenses . total revenue for fiscal 2011 increased 11 % compared with total revenue for fiscal 2010. total revenue was $ 26.3 million for fiscal 2011 compared with $ 23.6 million for fiscal 2010. web application development services web application development services revenue is comprised of iapps development related services and other development related services generated from non iapps customers . revenue total from web application development increased $ 2.0 million , or 10 % to $ 21.9 million from $ 19.9 million for fiscal 2011 compared to fiscal 2010. the increases in web application development for fiscal 2011 compared to fiscal 2010 is primarily related to our acquisitions of tmx ( may 2010 ) and e.magination ( july 2010 ) completed in the last two quarters of fiscal 2010. also contributing to the increases are services engagements generated from sales of our iapps product . story_separator_special_tag effective for interim and annual periods ending after september 15 , 2009 , the financial accounting standards board ( “ fasb ” ) accounting standards codification ( the “ codification ” ) became the single source of authoritative nongovernmental us gaap . the company adopted the codification during the quarter ending september 30 , 2009. the adoption had no effect on the company 's consolidated financial statements . the preparation of financial statements in accordance us gaap requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses in the reporting period . we regularly make estimates and assumptions that affect the reported amounts of assets and liabilities . the most significant estimates included in our financial statements are the valuation of accounts receivable and long-term assets , including intangibles , goodwill and deferred tax assets , stock-based compensation , amounts of revenue to be recognized on service contracts in progress , unbilled receivables , and deferred revenue . we base our estimates and assumptions on current facts , historical experience and various other factors that we believe to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources . the actual results experienced by us may differ materially and adversely from our estimates . to the extent there are material differences between our estimates and the actual results , our future results of operations will be affected . we consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment : · revenue recognition ; 26 · allowance for doubtful accounts ; · accounting for cost of computer software to be sold , leased or otherwise marketed ; · accounting for goodwill and other intangible assets ; and · accounting for stock-based compensation . revenue recognition overview we enter into arrangements to sell web application development services ( professional services ) , software licenses or combinations thereof . revenue is categorized into ( i ) web application development services ( ii ) managed service hosting , and ( iii ) subscriptions and perpetual licenses . we recognize revenue as required by the revenue recognition topic of the codification . revenue is generally recognized when all of the following conditions are satisfied : ( 1 ) there is persuasive evidence of an arrangement ; ( 2 ) delivery has occurred or the services have been provided to the customer ; ( 3 ) the amount of fees to be paid by the customer is fixed or determinable ; and ( 4 ) the collection of the fees is reasonably assured . billings made or payments received in advance of providing services are deferred until the period these services are provided . during fiscal 2010 , we began to develop a reseller channel to supplement our direct sales force for our iapps product suite . we continued to develop this reseller channel in fiscal 2011. resellers are generally located in territories where we do not have a direct sales force . customers generally sign a license agreement directly with us . revenue from perpetual licenses sold through resellers is recognized upon delivery to the end user as long as evidence of an arrangement exists , collectability is probable , and the fee is fixed and determinable . revenue for subscription licenses is recognized monthly as the services are delivered . web application development services web application development services include professional services primarily related to the company 's web development solutions that address specific customer needs such as information architecture and usability engineering , interface configuration , application development , rich media development , back end integration , search engine optimization , and project management . web application development services are contracted for on either a fixed price or time and materials basis . for its fixed price engagements , after assigning the relative selling price to the elements of the arrangement , the company applies the proportional performance model ( if not subject to contract accounting ) to recognize revenue based on cost incurred in relation to total estimated cost at completion . the company has determined that labor costs are the most appropriate measure to allocate revenue among reporting periods , as they are the primary input when providing application development services . customers are invoiced monthly or upon the completion of milestones . for milestone based projects , since milestone pricing is based on expected hourly costs and the duration of such engagements is relatively short , this input approach principally mirrors an output approach under the proportional performance model for revenue recognition on such fixed priced engagements . for time and materials contracts , revenues are recognized as the services are provided . web application development services also include retained professional services contracted for on an “ on call ” basis or for a certain amount of hours each month . such arrangements generally provide for a guaranteed availability of a number of professional services hours each month on a “ use it or lose it ” basis . for retained professional services sold on a stand-alone basis we recognize revenue as the services are delivered or over the term of the contractual retainer period . these arrangements do not require formal customer acceptance and do not grant any future right to labor hours contracted for but not used . managed service hosting managed service hosting includes hosting arrangements that provide for the use of certain hardware and infrastructure for those customers who do not wish to host our applications independently . hosting agreements are either annual or month-to-month arrangements that provide for termination for convenience by either party generally upon 30-days notice .

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cash flows operating activities cash provided by operating activities was $ 823 thousand for the year ended september 30 , 2011 , compared to $ 1.5 million for fiscal 2010. this decrease in cash from operating activities is primarily attributable to lower net income for fiscal 2011 as compared with fiscal 2010 and an increase in accounts receivable . investing activities cash used in investing activities was $ 1.4 million for the year ended september 30 , 2011 compared to $ 5.5 million for fiscal 2010. this amount included expenditures for equipment and improvements of $ 618 thousand for the year ended september 30 , 2011 compared with $ 398 thousand for fiscal 2010 , and capitalized software development costs of $ 59 thousand for the year ended september 30 , 2011 as compared with $ 508 thousand in fiscal 2010. also included in investing activities for the twelve months ended september 30 , 2010 was net cash paid for the tmx and e.magination acquisitions of $ 3.1 million . there were no acquisitions completed in fiscal 2011. contingent acquisition payments were $ 696 thousand for the year ended september 30 , 2011 compared with $ 1.5 million for fiscal 2010. financing activities cash provided by financing activities was $ 34 thousand for the year ended september 30 , 2011 compared with cash provided of $ 3.9 million for fiscal 2010. the cash provided by financing activities for the year ended september 30 , 2011 was attributable to cash generated from the sale of common stock of $ 858 thousand and exercise of employee stock options of

on june 1 , 2015 , mac and csa entered into new dry-lease agreements with fedex with terms different from our prior dry-lease service contracts . the new dry-lease agreements provide for the lease of specified aircraft by mac and csa in return for the payment of monthly rent with respect to each aircraft leased , which monthly rent was increased from the prior dry-lease service contracts to reflect an estimate of a fair market rental rate . the new dry-lease agreements provide for the reimbursement by fedex of our costs , without mark up , incurred in connection with the operation of the leased aircraft for the following : fuel , landing fees , third-party maintenance , parts and certain other direct operating costs . unlike the prior dry-lease contracts , under the new dry-lease agreements , certain operational costs incurred by mac and csa in operating the aircraft under the new dry-lease agreements are not reimbursed by fedex at cost , and such operational costs are to be borne solely by us . under the new dry-lease agreements , mac and csa are required to perform maintenance of the leased aircraft in return for a maintenance fee based upon an hourly maintenance labor rate , which has been increased from the rate in place under the prior dry-lease service contracts and had not been adjusted since 2008. the new dry-lease agreements provide for the payment by fedex to mac and csa of a monthly administrative fee based on the number and type of aircraft leased and routes operated . the amount of the monthly administrative fee under the new dry-lease agreements is greater than under the prior dry-lease service contracts with fedex , in part to reflect the greater monthly lease payment per aircraft and that certain operational costs are to be borne by mac and csa and not reimbursed . 13 ggs manufactures and supports aircraft deicers and other specialized equipment on a worldwide basis . ggs manufactures five basic models of mobile deicing equipment with capacities ranging from 700 to 2,800 gallons . ggs also offers fixed-pedestal-mounted deicers . each model can be customized as requested by the customer , including single operator configuration , fire suppressant equipment , open basket or enclosed cab design , a patented forced-air deicing nozzle and on-board glycol blending system to substantially reduce glycol usage , color and style of the exterior finish . ggs also manufactures five models of scissor-lift equipment , for catering , cabin service and maintenance service of aircraft , and has developed a line of decontamination equipment , flight-line tow tractors , glycol recovery vehicles and other special purpose mobile equipment . ggs competes primarily on the basis of the quality , performance and reliability of its products , prompt delivery , customer service and price . in july 2009 , ggs was awarded a new contract to supply deicing trucks to the usaf , which expired in july 2014. on may 15 , 2014 , ggs was awarded a new contract to supply deicing trucks to the usaf . the initial contract award is for two years through july 13 , 2016 with four additional one-year extension options that may be exercised by the usaf . the value of the contract , as well as the number of units to be delivered , depends upon annual requirements and available funding to the usaf . in september 2010 , ggs was awarded a contract to supply flight-line tow tractors to the usaf . the contract award was for one year commencing september 28 , 2010 with four additional one-year extension options that may be exercised by the usaf . in august 2013 , the third option period under the contract was exercised , extending the contract to september 2014. because these contracts with the usaf do not obligate the usaf to purchase a set or minimum number of units , the value of these contracts , as well as the number of units to be delivered , depends upon the usaf 's requirements and available funding . at march 31 , 2015 , ggs 's backlog of orders was $ 2.8 million , compared to a backlog of $ 14.4 million at march 31 , 2014. ggs 's backlog at may 31 , 2015 was $ 6.3 million . gas provides the aircraft ground support equipment , fleet , and facility maintenance services . at march 31 , 2015 , gas was providing ground support equipment , fleet , and facility maintenance services to more than 75 customers at 54 north american airports . in march 2014 , the company formed space age insurance company ( “ saic ” ) , a captive insurance company licensed in utah , and initially capitalized with $ 250,000. saic insures risks of the company and its subsidiaries that were not previously insured by the company 's insurance programs ; and underwrites third-party risk through certain reinsurance arrangements . the activities of saic are included within the corporate results in the accompanying financial statements . fiscal 2015 summary revenues for our overnight air cargo segment totaled $ 49,865,000 for the year ended march 31 , 2015 , representing a $ 2,477,000 ( 5 % ) decrease over the prior year . revenues were down primarily as a result of a decrease in maintenance labor revenue due to the completion of two- , four- and eight-year heavy maintenance checks during the prior fiscal year which did not recur in fiscal 2015. in addition , the segment experienced a slight decrease in the administrative fee revenue and a reduction in reimbursement for flight crew costs due to fewer aircraft in full revenue service in fiscal 2015 , which was partially offset by a modest increase in other reimbursable costs . story_separator_special_tag the company had worked to reduce ggs 's seasonal fluctuation in revenues and earnings by increasing military and international sales and broadening its product line to increase revenues and earnings throughout the year . in july 2009 , ggs was awarded a new contract to supply deicing trucks to the usaf , which expired in july 2014. on may 15 , 2014 , ggs was awarded a new contract to supply deicing trucks to the usaf . the initial contract award is for two years through july 13 , 2016 with four additional one-year extension options that may be exercised by the usaf . the value of the contract , as well as the number of units to be delivered , depends upon annual requirements and available funding to the usaf . although ggs has retained the usaf deicer contract , recent orders under the contract have not been sufficient to offset the seasonal trend for commercial sales . as a result , ggs revenues and operating income have resumed their seasonal nature . the overnight air cargo and ground support services segments are not susceptible to seasonal trends . critical accounting policies and estimates the company 's significant accounting policies are more fully described in note 1 of notes to the consolidated financial statements in item 8. the preparation of the company 's consolidated financial statements in conformity with accounting principles generally accepted in the united states requires the use of estimates and assumptions to determine certain assets , liabilities , revenues and expenses . management bases these estimates and assumptions upon the best information available at the time of the estimates or assumptions . the company 's estimates and assumptions could change materially as conditions within and beyond our control change . accordingly , actual results could differ materially from estimates . the company believes that the following are its most significant accounting policies : allowance for doubtful accounts . an allowance for doubtful accounts receivable is established based on management 's estimates of the collectability of accounts receivable . the required allowance is determined using information such as customer credit history , industry information , credit reports , customer financial condition and the collectability of outstanding accounts receivables . the estimates can be affected by changes in the financial strength of the aviation industry , customer credit issues or general economic conditions . inventories . the company 's parts inventories are valued at the lower of cost or market . provisions for excess and obsolete inventories are based on assessment of the marketability of slow-moving and obsolete inventories . historical parts usage , current period sales , estimated future demand and anticipated transactions between willing buyers and sellers provide the basis for estimates . estimates are subject to volatility and can be affected by reduced equipment utilization , existing supplies of used inventory available for sale , the retirement of aircraft or ground equipment and changes in the financial strength of the aviation industry . 18 warranty reserves . the company warranties its ground equipment products for up to a three-year period from date of sale . product warranty reserves are recorded at time of sale based on the historical average warranty cost and are adjusted as actual warranty cost becomes known . income taxes . income taxes have been provided using the asset and liability method . deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases . deferred tax assets and liabilities are measured using enacted tax laws and rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . 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 . revenue recognition . cargo revenue is recognized upon completion of contract terms . maintenance and ground support services revenue is recognized when the service has been performed . revenue from product sales is recognized when contract terms are completed and ownership has passed to the customer . recent accounting pronouncements in may 2014 , a comprehensive new revenue recognition standard was issued that will supersede nearly all existing revenue recognition guidance . the new guidance introduces a five-step model in which an entity should 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 . this guidance also requires disclosures sufficient to enable users to understand the nature , amount , timing , and uncertainty of revenue and cash flows arising from contracts with customers , including qualitative and quantitative disclosures about contracts with customers , significant judgments and changes in judgments , and assets recognized from the costs to obtain or fulfill a contract . this guidance is effective for fiscal years beginning after december 15 , 2016 , including interim periods within that reporting period . management is currently evaluating the new guidance , including possible transition alternatives , to determine the impact it will have on the company 's consolidated financial statements . forward looking statements certain statements in this report , including those contained in “ overview , ” are “ forward-looking ” statements within the meaning of the private securities litigation reform act of 1995 with respect to the company 's financial condition , results of operations , plans , objectives , future performance and business . forward-looking statements include those preceded by , followed by or that include the words “ believes ” , “ pending ” , “ future ” , “ expects , ” “ anticipates , ” “ estimates , ” “ depends ” or similar expressions . these forward-looking statements involve risks and uncertainties . actual results may differ materially

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liquidity and capital resources as of march 31 , 2015 , the company held approximately $ 14.2 million in cash and cash equivalents . of this amount , $ 2,799,000 was invested in accounts not insured by the federal deposit insurance corporation ( “ fdic ” ) . as of march 31 , 2015 , the company 's working capital amounted to $ 30,425,000 , an increase of $ 8,292,000 compared to march 31 , 2014. as of march 31 , 2015 , the company had a $ 7,000,000 secured long-term revolving credit line with an expiration date of august 31 , 2016. the revolving credit line contained customary events of default , a subjective acceleration clause and a fixed charge coverage requirement , with which the company was in compliance at march 31 , 2015. at march 31 , 2015 , aggregate outstanding borrowings under the line of credit were $ 5,000,000. see note 7 in the consolidated financial statements , included elsewhere in this report , for further discussion . on april 1 , 2015 , the company replaced this credit line with a senior secured revolving credit facility of $ 20.0 million ( the “ revolving credit facility ” ) . the revolving credit facility includes a sublimit for issuances of letters of credit of up to $ 500,000. under the revolving credit facility , each of the company , mac , csa , ggs and gas may make borrowings . initially , borrowings under the revolving credit facility bear interest ( payable monthly ) at an annual rate of one-month libor plus 1.50 % , although the interest rates under the revolving credit facility are subject to incremental increases based on a consolidated leverage ratio . in addition , a commitment fee accrues with respect to the unused amount of the revolving credit facility at an annual rate of 0.15 % .

we expect 2014 natural gas liquids prices will be range-bound and remain relatively flat compared to 2013. crude oil prices remained relatively stable throughout 2013 , and oil continues to be more valuable than natural gas on a relative energy-equivalent basis . as a result , we and other producers have been focused on growing oil production . north american crude oil supply continues to increase due to the continued use of horizontal drilling technology throughout the u.s. and expansions of heavy oil production operations primarily in canada . global crude oil demand is expected to grow with supply in 2014. as crude oil supply grows , transportation capacity to downstream markets will be increasingly important . bottlenecks and other transportation limitations may continue to add volatility among u.s. and canadian grades of oil . however , we expect 2014 oil prices will remain relatively consistent with 2013. we exited 2013 with a production profile comprised of roughly 55 percent natural gas , 25 percent oil , and 20 percent natural gas liquids . recognizing the relative value of crude oil , we are devoting the vast majority of our 2014 capital investment toward growing our oil production , particularly the sweet grades of oil found in the u.s. to make a significant shift in our production profile , we expect to complete a $ 6 billion acquisition of eagle ford shale assets in the first quarter of 2014 and divest non-core , dry natural gas assets throughout 2014. once these transactions are complete , we expect oil will represent more than 30 percent of our production profile . further enhancing the value of our assets , we are combining substantially all of our u.s. midstream assets with crosstex energy , inc. 's and crosstex energy , l.p. 's assets to form a new midstream business . the new business will consist of enlink midstream partners , l.p. ( the “partnership” ) and enlink midstream , llc ( “enlink” ) , a master limited partnership and a general partner entity , which will both be publicly traded entities . the new midstream business will own devon 's midstream assets in the barnett shale in north texas and the cana and arkoma woodford shales in oklahoma , as well as devon 's economic interest in gulf coast fractionators in mt . belvieu , texas . devon will own a 70 percent controlling interest in enlink and an approximate 53 percent controlling interest in the partnership . results of operations all amounts in this document related to our international operations are presented as discontinued . therefore , the production , revenue and expense amounts presented in this “results of operations” section exclude amounts related to our international assets unless otherwise noted . 26 oil , gas and ngl production replace_table_token_15_th 27 oil , gas and ngl pricing replace_table_token_16_th ( 1 ) prices presented exclude any effects due to oil , gas and ngl derivatives . commodity sales the volume and price changes in the tables above caused the following changes to our oil , gas and ngl sales . replace_table_token_17_th volumes 2013 vs. 2012 – upstream sales increased $ 625 million due to a 15 percent increase in our liquids production , partially offset by a 7 percent decline in our gas production . oil production was the largest driver of the increase , accounting for 85 percent of the higher sales . largely due to continued development of our properties in the permian basin , the mississippian-woodford trend and the anadarko basin , our oil sales increased $ 531 million . bitumen sales increased $ 65 million due to development of our jackfish thermal heavy oil projects in canada . additionally , our ngl sales increased $ 181 million as a result of continued drilling in the liquids-rich gas portions of the barnett shale and the anadarko basin . these increases were partially offset by a 7 percent decrease in our 2013 gas production , resulting in a $ 152 million decline in sales . volumes 2012 vs. 2011 – upstream sales increased $ 695 million due to a 4 percent increase in production . oil and bitumen production were the largest drivers of the increase , accounting for nearly 90 percent of the higher sales . as a result of continued development of our liquids-rich properties in the permian basin , our oil 28 sales increased $ 337 million . bitumen sales increased $ 273 million due to development of our jackfish thermal heavy oil projects in canada . additionally , our ngl sales increased $ 137 million as a result of continued drilling in the liquids-rich gas portions of the barnett shale and the anadarko basin . these increases were partially offset by a slight decrease in our 2012 gas production , resulting in a $ 52 million decline in sales . prices 2013 vs. 2012 – upstream sales increased $ 744 million due to an 18 percent increase in our realized price without hedges . our gas sales were the most significantly impacted with a $ 639 million increase in sales . the change in our gas price was largely due to higher north american regional index prices upon which our gas sales are based . our liquid sales increased $ 105 million due to higher oil and bitumen sales partially offset by lower ngl sales . the largest contributors to the higher liquids prices were an increase in the average nymex west texas intermediate index price and a slightly higher bitumen realized price , partially offset by lower ngl prices at the mont belvieu , texas hub . prices 2012 vs. 2011 – upstream sales decreased $ 1.9 billion due to a 17 percent decrease in our realized price without hedges . our gas sales were the most significantly impacted with a $ 1.1 billion decrease in sales . story_separator_special_tag if we were to repatriate a portion or all of the cash held by our foreign subsidiaries , we would recognize and pay current income taxes in accordance with current u. s. tax law . the payment of such additional income tax would materially decrease the amount of cash and short-term investments ultimately available to fund our business . credit availability we have a $ 3.0 billion syndicated , unsecured revolving line of credit ( the “senior credit facility” ) that matures on october 24 , 2018. amounts borrowed under the senior credit facility may , at our election , bear interest at various fixed rate options for periods of up to twelve months . such rates are generally less than the prime rate . however , we may elect to borrow at the prime rate . as of december 31 , 2013 , we had $ 2.9 billion of available capacity under our syndicated , unsecured senior credit facility , net of letters of credit outstanding . the senior credit facility contains only one material financial covenant . this covenant requires us to maintain a ratio of total funded debt to total capitalization , as defined in the credit agreement , of no more than 65 percent . the credit agreement defines total funded debt as funds received through the issuance of debt securities such as debentures , bonds , notes payable , credit facility borrowings and short-term commercial paper borrowings . in addition , total funded debt includes all obligations with respect to payments received in consideration for oil , gas and ngl production yet to be acquired or produced at the time of payment . funded debt excludes our outstanding letters of credit and trade payables . the credit agreement defines total capitalization as the sum of funded debt and stockholders ' equity adjusted for noncash financial write-downs , such as full cost ceiling impairments . as of december 31 , 2013 , we were in compliance with this covenant . our debt-to-capitalization ratio at december 31 , 2013 , as calculated pursuant to the terms of the agreement , was 25.7 percent . our access to funds from the senior credit facility is not restricted under any “material adverse effect” clauses . it is not uncommon for credit agreements to include such clauses . these clauses can remove the obligation of the banks to fund the credit line if any condition or event would reasonably be expected to have a material and adverse effect on the borrower 's financial condition , operations , properties or business considered as a whole , the borrower 's ability to make timely debt payments , or the enforceability of material terms of the credit agreement . while our credit facility includes covenants that require us to report a condition or event having a material adverse effect , the obligation of the banks to fund the credit facility is not conditioned on the absence of a material adverse effect . we also have access to $ 3.0 billion of short-term credit under our commercial paper program . commercial paper debt generally has a maturity of between 1 and 90 days , although it can have a maturity of up to 365 days , and bears interest at rates agreed to at the time of the borrowing . the interest rate is generally based on a standard index such as the federal funds rate , libor , or the money market rate as found in the commercial paper market . as of december 31 , 2013 , we had $ 1.3 billion of borrowings under our commercial paper program . 39 debt ratings we receive debt ratings from the major ratings agencies in the u.s. in determining our debt ratings , the agencies consider a number of qualitative and quantitative items including , but not limited to , commodity pricing levels , our liquidity , asset quality , reserve mix , debt levels , cost structure , planned asset sales , near-term and long-term production growth opportunities and capital allocation challenges . our current debt ratings are bbb with a stable outlook by fitch , bbb+ with a negative outlook by standard & poor 's , and baa1 with a review for downgrade by moody 's . there are no “rating triggers” in any of our debt contractual obligations that would accelerate scheduled maturities should our debt rating fall below a specified level . our cost of borrowing under our senior credit facility is predicated on our corporate debt rating . therefore , even though a ratings downgrade would not accelerate scheduled maturities , it would adversely impact the interest rate on any borrowings under our senior credit facility . under the terms of the senior credit facility , a one-notch downgrade would increase the fully-drawn borrowing costs from libor plus 112.5 basis points to a new rate of libor plus 125 basis points . a ratings downgrade could also adversely impact our ability to economically access debt markets in the future . capital expenditures excluding our planned $ 6 billion eagle ford shale acquisition , our 2014 capital expenditures are expected to range from $ 6.4 billion to $ 6.9 billion , including $ 5.4 billion to $ 5.8 billion for our oil and gas operations , which include capitalized g & a and interest . to a certain degree , the ultimate timing of these capital expenditures is within our control . therefore , if commodity prices fluctuate from our current estimates , we could choose to defer a portion of these planned 2014 capital expenditures until later periods or accelerate capital expenditures planned for periods beyond 2014 to achieve the desired balance between sources and uses of liquidity . based upon current price expectations for 2014 , our existing commodity hedging contracts , available cash balances and credit availability , we anticipate having adequate capital resources to fund our 2014 capital expenditures . additionally , our financial and operational

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sources and uses of cash the following table presents the major source and use categories of our cash and cash equivalents . replace_table_token_31_th operating cash flow – continuing operations net cash provided by operating activities ( “operating cash flow” ) continued to be a significant source of capital and liquidity in 2013. our operating cash flow increased 10 percent during 2013 primarily due to higher commodity prices and production growth , partially offset by higher expenses . our operating cash flow decreased 21 percent during 2012 primarily due to lower commodity prices and higher expenses , partially offset by additional cash flow from our production growth and higher cash settlements from our commodity derivatives . during 2013 our operating cash flow funded approximately 80 percent of our cash payments for capital expenditures . leveraging our liquidity , we used cash balances , short-term debt and divestiture proceeds to fund the remainder of our cash-based capital expenditures . capital expenditures replace_table_token_32_th 36 our capital expenditures consist of amounts related to our oil and gas exploration and development operations , our midstream operations and other corporate activities . the vast majority of our capital expenditures are for the acquisition , drilling and development of oil and gas properties , which totaled $ 6.0 billion , $ 7.4 billion and $ 6.9 billion in 2013 , 2012 and 2011 , respectively . the 20 percent decline in exploration , development and acquisition capital spending in 2013 was primarily due to a decline in new venture acreage acquisitions and utilization of the drilling carries in 2013 from our sinopec and sumitomo joint venture arrangements . the higher exploration and development capital spending in 2012 and 2011 was primarily due to new venture acreage acquisitions and increased drilling and development . with rising oil prices and proceeds from our offshore divestitures , we increased our onshore north american acreage positions and associated exploration and development activities to drive near-term growth of our oil production .

we expect , over time , to fully integrate these acquisitions utilizing the trimas business model ( `` tbm `` ) , achieving planned synergies and improving margins . 29 while demand levels in certain end markets were strong , especially for health , beauty and home care products as well as commercial aircraft fastening products , sales of north american industrial-related products declined by nearly $ 20 million from prior year levels . in our specialty products segment , industrial sales were down approximately $ 13.8 million , with cylinder sales lower due to the impact of customer consolidation and inventory management , and sales of upstream oil and gas products lower due to reduced oilfield-related activity . in our packaging segment , industrial sales were down approximately $ 5.8 million due to lower demand levels . given this level of sales , operating profit levels were significantly impacted , primarily in our specialty products segment , which declined by 300 basis points year-over-year due to lower fixed cost absorption and higher conversion costs . while difficult to quantify , we believe demand levels , primarily in the packaging end markets , are being affected by uncertainties related to the direct and indirect impact of current and proposed tariffs and other restrictions on trade . an additional factor significantly impacting 2019 versus 2018 results of operations related to the termination of a legacy liability of approximately $ 8.2 million , which resulted in a non-cash reduction to corporate office selling , general and administrative expenses in 2018 that did not repeat in 2019. prior to 2002 , we were wholly-owned by metaldyne corporation ( `` metaldyne `` ) . in connection with the reorganization between trimas and metaldyne in june 2002 , we assumed certain liabilities and obligations of metaldyne , mainly comprised of contractual obligations to former trimas employees , tax-related matters , benefit plan liabilities and reimbursements to metaldyne of normal course payments to be made on trimas ' behalf . metaldyne and its u.s. subsidiaries filed voluntary petitions in the united states bankruptcy court under chapter 11 of the u.s. bankruptcy code in 2009. in january 2018 , the u.s. bankruptcy court entered a final decree to close all remaining cases and finalize the metaldyne bankruptcy distribution trust , effectively terminating any potential obligation by trimas to metaldyne . another factor impacting the 2019 versus 2018 results of operations was a $ 3.9 million non-cash reversal of a contingent liability in our packaging segment . this liability represented deferred purchase price for a prior acquisition , for which the underlying obligation expired during 2019. the remaining factor impacting the 2019 versus 2018 results of operations was our settlement of defined benefit obligations in 2018. in 2018 , we purchased an annuity contract to transfer certain retiree defined benefit obligations to an insurance company . the annuity contract was funded by plan assets . we recognized a one-time settlement charge of approximately $ 2.5 million , which is included in other income ( expense ) , net in the accompanying consolidated statement of income . additional key risks that may affect our reported results critical factors affecting our ability to succeed include : our ability to create organic growth through product development , cross-selling and extending product-line offerings , and our ability to quickly and cost-effectively introduce new products ; our ability to acquire and integrate companies or products that supplement existing product lines , add new distribution channels or customers , expand our geographic coverage or enable better absorption of overhead costs ; our ability to manage our cost structure more efficiently via supply base management , internal sourcing and or purchasing of materials , selective outsourcing and or purchasing of support functions , working capital management , and greater leverage of our administrative functions . our overall business does not experience significant seasonal fluctuation , other than our fourth quarter , which has tended to be the lowest net sales quarter of the year due to holiday shutdowns at certain customers or other customers deferring capital spending to the following year . given the shorter-cycle nature of most of our businesses , we do not consider sales order backlog to be a material factor . a growing amount of our sales is derived from international sources , which exposes us to certain risks , including currency risks . we are sensitive to price movements in our raw materials supply base . our largest material purchases are for resins ( such as polypropylene and polyethylene ) , steel , aluminum and other oil and metal-based purchased components . in mid 2018 , material costs began to rise , increasing through the remainder of 2018 , primarily as a direct and indirect result of foreign trade policy changes . these cost increases primarily related to oil and metal-based commodities . we took swift actions , and continue to take actions , to mitigate such cost impacts , including implementing commercial pricing adjustments , resourcing to alternate suppliers and insourcing of previously sourced products to better leverage our global manufacturing footprint . as a result of these actions , as well as softening of certain underlying commodity costs during 2019 , we largely mitigated the impact such that material costs were not a significant driver of year-over-year profit change . while higher material costs were not directly a significant driver of year-over-year profit change , certain of our packaging segment customers in the united states chose to resource their order requirements in 2019 to avoid tariffs or higher prices from tariffs , until , we believe , we are able to install capacity outside of countries subject to tariffs . story_separator_special_tag 35 year ended december 31 , 2018 compared with year ended december 31 , 2017 the principal factors impacting us during the year ended december 31 , 2018 compared with the year ended december 31 , 2017 were : increased sales levels across our end markets , primarily driven by higher demand for our industrial products within our specialty products reportable segment and from growth in our health , beauty and home care end market within our packaging reportable segment ; benefits of leveraging the tbm , as we continue to drive operating improvements , as well as evaluate , realign and streamline fixed costs and selling , general and administrative expenses ; the impact of the tax reform act , contributing to a lower overall effective tax rate ; higher commodity costs , primarily related to oil and steel-based raw materials , primarily impacting our packaging reportable segment ; the termination of the liability to metaldyne , resulting in an approximate $ 8.2 million reduction in selling , general and administrative expenses ; the impact of fees and expenses related to our issuance of our 4.875 % senior unsecured notes due october 2025 ( `` senior notes `` ) and other refinancing activities in 2017 ; and the settlement of defined benefit obligations in 2018 , wherein a one time settlement charge was recognized . overall , net sales increased approximately $ 48.9 million , or approximately 7.4 % , to $ 705.0 million in 2018 , as compared to $ 656.2 million in 2017 , as sales increased in all three reportable segments . the primary drivers of the sales increase were industrial cylinder products , as well as engines , compressors and related parts used in upstream oil and gas applications , which increased approximately $ 16.2 million and $ 7.4 million , respectively , within our specialty products reportable segment . in addition , sales of our health , beauty and home care products increased approximately $ 15.6 million within our packaging reportable segment . net sales also increased by approximately $ 1.7 million due to net favorable currency exchange , as our reported results in u.s. dollars were favorably impacted as a result of the weakening u.s. dollar relative to foreign currencies . gross profit margin ( gross profit as a percentage of sales ) approximated 28.4 % and 28.8 % in 2018 and 2017 , respectively . gross profit increased primarily as a result of higher sales levels , as well as lower facility exit costs within our packaging reportable segment . these increases were partially offset by the impact of higher commodity-related costs , a less favorable product sales mix and pricing pressures , most notably in our health , beauty and home care end market within our packaging reportable segment . operating profit margin ( operating profit as a percentage of sales ) approximated 15.4 % and 14.1 % in 2018 and 2017 , respectively . operating profit increased approximately $ 16.1 million , to $ 108.8 million in 2018 , as compared to an operating profit of $ 92.7 million in 2017 . operating profit increased primarily due to overall higher sales levels and as a result of the approximately $ 8.2 million reduction of our recorded liability to metaldyne in 2018 following the u.s. bankruptcy court 's final decree to close all remaining cases and terminate the metaldyne bankruptcy distribution trust . interest expense decreased approximately $ 0.5 million , to $ 13.9 million in 2018 , as compared to $ 14.4 million in 2017 , as lower weighted average borrowings more than offset an increase in our interest rates . other expense , net decreased approximately $ 5.9 million to $ 2.5 million in 2018 , from $ 8.5 million in 2017 , primarily due to approximately $ 6.6 million of debt financing and related expenses we incurred in connection with our 2017 refinancing of our long-term debt that did not recur in 2018. this decrease was partially offset by our recognition of a one-time settlement charge of approximately $ 2.5 million in 2018 related to our settlement of defined benefit obligations . in 2018 , we purchased an annuity contract to transfer certain retiree defined benefit obligations to an insurance company . the annuity contract was funded by plan assets . 36 income tax expense decreased approximately $ 15.3 million , to $ 18.7 million in 2018 as compared to $ 33.9 million in 2017. the effective income tax rate for 2018 was 20.2 % , compared to 48.5 % for 2017 . during 2018 , we reported domestic and foreign pre-tax income of approximately $ 64.7 million and $ 27.7 million , respectively , and recognized a net tax benefit of approximately $ 2.7 million related to provision to return adjustments for our u.s. federal tax return , which included an approximate $ 1.1 million benefit due to additional regulations that were issued in connection with the tax reform act . in 2017 , we reported domestic and foreign pre-tax income of approximately $ 46.2 million and $ 23.7 million , and recognized tax benefits of approximately $ 1.5 million resulting from research and manufacturing tax incentives . we recognized approximately $ 12.7 million of income tax expense as a result of the tax reform act , including $ 3.7 million of provisional expense related to revaluing our net deferred tax assets at the lower u.s. corporate tax rate , and a $ 9.0 million of provisional tax expense related to the deemed repatriation of approximately $ 110.0 million of undistributed non-u.s. subsidiary earnings . income from continuing operations increased approximately $ 37.8 million to $ 73.7 million in 2018 , from $ 36.0 million in 2017 . the increase was primarily the result of an approximately $ 16.1 million increase in operating profit , a decrease in income tax expense of approximately $ 15.3 million , a decrease in interest expense of approximately $ 0.5 million

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liquidity and capital resources cash flows cash flows provided by operating activities of continuing operations in 2019 were approximately $ 95.7 million , as compared to $ 110.8 million in 2018 . significant changes in cash flows provided by operating activities of continuing operations and the reasons for such changes are as follows : in 2019 , the company generated $ 148.1 million in cash flows , based on the reported net income of $ 61.9 million and after considering the effects of non-cash items related to gains and losses on dispositions of assets , depreciation , amortization , changes in deferred income taxes , debt financing and related expenses , stock-based compensation and other operating activities . in 2018 , the company generated $ 138.2 million in cash flows based on the reported net income of $ 73.7 million and after considering the effects of similar non-cash items . decreases in accounts receivable resulted in a source of cash of approximately $ 3.3 million in 2019 , primarily due to timing of cash collections . increases in accounts receivable resulted in a use of cash of approximately $ 9.6 million in 2018 . days sales outstanding of receivables increased by 3 days , primarily as a result of an increase in sales in europe following our italian acquisitions during 2019 , where standard terms are typically longer than in north america . 38 we decreased our investment in inventory by approximately $ 0.7 million in 2019 , while we increased our investment in inventory by approximately $ 14.7 million in 2018 to buy-ahead on certain china-sourced products that were subject to tariffs , or where the tariff rate would increase , to avoid the higher cost and to ensure we had sufficient inventory supply . our days sales in inventory remained relatively flat in 2019 as compared to 2018 , as we have been moderating inventory levels in line with sales levels . increases in prepaid expenses and other assets resulted in a use of cash of approximately $ 6.9 million in 2019 .

number of new invisalign doctors trained . we continue to expand our invisalign customer base through the training of new doctors . in 2017 , invisalign growth was driven primarily by increased utilization across all regions as well as by the continued expansion of our customer base as we trained a total of 16,500 new invisalign doctors , of which 67 % were trained internationally . international invisalign growth . we will continue to focus our efforts towards increasing invisalign adoption by dental professionals in our direct international markets . on a year over year basis , international invisalign volume increased 52.3 % driven primarily by strong performance in our apac and emea regions . we believe that the introduction of invisalign teen treatment with mandibular advancement is helping to raise visibility for invisalign treatment of teenagers and contributed to some of the growth in the apac market . in 2018 , we are continuing to expand in our existing markets through targeted investments in sales coverage and professional marketing and education programs , along with consumer marketing in selected country markets . we expect international invisalign clear aligner revenues to continue to grow at a faster rate than north america for the foreseeable future due to our continued investment in international market expansion , the size of the market opportunity , and our relatively low market penetration of these regions ( refer to item 1a risk factors - “ we are exposed to fluctuations in currency exchange rates , which could negatively affect our financial condition and results of operations . ” for information on related risk factors ) . establish regional order acquisition , treatment planning and manufacturing operations . we will continue to establish and expand additional order acquisition , treatment planning and manufacturing operations closer to our international customers in order to improve our operational efficiency and to provide doctors confidence in using invisalign clear aligners to treat more patients and more often : ◦ in june 2017 , we opened a new treatment planning facility in chengdu , china which services and supports our customers within china . it also serves as a clinical education and training center for all of our customers across asia pacific . ◦ in august 2017 , we opened a treatment planning facility in cologne , germany to support our customers located in europe . ◦ in 2017 , we purchased two buildings in costa rica for a total purchase price of approximately $ 51.7 million in order to support our expanding treatment planning and customer service needs . ◦ in november 2017 , we entered into an investment agreement with the people 's republic of china in which we have committed to invest a minimum of $ 46.0 million in ziyang , china over five years to establish manufacturing operations . 36 refer to item 1a risk factors - “ as we continue to grow , we are subject to growth related risks , including risks related to excess or constrained capacity at our existing facilities ” for information on related risk factors and refer to note 9 `` commitments and contingencies `` of the notes of consolidated financial statements for more information on the costa rica purchase agreements and the china investment agreement . operating expenses . we expect operating expenses to increase in 2018 due in part to : ◦ investments in international expansion in new country markets ; ◦ investments in manufacturing to enhance our regional capabilities ; ◦ increases in legal expenses primarily related to the continued protection of our intellectual property rights , including our patents ; ◦ increases in sales , marketing and customer support resources ; and ◦ product and technology innovation to enhance product efficiency and operational productivity . we believe that these investments will position us to increase our revenues and continue to grow our market share . stock repurchases : april 2016 repurchase program . in 2017 , we repurchased $ 50.0 million of our common stock through an accelerated stock repurchase agreement and repurchased $ 50.0 million on the open market . as of december 31 , 2017 , we had $ 200.0 million remaining under the april 2016 repurchase program . in february 2018 , we repurchased $ 100.0 million of our common stock on the open market ( refer to note 11 `` common stock repurchase program `` of the notes to consolidated financial statements for details on stock repurchase program ) . u.s. tax cuts and jobs act . the u.s. tax cuts and jobs act ( the “ tcja ” ) was enacted into law on december 22 , 2017 and impacted our effective tax rate for the year ended december 31 , 2017. the tcja made significant changes to the internal revenue code , including , but not limited to , a corporate tax rate decrease from 35 % to 21 % effective for tax years beginning after december 31 , 2017 , the transition of u.s. international taxation from a worldwide tax system to a territorial system , and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of december 31 , 2017. we have estimated the impact of the tcja and recorded a provisional amount of $ 84.3 million additional income tax expense in the fourth quarter of 2017. this provisional amount includes income tax expenses related to the remeasurement of certain deferred tax assets and liabilities of $ 10.4 million , and the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings in the amount of $ 73.9 million . additional work is necessary for a more detailed analysis of our deferred tax assets and liabilities and our historical foreign earnings as well as potential correlative adjustments . any subsequent adjustment to these amounts will be recorded to tax expense in 2018 when the analysis is complete . smiledirectclub . story_separator_special_tag our effective tax rate differs from the statutory federal income tax rate of 35 % primarily due to certain foreign earnings , most significantly from the netherlands and costa rica , being taxed at lower tax rates and excess tax benefits related to stock-based compensation recognized as a reduction of income tax expense , partially offset by certain one-time tax charges recorded as a result of the tcja . the increase in the effective tax rate in 2017 compared to 2016 was primarily attributable to tax charges recorded as a result of the tcja and the tax benefit recognized pursuant to the release of valuation allowance against our israel deferred tax assets in 2016 that did not recur this year , partially offset by excess tax benefits related to stock-based compensation recognized as a reduction of income tax expense in accordance with asu 2016-09 and increased tax benefits from foreign earnings being taxed at lower tax rates . the increase in the effective rate for the year ended december 31 , 2016 compared to 2015 was primarily related to our international corporate restructuring as explained below . on july 1 , 2016 , we implemented a new international corporate structure . this changed the structure of our international procurement and sales operations , as well as realigned the ownership and use of intellectual property among our wholly-owned subsidiaries . we continue to anticipate that an increasing percentage of our consolidated pre-tax income will be derived from , and reinvested in our foreign operations . we believe that income taxed in certain foreign jurisdictions at a lower rate relative to the u.s. federal statutory rate will have a beneficial impact on our worldwide effective tax rate over time . although the license of 43 intellectual property rights between consolidated entities did not result in any gain in the consolidated financial statements , the company generated taxable income in certain jurisdictions in 2016 resulting in a tax expense of $ 34.3 million . additionally , as a result of the restructuring , we reassessed the need for a valuation allowance against our deferred tax assets considering all available evidence . given the current earnings and anticipated future earnings of our subsidiary in israel , we concluded that we have sufficient positive evidence to release the valuation allowance against our israel operating loss carryforwards of $ 31.4 million , which resulted in an income tax benefit in 2016. in june 2017 , the costa rica ministry of foreign trade , an agency of the government of costa rica , granted an extension of certain income tax incentives for an additional twelve year period . under these incentives , all of the income in costa rica is subject to a reduced tax rate . in order to receive the benefit of these incentives , we must hire a specified number of employees and maintain certain minimum levels of fixed asset investment in costa rica . if we do not fulfill these conditions for any reason , our incentive could lapse and our income in costa rica would be subject to taxation at higher rates which could have a negative impact on our operating results . the costa rica corporate income tax rate that would apply , absent the incentives , is 30 % for 2017 , 2016 and 2015. as a result of these incentives , our income taxes were reduced by $ 1.8 million , $ 19.1 million and $ 32.7 million in the year ended december 31 , 2017 , 2016 and 2015 respectively , representing a benefit to diluted net income per share of $ 0.02 , $ 0.23 and $ 0.40 in the year ended december 31 , 2017 , 2016 and 2015 , respectively ( refer to note 13 `` income taxes `` of the notes to consolidated financial statements for details on income taxes ) . liquidity and capital resources we fund our operations from product sales . as of december 31 , 2017 and 2016 , we had the following cash and cash equivalents , and short-term and long-term marketable securities ( in thousands ) : replace_table_token_13_th cash flows ( in thousands ) : replace_table_token_14_th as of december 31 , 2017 , we had $ 761.5 million in cash , cash equivalents , and short-term and long-term marketable securities . cash equivalents and marketable securities are comprised of money market funds and highly liquid debt instruments which primarily include commercial paper , corporate bonds , u.s. government agency bonds , u.s. government treasury bonds and certificates of deposit . as of december 31 , 2017 , approximately $ 490.1 million of cash , cash equivalents and short-term and long-term marketable securities was held by our foreign subsidiaries . the tcja enacted into law on december 22 , 2017 included a one-time transition tax on the mandatory deemed repatriation of foreign earnings , and , as a result , we recorded a provisional amount of additional income tax expense of $ 73.9 million , which will be paid over the next eight years . we may repatriate cash and cash equivalents and marketable securities back to the u.s. to invest in market expansion opportunities , provide additional working capital , and have greater flexibility to fund our stock repurchase program ( refer to note 13 `` income taxes `` of the notes to consolidated financial statements for details ) . 44 operating activities for the year ended december 31 , 2017 , cash flows from operations of $ 438.5 million resulted primarily from our net income of approximately $ 231.4 million as well as the following : significant non-cash activities stock-based compensation was $ 58.9 million related to equity incentive compensation granted to employees and directors , depreciation and amortization of $ 37.7 million related to our fixed assets and acquired and purchased intangible assets , and net change in deferred tax assets of $ 17.6 million . significant changes in working capital increase of $ 91.0 million

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net cash used in investing activities was $ 248.3 million for the year ended december 31 , 2017 , which primarily consisted of purchases of marketable securities of $ 390.2 million , property , plant and equipment purchases of $ 195.7 million for additional manufacturing capacity and to purchase our new headquarters , $ 30.0 million of loan advances to equity investee , net of repayments and $ 12.8 million related to our equity interest investment in smiledirectclub , llc ( `` sdc '' ) . these outflows were partially offset by maturities and sales of marketable securities of $ 388.8 million . for 2018 , we expect to invest $ 200.0 million to $ 230.0 million on capital expenditures primarily related to operational expansion and ongoing growth of the business . net cash provided by investing activities was $ 72.8 million for the year ended december 31 , 2016 , which primarily consisted of maturities and sales of our marketable securities of $ 604.0 million . these inflows were partially offset by purchases of marketable securities of $ 405.6 million , property , plant and equipment purchases of $ 70.6 million including the implementation of our new erp system and $ 46.7 million related to our equity interest investment in sdc .

when complete , this transition will result in approximately doubling our available facility space and will substantially increase our production capacity of indirect printing machines and psc operations . this transition also results in a full consolidation of our production , research and development , sales and marketing and administrative teams under one combined facility . 40 initiating expansion of our north huntingdon , pa facility . upon completion , this expansion doubles the available psc production space for this facility and also expands our available space for research and development activities . opening our psc in italy . we opened our newest psc site in italy , which also serves as a machine sales center for the country . upgrading our united states pscs . we upgraded our united states pscs with new technology , effectively expanding our capacity with newer , faster machines to print products for customers . our united states pscs are certified to iso 9000:2008. significant developments with our machines . we committed significant resources in 2014 to the development of our machine technologies . during 2014 we introduced our exerial , s-max+ and innovent machine platforms and sold our first m-print unit . developments with our binder jetting technology and printable materials . we continued to evolve our qualified and printable materials capabilities . during 2014 , we commercialized our first near 100 % dense material , a nickel-based alloy . in addition , we introduced several materials capable of direct printing for research and development activities . our continued goal is to qualify an additional indirect or directly printed industrial material every six months . acquisitions . in march 2014 , we acquired mam and mwt which have enhanced our post-printing capabilities by providing specialty machining support ( mam ) and microwave technologies ( mwt ) which are a complementary element to certain of our 3d printing technologies . with our facilities expansion substantially behind us , and our new machine platforms gaining market attention , we plan to focus our attention in 2015 on the operational effectiveness of our business with the primary goal being the continued global adoption of our binder jetting technologies . this includes further expanding our business focus from predominantly prototyping activities and short-run production to series production , principally through our introduction of the exerial machine platform . we plan to complete an extensive strategic review of our businesses which will consider the markets we serve , our customers and our geographic footprint . we intend to place a firm emphasis of maximizing revenues from our 3d printing machines and continuing to grow our revenues from 3d printed and other products , materials and services . we also plan to continue to effectively manage our costs of production and operating expenses such that we align our spending plans with the anticipated growth of our business . how we measure our business we use several financial and operating metrics to measure our business . we use these metrics to assess the progress of our business , make decisions on where to allocate capital , time and technology investments , and assess longer-term performance within our marketplace . the key metrics are as follows : revenue . our revenue consists of sales of our 3d printing machines and 3d printed and other products , materials and services . 3d printing machines . 3d printing machine revenues consist of machine sales and equipment under leasing arrangements . 3d printing machine sales generally include ancillary equipment , materials , installation and training services , the value of a warranty and other optional products and or services . 3d printing machine sales are influenced by a number of factors including , among other things , ( i ) the adoption rate of our 3d printing technology , ( ii ) end-user product design and manufacturing activity , ( iii ) the capital expenditure budgets of end-users and potential end-users and ( iv ) other macroeconomic factors . purchases of our 3d printing machines , particularly our higher-end , higher-priced systems , typically involve long sales cycles . several factors can significantly affect revenue reported for our 3d printing machines for a given period including , among others , ( i ) the overall low unit volume of 3d printing machine sales , ( ii ) the sales mix of machines for a given period and ( iii ) the customer-driven acceleration or delay of orders and shipments of machines . 41 3d printed and other products , materials and services . 3d printed and other products , materials and services consist of sales of ( i ) products printed in our global psc network or manufactured through our excast strategy , ( ii ) consumable materials and replacement parts for our global installed base of 3d printing machines and ( iii ) services for maintenance and certain research and development activities . our pscs utilize our 3d printing machine technology to print products to the specifications of customers . in addition , our pscs also provide support and services such as pre-production collaboration prior to printing products for a customer . sales of consumable materials , replacement parts and service maintenance contracts are linked to the number of our 3d printing machines that are installed globally . other research and development contracts are a function of customer-specific needs in applying our additive manufacturing technologies . cost of sales and gross profit . our cost of sales consists primarily of labor ( related to our global workforce ) , materials ( for both the manufacture of 3d printing machines and for our psc operations ) and overhead to produce 3d printing machines and 3d printed and other products , materials and services . story_separator_special_tag operating expenses for 2013 were $ 21,246 compared with operating expenses of $ 20,215 for 2012 , an increase of $ 1,031 , or 5.1 % . operating expenses as a percentage of revenue were 53.8 % for 2013 , compared with 70.5 % for 2012. research and development expenses for 2013 were $ 5,127 compared with research and development expenses of $ 1,930 for 2012 , an increase of $ 3,197 , or 165.6 % . this increase was due primarily to ( i ) increased costs associated with our materials qualification activities , including additional research and development headcount , materials usage and facilities costs associated with our materials development laboratory in the united states and ( ii ) continued investment in enhancing our 3d printing machine technology for both direct and indirect printing . selling , general and administrative expenses for 2013 were $ 16,119 compared with selling , general and administrative expenses of $ 18,285 for 2012 , a decrease of $ 2,166 , or 11.8 % . this decrease was due principally to a net decrease in equity-based compensation expense for 2013 compared to 2012. the net decrease in equity- 45 based compensation expense is as a result of the absence of $ 7,735 in expense for 2012 related to the sale of common units by the majority member of the former limited liability company to another member and two executives of the former limited liability company . offsetting the net decrease in equity-based compensation were increases in selling , general and administrative expenses in 2013 compared to 2012 associated with ( i ) merger and acquisition related activities following our secondary public offering of common stock in september 2013 , ( ii ) increased professional service fees ( including legal , audit and other consulting expenses ) , ( iii ) increased personnel costs associated with an increased headcount ( including salaries and related benefits ) in making the transition from a private company to a publicly traded company and ( iv ) increased selling costs ( principally selling commissions for machine sale transactions ) . interest expense interest expense for 2014 was $ 144 compared with interest expense of $ 372 in 2013 , a decrease of $ 228 , or 61.3 % . this decrease was due principally to a lower average outstanding debt balance for 2014 , as compared to 2013 , mostly due to ( i ) the retirement of the demand note payable to a member in february 2013 and ( ii ) the settlement of debt held by variable interest entities in connection with our acquisition of certain related assets of those entities in march 2013. interest expense for 2013 was $ 372 compared with interest expense of $ 842 in 2012 , a decrease of $ 470 , or 55.8 % . this decrease was due principally to a lower average outstanding debt balance for 2013 , as compared to 2012 , mostly due to ( i ) the retirement of the demand note payable to a member in february 2013 and ( ii ) the settlement of debt held by variable interest entities in connection with our acquisition of certain related assets of those entities in march 2013. other income — net other income — net for 2014 was $ 210 compared with other income — net of $ 98 for 2013 and other income — net of $ 221 for 2012. amounts for all periods consist principally of interest income on cash deposits and other financing activity benefits . provision for income taxes the provision for income taxes for 2014 , 2013 and 2012 was $ 159 , $ 370 and $ 995 , respectively . the effective tax rate for 2014 , 2013 and 2012 was 0.7 % , 6.2 % and 11.5 % ( provision on a loss ) , respectively . for 2014 and 2013 , the effective tax rate differed from the u.s. federal statutory rate of 34.0 % primarily due to net changes in valuation allowances for the period . for 2012 , the effective tax rate differed from the u.s. federal statutory rate of 34.0 % primarily due to the effects of ( i ) limited liability company losses not subject to tax and ( ii ) net changes in valuation allowances for the period . we have provided a valuation allowance for our net deferred tax assets as a result of our inability to generate consistent net operating profits in jurisdictions in which we operate . as such , any benefit from deferred taxes in any of the periods presented in our consolidated financial statements has been fully offset by changes in the valuation allowance for net deferred tax assets . we continue to assess our future taxable income by jurisdiction based on ( i ) our recent historical operating results , ( ii ) the expected timing of reversal of temporary differences , ( iii ) various tax planning strategies that we may be able to enact in future periods , ( iv ) the impact of potential operating changes on our business and ( v ) our forecast results from operations in future periods based on available information at the end of each reporting period . to the extent that we are able to reach the conclusion that deferred tax assets are realizable based on any combination of the above factors , a reversal of existing valuation allowances may occur . 46 noncontrolling interests there was no net income attributable to noncontrolling interests for 2014. net income attributable to noncontrolling interests for 2013 was $ 138 compared with net income attributable to noncontrolling interests of $ 480 in 2012 , a decrease of $ 342 , or 71.3 % . changes in net income attributable to noncontrolling interests for all periods are as a result of the acquisition of net assets in the related variable interest entities completed during the quarter ended march 31 , 2013.

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liquidity and capital resources we incurred net losses of approximately $ 21,843 , $ 6,317 and $ 9,688 for 2014 , 2013 and 2012 , respectively . prior to our reorganization , we operated as a limited liability company and were substantially supported by the continued financial support provided by our majority member . in connection with the completion of our initial public offering in february 2013 and our secondary public offering in september 2013 , we received total unrestricted net proceeds from the sale of our common stock of approximately $ 157,311. we believe that our existing capital resources will be sufficient to support our operations through january 1 , 2016. the following table summarizes the significant components of cash flows for each of the years ending december 31 : replace_table_token_9_th operating activities cash used for operating activities for 2014 was $ 28,932 compared with $ 20,192 for 2013. the increase of $ 8,740 , or 43.3 % , was mostly attributed to an increase in our net loss and cash outflows associated with accounts receivable ( based on the timing of sales and payments by customers ) and inventories ( based on an increase in manufacturing capacity ) . these amounts were offset by lower cash outflows associated with prepaid expenses and other current assets ( based on a reduction in increases of prepayments to vendors ) and deferred revenue and customer prepayments ( mostly due to the timing and amount of prepayments by customers ) .

if billings for the sale of equipment exceed the amount of contract proceeds allocated to the equipment unit , revenue is deferred . we recognize recurring service revenue over the period the service is performed and revenue from equipment sales at the time equipment is placed in service . we recognize revenue when the following four basic criteria have been met : ( 1 ) persuasive evidence that an arrangement exists , ( 2 ) delivery has occurred or services were rendered , ( 3 ) the fee is either fixed or determinable and ( 4 ) collectability is reasonably assured . amounts billed which do not meet such criteria are deferred until all four criteria have been met . stock-based compensation under the fair value recognition provisions of the authoritative guidance , stock-based compensation cost granted to employees is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service or performance period , which is the vesting period . stock options and warrants issued to consultants and other non-employees as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair value of the option or warrant , whichever can be more clearly determined . we currently use the black-scholes option pricing model to determine the fair value of stock options . the determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables . these variables include our expected stock price volatility over the term of the awards , the expected term of the award , the risk-free interest rate and any expected dividends . compensation cost associated with grants of restricted stock units are also measured at fair value . we evaluate the assumptions used to value restricted stock units on a quarterly basis . when factors change , including the market price of the stock , share-based compensation expense may differ significantly from what has been recorded in the past . if there are any modifications or cancellations of the underlying unvested securities , we may be required to accelerate , increase or cancel any remaining unearned share-based compensation expense . income taxes the preparation of consolidated financial statements in conformity with gaap requires management to make estimates and assumptions that affect the reported amount of tax-related assets and liabilities and income tax expense . these estimates and assumptions are based on the requirements of the financial accounting standards board ( “ fasb ” ) accounting standards codification ( “ asc ” ) relating to accounting for uncertainty in income taxes . our policy is to classify interest and penalties related to unrecognized income tax benefits as a component of income tax expense . 11 we assess whether previously unrecognized tax benefits may be recognized when the tax position is ( 1 ) more likely than not of being sustained based on its technical merits , ( 2 ) effectively settled through examination , negotiation or litigation , or ( 3 ) settled through actual expiration of the relevant tax statutes . implementation of this requirement requires the exercise of significant judgment . recognizing deferred tax assets will increase tax benefits and increase net income . impairment of intangible assets we account for goodwill in accordance with fasb 's authoritative guidance which requires that goodwill and certain intangible assets are not amortized , but are subject to an annual impairment test . we complete our goodwill impairment test on an annual basis , during the fourth quarter of our fiscal year , or more frequently , if changes in facts and circumstances indicate that impairment in the value of goodwill recorded on our balance sheet may exist . for purposes of testing the impairment of goodwill , we have one reporting unit . our methodology for testing goodwill impairment consists of one , and possibly two steps . in step one of the goodwill impairment test , we compare our carrying amount ( including goodwill ) of our entity-wide reporting unit and auxilio 's fair value based on market capitalization . we evaluated how this market capitalization measure compared to the performance based multiples of revenue and earnings methods and feel it most accurately reflects the company 's valuation given our recent revenue growth accompanied by losses which causes performance based metrics to portray the company at an unrealistic value . our market capitalization is based on the closing price of our common stock as quoted on the otcbb multiplied by our outstanding shares of common stock . there was no impairment of goodwill as a result of the annual impairment tests completed during the fourth quarters of 2012 and 2011. excluding goodwill , we have no intangible assets deemed to have indefinite lives . at december 31 , 2012 , the fair value of auxilio , based on our market capitalization , was approximately $ 18.8 million , exceeding our book value of negative $ 378,000. the second step of the impairment test , which compares the implied fair value of the goodwill with the book value , was not required since we passed step one . new customer implementation costs we ordinarily incur additional costs to implement our services for new customers . these costs are comprised primarily of additional labor and support , with the efforts going to identify , map and record all existing devices and support arrangements for all subject devices . once this effort is complete , it need not be repeated . this ordinarily takes one to six months to complete , depending on the size of the new customer . story_separator_special_tag these costs are expensed as incurred , and have a negative impact on our statements of operations and cash flows during the implementation phase . derivative liabilities the company 's derivative warrants and additional investment rights liabilities are measured at fair value using the black-scholes valuation model which takes into account , as of the measurement date , factors including the current exercise price , the term of the instrument , the current price of the underlying stock and its expected volatility , expected dividends on the stock and the risk-free interest rate for the term of the item . these derivative liabilities are revalued at each reporting period and changes in fair value are recognized currently in the consolidated statements of operations under the caption “ change in fair value of derivative liabilities . ” the above listing is not intended to be a comprehensive list of all of our accounting policies . in many cases , the accounting treatment of a particular transaction is specifically dictated by gaap , with no need for management 's judgment in its application . there are also areas in which management 's judgment in selecting any available alternative would not produce a materially different result . please see our audited financial statements and notes thereto which begin on page f-1 of this annual report on form 10-k , which contain accounting policies and other disclosures required by gaap and please refer to the disclosures in note 1 of our financial statements for a summary of our significant accounting policies . 12 results of operations year ended december 31 , 2012 compared to the year ended december 31 , 2011 net revenue revenues consist of equipment sales and ongoing service fees . net revenue increased by $ 13,801,402 to $ 35,647,021 for the year ended december 31 , 2012 , as compared to the same period in 2011. service revenue in 2012 totaled approximately $ 30,500,000 compared to approximately $ 19,800,000 in 2011. of this increase , approximately $ 10,700,000 was a result of the addition of eight new recurring revenue contracts between july 2011 and august 2012. another $ 1,000,000 of the increase was due to the expansion of services at existing customers . partially offsetting these increases was a decrease in revenue of approximately $ 700,000 at existing customers , where there was a reduction in unit price and sales volume . we anticipate this trend to continue as we renew our customers ' contracts but anticipate overall revenue growth as a result of the expansion of our customer base . equipment sales for the year ended december 31 , 2012 were approximately $ 5,200,000 as compared to approximately $ 2,100,000 for the same period in 2011. of this increase , approximately $ 3,000,000 was from large copier equipment conversions at three customers , of which approximately $ 1,600,000 was from an arrangement whereby we are contractually limited to billing for the equipment at our cost . we limit our revenue recognition of delivered equipment to the extent of funds received for such equipment , and thus only recognized revenue for equipment to the extent of our direct cost for this contract . cost of revenue cost of revenue consists of document imaging equipment , parts , supplies and salaries expense for field services personnel . cost of revenue was $ 31,018,117 for the year ended december 31 , 2012 , as compared to $ 19,131,257 for the same period in 2011. the increase in the cost of revenue for 2012 is attributed primarily to the addition of eight new recurring revenue contracts between july 2011 and august 2012 and an increase in our operational support costs to prepare for the growth . we incurred approximately $ 3,100,000 in additional staffing and approximately $ 500,000 in additional one-time travel related costs in connection with new staff training and the implementation of new customers . service and supply costs increased by approximately $ 4,900,000 primarily as a result of our new customers . equipment costs , which includes equipment provided under the recurring service contracts and equipment sold , increased by approximately $ 3,300,000 in 2012 , primarily as a result of the increase in copier equipment conversions at our customers ' locations . we expect higher cost of revenues at the start of our engagement with most new customers . in addition to the costs associated with implementing our services , we absorb our new customer 's legacy contracts with third-party vendors . as we implement our programs , we strive to improve upon these legacy contracts thus reduce costs over the term of the contract . we anticipate this trend to continue but anticipate an overall increase in the cost of revenues as a result of the expansion of our customer base . sales and marketing sales and marketing expenses include salaries , commissions and expenses of sales and marketing personnel , travel and entertainment , and other selling and marketing costs . sales and marketing expenses were $ 2,604,783 for the year ended december 31 , 2012 , as compared to $ 1,830,538 for the same period in 2011. we incurred sales commissions to employees totaling approximately $ 490,000 in 2012 compared to $ 130,000 in 2011. also included in sales and marketing costs in 2012 is a non-cash charge of approximately $ 350,000 in connection with restricted stock units granted to channel partners for marketing and placement services . this compares to approximately $ 80,000 paid in 2011 for the same services . general and administrative general and administrative expenses , which include personnel costs for finance , administration , information systems , and general management , as well as facilities expenses , professional fees , and other administrative costs , increased by $ 294,203 to $ 3,654,716 for the year ended december 31 , 2012. salary expense increased approximately $ 300,000 in 2012 and was primarily due to additional office staff needed to handle the increase in

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liquidity and capital resources at december 31 , 2012 , our cash and cash equivalents were $ 2,190,972 and our negative working capital was $ 661,457. our principal cash requirements were for operating expenses , including equipment , supplies , employee costs , and capital expenditures and funding of the operations . our primary sources of cash were from service and equipment sale revenues , commercial line of credit borrowings , the exercise of options and warrants and the sale of common stock in compliance with applicable federal and state securities laws . during the year ended december 31 , 2012 , cash used for operating activities was $ 29,601 as compared to $ 2,023,052 for the same period in 2011. the difference in cash from operating activities in 2011 was primarily due to the costs incurred to implement our new recurring revenue contracts , more aggressive sales and marketing efforts to obtain new clients and legal and consulting fees in connection with the development of operational training tools , statutory filings , the drafting and adoption of the new stock incentive plan and investor relations . we expect to continue to establish recurring revenue contracts to new customers throughout 2013. since we expect higher cost of revenues at the start of our engagement with most new customers , we may seek additional financing , which may include debt and or equity financing or funding through third party agreements .

as generally used in the energy industry and in this annual report , the acronyms below have the following meanings : /d = per day mmbbls = million barrels bbtus = billion british thermal units mmbpd = million barrels per day bcf = billion cubic feet mmbtus = million british thermal units bpd = barrels per day mmcf = million cubic feet mbpd = thousand barrels per day tbtus = trillion british thermal units 64 cautionary statement regarding forward-looking information this annual report on form 10-k for the year ended december 31 , 2017 ( our “ annual report ” ) contains various forward-looking statements and information that are based on our beliefs and those of our general partner , as well as assumptions made by us and information currently available to us . when used in this document , words such as “ anticipate , ” “ project , ” “ expect , ” “ plan , ” “ seek , ” “ goal , ” “ estimate , ” “ forecast , ” “ intend , ” “ could , ” “ should , ” “ would , ” “ will , ” “ believe , ” “ may , ” “ potential ” and similar expressions and statements regarding our plans and objectives for future operations are intended to identify forward-looking statements . although we and our general partner believe that our expectations reflected in such forward-looking statements are reasonable , neither we nor our general partner can give any assurances that such expectations will prove to be correct . forward-looking statements are subject to a variety of risks , uncertainties and assumptions as described in more detail under part i , item 1a of this annual report . if one or more of these risks or uncertainties materialize , or if underlying assumptions prove incorrect , our actual results may vary materially from those anticipated , estimated , projected or expected . you should not put undue reliance on any forward-looking statements . the forward-looking statements in this annual report speak only as of the date hereof . except as required by federal and state securities laws , we undertake no obligation to publicly update or revise any forward-looking statements , whether as a result of new information , future events or any other reason . overview of business we are a publicly traded delaware limited partnership , the common units of which are listed on the new york stock exchange ( “ nyse ” ) under the ticker symbol “ epd . ” we were formed in april 1998 to own and operate certain natural gas liquids ( “ ngls ” ) related businesses of epco and are a leading north american provider of midstream energy services to producers and consumers of natural gas , ngls , crude oil , petrochemicals and refined products . our integrated midstream energy asset network links producers of natural gas , ngls and crude oil from some of the largest supply basins in the united states ( “ u.s. ” ) , canada and the gulf of mexico with domestic consumers and international markets . our midstream energy operations currently include : natural gas gathering , treating , processing , transportation and storage ; ngl transportation , fractionation , storage , and export and import terminals ( including those used to export liquefied petroleum gases , or “ lpg , ” and ethane ) ; crude oil gathering , transportation , storage , and export and import terminals ; petrochemical and refined products transportation , storage , export and import terminals , and related services ; and a marine transportation business that operates primarily on the u.s. inland and intracoastal waterway systems . our assets currently include approximately 50,000 miles of pipelines ; 260 mmbbls of storage capacity for ngls , crude oil , petrochemicals and refined products ; and 14 bcf of natural gas storage capacity . we conduct substantially all of our business through epo and are owned 100 % by our limited partners from an economic perspective . enterprise gp manages our partnership and owns a non-economic general partner interest in us . we , enterprise gp , epco and dan duncan llc are affiliates under the collective common control of the dd llc trustees and the epco trustees . like many publicly traded partnerships , we have no employees . all of our management , administrative and operating functions are performed by employees of epco pursuant to an administrative services agreement ( the “ asa ” ) or by other service providers . our operations are reported under four business segments : ( i ) ngl pipelines & services , ( ii ) crude oil pipelines & services , ( iii ) natural gas pipelines & services and ( iv ) petrochemical & refined products services . our business segments are generally organized and managed according to the types of services rendered ( or technologies employed ) and products produced and or sold . each of our business segments benefits from the supporting role of our related marketing activities . the main purpose of our marketing activities is to support the utilization and expansion of assets across our midstream energy asset network by increasing the volumes handled by such assets , which results in additional fee-based earnings for each business segment . in performing these support roles , our marketing activities also seek to participate in supply and demand opportunities as a supplemental source of gross operating margin , a non-generally accepted accounting principle ( “ non-gaap ” ) financial measure , for the partnership . the financial results of our marketing efforts fluctuate due to changes in volumes handled and overall market conditions , which are influenced by current and forward market prices for the products bought and sold . story_separator_special_tag 69 crude oil , natural gas and ngl prices were significantly higher in 2017 , compared to 2016 and 2015 , although far below peak levels seen in 2014. nonetheless , u.s. exploration and production ( “ e & p ” ) companies have shown that they can grow shale production at a crude oil price of $ 50/bbl . oilfield service and e & p companies continue to improve technologies to drill and complete non-conventional wells more efficiently . some of these improvements include faster drilling , longer horizontal laterals , and higher density fracture treatments . improved technology has enabled e & p companies to realize higher returns on capital from developing non-conventional resources at lower energy prices . rig counts increased rapidly in the first half of 2017. as more wells were drilled , most basins experienced a shortage of completion equipment and crews , forcing producers to defer completions and build their inventory of drilled but uncompleted wells ( “ ducs ” ) . the duc count grew by over 2,000 wells from december 2016 to december 2017 , to a total of nearly 7,500 wells , as reported by the u.s. energy information administration . this represents a significant potential volume which we believe could be brought into production starting in 2018. ngl volumes will likely grow proportionately faster than either crude oil or natural gas volumes , as the mix of drilling has continued to shift to crude oil wells and richer natural gas wells . while changes in drilling rig counts ( as reported by baker hughes ) have historically been a reliable leading indicator of future production growth or decline , recent developments in technology , high grading of drilling locations and the large inventory of ducs have reduced the correlation between changes in rig counts and changes in production . we believe this to be especially true when comparing current rig counts to those prior to 2015. rig counts continue , however , to be a reliable indicator of overall e & p activity and investment . u.s. e & p company sentiment continued to improve in 2017 as the opec production freeze had a high level of compliance and storage levels indicated a return to global supply-demand balance . since may 2016 , total u.s. drilling rig counts have increased by 542 rigs , or 134 % , to 946 rigs as of february 2018. the crude oil rig count increased by 449 to 765 rigs , an increase of 142 % from the low in may 2016. likewise , the natural gas rig count increased by 100 rigs , or 123 % , from the low in august 2016. not all regions have reacted equally to the recovery in rig counts , with the largest increases seen in the permian basin and scoop/stack play in oklahoma . in the second half of 2017 , rig count growth stabilized , however , we believe the current rig count is enough to continue to grow production , even without completion of a significant number of ducs or further increases in productivity . permian outlook the permian basin in west texas and southeastern new mexico has experienced the largest increase in drilling activity in the country , with the number of active rigs increasing from 134 in april 2016 to 427 in february 2018. the permian basin is an oil prone basin with many attributes , including stacked pay zones , light sweet crude oil and a long history of support for the oil and gas industry . the current level of producer activity provides support for the construction of incremental midstream infrastructure in the basin . an area of focus for us has been the development of midstream infrastructure serving producers in the delaware basin , which is part of the overall permian basin . the delaware basin historically has been a relatively lightly drilled area due to a lack of conventional targets . with the introduction of horizontal drilling and identification of stacked targets of tight-rock and shales , delaware basin drilling has accelerated over the past five years . these drilling targets have proven to produce not only light crude oil but also lighter and gassier hydrocarbons such as condensate and ngls . these gassier hydrocarbons have presented to us a large number of midstream opportunities to provide services to producers in the delaware basin . we are diligently working to identify attractive midstream prospects from these opportunities to complement our current asset infrastructure . during 2017 , we completed and placed into service two natural gas processing facilities ( south eddy and waha ) and are constructing three additional plants near orla , texas in the delaware basin . two of the orla plants ( orla i and ii ) are expected to start up in 2018 and one ( orla iii ) in 2019. when the orla plants are completed we will operate approximately 1.3 bcf/d of processing in the permian basin , which are all highly integrated with other enterprise natural gas and ngl assets , including our shin oak ngl pipeline that is currently under construction . in addition , we placed into limited service a major crude oil pipeline system , the midland-to-echo pipeline system that serves producers in the permian basin and originates at our midland , texas crude oil terminal and extends to our sealy , texas terminal and on to our echo terminal near houston , texas . we are also evaluating several other natural gas , ngl and crude oil projects in the permian basin . 70 eagle ford outlook rig counts in the eagle ford shale region were significantly impacted by the downturn in crude oil prices and producers allocating their capital budgets to other producing basins , especially the permian . with that being said , the number of active drilling rigs in the eagle ford shale has increased by 37 rigs , or 128 % , to

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liquidity and capital resources based on current market conditions ( as of the filing date of this annual report ) , we believe we will have sufficient liquidity , cash flow from operations and access to capital markets to fund our capital expenditures and working capital needs for the reasonably foreseeable future . at december 31 , 2017 , we had $ 3.75 billion of consolidated liquidity , which was comprised of $ 3.74 billion of available borrowing capacity under epo 's revolving credit facilities and $ 5.1 million of unrestricted cash on hand . in february 2018 , we issued $ 2.7 billion aggregate principal amount of senior notes and junior subordinated notes and used the net proceeds therefrom for the temporary repayment of amounts outstanding under our commercial paper program and for the expected redemption of all $ 682.7 million aggregate principal amount of our junior subordinated notes b. for information regarding these debt offerings and the related redemption , see “ significant recent developments ” within this item 7. we expect to issue additional equity and debt securities to assist us in meeting our future funding and liquidity requirements , including those related to capital spending . consolidated debt the following table presents scheduled maturities of our consolidated debt obligations outstanding at december 31 , 2017 for the years indicated ( dollars in millions ) : replace_table_token_12_th the following information describes significant transactions that affected our consolidated debt obligations during the year ended december 31 , 2017 : issuance of $ 1.7 billion of junior subordinated notes in august 2017 in august 2017 , epo issued a combined $ 1.7 billion in principal amount of junior subordinated notes in two series . the epo junior subordinated notes d ( “ junior notes d ” ) , which were issued at $ 700 million principal amount in the aggregate , are redeemable at epo 's option , in whole or in part , on one or more occasions , on or after august 16 , 2022 ( the non-call 5 notes ) at 100 % of their principal amount , plus any accrued and unpaid interest .

as a result of uncertainty at the beginning of the pandemic , in march 2020 , we fully drew down on our $ 650.0 million unsecured revolving credit facility , reduced the quarterly cash dividend on our common shares to one penny per share , reduced planned capital expenditures , reduced the compensation of our executive officers , trustees and employees , and , working closely with our hotel operating partners , significantly reduced our hotels ' operating expenses . on june 29 , 2020 , we amended the agreements governing our existing credit facilities , term loan facilities and senior notes . among other things , the amendments extended the maturity of a significant portion of our term loan due in november 2021 to november 2022 , waived existing financial covenants through the end of the first quarter of 2021 and provided substantially less restrictive financial covenants through the end of the second quarter of 2022. in addition , we repaid approximately $ 250.0 million on our unsecured revolving credit facility . in december 2020 , we issued $ 500.0 million of convertible notes and used the proceeds to repay an additional $ 250.0 million of our unsecured revolving credit facility and $ 200.0 million of our unsecured term loans . as of december 31 , 2020 , we had $ 40.0 million of outstanding borrowings $ 6.8 million of outstanding letters of credit and borrowing capacity of $ 603.2 million remaining on our senior unsecured credit facility . during the year ended december 31 , 2020 , other significant transactions included : sold three hotel properties for an aggregate sales price of $ 387.0 million and recognized a gain of $ 117.4 million ; recognized an impairment loss of $ 74.6 million related to two hotels and the retail component of a hotel ; and 41 cancelled ltip class b units and time-based service condition awards granted in february 2020 and incurred full compensation expense of $ 16.0 million . in february 2021 , we issued an additional $ 250.0 million of convertible notes under the same terms as the december 2020 offering . the notes were sold at a 5.5 % premium to par . in connection with the pricing of the notes , we entered into privately negotiated capped call transactions with certain of the underwriters , their respective affiliates and or other counterparties . we used the net proceeds to reduce amounts outstanding under our senior unsecured revolving credit facility , unsecured term loans , and for general corporate purposes . in february 2021 , we further amended the agreements governing our existing credit facilities , term loan facilities and senior notes to , among other items , increase the interest rate spread and waive financial covenants through the end of the first quarter of 2022 except for the minimum fixed charge coverage and minimum unsecured interest coverage ratio , which were extended through december 31 , 2021. refer to `` note 5. debt `` for additional information regarding these amendments and convertible debt . based on these amendments and expense and cash burn rate reductions , we believe that we will have sufficient liquidity to meet our obligations for the next twelve months . while we do not operate our hotel properties , both our asset management team and our executive management team monitor and work cooperatively with our hotel managers by advising and making recommendations in all aspects of our hotels ' operations , including property positioning and repositioning , revenue and expense management , operations analysis , physical design , renovation and capital improvements , guest experience and overall strategic direction . through these efforts , we seek to improve property efficiencies , lower costs , maximize revenues and enhance property operating margins , which we expect will enhance returns to our shareholders . key indicators of financial condition and operating performance we measure hotel results of operations and the operating performance of our business by evaluating financial and non-financial metrics such as room revenue per available room ( `` revpar `` ) ; total revenue per available room ( `` total revpar `` ) ; average daily rate ( `` adr `` ) ; occupancy rate ( `` occupancy `` ) ; funds from operations ( `` ffo `` ) ; earnings before interest , income taxes , depreciation and amortization ( `` ebitda `` ) ; and ebitda for real estate ( `` ebitda re `` ) . we evaluate individual hotel and company-wide performance with comparisons to budgets , prior periods and competing properties . adr , occupancy and revpar may be impacted by macroeconomic factors as well as regional and local economies and events . see `` non-gaap financial matters `` for further discussion of ffo , ebitda and ebidta re . hotel operating statistics the following table represents the key same-property hotel operating statistics for our hotels for the years ended december 31 , 2020 and 2019. replace_table_token_7_th while the operations of many of our hotels were temporarily suspended beginning in march 2020 , the above schedule of hotel results for the years ended december 31 includes information from all hotels owned as of december 31 , 2020 , except for hotel zena washington dc ( formerly donovan hotel ) for the first , second and fourth quarters in both 2020 and 2019 , because it was closed for renovations in the fourth quarter of 2019 and the first and second quarters of 2020. results of operations this section includes comparisons of certain 2020 financial information to the same information for 2019. year-to-year comparisons of the 2019 financial information to the same information for 2018 are contained in item 7 of the company 's annual report on form 10-k for the year ended december 31 , 2019 filed with the sec on february 20 , 2020 . story_separator_special_tag we also have a $ 25.0 million unsecured revolving credit facility ( the `` phl credit facility `` ) to be used for phl 's working capital and general corporate purposes . this credit facility has substantially similar terms as our senior unsecured revolving credit facility and matures in january 2022. borrowings under the phl credit facility bear interest at libor plus an applicable margin , depending on our leverage ratio . as a result of the amendments described in `` note 5. debt , `` the spread on the borrowings is fixed at 2.25 % during the waiver period . as of december 31 , 2020 , we had no borrowings under the phl credit facility . unsecured term loan facilities we are party to senior unsecured term loans with different maturities . each unsecured term loan bears interest at a variable rate of a benchmark interest rate plus an applicable margin , depending on our leverage ratio . we entered into interest rate swap agreements to fix the libor rate on a portion of these unsecured term loans . information about our senior unsecured term loans is found in the table above and `` note 5. debt `` to the accompanying consolidated financial statements . convertible senior notes in december 2020 , the company issued $ 500.0 million aggregate principal amount of 1.75 % convertible senior notes maturing in december 2026 ( the `` convertible notes `` ) . the convertible notes are governed by an indenture ( the “ base indenture ” ) between the company and the bank of new york mellon trust company , n.a . , as trustee . the net proceeds from the offering of the notes were approximately $ 487.3 million after deducting the underwriting fees and other expenses paid by the company . interest is payable semi-annually in arrears on june 15th and december 15th of each year , beginning on june 15 , 2021. the company recorded coupon interest expense of $ 0.4 million for the year ended december 31 , 2020. the company separated the convertible notes into liability and equity components . the initial carrying amount of the liability component was $ 386.1 million and was calculated using a discount rate of 6.25 % . the discount rate was based on the terms of debt instruments that were similar to the convertible notes without an equity component . the carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the principal amount of the convertible notes , or $ 113.9 million . the amount recorded in equity is not subject to remeasurement or amortization . the $ 113.9 million also represents the initial discount recorded on the convertible notes . the discount is accreted to interest expense using the effective interest rate method over the contractual term of the convertible notes . the company recorded interest expense related to the accretion of the discount and the amortization of the debt issuance costs of $ 0.9 million for the year ended december 31 , 2020. prior to june 15 , 2026 , the convertible notes will be convertible only upon certain circumstances . on and after june 15 , 2026 , holders may convert any of their convertible notes into the company 's common shares , at the applicable conversion rate at any time at their election two days prior to the maturity date . the initial conversion rate is 39.2549 common shares per $ 1,000 principal amount of convertible notes , which represents an initial conversion price of approximately $ 25.47 per share . the conversion rate is subject to adjustment in certain circumstances . the company may redeem for cash all or a portion of the convertible notes , at its option , on or after december 20 , 2023 upon certain circumstances . the redemption price will be equal to 100 % of the principal amount of the convertible notes to be redeemed , plus accrued and unpaid interest to , but excluding , the redemption date . if certain make-whole fundamental changes occur , the conversion rate for the convertible notes may be increased . 48 in connection with the convertible notes , the company entered into privately negotiated capped call transactions ( the “ capped call transactions ” ) with certain of the underwriters of the offering of the convertible notes or their respective affiliates and other financial institutions ( the “ capped call counterparties ” ) . the capped call transactions initially cover , subject to anti-dilution adjustments substantially similar to those applicable to the convertible notes , the number of common shares underlying the convertible notes . the capped call transactions are expected generally to reduce the potential dilution to holders of common shares upon conversion of the convertible notes and or offset the potential cash payments that the company could be required to make in excess of the principal amount of any converted convertible notes upon conversion thereof , with such reduction and or offset subject to a cap . the upper strike price of the capped call transactions is $ 33.0225 per share . the cost of the capped call transactions was $ 38.3 million and was recorded within additional paid-in capital . senior unsecured notes we have two unsecured notes outstanding , $ 60.0 million of senior unsecured notes bearing a fixed interest rate of 4.70 % per annum and maturing in december 2023 ( the `` series a notes `` ) and $ 40.0 million of senior unsecured notes bearing a fixed interest rate of 4.93 % per annum and maturing in december 2025 ( the `` series b notes `` ) . the terms of the series a notes and the series b notes are substantially similar to those of our senior unsecured revolving credit facility , as amended and restated . issuance of shares of beneficial interest on february 22 , 2016 , we

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sources and uses of cash our principal sources of cash are cash from operations , borrowings under mortgage financings and other debt , draws on our credit facilities , proceeds from offerings of our equity securities , debt securities and hotel property sales . our principal uses of cash are asset acquisitions , debt service , capital investments , operating costs , corporate expenses and dividends . cash ( used in ) and provided by operations . our cash used in operating activities was $ 201.8 million for the year ended december 31 , 2020. our cash from operations includes the operating activities of the 53 hotels we owned as of december 31 , 2020 , offset by corporate expenses . the negative cash flow from operations during the year and decline from the prior year is due to the temporary suspension and reduced operations at our hotels as a result of covid-19 . our cash provided by operating activities was $ 395.2 million for the year ended december 31 , 2019. our cash from operations includes the operating activities of the 56 hotels we owned as of december 31 , 2019 , offset by corporate expenses . cash provided by investing activities . our cash provided by investing activities was $ 250.1 million for the year ended december 31 , 2020. during the year ended december 31 , 2020 , we invested $ 125.0 million in improvements to our hotel properties and received $ 375.1 million from sales of hotel properties . our cash provided by investing activities was $ 300.0 million for the year ended december 31 , 2019. during the year ended december 31 , 2019 , we invested $ 169.6 million in improvements to our hotel properties and received $ 470.4 million from sales of hotel properties . cash provided by and ( used in ) financing activities .

fiscal year 2012 . ( 2 ) calculated as net tax preparation fees divided by retail tax returns prepared . replace_table_token_0_th h & r block 2011 form 10k 19 fiscal 2011 compared to fiscal 2010 – tax services ' revenues decreased $ 62.9 million , or 2.1 % , compared to the prior year . tax preparation fees decreased $ 77.1 million , or 3.9 % , due primarily to the sale of company-owned offices to franchisees and the loss of certain clients as a result of not having a ral offering in our tax offices this year . although we believe we gained clients through the free federal ez filing we began offering this year , that increase did not have a significant impact on our revenues . royalties increased $ 28.6 million , or 10.4 % , primarily due to the conversion of 280 company-owned offices into franchises . fees earned on racs increased $ 94.1 million , or 107.5 % , primarily due to an increase in the number of racs issued as a portion of our clients chose to receive their refunds via rac , as an alternative to a ral . rals were historically offered to our clients by hsbc . in december 2010 , hsbc terminated its contract with us based on restrictions placed on hsbc by its regulator and , therefore , rals were not offered this tax season . current year revenues of $ 17.2 million include the recognition of net deferred fees from hsbc . this compares with revenues resulting from loans participations and related fees in the prior year of $ 146.2 million . interest income earned on eas increased $ 16.4 million , or 21.1 % , over the prior year primarily due to an increase in loan volume , which resulted from offering the product to a wider client base . other revenue increased $ 14.9 million , or 6.9 % , primarily due to an increase in online revenues . total expenses increased $ 37.0 million , or 1.8 % , compared to the prior year . compensation and benefits decreased $ 12.7 million , or 1.3 % , primarily due to lower commission-based wages due to conversions to franchise offices , reduced headcount and related payroll taxes . this decline was partially offset by severance costs and related payroll taxes of $ 27.4 million . occupancy costs declined $ 25.6 million , or 6.2 % , due to office closures and cost-saving initiatives . bad debt expense increased $ 34.3 million , or 32.8 % , primarily due to increased volumes on eas , as well as a decline in tax returns prepared for those clients . during the current year , we recorded a $ 22.7 million impairment of goodwill in our redgear reporting unit , as discussed in item 8 , note 9 to the consolidated financial statements . other expenses increased $ 15.7 million , or 6.0 % , primarily due to incremental litigation expenses recorded in the current year . pretax income for fiscal year 2011 decreased $ 99.9 million , or 11.5 % , from 2010. as a result of the declines in revenues and higher expenses , primarily bad debt expense and goodwill impairment , pretax margin for the segment decreased to 26.4 % from 29.2 % in fiscal year 2010. fiscal 2010 compared to fiscal 2009 – tax services ' revenues decreased $ 156.8 million , or 5.0 % , compared to fiscal year 2009. tax preparation fees decreased $ 162.8 million , or 7.6 % , due to a 10.3 % decrease in u.s. retail tax returns prepared in company-owned offices , partially offset by a 0.6 % increase in the net average fee per u.s. retail tax return . adjusting for the effect of company-owned offices sold to franchisees during fiscal year 2010 , the decline in tax returns prepared in company-owned offices was 6.7 % from fiscal 2009 to 2010. the 6.7 % decrease in u.s. retail tax returns prepared in company-owned offices is primarily due to the following factors : § tax returns filed with the irs declined 1.7 % . § lower employment levels disproportionately impacted our key client segments . fourth quarter 2009 unemployment levels ranged from 15-30 % , far in excess of national unemployment levels for key client segments . § we closed certain under-performing offices and exited offices serving clients in wal-mart locations . we believe that tax returns prepared declined by approximately 1 % ( net of client retention through other office locations ) as a result of these office closures . royalties increased $ 20.0 million , or 7.8 % , due to the conversion of 267 company-owned offices into franchises , partially offset by a decline in tax returns prepared in existing franchise offices . interest income on eas decreased $ 13.1 million , or 14.4 % . this decline was primarily a result of lower loan volumes due to these lines of credit only being offered to prior year tax clients in fiscal year 2010 , while being offered to both prior and new clients in fiscal year 2009. total expenses decreased $ 97.1 million , or 4.4 % , compared to fiscal year 2009. total compensation and benefits decreased $ 41.1 million , or 3.9 % , primarily as a result of lower commission-based wages due to the decline in the number of tax returns prepared . bad debt expense decreased $ 7.3 million , or 6.5 % , primarily as a result of lower ea and ral volumes , and more restrictive underwriting criteria . depreciation and amortization expenses increased $ 13.9 million , or 17.5 % , primarily as a result of amortization of intangible assets , related to the november 2008 acquisition of our last major independent franchise operator . other expenses decreased $ 31.4 million , or 10.7 % , primarily as a result of lower legal expenses . story_separator_special_tag representations and warranties in whole loan sale transactions to institutional investors included a “knowledge qualifier” which limits scc liability for borrower fraud to those instances where scc had knowledge of the fraud at the time the loans were sold . in the event that there is a breach of a representation and warranty and such breach materially and adversely affects the value of a mortgage loan , scc may be obligated to repurchase a loan or otherwise indemnify certain parties for losses incurred as a result of loan liquidation . generally , these representations and warranties are not subject to a stated term , but would be subject to statutes of limitation applicable to the contractual provisions . scc estimates losses relating to representation and warranty claims by estimating loan repurchase and indemnification obligations on both known claims and projections of future claims . projections of future claims are based on an analysis that includes a combination of reviewing repurchase demands and actual defaults and loss severities , inquiries from various third-parties , the terms and provisions of related agreements and the historical rate of repurchase and indemnification obligations related to breaches of representations and warranties . scc 's methodology for calculating this liability considers the likelihood that individual counterparties will assert future claims . scc recorded a liability for estimated contingent losses related to representation and warranty claims of $ 126.3 million as of april 30 , 2011. actual losses charged against this reserve during fiscal year 2011 totaled $ 61.9 million , which included payments totaling $ 49.8 million made under an indemnity agreement dated april 2008 with a specific counterparty in exchange for a full and complete release of such party 's ability to assert representation and warranty claims . the recorded liability represents scc 's estimate of losses from future claims where assertion of a claim and a related contingent loss are both deemed probable . because the rate at which future claims may be deemed valid and actual loss severity rates may differ significantly from historical experience , scc is not able to estimate reasonably possible loss outcomes in excess of its current accrual . a 1 % increase in both assumed validity rates and loss severities would result in losses beyond scc 's accrual of approximately $ 16 million . this sensitivity is hypothetical and is intended to provide an indication of the impact of a change in key assumptions on the representations and warranties liability . in reality , changes in one assumption may result in changes in other assumptions , which may or may not counteract the sensitivity . while scc uses the best information available to it in estimating its liability , assessing the likelihood that claims will be asserted in the future and estimating probable losses are inherently difficult to estimate and require considerable management judgment . although net losses on settled claims since may 1 , 2008 have been within initial loss estimates , to the extent that the volume of asserted claims , the level of valid claims , the counterparties asserting claims , the nature of claims , or the value of residential home prices differ in the future from current estimates , future losses may be greater than the current estimates and those differences may be significant . see item 8 , note 18 to our consolidated financial statements . litigation – it is our policy to routinely assess the likelihood of any adverse judgments or outcomes related to legal matters , as well as ranges of probable losses . a determination of the amount of the reserves required , if any , 24 h & r block 2011 form 10k for these contingencies is made after analysis of each known issue and an analysis of historical experience . therefore , we have recorded reserves related to certain legal matters for which we believe it is probable that a loss will be incurred and the range of such loss can be estimated . with respect to other matters , we have concluded that a loss is only reasonably possible or remote , or is not estimable and , therefore , no liability is recorded . assessing the likely outcome of pending litigation , including the amount of potential loss , if any , is highly subjective . our judgments regarding likelihood of loss and our estimates of probable loss amounts may differ from actual results due to difficulties in predicting the outcome of jury trials , arbitration hearings , settlement discussions and related activity , predicting the outcome of class certification actions and various other uncertainties . due to the number of claims which are periodically asserted against us , and the magnitude of damages sought in those claims , actual losses in the future may significantly exceed our current estimates . see item 8 , note 19 to our consolidated financial statements . valuation of goodwill – the evaluation of goodwill for impairment is a critical accounting estimate due both to the magnitude of our goodwill balances , and the judgment involved in determining the fair value of our reporting units . goodwill balances totaled $ 846.2 million as of april 30 , 2011 and $ 840.4 million as of april 30 , 2010. we test goodwill and other indefinite-life intangible assets for impairment annually or more frequently if events occur or circumstances change which would , more likely than not , reduce the fair value of a reporting unit below its carrying value . our goodwill impairment analysis is based on a discounted cash flow approach and market comparables . this analysis , at the reporting unit level , requires significant management judgment with respect to revenue and expense forecasts , anticipated changes in working capital and the selection and application of an appropriate discount rate . changes in projections or assumptions could materially affect our estimate of reporting unit fair values . the use of different assumptions would increase or decrease estimated discounted

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cash from operating activities – cash provided by operations , which consists primarily of cash received from customers , decreased $ 75.0 million from fiscal year 2010. cash payments for representation and warranty obligations of our discontinued mortgage business totaled $ 61.9 million in fiscal year 2011 , compared to $ 18.4 million in fiscal year 2010 and $ 36.5 million in fiscal year 2009. restricted cash . we hold certain cash balances that are restricted as to use . cash and cash equivalents – restricted totaled $ 48.4 million at april 30 , 2011 , and primarily consisted of cash held by our captive insurance subsidiary that will be used to pay claims . cash from investing activities – changes in cash provided by investing activities primarily relate to the following : purchases of available-for-sale securities . during fiscal year 2011 , hrb bank purchased $ 138.8 million in mortgage-backed securities for regulatory purposes . see additional discussion in item 8 , note 4 to the consolidated financial statements . mortgage loans held for investment . we received net proceeds of $ 58.5 million , $ 72.8 million and $ 91.3 million on our mortgage loans held for investment in fiscal years 2011 , 2010 and 2009 , respectively . purchases of property and equipment . total cash paid for property and equipment was $ 63.0 million , $ 90.5 million and $ 97.9 million for fiscal years 2011 , 2010 and 2009 , respectively . business acquisitions . total cash paid for acquisitions was $ 54.2 million , $ 10.5 million and $ 293.8 million during fiscal years 2011 , 2010 and 2009 , respectively .

furniture and appliance purchase loans – as of december 31 , 2012 , we had approximately 27,000 furniture and appliance purchase loans outstanding , representing $ 30.0 million in finance receivables . 44 insurance products – we offer our customers optional payment protection insurance options relating to many of our loan products . our primary sources of revenue are interest and fee income from our loan products , of which interest and fees relating to installment loans and automobile purchase loans have historically been the largest component . in 2009 , we introduced furniture and appliance purchase loans and expanded our automobile purchase loans to offer loans through online credit application networks . in addition to interest and fee income from loans , we derive revenue from insurance products sold to customers of our direct loan products . initial public offering our initial public offering closed on april 2 , 2012 , at which time we sold 3,150,000 shares of our common stock and received cash proceeds of approximately $ 39.8 million , net of underwriting discounts and commissions of $ 4.2 million and other offering expenses of $ 3.3 million . we used the proceeds of the offering to pay a portion of our indebtedness . we are incurring lower amounts of interest expense from the reduction of debt resulting from our initial public offering , as described in “unaudited pro forma consolidated financial information” below . factors affecting our results of operations our business is driven by several factors affecting our revenues , costs , and results of operations , including the following : growth in loan portfolio . the revenue that we derive from interest and fees from our loan products is largely driven by the number of loans that we originate . average finance receivables grew 11.9 % from $ 193.0 million in 2009 to $ 216.0 million in 2010 , grew 22.2 % to $ 264.0 million in 2011 , and grew 36.2 % to $ 359.7 million in 2012. we originated or purchased 120,900 ; 67,300 ; and 55,300 new loans during 2012 , 2011 , and 2010 , respectively . we source our loans through our branches and our live check program , as well as through automobile dealerships and furniture and appliance retailers that partner with us . our loans are made almost exclusively in geographic markets served by our network of branches . increasing the number of branches we operate allows us to increase the number of loans that we are able to service . we opened or acquired 51 , 36 , and 17 new branches in 2012 , 2011 , and 2010 , respectively . our 2013 plans include opening 35 to 45 de novo branch locations , which is a 15.8 % to 20.4 % increase in our branch network . we have the opportunity to add as many as 800 additional branches over time in the states in which it is favorable for us to conduct business , and we have plans to continue to grow our branch network . product mix . we offer a number of different loan products , including small installment loans , large installment loans , automobile purchase loans , and furniture and appliance purchase loans . we charge different interest rates and fees and are exposed to different credit risks with respect to the various types of loans we offer . for example , in recent years , we have sought to increase our product diversification by growing our automobile purchase and furniture and appliance purchase loans , which have lower interest rates and fees than our small and large installment loans but also have lower charge-off rates . our product mix also varies to some extent by state . for example , small installment loans make up a smaller percentage of our loan portfolio in north carolina than in the other states in which we operate because customers find the rate structure in north carolina to be more favorable for larger loans . small installment loans make up a larger percentage of our loan portfolio in texas than our other loan products because customers find the rate structure in texas to be more favorable for small installment loans . however , we expect to continue to diversify our product mix in the future . asset quality . our results of operations are highly dependent upon the quality of our asset portfolio . we recorded a $ 27.8 million provision for credit losses during 2012 ( or 7.7 % as a percentage of average finance receivables ) , a $ 17.9 million provision for credit losses during 2011 ( or 6.8 % as a percentage of average finance receivables ) , and a $ 16.6 million provision for credit losses during 2010 ( or 7.7 % as a percentage of average 45 finance receivables ) . the quality of our asset portfolio is the result of our ability to enforce sound underwriting standards , maintain diligent portfolio oversight , and respond to changing economic conditions as we grow our loan portfolio . allowance for credit losses . we evaluate losses in each of our four categories of loans in establishing the allowance for credit losses . the following table sets forth our allowance for credit losses compared to the related finance receivables as of december 31 , 2012 and december 31 , 2011 : replace_table_token_14_th the allowance for credit losses as a percentage of related finance receivables decreased in 2012 due to good performance in the loan categories . we believe the reduction is appropriate based on all the factors considered in establishing the allowance for credit losses . the allowance for small installment loans uses the most recent eight months of net charge-offs as a percentage of the average of the most recent month-end balance of loans as a key data point in estimating the allowance . story_separator_special_tag interest expense on the senior revolving credit facility and other debt increased $ 2.3 million , or 27.4 % , to $ 10.6 million in 2012 from $ 8.3 million in 2011. the average cost of our senior revolving credit facility decreased by 22 basis points from 4.76 % for the year ended december 31 , 2011 to 4.54 % for the year ended december 31 , 2012. the primary difference was the mix between our libor-based portion of the loan and the prime interest rate portion of the loan and the reduction in the unused line fee as the amount outstanding increased . the increase in interest in 2012 was due primarily to higher average outstanding debt balances . consulting and advisory fees . the consulting and advisory fees paid to related parties increased $ 476,000 to $ 1.5 million in 2012 from $ 975,000 in 2011. the increase in advisory and consulting fees is attributable to the termination fees payable to the sponsors and former majority stockholders at closing of the initial public offering in april 2012. these fee agreements terminated with the closing of the initial public offering . income taxes . income taxes increased $ 2.4 million , or 19.7 % , to $ 14.6 million in 2012 from $ 12.2 million compared to 2011. the increase in income taxes was due to an increase in our net income before taxes . comparison of the year ended december 31 , 2011 , versus the year ended december 31 , 2010 income and revenue . net income increased to $ 21.2 million for 2011 , or 29.2 % , from 2010. operating income ( revenue less provision for credit losses and general and administrative expenses ) increased approximately $ 9.8 million , or 26.6 % , in 2011. total revenues increased to $ 18.4 million during 2011 , a 21.2 % increase over the $ 86.8 million of total revenues for 2010. the increase is attributable to the opening of 33 additional branches and the acquisition of 3 net new branches in 2011. interest and fee income . interest and fee income increased $ 17.1 million , or 23.0 % , to $ 91.3 million in 2011 from $ 74.2 million in 2010. the increase in interest and fee income was due primarily to a 22.2 % increase in average finance receivables in 2011 as compared to 2010 and an increase in the average yield on loans from 34.4 % to 34.6 % . the following table sets forth the portions of the increase in interest and fee income attributable to changes in the finance receivables balance and average yield for each of our products for 2011 , compared to 2010 ( dollars in thousands ) : replace_table_token_23_th insurance income . insurance income increased $ 995,000 , or 12.1 % , to $ 9.2 million in 2011 from $ 8.3 million in 2010. insurance income as a percentage of average finance receivables declined from 3.8 % to 3.5 % in 2011. in 2010 , our insurance partner refunded $ 570,000 to us . without this refund , insurance income in 2010 would have been 3.6 % of average finance receivables . we expect that insurance income as a percentage of average finance receivables will decline with the growth of our indirect automobile purchase loan and furniture and appliance purchase loan businesses as they do not provide us the opportunity to offer insurance products to customers . 53 other income . other income increased $ 307,000 , or 7.0 % , to $ 4.7 million in 2011 from $ 4.4 million in 2010. the largest component of other income is late charges , which increased $ 353,000 , or 12.6 % , to $ 3.2 million in 2011 from $ 2.8 million in 2010 as a result of our higher average finance receivables in 2011. however , late charges as a percentage of average finance receivables declined slightly in 2011 as compared to 2010 as a result of lower loan delinquencies in 2011. in 2010 and 2011 , we recognized $ 500,000 and $ 453,000 , respectively , of revenue from the preparation of income tax returns . provision for credit losses . our provision for credit losses increased $ 1.3 million , or 7.8 % , to $ 17.9 million in 2011 from $ 16.6 million in 2010. the increase in the provision for credit losses in 2011 resulted from the growth in average finance receivables , particularly the automobile purchase loan portfolio . in 2011 , automobile purchase loans grew by $ 35.4 million , compared to a growth of $ 10.0 million in 2010. net charge-offs for 2011 were $ 16.6 million , or 6.3 % of average finance receivables , down from $ 17.0 million , or 7.9 % of average finance receivables , in 2010. general and administrative expenses . our general and administrative expenses , comprising expenses for personnel , occupancy , advertising , and other expenses , increased $ 7.3 million , or 21.9 % , to $ 40.6 million during 2011 from $ 33.3 million in 2010. our efficiency ratio ( general and administrative expenses as a percentage of revenue ) increased to 38.6 % in 2011 from 38.4 % in 2010. personnel . the largest component of general and administrative expenses is personnel expense , which increased $ 4.7 million , or 22.7 % , to $ 25.5 million in 2011 from $ 20.7 million for 2010. this increase is primarily attributable to the addition of 36 branches in 2011. personnel costs as a percentage of average finance receivables remained constant at 9.6 % in 2011 and 2010. personnel costs increase with the opening of new branches as we frequently hire branch managers one to three months in advance of opening the branch . this time is spent training managers in another branch prior to opening the branch for which they were hired . occupancy . occupancy expenses increased

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liquidity and capital resources our primary cash needs relate to the funding of our lending activities and , to a lesser extent , capital expenditures relating to expanding and maintaining our branch locations . in connection with our plans to open 35 to 45 new branches in 2013 , we will incur $ 2.1 million to $ 2.7 million of capital expenditures . we have historically financed , and plan to continue to finance , our short-term and long-term operating liquidity and capital needs through a combination of cash flows from operations and borrowings under our senior revolving credit facility . as a holding company , almost all of the funds generated from our operations are earned by our operating subsidiaries . in addition , our wholly-owned subsidiary , rmc reinsurance , is required to maintain cash reserves against life insurance policies ceded to it , as determined by the ceding company , and has also purchased a cash-collateralized letter of credit in favor of the ceding company . as of december 31 , 2012 , these reserve requirements totaled $ 1.3 million . additionally , we had a reserve for life insurance claims on our balance sheet of $ 207,000 , as determined by the third party , unrelated ceding company . cash flow . operating activities . net cash provided by operating activities increased by $ 16.5 million , or 40.2 % , to $ 57.6 million in 2012 from $ 41.0 million in 2011. the increase was primarily due to higher profitability due to growth in the business . net cash provided by operating activities decreased slightly from 2010 to 2011 , despite an increase in net income of $ 4.8 million . offsetting the increase in net income was cash spent on other assets , primarily $ 2.6 million of expenses related to the preparation for our initial public offering . investing activities . investing activities consist of finance receivables originated and purchased , net change in restricted cash , purchase of furniture and equipment for new and existing branches , and the purchase of interest rate caps .

the wholesale finished jewelry business that we launched in 2010 is currently expanding through select retailers and television shopping networks . we believe there is significant opportunity to further expand our wholesale finished jewelry business through e-commerce , television shopping , and other retailers . we also believe our finished jewelry business , including finished jewelry sold through our direct-to-consumer e-commerce and home party sales channels , allows us to have more control over the end product and enhance our relationships with consumers , as well as provide incremental sales and gross profit dollars due to the higher price points of finished jewelry containing moissanite relative to loose jewels . to that end , we focused on the following critical aspects of our strategic plan during 2013 : · developing brand strategies - our goal is to build multiple strong brands around the moissanite jewel and finished jewelry collections in attractive and desirable jewelry designs , especially those featuring larger center stones that leverage moissanite 's point of differentiation and value proposition . we believe branding will allow us to increase consumer awareness , which we expect to help drive sales and develop consumer brand recognition and loyalty . in june 2012 , we launched a moissanite jewel with optical properties that are significantly whiter than our standard vg “ classic moissanite ” grade jewels . we are marketing these whiter jewels under the forever brilliant ® trademark as a premier brand to differentiate from other grades of our moissanite as well as moissanite sold by potential competitors in the future . we expect demand for our forever brilliant ® loose jewel and finished jewelry featuring the forever brilliant ® jewel to grow , both in our wholesale channel and on our moissanite.com e-commerce website , and that forever brilliant ® will become an increasingly important brand for charles & colvard , ltd. as we execute future branding initiatives . we are also exploring additional product lines and branding strategies that will differentiate our products in the market . 20 in october 2012 , we partnered with a well-known designer to custom design and source finished fashion and moissanite jewelry and provide branding direction for lulu avenue ® , the home party direct sales brand of charles & colvard direct . we believe our exclusive fashion and moissanite jewelry designs serve as the point of differentiation that positions lulu avenue ® ahead of other jewelry home party direct sales companies and will excite both consumers and women searching for unique business ownership opportunities . in june 2013 , we engaged cindy riccio communications , inc. , or crc , a new york-based public relations , marketing , and events agency , as our agency of record to generate optimal exposure with consumer media for both our lulu avenue ® and forever brilliant ® brands , with the goal to increase consumer awareness of our brands specifically and moissanite generally . several media events occurred during 2013 where magazine editors , fashion columnists , and bloggers were invited to experience first-hand our lulu avenue ® fashion and moissanite finished jewelry and our forever brilliant ® loose jewels . we are also utlizing crc to increase exposure for our brands through improved product placement in leading fashion periodicals and blogging sites , and through broadcast and print editorial outreach . we believe our efforts to position forever brilliant ® as the whitest and brightest moissanite jewel available anywhere in the world , the introduction of designer finished jewelry brands , and the engagement of a branding public relations agency will help us to build brand recognition and increase consumer awareness of our products . we also expect that this strategy of building brand recognition will help to support revenue streams as our intellectual property rights expire in the future . · expanding our direct-to-consumer e-commerce business - our direct-to-consumer e-commerce website , moissanite.com , features an intuitive site design with robust functionality to enhance the customer experience and convert traffic into sales . we continue to expand the website 's jewelry collections and its loose moissanite jewel assortment by featuring a variety of colors and shapes , and we are investing resources in targeted advertising and marketing campaigns . in 2013 , we continued fine-tuning such marketing efforts to maximize return on investment , increasing product assortment , and building new site functionality designed to increase sales conversion rates . we believe our direct-to-consumer e-commerce sales channel will not only add to our top-line revenues in a significant manner , but will also play a key role in our campaign to increase overall consumer awareness of moissanite . we also envision e-commerce as a part of a broader effort to establish online connections with consumers that build our brands and our business with retail partners . · developing our direct-to-consumer home party business - in october 2012 , our direct-to-consumer home party business , lulu avenue ® , began to integrate the custom designs of a well-known jewelry designer into the current jewelry line . the first phase of the integration was completed in march 2013. in april 2013 , we hired a president of lulu avenue ® whose focus is on the scale-up of the sales force , and in march 2013 , we hired a director of finance and administration , who leads the back office technology and supply chain efforts of lulu avenue ® . with these new key personnel , we completed the final phase of the integration process in 2013. we believe our direct-to-consumer home party sales channel will provide future sales growth and play a role in our campaign to increase overall consumer awareness of moissanite . story_separator_special_tag ” based on our tax losses in tax years prior to 2012 and the lack of verifiable positive evidence of sufficient future taxable income to fully use our net operating loss carryforward and other deferred tax assets , we established valuation allowances against all u.s. deferred tax assets of $ 4.43 million as of december 31 , 2011. as of each reporting date , management considers new evidence , both positive and negative , that could impact its view with regard to future realization of deferred tax assets . for the years ended december 31 , 2013 and 2012 , cumulative positive taxable income over the last three years had been generated , offsetting the negative evidence of cumulative losses in previous years . we also determined that our expectations of future taxable income in upcoming tax years would be sufficient to result in full utilization of these net operating loss carryforwards and deferred tax assets prior to any statutory expiration . as a result , management determined that sufficient positive evidence exist as of december 31 , 2013 and 2012 to conclude that it is more likely than not deferred tax assets of $ 4.04 million and $ 3.73 million , respectively , are realizable , and we reduced our valuation allowance accordingly . the reduction of the valuation allowances against these deferred tax assets resulted in an income tax benefit during the years ended december 31 , 2013 and 2012 of $ 1,000 and $ 3.73 million , respectively . a valuation allowance remained at december 31 , 2013 and 2012 against certain deferred tax assets relating to state net operating loss carryforwards from our e-commerce and home party operating subsidiaries due to the timing uncertainty of when the subsidiaries will generate cumulative positive taxable income to utilize the associated deferred tax assets . a valuation allowance also remained at december 31 , 2013 and 2012 against certain deferred tax assets relating to investment loss carryforwards because our current investments were classified as held-to-maturity as of december 31 , 2012 , indicating they would be redeemed at par value , and they did not generate gains sufficient to utilize the associated deferred tax assets when they matured in 2013. our deferred tax assets in hong kong were fully reserved with a valuation allowance of $ 996,000 as of december 31 , 2013 and 2012 and had been fully reserved in all prior periods due to the uncertainty of future taxable income in this jurisdiction to utilize the deferred tax assets . our hong kong subsidiary ceased operations during 2008 and became a dormant entity during 2009. if we use any portion of our deferred tax assets in future periods , the valuation allowance would need to be reversed and may impact our future operating results . uncertain tax positions - effective january 1 , 2007 , we adopted u.s. gaap guidance regarding the de-recognition , classification , accounting in interim periods , and disclosure requirements for uncertain tax positions . determining which tax positions qualify as uncertain positions and the subsequent accounting for these positions requires significant estimates and assumptions . our net accrued income tax liability under the provisions of this guidance was $ 395,000 and $ 384,000 at december 31 , 2013 and 2012 , respectively . this liability is only resolved when we obtain an official ruling from the tax authority on the positions or when the statute of limitations expires . our liability increased by $ 11,000 for accrued interest on these positions . cooperative advertising - we offer a cooperative advertising program to many of our wholesale customers that reimburses , via a credit towards future purchases , a portion of their marketing costs based on their net purchases from us . at the end of any given period , we estimate the amount of cooperative advertising expense that has not yet been submitted for credit by our customers . these amounts were $ 188,000 and $ 200,000 at december 31 , 2013 and 2012 , respectively . we estimate this amount based on our historical experience with each customer and the related contractual arrangements to provide certain levels of cooperative advertising for our customers . any differences in actual amounts to our estimates will result in a charge or credit to sales and marketing expenses . revenue recognition - revenue is recognized when title transfers at the time of shipment from our or a third-party fulfillment company 's facility , excluding consignment shipments as discussed below ; evidence of an arrangement exists ; pricing is fixed and determinable ; and collectability is reasonably assured . our standard wholesale customer payment terms are generally between 30 and 90 days , though we may offer extended terms with specific customers and on significant orders from time to time . some wholesale customers and all direct-to-consumer customers are required to prepay prior to shipment . at the time revenue is recognized , an allowance for estimated returns is established . any change in the allowance for returns is charged against net sales . our return policy allows for the return of loose jewels and finished jewelry for credit generally within 30 days of shipment and must be returned for a valid reason , such as quality problems or an error in shipment . from time to time , some wholesale customers may have a contractual right to return a certain percentage of goods for any reason for specified periods of time . in these instances , we only recognize revenue when the contractual right of return is exhausted . periodically , we ship finished goods inventory to wholesale customers on consignment terms . under these terms , the customer assumes the risk of loss and has an absolute right of return for a specified period that typically ranges from six months to one year . our wholesale customers are generally required to make payments on consignment shipments within 60 days upon the customer informing us

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liquidity and capital resources we require cash to fund our operating expenses and working capital requirements , including outlays for capital expenditures . as of december 31 , 2013 , our principal sources of liquidity were cash and cash equivalents totaling $ 2.57 million , trade accounts receivable of $ 10.24 million , and short-term inventory of $ 13.07 million , as compared to cash and cash equivalents totaling $ 11.86 million , trade accounts receivable of $ 8.14 million , and short-term inventory of $ 8.44 million as of december 31 , 2012. we had $ 500,000 of highly liquid u.s. government agency securities that matured during the year . as described more fully below , we also have access to the $ 10 million line of credit . during the year ended december 31 , 2013 , our working capital decreased by approximately $ 4.47 million to $ 23.54 million from $ 28.01 million at december 31 , 2012. as described more fully below , the decrease in working capital at december 31 , 2013 is primarily attributable to a decrease in cash and cash equivalents , a decrease in held-to-maturity investments , an increase in trade accounts payable , a net increase in accrued expenses and other liabilities , and a decrease in interest receivable , offset in part by an increase in trade accounts receivable , a greater allocation of inventory to short-term , and an increase in prepaid expenses and other assets . during the year ended december 31 , 2013 , $ 9.31 million of cash was used in operations .

this public health crisis has resulted in unprecedented uncertainty , volatility and disruption in financial markets and in governmental , commercial and consumer activity in the united states and globally , including the markets that we serve . in response to the crisis , the board of governors of the federal reserve ( the “ federal reserve ” ) cut benchmark federal fund interest rates to near zero . in addition , in march 2020 , the coronavirus aid , relief , and economic security ( “ cares ” ) act was enacted . the cares act contains substantial tax and spending provisions intended to address the impact of the covid-19 pandemic . at the onset of the pandemic , we pro-actively conducted outreach to all commercial loan customers to understand the potential impact that covid-19 could have on their business . we implemented deferral arrangements in accordance with the cares act and bank 53 regulatory guidance . the majority of our deferrals have already resumed payment . only 13 loans representing $ 84.5 million , or 1 % of total loans had not yet resumed payment at december 31 , 2020 , which was ahead of our previous forecasts . while this crisis may have substantial impact on many businesses , we have maintained our disciplined approach of focusing on commercial lending opportunities within our four-state mid-atlantic region and financial services companies where our team has deep experience and relationships . additionally , we have worked to keep our commercial loan sizes predominately below our preferred hold level of $ 10.0 million . the bank is not a qualified lender or additional lender registered with the small business administration and is not participating in the paycheck protection program , established by the cares act . 2020 compared to 2019 operating performance for the year ended december 31 , 2020 , our net income available to common shareholders was $ 37.4 million compared to $ 54.4 million in 2019 , a decrease of $ 17.1 million , or 31.4 % . our diluted earnings per share ( “ eps ” ) was $ 1.30 for the year ended december 31 , 2020 , compared to $ 1.89 in 2019 . this decrease in net income and eps was primarily due to an increase in provision for credit losses of $ 20.4 million , an increase of $ 11.0 million , or 9.8 % , in our non-interest expense and an increase in preferred stock dividends of $ 2.1 million , partially offset by the net impact of $ 10.9 million , or 8.6 % , increase in our net interest income , an increase of $ 4.4 million , or 8.4 % , in non-interest income and a $ 1.1 million decrease in income taxes . net interest income and non-interest income , excluding net gains and losses on the sale of securities , combined to generate total revenue of $ 191.2 million for the year ended december 31 , 2020 , compared to $ 179.4 million in 2019. the increase of $ 11.8 million , or 6.6 % was driven largely by higher net interest income and swap fees for the bank as a result of loan growth , partially offset by lower investment management fees . our net interest margin was 1.58 % for the year ended december 31 , 2020 , as compared to 1.97 % in 2019. the decrease in net interest margin for the year ended december 31 , 2020 , resulted from the federal reserve interest rate cuts , contributing to lower net interest spread , and higher average balances of lower-earning assets . this included excess liquidity in interest-bearing cash deposits and investments during certain times of the year in anticipation of clients ' potential liquidity and credit needs during the covid-19 . the significant reduction in interest rates by the federal reserve in response to the covid-19 pandemic impacted our interest-earning assets and interest-bearing liabilities . our loans are predominantly variable rate loans indexed to 1-month libor . at the end of the first quarter of 2020 , we placed interest rate floors on many of these floating rate loans , particularly our private banking loans . our deposits are a combination of fixed-rate time deposits and variable rate deposits , many of which are indexed to the effective federal funds rate and others that are priced at the bank 's discretion . the majority of the floating rate deposits were initially repriced in march 2020 , in line with the federal reserve rate reduction . in addition , we intentionally increased our liquid assets for the express purpose of carrying more on balance sheet liquidity in anticipation of clients ' needs during the first six months of the covid-19 pandemic . even though we continued to reduce our cost of deposits , as well as excess deposit levels , throughout the year . these carrying costs resulted in marginally lower returns based on the interest rate environment . our non-interest income is largely comprised of investment management fees for chartwell , which totaled $ 32.0 million for the year ended december 31 , 2020 , as compared to $ 36.4 million in 2019. the decrease was driven by a lower weighted average fee rate from the change in asset composition across investment products , partially offset by higher assets under management . assets under management were $ 10.26 billion as of december 31 , 2020 , an increase of $ 562.0 million from december 31 , 2019 , driven by market appreciation of $ 410.0 million , and net inflows of $ 152.0 million . another large component of our non- interest income are swap fees at the bank , which totaled $ 16.3 million for the year ended december 31 , 2020 , as compared to $ 11.0 million for the same period in 2019 , due to an increase in swap transactions from both new and existing customers . story_separator_special_tag the increase in net interest income reflects an increase of $ 62.7 million , or 31.3 % , in interest income , partially offset by an increase of $ 49.0 million , or 56.7 % , in interest expense . net interest margin decreased to 1.97 % for the year ended december 31 , 2019 , as compared to 2.26 % in 2018 , driven higher costs of funds , partially offset by a higher yield on our loan portfolio . the increase in interest income on interest-earning assets was primarily the result of an increase in average total loans , which are our primary earning assets , of $ 1.17 billion , or 26.0 % and an increase of 10 basis points in yield on our loans . the yield on our loan portfolio was primarily driven by the direction and timing of the federal reserve 's target federal funds rate changes , which impacted our floating-rate loans . the change in yield is also attributable to our continuing gradual shift towards lower-risk marketable-securities-backed private banking loans and commercial loans . the overall yield on interest-earning assets increased 8 basis points to 4.06 % for the year ended december 31 , 2019 , as compared to 3.98 % in 2018 , primarily from the higher loan yields . the increase in interest expense on interest-bearing liabilities was primarily the result of an increase of 41 basis points in the average rate paid on our average interest-bearing liabilities , as well as an increase of $ 1.31 billion , or 29.2 % , in average interest-bearing liabilities for the year ended december 31 , 2019 , compared to 2018 . the increase in average rate paid was reflective of increases in rates paid in all interest-bearing deposit categories , fhlb borrowings and line of credit borrowings , which was driven by the direction and timing of the federal reserve 's target federal funds rate changes , which impacted our variable-rate liabilities . the increase in average interest-bearing liabilities was driven primarily by an increase of $ 514.3 million in average money market deposit accounts , an increase of $ 445.1 million in average interest-bearing checking accounts and an increase of $ 299.5 million in average certificates of deposit . 58 the following tables analyze the dollar amount of the change in interest income and interest expense with respect to the primary components of interest-earning assets and interest-bearing liabilities . the tables show the amount of the change in interest income or interest expense caused by either changes in outstanding balances or changes in interest rates for the periods indicated . the effect of changes in balance is measured by applying the average rate during the first period to the balance ( “ volume ” ) change between the two periods . the effect of changes in rate is measured by applying the change in rate between the two periods to the average volume during the first period . replace_table_token_18_th ( 1 ) the change in interest income and expense due to changes in both composition and applicable yields/rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each . 59 replace_table_token_19_th ( 1 ) the change in interest income and expense due to changes in both composition and applicable yields/rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each . provision for credit losses on loans and leases the provision for credit losses on loans and leases represent our determination of the amount necessary to be recorded against the current period 's earnings to maintain the allowance for credit loss at a level that is consistent with management 's assessment of credit losses in the loan and lease portfolio at a specific point in time . we adopted cecl on december 31 , 2020 , which replaced the incurred loss methodology for determining our provision for credit losses and allowance for credit losses . we recorded a net decrease to retained earnings of $ 942,000 related to the allowance for credit losses on loans and leases as of january 1 , 2020 , for the cumulative effect of adopting cecl . results for full year and period end december 31 , 2020 , are presented under cecl methodology while prior period amounts continue to be reported in accordance with previously applicable gaap . for additional information regarding our allowance for credit losses on loans and leases , see “ allowance for credit losses on loans and leases . ” we recorded a provision for credit losses on loans and leases of $ 19.3 million for the year ended december 31 , 2020 , compared to a credit to provision for loan losses of $ 968,000 for the year ended december 31 , 2019 , and a credit to provision for loan losses of $ 205,000 for the year ended december 31 , 2018. the provision for credit losses on loans and leases for the year ended december 31 , 2020 , was comprised of an increase in general reserves of $ 18.7 million largely due to adjustments to the macro-economic forecast data such as gross domestic product ( “ gdp ” ) and unemployment in response to economic uncertainty around the covid-19 pandemic and an increase of $ 1.8 million in specific reserves on non-performing loans , largely driven by new non-accrual loans in our commercial and industrial and commercial real estate portfolios . the credit to provision for loan and lease losses for the year ended december 31 , 2019 , was comprised of recoveries of $ 2.0 million related to commercial and industrial loans and a net decrease of $ 266,000 in specific reserves primarily due to paydowns of these non-performing loans and collateral related to an impaired loan that was transferred to other real estate owned ( “ oreo ”

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capital resources the access to and cost of funding for new business initiatives , the ability to engage in expanded business activities , the ability to pay dividends , the level of deposit insurance costs and the level and nature of regulatory oversight depend , in part , on our capital position . the company filed a shelf registration statement on form s-3 with the sec on december 26 , 2019 , which provides a means to allow us to issue registered securities to finance our growth objectives . the assessment of capital adequacy depends on a number of factors , including asset quality , liquidity , earnings performance , changing competitive conditions and economic forces . we seek to maintain a strong capital base to support our growth and expansion activities , to provide stability to current operations and to promote public confidence in our company . shareholders ' equity . shareholders ' equity increased to $ 757.1 million as of december 31 , 2020 , compared to $ 621.3 million as of december 31 , 2019 . the $ 135.9 million increase during the year ended december 31 , 2020 , was primarily attributable to the issuance of $ 100.0 million in stock , net income of $ 45.2 million and the impact of $ 9.5 million in stock-based compensation , partially offset by preferred stock dividends declared of $ 7.9 million , a decrease of $ 3.8 million in accumulated other comprehensive income , the purchase of $ 3.6 million in treasury stock , $ 2.5 million in cancellation of stock options and $ 1.7 million related to our adoption of cecl on december 31 , 2020 . shareholders ' equity increased to $ 621.3 million as of december 31 , 2019 , compared to $ 479.4 million as of december 31 , 2018 .

in december 2016 the company has completed a settlement of all future obligations for a one-time payment of $ 650,000. the company had previously recorded this obligation at $ 1,538,000 and recorded a gain on settlement of debt of $ 888,000 in december 2016. as of december 31 , 2016 , the company leased one independent living community in oregon , with a capacity of 114 residents . the lease will terminate on march 30 , 2017. a number of years ago the company owned , leased and operated assisted living and retirement communities throughout the united states of america . during that period of time the company has both acquired and sold over seventy communities . the property in oregon is a holdover from that time period . the retirement center was not an integral part of our business plan . critical accounting policies and estimates the company 's discussion and analysis of its financial condition and results of operations are based upon the company 's consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . certain of the company 's accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty . these judgments and estimates are based upon the company 's historical experience , current trends and information available from other sources that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . the company believes the following critical accounting policies are more significant to the judgments and estimates used in the preparation of its consolidated financial statements . revisions in such estimates are recorded in the period in which the facts that give rise to the revisions become known . oil and gas property accounting the company uses the full cost method of accounting for its investment in oil and natural gas properties . under this method of accounting , all costs of acquisition , exploration and development of oil and natural gas properties ( including such costs as leasehold acquisition costs , geological expenditures , dry hole costs , tangible and intangible development costs and direct internal costs ) are capitalized as the cost of oil and natural gas properties when incurred . the full cost method requires the company to calculate quarterly , by cost center , a “ ceiling , ” or limitation on the amount of properties that can be capitalized on the balance sheet . to the extent capitalized costs of oil and natural gas properties , less accumulated depletion and related deferred taxes exceed the sum of the discounted future net revenues of proved oil and natural gas reserves , the lower of cost or estimated fair value of unproved properties subject to amortization , the cost of properties not being amortized , and the related tax amounts , such excess capitalized costs are charged to expense . beginning december 31 , 2009 , full cost companies use the unweighted arithmetic average first day of the month price for oil and natural gas for the 12-month period preceding the calculation date to calculate the future net revenues of proved reserves . prior to december 31 , 2009 , companies used the price in effect at the calculation date and had the option , under certain circumstances , to elect to use subsequent commodity prices if they increased after the calculation date . the company assesses any unproved oil and gas properties on an annual basis for possible impairment or reduction in value . the company assesses properties on an individual basis or as a group if properties are individually insignificant . the assessment includes consideration of the following factors , among others : intent to drill ; remaining lease term ; geological and geophysical evaluations ; drilling results and activity ; the assignment of proved reserves ; and the economic viability of development if proved reserves are assigned . during any period in which these factors indicate an impairment of unproved properties not subject to amortization , the associated costs incurred to date for such properties are then included in unproved properties subject to amortization . oil and gas reserves our proved oil and gas reserves are estimated by independent petroleum engineers . reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof , 11 including evaluations and extrapolations of well flow rates and reservoir pressure . estimates by different engineers often vary , sometimes significantly . in addition , physical factors such as the results of drilling , testing and production subsequent to the date of an estimate , as well as economic factors such as changes in product prices , may justify revision of such estimates . because proved reserves are required to be estimated using prices at the date of the evaluation , estimated reserve quantities can be significantly impacted by changes in product prices . depreciation , depletion and amortization ( “ dd & a ” ) of producing properties is computed on the unit-of-production method based on estimated proved oil and gas reserves . while total dd & a expense for the life of a property is limited to the property 's total cost , proved reserve revisions result in a change in timing of when dd & a expense is recognized . downward revisions of proved reserves result in an acceleration of dd & a expense , while upward revisions tend to lower the rate of dd & a expense recognition . the standardized measure of discounted future net cash flows and changes in such cash flows are prepared using assumptions required by the financial accounting story_separator_special_tag in december 2016 the company has completed a settlement of all future obligations for a one-time payment of $ 650,000. the company had previously recorded this obligation at $ 1,538,000 and recorded a gain on settlement of debt of $ 888,000 in december 2016. as of december 31 , 2016 , the company leased one independent living community in oregon , with a capacity of 114 residents . the lease will terminate on march 30 , 2017. a number of years ago the company owned , leased and operated assisted living and retirement communities throughout the united states of america . during that period of time the company has both acquired and sold over seventy communities . the property in oregon is a holdover from that time period . the retirement center was not an integral part of our business plan . critical accounting policies and estimates the company 's discussion and analysis of its financial condition and results of operations are based upon the company 's consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . certain of the company 's accounting policies require the application of judgment in selecting the appropriate assumptions for calculating financial estimates . by their nature , these judgments are subject to an inherent degree of uncertainty . these judgments and estimates are based upon the company 's historical experience , current trends and information available from other sources that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . the company believes the following critical accounting policies are more significant to the judgments and estimates used in the preparation of its consolidated financial statements . revisions in such estimates are recorded in the period in which the facts that give rise to the revisions become known . oil and gas property accounting the company uses the full cost method of accounting for its investment in oil and natural gas properties . under this method of accounting , all costs of acquisition , exploration and development of oil and natural gas properties ( including such costs as leasehold acquisition costs , geological expenditures , dry hole costs , tangible and intangible development costs and direct internal costs ) are capitalized as the cost of oil and natural gas properties when incurred . the full cost method requires the company to calculate quarterly , by cost center , a “ ceiling , ” or limitation on the amount of properties that can be capitalized on the balance sheet . to the extent capitalized costs of oil and natural gas properties , less accumulated depletion and related deferred taxes exceed the sum of the discounted future net revenues of proved oil and natural gas reserves , the lower of cost or estimated fair value of unproved properties subject to amortization , the cost of properties not being amortized , and the related tax amounts , such excess capitalized costs are charged to expense . beginning december 31 , 2009 , full cost companies use the unweighted arithmetic average first day of the month price for oil and natural gas for the 12-month period preceding the calculation date to calculate the future net revenues of proved reserves . prior to december 31 , 2009 , companies used the price in effect at the calculation date and had the option , under certain circumstances , to elect to use subsequent commodity prices if they increased after the calculation date . the company assesses any unproved oil and gas properties on an annual basis for possible impairment or reduction in value . the company assesses properties on an individual basis or as a group if properties are individually insignificant . the assessment includes consideration of the following factors , among others : intent to drill ; remaining lease term ; geological and geophysical evaluations ; drilling results and activity ; the assignment of proved reserves ; and the economic viability of development if proved reserves are assigned . during any period in which these factors indicate an impairment of unproved properties not subject to amortization , the associated costs incurred to date for such properties are then included in unproved properties subject to amortization . oil and gas reserves our proved oil and gas reserves are estimated by independent petroleum engineers . reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof , 11 including evaluations and extrapolations of well flow rates and reservoir pressure . estimates by different engineers often vary , sometimes significantly . in addition , physical factors such as the results of drilling , testing and production subsequent to the date of an estimate , as well as economic factors such as changes in product prices , may justify revision of such estimates . because proved reserves are required to be estimated using prices at the date of the evaluation , estimated reserve quantities can be significantly impacted by changes in product prices . depreciation , depletion and amortization ( “ dd & a ” ) of producing properties is computed on the unit-of-production method based on estimated proved oil and gas reserves . while total dd & a expense for the life of a property is limited to the property 's total cost , proved reserve revisions result in a change in timing of when dd & a expense is recognized . downward revisions of proved reserves result in an acceleration of dd & a expense , while upward revisions tend to lower the rate of dd & a expense recognition . the standardized measure of discounted future net cash flows and changes in such cash flows are prepared using assumptions required by the financial accounting

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liquidity and capital resources at december 31 , 2016 , the company had current assets of $ 438,000 and current liabilities of $ 393,000. cash and cash equivalents totaled $ 113,000 at december 31 , 2016 and $ 473,000 at december 31 , 2015. new concept 's principal sources of cash are property operations , sales of oil and gas , and proceeds from sales of assets . net cash provided ( used ) by continuing operating activities was ( $ 314,000 ) in 2016 , $ 566,000 in 2015 and ( $ 282,000 ) in 2014. net cash provided ( used ) in investing activities was $ 686,000 in 2016 , ( $ 112,000 ) in 2015 and ( $ 954,000 ) in 2014. net cash used in financing activities was $ 732,000 in 2016 $ 281,000 in 2015 and ( $ 85,000 ) in 2014. results of operations fiscal 2016 as compared to 2015 revenues : total revenues from the oil & gas operation was $ 754,000 in 2016 and $ 820,000 in 2015. net revenue for our oil and gas operation decreased by $ 56,000 in 2016 as compared to 2015. included in 2016 revenue is a one time fee of $ 30,000. the drop in revenue in 2016 was principally due to a reduction in the quantity of oil and gas produced . operating expenses : operating expenses for the oil & gas operation were $ 1.2 million in 2016 and $ 1.8 million in 2015. this decrease was the result of an overall reduction in operating expenses as the company has actively reduced expenses to compensate for a slowdown in the oil and gas operation .

we announced the top-line results for zs004 in september 2014 and presented detailed primary and secondary endpoint results for zs004 at the american heart association scientific sessions on november 17 , 2014. the zs004 study results were simultaneously published in the journal of the american medical association , and we announced the publication of detailed results from the zs003 study in the new england journal of medicine on november 21 , 2014. we initiated an extension to the zs004 study , or zs004e , and a long-term safety study , zs005 , in the second quarter of 2014. we expect to file our nda with the fda in the second quarter of 2015 and our maa with the ema in the second half of 2015. zs-9 was developed utilizing proprietary zirconium silicate technology , the rights to which we currently have pursuant to a 2011 license agreement with uop , which grants us an exclusive license under specified patent rights held by uop to develop and commercialize pharmaceutical products for use in the field of removing toxins from bodily fluids and the gastrointestinal ( gi ) tract of humans and animals , which includes zs-9 and any other product covered by the terms of the license agreement . under the terms of the license agreement , we will owe uop royalties equal to 5 % of worldwide net sales of zs-9 made by us or our sublicensees , and we are obligated to make a minimum annual royalty payment to uop , which commenced with payments of $ 25,000 and $ 50,000 in 2010 and 2011 , respectively , increasing to $ 100,000 for 2012 and years thereafter . 83 we have never been profitable and , as of december 31 , 2014 , had an accumulated deficit of $ 114.3 million . we incurred net losses of approximately $ 64.0 million , $ 33.6 million and $ 10.3 million in the fiscal years ended december 31 , 2014 , 2013 and 2012 , respectively . we expect to continue to incur net losses as we advance zs-9 through clinical development , seek regulatory approval , expand our manufacturing capabilities and prepare for and , if approved , proceed to commercialization . we manufacture clinical trial quantities of zs-9 in-house in two facilities from readily available starting materials using specialized equipment . we are currently in the process of increasing our manufacturing capabilities to support anticipated commercial demand . additionally , we have established a supply chain to provide us with the materials required to manufacture zs-9 . we expect to significantly increase our investment in our commercial manufacturing process and inventory of zs-9 , and in our commercialization and marketing related activities as we prepare for a possible commercial launch of zs-9 . we do not have a sales organization , and we will need substantial additional funding to support our operating activities . adequate funding may not be available to us on acceptable terms , or at all . our failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on our business , results of operations and financial condition . financial overview on june 23 , 2014 , we completed our ipo of 6,836,111 shares of our common stock for net proceeds of $ 112.1 million after deducting underwriting discounts and commissions and offering expenses . we have invested substantially all of our efforts and financial resources to identify , acquire , and develop our product candidates , and in particular zs-9 , including conducting clinical studies and providing general and administrative support for these operations . to date , we have funded our operations primarily from the sale of convertible preferred stock and equity securities and a small amount of secured debt . we have never been profitable and have incurred net losses in each year since inception . our net losses were $ 64.0 million , $ 33.6 million and $ 10.3 million for the fiscal years ended december 31 , 2014 , 2013 and 2012. as of december 31 , 2014 we had an accumulated deficit of $ 114.3 million . substantially all of our net losses have resulted from costs incurred in connection with our research and development programs and from general and administrative costs associated with our operations . revenue to date , we have not generated any revenues . our ability to generate product revenues , which we do not expect will occur before 2016 , at the earliest , will depend heavily on our obtaining marketing approval from the fda and ema for , and , subsequent to that , our successful commercialization of zs-9 . if we fail to complete the development of zs-9 in a timely manner or to obtain regulatory approval , our ability to generate future revenue , and our results of operations and financial position , would be materially adversely effected . research and development expenses our research and development expenses consist primarily of : salaries and related costs , including stock-based compensation expense , for personnel in our research and development functions ; costs related to nonclinical studies in animal models ; fees paid to clinical consultants , clinical trial sites and vendors in conjunction with implementing and monitoring our clinical trials and acquiring and evaluating clinical trial data , including all related fees , such as for investigator grants , patient screening fees , laboratory work and statistical compilation and analysis ; costs related to production of clinical supplies , including fees paid to contract packagers ; costs related to compliance with drug development regulatory requirements ; annual minimum royalty payments to uop pursuant to a license agreement ; and depreciation and other allocated facility-related and overhead expenses . 84 we expense both internal and external research and development costs in the periods in which they are incurred . story_separator_special_tag in october 2014 , we entered into a one month lease agreement with regus management group , llc for 9 individual offices in grapevine , tx commencing november 1 , 2014 and a five month lease agreement for 15 individual offices in grapevine , tx commencing december 1 , 2014. rent is due and payable on the first day of each month of the lease term . 91 indemnification in the normal course of business , we enter into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications . our exposure under these agreements is unknown because it involves claims that may be made against us in the future , but have not yet been made . to date , we have not paid any claims or been required to defend any action related to our indemnification obligations . however , we may record charges in the future as a result of these indemnification obligations . in accordance with our seventh amended and restated certificate of incorporation and amended and restated bylaws , we have indemnification obligations to our officers and directors for specified events or occurrences , subject to some limits , while they are serving at our request in such capacities . there have been no claims to date , and we have director and officer insurance that may enable us to recover a portion of any amounts paid for future potential claims . off-balance sheet arrangements we do not have any off-balance sheet arrangements . critical accounting polices and significant estimates our financial statements are prepared in accordance with u.s. generally accepted accounting principles , or u.s. gaap . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues , costs and expenses and related disclosures . we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances . in many instances , we could have reasonably used different accounting estimates , and in other instances changes in the accounting estimates are reasonably likely to occur from period to period . accordingly , actual results could differ significantly from management 's estimates . to the extent that there are material differences between these estimates and actual results , our future financial statement presentation , financial condition , results of operations and cash flows will be affected . while our significant accounting policies are described in the notes to our financial statements , we believe that the accounting policies discussed below are critical to understanding our historical and future performance , as these policies relate to the more significant areas involving management 's judgments and estimates . clinical trial accruals clinical trial costs are a component of research and development expenses . we accrue and expense clinical trial activities performed by third parties based upon actual patient enrollment in accordance with agreements established with third-party vendors and clinical sites . we determine the actual expense accrual through review of patient enrollment databases and the agreed-upon fee to be paid for each patient enrolled less any payments made . during the course of a clinical trial , we may adjust our rate of clinical expense recognition if actual results differ from our estimates . we make estimates of our accrued expenses as of each balance sheet date in our financial statements based on the facts and circumstances known to us at that time . although we do not expect our estimates to be materially different from amounts actually incurred , our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low for any particular period . our clinical trial accrual is dependent , in part , upon the receipt of timely and accurate reporting from clinical sites and other third-party vendors . through december 31 , 2014 , there have been no material adjustments to our prior period estimates of accrued expenses for clinical trials . stock-based compensation we measure and recognize compensation expense for stock options granted to our employees and directors , based on the estimated fair value of the award on the grant date . historically , for all periods prior to our ipo , the fair values of the shares of common stock underlying our stock-based awards were estimated on each grant date 92 by our board of directors . in order to determine the fair value of our common stock underlying option grants , our board of directors considered , among other things , contemporaneous valuations of our common stock prepared by an unrelated third-party valuation firm . we use the black-scholes valuation model to estimate the fair value of stock option awards . the fair value is recognized as expense , net of estimated forfeitures , over the requisite service period , which is generally the vesting period of the respective award on a straight-line basis . vesting terms for certain employee grant agreements did not initially match the terms approved by our board of directors . accordingly , these options were not considered granted for accounting purposes until a mutual understanding of the terms was obtained through amendment of the grant agreements in january 2014. certain of these options were considered to have service inception dates in 2013 , which resulted in the vested portion of these options being re-measured to fair value throughout 2013. prior to the public trading of our common stock , our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock , including : contemporaneous valuations of our common stock performed by unrelated third-party valuation firms ; our stage of development ; our operational and financial performance ; the nature of our services

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liquidity and capital resources due to our significant research and development expenditures , we have generated significant operating losses since our inception . we have funded our operations primarily through our ipo , sales of our preferred shares of stock and a small amount of secured debt . our expenditures are primarily related to research and development activities . at december 31 , 2014 , we had available cash and cash equivalents of $ 47.4 million and short-term investments of $ 54.9 million . our cash , cash equivalents and short-term investments are currently held in a variety of interest and non-interest bearing accounts at financial institutions and invested in a variety of short-term interest-bearing instruments . cash in excess of immediate requirements is invested with a view toward liquidity and capital preservation , and we seek to minimize the potential effects of concentration and degrees of risk . 87 in july 2014 , we entered into a credit and security agreement ( credit agreement ) with midcap financial sbic , lp ( midcap ) for a $ 20 million credit facility , secured by all of our assets , with a negative pledge against our intellectual property ( with all amendments thereto , the midcap credit facility ) . the midcap credit facility is structured in two $ 10 million tranches , with the first tranche previously drawn at closing and the second tranche to be drawn after we provide evidence to midcap of positive primary endpoint results from our zs004 clinical study , which has occurred , but before its expiration on october 31 , 2014. in september 2014 , we entered into the first amendment to credit and security agreement , which extended the second tranche commitment termination date from october 31 , 2014 to march 31 , 2015. notes issued under the terms of the credit agreement bear interest at the rate of 7.5 % per annum , payable monthly , have principal payable in 36 monthly installments commencing on january 1 , 2016 and are subject to a $ 50,000 fee which we paid to midcap upon closing .

our clients are contractually obligated to pay us for all hours billed . to a much lesser extent , we also earn revenue if a client hires one of our consultants . this type of contractually non-refundable revenue is recognized at the time our client completes the hiring process and represented 0.5 % of our revenue for each of the years ended may 25 , 2013 , may 26 , 2012 and may 28 , 2011. we periodically review our outstanding accounts receivable balance and determine an estimate of the amount of those receivables we believe may prove uncollectible . our provision for bad debts , if any , is included in our selling , general and administrative expenses . the costs to pay our professional consultants and all related benefit and incentive costs , including provisions for paid time off and other employee benefits , are included in direct cost of services . we pay most of our consultants on an hourly basis for all hours worked on client engagements and , therefore , direct cost of services tends to vary directly with the volume of revenue we earn . we expense the benefits we pay to our consultants as they are earned . these benefits include paid time off and holidays ; a discretionary bonus plan ; subsidized group health , dental and life insurance programs ; a matching 401 ( k ) retirement plan ; the ability to participate in the company 's espp ; and professional development and career training . in addition , we pay the related costs of employment , including state and federal payroll taxes , workers ' compensation insurance , unemployment insurance and other costs . typically , a consultant must work a threshold number of hours to be eligible for all of the benefits . we recognize direct cost of services when incurred . selling , general and administrative expenses include the payroll and related costs of our internal management as well as general and administrative , marketing and recruiting costs . our sales and marketing efforts are led by our management team who are salaried employees and earn bonuses based on operating results for the company as a whole and within each individual 's geographic market . the company 's fiscal year consists of 52 or 53 weeks , ending on the saturday in may closest to may 31. fiscal 2013 and 2012 consisted of 52 weeks each . for fiscal years of 53 weeks , such as next year 's fiscal 2014 , the first three quarters consist of 13 weeks each and the fourth quarter consists of 14 weeks . critical accounting policies the following discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements , which have been prepared in accordance with gaap in the united states . the preparation of these financial statements requires us to make estimates and judgments 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 . the following represents a summary of our critical accounting policies , defined as those policies that we believe : ( a ) are the most important to the portrayal of our financial condition and results of operations and ( b ) involve inherently uncertain issues that require management 's most difficult , subjective or complex judgments . valuation of long-lived assets — we assess the potential impairment of long-lived tangible and intangible assets periodically or whenever events or changes in circumstances indicate that the carrying value may not be recoverable . our goodwill and certain other intangible assets are not subject to periodic amortization . these assets are considered to have an indefinite life and their carrying values are required to be assessed by us for impairment at least annually . depending on future market values of our stock , our operating performance and other factors , these assessments could potentially result in impairment reductions of these intangible assets in the future and this adjustment may materially affect the company 's future financial results and financial condition . contingent consideration — the company estimates and records the acquisition date fair value of contingent consideration as part of purchase price consideration for acquisitions occurring subsequent to may 30 , 2009. in addition , each reporting period , the company estimates changes in the fair value of contingent consideration and any change in fair value is recognized in the company 's consolidated statement of operations . the estimate of the fair value of contingent consideration requires very subjective assumptions to be made of future operating results , discount rates and probabilities assigned to various potential operating result scenarios . future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore materially affect the company 's future financial results and financial condition . 32 under the terms of a november 2009 membership interest purchase agreement that we entered into with sitrick and company , michael s. sitrick , brincko associates , inc. and john p. brincko ( together , the “sellers” ) to acquire sitrick brincko group , the sellers have the opportunity to receive contingent consideration subsequent to the fourth anniversary of the acquisition , provided that sitrick brincko group 's average annual ebitda ( defined as earnings before interest , taxes , depreciation and amortization ) over a period of four years following the acquisition date exceeds $ 11.3 million . the range of undiscounted amounts the company could be obligated to pay as contingent consideration under the earn-out arrangement is between $ 0 and an unlimited amount . at the date of acquisition , the company determined the fair value of the obligation to pay contingent consideration based on probability-weighted projections of the average ebitda during the four year earn-out measurement period . story_separator_special_tag this decrease is primarily attributable to the absence of paid holidays in the united states during the fourth quarter and the declining impact of payroll taxes as the calendar year progresses . s , g & a expenses increased $ 700,000 from the quarter ended february 23 , 2013 to the quarter ended may 25 , 2013 , primarily as a result of increased marketing spend and severance expenses in certain european offices offset by reduced payroll related benefit costs . the leverage of s , g & a expenses was relatively flat at 30.1 % in the third quarter of fiscal 2013 and 30.2 % in the fourth quarter of fiscal 2013. a downturn or softening in global economic conditions and the impact of the summer holiday period could put resulting pressure on revenue in the first quarter of fiscal 2014 , and may limit our ability to leverage direct cost of services and s , g & a expenses . employee portion of contingent consideration adjustment and contingent consideration adjustment . at the conclusion of the second annual evaluation period for earn-out qualification as of november 26 , 2012 , the company determined that it was more likely than not that the sitrick brincko group would not exceed the target average ebitda of $ 11.3 million necessary for an earn-out payment in november 2013 and reduced the fair value of the estimated liability from $ 33.4 million to zero , representing a non-cash favorable adjustment as reflected in the company 's consolidated statement of operations for the year ended may 26 , 2012 ( $ 20.4 million net of tax , including the employee portion adjustment discussed below ) . as of may 25 , 2013 , the company has not altered its conclusion after updating its probability weighted assessment of various projected ebitda scenarios for the remaining two quarters in the earn-out period . in addition , in fiscal 2012 , the company also reversed its previously recorded estimate of $ 500,000 for the employee portion of contingent consideration after determining that it is more likely than not that the earn-out contingent consideration will not be paid . as of may 25 , 2013 , the company continues to believe it is more likely than not that no contingent consideration will be payable . in the event that the contingent consideration is not paid at the conclusion of the earn-out period , mr. brincko will be entitled to receive a cash payment of $ 2,250,000 , subject to his employment in good standing with the company as defined . as a result of the company 's determination that it is more likely than not that the contingent consideration will not be earned , this amount is recognized as a component of s , g & a over the remaining service period from the time it was estimated that no contingent consideration will be due . the estimate of the fair value of contingent consideration payable , including the employee portion , requires very subjective assumptions to be made of various potential operating result scenarios ; significant increases in the future estimated ebitda could result in an increase in the estimated fair value of the sitrick brincko group contingent consideration and therefore materially affect the company 's future financial results and financial condition . amortization and depreciation expense . amortization of intangible assets decreased to $ 1.7 million in fiscal 2013 from $ 3.4 million in fiscal 2012. the decrease is the result of the completion of amortization on certain identifiable intangible assets . based upon identified intangible assets recorded at may 25 , 2013 , the company anticipates amortization expense related to identified intangible assets to approximate $ 1.7 million during the fiscal year ending may 31 , 2014. depreciation expense decreased from $ 5.7 million for the year ended may 26 , 2012 to $ 4.6 million for the year ended may 25 , 2013. depreciation decreased as a number of assets were fully depreciated during fiscal 2012 and fiscal 2013 and the company has slowed the amount invested in property and equipment since fiscal 2009 as compared to previous fiscal years . interest income . interest income declined to $ 175,000 in fiscal 2013 compared to $ 252,000 in fiscal 2012. the decrease in interest income is the result of lower interest rates available for the company 's investments as compared to fiscal 2012 and , to a lesser extent , lower available cash balances available for investment . the company has invested available cash in certificates of deposit , money market investments and commercial paper that have been classified as cash equivalents due to the short maturities of these investments . as of may 25 , 2013 , the company had $ 25.0 million of investments in commercial paper and certificates of deposit with remaining maturity dates between three months and one year from the balance sheet date classified as short-term investments and considered “held-to-maturity” securities . 37 income taxes . the provision for income taxes decreased from $ 32.2 million ( effective rate of 43.9 % ) for the year ended may 26 , 2012 to $ 19.4 million ( effective rate of 48.6 % ) for the year ended may 25 , 2013. while the provision decreased because of lower pretax income , the effective tax rate increased as a consequence of the mix of international results . in addition , the provision for taxes in each of fiscal 2013 and fiscal 2012 resulted from taxes on income from operations in the united states and certain other foreign jurisdictions , a lower benefit for losses in certain foreign jurisdictions with tax rates lower than the united states statutory rates , and no benefit for losses in jurisdictions in which a valuation allowance on operating loss carryforwards had previously been established . the effective tax rate in both fiscal years disproportionally magnifies the effect of the components of the tax rate that differ

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liquidity and capital resources our primary source of liquidity is cash provided by our operations and , historically , to a lesser extent , stock option exercises . we have generated positive cash flows annually from operations since inception , and we continued to do so during the year ended may 25 , 2013. our ability to continue to increase positive cash flow from operations in the future will be , at least in part , dependent on improvement in global economic conditions . at may 25 , 2013 , the company had operating leases , primarily for office premises , and purchase obligations , primarily for property and equipment , expiring at various dates . at may 25 , 2013 , the company had no capital leases . the following table summarizes our future minimum rental commitments under operating leases and our other known contractual obligations as of may 25 , 2013 : replace_table_token_13_th the company has a $ 3.0 million unsecured revolving credit facility with bank of america ( the “credit agreement” ) . the credit agreement allows the company to choose the interest rate applicable to advances . the interest rate options are bank of america 's prime rate and a london inter-bank offered rate ( “libor” ) plus 2.25 % . interest , if any , is payable monthly . the credit agreement expires november 30 , 2013. as of may 25 , 2013 , the company had approximately $ 1.3 million available under the terms of the credit agreement as bank of america has issued approximately $ 1.7 million of outstanding letters of credit in favor of third parties related to operating leases . as of may 25 , 2013 , the company was in compliance with all covenants included in the credit agreement . operating activities provided $ 35.0 million in cash in fiscal 2013 compared to $ 36.4 million in fiscal 2012. cash provided by operations in fiscal 2013 resulted from net income of $ 20.5 million and net favorable non-cash reconciling adjustments of $ 14.5 million ( principally depreciation and amortization and stock compensation expense ) .

our 2016 dividend payments are expected to be approximately $ 123 million assuming no change in the quarterly dividend rate of $ 0.25 per share or material changes in the number of shares outstanding . we made no discretionary pension contributions in 2015 or 2014 . we have no mandatory pension contributions in 2016 but may make discretionary contributions in the future . on an ongoing basis , cash income tax payments are expected to be minimal . during 2016 , we may repatriate approximately $ 23 million of proceeds received from the sale of our forestry assets to the new zealand jv when it was formed in 2005. if this occurs , we anticipate that cash payments for income taxes in 2016 will be approximately $ 1.7 million . 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 : adjusted earnings before interest , taxes , depreciation , depletion and amortization ( “ adjusted ebitda ” ) , and cash available for distribution ( “ cad ” ) . these measures are not defined by generally accepted accounting principles ( “ gaap ” ) and the discussion of adjusted ebitda and 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 adjusted ebitda as a performance measure and cad as a liquidity measure . adjusted ebitda and cad as defined may not be comparable to similarly titled measures reported by other companies . adjusted ebitda is defined as earnings before interest , taxes , depreciation , depletion , amortization , the non-cash cost of land and real estate sold , costs related to shareholder litigation , costs related to the spin-off of the performance fibers business , discontinued operations , large dispositions , internal review and restatement costs and the gain related to consolidation of the new zealand joint venture . below is a reconciliation of net income to adjusted ebitda for the five years ended december 31 ( in millions of dollars ) : replace_table_token_30_th ( a ) previously reported adjusted ebitda for 2014 , 2013 and 2011 has been restated to exclude large dispositions . large dispositions are defined as transactions involving the sale of timberland that exceed $ 20 million in size and do not have any identified hbu premium relative to timberland value . ( b ) costs related to shareholder litigation include expenses incurred as a result of the securities litigation , the shareholder derivative demands and the securities and exchange commission investigation . see note 10 — contingencies . see item 6 — selected financial data for a reconciliation of adjusted ebitda to operating income by segment as well as item 7 — results of operations for an analysis of changes in adjusted ebitda from the prior year . 46 cad is a non-gaap measure of cash generated during a period which is available for dividend distribution , repurchase of the company 's common shares , debt reduction and strategic acquisitions . we define cad as cash provided by operating activities adjusted for capital spending ( excluding timberland acquisitions ) , large dispositions , cash provided by discontinued operations and working capital and other balance sheet changes . in compliance with sec requirements for non-gaap measures , we reduce cad by mandatory debt repayments which results in the measure entitled “ adjusted cad . ” adjusted cad generated in any period is not necessarily indicative of the amounts that may be generated in future periods . below is a reconciliation of cash provided by operating activities to adjusted cad for the five years ended december 31 ( in millions ) : replace_table_token_31_th replace_table_token_32_th ( a ) capital expenditures exclude timberland acquisitions of $ 98.4 million and $ 130.9 million during the years ended december 31 , 2015 and december 31 , 2014 , respectively . capital expenditures also exclude $ 139.9 million for the purchase of an additional interest in the new zealand jv and $ 20.4 million for timberland acquisitions for the year ended december 31 , 2013 . in 2012 , timberland acquisitions totaled $ 106.5 million . ( b ) previously reported cad for 2014 , 2013 and 2011 has been restated to exclude large dispositions . large dispositions are defined as transactions involving the sale of timberland that exceed $ 20 million in size and do not have any identified hbu premium relative to timberland value off-balance sheet arrangements we utilize off-balance sheet arrangements to provide credit support for certain suppliers and vendors in case of their default on critical obligations , and collateral for certain self-insurance programs that we maintain . these arrangements consist of standby letters of credit and surety bonds . as part of our ongoing operations , we also periodically issue guarantees to third parties . off-balance sheet arrangements are not considered a source of liquidity or capital resources and do not expose us to material risks or material unfavorable financial impacts . see note 11 — guarantees for further discussion . 47 contractual financial obligations in addition to using cash flow from operations , we finance our operations through the issuance of debt and by entering into leases . these financial obligations are recorded in accordance with accounting rules applicable to the underlying transaction , with the result that some are recorded as liabilities on the consolidated balance sheets , while others are required to be disclosed in the notes to consolidated financial statements and management story_separator_special_tag our 2016 dividend payments are expected to be approximately $ 123 million assuming no change in the quarterly dividend rate of $ 0.25 per share or material changes in the number of shares outstanding . we made no discretionary pension contributions in 2015 or 2014 . we have no mandatory pension contributions in 2016 but may make discretionary contributions in the future . on an ongoing basis , cash income tax payments are expected to be minimal . during 2016 , we may repatriate approximately $ 23 million of proceeds received from the sale of our forestry assets to the new zealand jv when it was formed in 2005. if this occurs , we anticipate that cash payments for income taxes in 2016 will be approximately $ 1.7 million . 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 : adjusted earnings before interest , taxes , depreciation , depletion and amortization ( “ adjusted ebitda ” ) , and cash available for distribution ( “ cad ” ) . these measures are not defined by generally accepted accounting principles ( “ gaap ” ) and the discussion of adjusted ebitda and 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 adjusted ebitda as a performance measure and cad as a liquidity measure . adjusted ebitda and cad as defined may not be comparable to similarly titled measures reported by other companies . adjusted ebitda is defined as earnings before interest , taxes , depreciation , depletion , amortization , the non-cash cost of land and real estate sold , costs related to shareholder litigation , costs related to the spin-off of the performance fibers business , discontinued operations , large dispositions , internal review and restatement costs and the gain related to consolidation of the new zealand joint venture . below is a reconciliation of net income to adjusted ebitda for the five years ended december 31 ( in millions of dollars ) : replace_table_token_30_th ( a ) previously reported adjusted ebitda for 2014 , 2013 and 2011 has been restated to exclude large dispositions . large dispositions are defined as transactions involving the sale of timberland that exceed $ 20 million in size and do not have any identified hbu premium relative to timberland value . ( b ) costs related to shareholder litigation include expenses incurred as a result of the securities litigation , the shareholder derivative demands and the securities and exchange commission investigation . see note 10 — contingencies . see item 6 — selected financial data for a reconciliation of adjusted ebitda to operating income by segment as well as item 7 — results of operations for an analysis of changes in adjusted ebitda from the prior year . 46 cad is a non-gaap measure of cash generated during a period which is available for dividend distribution , repurchase of the company 's common shares , debt reduction and strategic acquisitions . we define cad as cash provided by operating activities adjusted for capital spending ( excluding timberland acquisitions ) , large dispositions , cash provided by discontinued operations and working capital and other balance sheet changes . in compliance with sec requirements for non-gaap measures , we reduce cad by mandatory debt repayments which results in the measure entitled “ adjusted cad . ” adjusted cad generated in any period is not necessarily indicative of the amounts that may be generated in future periods . below is a reconciliation of cash provided by operating activities to adjusted cad for the five years ended december 31 ( in millions ) : replace_table_token_31_th replace_table_token_32_th ( a ) capital expenditures exclude timberland acquisitions of $ 98.4 million and $ 130.9 million during the years ended december 31 , 2015 and december 31 , 2014 , respectively . capital expenditures also exclude $ 139.9 million for the purchase of an additional interest in the new zealand jv and $ 20.4 million for timberland acquisitions for the year ended december 31 , 2013 . in 2012 , timberland acquisitions totaled $ 106.5 million . ( b ) previously reported cad for 2014 , 2013 and 2011 has been restated to exclude large dispositions . large dispositions are defined as transactions involving the sale of timberland that exceed $ 20 million in size and do not have any identified hbu premium relative to timberland value off-balance sheet arrangements we utilize off-balance sheet arrangements to provide credit support for certain suppliers and vendors in case of their default on critical obligations , and collateral for certain self-insurance programs that we maintain . these arrangements consist of standby letters of credit and surety bonds . as part of our ongoing operations , we also periodically issue guarantees to third parties . off-balance sheet arrangements are not considered a source of liquidity or capital resources and do not expose us to material risks or material unfavorable financial impacts . see note 11 — guarantees for further discussion . 47 contractual financial obligations in addition to using cash flow from operations , we finance our operations through the issuance of debt and by entering into leases . these financial obligations are recorded in accordance with accounting rules applicable to the underlying transaction , with the result that some are recorded as liabilities on the consolidated balance sheets , while others are required to be disclosed in the notes to consolidated financial statements and management

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liquidity facilities term credit agreement on august 5 , 2015 , the company entered into a credit agreement with cobank , acb , as administrative agent , and a syndicate of farm credit institutions and other commercial banks to provide $ 550 million of new credit facilities , including a nine-year $ 350 million term loan facility . the periodic interest rate on the term loan facility is subject to a pricing grid based on the company 's leverage ratio , as defined in the credit agreement . as of december 31 , 2015 , the periodic interest rate on the term loan facility was libor plus 1.625 % . concurrent with the closing of the facilities , the company entered into an interest rate swap transaction to fix the cost of the term loan facility over its nine-year term . the company also expects to receive annual patronage refunds , which are profit distributions made by a cooperative to its member-users based on the quantity or value of business done with the member-user . the company estimates the effective interest rate on the term loan facility to be approximately 3.3 % after consideration of the interest rate swap and estimated patronage refunds . as of december 31 , 2015 , the company had additional draws available of $ 180 million under the term loan facility . revolving credit facility in august 2015 , the company entered into a five-year $ 200 million unsecured revolving credit facility , replacing the previous $ 200 million revolving credit facility and $ 100 million farm credit facility which were scheduled to expire in april 2016 and december 2019 , respectively . the periodic interest rate on the revolving credit facility is subject to a pricing grid based on the company 's leverage ratio , as defined in the credit agreement .

these r & d projects include certain products that we have dubbed our `` significant seven `` , which are products recently launched or expected to launch in the near term pending completion of testing and receiving fda approval . our significant seven are : ( i ) vyzulta ( bausch + lomb ) , ( ii ) siliq ( psoriasis ) , ( iii ) jemdel ( psoriasis ) , ( iv ) lumify ( bausch + lomb ) , ( v ) duobrii ( psoriasis ) , ( vi ) relistor ® ( gi ) and ( vii ) the bausch + lomb ultra ® product lines ( bausch + lomb ) . as outlined later in the discussion of our transformation , although the 2017 revenues associated with our significant seven are not material , we believe the prospects for this group of products over the next five years are substantial . history following the company 's ( then named biovail corporation ) acquisition of valeant pharmaceuticals international on september 28 , 2010 , we supplemented our internal r & d efforts with strategic acquisitions to expand our portfolio offerings and geographic footprint . in 2013 , we acquired bausch & lomb holdings incorporated ( “ b & l ” ) ( the “ b & l acquisition ” ) , a global eye-health company that focuses on developing , manufacturing and marketing eye-health products , including contact lenses , contact lens care solutions , ophthalmic pharmaceuticals and ophthalmic surgical products . in 2015 , we acquired salix pharmaceuticals , ltd. ( “ salix ” ) ( the “ salix acquisition ” ) , a specialty pharmaceutical company dedicated to developing and commercializing prescription drugs and medical devices used in treatment of a variety of gi disorders with a portfolio of over 20 marketed products , including xifaxan ® , uceris ® , apriso ® , glumetza ® and relistor ® . in 2015 , we acquired the exclusive licensing rights to develop and commercialize brodalumab , an il-17 receptor monoclonal antibody for patients with moderate-to-severe 40 plaque psoriasis for which , following internal development work , on february 15 , 2017 , we received approval from the u.s. food and drug administration ( “ fda ” ) . on july 27 , 2017 , we launched this product in the u.s. , marketed as siliq . we believe the investments we have made in b & l , salix , brodalumab and other acquisitions , as well as our ongoing investments in our internal r & d efforts , are helping us to capitalize on the core geographies and therapeutic classes that have the potential for strong operating margins and offer attractive growth opportunities . while business development through acquisitions may continue to be a component of our long-term strategy , we have made minimal acquisitions since 2015 and expect the volume and size of acquisitions to be low in the foreseeable future . see note 3 , `` acquisitions `` to our audited consolidated financial statements for additional details regarding acquisitions . our transformation prior to 2016 , we had completed a series of mergers and acquisitions which were in-line with the company 's previous strategy for growth . however , in response to changing business dynamics within our company , we recognized the need to change our focus in order to build a world-class health care organization . in 2016 , we retained a new executive team which immediately implemented a multi-year plan to stabilize , turnaround and transform the company . stabilize in 2016 the new executive team : ( i ) identified and retained a new leadership team , ( ii ) enhanced the company 's focus on core assets , which enabled the company to recruit and retain stronger talent for its sales initiatives and ( iii ) realigned the company 's operations to improve transparency and operational efficiency and better support the company 's sales force . once in place , the new leadership team began executing on the turnaround phase of the multi-year action plan and delivering on commitments to narrow the company 's activities to our core businesses where we believe we have an existing and sustainable competitive edge and to identify opportunities to improve operational efficiencies and our capital structure . turnaround throughout 2017 and into 2018 , the company continues to execute on its commitments to stabilize and turnaround the company . during this time , we : ( i ) have better defined our core businesses , ( ii ) made measurable progress in improving our capital structure and ( iii ) have been aggressively addressing and resolving certain legacy matters to eliminate disruptions to our operations . focus on core businesses we have found and continue to believe that there is significant opportunity in the : ( i ) eye-health , ( ii ) gi and ( iii ) dermatology businesses . we believe that our existing portfolio , commercial footprint and pipeline of product development projects position us to successfully compete in these markets and provide us with the greatest opportunity to build value for our shareholders . we identify these businesses as “ core ” , meaning that we believe we are best positioned to grow and develop them . by narrowing our focus , we have the opportunity to reduce complexity in our operations and maximize the value of our core businesses . in order to focus our efforts , we performed a review of our portfolio of assets within these core businesses to identify those products where we believe we have , and can maintain , a competitive advantage and we continue to define and shape our operations and business strategies around these assets . once we committed to our core businesses , we began analyzing what to do with those business units and assets that fall outside our definition of “ core ” . story_separator_special_tag the bausch + lomb ultra ® for presbyopia lens was developed using the proprietary moistureseal ® technology . in addition , the bausch + lomb ultra ® for presbyopia lens integrates a 3 zone progressive design for near , intermediate and distance vision . we launched expanded parameters of this product throughout 2017. bausch + lomb - bausch + lomb scleralfil ® solution is a novel contact lens care solution that makes use of a preservative free buffered saline solution for use with the insertion of scleral lenses and was launched in 2017. bausch + lomb - bausch + lomb renu ® advanced formula multi-purpose solution is a novel soft and silicone hydrogel contact lens solution that makes use of three disinfectants and two moisture agents and was launched in may 2017. bausch + lomb - we are developing a new ophthalmic viscosurgical device product , with a formulation to protect corneal endothelium during phaco emulsification process during a cataract surgery and to help chamber maintenance and 44 lubrication during interocular lens delivery . the planned investigative device exemption ( “ ide ” ) study is scheduled to begin in the first half of 2018. dermatology - traser is an energy-based platform device with significant versatility and power capabilities to address various dermatological conditions , including vascular and pigmented lesions . we are planning to launch this product in the second half of 2019 as part of our solta business . bausch + lomb - loteprednol gel 0.38 % is a new formulation for the treatment of post-operative ocular inflammation and pain with lower drug concentration and less frequent dosing . we have completed phase iii testing and expect to file an nda for this product in the first half of 2018. bausch + lomb - envista ® trifocal intraocular lens is an innovative lens design and expect to initiate an ide study for this product in 2018. improve capital structure by executing our strategies during 2017 , we have made measurable progress in improving our capital structure through debt reduction and extending debt maturities . using cash generated from operations , the net cash proceeds from divestitures of non-core assets and cash generated from tighter working capital management , we repaid ( net of additional borrowings ) over $ 5,800 million of long-term debt during 2017 and 2016 , in the aggregate . in january 2018 , we also made a $ 200 million payment of our series f tranche b term loan facility , which we directed to be applied to satisfy ( in part ) payment of the expected $ 206 million consolidated excess cash flow payment for the year 2017. under our senior secured credit facilities , subject to certain exceptions and reductions , we are required to make mandatory annual principal prepayments equal to 50 % of the company 's consolidated excess cash flow , if any , as defined in its credit agreement . we accessed the credit markets in march , october , november and december of 2017 , and completed a series of refinancing transactions to improve our capital structure , whereby we extended the maturities of certain debt obligations originally scheduled to mature in the years 2018 through 2022 out to march 2022 through december 2025. furthermore , we extended $ 1,190 million of commitments under our revolving credit facility , originally set to expire in april 2018 , out to april 2020. as a result of these debt repayments and refinancing transactions , we have eliminated all mandatory scheduled principal long-term debt repayments through march 2020 , providing us with additional liquidity and greater flexibility to execute our business plans . our reduced debt levels and improved debt portfolio will translate to lower payments of principal over the next three years , which , in turn , will permit more cash flow to be directed toward developing our core assets and repaying additional debt amounts . divestitures - during 2017 , we divested businesses and assets not aligned with our core business objectives which simplified our operating model and generated over $ 3,200 million of net cash proceeds that we used to improve our capital structure . the most significant of these divestitures were as follows . in march 2017 , we completed the sale of the cerave ® , acnefree and ambi ® skincare brands to a global beauty company for $ 1,300 million in cash ( the “ skincare sale ” ) . aggregate annual revenue associated with these skincare brands was less than $ 200 million . over the course of the first half of 2017 , using the net proceeds from the skincare sale and the divestiture of a manufacturing facility in brazil , the company repaid $ 1,306 million , of its series f tranche b term loan facility . in june 2017 , we completed the sale of our equity interests in dendreon pharmaceuticals llc ( formerly dendreon pharmaceuticals , inc. ) ( “ dendreon ” ) for $ 845 million in cash ( the “ dendreon sale ” ) , as adjusted through december 31 , 2017. dendreon 's only commercialized product , provenge ® , is an autologous cellular immunotherapy ( vaccine ) for prostate cancer treatment approved by the fda in april 2010. revenues from provenge ® were $ 164 million , $ 303 million and $ 250 million in 2017 , 2016 and 2015 , respectively . with this sale completed , we have exited the oncology business , which was not core to our objectives . on july 3 , 2017 , using the net proceeds from the dendreon sale , the company repaid $ 811 million of its series f tranche b term loan facility . in september 2017 , we completed the sale of our australian-based inova pharmaceuticals ( “ inova ” ) business for $ 938 million in cash ( the “ inova sale ” ) , as adjusted , and subject to the finalization of

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loss on extinguishment of debt of $ 122 million . net income attributable to valeant pharmaceuticals international , inc. for 2017 was $ 2,404 million as compared to net loss attributable to valeant pharmaceuticals international , inc. for 2016 of $ 2,409 million , an increase of $ 4,813 million . the increase in net income attributable to valeant pharmaceuticals international , inc. was primarily due to : ( i ) the increase in the benefit from income taxes of $ 4,118 million which in 2017 includes non-cash income tax benefits related to the company 's internal corporate restructuring and the accounting for the tax act and ( ii ) the decrease in loss before ( benefit from ) provision for income taxes of $ 694 million previously described . see note 18 , `` income taxes '' to our audited consolidated financial statements for further details . 57 summary of 2016 compared with 2015 our revenue for 2016 and 2015 was $ 9,674 million and $ 10,447 million , respectively , a decrease of $ 773 million , or 7 % . the decrease was primarily driven by the decreases in the branded rx segment and u.s. diversified products segment revenues . the changes in our segment revenues and segment profits are discussed in detail in the subsequent section titled `` reportable segment revenues and profits '' . operating loss for 2016 was $ 566 million as compared to operating income for 2015 of $ 1,527 million , a decrease of $ 2,093 million . our 2016 operating loss compared to our 2015 operating income reflects , among other factors : a decrease in contribution of $ 796 million . the decrease is primarily driven by : ( i ) lower average realized pricing and ( ii ) lower volumes . the decreases in contribution were partially offset by the incremental contributions from the salix acquisition , the acquisition of amoun pharmaceutical company s.a.e .

these inducement awards cover an aggregate of up to 43,567 common shares each to ms. may and mr. cox if earnings targets for shippingeasy are achieved over a two and one-half year period beginning july 1 , 2016. the awards are subject to proration if at least 75 % of the applicable target is achieved and are subject to forfeiture or acceleration based on changes in employment circumstances over the performance period . the awards were a material inducement to ms. may and mr. cox entering into employment agreements with stamps.com in connection with the acquisition . we also issued inducement stock option grants for an aggregate of 62,000 shares of stamps.com common stock to 48 new employees in connection with our acquisition of shippingeasy . the stock options were granted as inducements material to the new employees entering into employment with stamps.com . endicia on march 22 , 2015 we entered into a stock purchase agreement ( the “ stock purchase agreement ” ) with psi systems , inc. , a california corporation d/b/a endicia ( “ endicia ” ) , and newell rubbermaid inc. , a delaware corporation ( “ newell ” ) . endicia , based in mountain view , california , offers mailing and shipping solutions for use with the usps . the stock purchase agreement provided for our purchase of all of the issued and outstanding shares of common stock of endicia from a wholly owned indirect subsidiary of newell for an aggregate purchase price of approximately $ 215 million in cash ( the “ transaction ” ) . the purchase price was subject to adjustment for changes in endicia 's net working capital as of the date of the closing of the transaction and certain transaction expenses and closing cash adjustments . after receiving regulatory clearance , we closed the transaction on november 18 , 2015. as part of the funding for our acquisition of endicia , we entered into a credit agreement with a group of banks on november 18 , 2015 , which provides for a term loan of $ 82.5 million and a revolving credit facility with a maximum borrowing of $ 82.5 million ( collectively , the “ credit agreement ” ) . the credit agreement is secured by substantially all our assets . we funded our acquisition with cash of $ 56.5 million and debt from our credit agreement of $ 164.5 million , totaling $ 221.0 million . the $ 221.0 million consists of the following : 1 ) purchase price of $ 214.2 million , 2 ) $ 1.5 million of debt issuance costs and 3 ) the transfer of endicia 's ending cash balance on november 17 , 2015 of $ 5.3 million . total debt issuance costs of $ 1.8 million , which includes $ 300 thousand of costs incurred prior to closing , were recorded as debt discount and are being accreted as interest expense over the life of the credit agreement . our credit agreement matures on november 18 , 2020. during the first quarter of 2016 , we adjusted the purchase price of endicia by $ 573,000 to $ 214.7 million . 34 shipworks on august 29 , 2014 , we acquired 100 % of the outstanding equity of interapptive , inc. , which operates shipworks , in a cash transaction . shipworks , based in st. louis , missouri , offers software-based multi-carrier shipping solutions . the total purchase price for shipworks was approximately $ 22.1 million and was funded from cash and investment balances . shipstation on june 10 , 2014 , we acquired 100 % of the outstanding equity of auctane llc , which operates shipstation , in a cash and contingent stock transaction . shipstation , based in austin , texas , offers web-based multi-carrier shipping solutions primarily under the brands shipstation and auctane . the total purchase price for shipstation was approximately $ 66.2 million which was funded from cash and investment balances . the performance linked earn-out payment of stamps.com shares ( or contingent consideration ) to former equity members of auctane llc was based on the achievement of certain financial measures within time periods subsequent to the acquisition . there were two periods in which the earn-out payment was calculated . the first earn-out period was based on the achievement of certain financial measures during the six months ended december 31 , 2014. the second earn-out period was based on the achievement of certain financial measures during the twelve months ended december 31 , 2015. shipstation achieved the financial measures for both earn-out periods and , as a result , we made earn-out payments of 192,225 shares in the first quarter of 2015 and 576,675 shares in the first quarter of 2016. under asc 805 , business combinations , we were required to re-measure the fair value of the contingent consideration at each reporting period . as a result of the re-measured fair value , we incurred contingent consideration charges in our consolidated statement of operations of $ 8.4 million in 2014 and $ 46.1 million in 2015. please see note 3 – “ acquisitions ” and note 7 – “ debt ” in our notes to consolidated financial statements for further description . results of operations the results of our operations during the year ended december 31 , 2016 includes operations of shippingeasy for the period from july 1 , 2016 through december 31 , 2016 and the operations of endicia , shipstation , and shipworks for the full fiscal year 2016. the results of our operations during the year ended december 31 , 2015 includes operations of endicia for the period from november 18 , 2015 through december 31 , 2015 and the operations of shipstation and shipworks for the full fiscal year 2015. please see note 3 – “ acquisitions ” in our notes to consolidated financial statements for further description . story_separator_special_tag in 2016 , our income tax expense of $ 41.7 million consisted of current income tax expense of $ 8.1 million consisting of federal alternative minimum tax and various state taxes and deferred income tax expense of $ 33.6 million consisting of temporary tax items including utilization of net operating losses , contingent consideration , stock compensation and differences in the book and tax lives of amortizable intangibles . our effective income tax rate differed from the statutory income tax rate primarily as a result of permanent tax adjustments for nondeductible items , research and development tax credits , and changes in state tax rates including the addition and reduction of uncertain tax positions of the prior and of the current year . as of december 31 , 2016 and 2015 , we had net deferred tax assets of approximately $ 48.8 million and $ 57.2 million , respectively . we evaluated the appropriateness of our deferred tax assets and related valuation allowance in accordance with asc 740 based on all available positive and negative evidence , including our recent earnings trend and expected future income . as of december 31 , 2016 and 2015 , we did not have any valuation allowance against our gross deferred tax assets . trend analysis we expect our mailing and shipping revenue to increase in 2017 compared to 2016. we expect our mailing and shipping revenue growth in 2017 to be less than the growth we achieved in 2016 now that we have passed the one year anniversary of our endicia acquisition . our ability to grow our mailing and shipping revenue is partly dependent on our ability to increase our sales and marketing spend to acquire new customers and to retain our existing customers . to the extent we are not able to achieve our target increase in spending and acquire or retain customers , this would negatively impact our 2017 mailing and shipping revenue growth expectations . we expect customized postage revenue to increase in 2017 compared to 2016. we expect our customized postage revenue growth in 2017 to be a smaller percentage than the growth in 2016 , as 2016 reflects a full year of endicia results , as opposed to approximately one and a half months in 2015. high volume business orders for customized postage can fluctuate significantly from quarter to quarter and therefore historical trends may not be indicative of future results for customized postage revenue . we expect our sales and marketing expense to increase in 2017 compared to 2016. we expect the percent increase in sales and marketing expense in 2017 to be less than the percent increase in 2016 , as 2016 reflects a full year of endicia results , as opposed to approximately one and a half months in 2015. we will continue to monitor our customer metrics and the state of the economy and adjust our level of spending accordingly . sales and marketing spend is expensed in the period incurred , while the revenue and profits associated with the acquired customers are earned over the customers ' lifetimes . as a result , increased sales and marketing spend in future periods could result in a reduction in operating profit and cash flow compared to past periods . we expect research and development expenses to be higher in 2017 as compared to 2016. we expect the percent increase in research and development expense in 2017 to be less than the percent increase in 2016 , as 2016 reflects a full year of endicia results , as opposed to approximately one and a half months in 2015. we expect to hire additional research and development personnel in 2017. we expect general and administrative expenses to be higher in 2017 as compared to 2016. we expect the percent increase in general and administrative expense in 2017 to be less than the percent increase in 2016 , as 2016 reflects a full year of endicia results , as opposed to approximately one and a half months in 2015. we expect to hire additional general and administrative personnel in 2017. we expect our stock-based compensation expense to be higher in 2017 compared to 2016 based on stock-based compensation expense incurred in the fourth quarter and the expectation of stock option grants to new hires in 2017. we expect our interest expense in 2017 to be largely consistent with 2016 . 41 we expect our effective tax rate for 2017 to be higher than 2016 as we benefitted from certain research and development tax credits earned in prior years in 2016 which we do not expect to recur at the same levels in 2017. there are other factors that impact taxable income compared to book income which can be difficult to predict and can change from quarter-to-quarter . we expect we will utilize the remainder of our federal net operating losses and other tax credits during 2017 and thus we expect to become a cash tax payer for 2017. as discussed earlier in this report , our expectations are subject to substantial uncertainty and our results are subject to macro-economic factors and other factors which could cause these trends to be worse than our current expectation or which could cause actual results to be materially different than our current expectations . these expectations are “ forward looking statements , ” are made only as of the date of this report and are subject to the qualifications and limitations on forward-looking statements discussion on page 1 of part i of this report and the risks and other factors set forth in item 1a “ risk factors . ” our business has grown through acquisitions during 2014 through 2016 ; however the expectations above do not assume any future acquisitions or dispositions , any of which could have a significant impact on our current expectations . as described in our forward-looking statements discussion , we do not undertake any obligation to release publicly any revisions to our forward-looking statements to

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liquidity and capital resources as of december 31 , 2016 and 2015 , we had $ 108 million and $ 75 million , respectively , in cash , cash equivalents and short-term and long-term investments . we invest available funds in short-term and long-term securities , including money market funds , corporate bonds , asset backed securities , and us government and agency bonds , and do not engage in hedging or speculative activities . net cash provided by operating activities was approximately $ 148 million and $ 46 million in 2016 and 2015 , respectively . the increase in net cash provided by operating activities was primarily attributable to an increase in our net income , depreciation and amortization , stock compensation expense offset by the impact of the stock option windfall tax benefit and deferred income tax expense and from net changes in our operating assets and liabilities in 2016 as compared to 2015. net cash used in investing activities was approximately $ 55 million and $ 210 million in 2016 and 2015 , respectively . the decrease in net cash used in investing activities was primarily due to the acquisition of shippingeasy , of $ 55.4 million in 2016 as compared to the acquisition of endicia of $ 214.2 million in 2015 . ( see note 3 – “ acquisitions ” in our notes to consolidated financial statements for further description ) .

the delivery of the goods to the customer completes the earnings process . net sales consist of product sales and related delivery charge revenue , net of adjustments for returns and allowances . shipping and handling costs are included in cost of goods sold . recently issued accounting pronouncements see item 8. note 1 to the company 's consolidated financial statements . results of operations the following table has been prepared as an aid in understanding the company 's results of operations on a comparative basis for the fiscal years ended june 30 , 2015 , 2014 and 2013. amounts presented are percentages of the company 's net sales . replace_table_token_7_th 9 fiscal 2015 compared to fiscal 2014 net sales for fiscal 2015 were $ 467.0 million compared to $ 438.5 million in the prior fiscal year , an increase of 6.5 % . for the fiscal year ended june 30 , 2015 , residential net sales were $ 393.1 million compared to $ 359.5 million for the year ended june 30 , 2014 , an increase of 9.3 % . the residential net sales increase of $ 33.6 million for the year ended june 30 , 2015 resulted from capturing demand for upholstered and ready-to-assemble products . commercial net sales were $ 73.8 million for the year ended june 30 , 2015 , a decrease of 6.6 % from net sales of $ 79.0 million for the year ended june 30 , 2014. gross margin for the fiscal year ended june 30 , 2015 was 23.5 % compared to 22.9 % for the prior fiscal year . the improvement in gross margin for the fiscal year is primarily driven by declining inventory write downs . selling , general and administrative expenses ( sg & a ) for the fiscal year ended june 30 , 2015 were 16.2 % of net sales compared to 16.4 % in the prior fiscal year . the company incurred approximately $ 0.6 million of legal defense costs during the current fiscal year which has been recorded in sg & a expense . the company received reimbursements of legal defense costs of approximately $ 0.2 million from insurers which has been reflected as a reduction of legal expenses in sg & a expenses for the current fiscal year . the prior fiscal year included $ 2.1 million in legal defense costs which was offset by reimbursements of $ 2.8 million from insurers . the effective tax rate was 37.3 % and 37.0 % for fiscal years ended june 30 , 2015 and 2014. the fiscal year 2015 net income increased $ 7.3 million to $ 22.3 million , the highest ever reported for the company . the number of diluted shares increased during fiscal 2015 due to additional shares outstanding and the impact of more dilutive stock options at june 30 , 2015 based on the company 's higher stock trading price , resulting in the company reporting diluted earnings per share of $ 2.89 for fiscal year 2015 versus $ 2.00 for fiscal year 2014. all earnings per share amounts are on a diluted basis . fiscal 2014 compared to fiscal 2013 net sales for fiscal 2014 were $ 438.5 million compared to $ 386.2 million in fiscal 2013 , an increase of 13.6 % . for the fiscal year ended june 30 , 2014 , residential net sales were $ 359.6 million compared to $ 311.2 million for the year ended june 30 , 2013 , an increase of 15.5 % . the residential net sales increase of $ 48.3 million for the year ended june 30 , 2014 resulted from capturing demand for upholstered and ready-to-assemble products . commercial net sales were $ 79.0 million for the year ended june 30 , 2014 , an increase of 5.3 % from net sales of $ 75.0 million for the year ended june 30 , 2013. gross margin for the fiscal year ended june 30 , 2014 was 22.9 % compared to 23.4 % for the fiscal year ended june 30 , 2013. the decrease in fiscal 2014 was primarily due to price discounting on certain case goods to address changing customer requirements . selling , general and administrative expenses ( sg & a ) for the fiscal year ended june 30 , 2014 were 16.4 % of net sales compared to 18.2 % in the fiscal year ended june 30 , 2013. the company incurred approximately $ 2.1 million of legal defense costs during the 2014 fiscal year which has been recorded in sg & a expense . the company received reimbursements of legal defense costs of approximately $ 2.8 million from insurers which has been reflected as a reduction of legal expenses in sg & a expenses for the 2014 fiscal year . fiscal year 2013 included $ 2.3 million in legal defense costs . in december 2013 , the company entered into an agreement to settle the indiana civil litigation in order to eliminate the ongoing costs and distraction of the litigation . in february 2014 , the company contributed $ 6.25 million to the settlement as part of an agreement . in reaching the agreement , the company did not admit any wrongdoing and believes that it did not cause or contribute to the contamination at issue . this amount is recorded as litigation settlement costs in the consolidated statements of income . the effective tax rate was 37.0 % for fiscal years ended june 30 , 2014 and 2013. the fiscal year 2014 net income increased $ 1.8 million to $ 15.0 million . the number of diluted shares increased during fiscal 2014 due to additional shares outstanding and the impact of more dilutive stock options at june 30 , 2014 based on the company 's higher stock trading price , resulting in the company reporting diluted earnings per share of $ 2.00 for fiscal year 2014 versus $ 1.80 for fiscal year 2013. all earnings per share amounts story_separator_special_tag the delivery of the goods to the customer completes the earnings process . net sales consist of product sales and related delivery charge revenue , net of adjustments for returns and allowances . shipping and handling costs are included in cost of goods sold . recently issued accounting pronouncements see item 8. note 1 to the company 's consolidated financial statements . results of operations the following table has been prepared as an aid in understanding the company 's results of operations on a comparative basis for the fiscal years ended june 30 , 2015 , 2014 and 2013. amounts presented are percentages of the company 's net sales . replace_table_token_7_th 9 fiscal 2015 compared to fiscal 2014 net sales for fiscal 2015 were $ 467.0 million compared to $ 438.5 million in the prior fiscal year , an increase of 6.5 % . for the fiscal year ended june 30 , 2015 , residential net sales were $ 393.1 million compared to $ 359.5 million for the year ended june 30 , 2014 , an increase of 9.3 % . the residential net sales increase of $ 33.6 million for the year ended june 30 , 2015 resulted from capturing demand for upholstered and ready-to-assemble products . commercial net sales were $ 73.8 million for the year ended june 30 , 2015 , a decrease of 6.6 % from net sales of $ 79.0 million for the year ended june 30 , 2014. gross margin for the fiscal year ended june 30 , 2015 was 23.5 % compared to 22.9 % for the prior fiscal year . the improvement in gross margin for the fiscal year is primarily driven by declining inventory write downs . selling , general and administrative expenses ( sg & a ) for the fiscal year ended june 30 , 2015 were 16.2 % of net sales compared to 16.4 % in the prior fiscal year . the company incurred approximately $ 0.6 million of legal defense costs during the current fiscal year which has been recorded in sg & a expense . the company received reimbursements of legal defense costs of approximately $ 0.2 million from insurers which has been reflected as a reduction of legal expenses in sg & a expenses for the current fiscal year . the prior fiscal year included $ 2.1 million in legal defense costs which was offset by reimbursements of $ 2.8 million from insurers . the effective tax rate was 37.3 % and 37.0 % for fiscal years ended june 30 , 2015 and 2014. the fiscal year 2015 net income increased $ 7.3 million to $ 22.3 million , the highest ever reported for the company . the number of diluted shares increased during fiscal 2015 due to additional shares outstanding and the impact of more dilutive stock options at june 30 , 2015 based on the company 's higher stock trading price , resulting in the company reporting diluted earnings per share of $ 2.89 for fiscal year 2015 versus $ 2.00 for fiscal year 2014. all earnings per share amounts are on a diluted basis . fiscal 2014 compared to fiscal 2013 net sales for fiscal 2014 were $ 438.5 million compared to $ 386.2 million in fiscal 2013 , an increase of 13.6 % . for the fiscal year ended june 30 , 2014 , residential net sales were $ 359.6 million compared to $ 311.2 million for the year ended june 30 , 2013 , an increase of 15.5 % . the residential net sales increase of $ 48.3 million for the year ended june 30 , 2014 resulted from capturing demand for upholstered and ready-to-assemble products . commercial net sales were $ 79.0 million for the year ended june 30 , 2014 , an increase of 5.3 % from net sales of $ 75.0 million for the year ended june 30 , 2013. gross margin for the fiscal year ended june 30 , 2014 was 22.9 % compared to 23.4 % for the fiscal year ended june 30 , 2013. the decrease in fiscal 2014 was primarily due to price discounting on certain case goods to address changing customer requirements . selling , general and administrative expenses ( sg & a ) for the fiscal year ended june 30 , 2014 were 16.4 % of net sales compared to 18.2 % in the fiscal year ended june 30 , 2013. the company incurred approximately $ 2.1 million of legal defense costs during the 2014 fiscal year which has been recorded in sg & a expense . the company received reimbursements of legal defense costs of approximately $ 2.8 million from insurers which has been reflected as a reduction of legal expenses in sg & a expenses for the 2014 fiscal year . fiscal year 2013 included $ 2.3 million in legal defense costs . in december 2013 , the company entered into an agreement to settle the indiana civil litigation in order to eliminate the ongoing costs and distraction of the litigation . in february 2014 , the company contributed $ 6.25 million to the settlement as part of an agreement . in reaching the agreement , the company did not admit any wrongdoing and believes that it did not cause or contribute to the contamination at issue . this amount is recorded as litigation settlement costs in the consolidated statements of income . the effective tax rate was 37.0 % for fiscal years ended june 30 , 2014 and 2013. the fiscal year 2014 net income increased $ 1.8 million to $ 15.0 million . the number of diluted shares increased during fiscal 2014 due to additional shares outstanding and the impact of more dilutive stock options at june 30 , 2014 based on the company 's higher stock trading price , resulting in the company reporting diluted earnings per share of $ 2.00 for fiscal year 2014 versus $ 1.80 for fiscal year 2013. all earnings per share amounts

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liquidity and capital resources working capital ( current assets less current liabilities ) at june 30 , 2015 was $ 119.9 million as compared to $ 128.6 million at june 30 , 2014. significant changes in working capital during fiscal year 2015 included a decrease in cash of $ 20.9 million and increases in inventories of $ 15.9 million , short term borrowings of $ 11.9 million , accounts receivable of $ 6.6 million and accounts payable of $ 2.5 million . during the fiscal year , the company utilized cash and borrowings to acquire and ready a distribution center in edgerton , kansas . the increase in inventory primarily supports anticipated increased sales volume in upholstered and case goods product categories . the increase in accounts receivable is due to the increase in sales volume and timing of collections . the increase in accounts payable is due to timing of payments . the company 's main sources of liquidity are cash , cash flows from operations and credit arrangements . as of june 30 , 2015 and 2014 , the company had cash totaling $ 1.3 million and $ 22.2 million , respectively . the company maintains an unsecured credit agreement which was amended on june 29 , 2015 , and provides short-term working capital financing up to $ 30.0 million with interest of libor plus 1 % , including up to $ 4.0 million of letters of credit . the amendment reduced the borrowing availability from $ 65.0 million to $ 30.0 million . letters of credit outstanding at june 30 , 2015 totaled $ 2.9 million . as of june 30 , 2015 , the company utilized $ 10.6 million of borrowing availability under the credit facility during the year , other than the aforementioned letters of credit , leaving borrowing availability of $ 16.5 million .

this broad diversification mitigates the impact on invesco of different market cycles and enables the company to take advantage of growth opportunities in various markets and channels . the company has moved to a unified brand - invesco , while preserving the time-tested and distinctive investment perspectives , processes and approaches of our different investment teams across the globe . this effort will contribute to a more consistent client experience across multiple markets and strengthen our ability to market our comprehensive range of capabilities more effectively . as announced in october 2018 , invesco and massmutual have entered into a definitive agreement whereby invesco will acquire massmutual 's asset management affiliate , oppenheimerfunds , inc. in turn , massmutual and the oppenheimerfunds employee shareholders will receive a combination of common and preferred equity consideration , and massmutual will become a significant shareholder of invesco , with an approximate 17 % stake expected at closing . the transaction is on track to close in the second 31 quarter of 2019 ( pending necessary regulatory and other third-party approvals ) . this strategic combination of highly complementary investment and distribution capabilities will strengthen the combined organization 's ability to provide relevant investment outcomes to an expanded number of institutional and retail clients in the u.s. and around the globe . under the terms of the agreement , invesco will acquire oppenheimerfunds with consideration to massmutual and oppenheimerfunds employee shareholders consisting of 81.9 million shares of invesco common equity and $ 4 billion in perpetual , non-cumulative preferred shares with a 21-year non-call period and a fixed rate of 5.9 % . based on invesco 's stock price as of december 31 , 2018 , this represents an estimated purchase price of $ 5.4 billion . the purchase and sale agreement contain customary purchase price adjustments related to net working capital and revenue run rate changes at the closing date . as of the date of this report , no such adjustment to the purchase price would be triggered . the purchase and sale agreement does not contain an adjustment to the purchase price based upon changes in the market valuation of aum . since announcement , invesco and oppenheimerfunds have made significant progress toward achieving the post-close integration and targeted expense synergies of $ 475 million through a planned combination of middle- and back-office rationalization , location strategy and leveraging the scale of the global operating platform . as noted in october , bringing the two firms together will accelerate invesco 's growth strategy and further strengthen our ability to meet client needs across the globe . in october 2018 , the company announced a common stock buyback program of $ 1.2 billion to be completed within the next two years , which will be financed through the strong operating cash flows of the combined invesco and oppenheimerfunds organization . for the purpose of repurchasing its shares , the company entered into a forward contract during the fourth quarter of 2018. under this contract , the counterparty purchased $ 300 million ( 14.4 million shares ) of the company 's shares in the fourth quarter . the shares are included as treasury shares in the company 's balance sheet and reduced outstanding shares as of december 3 , 2018. the company intends to repurchase an additional $ 100- $ 300 million prior to the closing of the oppenheimerfunds acquisition ( depending on market conditions ) , with the remainder to be purchased by the end of 2020. one of the company 's strategic objectives is to harness the power of our global platform by improving effectiveness and efficiency by allocating our resources to the opportunities that will best benefit clients and our business . during 2018 , the company has continued our efforts to transform several key business support functions to become more effective and efficient by leveraging shared service centers , outsourcing , automating key processes and optimizing the company 's office footprint . consistent with this objective , business optimization costs of $ 34.1 million and $ 58.0 million were recorded during the years ended december 31 , 2018 and 2017 , respectively . total costs of these initiatives at completion are estimated to be approximately $ 160.0 million , of which $ 5.0 million remains to be incurred through 2019. at the end of 2018 , these initiatives have produced annualized run-rate expense savings of approximately $ 56 million , and by completion in 2019 , the annualized run-rate savings is expected to be up to $ 58.0 million . invesco great wall fund management company ( `` invesco great wall `` ) , the company 's largest joint venture in china , is experiencing strong growth . invesco great wall is one of the largest sino-foreign managers of equity products in china , with aum of $ 26.9 billion as of december 31 , 2018. the company has a 49 % interest in invesco great wall . in june , invesco great wall 's jingyi money market fund was selected as one of seven money market funds to be included in the money market program , yu ' e bao , administered by ant financial , an affiliate of alibaba . given invesco 's influence on invesco great wall , a change in regulation allowing increased foreign ownership , and reaching oral agreement in principle in the third quarter to obtain a majority stake of the joint venture , the company began reporting 100 % of the flows and aum for invesco great wall beginning in the third quarter . the company 's non-gaap operating results reflect the economics of these holdings on a basis consistent with the underlying aum and flows . o n april 6 , 2018 the company completed its previously announced acquisition of guggenheim investments ' exchange-traded funds ( etf ) business , which consists of $ 38.1 billion of assets under management ( at date of acquisition ) . story_separator_special_tag as discussed in the “ executive overview ” section of this management 's discussion and analysis , during 2018 , global markets saw a return of market volatility and significant negative returns late in the year wipe out earlier gains in all markets . see below for a discussion of the impact of foreign exchange rates on aum . foreign exchange rates during the year ended december 31 , 2018 , we experienced decreases in aum of $ 12.5 billion due to changes in foreign exchange rates ( december 31 , 2017 : aum increased by $ 21.4 billion ; december 31 , 2016 : aum decreased by $ 22.1 billion ) . see the company 's disclosures regarding the changes in foreign exchange rates during the year ended december 31 , 2018 in the “ foreign exchange impact on balance sheet , assets under management and results of operations ” section above for additional information regarding the movement of foreign exchange rates . acquisitions and dispositions during the year ended december 31 , 2018 , we completed the acquisition of guggenheim investments ' etf business , which added $ 38.1 billion in aum at date of purchase and we began including 100 % of invesco great wall fund management company which added $ 9.5 billion in aum during the year . for the year ended december 31 , 2017 , we completed the acquisition of the european etf business , which added $ 26.0 billion in passive etf aum ( including approximately $ 7.0 billion of externally managed aum ) at date of purchase . for the year ended december 31 , 2016 , dispositions of $ 2.7 billion related to the deconsolidation of certain securitization trusts by invesco mortgage capital inc. ( ivr ) and other aum dispositions were partially offset by the acquisition of the controlling interest of invesco asset management ( india ) private limited , which added $ 2.4 billion to aum . revenue yield as a significant proportion of our aum is based outside of the u.s. , changes in foreign exchange rates result in a change to the mix of u.s. dollar denominated aum with aum denominated in other currencies . as fee rates differ across geographic locations , changes to exchange rates have an impact on the net revenue yields . see the company 's disclosures regarding the changes in foreign exchange rates in the `` foreign exchange impact on balance sheet , assets under management and results of operations `` section for additional information regarding the movement of foreign exchange rates . additionally , changes in our aum mix can significantly impact our net revenue yield . passive aum generally earn a lower effective fee rate than active asset classes . the acquisitions of the european etf business in the third quarter of 2017 and the guggenheim etf acquisition in april 2018 increased the level of passive aum and have a dilutive impact on the company 's overall net revenue yield . the company has experienced greater outflows from active aum as compared to outflows from passive aum , increasing the proportion of passive to active aum during the year ended december 31 , 2018 . at december 31 , 2018 , passive aum were $ 221.0 billion , representing 24.9 % of total aum at that date ; whereas at december 31 , 2017 , passive aum were $ 199.0 billion , representing 21.2 % of our total aum at that date ( december 31 , 2016 : $ 144.4 billion 17.8 % ) . in the year ended december 31 , 2018 , the net revenue yield on passive aum was 14.9 basis points compared to 16.3 basis points in the year ended december 31 , 2017 , a decrease of 1.4 basis points ( december 31 , 2016 : 15.3 ) . 38 changes in our aum by channel , asset class , and client domicile , and average aum by asset class , are presented below : total aum by channel ( 1 ) replace_table_token_10_th see accompanying notes immediately following these aum tables . 39 passive aum by channel ( 1 ) replace_table_token_11_th see accompanying notes immediately following these aum tables . 40 total aum by asset class ( 3 ) replace_table_token_12_th see accompanying notes immediately following these aum tables . 41 passive aum by asset class ( 3 ) replace_table_token_13_th see accompanying notes immediately following these aum tables . 42 total aum by client domicile ( 6 ) replace_table_token_14_th see accompanying notes immediately following these aum tables . 43 passive aum by client domicile ( 6 ) replace_table_token_15_th ( 1 ) channel refers to the internal distribution channel from which the aum originated . retail aum represents aum distributed by the company 's retail sales team . institutional aum represents aum distributed by our institutional sales team . this aggregation is viewed as a proxy for presenting aum in the retail and institutional markets in which the company operates . ( 2 ) in 2018 , reinvested distributions are shown in a separate line in the aum tables . for periods prior to the third quarter of 2017 , reinvested distributions are included in market gains and losses . ( 3 ) asset classes are descriptive groupings of aum by common type of underlying investments . ( 4 ) during 2018 , $ 29.8 billion of aum were transferred from retail into institutional to better reflect the activities of institutional sales teams and the clients they support . additionally , a net $ 0.5 billion of passive etf aum were reclassified to active aum in 2018. during 2017 , the company reclassified certain aum previously classified in fixed income to money market totaling $ 3.0 billion . 44 ( 5 ) ending money market aum includes $ 83.7 billion in institutional money market aum as of december 31 , 2018 . ( 6 ) client domicile disclosure groups aum by the domicile of the underlying clients

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cash of $ 227.2 million in the year ended december 31 , 2018 ( 2017 : cash used of $ 577.3 million ) . financing cash outflows during the year ended december 31 , 2018 included $ 490.6 million of dividend payments for the dividends declared in january , april , july and november 2018 ( 2017 : dividends paid of $ 471.6 million ) , the payment of $ 51.8 million to meet employees ' withholding tax obligations on share vestings ( 2017 : $ 63.8 million ) , a net borrowing on the credit facility of $ 330.8 million and a payment of $ 15.6 million of contingent consideration related to the deutsche bank management contract purchase ( 2017 : $ 13.2 million ) . financing cash outflows during the year ended december 31 , 2017 also included the purchase of shares through market transactions totaling $ 63.8 million . net cash provided by financing activities totaled $ 169.0 million for the year ended december 31 , 2017 ( 2016 : cash provided of $ 470.1 million ) . as shown in the tables above , the impact of cip on financing activities provided cash of $ 746.3 million during the year ( 2016 : cash provided of $ 1,451.6 million ) . excluding the impact of cip , financing activities used cash of $ 577.3 million in the year ended december 31 , 2017 ( 2016 : cash used of $ 981.5 million ) . financing cash outflows during the year ended december 31 , 2017 included $ 471.6 million of dividend payments for the dividends declared in january , april , july and november 2017 ( 2016 : dividends paid of $ 460.4 million ) , the payment of $ 63.8 million to meet employees ' withholding tax obligations on share vestings ( 2016 : $ 42.0 million ) , a repayment of the credit facility of $ 28.7

we are organized into three divisions across six physical locations . our instruments division designs , manufactures and markets quality control instruments and disposable products utilized in connection with the healthcare , pharmaceutical , food and beverage , medical device , industrial hygiene , environmental air sampling and semiconductor industries . our biological indicators division manufactures and markets biological indicators and distributes chemical indicators used to assess the effectiveness of sterilization processes , including steam , hydrogen peroxide , ethylene oxide and radiation , in the hospital , dental , medical device and pharmaceutical industries . our continuous monitoring division designs , develops and markets systems which are used to monitor various environmental parameters such as temperature , humidity and differential pressure to ensure that critical storage and processing conditions are maintained in hospitals , pharmaceutical and medical device manufacturers , blood banks , pharmacies and a number of other laboratory and industrial environments . we follow a philosophy of manufacturing a high quality product and providing a high level of on-going service for those products . our revenues come from two main sources – product sales and services . product sales are dependent on several factors , including general economic conditions , both domestic and international , customer capital spending trends , competition , introduction of new products and acquisitions . biological indicator products are disposable and are used on a routine basis for quality control , thus product sales are less sensitive to general economic conditions . instrument products and continuous monitoring systems have a longer life , and their purchase by our customers is somewhat discretionary , so sales are more sensitive to general economic conditions . service demand is driven by our customers ' quality control and regulatory environments , which require periodic repair and recalibration or certification of our instrument products and continuous monitoring systems . we typically evaluate costs and pricing annually . our policy is to price our products and systems competitively and , where possible , we try to pass along cost increases in order to maintain our margins . gross profit is affected by our product mix , manufacturing efficiencies and price competition . historically , as we have integrated our acquisitions and taken advantage of manufacturing efficiencies , our gross margins for some of the products have improved . there are , however , differences in gross margins between different product lines , and ultimately the mix of sales will continue to impact our overall gross margin . selling expense is driven primarily by labor costs , including salaries and commissions . accordingly , it may vary with sales levels . labor costs and amortization of intangible assets drive the substantial majority of general and administrative expense . research and development expense is predominantly comprised of labor costs and third party consultants . year ended march 31 , 2015 acquisitions during the year ended march 31 , 2015 , we completed the following six acquisitions ( the “ 2015 acquisitions ” ) : in march 2015 , we completed the früh acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of früh 's business segment associated with the distribution of our biological indicator products ; in february 2015 , we completed the cherwell acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of cherwell 's business segment associated with the distribution of our biological indicator products ; in october 2014 , we completed the ati acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of ati , a distributor of our biological indicator products ; in october 2014 , we completed the pcd acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of pcd 's business segment associated with the sale of pcd 's which are used for quality control purposes in the field of ethylene oxide sterilization of medical devices ; page 18 in april 2014 , we completed the bgi acquisition whereby we acquired substantially all of the assets ( other than cash and accounts receivable ) and certain liabilities of bgi 's business which is focused on the sale of equipment used primarily for particulate air sampling ; and in april 2014 , we completed the amilabo acquisition whereby we acquired all of the common stock of amilabo , a distributor of our biological indicator products . year ended march 31 , 2014 acquisitions during the year ended march 31 , 2014 , we completed the following three acquisitions ( the “ 2014 acquisitions ” ) : in november 2013 , we completed the tempsys acquisition whereby we acquired all of the common stock of tempsys , a company in the business of providing continuous monitoring systems to regulated industries ; in november 2013 , we completed the amega acquisition whereby we acquired substantially all of the assets ( other than cash ) and certain liabilities of amega , a company in the business of providing continuous monitoring services to regulated industries ; and in july 2013 , we completed the suretorque acquisition whereby we acquired substantially all the assets ( other than cash ) of st acquisition 's business segment involving the design , manufacture , sale and service of its suretorque line of bottle cap torque testing instrumentation . story_separator_special_tag while our estimates and assumptions are based on our knowledge of current events and actions we may undertake in the future , actual results may ultimately differ from these estimates and assumptions . for a discussion of our significant accounting policies , please see note 1 of notes to consolidated financial statements contained in “ item 8. financial statements and supplementary data . ” accounts receivable we estimate an allowance for doubtful accounts based on overall historic write-offs , the age of our receivable balances , and the payment history and creditworthiness of the customer . if actual results are not consistent with our assumptions and judgments or our assumptions and estimates change due to new information , we may experience material changes in our allowance for doubtful accounts and bad debt expense . inventories inventories are stated at the lower of cost or market , based on standards using the first-in , first-out method ( fifo ) to determine cost . we evaluate standard costs annually , unless circumstances necessitate a mid-year evaluation for specific items . our work in process and finished goods inventory includes labor and overhead , which are estimated based on trailing twelve months of expense and standard labor hours for each product . our biological indicator inventory is tracked by lot number , thus labor is generally based on actual hours . we monitor inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary . at year end we perform a complete physical inventory observation . throughout the year , we estimate and maintain an inventory reserve , as needed , for such matters as obsolete inventory , shrink and scrap . this reserve may fluctuate as our assumptions change due to new information , discrete events , or changes in our business , such as entering new markets or discontinuing a specific product . page 26 recoverability of long-lived assets for property , plant and equipment , and intangible assets subject to amortization , recoverability and or impairment tests are required only when conditions exist that indicate the carrying value may not be recoverable . we monitor the same conditions for our goodwill , but an annual evaluation is also required . monitoring these conditions requires significant management judgment , including evaluating general economic conditions , industry and market considerations , changes in production costs , cash flow trends , and other relevant entity-specific events such as changes in management , key personnel , strategy or customers . if conditions exist that indicate the carrying value may not be recoverable , we would be required to estimate the fair value of the asset , asset group , or reporting unit . we determine fair value using widely accepted valuation techniques , primarily discounted cash flow and market multiple analyses . these techniques are also used when initially allocating the purchase price to acquired assets and liabilities . these types of analyses require us to make assumptions and estimates regarding industry and economic factors , the profitability of future business strategies , and cash flow . we did not record any impairment charges for the years ended march 31 , 2015 , 2014 or 2013. if actual results are not consistent with our assumptions and estimates , or our assumptions and estimates change due to new information , we may be exposed to an impairment charge in the future . purchase accounting for acquisitions we apply the acquisition method of accounting for a business combination . in general , this methodology requires companies to record assets acquired and liabilities assumed at their respective fair market values at the date of acquisition . any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill . for the pcd , amega and bios acquisitions , we also recorded a liability for contingent consideration based on estimated future revenues . we monitor our assumptions surrounding these estimated future cash flows and , if there is a significant change , would record an adjustment to the contingent consideration liability and a corresponding adjustment to either income or expense . we determine fair value using widely accepted valuation techniques , primarily discounted cash flow and market multiple analyses . these types of analyses require us to make assumptions and estimates regarding industry and economic factors , the profitability of future business strategies , discount rates and cash flow . if actual results are not consistent with our assumptions and estimates , or our assumptions and estimates change due to new information , we may be exposed to an impairment charge in the future . if the contingent consideration paid for any of our acquisitions differs from the amount initially recorded , we would record either income or expense . stock-based compensation we estimate the fair value of option grants using the black-scholes model , which requires us to estimate the volatility and forfeiture rate . under our current stock-based compensation plan , we recognize the expense on a straight-line basis over the service period . contingent liabilities we accrue a loss for contingencies if it is probable that an asset has been impaired or a liability has been incurred , and when the amount of loss can be reasonably estimable . when no accrual is made because one or both of these conditions does not exist , we disclose the contingency if there is at least a reasonable possibility that a loss may be incurred . we estimate contingent liabilities , such as for state sales taxes , based on the best information available at the time . if there is a range of possible outcomes , we accrue the low end of the range . recent accounting standards and pronouncements in may 2014 , the financial accounting standards board ( “ fasb ” ) and international accounting standards board ( “ iasb ” )

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liquidity and capital resources our sources of liquidity may include cash generated from operations , working capital , capacity under our credit facility and potential equity and debt offerings . we believe that cash generated from these sources will be sufficient to meet our short-term and long-term needs . our more significant uses of resources include quarterly dividends to shareholders , payment of debt obligations , long-term capital equipment expenditures and potential acquisitions . page 23 due to continued organic and acquisition related growth , we have outgrown the capacity of our current building in bozeman , montana and as a result , we will build a new facility in the same general area . we expect that construction will begin in july 2015 and we are hopeful that the building will be completed no later than september 30 , 2016. during our year ended march 31 , 2015 we acquired the related land for $ 741,000 and we anticipate that the remaining cost of the new facility will be approximately $ 14,000,000. following the relocation from our current bozeman building into the new facility , we expect to be able to sell the current facility for $ 2,000,000 - $ 3,000,000 to partially offset the cost of the new building . we are currently implementing a new erp system which has required a significant amount of cash . we incurred $ 993,000 of expense associated with this project for the year ended march 31 , 2015. our expectation is that we will go live with our new erp system during our second quarter ending september 30 , 2015. we anticipate that we will incur up to $ 500,000 for activities necessary to go live and for related post go-live support . in addition , we may incur additional costs associated with software system upgrades . working capital is the amount by which current assets exceed current liabilities .

26 we also include within our analysis “ premiums collected , ” another measure that is not used in financial statements prepared in accordance with gaap , but is a common life insurance industry measure of agent productivity . see note 13 to our consolidated financial statements included in item 8 for further information regarding this measure and its relationship to gaap revenues . our profitability is primarily a factor of : the volume of our life insurance and annuity business in force , which is driven by the level of our sales and the persistency of the business written . the amount of spread ( excess of net investment income earned over interest credited ) we earn on contract holders ' general account balances . our ability to price our life insurance products to earn acceptable margins over the cost of providing benefits and the expenses of acquiring and administering the products . competitive conditions , mortality experience , persistency , benefit utilization , investment results and our ability to maintain expenses in accordance with pricing assumptions drive our margins on the life products . on many products , we have the ability to mitigate adverse experience through adjustments to credited interest rates , policyholder dividends or cost of insurance charges . our ability to manage our investment portfolio to maximize investment returns while providing adequate liquidity for obligations to policyholders and minimizing the risk of defaults or impairments of invested assets . our ability to manage the level of our operating expenses . actual experience and changes in assumptions for expected surrender and withdrawal rates , mortality and spreads used in the amortization of deferred acquisition costs . our profitability is also impacted by changes in accounting guidance that impact the timing of profit recognition . see note 1 to our consolidated financial statements included in item 8 for details on adopted and pending accounting pronouncements . in addition to guidance that has been adopted , the accounting standards setting bodies are currently working on other projects that could impact the timing of profit emergence including the accounting for insurance contracts . it is uncertain what the outcome of these or other projects will be or when they will be completed . impact of recent business environment our business generally benefits from moderate to strong economic expansion . conversely , a lackluster economy characterized by higher unemployment , lower family income , lower consumer spending , muted corporate earnings growth and lower business investment could adversely impact the demand for our products in the future . we also may experience a higher incidence of claims , lapses or surrenders of policies during such times . we can not predict whether or when such actions may occur , or what impact , if any , such actions could have on our business , results of operations , cash flows or financial condition . economic and other environmental factors that may impact our business include , but are not limited to , the following : gross domestic product increased at an annual rate of 2.6 % during 2017 based on recent estimates . u.s. unemployment was estimated to be 4.1 % at year-end 2017. u.s. net farm income is estimated to have increased 2.7 % and farm real estate value is estimated to have increased 3.3 % during 2017 according to recent u.s. department of agriculture estimates . the u.s. 10-year treasury yield decreased during 2017 from 2.45 % at december 31 , 2016 to 2.40 % at december 31 , 2017. continued uncertainty as to actions the united states congress will take to address the national debt the pending department of labor fiduciary rule that expands the regulation of sales of insurance products used in retirement plans . see part 1 , item 1a for further discussion of this proposal . the enactment of the tax act during december 2017 may alter consumer demand for our insurance products . the low market interest rate environment continues to impact our investment yields as well as the interest we credit on our interest sensitive products . the benchmark 10-year u.s. treasury yield fluctuated during 2017 , reaching a high of 2.62 % in march and ultimately ending 2017 at 2.40 % , five basis points lower than year-end 2016. credit spreads continued to tighten during 2017. low crediting rates pose challenges to maintaining attractive annuity and universal life products , although our rates are comparable to other insurance companies , allowing us to maintain our competitive position within the market . we experienced an increase in the fair value of our fixed maturity security portfolio during 2017 primarily due to a decrease in market yields . see the segment discussion and “ financial condition ” section that follows for additional information regarding the impact of low market interest rates on our business . 27 results of operations for the three years ended december 31 , 2017 replace_table_token_11_th ( 1 ) amounts are net of adjustments , as applicable , to amortization of unearned revenue reserves , deferred acquisition costs and value of insurance in force acquired , as well as changes in interest sensitive product reserves and income taxes attributable to these items . ( 2 ) see note 13 to our consolidated financial statements . ( 3 ) average invested assets and annualized yield including , beginning in 2017 , investments held as securities and indebtedness of related parties ; 2016 and 2015 amounts have been adjusted for comparability . our net income increased in 2017 , compared to 2016 , primarily due to the initial impact of the tax act . net income and non-gaap operating income were positively impacted by increased earnings from an increase in the volume of business in force and the impact of unlocking , partially offset by increases in death benefits . story_separator_special_tag see note 5 to our consolidated financial statements included in item 8 for additional information regarding the tax act . 36 replace_table_token_24_th the level of realized gains ( losses ) is subject to fluctuation from period to period due to movements in credit spreads and prevailing interest rates , changes in the economic environment , the timing of the sales of the investments generating the realized gains and losses , as well as the timing of other than temporary impairment charges . during 2017 , we sold securities to reduce our exposure to a retailer and to the energy sector , resulting in realized losses of $ 0.9 million . during 2016 , we sold securities to decrease our exposure to the energy sector , resulting in realized gains of $ 3.9 million and realized losses of $ 8.4 million . see `` financial condition - investments `` and note 2 to our consolidated financial statements included in item 8 for details regarding our unrealized gains and losses on available-for-sale securities at december 31 , 2017 and 2016. we monitor the financial condition and operations of the issuers of securities rated below investment grade and of the issuers of certain investment grade securities for which we have concerns regarding credit quality that could potentially be other than temporarily impaired . see additional details regarding write downs and our methodology for evaluating investments for other-than-temporary impairment in notes 1 and 2 to our consolidated financial statements included in item 8. replace_table_token_25_th fixed maturity other-than-temporary credit losses for 2017 occurred in the construction sector due to an expected reduction in future revenue and the declining liquidity of an issuer . impairment charges were also recognized on securities and indebtedness of related parties as the tax act resulted in a change in the expected future tax benefits of lihtc entities . fixed maturity other-than-temporary credit losses for 2016 occurred within the energy sector due to a decline in credit of an issuer that led to a decrease in the expected future cash flows . other than temporary credit losses also occurred within residential mortgage-backed securities due to reduced reliance on insurance credit support , resulting in a decline in the present value of expected cash flows . fixed maturity other-than-temporary credit losses for 2015 occurred in the residential mortgage-backed sector due to changes in the amount and timing of future cash flows resulting in a decline in the present value . an impairment charge was also recognized on a real estate investment due to an appraisal declining below our current carrying value . 37 financial condition investments our investment portfolio increased 5.5 % to $ 8,620.2 million at december 31 , 2017 , compared to $ 8,174.7 million at december 31 , 2016 . the portfolio increased due to positive cash flows from operating and financing activities as well as an increase of $ 187.6 million of net unrealized appreciation of fixed maturities during 2017. additional details regarding securities in an unrealized gain or loss position at december 31 , 2017 are included in the discussion that follows and in note 2 to our consolidated financial statements included in item 8. details regarding investment impairments are discussed above in the `` realized gains ( losses ) on investments `` section under `` results of operations . `` we manage the investment portfolio to optimize risk-adjusted yield within the context of prudent asset-liability management . we evaluate multiple cash flow testing scenarios as part of this process . the company 's investment policy calls for investing primarily in high-quality fixed maturities and commercial mortgage loans . replace_table_token_26_th the table above summarizes selected information for fixed maturity purchases . the effective annual yield shown is the yield calculated to the `` worst-call date . `` for non-callable bonds , the worst-call date is always the maturity date . for callable bonds , the worst-call date is the call or maturity date that produces the lowest yield . the weighted-average life is calculated using scheduled pay-downs and expected prepayments for amortizing securities . for non-amortizing securities , the weighted-average life is equal to the stated maturity date . a portion of the securities acquired during 2017 and 2016 were acquired with the proceeds from advances on our funding agreements with the fhlb . the securities acquired to support these funding agreements often carry a lower average yield than securities acquired to support our other insurance products , due to the shorter maturity and relatively low interest rate paid on those advances . in addition , certain municipal securities acquired are exempt from federal income taxes , and accordingly have a higher actual return than reflected in the yields stated above . the average yield of the securities acquired , excluding the securities supporting the funding agreements and using a tax-adjusted yield for the municipal securities , was 3.95 % in 2017 and 4.39 % in 2016 . 38 replace_table_token_27_th as of december 31 , 2017 , 96.5 % ( based on carrying value ) of the available-for-sale fixed maturities were investment grade debt securities , defined as being in the highest two national association of insurance commissioners ( naic ) designations . non-investment grade debt securities generally provide higher yields and involve greater risks than investment grade debt securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers . in addition , the trading market for these securities is usually more limited than for investment grade debt securities . we regularly review the percentage of our portfolio that is invested in non-investment grade debt securities ( naic designations 3 through 6 ) . as of december 31 , 2017 , no single non-investment grade holding exceeded 0.2 % of total investments . replace_table_token_28_th ( 1 ) equivalent ratings are based on those provided by nationally recognized rating agencies with some exceptions for certain residential mortgage , commercial mortgage- and asset-backed securities that are based on the

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cash flows during 2017 , our operating activities generated cash flows totaling $ 241.7 million , consisting of net income of $ 194.4 million adjusted for non-cash operating revenues and expenses netting to $ 47.3 million . we used cash of $ 235.4 million in our investing activities during 2017 . the primary uses were $ 974.6 million of investment acquisitions , mostly in fixed maturity securities , partially offset by $ 751.3 million in sales , maturities and repayments of investments . our financing activities provided cash of $ 12.8 million during 2017 . the primary financing source was $ 534.4 million in receipts from interest sensitive products credited to policyholder account balances , which was partially offset by $ 440.6 million for return of policyholder account balances on interest sensitive products and $ 81.4 million for dividends paid to stockholders . sources and uses of capital resources parent company cash inflows from operations consist primarily of fees that it charges various subsidiaries and affiliates for management of their operations , expense reimbursements and tax settlements from subsidiaries and affiliates , proceeds from the exercise of employee stock options , investment income and dividends from subsidiaries , if declared and paid . revenue sources for the parent company during 2017 included management fees from subsidiaries and affiliates totaling $ 7.8 million and dividends of $ 71.5 million .

additionally , there was a number of cases in the united states by the balance sheet date , january 31 , 2020. the company serves acute care hospitals throughout the united states . while the company has not been materially impacted by the “ shelter in place ” movements of local and state governments across the united states , it is not possible to reliably estimate the length or severity of the pandemic , and whether it may have an adverse financial impact on the company 's financial condition . 21 results of operations statements of operations for the fiscal years ended january 31 ( in thousands ) : replace_table_token_1_th ( 1 ) non-gaap measure meaning net earnings ( loss ) before net interest expense , tax expense ( benefit ) , depreciation , amortization , stock-based compensation expense , transactional and other expenses that do not relate to our core operations . see “ use of non-gaap financial measures ” below for additional information and reconciliation . 22 the following table sets forth , for each fiscal year indicated , certain operating data as percentages of total revenues : statements of operations ( 1 ) replace_table_token_2_th ( 1 ) because a significant percentage of the operating costs are incurred at levels that are not necessarily correlated with revenue levels , a variation in the timing of systems sales and installations and the resulting revenue recognition can cause significant variations in operating results . as a result , period-to-period comparisons may not be meaningful with respect to the past results nor are they necessarily indicative of the future results of the company in the near or long-term . the data in the table is presented solely for the purpose of reflecting the relationship of various operating elements to revenues for the periods indicated . 23 comparison of fiscal year 2019 with 2018 revenues replace_table_token_3_th proprietary software and term licenses — proprietary software revenues recognized in fiscal 2019 were $ 936,000 , as compared to $ 1,398,000 in fiscal 2018. the decreased fiscal 2019 revenues as compared to 2018 revenues are primarily attributable to two larger perpetual license sales of our streamline health® abstracting ; one in our first quarter and one in our second quarter of fiscal 2018. these perpetual license sales have been gaining traction from a significant distributor partner to the company . the company continues to see a positive trend in the volumes with this significant distributor partner . term license revenue for fiscal 2019 decreased $ 719,000 from fiscal 2018 , to $ 180,000. the decrease is related to the lower revenues from certain clinical analytics contracts that terminated in fiscal 2018. hardware and third-party software — revenues from hardware and third-party software sales in fiscal 2019 were $ 103,000 , as compared to $ 175,000 in fiscal 2018. fluctuations from year to year are a function of client demand and the customers ' timing of replacing or enhancing their scanning capabilities through our vendors . this revenue stream is from the ecm assets . the ecm assets were sold to hyland software on february 24 , 2020 in a transaction accounted for a sale of assets . see note 14 of the audited consolidated financial statements for additional information . professional services — revenues from professional services in fiscal 2019 were $ 1,801,000 , as compared to $ 1,336,000 in fiscal 2018. the increases in professional services revenue are primarily due to the completion of large implementation projects in fiscal 2019. these professional fees are driven , primarily , from certain large cdi & abstracting projects that were sold in 2018 and 2019 , and the related implementation and services associated with these . a portion of this revenue is related to the ecm assets that were sold on february 24 , 2020 in a transaction accounted for as a sale of assets . see note 14 of the audited consolidated financial statements for additional information on the transaction . audit services — audit services revenue for fiscal 2019 increased , to $ 1,712,000 from $ 1,118,000 in fiscal 2018. audit services revenue was positively impacted by the company 's audit services personnel using the evaluator solution to increase efficiency and effectiveness . looking ahead to fiscal 2020 , the company continues to see demand for on-shore , technically proficient auditors in the marketplace . the company has technically proficient and on-shore resources to address this need . maintenance and support — revenues from maintenance and support in fiscal 2019 were $ 11,309,000 as compared to $ 12,586,000 in fiscal 2018. the decrease in maintenance and support revenues in fiscal 2019 resulted primarily from pricing pressure and certain terminations on the company 's content management software solution , ecm assets . the company believes it has mitigated future pricing pressure and terminations through aggressively pursuing long-term contracts with our significant legacy product customers . these activities have proven useful , as they have resulted in substantially better visibility in the near-term revenue base for our company . this “ maintenance and support ” revenue category will be most impacted by the company 's divestiture of the ecm assets . see note 14 to the audited consolidated financial statements for additional information on the sale of the ecm assets . 24 software as a service ( saas ) — revenues from saas in fiscal 2019 were $ 4,702,000 , as compared to $ 4,853,000 in fiscal 2018. the decrease in fiscal 2019 revenue was attributable to cancellations by a few customers of our financial management solutions , offset by growth associated with the company 's new evaluator product . story_separator_special_tag adjusted ebitda removes the impact of share-based compensation expense , which is another non-cash item . adjusted ebitda per diluted share includes incremental shares in the share count that are considered anti-dilutive in a gaap net loss position . the board of directors and management also use these measures ( i ) as one of the primary methods for planning and forecasting overall expectations and for evaluating , on at least a quarterly and annual basis , actual results against such expectations ; and ( ii ) as a performance evaluation metric in determining achievement of certain executive and associate incentive compensation programs . our lender uses a measurement that is similar to the adjusted ebitda measurement described herein to assess our operating performance . the lender under our loan and security agreement requires delivery of compliance reports certifying compliance with financial covenants , certain of which are based on a measurement that is similar to the adjusted ebitda measurement reviewed by our management and board of directors . 29 ebitda , adjusted ebitda and adjusted ebitda margin are not measures of liquidity under gaap or otherwise , and are not alternatives to cash flow from continuing operating activities , despite the advantages regarding the use and analysis of these measures as mentioned above . ebitda , adjusted ebitda , adjusted ebitda margin , and adjusted ebitda per diluted share , as disclosed in this annual report on form 10-k have limitations as analytical tools , and you should not consider these measures in isolation or as a substitute for analysis of our results as reported under gaap ; nor are these measures intended to be measures of liquidity or free cash flow for our discretionary use . some of the limitations of ebitda and its variations are : ● ebitda does not reflect our cash expenditures or future requirements for capital expenditures or contractual commitments ; ● ebitda does not reflect changes in , or cash requirements for , our working capital needs ; ● ebitda does not reflect the interest expense , or the cash requirements to service interest or principal payments under our loan and security agreement ; ● ebitda does not reflect income tax payments that we may be required to make ; and ● although depreciation and amortization are non-cash charges , the assets being depreciated and amortized often will have to be replaced in the future , and ebitda does not reflect any cash requirements for such replacements . adjusted ebitda has all the inherent limitations of ebitda . to properly and prudently evaluate our business , the company encourages readers to review the gaap financial statements included elsewhere in this annual report on form 10-k , and not rely on any single financial measure to evaluate our business . we also strongly urge readers to review the reconciliation of these non-gaap financial measures to the most comparable gaap measure in this section , along with the consolidated financial statements included in part ii , item 8. the following table reconciles ebitda and adjusted ebitda to net loss , and adjusted ebitda per diluted share to loss per diluted share for the fiscal years ended january 31 , 2020 and 2019 ( amounts in thousands , except per share data ) . all of the items included in the reconciliation from ebitda and adjusted ebitda to net loss and the related per share calculations are either recurring non-cash items , or items that management does not consider in assessing our on-going operating performance . in the case of the non-cash items , management believes that investors may find it useful to assess the company 's comparative operating performance because the measures without such items are less susceptible to variances in actual performance resulting from depreciation , amortization and other expenses that do not relate to our core operations and are more reflective of other factors that affect operating performance . in the case of items that do not relate to our core operations , management believes that investors may find it useful to assess our operating performance if the measures are presented without these items because their financial impact does not reflect ongoing operating performance . 30 replace_table_token_11_th ( 1 ) executive transition cost on the consolidated statement of operations includes $ 64,000 in stock compensation expense for fiscal 2019 , which is included within share-based compensation expense in the adjusted ebitda calculation above . ( 2 ) adjusted ebitda as a percentage of gaap net revenues . ( 3 ) adjusted ebitda per adjusted diluted share for the company 's common stock is computed using the more dilutive of the two-class method or the if-converted method . ( 4 ) the number of incremental shares that would be dilutive under profit assumption , only applicable under a gaap net loss . if gaap profit is earned in the current period , no additional incremental shares are assumed . application of critical accounting policies the following is a summary of the company 's most critical accounting policies . refer to note 2 - significant accounting policies to our consolidated financial statements included in part ii , item 8 for a complete discussion of the significant accounting policies and methods used in the preparation of our consolidated financial statements . 31 revenue recognition the company derives revenue from the sale of internally-developed software , either by licensing for local installation or by a software as a service ( “ saas ” ) delivery model , through our direct sales force or through third-party resellers . licensed , locally-installed clients on a perpetual model utilize our support and maintenance services for a separate fee , whereas term-based locally installed license fees and saas fees include support and maintenance . the company also derives revenue from professional services that support the implementation , configuration , training and optimization of the applications , as well as audit services provided to help clients review their internal coding audit processes

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liquidity and capital resources the company 's liquidity is dependent upon numerous factors including : ( i ) the timing and amount of revenues and collection of contractual amounts from clients , ( ii ) amounts invested in research and development and capital expenditures , and ( iii ) the level of operating expenses , all of which can vary significantly from quarter-to-quarter . the company 's primary cash requirements include regular payment of payroll and other business expenses , principal and interest payments on debt and capital expenditures . capital expenditures generally include computer hardware and computer software to support internal development efforts or saas data center infrastructure . operations are funded with cash generated by operations and borrowings under credit facilities . the company believes that cash flows from operations and available credit facilities are adequate to fund current obligations for the next twelve months . cash and cash equivalent balances at january 31 , 2020 and 2019 were $ 1,649,000 and $ 2,376,000 , respectively . continued expansion may require the company to take on additional debt or raise capital through issuance of equities , or a combination of both . there can be no assurance the company will be able to raise the capital required to fund further expansion . 33 the company has liquidity through the loan and security agreement described in more detail in note 5 - debt to our consolidated financial statements included in part ii , item 8. the company has a $ 2,000,000 revolving credit facility , which can be advanced based upon 80 % of eligible accounts receivable , as defined in the loan and security agreement .

our plan is to complete development of our remaining projects and grow production to more than 4.0 million clean tons of metallurgical coal over the next three to four years depending on the rate at which we are able to deploy capital . we may make acquisitions of reserves or infrastructure that continue our focus on advantaged geology and lower costs . during 2018 , we sold 2.1 million tons of coal , which represents a 253 % increase from our 2017 sales volume . of this , 65 % was sold in north american markets and 35 % was sold in export markets principally to europe and asia . in 2016 and through april 2017 , we processed raw coal for third parties at our knox creek preparation plant and loading facility under arrangements that have been cancelled . beginning in late 2016 , we began purchasing coal from third parties for sale for our own account . the overall outlook of the metallurgical coal business is dependent on a variety of factors such as pricing , regulatory uncertainties and global economic conditions . coal consumption and production in the u.s. have been driven in recent periods by several market dynamics and trends , such as the global economy , a strong u.s. dollar and accelerating production cuts . in march 2018 , president trump signed a proclamation imposing a 25 % global tariff on imports of certain steel products , effective march 31 , 2018. generally , we are experiencing signs of some increase in domestic demand for metallurgical coal as a result of the proclamations . our export customers include foreign steel producers who may be negatively affected by the tariffs to the extent their production is imported into the u.s. some countries have also threatened retaliatory tariffs on u.s. products including metallurgical coal . at this time , it is too early to know the impact these tariffs will have on longer-term demand or pricing , if any . in 2018 , our capital expenditures totaled approximately $ 48 million . we completed the development and opening of one new deep mine at our elk creek mining complex . we continued to invest in infrastructure and mine equipment at our elk creek mining complex . we also continued development mining at our berwind property and continued third-party coal purchases which augment our sales . on november 5 , 2018 , one of our three raw coal storage silos that feed our elk creek plant in west virginia experienced a partial structural failure . the prep plant at our elk creek mining complex was idled for approximately three weeks due to the partial structural failure of the silo . in late november 2018 , we completed a temporary conveying system at our elk creek mining complex . the temporary conveying system allowed us to bypass the damaged raw coal storage silo , which has since been demolished , and allowed for the immediate processing and shipping of coal at approximately 80 % of the entire plant capacity , throughout december 2018. in february 2019 , we completed the fabrication of a higher capacity bypass system to provide a secondary conveyance system , which operates at greater than 80 % of processing capacity with increased reliability compared to the initial bypass system . we anticipate completion of the silo rehabilitation in the second quarter of 2019 at which point we expect the prep plant to return to full processing capacity . our insurance carrier has disputed our claim for coverage based on certain exclusions to the applicable policy . we are still evaluating whether we will be fully insured against all losses or liabilities that could arise from this incident . 46 results of operations replace_table_token_3_th our revenue producing activities for 2018 consisted of the sale of coal we produced and coal we purchased from third parties for our own account . we began commercial production of coal in january 2017. starting as new mine projects , we developed and opened four mines at our elk creek mining complex and completed construction of the preparation plant and rail load-out facility during 2017 and 2018. we also began development mining in 2017 at our berwind property , which continued during 2018. in 2016 , revenue consisted principally of the sale of purchased coal and revenue for processing coal for third parties , which processing contracts were terminated in april 2017. our first revenues commenced in mid-2016 with completion of the knox creek acquisition ( as later defined ) . before this acquisition , our activities were limited to acquiring geologically advantaged coal reserve properties and to advancing those properties toward coal production through exploration , the delineation of reserves ; assessment and mine planning ; permitting ; and the development of access for mining . direct costs associated with preparation of future mine sites for mining were capitalized . operating expenditures including certain professional fees and overhead costs are not capitalized but are expensed as incurred . year ended december 31 , 201 8 compared to year ended december 31 , 201 7 revenue . for the year ended december 31 , 2018 , we had revenue of $ 227.6 million from the sale of coal . during 2018 , we sold 2.1 million tons of coal including 0.4 million tons of purchased coal . for the year ended december 31 , 2017 , we had revenue of $ 58.8 million from the sale of coal and $ 2.2 million from the processing of coal for third parties . during 2017 , we sold 0.6 million tons of coal including 0.2 million tons of purchased coal . story_separator_special_tag of these committed sales , approximately 1.5 million tons , or about 75 % , are committed to domestic customers at fixed prices averaging $ 113 , approximately 100,000 tons are committed to export markets at prices averaging $ 122 and approximately 350,000 tons are committed at prices based upon an index determined near the time of shipment . story_separator_special_tag changes in the metallurgical coal markets that would reduce the expected cash flow from operations . capital requirements our primary use of cash currently includes capital expenditures for mine development and for ongoing operating expenses . during 2018 we spent $ 48 million primarily for the purchase of mining equipment , infrastructure and development of mines at our elk creek and berwind mining complexes . we anticipate capital expenditures of $ 35 million to $ 40 million in 2019 for mine equipment and development . management believes that current cash on hand , cash flow from operations and available liquidity under our revolving credit facility will be sufficient to meet its capital expenditure and operating plans . we expect to fund any new reserve acquisitions from cash on hand , cash from operations and potential future issuances of debt or equity securities . if future cash flows are insufficient to meet our liquidity needs or capital requirements , we may reduce our expected level of capital expenditures and or fund a portion of our capital expenditures through the issuance of debt or equity securities , the entry into debt arrangements or from other sources , such as asset sales . 52 contractual obligations the following table summarizes our contractual obligations as of december 31 , 2018 : replace_table_token_10_th off-balance sheet arrangements as of december 31 , 2018 , we had no off-balance sheet arrangements . critical accounting policies and estimates the preparation of consolidated financial statements in conformity with u.s. gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the amounts of revenues and expenses reported for the period then ended . mine development costs . mine development costs represent the costs incurred to prepare future mine sites for mining . these costs include costs of acquiring , permitting , planning , research , and establishing access to identify mineral reserves and other preparations for commercial production as necessary to develop and permit the properties for mining activities . operating expenditures , including certain professional fees and overhead costs , are not capitalized but are expensed as incurred . amortization of mine development costs , with respect to a specific mine , commences when mining of the related reserves begins . amortization is computed using the units-of-production method over the proven and probable reserves dedicated to the specific mine . asset retirement obligations . we recognize as a liability an asset retirement obligation , or aro , associated with the retirement of a tangible long-lived asset in the period in which it is incurred or becomes determinable , with an associated increase in the carrying amount of the related long-lived asset . the initially recognized asset retirement cost is amortized using the same method and useful life as the long-lived asset to which it relates . amortization begins when mining of the specific mineral property begins . accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value . estimating the future aro requires management to make estimates and judgments regarding timing and existence of a liability , as well as what constitutes adequate restoration . inherent in the fair value calculation are numerous assumptions and judgments including the ultimate costs , inflation factors , credit adjusted discount rates , timing of settlement and changes in the legal , regulatory , environmental and political environments . to the extent future revisions to these assumptions impact the fair value of the existing aro liability , a corresponding adjustment is made to the related asset . impairment of long-lived assets . we review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . these events and circumstances include , but are not limited to , a current expectation that a long-lived asset will be disposed of significantly before the end of its previously estimated useful life , a significant adverse change in the extent or manner in which we use a long-lived asset or a change in its physical condition . when such events or changes in circumstances occur , a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying amount . if the projected undiscounted cash flows are less than the carrying amount , an impairment is recorded for the excess of the carrying amount over the estimated fair value . we make various assumptions , including assumptions regarding future cash flows in our assessments of long-lived assets for impairment . the assumptions about future cash flows and growth rates are based on the current and long-term business plans related to the long-lived assets . 53 equity -based compensation expense . compensation cost for equity incentive awards is based on the fair value of the equity instrument generally on the date of grant and is recognized over the requisite service period . the fair value of restricted stock awards is determined using the publicly-traded price of our common stock on the grant date . the fair value of option awards is calculated using the black-scholes option-pricing model . the black-scholes model requires us to make assumptions and judgments about the variables used in the calculation , including the expected term , expected volatility , risk-free interest rate , dividend rate and service period . income taxes . we provide for deferred income taxes for temporary differences arising from differences between the financial

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liquidity and capital resources our primary source of cash is proceeds from the sale of our coal production to customers . our primary uses of cash include the cash costs of coal production , capital expenditures , royalty payments and other operating expenditures . cash flow information is as follows : replace_table_token_9_th net cash provided by operating activities in the year ended december 31 , 2018 reflects a significant increase in net income as compared to the loss incurred in the prior year . net cash used in operating activities in the year ended december 31 , 2017 reflects higher costs associated with the commencement and expansion of our operations . the cash used in operating activities in 2016 was primarily the result of net losses incurred in preparing the company for operations . net cash used in investing activities was $ 42.9 million for 2018 as compared with $ 19.8 million for 2017. our capital expenditures totaled $ 48.1 million , $ 75.0 million and $ 16.7 million in 2018 , 2017 and 2016 , respectively . in 2016 , we invested a portion of the proceeds of the issuance of our series a preferred units into investment securities , the maturity of which was timed to coincide with anticipated capital expenditures . we received proceeds from those investment securities of $ 5.2 million and $ 55.2 million in 2018 and 2017 , respectively . net cash from financing activities was $ 7.9 million for 2018 as compared with $ 29.3 million for 2017. during 2018 , we borrowed $ 16.0 million through short-term notes payable .

we base our assessment of the collectibility of rent receivables ( other than straight-line rent receivables ) on several factors , including payment history , the financial strength of the tenant and any guarantors , the value of the underlying collateral , and current economic conditions . if our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments , we provide a reserve against the portion of the receivable that we estimate may not be recovered . if our evaluation of these factors indicates it is probable that we will be unable to receive the rent payments due in the future , we provide a reserve against the recognized straight-line rent receivable asset for the portion that we estimate may not be recovered . if we change our assumptions or estimates regarding the collectibility of future rent payments required by a lease , we may adjust our reserve to increase or reduce the rental revenue recognized in the period we make such change in our assumptions or estimates . at december 31 , 2016 , we allowed for approximately $ 7.5 million on approximately $ 8.4 million of gross patient care related receivables . allowance for patient care receivables are estimated based on an aged bucket method as well as additional analyses of remaining balances incorporating different payor types . 40 asset impairment we review the carrying value of long-lived assets that are held and used in our operations for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . recoverability of these assets is determined based upon expected undiscounted future net cash flows from the operations to which the assets relate , utilizing management 's best estimate , assumptions , and projections at the time . if the carrying value is determined to be unrecoverable from future operating cash flows , the asset is deemed impaired and an impairment loss would be recognized to the extent the carrying value exceeded the estimated fair value of the asset . we estimate the fair value of assets based on the estimated future discounted cash flows of the asset . management has evaluated its long-lived assets and has identified asset impairment during the years ended december 31 , 2016 and 2015 . we test indefinite-lived intangible assets for impairment on an annual basis or more frequently if events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable . goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations . goodwill is subject to annual testing for impairment . in addition , goodwill is tested for impairment if events occur or circumstances change that would reduce the fair value of a facility below its carrying amount . we perform annual testing for impairment during the fourth quarter of each year ( see note 6 - intangible assets and goodwill to our consolidated financial statements included in part ii , item 8. , `` financial statements and supplementary data. `` ) . our asset impairment analysis is consistent with the fair value measurements described in the accounting standards codification ( `` asc `` ) topic 820 , `` fair value measurements and disclosures `` . during the year ended december 31 , 2015 , we recognized impairment charges of approximately $ 0.5 million and $ 0.1 million to write down the carrying value of two office buildings located in roswell , georgia and one office building located in rogers , arkansas , respectively . during the year ended december 31 , 2016 , we recognized approximately $ 21 thousand impairment charge on an office building located in roswell , georgia . ( see note 11 - discontinued operations to our consolidated financial statements included in part ii , item 8. , `` financial statements and supplementary data `` ) . the impairment charges represent the difference between fair values and the carrying amount . self-insurance reserve the company has self-insured against professional and general liability claims since it discontinued its healthcare operations in connection with its transition to a healthcare holding and leasing company . professional and general liability actions generally seek unspecified compensatory and punitive damages for former patients of the company who were allegedly injured due to professional negligence or understaffing . the company evaluates quarterly the adequacy of its self-insurance reserve based on a number of factors , including : ( i ) the number of actions pending and the relief sought ; ( ii ) analyses provided by defense counsel , medical experts or other information which comes to light during discovery ; ( iii ) the legal fees and other expenses anticipated to be incurred in defending the actions ; ( v ) the status and likely success of any mediation or settlement discussions ; and ( vi ) the venues in which the actions have been filed or will be adjudicated . the company currently believes that most of the professional and general liability actions , and particularly many of the most recently filed actions , are defensible and intends to defend them through final judgement . accordingly , the self-insurance reserve primarily reflects the company 's estimated legal costs of litigating the pending actions accordingly . because the self-insurance reserve is based on estimates , the amount of the self-insurance reserve may not be sufficient to cover the legal costs actually incurred in litigating the pending actions . stock-based compensation we follow the provisions of asc topic 718 , `` compensation - stock compensation `` , which requires the measurement and recognition of compensation expense for all share-based payment awards either modified or granted to employees , non-employees , and directors based upon estimated fair values . story_separator_special_tag million , which refinanced approximately $ 5.9 million in debt with respect to to the company 's facility located in sumter , south carolina ( the “ sumter facility ” ) which includes $ 0.8 million of indebtedness previously attributed to the georgetown facility and reallocated as a result of a price out at closing . on june 18 , 2016 , a subsidiary of the company entered into the peach health sublease , providing that peach health sublessee would take possession of the facilities peach facilities subleased to affiliates of new beginnings prior to their bankruptcy . the peach facilities are comprised of the oceanside facility , the savannah beach facility and the jeffersonville facility . rent for the savannah beach facility , the oceanside facility , and the jeffersonville facility is $ 0.3 million , $ 0.4 million and $ 0.6 million per annum , respectively ; but such rent is only $ 1 per month for the oceanside and jeffersonville facilities until the date such facilities are recertified by cms or april 1 , 2017 , whichever first occurs ( the “ rent commencement date ” ) . the oceanside and jeffersonville facilities were recertified by cms in february 2017 and december 2016 , respectively . in addition , with respect to the oceanside and jeffersonville facilities , peach health sublessee is entitled to three months of $ 1 per month rent following the rent commencement date and , following such three-month period , five months of rent discounted by 50 % . in the event that the savannah beach facility is decertified due to any previous non-compliance attributable to new beginnings , rent for such facility will revert to $ 1 a month until it is recertified along with the other facilities . the company also provided peach health with a $ 1.0 million line of credit ( the “ peach line ” ) to be used for working capital and capital expenditure needs , under which peach health had borrowed approximately $ 0.7 million as of december 31 , 2016. on january 10 , 2017 , the company repurchased $ 6.7 million of its 10 % convertible subordinated notes due april 30 , 2017 pursuant to a cash tender offer for any and all of such outstanding convertible subordinated notes ( the “ tender offer ” ) . ( see note 19 -subsequent events to our consolidated financial statements included in part ii , item 8. , “ financial statements and supplementary data . ” ) 45 cash requirements at december 31 , 2016 , we had $ 80.0 million in indebtedness of which the current portion is $ 13.2 million . this current portion is comprised of the following components : ( i ) convertible debt of $ 9.1 million ; and ( ii ) remaining debt of approximately $ 4.1 million which includes senior debt - bond and mortgage indebtedness ( see note 9 - notes payable and other debt to our consolidated financial statements included in part ii , item 8. , “ financial statements and supplementary data ” ) . subsequent to december 31 , 2016 , the company repurchased $ 6.7 million in convertible debt pursuant to the tender offer using proceeds from the sale of the arkansas facilities . management anticipates cash requirements over the next twelve months to be less than the prior twelve months due to significant reductions in debt amortization and remaining trade payables of legacy operations along with anticipated continued reductions in general and administrative expenses . management also considers acquisitions financed both by existing cash on hand and third party financing to be an integral part of its ongoing strategy for increasing cash flow from operations . in addition , management anticipates a decreased need for non-recurring capital expenditures , given the recertification by cms of the two previously decertified facilities located in georgia , which required significant capital investment . management expects sufficient funds from operations coupled with existing cash on hand to cover all cash needs at least through the next twelve months and to satisfy the company 's liquidity needs by these same sources , coupled with additional borrowings for underleveraged facilities , and acquisitions . the company anticipates , over the next twelve months , net principal disbursements of approximately $ 13.2 million , which includes the aforementioned $ 9.1 million of convertible debt ( $ 6.7 million of which was repaid as part of the tender offer in january 2017 ) , approximately $ 0.5 million of payments on short term vendor notes , $ 1.8 million of routine debt service amortization , and $ 1.7 million of payments of other debt , which is inclusive of anticipated proceeds on refinancing of one facility in oklahoma of approximately $ 1.2 million . based on the described sources of liquidity , the company expects sufficient funds for its operations and scheduled debt service , at least through the next twelve months . on a longer term basis , at december 31 , 2016 , the company had approximately $ 19.3 million of debt maturities due over the next two year period ending december 31 , 2018 and $ 19.8 million over the 27 month period ended march 31 , 2018. these debt maturities include $ 9.1 million of convertible promissory notes as well as $ 1.2 million for current maturities of one facility located in oklahoma . the company believes its long-term liquidity needs will be satisfied by these same sources , as well as borrowings as required to refinance indebtedness . in november 2016 , the board of directors approved two share repurchase programs , pursuant to which adcare was authorized to repurchase up to 1.0 million shares of the common stock and 100,000 shares of the series a preferred stock during a twelve-month period . as of april 17 , 2017 , the company had repurchased 2,300 shares of series a preferred stock for approximately $ 48,000 at

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net cash used in operating activities —continuing operations for the year ended december 31 , 2015 , was $ 11.7 million consisting primarily of our loss from operations less changes in working capital , and noncash charges ( primarily depreciation and amortization , share-based compensation , rent revenue in excess of cash received , and amortization of debt discounts and related deferred financing costs ) all primarily the result of routine operating activity . net cash provided by operating activities—discontinued operations was approximately $ 6.1 million due primarily to a $ 18.5 million decrease in accounts payable and accrued liabilities offset by noncash charges . net cash used in investing activities —continuing operations for the year ended december 31 , 2015 , was approximately $ 5.7 million . this is primarily the result of an increase in restricted cash deposits offset by capital expenditures . net cash used in 47 investing activities—discontinued operations was approximately $ 15.6 million primarily due to proceeds of $ 13.9 million related to the sale of the companions specialized care center , the bentonville manor nursing home and the riverchase village facilities . net cash provided by financing activities —continuing operations was approximately $ 12.7 million for the year ended december 31 , 2015 . this is primarily the result of proceeds received from additional debt borrowings and preferred stock issuances partially offset by repayments of existing debt obligations and payments of preferred stock dividends . net cash used in financing activities—discontinued operations was approximately $ 12.8 million due to the payoff of loans related to the facilities sold , companions specialized care center , the bentonville manor nursing home and the riverchase village facilities . 48 notes payable and other debt notes payable and other debt consists of the following : replace_table_token_13_th ( a ) hud , u.s. department of agriculture ( `` usda '' ) , u.s. small business administration ( `` sba '' ) . ( b ) on september 29 , 2016 , the company closed on hud-guaranteed financing in the amount of $ 3.7 million , which refinanced approximately $ 3.1 million in debt previously owed to the privatebank , classified as senior debt - other mortgage indebtedness with respect to the georgetown facility .

unfavorable impacts from the global economy and consumer spending together with exchange rate fluctuations could continue to negatively impact our net revenues in our fiscal year 2017. we continually work to offset currency movements through hedging strategies designed to minimize the volatility of results and dampen large fluctuations . however , as our revenue hedging instruments cover a period of up to 12 months , the hedging conducted a year ago is expected to deliver little benefit to offset the stronger dollar against other major currencies in fiscal year 2017. revenues from our consumer products channel are seasonal and typically strongest in our third fiscal quarter , which includes the majority of the holiday shopping season . additionally , other factors directly impact our consumer product category performance , such as consumer preferences , changes in consumer confidence and other macroeconomic factors , product life-cycles ( including the introduction and pace of adoption of new technology ) , and the competitive retail environment . our consumer business continues to be impacted by a decline in sales volumes in our mono bluetooth products as the market for these products contracts . the unit volumes in our stereo bluetooth category increased slightly when compared to the prior fiscal year , driven primarily by our newer generation of products . we anticipate that these newer products and other planned investments in the consumer category will allow us to better compete in these consumer product categories as they continue to expand . while we have been building our stereo portfolio over the last several years , it is not yet as robust as our mono bluetooth portfolio of products . as a result of these market changes , we have reduced the amount we expect to invest in non-premium mono bluetooth portfolio while shifting that investment toward additional stereo bluetooth products . this shift toward entertainment solutions is important to our long-term brand position . 27 due to slower than anticipated growth of uc revenues , combined with the negative impact of a strengthening dollar , and a sharp decrease in the u.s. mono bluetooth market , our fiscal year 2016 revenues declined year over year , causing us to make some necessary changes to reduce our cost structure . during the third quarter of fiscal year 2016 we initiated a restructuring plan to better align expenses to our revenue and gross margin profile and position us for improved operating performance . under that plan , we reduced costs through voluntary and involuntary elimination of certain positions throughout the organization in the u.s. , mexico , china , and europe . the restructuring actions have resulted in pre-tax charges of approximately $ 16.2 million in our fiscal year 2016. looking forward to fiscal year 2017 , uc continues to be our primary focus area . with the vast majority of the uc opportunity still ahead of us , we believe we are in the beginning stage of a potentially long period of growth . we believe uc represents our key long-term driver of revenue and profit growth , as we anticipate uc systems will become more commonly adopted by enterprises to reduce costs and improve collaboration . we believe growth of uc will increase overall headset adoption in enterprise environments , and we expect most of the growth in our enterprise product category over the next five years to come from headsets designed for uc . in addition , in fiscal year 2017 we are expecting to launch new peripheral `` as-a-service `` offerings which we anticipate will complement our existing suite of product offerings as we move toward a hybrid business model of hardware , software , and services . we believe these enhanced offerings will allow us to expand the reach of our solutions portfolio and scale for growth . our aim is to simplify our customers ' experience and drive a baseline of experiences across our portfolio . during our fiscal year 2017 , we will strive to transform data into actionable insights for our customers through software solutions that will offer reporting on asset management , usage , and conversation/acoustic health . in order to achieve these objectives , we will redefine our sales and marketing relationships and harmonize goals across these organizations to ensure we are working toward the same shared vision and go-to-market strategy . we remain cautious about the macroeconomic environment , based on uncertainty around fiscal policy in the u.s. , as well as broader economic uncertainty in many parts of europe and asia pacific , which makes it difficult for us to gauge what impact the economy may have on our future business , and the fact that the uc opportunity has not matured as quickly as we initially anticipated . we will continue to monitor our expenditures and prioritize expenditures that further our strategic long-term growth opportunities such as innovative product development in our core research and development efforts , including the use of software and services as part of our portfolio . uc will also remain the central focus of our sales force , marketing group , and other customer service and support teams as we continue investing in key strategic alliances and integrations with major uc vendors . results of operations the following tables set forth , for the periods indicated , the consolidated statements of operations data . the financial information and the ensuing discussion should be read in conjunction with the accompanying consolidated financial statements and notes thereto . net revenues replace_table_token_3_th enterprise products represent our largest source of revenues , while consumer products represent our largest unit volumes . net revenues may vary due to seasonality , the timing of new product introductions and discontinuation of existing products , discounts and other incentives , and channel mix . net revenues derived from sales of consumer products into the retail channel typically account for a seasonal increase in net revenues in the third quarter of our fiscal year . story_separator_special_tag 33 we anticipate our capital expenditures in fiscal year 2017 to be approximately $ 25.0 million to $ 30.0 million , related to costs associated with the purchase and related construction of a new smarter working office for our european headquarters in the netherlands as well as costs associated with building and leasehold improvements at our u.s. headquarters , the implementation of a manufacturing execution system at our facility in mexico , and other it-related expenditures . the remainder of the anticipated capital expenditures for fiscal year 2017 consist primarily of capital investment in our manufacturing capabilities , including tooling for new products . we will continue to evaluate new business opportunities and new markets ; as a result , our future growth within the existing business or new opportunities and markets may dictate the need for additional facilities and capital expenditures to support that growth . financing activities net cash used for financing activities during the year ended march 31 , 2016 decreased from the year ended march 31 , 2015 primarily driven by net proceeds received from issuance of the 5.50 % senior notes partially offset by an increase in the level of common stock repurchases . net cash used for financing activities during the year ended march 31 , 2015 increased from the year ended march 31 , 2014 due to an increase in the level of common stock repurchases and an increase in our quarterly dividend beginning in the first quarter of our fiscal year 2015. these items were partially offset by an increase in proceeds from our revolving line of credit . on may 3 , 2016 , we announced that our audit committee of the board of directors ( `` the audit committee `` ) had declared a cash dividend of $ 0.15 per share of our common stock , payable on june 10 , 2016 to stockholders of record at the close of business on may 20 , 2016 . we expect to continue paying a quarterly dividend of $ 0.15 per share of our common stock ; however , the actual declaration of dividends and the establishment of record and payment dates are subject to final determination by the audit committee each quarter after its review of our financial performance and financial position . story_separator_special_tag font style= `` font-family : inherit ; font-size:10pt ; `` > per annum . principal , together with all accrued and unpaid interest , on the revolving loans is due and payable on may 9 , 2019 . the company is also obligated to pay a commitment fee of 0.37 % per annum on the average daily unused amount of the revolving line of credit , which fee shall be payable quarterly in arrears . the company may prepay the loans and terminate the commitments under the amended credit agreement at any time , without premium or penalty , subject to the reimbursement of certain costs . as of march 31 , 2016 the company had no outstanding borrowings under the line of credit . the line of credit requires us to comply with the following two financial covenant ratios , in each case at each fiscal quarter end and determined on a rolling four-quarter basis : maximum ratio of funded debt to earnings before interest , taxes , depreciation and amortization ( `` ebitda `` ) ; and , minimum ebitda coverage ratio , which is calculated as interest payments divided by ebitda . in addition , we and our subsidiaries are required to maintain unrestricted cash , cash equivalents and marketable securities plus availability under the amended credit agreement at the end of each fiscal quarter of at least $ 300.0 million . the amended credit agreement contains customary events of default that include , among other things , payment defaults , covenant defaults , cross-defaults with certain other indebtedness , bankruptcy and insolvency defaults , and judgment defaults . the occurrence of an event of default could result in the acceleration of the obligations under the amended credit agreement . as of march 31 , 2016 , we were in breach of our debt to ebitda ratio covenant but in compliance with all other ratios and covenants by a substantial margin . on may 2 , 2016 , we received a waiver from the lender for noncompliance with the minimum ebitda covenant at march 31 , 2016. pursuant to the terms of the waiver and amendment to the credit agreement , the $ 16.2 million of restructuring charges recorded in our fiscal year 2016 will be excluded from the lender 's rolling four-quarter ebitda calculation . this exclusion of restructuring charges does not automatically extend to any such future charges , should they be incurred . this breach is not considered to be a cross-default on our 5.50 % senior notes and as such has no impact on the amount or timing of amounts payable related to these debt instruments . our liquidity , capital resources , and results of operations in any period could be affected by repurchases of our common stock , the payment of cash dividends , the exercise of outstanding stock options , restricted stock grants under stock plans , and the issuance of common stock under our espp . we receive cash from the exercise of outstanding stock options under our stock plan and the issuance of shares under our espp . however , the resulting increase in the number of outstanding shares from these equity grants and issuances could affect our earnings per share . we can not predict the timing or amount of proceeds from the sale or exercise of these securities or whether they will be exercised , forfeited , canceled , or will expire . we believe that our current cash and cash equivalents , short-term investments , cash provided by operations , and the availability of additional funds under the amended credit agreement will be sufficient to fund operations for at least the next

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liquidity and capital resources our primary discretionary cash uses have historically been for repurchases of our common stock and dividend payments . at march 31 , 2016 , we had working capital of $ 487.8 million , including $ 395.3 million of cash , cash equivalents , and short-term investments , compared to working capital of $ 507.8 million , including $ 374.7 million of cash , cash equivalents , and short-term investments at march 31 , 2015 . the decrease in working capital at march 31 , 2016 compared to march 31 , 2015 results from the decrease in accounts receivable and increase in accounts payable both due primarily to improved working capital management . our cash and cash equivalents as of march 31 , 2016 consist of bank deposits with third party financial institutions , commercial paper , and corporate bonds . we monitor bank balances in our operating accounts and adjust the balances as appropriate . cash balances are held throughout the world , including substantial amounts held outside of the u.s. as of march 31 , 2016 , of our $ 395.3 million of cash , cash equivalents , and short-term investments , $ 40.9 million is held domestically while $ 354.4 million is held by foreign subsidiaries , approximately 90 % of which were based in u.s. dollar-denominated holdings .

in fiscal 2019 , our net revenue was derived primarily from sales of rf receivers and rf receiver systems-on-chip and connectivity solutions into broadband operator voice and data modems and gateways and connectivity adapters , global analog and digital rf receiver products for analog and digital pay-tv applications , radio and modem solutions into wireless carrier access and backhaul infrastructure platforms , high-speed optical interconnect solutions sold into optical modules for data-center , metro and long-haul networks , and high-performance interface and power management solutions into a broad range of communications , industrial , automotive and multi-market applications . our ability to achieve revenue growth in the future will depend , among other factors , on our ability to further penetrate existing markets ; our ability to expand our target addressable markets by developing new and innovative products ; changes in government trade policies ; and our ability to obtain design 42 wins with device manufacturers , in particular manufacturers of set-top boxes , data modems , and gateways for the broadband service provider and pay-tv industries , manufacturers selling into the smartphone market , storage networking market , cable infrastructure market , industrial and automotive markets , and optical module and telecommunications infrastructure markets . products shipped to asia accounted for 84 % , 81 % and 89 % of net revenue during the years ended december 31 , 2019 , 2018 and 2017 , respectively , including 60 % , 63 % and 71 % , respectively , from products shipped to china . although a large percentage of our products is shipped to asia , we believe that a significant number of the systems designed by these customers and incorporating our semiconductor products are then sold outside asia . for example , revenue generated from sales of our cable modem products during the years ended december 31 , 2019 , 2018 and 2017 related principally to sales to asian odms and contract manufacturers delivering products into european and north american markets . to date , all of our sales have been denominated in united states dollars . a significant portion of our net revenue has historically been generated by a limited number of customers . sales to customers comprise both direct sales to customers and indirect sales through distributors . in the year ended december 31 , 2019 , one of our direct customers , commscope , accounted for 14 % of our net revenue , and our ten largest customers collectively accounted for 63 % of our net revenue , of which distributor customers comprised 38 % of our net revenue . in the year ended december 31 , 2018 , commscope accounted for 18 % of our net revenue , and our ten largest customers collectively accounted for 61 % of our net revenue , of which distributor customers comprised 29 % of our net revenue . in the year ended december 31 , 2017 , commscope accounted for 25 % of our net revenue , and our ten largest customers collectively accounted for 58 % of our net revenue , of which distributor customers comprised 9 % of our net revenue . for certain customers , we sell multiple products into disparate end user applications such as cable modems , satellite set-top boxes and broadband gateways . our business depends on winning competitive bid selection processes , known as design wins , to develop semiconductors for use in our customers ' products . these selection processes are typically lengthy , and as a result , our sales cycles will vary based on the specific market served , whether the design win is with an existing or a new customer and whether our product being designed in our customer 's device is a first generation or subsequent generation product . our customers ' products can be complex and , if our engagement results in a design win , can require significant time to define , design and result in volume production . because the sales cycle for our products is long , we can incur significant design and development expenditures in circumstances where we do not ultimately recognize any revenue . we do not have any long-term purchase commitments with any of our customers , all of whom purchase our products on a purchase order basis . once one of our products is incorporated into a customer 's design , however , we believe that our product is likely to remain a component of the customer 's product for its life cycle because of the time and expense associated with redesigning the product or substituting an alternative chip . product life cycles in our target markets will vary by application . for example , in the cable operator modem and gateway sectors , a design-in can have a product life cycle of 24 to 48 months . in the industrial and wired and wireless infrastructure markets , a design-in can have a product life cycle of 24 to 60 months and beyond . critical accounting policies and estimates management 's discussion and analysis of our financial condition and results of operations is based upon our financial statements which are prepared in accordance with accounting principles that are generally accepted in the united states . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities , related 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 continually evaluate our estimates and judgments , the most critical of which are those related to revenue recognition , inventory valuation , income taxes and stock-based compensation . we base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances . materially different results can occur as circumstances change and additional information becomes known . story_separator_special_tag we will continue to assess the appropriateness of the use of the simplified method as we develop a history of option exercises . recently adopted accounting pronouncements in february 2016 , the fasb issued asu no . 2016-02 , leases ( topic 842 ) . the amendments in this update require a lessee to recognize in the statement of financial position a liability to make lease payments ( the lease liability ) and a right-of- 46 use asset representing its right to use the underlying asset . for leases less than twelve months , an entity is permitted to make an accounting policy election by class of underlying asset not to recognize right-of-use assets and lease liabilities . if a lessee makes this election , it should recognize lease expense for such leases generally on a straight-line basis over the lease term . we have made this election . also , in july 2018 , the fasb issued asu no . 2018-11 , leases ( topic 842 ) : targeted improvements , to provide an additional transition method . an entity can elect not to present comparative financial information under topic 842 if it recognizes a cumulative-effect adjustment to retained earnings upon adoption . we have also made this election . further , in january 2019 , the fasb issued asu 2019-01 , leases ( topic 842 ) : codification improvements , which clarified that post-adoption interim transition disclosures normally required in the year of adoption for the effect of a change in accounting principle on an entity 's financial statements are not required for the adoption of asc 842. the amendments in these updates are effective for us for fiscal years beginning with 2019 , including interim periods within those years , with early adoption permitted . we have completed our assessment of the impact of the adoption of asc 842. upon adoption , we recognized approximately $ 24.8 million of right-of-use assets and a net increase of $ 25.1 million in lease-related liabilities at january 1 , 2019. also , the impact of the adoption of asc 842 on our accumulated deficit and deferred tax assets at january 1 , 2019 was not material . lastly , the impact of the adoption of asc 842 on our consolidated results of operations for the year ended december 31 , 2019 was not material . in july 2018 , the fasb issued asu no . 2018-10 , codification improvements to topic 842 , leases , to clarify how to apply certain aspects of the new lease accounting standard . the amendments in this update , among other things , better articulates the requirement for a lessee 's reassessment of lease classification as of the effective date of a modification , clarifies that a change to an index or rate for variable lease payments does not constitute a resolution of a contingency that would result in the remeasurement of lease payments , and requires entities that apply topic 842 retrospectively to each reporting period and do not adopt the practical expedients to write off any prior unamortized initial direct costs that do not meet the definition under topic 842 to equity . the amendments in this update have the same effective date and transition requirements as the new lease standard summarized above . we have disclosed the impact of adoption of topic 842 on our consolidated financial position and results of operations as stated above . in july 2018 , the fasb issued asu no . 2018-09 , codification improvements , to clarify the codification and prevent unintended application of the guidance . an amendment to asc 718-740 , compensation—stock compensation—income taxes , clarifies that excess tax benefits should be recognized in the period in which the amount of the deduction is determined . the transition and effective date guidance is based on the facts and circumstances of each amendment . the amendment identified above will be effective for us beginning with fiscal year 2019. the adoption of the amendments in this update in year ended december 31 , 2019 did not have a material impact on our consolidated financial position and results of operations . in august 2017 , the fasb issued asu 2017-12 , derivatives and hedging ( topic 815 ) , which is intended to improve accounting for hedging activities by expanding and refining hedge accounting for both nonfinancial and financial risk components and aligning the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements . the amendments in this update became effective for us beginning with fiscal year 2019. the amendments in this update were required to be applied prospectively . the adoption of the amendments in this update did not have a material impact on our consolidated financial statements for the year ended december 31 , 2019. in july 2019 , the fasb issued asu no . 2019-07 , codification updates to sec sections—amendments to sec paragraphs pursuant to sec final rule releases no . 33-10532 , disclosure update and simplification , and nos . 33-10231 and 33-10442 , investment company reporting modernization , and miscellaneous updates , to align the fasb 's accounting standards codification with requirements of certain already effective sec final rules , which included requiring interim presentation of changes in stockholders ' equity and eliminating certain other disclosures . the amendments in asu no . 2019-07 were effective for us immediately in the third quarter 2019. we previously adopted the related sec final rules in our 2018 annual report and form 10-q for the three months ended march 31 , 2019. the adoption of the amendments in these updates did not have a material impact on our consolidated financial position , results of operations , and disclosures . recently issued accounting pronouncements in june 2016 , the fasb issued asu no . 2016-13 , financial instruments—credit losses ( topic 326 ) : measurement of credit losses on financial instruments , to require the

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. net cash provided by operating activities consisted of positive cash flow from operations including $ 100.3 million in non-cash operating expenses and $ 28.6 million in changes in operating assets and liabilities , partially offset by net loss of $ 26.2 million . non-cash items included in net loss for the year ended december 31 , 2018 primarily included depreciation and amortization of property , equipment and intangible assets of $ 79.0 million , stock-based compensation of $ 31.7 million , and impairment of intangible assets of $ 2.2 million , partially offset by deferred income taxes of $ 12.1 million and excess tax benefits on stock-based awards of $ 2.0 million . cash flows from investing activities net cash used in investing activities was $ 7.0 million for the year ended december 31 , 2019 . net cash used in investing activities primarily consisted of $ 6.9 million in purchases of property and equipment . net cash used in investing activities was $ 7.8 million for the year ended december 31 , 2018 . net cash used in investing activities consisted entirely of $ 7.8 million in purchases of property and equipment . cash flows from financing activities net cash used in financing activities was $53.4 million for the year ended december 31 , 2019 .

we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . senior management has discussed the development , selection and disclosure of these estimates with the audit committee of our board of directors . we believe the following critical accounting policies and the related judgments and estimates affect the preparation of our consolidated financial statements . revenue recognition . revenue is recognized when persuasive evidence of an arrangement exists , upon delivery of the product to the customer at a fixed or determinable price with a reasonable assurance of collection , passage of title and risk of loss to the customer as indicated by the contractual terms and fulfillment of all significant obligations . 34 we design , market and sell our products primarily as commercial , off-the-shelf products . certain customers request different system configurations , generally based on standard options or accessories that we offer . in general , our revenue arrangements do not involve acceptance provisions based upon customer specified acceptance criteria . in those circumstances when customer specified acceptance criteria exist , revenue is deferred until customer acceptance if we can not demonstrate that the system meets those specifications prior to shipment . for any contracts with multiple elements ( i.e . , training , installation , additional parts , etc . ) we allocate revenue among the deliverables primarily based upon objective and reliable evidence of fair value of each element in the arrangement . if objective and reliable evidence of fair value of any element is not available , we use an estimated selling price for purposes of allocating the total arrangement consideration among the elements . in addition , judgments are required in evaluating the credit worthiness of our customers . credit is not extended to customers and revenue is not recognized until we have determined that collectability is reasonably assured . allowance for doubtful accounts . our policy is to maintain allowances for estimated losses resulting from the inability of our customers to make required payments . credit limits are established through a process of reviewing the financial history and stability of each customer . where appropriate , we obtain credit rating reports and financial statements of the customer when determining or modifying their credit limits . we regularly evaluate the collectability of our trade receivable balances based on a combination of factors . when a customer 's account balance becomes past due , we initiate dialogue with the customer to determine the cause . if it is determined that the customer will be unable to meet its financial obligation to us , such as in the case of a bankruptcy filing , deterioration in the customer 's operating results or financial position or other material events impacting their business , we record a specific allowance to reduce the related receivable to the amount we expect to recover given all information presently available . actual write-offs during the past three years have not been material to our results of operations . we also record an allowance for all other customers based on certain other factors including the length of time the receivables are past due and historical collection experience with individual customers . as of december 31 , 2016 , our accounts receivable balance of $ 352.0 million is reported net of allowances for doubtful accounts of $ 6.5 million . we believe our reported allowances at december 31 , 2016 are adequate . if the financial conditions of those customers were to deteriorate , however , resulting in their inability to make payments , we may need to record additional allowances that would result in additional selling , general and administrative expenses being recorded for the period in which such determination is made . inventory . our policy is to record inventory write-downs when conditions exist that indicate that our inventories are likely to be in excess of anticipated demand or are obsolete based upon our assumptions about future demand for our products and market conditions . we regularly evaluate the ability to realize the value of our inventories based on a combination of factors including the following : historical usage rates , forecasted sales or usage , product end of life dates , estimated current and future market values and new product introductions . purchasing requirements and alternative usages are evaluated within these processes to mitigate inventory exposure . when recorded , our write-downs are intended to reduce the carrying value of our inventories to their net realizable value and establish a new cost basis . as of december 31 , 2016 , our inventories of $ 371.4 million are stated net of inventory write-downs . if actual demand for our products deteriorates or market conditions are less favorable than those that we project , additional inventory write-downs may be required in the future . goodwill . goodwill represents the excess purchase price of an acquired enterprise or assets over the estimated fair value of identifiable net assets acquired . we assess goodwill for potential impairment at the reporting unit level during the third quarter of each year , or whenever events or circumstances indicate that the carrying value of these assets may exceed their fair value . 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 . story_separator_special_tag the increase in revenue was primarily due to the acquisition of armasight in june 2016. earnings from operations decreased by 0.5 percent in 2016 compared to 2015. the decrease in earnings from operations was primarily due to a change in product mix , as we sold more products with lower gross margins in 2016 compared to 2015 , and acquisition-related amortization and costs associated with the armasight acquisition in june 2016 and the prox dynamics acquisition in november 2016. revenue decreased by 3.3 percent in 2015 compared to 2014 , primarily due to reductions in demand from united states government funded customers and decreases in airborne and integrated systems product line revenues , partially offset by an increase in revenues in the land product line . earnings from operations increased by 14.5 percent primarily due to lower operating expenses and higher gross margins , partially offset by the decrease in revenues . during the year ended december 31 , 2015 , surveillance had restructuring charges of $ 0.2 million , compared to $ 5.2 million in 2014. instruments instruments operating results are as follows ( in millions , except percentages ) : replace_table_token_6_th instruments segment revenue decreased by 3.3 percent in 2016 compared to 2015. the decrease in revenue was primarily due to a revenue decline in europe and apac regions . on a product line basis , declines in our building and predictive maintenance and science products lines were partially offset by increases in our firefighting and automation products lines . earnings from operations decreased 13.9 % in 2016 compared to 2015. the decrease in earnings from operations was due to a change in product mix , as we sold more products with lower gross margins in 2016 compared to 2015 , and increased manufacturing cost under-absorption . revenue decreased by 1.9 percent in 2015 compared to 2014 , primarily due to a revenue decline in the americas region , partially offset by an increase in the asia pacific region ; on a product line basis , declines in our higher end thermography and in 40 our optical gas imaging product lines were partially offset by increases in our science , test and measurement , and fire product lines . revenues for the year ended december 31 , 2015 were also negatively impacted by year over year changes in currency exchange rates . the increase in earnings from operations for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 is primarily due to lower restructuring expenses and costs savings associated with restructuring activities . as a large portion of segment expenses are incurred in europe , the segment experienced a favorable impact on its operating expenses from the changes in foreign currency rates which largely offset the associated decline in revenues in that region . during the year ended december 31 , 2015 , instruments recorded restructuring charges of $ 1.2 million compared to $ 11.0 million in the year ended december 31 , 2014. security security operating results are as follows ( in millions , except percentages ) : replace_table_token_7_th security segment revenue increased by 5.9 percent in 2016 compared to 2015. the increase in revenue was primarily due to the acquisition of dvtel in november 2015 and the inclusion of the associated revenues in the current year , partially offset by a decrease in consumer-grade security products . earnings from operations decreased 63.9 percent in 2016 compared to 2015. the decrease in earnings from operations was primarily due to acquisition-related amortization and higher operating expenses associated with the dvtel acquisition . security segment revenue for the year ended december 31 , 2015 increased by 26.5 percent compared to the prior year primarily due to increased deliveries across all product families and in the americas and europe geographic regions . the increase in earnings from operations in 2015 of 13.1 percent over 2014 was primarily due to the increase in revenues , partially offset by increases in sales and marketing support operating expenses . oem & emerging markets oem & emerging markets operating results are as follows ( in millions , except percentages ) : replace_table_token_8_th oem & emerging markets segment revenue increased by 30.5 percent in 2016 compared to 2015 . the increase in revenue was primarily due to higher deliveries in most of the segment product lines , particularly in cores and components and mobile accessories , and the acquisition of point grey in november 2016. earnings from operations increased 45.3 % in 2016 compared to 2015. the increase in earnings from operations is primarily due to the increase in revenue . revenue decreased by 6.2 percent in 2015 compared to 2014 , primarily due to the loss of approximately $ 8.8 million in 2014 revenue from our former optical components group which was sold in august 2014 and the negative impacts of changes in currency exchange rates . earnings from operations declined in 2015 compared to 2014 primarily due to the decrease in revenue and lower gross margins , partially offset by lower operating expenses . 41 maritime maritime operating results are as follows ( in millions , except percentages ) : replace_table_token_9_th maritime segment revenue increased by 4.4 percent in 2016 compared to 2015 . the increase in revenue is primarily due to an increase in the americas and europe regions . on a product basis , increased shipments of multifunction displays , radar , and thermal cameras more than offset declines in autopilot and instrument shipments . earnings from operations increased 13.3 % in 2016 compared to 2015. the increase in earnings from operations is due an increase in revenue and a decrease in operating expenses , partially offset by an increase in warranty costs . maritime segment revenue for the year ended december 31 , 2015 decreased by 7.6 percent compared to the same period of 2014 primarily due to the negative impact of year over year changes in currency exchange rates in the europe

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liquidity and capital resources at december 31 , 2016 , we had a total of $ 361.3 million in cash and cash equivalents , $ 98.3 million of which was in the united states and $ 263.0 million at our foreign subsidiaries , compared to cash and cash equivalents at december 31 , 2015 of $ 472.8 million , of which $ 129.6 million was in the united states and $ 343.2 million at our foreign subsidiaries . we intend to indefinitely reinvest the cash at our foreign subsidiaries in operations and other activities outside the united states . the decrease in cash and cash equivalents in 2016 was primarily due to $ 419.2 million spent on the acquisitions of innovative security designs , llc , armasight , inc , point grey research inc. and prox dynamics as , $ 367.4 million spent on the repayment of long-term debt and a credit agreement , $ 66.0 million spent for the repurchase of our common stock , dividends paid of $ 65.9 million and $ 35.9 million spent on capital expenditures , partially offset by $ 524.6 million of net proceeds from long-term debt and the new credit agreement and cash provided from operations of $ 312.3 million . cash provided by operating activities in 2016 totaled $ 312.3 million compared to $ 275.8 million in 2015 and $ 226.2 million in 2014 . the increase in cash provided from operations in 2016 compared to 2015 was primarily due to changes in current balances and a gain from the sale of a cost-basis investment in 2015 , partially offset by a decrease in net earnings . the increase in cash provided from operations in 2015 compared to 2014 was primarily due to the increase in net earnings .

foreign currency exchange rates for the year ended december 31 , 2015 as compared to the prior year period had a negative impact on net earnings of $ 2.0 million , or $ 0.15 per diluted share . the results of operations for the years ended december 31 , 2015 and 2014 include items affecting comparability as listed in the reconciliations below . the reconciliations below include certain financial measures which are not recognized in accordance with u.s. generally accepted accounting principles ( `` gaap `` ) , including adjusted gross profits , adjusted gross profit margin , adjusted net earnings ( loss ) , and adjusted net earnings ( loss ) per diluted share . these non-gaap measures should not be viewed as an alternative to gaap measures of performance . non-gaap measures such as adjusted gross profit margin , adjusted net earnings ( loss ) , and adjusted net earnings ( loss ) per diluted share do not have uniform definitions . these measures , as calculated by vpg , may not be comparable to similarly titled measures used by other companies . management believes that these measures are meaningful because they provide insight with respect to intrinsic operating results . the reconciling items presented below represent significant charges or credits which are important to understanding our intrinsic operations . - 26 - the items affecting comparability are ( dollars in thousands , except per share amounts ) : replace_table_token_5_th replace_table_token_6_th ( a ) acquisition purchase accounting adjustments include fair market value adjustments associated with inventory and advance customer payments . financial metrics we utilize several financial measures and metrics to evaluate the performance and assess the future direction of our business . these key financial measures and metrics include net revenues , gross profit margin , end-of-period backlog , book-to-bill ratio , and inventory turnover . gross profit margin is gross profit shown as a percentage of net revenues . gross profit is generally net revenues less costs of products sold , but could also include certain other period costs . gross profit margin is clearly a function of net revenues , but also reflects our cost-cutting programs and our ability to contain fixed costs . end-of-period backlog is one indicator of potential future sales . we include in our backlog only open orders that have been released by the customer for shipment in the next twelve months . if demand falls below customers ' forecasts , or if customers do not control their inventory effectively , they may cancel or reschedule the shipments that are included in our backlog , in many instances without the payment of any penalty . therefore , the backlog is not necessarily indicative of the results to be expected for future periods . another important indicator of demand in our industry is the book-to-bill ratio , which is the ratio of the amount of product ordered during a period compared with the product that we ship during that period . a book-to-bill ratio that is greater than one indicates that demand is higher than current revenues and manufacturing capacities , and it indicates that we may generate increasing revenues - 27 - in future periods . conversely , a book-to-bill ratio that is less than one is an indicator of lower demand compared to existing revenues and current capacities and may foretell declining sales . we focus on our inventory turnover as a measure of how well we are managing our inventory . we define inventory turnover for a financial reporting period as our costs of products sold for the four fiscal quarters ending on the last day of the reporting period divided by our average inventory ( computed using each quarter-end balance ) for this same period . a higher level of inventory turnover reflects more efficient use of our capital . the quarter-to-quarter trends in these financial metrics can also be an important indicator of the likely direction of our business . the following table shows net revenues , gross profit margin , the end-of-period backlog , the book-to-bill ratio , and the inventory turnover for our business as a whole during the five quarters beginning with the fourth quarter of 2014 and through the fourth quarter of 2015 ( dollars in thousands ) : replace_table_token_7_th replace_table_token_8_th - 28 - net revenues for the fourth quarter of 2015 increased 3 % from the net revenues reported in the third quarter of 2015 , and decreased 2.2 % from $ 60.2 million of net revenues for the comparable prior year period . higher net revenues in the force sensors and weighing and control systems segments were due to higher volumes in each segment , partially offset by a decrease in net revenues in our foil technology products segment , where we experienced lower volume . net revenues for the fourth quarter of 2015 were negatively impacted by the effect of foreign exchange rates of $ 3.6 million as compared to the fourth quarter of 2014. exchange rates had minimal impact on net revenues from the third quarter of 2015 to the fourth quarter of 2015. the gross profit margin in the fourth quarter of 2015 increased 1.2 % as compared to the fourth quarter of 2014. higher gross profit margin in the weighing and control systems segment was partially offset by declines in the gross profit margins in the foil technology products and force sensors segments . the gross profit margin in the fourth quarter of 2015 decreased 2.3 % from the third quarter of 2015. higher gross profit margin in the weighing and control systems segment was offset by declines in the gross profit margins in the foil technology products and force sensors segments . story_separator_special_tag if the carrying amount of a reporting unit exceeds its fair value , then we are required to perform the second step of the goodwill impairment . to measure the amount of the impairment , we determine the implied fair value of goodwill in the same manner as if we had acquired those reporting units . specifically , we must allocate the fair value of the reporting unit to all of the assets of that unit , including any unrecognized intangible assets , in a hypothetical calculation that would yield the implied fair value of goodwill . the impairment loss is measured as the difference between the book value of the goodwill and the implied fair value of the goodwill computed in step two . the indefinite-lived trade names are tested for impairment by comparing the carrying value to the fair value based on current revenue projections of the related operations , under the relief from royalty method . any excess carrying value over the applicable fair value is recognized as impairment . any impairment would be recognized in the reporting period in which it has been identified . we estimate the fair value of our iprd asset using an income approach to valuation , whereby we estimate the future cash flows associated with the iprd and discount those cash flows back to their net present value using a discount rate determined using the capital asset pricing model , and adjusted for the forecast risk inherent in our projections of cash flows associated with this asset . our estimates of cash flows include revenues to be generated by the products supported by the iprd and the expected profits on those product sales . definite-lived assets , such as customer relationships , patents and acquired technology , non-competition agreements , and certain trade names are amortized on a straight-line method over their estimated useful lives . patents and acquired technology are being amortized over useful lives of seven to twenty years . customer relationships are being amortized over useful lives of five to eighteen years . trade names are being amortized over useful lives of seven to ten years . non-competition agreements are being amortized over periods of five to ten years . we continually evaluate the reasonableness of the useful lives of these assets . additionally , we review the carrying values of these assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on undiscounted estimated cash flows expected to result from its use and eventual disposition . - 32 - during 2015 and 2014 , we recognized impairment losses associated with the goodwill and indefinite lived intangible assets from the kelk acquisition , which were recognized in the third quarter of fiscal 2015 and the fourth quarter of fiscal 2014. the impairments were driven principally by the impacts of excess steel manufacturing capacity , particularly in china , on our current and forecasted sales of product manufactured and sold by the reporting unit with the impairment losses . after considering the impact of the impairment charges , the carrying value of goodwill , indefinite-lived trade names , and iprd of this reporting unit as of december 31 , 2015 was $ 6.2 million , $ 1.0 million , and $ 0.1 million , respectively . the carrying values of goodwill , indefinite-lived trade names , and iprd of this reporting unit as of december 31 , 2014 were $ 12.8 million , $ 1.4 million , and $ 0.1 million , respectively . additional impairments could be recognized in the future to the extent that actual future operating results of the reporting unit are less favorable than those included in the forecasts used to derive our estimates of the fair value of the reporting unit , trade name , and iprd . we believe that our estimates of the future operating performance of the reporting unit are reasonable in the circumstances and were based on the best available information as of the dates of our impairment tests . impairment of long-lived assets we assess the impairment of our long-lived assets , other than goodwill and other intangible assets , including property and equipment , whenever events or changes in circumstances indicate the carrying value may not be recoverable . factors we consider important , which could trigger an impairment review , include significant changes in the manner of our use of the asset , changes in historical or projected operating performance , and significant negative economic trends . pension and other postretirement benefits accounting for defined benefit pension and other postretirement plans involves numerous assumptions and estimates . the discount rate at which obligations could effectively be settled and the expected long-term rate of return on plan assets are two critical assumptions in measuring the cost and benefit obligations of our pension and other postretirement benefit plans . other important assumptions include the anticipated rate of future increases in compensation levels , estimated mortality , and for postretirement medical plans , increases or trends in health care costs . management reviews these assumptions at least annually . we use independent actuaries to assist us in formulating assumptions and making estimates . these assumptions are updated periodically to reflect the actual experience and expectations on a plan-specific basis , as appropriate . our defined benefit plans are concentrated in the united states and the united kingdom . plans in these countries comprise approximately 88 % of our retirement obligations at december 31 , 2015 . we utilize published long-term high-quality bond indices to determine the discount rate at the measurement date . we utilize bond yields at various maturity dates to reflect the timing of expected future benefit payments . we believe the discount rates selected are the rates at which these obligations could effectively be settled . for benefit plans which are funded , we establish strategic asset allocation percentage targets and appropriate benchmarks for

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. the debt is payable monthly over the next 6 years at a zero percent interest rate . see note 7 to our consolidated financial statements for more details . due to our strong product portfolio and market position , our business has historically generated significant cash flow . our cash provided by operating activities for the year ended december 31 , 2015 was $ 13.9 million as compared to $ 23.3 million for the year ended december 31 , 2014 , and $ 14.6 million for the year ended december 31 , 2013 . cash provided by operating activities for the year ended december 31 , 2015 was impacted by a decrease in net earnings . cash provided by operating activities for the year ended december 31 , 2014 was impacted by an increase in net earnings , offset by a net increase in working capital accounts . cash provided by operating activities for the year ended december 31 , 2013 was impacted by a decrease in net earnings . approximately 90 % and 73 % of our cash and cash equivalents balance at december 31 , 2015 and 2014 , respectively , was held by our non-u.s. subsidiaries . the decline in the cash held by our u.s. subsidiaries during 2015 was primarily due to our repurchase of common stock with an aggregate value of $ 8.7 million and $ 5.0 million related to the acquisition of stress-tek .

tems provide the highest resolution images of samples and their internal structure , down to the atomic level . sems provide detailed images of the surface and shape of samples . optical microscopes provide a wider field of view than sems and tems . dualbeams and fibs image , manipulate , mill and deposit material for a variety of purposes , including preparation of samples for tems . substantially all of these product categories are sold into all of our market segments . individual models of our products are increasingly designed to provide specific solutions and applications in each of our market segments . our dualbeam systems include models that have wafer handling capability and are purchased by semiconductor equipment manufacturers ( “ wafer-level dualbeam systems ” ) and models that have small stages and are sold to customers in several markets ( “ small-stage dualbeam systems ” ) . we have research and development and manufacturing operations in hillsboro , oregon ; eindhoven , the netherlands ; brno , czech republic ; munich , germany ; and delmont , pennsylvania , and software development in bordeaux , france and brisbane , australia . our sales and service operations are conducted in the united states ( u.s. ) and approximately 50 other countries around the world . we also sell our products through independent agents , distributors and representatives in additional countries . the electronics market segment consists of customers in semiconductor integrated circuit manufacturing and related industries such as manufacturers of data storage equipment and other technologies . for the semiconductor market , our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller , increasing complexity in their materials such as high-k metal gates and low-k dielectrics and increasing device complexity such as 3d transistor architectures . our products are used primarily in laboratories or near the fabrication line to speed new product development and increase yields by enabling 3d wafer metrology , defect analysis , root cause failure analysis and circuit edit for modifying device functionality . 24 the materials science market segment includes universities , public and private research laboratories and customers in a wide range of industries , including natural resources ( mining and oil and gas ) , petrochemicals , metals , automobiles , aerospace , and forensics . growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale . our solutions enable scientific discovery and advancement for researchers and help manufacturers develop , analyze and produce advanced products . our products are used in mining for automated mineralogy and we have opportunities in oil and gas exploration and laboratory analysis . our products are also used in root cause failure analysis and quality control applications across a range of industries . the life sciences market segment includes universities , government laboratories and research institutes engaged in biotech and life sciences applications , as well as pharmaceutical , biotech and medical device companies and hospitals . our products ' ultra-high resolution imaging allows structural biologists to create detailed 3d reconstructions of complex biological structures such as proteins and viruses . cellular biologists use our tools to correlate wide-field , lower resolution optical images with higher resolution electron microscope imaging . our products are also used by drug researchers and in particle analysis and a range of pathology and quality control applications . the service and components market segment provides support for products and customers for the entire life cycle of a tool from installation through the warranty period , and after warranty period through contract coverage or on a time and materials basis . we believe strong technical support is an important part of the value proposition that we offer customers when a tool is sold . our service and components market segment provides support across all markets and all regions . sales and backlog net sales increased to $ 891.7 million in 2012 compared to $ 826.4 million in 2011 . this increase reflects increases in all of our market segments , except life sciences , as described more fully below . at december 31 , 2012 , our total backlog was $ 424.8 million compared to $ 430.7 million at december 31 , 2011 . as discussed in the section entitled “ business ” included in part i , item 1 of this annual report on form 10-k , orders received in a particular period that can not be built and shipped to the customer in that period represent backlog . outlook for 2013 during 2012 , we experienced revenue growth of 8 % over 2011 and we expect another year of moderate growth in 2013. our backlog has stabilized at just under 6 months of revenue at current run rates and we expect revenue and bookings growth to be approximately equal in the coming year . in january 2013 , we executed a business reorganization that divided our operations into two primary groups . the business groups are titled industry and science and beginning in 2013 , we will report our revenue and earnings in two segments that align with these business groups . service revenue will be reported as part of each group . electronics revenue was up in 2012. we expect the early part of 2013 to be below 2012 levels , but believe electronics bookings and revenue will increase as the year progresses . the semiconductor capital equipment industry experienced a cyclical downturn at the end of 2012 and we expect it will continue in early to mid 2013. because our equipment is used in laboratories for new process development and yield improvement , we are less affected by cyclical swings than some equipment suppliers , but the industry downturn does have some impact . story_separator_special_tag we periodically receive funds from various organizations to subsidize our research and development . these funds are reported as an offset to research and development expense . during the 2012 , 2011 and 2010 periods , we received subsidies from european governments for technological developments for semiconductor and life sciences equipment . r & d costs , net of subsidies , were as follows ( in thousands ) : replace_table_token_10_th r & d costs increased in 2012 compared to 2011 primarily due to increased headcount and project spending to support current growth opportunities , as well as the inclusion of the r & d expenses for our recently acquired companies , till , aspex and vsg . currency fluctuations reduced r & d costs by $ 5.1 million in 2012 compared to 2011 . r & d costs increased in 2011 compared to 2010 primarily due to increased headcount and employee incentive compensation . the impact of currency fluctuations on r & d costs was an increase of $ 2.7 million in 2011 compared to 2010 . we anticipate that we will invest between 10 % and 11 % of revenue in r & d for the foreseeable future . accordingly , as revenues increase , we currently anticipate that r & d expenditures will also increase . actual future spending , however , will depend on market conditions . selling , general and administrative costs selling , general and administrative ( “ sg & a ” ) costs include labor , travel , outside services and overhead incurred in our sales , marketing , management and administrative support functions . sg & a costs also include sales commissions paid to our employees as well as to our agents . sg & a costs increased $ 10.9 million , or 6.9 % , in 2012 compared to 2011 primarily due to increased headcount , higher stock-based compensation cost associated with a higher stock price and more commissions paid as a result of increased sales . also causing the increase is the inclusion of sg & a costs of our four recently acquired companies , including amortization expense of the acquired intangibles , and the costs associated with executing the acquisitions . currency fluctuations decreased sg & a costs by $ 4.9 million in 2012 compared to 2011 . sg & a costs increased in $ 22.3 million , or 16.4 % , in 2011 compared to 2010 primarily due to increased commissions driven by the increase in revenue and increased employee incentive compensation , as well as an impairment charge of $ 1.4 million to write off the unamortized value of intellectual property and a $ 5.3 million charge for contingent litigation accruals . this activity was partially offset by a decrease in bad debt write-offs . in the first quarter of 2010 , we recorded a $ 2.1 million charge to fully write off amounts receivable from one customer . currency fluctuations increased sg & a costs by $ 3.9 million in 2011 compared to 2010 . 30 restructuring , reorganization , relocation and severance group structure reorganization in january 2013 , we announced our intention to reorganize the company into a group structure in order to enable us to efficiently execute our growth strategy . the reorganization will be effective beginning in the first quarter of 2013 and is expected to be implemented over the next six months . the costs associated with the reorganization will include primarily severance costs and we anticipate that it will result in the termination of certain positions throughout the company . in anticipation of this reorganization , we incurred $ 2.9 million of severance costs during the fourth quarter of 2012 and as the reorganization continues , we expect to incur approximately $ 1.9 million in additional restructuring charges . all of the costs related to this plan are expected to result in cash expenditures and we currently expect the total cost of the reorganization to be approximately $ 4.8 million . the reduction in positions as a result of the group structure reorganization is expected to reduce operating expenses by approximately $ 3 million per year when fully implemented . manufacturing transfer in 2008 we entered into an arrangement to outsource aspects of our manufacturing processes . in 2011 , we notified our largest contract manufacturer , accounting for approximately 10 % of our revenue , that we were terminating the arrangement and that we would transfer the manufacturing process back to fei . the termination contract was signed during the fourth quarter of 2011 and the manufacturing process was transitioned back to fei as of april 2 , 2012. the costs associated with the termination of the outsourcing arrangement were accrued in the fourth quarter of 2011. no additional costs were incurred in 2012 and we do not expect to incur any significant additional costs associated with the termination of this arrangement . the insourcing of our manufacturing operations is expected to reduce manufacturing costs by approximately $ 2 million to $ 3 million per year when fully implemented . april 2010 restructuring on april 12 , 2010 , we announced a restructuring program to consolidate the manufacturing of our small dualbeam product line by relocating manufacturing activities currently performed at our facility in eindhoven , the netherlands to our facility in brno , czech republic . the balance of our small dualbeam product line is already based in brno . the move , which has been substantially completed , resulted in severance costs , costs to transfer the product line , costs to train brno employees and costs to build-out the existing brno facility to add capacity for the additional small dualbeam production . in addition to the product line move , the april 2010 restructuring plan involved organizational changes designed to improve the efficiency of our finance , research and development and other corporate programs and improve our market focus . costs incurred in connection with this plan

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sources of liquidity and capital resources our sources of liquidity and capital resources as of december 31 , 2012 consisted of $ 360.4 million of cash , cash equivalents , short-term restricted cash and short-term investments , $ 29.2 million in non-current investments , $ 27.4 million of long-term restricted cash , $ 100.0 million available under revolving credit facilities , as well as potential future cash flows from operations . $ 162.4 million of our $ 417.0 million in total cash , cash equivalents , restricted cash and investments , are held outside of the united states . although we do not intend to do so , if these funds were ever repatriated , we would need to accrue and pay taxes on these funds . restricted cash relates to deposits to secure bank guarantees for customer prepayments that expire through 2018 . we believe that we have sufficient cash resources and available credit lines to meet our expected operational and capital needs for at least the next twelve months from december 31 , 2012 . in 2012 , cash and cash equivalents and short-term restricted cash decreased $ 62.1 million to $ 280.8 million as of december 31 , 2012 from $ 342.9 million as of december 31 , 2011 primarily as a result of $ 93.4 million used for acquisition related activities , $ 39.4 million used in the net purchase of marketable securities , $ 22.1 million used for the purchase of property , plant and equipment , $ 15.0 million used to settlelitigation with hitachi , and dividends paid on common stock of $ 6.1 million .

as of december 31 , 2017 , the company was the 19th largest domestic bank holding company in terms of deposits and is included in the standard and poor 's ( “ s & p ” ) 500 and nasdaq financial 100 indices . at december 31 , 2017 , the company had banking operations through 433 domestic branches in eleven western states . additionally , the company currently has , and continues to develop its digital delivery capabilities . revenues and profits are primarily derived from commercial customers and the company also emphasizes mortgage banking , wealth management , municipal finance , and brokerage services . the company is consistently ranked among the best banks in the country to work with by its small and middle-market customers , as measured by the greenwich associates annual survey . since the awards inception in 2009 , only three other u.s. banks have consistently received as many greenwich excellence awards as zions bancorporation . the company consistently wins awards for the best bank within its geography . examples include the best bank awards given by local newspapers , business journals , or similar publications in nevada , arizona , and california : orange county ( four consecutive years ) and san diego county ( seven consecutive years ) . the long-term strategy of the company is driven by key factors that include : ◦ continuing to execute on our community bank business model by doing business on a “ local ” basis , with significant local decision making for customer-facing elements of our business including product offerings , marketing , and pricing . we believe this provides a meaningful competitive advantage and an opportunity for growth over larger national banks whose loan and deposit products are often homogeneous . we are actively 31 engaged in community events and charitable efforts designed to give back to the people within our communities . in 2017 , we believe this local , customized approach led to a strong showing with commercial customers as reflected in the greenwich awards referenced earlier , as well as a growth rate of loans that exceeded the domestic commercial banks ' rate by approximately three percentage points . ◦ achieving even greater efficiencies than currently reflected in our financial statements . we have improved the financial performance of the company significantly during the past three years and we intend to continue to do so by creating value through the adoption of common practices , automation , and simplification of all of our front , middle and back-office processes . ◦ we expect to achieve continued growth of revenue ( net interest income plus noninterest income ) in excess of noninterest expense—so-called positive operating leverage—which should result in annual ppnr growth in the high single digit rate and further improvement to the efficiency ratio . ◦ improving profitability ratios . improved operating efficiency coupled with low credit costs as experienced in 2017 should lead to improved profitability ratios , such as the return on assets and equity . we expect to maintain or increase the return of shareholders ' equity due to stronger earnings and a lower risk profile than seen in stress testing results just a few years ago . ◦ maintaining a strong approach to risk management , having meaningfully improved our operational , credit , and financial risk management in the past several years . ◦ striving to be a “ top employer of choice , ” which means employees view zions bancorporation as one of the best places to work and grow . we believe our scale gives us superior access to capital markets , more robust treasury management , and other product capabilities than smaller community banks . looking forward for the next several years , we believe that digital delivery of products , including mobile banking , online banking and having a core processing system that is robust and prevents outages , is critical to remaining competitive . as such , we are investing a substantial amount to upgrade and replace systems and applications . during the past several years we have taken significant actions to improve the company 's risk profile , which include : ◦ the reduction of an above-average concentration in cre commitments , and within cre , the concentration of land development commitments declined from more than 70 % of total risk-based capital in 2007 , to less than 5 % at december 31 , 2017 ; ◦ numerous changes made to the credit administration organization and processes to facilitate improved data collection on loans and monitoring of potential default and loss risk ; ◦ the higher-risk portfolio of collateralized debt obligation securities were sold and replaced with government and government agency securities ; ◦ a significant increase in the on-balance sheet storehouse of liquidity with the purchase of moderate duration securities with limited duration extension risk ; i.e . , management has generally purchased securities that within the context of a rising interest rate environment would not experience interest rate related losses ; ◦ the addition of five members of the board of directors ; ◦ the replacement and upgrade of management information and accounting systems to allow for a more complete view of the company 's risks and opportunities ; ◦ the ongoing evaluation and classification of all known risks into approximately sixty unique risk categories , which are regularly monitored and reported in a process that flows from line-level employees through executive management to the board of directors ; ◦ the streamlining or elimination of redundant or inefficient processes , and the reduction of unnecessary complexity in product types ; with the improvement in the risk profile , along with improving profitability , the company 's capital stress test results have markedly improved within the past few years , and as such , we have increased the return of capital to shareholders including increasing the common dividend from $ 0.16 per share in 2014 to $ 0.44 per story_separator_special_tag although we consider a wide variety of sources when determining our fu nding needs , we benefit from access to deposits from a significant number of small to mid-sized business customers , which provide us with a low cost of funds and have a positive impact on our nim . including wholesale borrowings , the rate paid on interest-bearing liabilities increased 8 bps primarily due to borrowings increasing as a percentage of liabilities during 2017. the average balance of long-term debt decreased $ 286 million compared with 2016 , and although the average rate increased 61 bps in the current year , because remaining debt was at a higher average rate than the rate on debt that matured and was available to be called ; overall interest expense thereon decreased $ 13 million . as mentioned previously , the company has used short-term fhlb borrowings to fund some of its balance sheet growth . average short-term debt grew $ 3.6 billion and the rate paid increased 78 bps . further changes in short-term borrowings will be driven by balancing changes in deposits and loans as we do not foresee significant increases in investment security balances . the spread on average interest-bearing funds was 3.27 % and 3.23 % for 2017 and 2016 , respectively . the spread on average interest-bearing funds for these periods was affected by the same factors that had an impact on the nim . we expect the mix of interest-earning assets to continue to change over the next several quarters due to solid consumer loan growth , accompanied by moderate growth in cre term loans , and non-oil and gas-related commercial and industrial loans . we anticipate this growth will be partially offset by continued modest reduction in the nre portfolio . interest rate spreads and margin are impacted by the mix of assets we hold , the composition of our loan and securities portfolios and the type of funding used . assuming no additional increases in the federal funds rate , we expect the yield on the securities portfolio to increase slightly , as the cash flow from the portfolio is redeployed into securities with yields that are slightly accretive to the overall portfolio . we expect the yield of the loan portfolio to increase somewhat due to the effects of rising interest rates in late 2017 , partially offset by a continued modest change in the mix of the portfolio ( increasing concentration in lower-yielding residential mortgages ) , as well as reduced income from higher-yielding loans purchased from the fdic in 2009 . 37 our estimates of the company 's interest rate risk position are highly dependent upon a number of assumptions regarding the repricing behavior of various deposit and loan types in response to changes in both short-term and long-term interest rates , balance sheet composition , and other modeling assumptions , as well as the actions of competitors and customers in response to those changes . in addition , our modeled projections for noninterest-bearing demand deposits , which are a substantial portion of our deposit balances , are particularly reliant on assumptions for which there is little historical experience due to the prolonged period of very low interest rates . further detail on interest rate risk is discussed in “ interest rate and market risk management ” on page 68 . refer to the “ liquidity risk management ” section beginning on page 72 for more information on how we manage liquidity risk . net interest margin and interest rate spreads in 2016 vs. 2015 the nim was 3.37 % and 3.19 % for 2016 and 2015 , respectively . market trends and competitive pricing led to generally flat or lower yields across loans and investments in 2016 compared with 2015. these yield adjustments were offset by changes in the company 's asset mix , which in 2016 became less concentrated in lower-yielding money market investments , and more focused on higher-yielding agency securities and loans . further contributing to the improvement was a decline in the company 's cost of funds , due to higher amounts of noninterest-bearing deposits and tender offers , early calls and maturities of higher-rate debt , including the remaining trust preferred securities . average interest-earning assets increased $ 1.8 billion from 2015 , with rates improving 12 bps . average interest-bearing liabilities increased $ 769 million and rates decreased 11 bps over the same period . our average loan portfolio was $ 1.9 billion higher during 2016 , compared with 2015 , although the average interest rate earned on the loan portfolio was 8 bps lower than it was in 2015 due to competitive pricing pressure and depressed interest rates . the larger average loan base generated an additional $ 45 million of taxable-equivalent interest income during the year . the largest average growth in 2016 was in the cre portfolio , which also saw the average yield decline by 22 bps . the decline in loan yields occurred as new loans were originated or existing loans reset or were modified . see “ interest rate and market risk management ” on page 68 for further information regarding our interest rate sensitivity . during 2016 we continued to purchase u.s. agency pass-through securities in order to alter the mix of our interest-earning assets that began in the second half of 2014. the average balance of afs securities for 2016 increased by $ 4.4 billion or 84 % , compared with 2015 , and the average yield was flat at 1.93 % . average balances of money market investments over the same period declined $ 4.6 billion , with an average yield during 2016 of 0.59 % . this asset movement had the largest impact on the improvement in nim during 2016. average noninterest-bearing demand deposits provided us with low cost funding and comprised 44.4 % of average total deposits for 2016 , compared with 43.9 % for 2015. average interest-bearing deposit balances increased by 3

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liquidity management actions consolidated cash , interest-bearing deposits held as investments , and security resell agreements at the parent and its subsidiaries decreased to $ 1.6 billion at december 31 , 2017 from $ 2.5 billion at december 31 , 2016 . the $ 0.9 billion decrease during 2017 resulted primarily from ( 1 ) net loan originations and purchases , ( 2 ) an increase in investment securities , ( 3 ) a net decrease in deposits , ( 4 ) repurchase of our common stock , ( 5 ) repayment of our long-term debt , ( 6 ) repurchase and redemption of our preferred stock , and ( 7 ) dividends on common and preferred stock . these decreases were partially offset by short-term fhlb borrowings and net cash provided by operating activities . during 2017 our htm and afs investment securities increased by $ 1.7 billion . this increase was primarily due to purchases of short-to-medium duration agency guaranteed mortgage-backed securities . prior to the second quarter of 2017 , we were adding to our investment portfolio during the past couple of years to increase our hqla position in light of the new lcr rules and more broadly , to manage balance sheet liquidity more effectively . however , during the second through the fourth quarters of 2017 , our htm and afs investment securities decreased by $ 490 million , and we expect the size of the investment portfolio to be generally stable during the next several quarters .

study 404 also met its key secondary endpoint , clinical global impression scale for bipolar for severity of illness ( cgi-bp-s ) total score ( p < 0.001 ; effect size = 0.46 ) . study 401 tested two doses of lumateperone , 42 mg and 28mg along with placebo . in this trial , neither dose of lumateperone met the primary endpoint of statistical separation from placebo as measured by change 58 from baseline on the madrs total score . there was a high placebo response in this trial . lumateperone was generally well-tolerated in all three bipolar depression studies , with a favorable safety profile . in addition , while our phase 3 bipolar depression trials were powered for the overall patient population and not powered for subpopulation analyses , statistically significant benefit versus placebo was seen in the subgroup of patients with bipolar i and bipolar ii disorder in study 404 and in patients with bipolar i disorder in study 402 , but the bipolar ii subgroup was not statistically significant in study 402. in february 2021 , we submitted supplemental new drug applications , or sndas , to the fda for potential regulatory approval of lumateperone for the treatment of bipolar depression in patients with bipolar i or ii disorder as monotherapy and adjunctive therapy . assuming the snda submissions are accepted by the fda , we anticipate an fda target action date for the sndas in the second half of 2021. we are also pursuing clinical development of lumateperone for the treatment of additional cns diseases and disorders . at a dose of 42 mg , lumateperone has been shown effective in treating the symptoms associated with schizophrenia , and we believe lumateperone may represent a potential treatment for mood disorders including mdd , post-traumatic stress disorder and intermittent explosive disorder . we have commenced our program of lumateperone in mdd evaluating lumateperone as an adjunctive therapy to antidepressants for the treatment of mdd and we expect to initiate clinical conduct in two phase 3 trials in 2021. within the lumateperone portfolio , we are also developing a long-acting injectable formulation to provide more treatment options to patients suffering from mental illness . we have completed the preclinical development of a long-acting injectable formulation and in december 2020 we initiated a phase 1 single ascending dose study of lumateperone lai , a formulation of lumateperone designed to be administered subcutaneously and to maintain therapeutic levels of lumateperone for at least one month . this study will evaluate the pharmacokinetics , safety and tolerability of lumateperone lai in patients with stable symptoms of schizophrenia . we anticipate topline results from this study will be available in the second half of 2021. results from this study will inform the dosing strategy for future studies . given the encouraging tolerability data to date with oral lumateperone , we believe that a long-acting injectable option , in particular , may lend itself to being an important formulation choice for certain patients . we hold exclusive , worldwide commercialization rights to lumateperone and a family of compounds from bristol-myers squibb company pursuant to an exclusive license . we are developing iti-1284 for the treatment of behavioral disturbances in patients with dementia , the treatment of dementia-related psychosis and for the treatment of certain depressive disorders in the elderly . iti-1284 is a deuterated form of lumateperone , a new molecular entity formulated as an oral disintegrating tabl et for sublingual administration . iti-1284 is formulated as an oral solid dosage form that dissolves almost instantly when placed under the tongue , allowing for ease of use in the elderly and may be particularly beneficial for patients who have difficulty swallowing conventional tablets . phase 1 single and multiple ascending dose studies in healthy volunteers and healthy elderly volunteers ( > than 65 years of age ) evaluated the safety , tolerability and pharmacokinetics of iti-1284 . in these studies , there were no reported serious adverse events in either age group . in the elderly cohort , reported adverse events were infrequent with the most common adverse event being transient dry mouth ( mild ) . based on these studies , we plan to initiate phase 2 studies evaluating iti-1284 for the treatment of behavioral disturbances in dementia , dementia-related psychosis , and certain depressive disorders in the elderly . we have another major program called iti-002 that has yielded a portfolio of compounds that selectively inhibit the enzyme phosphodiesterase type 1 , or pde1 . pde1 enzymes are highly active in multiple disease states and our pde1 inhibitors are designed to reestablish normal function in these disease states . abnormal pde1 activity is associated with cellular proliferation and activation of inflammatory cells . our pde1 inhibitors ameliorate both of these effects in animal models . we intend to pursue the development of our phosphodiesterase , or pde , program , for the treatment aberrant immune system activation in several cns and non-cns conditions with a focus on diseases where excessive pde1 activity has been demonstrated and increased inflammation is an important contributor to disease pathogenesis . our potential disease targets include 59 heart failure , immune system regulation , neurodegenerative diseases , cancers and other non-cns disorders . iti-214 is our lead compound in this program . we believe iti-214 is the first compound in its class to successfully advance into phase 1 clinical trials . following the favorable safety and tolerability results in our phase 1 program , we initiated our development program for iti-214 for parkinson 's disease and commenced patient enrollment in the third quarter of 2017 in a phase 1/2 clinical trial of iti-214 in patients with parkinson 's disease to evaluate safety and tolerability in this patient population , as well as motor and non-motor exploratory endpoints . story_separator_special_tag cost of product sales cost of product sales was approximately $ 1.9 million for the year ended december 31 , 2020. cost of product sales consisted primarily of product royalty fees , overhead and minimal direct costs . product sold during the year ended december 31 , 2020 generally consisted of drug product that was previously charged to research and development expense prior to fda approval of caplyta . this minimal cost drug product had a positive impact on our cost of product sales and related product gross margins for the year ended december 31 , 2020. no similar cost of product sales was recognized during the year ended december 31 , 2019. we will continue to have a lower cost of product sales that excludes the cost of the drug product that was incurred prior to fda approval until our sales of caplyta include drug product that is manufactured after the fda approval . we expect that this will be the case for the near-term and as a result , our cost of product sales will be less than we anticipate it will be in future periods . research and development expenses replace_table_token_2_th 64 replace_table_token_3_th research and development expenses decreased to $ 65.8 million for the year ended december 31 , 2020 as compared to $ 89.1 million for the year ended december 31 , 2019 , representing a decrease of approximately $ 23.3 million , or 26 % . this decrease is due primarily to a decrease of approximately $ 15.1 million in manufacturing expense , which is due to expensing manufacturing costs related to caplyta prior to fda approval in prior years and capitalizing a significant portion as inventory in the current year , a decrease of approximately $ 4.2 million of lumateperone clinical and non-clinical expenses , a decrease of approximately $ 3.0 million relating to other projects and overhead , and a decrease of approximately $ 1.0 million of share-based compensation expense . internal costs decreased by approximately $ 3.0 million for the period due to lower labor related expenses , stock compensation expense , travel and other operating costs . as development of lumateperone progresses , we anticipate costs for lumateperone to increase due primarily to ongoing and planned clinical trials relating to our lumateperone programs in the next several years as we conduct phase 3 and other clinical trials . we are also required to complete non-clinical testing to obtain fda approval and manufacture material needed for clinical trial use , which includes non-clinical testing of the drug product and the creation of an inventory of drug product in anticipation of possible fda approval . we received fda approval on december 20 , 2019 for caplyta ( lumateperone ) for the treatment for schizophrenia in adults . there was no lumateperone inventory purchased , received , or produced from the date of approval through december 31 , 2019 and therefore no inventory costs are reflected on our balance sheet through december 31 , 2019. as of december 31 , 2020 , we employed 43 full time personnel in our research and development group as compared to 56 full time personnel in our research and development group at december 31 , 2019. the decrease is due primarily to personnel transitioning from research-related activities to commercial efforts in 2020. we expect to hire additional staff as we increase our development efforts and grow our business in the upcoming years . we currently have several projects , in addition to lumateperone , that are in the research and development stages , including in the areas of cognitive dysfunction and the treatment of neurodegenerative diseases , including ad , among others . we have used internal resources and incurred expenses not only in relation to the development of lumateperone , but also in connection with these additional projects as well , including our pde program . we have not , however , reported these costs on a project by project basis , as these costs are broadly spread among these projects . the external costs for these projects have been modest and are reflected in the amounts discussed in this section “ —research and development expenses . ” the research and development process necessary to develop a pharmaceutical product for commercialization is subject to extensive regulation by numerous governmental authorities in the united states and other countries . this process typically takes years to complete and requires the expenditure of substantial resources . the steps required before a drug may be marketed in the united states generally include the following : completion of extensive pre-clinical laboratory tests , animal studies , and formulation studies in accordance with the fda 's good laboratory practice , or glp , regulations ; submission to the fda of an investigational new drug application , or ind , for human clinical testing , which must become effective before human clinical trials may begin ; 65 performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each proposed indication ; submission to the fda of a new drug application , or nda , after completion of all clinical trials ; satisfactory completion of an fda pre-approval inspection of the manufacturing facility or facilities at which the active pharmaceutical ingredient , or api , and finished drug product are produced and tested to assess compliance with current good manufacturing practices , or cgmps ; satisfactory completion of fda inspections of clinical trial sites to assure that data supporting the safety and effectiveness of product candidates has been generated in compliance with good clinical practices ; and fda review and approval of the nda prior to any commercial marketing or sale of the drug in the united states . the successful development of our product candidates and the approval process requires substantial time , effort and financial resources , and is uncertain and subject to a number of risks . we can not be certain that any

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liquidity and capital resources through december 31 , 2020 , we provided funds for our operations by obtaining a total of approximately $ 1.6 billion of cash primarily through public and private offerings of our common stock and other securities , grants from government agencies and foundations and payments received under a terminated license and collaboration agreement . in the year ended december 31 , 2020 , we have collected approximately $ 16.8 million from product sales , which we believe will increase going forward . we do not believe that grant revenue will be a significant source of funding in the near future . on january 10 , 2020 , we completed a public offering of 10,000,000 shares of our common stock . all of the shares in the offering were sold by the company , with gross proceeds to the company of $ 295.0 million and net proceeds of approximately $ 277.0 million , after deducting underwriting discounts , commissions and offering expenses . in june 2020 , we sold 230,000 shares of common stock under our at-the-market equity program generating $ 5.6 million in net proceeds which was received in july 2020. in the third quarter of 2020 , we sold an additional 512,791 shares of common stock utilizing our at-the-market program and received $ 12.3 million of net proceeds . in september 2020 we completed a public offering of common stock in which we sold 12,666,667 shares of common stock at a public offering price of $ 30.00 per share for aggregate gross proceeds of $ 380.0 million . after deducting underwriting discounts , commissions and offering expenses , the net proceeds to the company were approximately $ 357.8 million .

based on the substantial reductions from baseline to weeks 4 to 12 in both uox and plasma oxalate , or pox , observed in subjects with enteric hyperoxaluria and advanced ckd , we obtained feedback from the fda on potential expedited approval pathways for reloxaliase in this patient population . the fda recognized that the high oxalate burden in these patients represents a serious , life-threatening condition , which is a requirement for considering an expedited approval pathway . however , the fda advised us that reloxaliase would not currently qualify for breakthrough designation in this patient population based on the lack of placebo-controlled data from open-label study 206. in this setting , and given our current financial resources , we remain focused on executing urirox-2 and plan to evaluate potential clinical development of reloxaliase in patients with enteric hyperoxaluria and advanced ckd in the future . in addition , we have designed our second product candidate , alln-346 , an orally administered , novel , urate degrading enzyme , for patients with hyperuricemia and gout in the setting of advanced ckd . hyperuricemia , or elevated levels of uric 107 acid in the blood , results from overproduction or insufficient excretion of urate , or often a combination of the two . we have conducted two preclinical proof-of-concept studies that support the potential of alln-346 as an oral therapy for the treatment of hyperuricemia in patients with gout and associated ckd . we filed an ind for alln-346 with the fda in december 2019. in july 2020 , we initiated a single-ascending dose ( sad ) phase 1 clinical trial of alln-346 in healthy volunteers and announced initial data from this study in november 2020. alln-346 was well-tolerated with no clinically significant safety signals and no dose-limiting toxicities observed in any cohort up to the highest administered dose . subject to feedback from the fda , we expect to initiate a phase 1b multiple-ascending dose ( mad ) trial in healthy volunteers in the second quarter of 2021 and a phase 2a program in patients with hyperuricemia and ckd in the third quarter of 2021 , with initial data from the phase 1b mad study expected in the third quarter of 2021 and initial phase 2a data in the fourth quarter of 2021 . on june 28 , 2019 , we completed a registered direct offering in which we issued and sold 2,632,092 shares of our common stock , at a purchase price of $ 3.80 per share , for net proceeds of $ 9.4 million , after deducting issuance costs , through a securities purchase agreement with the investors . the shares of common stock sold in this offering were being offered pursuant to our shelf registration statement on form s-3 , or form s-3 , filed with the securities and exchange commission , or sec , which was declared effective on december 26 , 2018. on december 30 , 2019 , we completed an at-the-market , offering in which we issued and sold 1,243,756 shares of our common stock , at a purchase price of $ 2.15 per share , for net proceeds of $ 2.6 million , after deducting issuance costs , through an at-the-market equity offering sales agreement , or atm agreement . the shares of common stock sold in this offering were also being offered pursuant to our shelf registration statement on form s-3 filed with the sec , which was declared effective on december 26 , 2018. on june 5 , 2020 , we completed a registered direct offering , in which we issued and sold 7,317,074 shares of our common stock , at a purchase price of $ 2.05 per share , for net proceeds of $ 13.7 million through a securities purchase agreement with certain institutional and accredited investors . the shares of common stock sold in this offering were being offered by us pursuant to our shelf registration statement on form s-3 filed with the sec , which was declared effective on december 26 , 2018 and a prospectus supplement thereunder filed on june 5 , 2020. on july 30 , 2020 , we completed a public underwritten offering of 5,894,191 shares of our common stock , including the exercise in full of the underwriter 's option to purchase an additional 768,807 shares of common stock , at a price to the public of $ 1.30 per share , for net proceeds of $ 6.7 million . on december 4 , 2020 , we completed a public underwritten offering of 11,960,000 shares of our common stock , including the exercise in full of the underwriter 's option to purchase an additional 1,560,000 shares of common stock , at a price to the public of $ 1.25 per share , for net proceeds of $ 13.5 million . during the first quarter of 2021 until the filing date of this annual report , we issued and sold 6,058,318 shares of our common stock under the atm agreement at a weighted average price of $ 1.99 per share for net proceeds of $ 11.7 million . our operations to date have been primarily focused on organizing and staffing our company , business planning , raising capital , developing our technology , identifying potential product candidates , manufacturing our product candidates and conducting preclinical studies and clinical trials of reloxaliase and alln-346 . we do not have any products approved for sale and have not generated any revenue to date . as of december 31 , 2020 , we had cash and cash equivalents totaling $ 35.0 million . we have incurred significant net operating losses in every year since our inception and expect to continue to incur significant expenses and increasing operating losses for the foreseeable future . our net losses may fluctuate significantly from quarter to quarter and year to year . story_separator_special_tag for options granted in 2020 , we placed a higher weighting on the historical volatility of our own stock price over the historical volatility of a representative group of public companies for the computation of expected volatility used for estimating the fair value of option grants . we will continue to increase the weighting on the historical volatility of our own stock price over the historical volatility of a representative group of public companies until such time as we have a sufficient amount of historical information regarding the volatility of our own stock . we use the simplified method as prescribed by the sec staff accounting bulletin no . 107 , share-based payment , to calculate the expected term for options granted to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term . under this approach , the weighted-average expected option term is presumed to be the average of the contractual term ( ten years ) and the vesting term ( generally four years ) of our stock options . we utilize this method due to lack of historical exercise data and the “ plain-vanilla ” nature of our stock-based awards . the expected term is applied to the stock option grant group as a whole , as we do not expect substantially different exercise or post-vesting termination behavior among our employee population . for options granted to non-employees , we utilize the contractual term of the arrangement as the basis for the expected term assumption . the risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options . the expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock . we recognize forfeitures as they occur as allowed per asu no . 2016-09 , compensation – stock compensation . 112 the fair value of stock options granted to employees and directors for their services on the board of directors was estimated on the date of grant using the black-scholes option-pricing model , with the following range of assumptions for the years ended december 31 , 2020 , 2019 and 2018 : replace_table_token_1_th the following table summarizes the classification of our stock-based compensation expense recognized in our statements of operations and comprehensive loss ( in thousands ) : replace_table_token_2_th as of december 31 , 2020 , we had $ 4.4 million of unrecognized compensation expense related to stock option awards , which is expected to be recognized over weighted-average remaining vesting periods of approximately 2.1 years and $ 0.8 million of unrecognized compensation expense related to restricted stock units , which is expected to be recognized during 2021. in future periods , we expect stock-based compensation expense to increase , due in part to our existing unrecognized stock-based compensation expense , potential increases in the value of our common stock and expected additional stock-based awards to continue to attract and retain our employees . results of operations comparison of years ended december 31 , 2020 and 2019 the following table summarizes our results of operations for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_3_th 113 research and development expenses research and development expense decreased by $ 16.9 million from $ 37.2 million for the year ended december 31 , 2019 to $ 20.4 million for the year ended december 31 , 2020. the following table summarizes our research and development expenses for the years ended december 31 , 2020 and 2019 ( in thousands ) : replace_table_token_4_th the $ 16.9 million decrease in research and development expense was primarily attributable to the following : our clinical development external costs decreased by $ 7.4 million from $ 14.7 million for the year ended december 31 , 2019 to $ 7.2 million for the year ended december 31 , 2020 : our urirox-1 costs decreased $ 4.5 million from $ 5.0 million for the year ended december 31 , 2019 to $ 0.5 million for the year ended december 31 , 2020. this study was completed in the fourth quarter of 2019 and we released top-line data in november 2019. the costs incurred during the year ended december 31 , 2020 were related to closeout activities ; our urirox-2 costs decreased $ 1.6 million from $ 7.0 million for the year ended december 31 , 2019 to $ 5.4 million for the year ended december 31 , 2020. during the first half of 2020 , we limited the opening of new trial sites for the ongoing urirox-2 trial while we assessed revisions to the study design and sought additional funds to support the development of reloxaliase . a significant portion of the proceeds from sales of our common stock during 2020 are being used to activate additional clinical trial sites and increase investment in the urirox-2 trial . during the second half of 2020 we began expanding urirox-2 to additional geographies and clinical trial sites ; during 2019 , we incurred costs of $ 0.4 million with an independent third party to perform an independent analysis of the results of the urirox-1 study to assist in the assessment of revisions and redesign of the urirox-2 study ; costs related to our study 206 of reloxaliase decreased $ 0.8 million from $ 1.3 million for the year ended december 31 , 2019 to $ 0.5 million for the year ended december 31 , 2020. this study was also completed in the fourth quarter of 2019 and we reported top-line data in november 2019. the costs incurred during the year ended december 31 , 2020 were related to closeout activities ; we incurred consulting costs of $ 0.4 million during the year ended december 31 , 2019 to support our urirox-1 , urirox-2 and 206 studies . in conjunction with the completion of the urirox-1 study

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cash flows the following table provides information regarding our cash flows for the years ended december 31 , 2020 , 2019 and 2018 ( in thousands ) : replace_table_token_9_th net cash used in operating activities the cash used in operating activities resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital . net cash used in operating activities was $ 28.2 million for the year ended december 31 , 2020 compared to $ 43.6 million for the year ended december 31 , 2019. the decrease in cash used in operating activities of $ 15.4 million was attributable to : a decrease in net loss of $ 14.4 million ; an increase in non-cash items of $ 1.2 million resulting primarily from increases in stock-based compensation expense ; and a decrease of $ 0.2 million due to changes in the components of working capital , including decreases in accounts payable , other assets and operating lease liabilities , partially offset by an increase in prepaid expenses and other current assets , accrued expenses and other liabilities . net cash used in operating activities was $ 43.6 million for the year ended december 31 , 2019 compared to $ 31.8 million for the year ended december 31 , 2018. the increase in cash used in operating activities of $ 11.8 million was attributable to : a n increase in net loss of $ 11.7 million ; an increase in non-cash items of $ 0.7 million resulting primarily from increases in stock-based compensation expense , partially offset by our loss on extinguishment of debt recognized for the year ended december 31 , 2018 ; and a decrease of $ 0.8 million in changes in the components of working capital , including decreases in accrued expenses partially offset by increases in prepaid expenses and other current assets and accounts payable . net cash used in investing activities net cash used in investing activities was $ 0.6 million , $ 0.1 million and $ 0.3 million for the years ended december 31 , 2020 , 2019 and 2018 , respectively .

local advertising is sold by each radio station 's sales staff while national advertising is sold by our national sales team . local advertising , which is our largest source of advertising revenue , and national advertising revenues are tracked separately because these revenue streams have different sales teams and respond differently to changes in the economic environment . we periodically review and refine our selling structures in all regions and markets in an effort to maximize the value of our offering to advertisers and , therefore , our revenue . 31 management also looks at audio 's revenue by region and market size . typically , larger markets can reach larger audiences with wider demographics than smaller markets . additionally , management reviews our share of audio advertising revenues in markets where such information is available , as well as our share of target demographics listening in an average quarter hour . this metric gauges how well our formats are attracting and retaining listeners . management also monitors revenue generated through our programmatic ad-buying platform , soundpoint , and our data analytics advertising product , smartaudio , to measure the success of our enhanced marketing optimization tools . we have made significant investments so we can provide the same ad-buying experience that once was only available from digital-only companies and enable our clients to better understand how our assets can successfully reach their target audiences . a portion of our audio segment 's expenses vary in connection with changes in revenue . these variable expenses primarily relate to costs in our sales department , such as commissions , and bad debt . our content costs , including music royalty and license fees for music delivered via broadcast or digital streaming , vary with the volume and mix of songs played on our stations and the listening hours on our digital platforms . our programming and general and administrative departments incur most of our fixed costs , such as utilities and office salaries . we incur discretionary costs in our advertising , marketing and promotions , which we primarily use in an effort to maintain and or increase our audience share . lastly , we have incentive systems in each of our departments which provide for bonus payments based on specific performance metrics , including ratings , revenue and overall profitability . our advertising revenue is highly correlated to changes in gross domestic product ( “ gdp ” ) as advertising spending has historically trended in line with gdp . in january 2020 , the company announced its modernization initiatives , which will take advantage of the significant investments we have made in new technologies to build an operating infrastructure that provides better quality and newer products and delivers new cost efficiencies . we expect our investment in these modernization initiatives to result in an increase in incremental capital expenditures related to real estate optimization of approximately $ 40 to $ 50 million during 2020. while we expect some additional capital expenditures impact from our modernization in 2021 , the majority of this investment in capital expenditures is expected to impact 2020 and will be weighted to the second-half of the year . combined results our financial results for the periods from january 1 , 2019 through may 1 , 2019 , the year ended december 31 , 2018 and the year ended december 31 , 2017 are referred to as those of the “ predecessor ” period . our financial results for the period from may 2 , 2019 through december 31 , 2019 are referred to as those of the “ successor ” period . our results of operations as reported in our consolidated financial statements for these periods are prepared in accordance with gaap . although gaap requires that we report our results for the period from january 1 , 2019 through may 1 , 2019 and the period from may 2 , 2019 through december 31 , 2019 separately , management views the company 's operating results for the year ended december 31 , 2019 by combining the results of the applicable predecessor and successor periods because such presentation provides the most meaningful comparison of our results to prior periods . the company can not adequately benchmark the operating results of the period from may 2 , 2019 through december 31 , 2019 against any of the previous periods reported in its consolidated financial statements without combining it with the period from january 1 , 2019 through may 1 , 2019 and does not believe that reviewing the results of this period in isolation would be useful in identifying trends in or reaching conclusions regarding the company 's overall operating performance . management believes that the key performance metrics such as revenue , operating income and adjusted ebitda for the successor period when combined with the predecessor period provide more meaningful comparisons to other periods and are useful in identifying current business trends . accordingly , in addition to presenting our results of operations as reported in our consolidated financial statements in accordance with gaap , the tables and discussion below also present the combined results for the year ended december 31 , 2019 . the combined results for the year ended december 31 , 2019 , which we refer to herein as the results for the `` year ended december 31 , 2019 `` represent the sum of the reported amounts for the predecessor period from january 1 , 2019 through may 1 , 2019 and the successor period from may 2 , 2019 through december 31 , 2019 . these combined results are not considered to be prepared in accordance with gaap and have not been prepared as pro forma results per applicable regulations . the combined operating results do not reflect the actual results we would have achieved absent our emergence from bankruptcy and may not be indicative of future results . story_separator_special_tag other operating income , net of $ 9.3 million in 2017 was primarily related to the gain on the exchange of four radio stations in chattanooga , tn and six radio stations in richmond , va for four radio stations in boston , ma and three radio stations in seattle , wa . interest expense , net interest expense decreased $ 1,149.6 million during 2018 compared to 2017 as a result of the company ceasing to accrue interest expense on long-term debt reclassified as liabilities subject to compromise as of the petition date . other expense , net other expense , net was $ 23.0 million for the year ended december 31 , 2018 related primarily to expenses incurred in connection with negotiations with lenders and other activities related to our capital structure which were incurred prior to the filing of the chapter 11 cases . other expense , net was $ 43.9 million for the year 2017 related primarily to expenses incurred in connection with negotiations with lenders and other activities related to our capital structure , including $ 41.8 million related to the notes exchange offers and term loan offers that were launched in early 2017 . 39 income tax benefit ( expense ) the effective tax rate for the year ended december 31 , 2018 was ( 57.3 ) % the effective tax rate for 2018 was primarily impacted by $ 11.3 million of deferred tax expense attributed to the valuation allowance recorded against federal and state deferred tax assets generated in the period due to the uncertainty of the ability to realize those assets in future periods . the effective tax rate for the year ended december 31 , 2017 was 21.3 % . the effective tax benefit rate for 2017 was impacted by the effects of u.s. corporate tax reform which resulted in a tax benefit of $ 282.1 million recorded in connection with the reduction in the u.s. federal corporate tax rate . in partial offset to this tax benefit , the company recorded tax expense of $ 202.0 million in connection with the valuation allowance recorded against federal and state deferred tax assets generated in the period due to the uncertainty of the ability to realize those assets in future periods . net loss attributable to the company net loss attributable to the company decreased $ 196.2 million to $ 201.9 million during the year ended december 31 , 2018 compared to a net loss of $ 398.1 million during the year ended december 31 , 2017 , primarily due to the factors discussed above . non-gaap financial measures reconciliations of operating income to adjusted ebitda replace_table_token_11_th replace_table_token_12_th 40 reconciliations of net income ( loss ) to ebitda and adjusted ebitda replace_table_token_13_th replace_table_token_14_th ( 1 ) increase in depreciation and amortization is driven by the application of fresh start accounting , resulting in significantly higher values of our tangible and intangible assets . 41 ( 2 ) increase in share-based compensation expense is due to our new equity compensation plan entered into in connection with our plan of reorganization . ( 3 ) music license fees adjustment represents the impact of updated estimates to music license fee expenses primarily related to the predecessor periods , which was recorded in the fourth quarter of 2019 and is not representative of the company 's operations during a normal business cycle . ( 4 ) we define adjusted ebitda as consolidated operating income adjusted to exclude restructuring and reorganization expenses included within direct operating expenses , selling , general and administrative expenses , ( “ sg & a ” ) and corporate expenses and share-based compensation expenses included within corporate expenses , as well as the following line items presented in our statements of operations : depreciation and amortization , impairment charges and other operating income ( expense ) , net . alternatively , adjusted ebitda is calculated as net income ( loss ) , adjusted to exclude ( income ) loss from discontinued operations , net of tax , income tax ( benefit ) expense , interest expense , depreciation and amortization , reorganization items , net , loss on investments , net , other ( income ) expense , net , equity in earnings ( loss ) of nonconsolidated affiliates , net , impairment charges , other operating ( income ) expense , net , share-based compensation , restructuring and reorganization expenses and music license fees adjustment . restructuring expenses primarily include severance expenses incurred in connection with cost saving initiatives , as well as certain expenses , which , in the view of management , are outside the ordinary course of business or otherwise not representative of the company 's operations during a normal business cycle . reorganization expenses primarily include the amortization of retention bonus amounts paid or payable to certain members of management directly as a result of the reorganization . we use adjusted ebitda , among other measures , to evaluate the company 's operating performance . this measure is among the primary measures used by management for the planning and forecasting of future periods , as well as for measuring performance for compensation of executives and other members of management . we believe this measure is an important indicator of our operational strength and performance of our business because it provides a link between operational performance and operating income . it is also a primary measure used by management in evaluating companies as potential acquisition targets . we believe the presentation of this measure is relevant and useful for investors because it allows investors to view performance in a manner similar to the method used by management . we believe it helps improve investors ' ability to understand our operating performance and makes it easier to compare our results with other companies that have different capital structures or tax rates . in addition , we believe this measure is also among the primary measures used externally by our investors

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cash provided by operating activities was $ 966.7 million in 2018 compared to $ 491.2 million of cash used for operating activities in 2017. cash provided by operating activities from continuing operations was $ 741.2 million in 2018 compared to $ 619.2 million of cash used for operating activities from continuing operations in 2017. the increase in cash provided by operating activities is primarily attributed to the $ 1,374.4 million decrease in cash paid for interest . cash paid for interest was $ 398.0 million during 2018 compared to $ 1,772.4 million during 2017. in addition , cash provided by operating activities increased as a result of changes in working capital balances , particularly accounts receivable , which were affected by improved collections as well as accounts payable and accrued expenses which were impacted by the timing of payments . cash paid for reorganization items , net was $ 103.7 million during 2018. as part of our liquidity measures taken in anticipation of our march 14 , 2018 bankruptcy filing , we did not make scheduled interest payments on our 9.0 % priority guarantee notes due 2021 , 11.25 % priority guarantee notes due 2021 and 14.0 % senior notes due 2021 and we extended certain accounts payable to conserve cash . subsequent to the bankruptcy filing , interest payments on our debt classified as `` liabilities subject to compromise '' were stayed and only limited pre-petition payments on accounts payable were made . 2017 cash used for operating activities was $ 491.2 million in 2017 compared to $ 15.8 million of cash used for operating activities in 2016. the increase in cash used for operating activities is primarily attributed to lower operating income as well as changes in working capital balances , particularly accounts receivable , which was impacted by slower collections , and prepaid assets , partially offset by accrued interest and accounts payable due to the timing of payments . investing activities 2019 cash used for investing activities of $ 334.4 million in 2019 primarily reflects $ 222.4 million in cash used for investing activities from discontinued operations . in addition , we used $ 112.2

this is intended to allow us to diversify the risks associated with our research and development expenditures . as a result , we believe our future capital requirements and our future financial success are not substantially dependent on any one product candidate . to the extent we are unable to maintain a broad range of product candidates , our dependence on the success of one or a few product candidates increases . regulatory approval is required before we can market our product candidates as therapeutic products . in order to proceed to subsequent clinical trial stages and to ultimately achieve regulatory approval , the regulatory agency must conclude that our clinical data is safe and effective . historically , the results from preclinical testing and early clinical trials ( through phase 2 ) have often not been predictive of results obtained in later clinical trials . a number of new drugs and biologics have shown promising results in early clinical trials , but subsequently failed to establish sufficient safety and efficacy data to obtain necessary regulatory approvals . furthermore , our business strategy includes the option of entering into collaborative arrangements with third parties to complete the development and commercialization of our product candidates . in the event that third parties take over the clinical trial process for one of our product candidates , the estimated completion date would largely be under control of that third party rather than us . we can not forecast with any degree of certainty which proprietary products , if any , will be subject to future collaborative arrangements , in whole or in part , and how such arrangements would affect our development plan or capital requirements . our programs may also benefit from subsidies , grants , contracts or government or agency-sponsored studies that could reduce our development costs . as a result of the uncertainties discussed above , among others , it is difficult to accurately estimate the duration and completion costs of our research and development projects or when , if ever , and to what extent we will receive cash inflows from the commercialization and sale of a product . our inability to complete our research and development projects in a timely manner or our failure to enter into collaborative agreements , when appropriate , could significantly increase our capital requirements and 41 could adversely impact our liquidity . these uncertainties could force us to seek additional , external sources of financing from time to time in order to continue with our business strategy . our inability to raise additional capital , or to do so on terms reasonably acceptable to us , would jeopardize the future success of our business . during the past five years through december 31 , 2012 , we incurred an aggregate of $ 156.3 million in research and development expenses . the following table indicates the amount incurred for each of our significant research programs and for other identified research and development activities during the years ended december 31 , 2012 , 2011 and 2010. the amounts disclosed in the following table reflect direct research and development costs , license fees associated with the underlying technology and an allocation of indirect research and development costs to each program . replace_table_token_13_th clinical development programs rindopepimut our lead clinical development program , rindopepimut , is a targeted immunotherapeutic that targets the tumor-specific molecule , epidermal growth factor receptor variant iii , or egfrviii . egfrviii is a mutated form of the epidermal growth factor receptor , or egfr , that is only expressed in cancer cells and not in normal tissue and can directly contribute to cancer cell growth . egfrviii is expressed in approximately 30 % of glioblastoma , or gb , tumors , also referred to as glioblastoma multiforme , or gbm , the most common and aggressive form of brain cancer . rindopepimut is composed of the egfrviii peptide linked to a carrier protein called keyhole limpet hemocyanin , or klh , and administered together with the adjuvant gm-csf . the food and drug administration , or fda , and the european medicines agency , or ema , have both granted orphan drug designation for rindopepimut for the treatment of egfrviii expressing gb . the fda has also granted fast track designation . in april 2008 , we and pfizer inc. entered into a license and development agreement under which pfizer was granted an exclusive worldwide license to rindopepimut . this agreement provided for reimbursement by pfizer of all costs incurred by us in connection with the collaboration since the effective date . in november 2010 , the agreement was terminated and all rights to rindopepimut were returned to us . since the termination of this agreement , pfizer is no longer funding the development of rindopepimut . the phase 2a study of rindopepimut referred to as activate was led by collaborating investigators at the brain center at duke comprehensive cancer center in durham , north carolina and at m.d . anderson cancer center in houston , texas and enrolled 18 evaluable gb patients . an extension of the phase 2a study referred to as act ii evaluated 22 additional gb patients treated in 42 combination with the current standard of care , maintenance temozolomide , or tmz , at the same two institutions . we initiated act iii , a phase 2b/3 randomized study of rindopepimut combined with standard of care , tmz , versus standard of care alone in patients with gb in over 30 sites throughout the united states . in december 2008 , we announced an amendment to convert the act iii study to a single-arm phase 2 clinical trial in which all patients were to receive rindopepimut in combination with tmz . story_separator_special_tag the phase 1 study evaluated seven different dosing regimens of cdx-301 to determine the appropriate dose for further development based on safety , tolerability , and biological activity . the data from the study were consistent with previous clinical experience and demonstrated that cdx-301 was well-tolerated and can effectively mobilize hematopoietic stem cell populations in healthy volunteers . based on the safety profile and the increases observed for cd34+ stem cells and dendritic cells , we plan to initiate a pilot study in hematopoietic stem cell transplant by the end of 2013. 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 . in october 2012 , we announced results from a dose-escalating , multi-center , phase 1 study that evaluated three different doses of cdx-1401 in combination with toll-like receptor agonists poly-iclc or hiltonol™ and or r848 or resiquimod . in total , the study enrolled 45 patients with advanced malignancies that had progressed after any available curative and or salvage 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 . the study has identified a well-tolerated and immunogenic regimen to take forward into the future studies and we expect that a study sponsored by the cancer immunotherapy trials network of the national cancer institute will be initiated in 2013. preclinical programs cdx-014 cdx-014 is a fully-human monoclonal adc that targets tim-1 , a molecule that is highly expressed on renal and ovarian cancers with minimal expression in normal tissues . the antibody , cdx-014 , is linked to mmae using seattle genetics ' proprietary technology . the adc is designed to 48 be stable in the bloodstream , but to release mmae upon internalization into tim-1-expressing tumor cells , resulting in a targeted cell-killing effect . cdx-014 has shown potent activity in preclinical models of ovarian and renal cancer . we are conducting proof-of-concept studies in 2013 to optimize the drug candidate to move into future manufacturing and ind-enabling studies . marketed products rotavirus vaccine rotavirus is a major cause of diarrhea and vomiting in infants and children . in 1997 , we licensed our oral rotavirus strain to glaxo and glaxo assumed responsibility for all subsequent clinical trials and all other development activities . we licensed-in the rotavirus strain that was used to develop glaxo 's rotarix rotavirus vaccine in 1995 and owe a license fee of 30 % to cincinnati children 's hospital medical center , or cch , on net royalties received from glaxo . in may 2005 , we entered into an agreement whereby an affiliate of paul royalty fund ii , l.p. , or prf , purchased a 70 % interest in the net royalties we received on worldwide sales of rotarix . in december 2012 , a u.s. patent for our rotavirus strain that we licensed to glaxo expired . the glaxo agreement terminates automatically upon the expiration , lapse or invalidation of the last relevant patent right ( patent or patent application ) covered by the glaxo agreement . the only remaining relevant patent right is a patent application in mexico with a projected final expiry date in may 2013 which is under appeal . the prf agreement provided for a normal expiry of the prf agreement on december 12 , 2012 except that the prf agreement provides for an exclusive 120-day right of negotiation for extension in certain circumstances . critical accounting policies and estimates our significant accounting policies are described in note 2 to the consolidated financial statements included in item 8 of this form 10-k. we believe our most critical accounting policies include accounting for business combinations , revenue recognition , impairment of long-lived assets , research and development expenses and stock-based compensation expense . the methods , estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements . we evaluate our estimates and judgments on an on-going basis . we base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances . 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 our financial statements and they require our most difficult , subjective or complex judgments in the

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liquidity and capital resources our cash equivalents are highly liquid investments with a maturity of three months or less at the date of purchase and consist primarily of investments in money market mutual funds with commercial banks and financial institutions . we maintain cash balances with financial institutions in excess of insured limits . we do not anticipate any losses with respect to such cash balances . we invest our excess cash balances in marketable securities including municipal bond securities , u.s. government agency securities , and high-grade corporate bonds that meet high credit quality standards , as specified in our investment policy . our investment policy seeks to manage these assets to achieve our goals of preserving principal and maintaining adequate liquidity . the use of our cash flows for operations has primarily consisted of salaries and wages for our employees , facility and facility-related costs for our offices , laboratories and manufacturing facility , fees paid in connection with preclinical studies , clinical studies , contract manufacturing , laboratory supplies and services , consulting , legal and other professional fees . to date , the primary sources of cash flows from operations have been payments received from our collaborative partners and from government entities . the timing of any new collaboration agreements , government contracts or grants and any payments under these agreements , contracts or grants can not be easily predicted and may vary significantly from quarter to quarter . at december 31 , 2012 , our principal sources of liquidity consisted of cash , cash equivalents and marketable securities of $ 84.0 million . our working capital at december 31 , 2012 was $ 67.4 million . at december 31 , 2012 , our term loan balance was $ 11.3 million . we incurred a loss of $ 59.1 million for the year ended december 31 , 2012. net cash used in operations for the year ended december 31 , 2012 was $ 49.8 million . in january 2013 , we issued 2,433,608 shares of common stock under the cantor amendment and raised $ 17.1 million in net proceeds .

overview we earn revenue by deploying professionals to provide services to our clients , including project management , construction management facilities management and related consulting . these services are primarily delivered on a “ cost plus ” or “ time and materials ” ( `` t & m `` ) basis in which we bill negotiated hourly or monthly rates or a negotiated multiple of the direct cost of these professionals , plus actual out-of-pocket expenses . our direct expenses are the actual cost of these professionals , including most payroll and benefits , except for paid time-off , which is recorded in selling , general and administrative expenses ( `` sg & a `` ) . we also provide services under fixed price contracts and t & m contracts with a cap . 19 our revenue consists of two components : cfr and reimbursable expenses . the professionals we deploy are occasionally subcontractors . we generally bill the actual cost of these subcontractors and recognize this cost as both revenue ( reimbursable expenses ) and direct expense . cfr refers to our revenue excluding amounts paid or due to subcontractors . we believe cfr is an important measure because it represents the revenue on which we earn gross profit , whereas total revenue includes the costs for subcontractors on which we generally pass through and earn minimal or no gross profit . we compete for business based on a variety of factors such as technical capability , global resources , price , reputation and past experience , including client requirements for substantial experience in similar projects . we have developed significant long-standing relationships , which bring us repeat business and would be very difficult to replicate . we believe we have an excellent reputation for attracting and retaining professionals . in addition , we believe there are high barriers to entry for new competitors especially in the project management market . sg & a expenses consist primarily of personnel costs that are not billable and corporate or regional costs such as sales , business development , proposals , operations , finance , human resources , legal , marketing , management and administration . the company operates in a single reporting segment , known as the project management group which provides fee-based project , construction and facilities management services to our clients . our experienced professionals are capable of managing all phases of the construction process from concept through completion , including cost and budget controls , scheduling , estimating , expediting , inspection , contract administration and management of contractors , subcontractors and suppliers . impact of covid-19 on our business in december 2019 , covid-19 was identified in wuhan , china . in march 2020 , the world health organization declared covid-19 a global pandemic as a result of the further spread of the virus into all regions of the world , including those regions where our primary operations occur . we instituted a work-from-home policy for all offices and employees globally in late march 2020 , except for field-based employees who normally work on-site at our client 's facilities . these field-based employees are complying with our respective clients ' policies . the majority of our field employees are located in the regions where they deliver their services , so travel restrictions enacted by various government authorities did not impair their ability to continue to perform services for our clients . employees have been returning to their assigned offices , on a modified basis , as their city , state and country reopens , consistent with the applicable requirements of local law . most of the projects to which we provide services have been classified as essential services by the relevant governmental authority and as such have continued despite restrictions on the operation of `` non-essential `` businesses by certain governmental authorities . the majority of our billable employees have continued to provide billable services to our clients , either on-site or remotely at the same or at a slightly reduced volume as in effect prior to the spread of covid-19 . we estimate that covid-19 resulted in loss of cfr of approximately $ 25,000 for the twelve months ended december 31 , 2020 , inclusive of delayed projects awards and cancellations brought on by the virus . nearly all our employees had company laptop computers and the ability to work remotely prior to the institution of our work-at-home policy . the work-at-home policy did not have a significant impact on our employees ' ability to perform their job requirements . our internal control structure does not generally require physical access to our office locations , and has not to date and is not expected in the future to be adversely impacted by the spread of covid-19 and the corresponding response by certain governmental authorities . processes that require physical access to our offices , such as receiving mail ( including collections ) and processing and mailing manual checks , are being performed by designated individuals at a reduced frequency while certain of our offices remain closed . the main impacts on our business observed to date other than those discussed above are delays in the procurement processes of a number of our current and potential clients and a temporary slowing of certain collections . we expect these delays in the procurement process to adversely impact the timing of our new bookings , resulting in lower bookings , cfr and backlog for the duration of the economic slowdown caused by the pandemic . we also experienced a slightly lower than normal amount of collections during the latter part of march . story_separator_special_tag selling , general and administrative expenses : our total selling , general and administrative expenses ( `` sg & a `` ) was approximately the same amount for the twelve months ended december 31 , 2020 and 2019. during 2020 , labor expenses were reduced by approximately $ 900 and travel expenses were reduced by approximately $ 2,800 , as a result of the covid-19 stay at home orders issued throughout the world . in addition , legal expenses were lower in 2020 by approximately $ 2,200 primarily as a result of a settlement and return of previously incurred legal expenses , professional fees were reduced by approximately $ 1,800 due to lower fees being charged and bad debt expense was reduced by $ 2,000 as a result of payments received on accounts receivables previously reserved . offsetting these reductions were a $ 7,124 net benefit in 2019 from the collection of a fully-reserved receivable and a $ 1,600 of additional depreciation charge for the write-off of leasehold improvements related to the company subletting office space in philadelphia to a third party during the first quarter of 2020 , an approximate $ 350 increase in computer equipment and software costs primarily related to remote working and increases in other indirect expenses . during 2019 , we received a payment of more than $ 9,400 , which netted to $ 7,124 after payments to subcontractors and other costs , against the approximately $ 42,000 outstanding accounts receivable that we had been owed from the organization for the development of administrative centres ( `` odac `` ) , an agency of the libyan national government , which we had previously fully reserved . upon receiving payment , the reserve was reversed in the amount received , which decreased the bad debt expense for 2019. sg & a expenses represented approximately 36.8 % and 35.6 % of cfr for the twelve months ended december 31 , 2020 and 2019 , respectively . 24 foreign currency exchange loss foreign currency exchange losses were approximately $ 1,800 greater for the twelve months ended december 31 , 2020 compared to the same period in 2019. the currency exchange losses were primarily caused by an 18 % weakening of the brazilian real against the euro prior to declaring bankruptcy of our brazilian subsidiary and a 12 % strengthening of the egyptian pound against the euro in 2019 compared to a 4 % weakening during the same period in 2020. interest and related financing fees , net interest and related financing fees , net , include interest expense of $ 5,357 , net of $ 133 in interest income , and interest expense of $ 6,082 , net of $ 287 in interest income for the years ended december 31 , 2020 and 2019 , respectively , which decreased as a result of higher weighted-average interest rates billed to us on our secured credit facilities with société générale throughout the year ended december 31 , 2019. income taxes the effective income tax rates for 2020 , and 2019 were ( 1636.2 ) % and ( 8.4 ) % respectively . the company 's effective tax rate differs from the u.s. federal statutory rate , for the year ended december 31 , 2020 , primarily due to additional uncertain tax position accruals , as well as the inability to recognize any tax benefit for losses in certain jurisdictions , particularly brazil . the company 's effective tax rate for the year ended december 31 , 2019 differs from the u.s. federal statutory rate primarily due to benefits recognized from provision to return adjustments and the reversal of an outstanding tax accrual related to the claims construction group sale . this is partially offset by additional uncertain tax position accruals , as well as additional increases in our valuation allowances . in assessing the realizability of deferred tax assets , we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized . the ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible . management considers the scheduled reversal of deferred tax liabilities and projected future taxable income in making this assessment . management evaluates the need for valuation allowances on the deferred tax assets according to the provisions of asc 740 , income taxes . we consider both positive and negative evidence . in making this determination , management assesses all of the evidence available at the time including recent earnings , internally-prepared income projections , and historical financial performance . story_separator_special_tag pronouncements and the impact of these pronouncements on our consolidated financial statements , see note 3 to the consolidated financial statements in item 8 , `` financial statements and supplementary data `` hereof . 26 quarterly fluctuations our operating results vary from period to period as a result of the timing of projects and assignments . we do not believe that our business is seasonal . off-balance sheet arrangements the following table provides information with respect to off-balance sheet arrangements with domestic and foreign banks for the issuance of performance bonds , advance payment guarantees and other letters of credit that are scheduled to expire in 2021 and beyond . the total amount of these arrangements in the following table includes amounts issued in various foreign currencies and are based on the foreign currency exchange rates as of december 31 , 2020 , where applicable . replace_table_token_10_th ( 1 ) at december 31 , 2020 , the company had provided cash collateral amounting to $ 7,184 for certain of these items . that collateral is reflected in restricted cash on the company 's consolidated balance sheets . see note 14 - commitments and contingencies to our consolidated financial statements for further information regarding these arrangements . ( 2 ) represents guarantee of service performance bonds and advance payments through domestic

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liquidity and capital resources our primary cash obligations are our payroll and our project subcontractors . our primary source of cash is receipts from clients . we generally pay our employees semi-monthly in arrears and invoice our clients monthly in arrears . our clients generally remit payment approximately three months , on average , after invoice date . this creates a lag between the time we pay our employees and the time we receive payment from our clients . we bill our clients for any subcontractors used and pay those subcontractors after receiving payment from our clients , so no such timing lag exists for the payments we make to subcontractors . we utilize cash on hand and our revolving credit facilities to fund the working capital requirement caused by the lag discussed above and other operating needs . we believe our expected cash receipts from clients , together with current cash on hand and revolving credit facilities , are sufficient to support the reasonably anticipated cash needs of our operations over the next twelve months . at december 31 , 2020 and 2019 , our primary sources of liquidity consisted of $ 34,229 and $ 15,915 in cash and cash equivalents , respectively , of which $ 28,842 and $ 15,260 was on deposit in foreign locations , respectively , and $ 11,711 and $ 14,735 of available borrowing capacity under our various credit facilities , respectively .

the merger on february 22 , 2021 , the company entered into the merger agreement , pursuant to which , subject to the satisfaction or ( to the extent permissible ) waiver of the conditions set forth therein , goodyear will acquire the company by way of the merger of merger sub with and into the company , with the company surviving such merger as a wholly owned subsidiary of goodyear . under the terms of the merger agreement , at the effective time of the merger , the company 's stockholders will be entitled to receive $ 41.75 per share in cash and a fixed exchange ratio of 0.907 shares of goodyear common stock per share of the company 's common stock they own at the effective time . upon completion of the proposed merger , it is expected that the company 's stockholders will own approximately 16 percent and goodyear stockholders will own approximately 84 percent of the combined company on a fully diluted basis . -27- the completion of the merger is subject to the receipt of antitrust clearance in the united states . under the hart-scott-rodino antitrust improvements act of 1976 , as amended ( “ hsr act ” ) , and the rules promulgated thereunder , the merger may not be completed until the company and goodyear have each filed notification and report forms with the united states federal trade commission ( “ ftc ” ) , and the antitrust division of the united states department of justice ( “ doj ” ) , and the applicable waiting period ( or any extension thereof ) has expired or been terminated . the completion of the merger is also subject to a number of foreign regulatory filings that will need to be completed . the company expects to complete the merger in the second half of 2021 , subject to the satisfaction of customary closing conditions , including receipt of required regulatory approvals and the approval of the company 's stockholders . consolidated statements of income replace_table_token_4_th covid-19 update with the global outbreak of covid-19 and the declaration of a pandemic by the world health organization on march 11 , 2020 , the company temporarily shut down its china , u.s. , europe , and mexico manufacturing plants for various periods of time through the first half of 2020. by the end of the second quarter , each of the company 's facilities were reopened . the company 's priorities during the covid-19 pandemic have been protecting the health and safety of its employees , responsibilities to its broader communities , and commitments to its customers and other key stakeholders . the company has taken a variety of measures to protect the health and safety of employees , including prohibiting non-essential travel for all employees , modifying workspaces with acrylic dividers and touchless faucets , providing additional personal protective equipment and cleaning supplies , increasing cleaning protocols across all locations , transitioning to remote working arrangements for certain -28- employees , emphasizing the importance of staying home when employees feel sick , implementing protocols to address actual and suspected covid-19 cases and potential exposure , and enacting policies on face mask usage and appropriate social distancing at the company 's locations the fundamentals of the company remain strong , and the company believes it has sufficient liquidity on hand to continue business operations during this volatile period . as disclosed in the liquidity and capital resources section , the company has total available liquidity of $ 1,234 million as of december 31 , 2020 , consisting of cash on hand and credit facilities . as a reaction to covid-19 , the company took actions to preserve liquidity , including capital expenditure reductions , actions to improve working capital , reductions in discretionary spending and additional temporary cost actions . based upon the company 's results and the effectiveness of these actions , such actions were gradually reversed throughout the second half of 2020. covid-19 negatively impacted the company 's business in 2020 and also presented potential new risks to it . the company began to see the impacts of covid-19 on its asian operations early in the first quarter , and in customer demand in late march in the americas and europe , which continued into the second quarter of 2020. the situation surrounding covid-19 remains fluid and the potential for a continued material impact on the company increases the longer the virus impacts the level of economic activity in the united states and globally . in the future , the covid-19 pandemic may cause additional reduced demand for the company 's products , including if it results in a recessionary global economic environment . it could also lead to volatility in consumer demand for or access to company products , including due to government actions impacting the ability to produce and ship products or impacting consumers ' movements and access to the company 's products . the company believes that over the long term , there will continue to be strong demand for the company 's products . however , the timing and extent of demand recovery in specific markets , the resumption of travel , and product demand trends caused by future economic trends are unclear . accordingly , there may be heightened volatility in net sales and earnings during and subsequent to the duration of the covid-19 pandemic . the company 's customers are also being impacted by the pandemic . the success of customers in addressing the issues and maintaining their operations , including their ability to remit timely payment , could impact consumer access to , and as a result , sales of the company 's products . in addition , the covid-19 pandemic and the company 's and government responses to it have disrupted the company 's operations , and increased its costs , and may continue to do so . story_separator_special_tag moody 's investors service has assigned a ba3 corporate family rating and a b1 rating to senior unsecured debt with a stable outlook . new accounting standards for a discussion of recent accounting pronouncements and their impact on the company , see the “ significant accounting policies - accounting pronouncements ” in the notes to the consolidated financial statements . critical accounting policies “ management 's discussion and analysis of financial condition and results of operations ” discusses the company 's consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the u.s. when more than one accounting principle , or the method of its application , is generally accepted , the company selects the principle or method that is appropriate in its specific circumstances . the company 's accounting policies are more fully described in the “ significant accounting policies ” note to the consolidated financial statements . application of these accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities , the disclosure of contingent assets and liabilities , and the reported amounts of revenues and expenses during the reporting period . management bases its estimates and judgments on historical experience and on other factors that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . the company believes that of its significant accounting policies , the following may involve a higher degree of judgment or estimation than other accounting policies . -34- product liability the company is a defendant in various product liability claims brought in numerous jurisdictions in which individuals seek damages resulting from motor vehicle accidents allegedly caused by defective tires manufactured by the company . each of the product liability claims faced by the company generally involves different types of tires and circumstances surrounding the accident such as different applications , vehicles , speeds , road conditions , weather conditions , driver error , tire repair and maintenance practices , service life conditions , as well as different jurisdictions and different injuries . in addition , in many of the company 's product liability lawsuits the plaintiff alleges that his or her harm was caused by one or more co-defendants who acted independently of the company . accordingly , both the claims asserted and the resolutions of those claims have an enormous amount of variability . the aggregate amount of damages asserted at any point in time is not determinable since often times when claims are filed , the plaintiffs do not specify the amount of damages . even when there is an amount alleged , at times the amount is wildly inflated and has no rational basis . the fact that the company is a defendant in product liability lawsuits is not surprising given the current litigation climate , which is largely confined to the united states . however , the fact that the company is subject to claims does not indicate that there is a quality issue with the company 's tires . the company sells approximately 30 to 35 million passenger car , light truck , sport utility vehicle , tbr and motorcycle tires per year in north america . the company estimates that approximately 300 million company-produced tires made up of thousands of different specifications are still on the road in north america . while tire disablements do occur , it is the company 's and the tire industry 's experience that the vast majority of tire failures relate to service-related conditions , which are entirely out of the company 's control , such as failure to maintain proper tire pressure , improper maintenance , improper repairs , road hazard , and excessive speed . the company accrues costs for asserted product liability claims at the time a loss is probable and the amount of loss can be estimated . the company believes the probability of loss can be established and the amount of loss can be estimated only after certain minimum information is available , including verification that company-produced product was involved in the incident giving rise to the claim , the condition of the product purported to be involved in the claim , the nature of the incident giving rise to the claim and the extent of the purported injury or damages . in cases where such information is known , each product liability claim is evaluated based on its specific facts and circumstances . a judgment is then made to determine the requirement for establishment or revision of an accrual for any potential liability . adjustments to estimated reserves are recorded in the period in which the change in estimate occurs . the liability often can not be determined with precision until the claim is resolved . pursuant to asc 450 `` contingencies , `` the company accrues the minimum liability for each known claim when the estimated outcome is a range of probable loss and no one amount within that range is more likely than another . for such known claims , the company accrues the minimum liability because the product liability claims faced by the company are unique and widely variable , and accordingly , the resolutions of those claims have an enormous amount of variability . the costs have ranged from zero dollars to $ 33 million in one case with no average that is meaningful . no specific accrual is made for individual unasserted claims or for premature claims , asserted claims where the minimum information needed to evaluate the probability of a liability is not yet known . however , an accrual is maintained for such claims based , in part , on management 's expectations for future litigation activity and the settled claims history maintained , including the

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liquidity and capital resources sources and uses of cash in operating activities net cash provided by operating activities was $ 459 million in 2020 compared to $ 291 million of net cash provided by operating activities in 2019. the improvement in operating cash flows was partially driven by the company 's increased net income in 2020 of $ 144 million , as compared to net income of $ 98 million in 2019. changes in operating assets and liabilities in 2020 provided $ 127 million of net cash , as compared to the usage of $ 1 million in 2019. lower sales volume and decreased production activity in the first half of 2020 as a result of the covid-19 pandemic resulted in favorable movement in accounts and notes receivable -32- and inventory in 2020 , as compared to 2019. this favorable movement continued into the second half of 2020 as improved unit sales volume kept the company 's inventory on hand at lower levels than 2019. non-cash items contributed $ 188 million of favorable cash flow movement in 2020 , compared to $ 193 million contributed in 2019 , with the decrease in the company 's lifo reserve in 2020 as a result of the company 's declining inventory balance the primary change . sources and uses of cash in investing activities net cash used in investing activities reflects capital expenditures of $ 151 million and $ 203 million in 2020 and 2019 , respectively . the reduced capital expenditures in 2020 reflect reductions enacted by the company in response to covid-19 . additionally , investing activities in 2019 also includes the company 's $ 49 million investment in the sailun vietnam equity joint venture . sources and uses of cash in financing activities in 2020 , the company repaid $ 9 million of net short-term debt at its asian operations .

for the year ended december 31 , 2013 , we renewed five leases at rates similar to existing rates by either i ) amending the lease to extend the term and assign the lease to a new operator , ii ) combining individual leases into a master lease with no change to the term , iii ) combing an individual lease into a master lease and extending the term , iv ) amending a lease to extend the term or v ) combining two master leases into one master lease with no change to the term . our primary objectives are to create , sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in senior housing and long term care properties managed by experienced operators . to meet these objectives , we attempt to invest in properties that provide opportunity for additional value and current returns to our stockholders and diversify our investment portfolio by geographic location , operator , property type and form of investment . we opportunistically consider investments in health care facilities in related businesses where the business model is similar to our existing model and the opportunity provides an attractive expected return . consistent with this strategy , we pursue , from time to time , opportunities for potential acquisitions and investments , with due diligence and negotiations often at different stages of development at any particular time . with respect to skilled nursing properties , we attempt to invest in properties that do not have to rely on a high percentage of private-pay patients . we prefer to invest in a property that has significant market presence in its community and where state certificate of need and or licensing procedures limit the entry of competing properties . for assisted living and independent living investments we have attempted to diversify our portfolio both geographically and across product levels . memory care facilities offer specialized options for seniors with alzheimer 's disease and other forms of dementia . purpose built , free-standing memory care facilities offer an attractive alternative for private-pay residents affected by memory loss in comparison to other accommodations that typically have been provided within a secured unit of an assisted living or skilled nursing facility . these facilities offer dedicated care and specialized programming for various conditions relating to memory loss in a secured environment that is typically smaller in scale and more residential in nature than traditional assisted living facilities . residents require a higher level of care and more assistance with activities of daily living than in assisted living facilities . therefore , these facilities have staff available 24 hours a day to respond to the unique needs of their residents . substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable . our investments in owned properties and mortgage loans represent our primary source of liquidity to fund distributions and are dependent upon the performance of the operators on their lease and loan obligations and the rates earned thereon . to the extent that the operators experience operating difficulties and are unable to generate sufficient cash to make payments to us , there could be a material adverse impact on our consolidated results of operations , liquidity and or financial condition . to mitigate this risk , we monitor our investments through a variety of methods determined by the type of health care facility and operator . our monitoring process includes periodic review of financial statements for each facility , periodic review of operator credit , scheduled property inspections and review of covenant compliance . 34 in addition to our monitoring and research efforts , we also structure our investments to help mitigate payment risk . some operating leases and loans are credit enhanced by guaranties and or letters of credit . in addition , operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans , operating leases or agreements between us and the operator and its affiliates . depending upon the availability and cost of external capital , we anticipate making additional investments in health care related properties . new investments are generally funded from cash on hand , temporary borrowings under our unsecured revolving line of credit and internally generated cash flows . our investments generate internal cash from rent and interest receipts and principal payments on mortgage loans receivable . permanent financing for future investments , which replaces funds drawn under our unsecured revolving line of credit , is expected to be provided through a combination of public and private offerings of debt and equity securities and secured and unsecured debt financing . the timing , source and amount of cash flows provided by financing activities and used in investing activities are sensitive to the capital markets environment , especially to changes in interest rates . changes in the capital markets ' environment may impact the availability of cost-effective capital . we believe our business model has enabled and will continue to enable us to maintain the integrity of our property investments , including in response to financial difficulties that may be experienced by operators . traditionally , we have taken a conservative approach to managing our business , choosing to maintain liquidity and exercise patience until favorable investment opportunities arise . at december 31 , 2013 , we had $ 6.8 million of cash on hand , $ 219.0 million available under our $ 240.0 million unsecured revolving line of credit , and $ 30.0 million available under the uncommitted private shelf agreement . subsequent to december 31 , 2013 , we borrowed $ 11.5 million and , therefore , have $ 207.5 million available under or unsecured revolving line of credit . story_separator_special_tag ffo , as defined by nareit , means net income available to common stockholders ( computed in accordance with u.s. gaap ) excluding gains or losses on the sale of real estate and impairment write-downs of depreciable real estate plus real estate depreciation and amortization , and after adjustments for unconsolidated partnerships and joint ventures . our calculation of ffo may not be comparable to ffo reported by other reits that do not define the term in accordance with the current nareit definition or that have a different interpretation of the current nareit definition from us ; therefore , caution should be exercised when comparing our ffo to that of other reits . the following table reconciles net income available to common stockholders to ffo available to common stockholders ( unaudited , amounts in thousands , except per share amounts ) : replace_table_token_18_th critical accounting policies preparation of the consolidated financial statements in conformity with u.s. generally accepted accounting principles ( u.s. gaap ) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes . actual results could differ from those estimates . see item 8. financial statements—note 2. summary of significant accounting policies for a description of the significant accounting policies we followed in preparing the consolidated financial statements for all periods presented . we have identified the following significant accounting policies as critical accounting policies in that they require significant judgment and estimates and have the most impact on financial reporting . impairments . impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount . management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be 42 held and used , and carrying amount over the fair value less cost to sell in instances where management has determined that we will dispose of the property . in determining fair value , we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated discounted future cash flows . also , we evaluate the carrying values of mortgage loans receivable on an individual basis . management periodically evaluates the realizability of future cash flows from the mortgage loan receivable when events or circumstances , such as the non-receipt of principal and interest payments and or significant deterioration of the financial condition of the borrower , indicate that the carrying amount of the mortgage loan receivable may not be recoverable . an impairment charge is recognized in current period earnings and is calculated as the difference between the carrying amount of the mortgage loan receivable and the discounted cash flows expected to be received , or if foreclosure is probable , the fair value of the collateral securing the mortgage . accounting standards codification no . 320 , investments—debt and equity securities ( or asc 320 ) , requires an entity to assess whether it intends to sell , or it is more likely than not that it will be required to sell , a debt security in an unrealized loss position before recovery of its amortized cost basis . if either of these criteria is met , the entire difference between fair value and amortized cost is recognized as impairment through earnings . for securities that do not meet the aforementioned criteria , the amount of impairment is split into two components as follows : 1 ) other-than-temporary impairment ( or otti ) related to other factors such as an entity 's ability to make scheduled interest or principal payments on the debt securities , which is recognized in other comprehensive income and 2 ) otti related to credit loss , which must be recognized in the income statement . the credit loss is determined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis . owned properties . we make estimates as part of our allocation of the purchase price of acquisitions to the various components of the acquisition based upon the relative fair value of each component . in determining fair value , we use current appraisals or other third party opinions of value . the most significant components of our allocations are typically the allocation of fair value to land and buildings and , for certain of our acquisitions , in-place leases and other intangible assets . in the case of the fair value of buildings and the allocation of value to land and other intangibles , the estimates of the values of these components will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired or the remaining lease term . in the case of the value of in-place leases , the appraisers make best estimates based on the evaluation of the specific characteristics of each tenant 's lease . factors considered include estimates of carrying costs during hypothetical expected lease-up periods , market conditions and costs to execute similar leases . these assumptions affect the amount of future revenue that we will recognize over the remaining lease term for the acquired in-place leases . we evaluate each purchase transaction to determine whether the acquired assets meet the definition of a business . transaction costs related to acquisitions that are not deemed to be businesses are included in the cost basis of the acquired assets , while transaction costs related to acquisitions that are deemed to be businesses are expensed as incurred . mortgage loans receivable . mortgage loans receivable we originate are recorded on an amortized cost basis . mortgage loans we acquire are recorded at fair value at the time of purchase net of any related premium or discount which is amortized as a yield adjustment to interest

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liquidity and capital resources operating activities : at december 31 , 2013 , our real estate investment portfolio ( before accumulated depreciation and amortization ) consisted of $ 937.6 million invested primarily in owned long term health care properties and mortgage loans of approximately $ 167.1 million ( prior to deducting a $ 1.7 million reserve ) . our portfolio consists of investments in 100 skilled nursing properties , 106 assisted living properties , 9 range of care properties , two schools , six parcels of land under development and four parcels of land held-for-use . these properties are located in 30 states . assisted living properties include assisted living , independent living and memory care properties . range of care properties consist of properties providing skilled nursing and any combination of assisted living , independent living and or memory care services . for the year ended december 31 , 2013 , we had net cash provided by operating activities of $ 86.2 million . for the year ended december 31 , 2013 we recorded $ 4.0 million in straight-line rental income and $ 37,000 in straight-line rent receivable reserve . during the fourth quarter of 2013 , we wrote-off a $ 0.9 million straight-line rent receivable balance related to the transition of four assisted living 44 properties to a new lessee . for the remaining leases in place at december 31 , 2013 , assuming no modification or replacement of existing leases and no new leased investments are added to our portfolio , we currently expect that straight-line rental income will decrease from $ 3.9 million in 2013 to $ 2.2 million for projected annual 2014 and , conversely , our cash rental income is projected to increase from $ 96.0 million in 2013 to $ 97.5 million for projected annual 2014. during the year ended december 31 , 2013 , we received $ 96.0 million of cash rental revenue and recorded $ 0.7 million of amortized lease inducement cost . investing activities : for the year ended december 31 , 2013 , we used $ 164.0 million of cash for investing activities .

million , $ 64.7 million more than the purchase price . there can be no assurances that the desired strategic and financial benefits of the acquisition will be realized . 47 the approval of ny dfs for the acquisition imposed certain post-closing requirements on ocwen , including certain reporting obligations and certain record retention and other requirements relating to the planned transfer of new york loans onto black knight msp as well as certain requirements with respect to the management of pmc , a licensed subsidiary of phh . importantly , the ny dfs also eased its restrictions on ocwen 's ability to acquire msrs to allow certain acquisitions of msrs that are boarded onto the black knight msp servicing system subject to annual portfolio growth limitations until such time as the ny dfs determines that all loans have been successfully migrated to black knight msp and that ocwen has developed a satisfactory infrastructure to board sizeable portfolios of msrs . we have established a set of initiatives to achieve our objective of returning to growth and profitability . first , we must successfully execute on the integration of phh 's business with ours , including a smooth transition onto the black knight msp servicing system which includes loan boarding , payment processing , escrow administration , and default management , among other functions . second , we must re-engineer our cost structure to go beyond eliminating redundant costs . third , we must fulfill our regulatory commitments and resolve our remaining legal and regulatory matters on satisfactory terms . fourth , we must replenish our servicing portfolio through expanding our lending business and making permissible msr acquisitions that are prudent and well-executed within appropriate financial return targets . finally , we must ensure that we continue to manage our balance sheet to provide a solid platform for executing on our growth and other initiatives . while we strengthened our cash position through amendments to our agreements with nrz and the phh acquisition , until we return to sustainable profitability , continuing losses will erode our available liquidity which could negatively impact our ability to invest in growth and investment opportunities , including our ability to acquire msrs . our business , operating results and financial condition have been significantly impacted by regulatory actions against us and by significant litigation matters . should the number or scope of regulatory or legal actions against us increase or expand or should we be unable to reach reasonable resolutions in existing regulatory and legal matters , our business , reputation , financial condition , liquidity and results of operations could be materially and adversely affected , even if we are successful in our ongoing efforts to optimize our cost structure and improve our financial performance . 48 operations summary replace_table_token_5_th 49 our 2018 results include the post-acquisition results of phh . the following table provides details of the phh results by segment : replace_table_token_6_th year ended december 31 , 2018 versus 2017 servicing and subservicing fees for 2018 were $ 55.0 million , or 6 % , lower than 2017 , primarily due to portfolio runoff and a decline in completed modifications , offset in part by the increase in the portfolio resulting from the acquisition of phh . servicing and subservicing fee revenue earned on the acquired phh portfolio during the post-acquisition period was $ 67.9 million . the number of completed modifications declined in 2018 compared to 2017 primarily because of the expiration of the hamp program on december 31 , 2016. revenue recognized in connection with loan modifications was $ 59.4 million for 2018 as compared to $ 97.2 million in 2017. the $ 25.7 million , or 25 % decline in gains on loans held for sale , net in 2018 is largely due to a decrease in total loan production offset in part by higher margins , primarily due to operating in the higher margin forward lending retail channel exclusively in 2018. forward lending originations declined as a result of our exit from the forward lending correspondent and wholesale channels in 2017 and rising interest rates which reduced refinance volume , offset in part by retail channel volume generated by phh during the post-acquisition period . changes to the fha hecm program for originations after october 1 , 2017 have negatively impacted reverse lending origination volume across all channels . other revenue for 2018 declined $ 50.8 million , or 50 % , largely due to a $ 31.1 million decline in reo referral commissions in connection with the transfer of the rights to such commissions to nrz effective with the new rmsr agreements , and a $ 6.5 million decline in crl premium revenue consistent with the decline in the number of foreclosed real estate properties in the servicing portfolio . a $ 5.7 million reduction in loan origination fees on lower lending segment production volumes and a $ 5.0 million unfavorable net change in the fair values of our hecm reverse mortgage loans and the related hmbs financing liability due to rising interest rates also contributed to the decline in other revenue . 50 msr valuation adjustments , net , increased $ 100.5 million , or 190 % , as compared to 2017 , primarily because 2017 included an $ 86.7 million favorable impact of a benchmarking update related to our non-agency msrs carried at fair value . in addition , msr valuation adjustments increased $ 25.7 million in 2018 due to the impact of higher runoff resulting from the acquisition of msrs from phh . fair value adjustments are largely offset by corresponding fair value adjustments related to the nrz financing liabilities , which are recorded in interest expense . excluding msr valuation adjustments , net , total expenses were $ 166.6 million , or 18 % , lower as compared to 2017 . total expenses for 2018 , excluding msr valuation adjustments , includes $ 59.2 million attributable to phh . story_separator_special_tag in the current market rate environment , we believe we have limited incremental fair value that can be realized even as interest rates increase absent comparable market transaction data supporting higher valuation multiples , which are already at historic highs . valuation is also impacted by loan delinquency rates whereby as delinquency rates decline , the value of the servicing portfolio rises . while we do not hedge changes in the fair value of our msrs , changes in fair value of any fair value elected msr financing liabilities , which are recorded in interest expense in our consolidated statements of operations , will partially offset the changes in fair value of the related msrs . loan resolutions we have a strong track record of success as a leader in the servicing industry in foreclosure prevention and loss mitigation that helps homeowners stay in their homes and improves financial outcomes for mortgage loan investors . reducing delinquencies also enables us to recover advances and recognize additional ancillary income , such as late fees , which we do not recognize on delinquent loans until they are brought current . loan resolution activities address the pipeline of delinquent loans and generally lead to ( i ) modification of the loan terms , ( ii ) repayment plan alternatives , ( iii ) a discounted payoff of the loan ( e.g . , a “ short sale ” ) , or ( iv ) foreclosure or deed-in-lieu-of-foreclosure and sale of the resulting reo . loan modifications must be made in accordance with the applicable servicing agreement as such agreements may require approvals or impose restrictions upon , or even forbid , loan modifications . to select an appropriate loan modification option for a borrower , we perform a structured analysis , using a proprietary model , of all options using information provided by the borrower as well as external data , including recent broker price opinions to value the mortgaged property . our proprietary model includes , among other things , an assessment of re-default risk . our future financial performance will be less impacted by loan resolutions because , under our nrz agreements , nrz receives all deferred servicing fees . deferred servicing fees related to delinquent borrower payments were $ 241.8 million at december 31 , 2018 , of which $ 198.4 million were attributable to nrz agreements . advance obligation as a servicer , we are generally obligated to advance funds in the event borrowers are delinquent on their monthly mortgage related payments . we advance principal and interest ( p & i advances ) , taxes and insurance ( t & i advances ) and legal fees , property valuation fees , property inspection fees , maintenance costs and preservation costs on properties that have been foreclosed ( corporate advances ) . for loans in non-agency securitization trusts , if we determine that our p & i advances can not be recovered from the projected future cash flows , we generally have the right to cease making p & i advances , declare advances , where permitted including t & i and corporate advances , in excess of net proceeds to be non-recoverable and , in most cases , immediately recover any such excess advances from the general collection accounts of the respective trust . with t & i and corporate advances , we continue to advance if net future cash flows exceed projected future advances without regard to advances already made . most of our advances have the highest reimbursement priority ( i.e . , they are “ top of the waterfall ” ) so that we are entitled to repayment from respective loan or reo liquidation proceeds before any interest or principal is paid on the bonds that were 55 issued by the trust . in the majority of cases , advances in excess of respective loan or reo liquidation proceeds may be recovered from pool-level proceeds . the costs incurred in meeting these obligations consist principally of the interest expense incurred in financing the servicing advances . most , but not all , subservicing agreements , including our agreements with nrz , provide for more rapid reimbursement of any advances from the owner of the servicing rights . significant variables aggregate upb and loan count . servicing fees are generally expressed as a percentage of upb and subservicing fees are generally expressed as a percentage of upb or earned on a per-loan basis . aggregate upb and loan count decline as a result of portfolio run-off and increase to the extent we retain msrs from new originations or engage in msr acquisitions , to the extent permitted . operating efficiency . our operating results are heavily dependent on our ability to scale our operations to cost-effectively and efficiently perform servicing activities in accordance with our servicing agreements . to the extent we are unable to process a high volume of transactions consistently and systematically , the cost of our servicing activities increases and has a negative impact on our operating results . to the extent we are unable to complete servicing activities in accordance with the requirements of our servicing agreements , we may incur additional costs or fail to recover otherwise reimbursable costs and advances . delinquencies . delinquencies impact our results of operations and operating cash flows . non-performing loans are more expensive to service because the loss mitigation activities that we must undertake to keep borrowers in their homes or to foreclose , if necessary , are costlier than the activities required to service a performing loan . these loss mitigation activities include increased contact with the borrower for collection and the development of forbearance plans or loan modifications by highly skilled associates who command higher compensation as well as the higher compliance costs associated with these , and similar , activities . while the higher cost is somewhat offset by ancillary fees , for severely delinquent loans or loans that enter the

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. cash inflows include net cash of $ 64.7 million and restricted cash of $ 38.8 million acquired in connection with acquisition of phh , net proceeds of $ 33.0 million on dealer financing notes issued by our automotive capital services business , which we decided to exit in january 2018 , and the receipt of $ 41.1 million of net proceeds from the sale of msrs and related advances . our financing activities provided $ 166.7 million of cash . cash inflows include $ 948.9 million received in connection with our reverse mortgage securitizations , which are accounted for as secured financings , less repayments on the related financing liability of $ 392.0 million . in january 2018 , ocwen received a lump-sum payment of $ 279.6 million in accordance with the terms of the new rmsr agreements . cash outflows include $ 220.3 million of net repayments on match funded liabilities as a result of advance recoveries , $ 211.8 million of net payments on the financing liability related to msrs pledged , $ 66.8 million of repayments on the sstl and $ 18.5 million to repurchase senior notes . in addition , we reduced borrowings under our mortgage loan warehouse facilities by $ 100.1 million . cash flows for the year ended december 31 , 2017 our operating activities provided $ 409.0

enrollment in the newly diagnosed unfit aml cohorts of the trial is complete and we continue to follow patients in the trial . as of the data cut-off , 40 newly diagnosed unfit aml patients had been enrolled in the trial and were eligible for the safety analysis . we reported at esh 2019 that sy-1425 in combination with azacitidine had been generally well-tolerated , with no evidence of increased toxicities due to the combination , and that adverse events had been consistent with what has previously been seen with sy-1425 and azacitidine as single agents in aml . across all grades and causalities , the most commonly reported adverse events in these cohorts of the trial were nausea , decreased appetite , constipation , fatigue and peripheral edema , the majority of which were low grade . of the 17 biomarker-positive patients evaluable for response , 13 were rara-positive and four were irf8-positive . we reported at esh 2019 that the aggregate rate of complete response , or cr , and complete 85 response with incomplete blood count recovery , or cri , in each case as defined by revised international working group , or iwg , criteria for aml , as of the data cut-off in rara-positive patients was 62 % and the cr rate was 54 % . the duration of responses in rara-positive patients was up to 344 days , with three of the eight responding patients having responses lasting beyond seven months at the time of the data cut-off . in patients with only the irf8 biomarker , the cr/cri rate was 0 % , supporting our decision to use rara as the sole biomarker for patient selection in sy-1425 clinical trials going forward . most of the initial responses reported were seen at the end of the first treatment cycle . in 22 response-evaluable rara-negative patients , the cr/cri rate was 27 % . single-agent azacitidine has shown response rates of 18-29 % in newly diagnosed unfit aml patients , with initial responses generally occurring after four cycles of treatment in most patients who respond . we expect to report mature data from the newly diagnosed aml cohorts of the trial , as well as potential proof-of-concept data from the relapsed or refractory aml cohort of the trial , in the fourth quarter of 2020. in january 2020 , we dosed the first patient in a phase 1 clinical trial of sy-5609 in patients with select advanced solid tumors , including breast , colorectal , lung and ovarian cancers , and in solid tumors of any histology having retinoblastoma-pathway , or rb pathway , alterations . the primary objectives of this trial are to assess the safety and tolerability of escalating doses of sy-5609 , with the goal of establishing a maximum tolerated dose . additional objectives include assessments of anti-tumor activity , pharmacokinetics , pharmacodynamics and potential predictive biomarkers , including rb pathway alterations . in a future expansion portion of the phase 1 trial , multiple cohorts are planned to further evaluate the safety and anti-tumor activity of sy-5609 as both a single agent and in combination with other therapies . we expect to report initial safety , tolerability , and pharmacokinetic and pharmacodynamic data from the trial in the fourth quarter of 2020. we also expect to report additional dose escalation data , including clinical activity data , in mid-2021 . at the aacr-nci-eortc international conference on molecular targets and cancer therapeutics held in october 2019 , or ena 2019 , we presented preclinical data characterizing the profile of sy-5609 . these data show that sy-5609 is a potent and highly selective cdk7 inhibitor , with at least 13,000-fold greater selectivity for cdk7 over closely related members of the cyclin- dependent kinase family . in addition , we reported at ena 2019 that sy-5609 induced dose-dependent tumor growth inhibition in preclinical models of ovarian and breast cancer , tumor regressions that were sustained after the end of treatment at well-tolerated doses in multiple preclinical models of triple-negative breast , small cell lung , and high-grade serous ovarian cancers . deeper and more sustained responses in these models were associated with the presence of rb pathway alterations . we also reported preclinical data showing the anti-tumor activity of sy-5609 in combination with fulvestrant , a hormonal therapy , in treatment-resistant preclinical models of estrogen receptor-positive breast cancer . we have shown that sy-5609 inhibits cdk7 more potently and selectively than sy-1365 , and that sy-5609 demonstrated greater tumor growth inhibition than sy-1365 in preclinical models in which both agents were studied , including models that were not responsive to sy-1365 . in october 2019 , we announced data from the expansion portion of our phase 1 clinical trial evaluating sy-1365 in multiple solid tumor indications . as of a september 30 , 2019 data snapshot , 68 patients had been treated in the expansion portion of this trial , including 53 across the single-agent cohorts in patients with high-grade serous ovarian cancer , relapsed clear cell ovarian cancer , and solid tumors of any histology available for biopsy , and 15 patients in combination cohorts evaluating sy-1365 in combination with carboplatin , a chemotherapeutic agent , in patients with high-grade serous ovarian cancer and in combination with fulvestrant in patients with treatment-resistant metastatic hormone-receptor positive breast cancer . we initiated the single-agent expansion cohorts at a dose of 80 mg/m 2 twice weekly and the combination cohorts at 53 mg/m 2 once weekly after having observed data from the dose-escalation portion of the trial demonstrating dose-dependent effects on cdk7 occupancy and downstream gene expression changes in blood cells as well as a confirmed partial response in one patient with recurrent clear cell ovarian cancer . story_separator_special_tag 90 stock-based compensation we account for our stock-based compensation awards in accordance with asc 718 , compensation—stock compensation ( “ asc 718 ” ) . asc 718 requires all stock-based payments to employees and directors , including grants of restricted stock units and stock option awards , to be recognized as expense in the consolidated statements of operations based on their grant date fair values . effective january 1 , 2019 , grants of restricted stock units and stock option awards to other service providers , referred to as non-employees , are measured based on the grant-date fair value of the award and expensed in our consolidated statement of operations over the vesting period . through december 31 , 2018 , grants of restricted stock unit and stock option awards to non-employees were required to be recognized as expense in the consolidated statements of operations based on their vesting date fair values . we estimate the fair value of stock options granted using the black-scholes option-pricing model . prior to june 30 , 2016 , we were a private company and , therefore , lack company-specific historical and implied volatility information . as a result , we estimate our expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our own traded stock price . the expected term of our stock options has been determined utilizing the “ simplified ” method for awards that qualify as “ plain-vanilla ” options . through december 31 , 2018 , the expected term of stock options granted to non-employees was equal to the contractual term of the option award . effective january 1 , 2019 , the expected term of stock options to non-employees can be determined using either the contractual term of the option award or the “ simplified ” method . the risk-free interest rate is determined by reference to the u.s. treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award . expected dividend yield is based on the fact that we have never paid cash dividends and do not expect to pay any cash dividends in the foreseeable future . we use the value of our common stock to determine the fair value of restricted stock awards . we expense the fair value of our stock-based awards to employees and non-employees on a straight-line basis over the associated service period , which is generally the vesting period . we account for forfeitures as they occur instead of estimating forfeitures at the time of grant . ultimately , the actual expense recognized over the vesting period will be for only those options that vest . compensation expense for discounted purchases under the employee stock purchase plan is measured using the black-scholes model to compute the fair value of the lookback provision plus the purchase discount and is recognized as compensation expense over the offering period . for stock-based awards that contain performance-based milestones , we record stock-based compensation expense in accordance with the accelerated attribution model . management evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance conditions as of the reporting date . for certain of our performance-based awards , notwithstanding any vesting in accordance with the achievement of performance-based milestones , such awards vest in full on the sixth anniversary of the vesting commencement date . compensation expense for such awards is recognized over the six-year vesting period unless management determines that the achievement of any performance-based milestones is probable , in which case expense is accelerated . we have computed the fair value of stock options at the date of grant using the following weighted-average assumptions : replace_table_token_4_th 91 results of operations comparison of years ended december 31 , 2019 and 2018 the following table summarizes our results of operations for the years ended december 31 , 2019 and 2018 , together with the changes in those items in dollars ( in thousands ) : replace_table_token_5_th revenue for the year ended december 31 , 2019 and 2018 , we recognized approximately $ 2.0 million and $ 2.1 million of revenue , all of which was attributable to our target discovery collaboration with incyte . research and development expense research and development expense increased by approximately $ 8.0 million , or 16 % , from $ 50.2 million for the year ended december 31 , 2018 to $ 58.2 million for the year ended december 31 , 2019. the following table summarizes our research and development expenses for the years ended december 31 , 2019 and 2018 , together with the changes to those items in dollars ( in thousands ) : replace_table_token_6_th the change in research and development expense was primarily attributable to research and development activities associated with advancing our lead clinical and preclinical programs and enhancing our internal capabilities , and included the following : an increase of approximately $ 4.0 million , or 35 % , for increased employee-related expenses , including increased salary and benefits primarily due to our increased headcount ; an increase of approximately $ 1.1 million , or 44 % , for stock-based compensation , also primarily due to our increased headcount ; an increase of approximately $ 1.7 million , or 90 % , consulting , licensing and professional fees increased professional fees in support of our sy-1425 , sy-1365 and sy-5609 clinical trials and our other preclinical programs ; and an increase of approximately $ 1.4 million , or 35 % , in facilities and other expenses primarily due to the rent expense related to the lease for our new headquarters , over which we took possession for accounting purposes in may 2019 . 92 general and administrative expense general and administrative expense increased by approximately $ 5.3

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net cash used in operating activities the use of cash in all periods presented resulted primarily from our net losses adjusted for non-cash charges and changes in components of working capital . net cash used in operating activities was $ 60.3 million during the year ended december 31 , 2019 , compared to $ 40.3 million during the year ended december 31 , 2018. the increase in cash used in operating activities was primarily due to a $ 13.1 million increase in our net loss from continuing operations and proceeds received upon entry into the incyte target discovery collaboration during the year ended december 31 , 2018 that did not recur in 2019. net cash used in operating activities was $ 40.3 million during the year ended december 31 , 2018 , compared to $ 44.7 million during the year ended december 31 , 2017. the decrease in cash used in operating activities was primarily due to proceeds received upon entry into the incyte target discovery collaboration during the year ended december 31 , 2018. net cash used in investing activities net cash used in investing activities was $ 11.7 million during the year ended december 31 , 2019 , compared to $ 10.6 million during the year ended december 31 , 2018. the increase in cash used in investing activities was primarily due to $ 12.6 million of purchases of property and equipment during the year ended december 31 , 2019 as compared to $ 1.4 million for the year ended december 31 , 2018 due to the buildout of our new corporate headquarters during the year ending december 31 , 2019. this amount was offset by net maturities of marketable securities of $ 0.8 million for the year ended december 31 , 2019 , as compared to net purchases of $ 9.3 million for the year ended december 31 , 2018. net cash used in investing activities was $ 10.6 million during the year ended december 31 , 2018 , compared to $ 15.6 million during the year ended december 31 , 2017. the decrease in cash used in investing activities was primarily due to net

the photomask industry has been , and is expected to continue to be , characterized by technological change and evolving industry standards . in order to remain competitive , the company will be required to continually anticipate , respond to , and utilize changing technologies . in particular , the company believes that , as semiconductor geometries continue to become smaller , it will be required to manufacture even more complex optically-enhanced reticles , including optical proximity correction and phase-shift photomasks . additionally , demand for photomasks has been , and could in the future be , adversely affected by changes in semiconductor and high performance electronics fabrication methods that affect the type or quantity of photomasks used , such as changes in semiconductor demand that favor field-programmable gate arrays and other semiconductor designs that replace application-specific ics . furthermore , increased market acceptance of alternative methods of transferring circuit designs onto semiconductor wafers could reduce or eliminate the need for photomasks in the production of semiconductors . as of the end of fiscal 2013 , one alternative method , direct-write lithography , has not been proven to be a commercially viable alternative to photomasks , as it is considered too slow for high volume semiconductor wafer production , and the company has not experienced a significant loss of revenue as a result of this or other alternative semiconductor design methodologies . however , should direct-write or any other alternative method of transferring ic designs to semiconductor wafers without the use of photomasks achieve market acceptance , and the company does not anticipate , respond to , or utilize these or other changing technologies due to resource , technological or other constraints , its business and results of operations could be materially adversely affected . both revenues and costs have been affected by the increased demand for high-end technology photomasks that require more advanced manufacturing capabilities , but generally command higher average selling prices ( `` asps `` ) . the company 's capital expenditure payments aggregated approximately $ 243 million for the three fiscal years ended november 3 , 2013 , which has significantly contributed to the company 's operating expenses . the company intends to continue to make the required investments to support the technological demands of its customers and position itself for future growth , and expects capital expenditure payments to be between $ 70 million and $ 90 million in fiscal 2014. the manufacture of photomasks for use in fabricating ics and other related products built using comparable photomask-based process technologies has been , and continues to be , capital intensive . the company 's integrated global manufacturing network , which consists of eight manufacturing sites , and its employees represent a significant portion of its fixed operating cost base . should sales volumes decrease as a result of a decrease in design releases from the company 's customers , the company may have excess or underutilized production capacity that could significantly impact operating margins , or result in write-offs from asset impairments . 18 in the first quarter of fiscal 2014 the company entered an agreement to merge psmc with dnp photomask technology taiwan co. , ltd. , a wholly owned subsidiary of dai nippon printing co. , ltd. ( dnp ) , to form a joint venture which will operate under the name of photronics dnp mask corporation ( pdmc ) . the pending merger , which is a noncash transaction , will result in the company owning 50.01 % and dnp owning 49.99 % of pdmc , whose financial results will be included in the company 's consolidated financial statements . pdmc is expected to generate sufficient cash flows to fund its operating and capital requirements . the merger is subject to regulatory approvals and customary closing conditions , and is expected to be finalized during the first half of fiscal 2014. in the first quarter of fiscal 2014 the company amended its credit facility to a five year $ 50 million credit facility ( the “ new credit facility ” ) with an expansion capacity to $ 75 million , and simultaneously repaid its $ 21.3 million term loan . the new credit facility , which replaced the credit facility in effect at november 3 , 2013 , bears interest based on the company 's total leverage ratio , at libor plus a spread , as defined in the new credit facility . in the fourth quarter of fiscal 2013 a $ 26.4 million principal amount , five year capital lease to fund the purchase of a high-end lithography tool commenced . payments under the lease , which bears interest at 2.77 % are $ 0.5 million per month through july 2018. under the terms of the lease agreement , the company must maintain the equipment in good working order , and is subject to a cross default with a cross acceleration provision related to certain nonfinancial covenants incorporated in its credit facility . as of november 3 , 2013 , the total amount payable through the end of the lease term was $ 26.8 million , of which $ 25.1 million represented principal and $ 1.7 million represented interest . in the third quarter of fiscal 2013 the company completed a tender offer for shares of psmc . a total of 50.3 million shares were tendered at the offering price of 16.30 ntd ( equivalent to a total of $ 27.4 million ) , which increased the company 's ownership interest in psmc from 75.11 % to 98.13 % . in the fourth quarter of fiscal 2013 the company further increased its ownership interest in psmc to 98.63 % with the purchase of an additional 1.1 million shares of psmc for $ 0.7 million . story_separator_special_tag the credit facility bore interest ( 2.69 % at november 3 , 2013 ) , based on the company 's total leverage ratio , at libor plus a spread , as defined in the agreement . the credit facility was secured by substantially all of the company 's assets located in the united states , as well as common stock the company owns in certain of its foreign subsidiaries , and was subject to financial covenants , including the following , as defined in the agreement : minimum fixed charge ratio , total leverage ratio and minimum unrestricted cash balance . as of november 3 , 2013 , the company was in compliance with the covenants of its credit facility , had no outstanding borrowings under the credit facility and $ 30 million was available for borrowing . as discussed above this credit facility was replaced with a new credit facility in december 2013. in june 2013 the company completed a tender offer for shares of psmc . a total of 50.3 million shares were tendered at the offering price of 16.30 ntd , equivalent to a total of $ 27.4 million . psmc , through a series of repurchase programs which commenced in 2011 and ended in 2013 , repurchased shares of its outstanding common stock . these repurchase programs resulted in 9.2 million shares being purchased for $ 4.2 million in 2013 , 35.9 million shares being purchased for $ 15.6 million in 2012 and 21.6 million shares being purchased for $ 9.9 million in 2011. in august 2013 a $ 26.4 million principal amount , five year capital lease to fund the purchase of a high-end lithography tool commenced . payments under the lease , which bears interest at 2.77 % are $ 0.5 million per month through july 2018. under the terms of the lease agreement , the company must maintain the equipment in good working order , and is subject to a cross default with a cross acceleration provision related to certain nonfinancial covenants incorporated in its credit facility . as of november 3 , 2013 , the total amount payable through the end of the lease term was $ 26.8 million , of which $ 25.1 million represented principal and $ 1.7 million represented interest . in april 2011 the company entered into a five year , $ 21.2 million capital lease of manufacturing equipment . payments under the lease , which bears interest at 3.09 % , are $ 0.4 million per month through march 2016. as of november 3 , 2013 , the total lease amount payable through the end of the lease term was $ 11.1 million , of which $ 10.7 million represented principal and $ 0.4 million represented interest . in february 2012 the company paid $ 35 million to micron in connection with the purchase of the u.s. nanofab facility . in connection therewith , the company amended its credit facility to include the addition of a $ 25 million term loan maturing in march 2017 , with minimum quarterly principal payments of $ 0.6 million . in the first quarter of fiscal 2014 the company repaid the $ 21.3 million balance of this term loan that was outstanding at november 3 , 2013. as a result of the purchase of the u.s. nanofab facility , the company 's lease agreement with micron for the u.s. nanofab facility was cancelled , which reduced the company 's related outstanding operating lease commitments by a combined total of $ 15 million for fiscal years 2013 and 2014. the company 's liquidity is highly dependent on its sales volume , cash conversion cycle , and the timing of its capital expenditures ( which can vary significantly from period to period ) , as it operates in a high fixed cost environment . depending on conditions in the semiconductor and fpd markets , the company 's cash flows from operations and current holdings of cash may not be adequate to meet its current and long-term needs for capital expenditures , operations and debt repayments . historically , in certain years , the company has used external financing to fund these needs . due to conditions in the credit markets , some financing instruments used by the company in the past may not be currently available to it . the company continues to evaluate further cost reduction initiatives . however , the company can not assure that additional sources of financing would be available to it on commercially favorable terms , should its cash requirements exceed cash available from operations , existing cash , and cash available under its credit facility . at november 3 , 2013 , the company had outstanding purchase commitments of $ 48 million , which included $ 42 million related to capital expenditures , primarily for investment in high-end ic photomask manufacturing capability . the company intends to finance its capital expenditures with its working capital , cash generated from operations , and , if necessary , with additional borrowings . 26 cash requirements the company 's cash requirements in fiscal 2014 will be primarily to fund its operations , including capital spending , and to service its debt . the company believes that its cash on hand , cash generated from operations and amounts available under its credit facility will be sufficient to meet its cash requirements for the next twelve months . the company regularly reviews the availability and terms on which it might issue additional equity or debt securities in the public or private markets . however , the company can not assure that additional sources of financing would be available to the company on commercially favorable terms , should the company 's cash requirements exceed its cash available from operations , existing cash , and cash available under its credit facility . contractual obligations the following table presents the company 's contractual obligations as of november 3 , 2013 : replace_table_token_11_th in december 2013

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liquidity and capital resources replace_table_token_10_th as of november 3 , 2013 , the company had cash and cash equivalents of $ 215.6 million compared to $ 218.0 million as of october 28 , 2012. the company 's working capital decreased $ 20.4 million to $ 213.9 million at november 3 , 2013 , as compared to $ 234.3 million at october 28 , 2012. the decrease in working capital was primarily the result of the purchase of psmc shares and increased payables for capital expenditures . the company may use its cash available on hand for operations , capital expenditures , debt repayments , strategic opportunities , stock repurchases or other corporate uses , any of which may be material . as of october 28 , 2012 , the company had cash and cash equivalents of $ 218.0 million compared to $ 189.9 million as of october 30 , 2011. the company 's working capital increased $ 25.0 million to $ 234.3 million at october 28 , 2012 , as compared to $ 209.3 million at october 30 , 2011. the increase in working capital was primarily the result of cash generated from operations . as of november 3 , 2013 and october 28 , 2012 , the company 's total cash and cash equivalents include $ 165.7 million and $ 158.2 million , respectively , held by its foreign subsidiaries . the majority of earnings of the company 's foreign subsidiaries are considered to be indefinitely reinvested . the company 's foreign subsidiaries continue to grow through the reinvestment of earnings in additional manufacturing capacity and capability , particularly in the high-end ic and fpd areas . repatriation of these funds to the u.s. may subject these funds to u.s. federal income taxes and local country withholding tax in certain jurisdictions .

to date , a substantial majority of our revenue has come from sales of subscriptions of castlight medical . we believe that there is a significant opportunity to sell subscriptions to other applications as our customers become more familiar with our offering and seek to address additional needs . annual net dollar retention rate and average annual revenue . we believe that our ability to retain our customers and expand their subscription revenue growth over time will be an indicator of the stability of our revenue base and the long-term value of our customer relationships . because we typically enter into long-term contracts with our customers , only a small percentage of our customer agreements have reached the end of their original terms and , as a result , we have not observed a large enough sample of renewals to derive meaningful conclusions . based on our limited experience , we observed an annual net dollar retention rate of 103 % for our signed customer base , for the year ended december 31 , 2014 . additionally , our average annual revenue per launched customer grew approximately 17 % for the year ended december 31 , 2014 compared to the year ended december 31 , 2013 . we calculate annual net dollar retention rate for a given period as the aggregate annualized subscription contract value as of the last day of that year from those customers that were also customers as of the last day of the prior year , divided by the aggregate annualized subscription contract value from all customers as of the last day of the prior year . we calculate annualized subscription contract value for each customer as the expected monthly recurring revenue of our customers multiplied by 12. recurring revenue excludes one-time fees . we calculate average annual revenue per launched customer for a given period , as the annualized revenue as of the last day of the year , divided by average customers launched during the same period . implementation timelines . our ability to convert backlog into revenue and improve our gross margin depends on how quickly we complete customer implementations . our implementation timelines vary from customer to customer based on the source and condition of the data we receive from third parties , the configurations that we agree to provide and the size of the customer . our implementation timelines for castlight medical are typically three to nine months after entering into an agreement with a customer . our implementation timelines for our other applications typically range from approximately six months to longer than twelve months . 35 professional services model . we believe our professional services capabilities support the adoption of our subscription offerings . as a result , our sales efforts have been focused primarily on our subscription offering , rather than the profitability of our professional services business . our professional services are generally priced on a fixed-fee basis and the costs incurred to complete these services , which consist mainly of personnel-related costs , have been greater than the amount charged to the customer . we also do not have standalone value for our implementation services for accounting purposes . accordingly , we recognize implementation services revenue in the same manner as the associated subscription revenue . prior to launching an individual customer , we incur significant costs associated with implementation activities , which we record as cost of revenue . since we do not recognize significant revenues from an individual customer until we launch , we generate a negative gross margin at the customer level during the implementation period . seasonality . a significantly higher proportion of our customers enter into new subscription agreements with us or renew previous agreements in the third and fourth quarters of the year compared to the first and second quarters . this seasonality is related to the employee benefits cycle , as customers typically want to make our applications available at the beginning of a new benefits year , which generally occurs in the first quarter . this seasonality is not immediately apparent in our revenue because we do not begin recognizing revenue from new customer agreements until we have implemented our offering , based on the implementation timelines discussed above . therefore , revenue recognized in any quarter is primarily from customer agreements entered into in prior quarters . in addition , the mix of customers paying monthly , quarterly , or annually varies from quarter to quarter and impacts our deferred revenue balance . as a result of variability in our billing and implementation timelines , the deferred revenue balance does not represent the total value of our customer contracts , nor do changes in deferred revenue serve as a reliable indicator of our future subscription revenue . components of results of operations revenue we generate revenue from subscription fees from customers for access to selected applications in the castlight enterprise healthcare cloud including basic customer service support . we also earn revenue from professional services primarily related to the implementation of our offering , including extensive communications support to drive adoption by our customers ' employees and their families . we recognize subscription fees on a straight-line basis ratably over the contract term beginning when our applications are implemented and ready for launch , which is based on the implementation timelines discussed above . our customer agreements generally have a term of three years . we generally invoice our customers in advance on a monthly , quarterly or annual basis . amounts that have been invoiced are initially recorded as deferred revenue . amounts that have not been invoiced are not reflected in our consolidated financial statements . we generally invoice our implementation services upon contract signing on a fixed-fee basis , which is generally when we commence work . story_separator_special_tag revenue is recognized based on the terms in our customer contracts , which can provide for ( a ) a variable periodic fee based upon the actual or contractual number of users that is recognized to revenue based on the actual or contractual number of users or ( b ) a fixed fee that is recognized to revenue on a straight-line basis over the contractual term of the arrangement . certain of our cloud-based subscription arrangements include performance incentives that are generally based upon employee engagement . fees for performance incentives are considered contingent revenue , and are recognized over the remaining term of the related subscription arrangement commencing at the time they are earned . professional services revenue . professional services revenue is comprised of implementation services related to our cloud-based subscription service , as well as follow-on professional services to assist our customers in further adopting our cloud-based subscription service , and communications services . nearly all of our professional services contracts are sold on a fixed-fee basis . we do not have standalone value for our implementation services . accordingly , we recognize implementation services revenue in the same manner as the associated cloud-based subscription service , beginning on the launch date , provided all other criteria described above have been met . for follow-on professional services that are sold separately from the cloud-based subscription service , we recognize revenue as the services are delivered . communication services revenue is recognized over the contractual term , generally one year , commencing when the revenue recognition criteria have been met . 43 multiple deliverable arrangements . to date , we have generated substantially all our revenue from multiple deliverable arrangements consisting of multi-year cloud-based subscription services and professional services , including implementation services and communication services . for arrangements with multiple deliverables , we evaluate whether the individual deliverables qualify as separate units of accounting . in order to treat deliverables in a multiple deliverable arrangement as separate units of accounting , the deliverables must have standalone value upon delivery . if the deliverables have standalone value upon delivery , we account for each deliverable separately and revenue is recognized for the respective deliverables as they are delivered . if one or more of the deliverables do not have standalone value upon delivery , the deliverables that do not have standalone value are generally combined with our cloud-based subscription service , and revenue for the combined unit is recognized over the remaining term of the cloud-based subscription service . our deliverables have standalone value if we or any other vendor sells a similar service separately . we have concluded that we have standalone value for our cloud-based subscription service as we sell these services separately through renewals and for our communication services as other vendors sell similar services separately . conversely , we have concluded that our implementation services do not have standalone value , as we and others do not yet sell these services separately . accordingly , we consider the separate units of accounting in our multiple deliverable arrangements to be the communication services and a combined deliverable comprised of cloud-based subscription services and implementation services . when multiple deliverables included in an arrangement are separable into different units of accounting , the arrangement consideration is allocated to the identified separate units of accounting based on their relative selling price . multiple deliverable arrangements accounting guidance provides a hierarchy to use when determining the relative selling price for each unit of accounting . vendor-specific objective evidence , or vsoe , of selling price , based on the price at which the item is regularly sold by the vendor on a standalone basis , should be used if it exists . if vsoe of selling price is not available , third-party evidence , or tpe , of selling price is used to establish the selling price if it exists . if tpe does not exist , we estimate the best estimated selling price , or besp . vsoe does not currently exist for any of our deliverables . additionally , we do not believe tpe is a practical alternative due to differences in our cloud-based subscription service compared to other parties and the availability of relevant third-party pricing information for our cloud-based subscription service and our other services . accordingly , for arrangements with multiple deliverables that can be separated into different units of accounting , we allocate the arrangement fee to the separate units of accounting based on our besp . the amount of arrangement fee allocated is limited by contingent revenue , if any . we determine besp for our deliverables by considering our overall pricing objectives and market conditions . this includes evaluating our pricing practices , our list prices , the size of our transactions , historical sales and our go-to-market strategy . the determination of besp is made through consultation with and approval by management . for financial statement presentation purposes , we allocate the fees from our combined units of accounting to subscription and professional services based upon their relative selling price . deferred commissions deferred commissions are the incremental costs that are directly associated with the non-cancellable portion of cloud-based subscription service contracts with customers and consist of sales commissions paid to our direct sales force . the commissions are deferred and amortized over the non-cancellable terms of the related contracts . the deferred commission amounts are recoverable through the future revenue streams under the non-cancellable customer contracts . amortization of deferred commissions is included in sales and marketing expense in the consolidated statements of operations . stock-based compensation compensation expense related to stock-based transactions , including employee , consultant and non-employee director stock option awards , is measured and recognized in the financial statements based on fair value . the fair value of each option award is estimated on the grant date using the black-scholes option-pricing model . the stock-based compensation expense , net of forfeitures , is recognized

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liquidity and capital resources replace_table_token_11_th 40 as of december 31 , 2014 , our principal sources of liquidity were cash , cash equivalents and marketable securities totaling $ 198.7 million , which were held for working capital purposes . our cash , cash equivalents and marketable securities are comprised primarily of u.s. agency obligations , u.s. treasury securities and money market funds . since our inception , we have financed our operations primarily through sales of equity securities and to a lesser extent , payments from our customers . we believe that our existing cash , cash equivalents and marketable securities will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months . our future capital requirements will depend on many factors including our growth rate , subscription renewal activity , the timing and extent of spending to support development efforts , our expansion of sales and marketing activities , the introduction of new and enhanced services offerings and the continuing market acceptance of our cloud-based applications . we may in the future enter into arrangements to acquire or invest in complementary businesses , services and technologies and intellectual property rights . we may be required to seek additional equity or debt financing . in the event that additional financing is required from outside sources , we may not be able to raise it on terms acceptable to us or at all . if we are unable to raise additional capital when desired , our business , operating results and financial condition would be adversely affected . operating activities for the year ended december 31 , 2014 , cash used in operating activities was $ 54.6 million .

we maintain control of the physical use of the property under lease if we serve as the general contractor for the tenant . rental revenue is recognized subject to management 's evaluation of tenant credit risk . the extended collection period for accrued straight-line rental revenue along with our evaluation of tenant credit risk may result in the non-recognition of all or a portion of straight-line rental revenue until the collection of such revenue is reasonably assured . general contracting and real estate services revenues we recognize revenue on construction contracts using the percentage-of-completion method . using this method , we recognize revenue and an estimated profit as construction contract costs are incurred based on the proportion of incurred costs to total estimated costs under the contract . provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined . changes in job performance , job conditions , and estimated profitability , including those arising from contract penalty provisions and final contract settlements , may result in revisions to costs and income and are recognized in the period in which they are determined . we include profit incentives in revenues when their realization is probable and the amount can be reasonably estimated . general contracting and real estate services revenue is recognized subject to management 's evaluation of customer credit risk . operating property acquisitions in connection with operating property acquisitions , we identify and recognize all assets acquired and liabilities assumed at their estimated fair values as of the acquisition date . the purchase price allocations to tangible assets , such as land , site improvements and buildings and improvements are presented within income producing property in the consolidated balance sheets and depreciated over their estimated useful lives . acquired lease intangibles are presented within other assets and liabilities in the consolidated balance sheets and amortized over their respective lease terms . the company amortizes in-place lease assets as depreciation and amortization expense on a straight-line basis over the remaining term of the related leases . we amortize above-market lease assets as reductions to rental revenues on a straight-line basis over the remaining term of the related leases . we amortize below-market lease liabilities as increases to rental revenues on a straight-line basis over the remaining term of the related leases . we amortize below-market ground lease assets as increases to rental expenses on a straight-line basis over the remaining term of the related leases . prior to october 1 , 2016 , we expensed all costs incurred related to operating property acquisitions . on october 1 , 2016 , we adopted newly issued accounting guidance that allows capitalization of costs related to operating property acquisitions . we value land based on a market approach , looking to recent sales of similar properties , adjusting for differences due to location , the state of entitlement as well as the shape and size of the parcel . improvements to land are valued using a replacement cost approach . the approach applies industry standard replacement costs adjusted for geographic specific considerations and reduced by estimated depreciation . the value of buildings acquired is estimated using the replacement cost 50 approach , assuming the buildings were vacant at acquisition . the replacement cost approach considers the composition of the structures acquired , adjusted for an estimate of depreciation . the estimate of depreciation is made considering industry standard information and depreciation curves for the identified asset classes . the value of acquired lease intangibles considers the estimated cost of leasing the properties as if the acquired buildings were vacant , as well as the value of the current leases relative to market-rate leases . the in-place lease value is determined using an estimated total lease-up time and lost rental revenues during such time . the value of current leases relative to market-rate leases is based on market rents obtained for market comparables . given the significance of unobservable inputs used in the valuation of acquired real estate assets , we classify them as level 3 inputs in the fair value hierarchy . we value debt assumed in connection with operating property acquisitions based on a discounted cash flow analysis of the expected cash flows of the debt . such analysis considers the contractual terms of the debt , including the period to maturity , and uses observable market-based inputs , including interest rate information as of the acquisition date . we also consider credit valuation adjustments for potential nonperformance risk . we classify the inputs used to value debt assumed in connection with operating property acquisitions as level 2 inputs in the fair value hierarchy as they are predominantly observable and market-based . real estate project costs we capitalize direct and certain indirect costs clearly associated with the development , redevelopment , construction , leasing or expansion of our real estate assets . capitalized project costs include direct material , labor , subcontract costs , real estate taxes , insurance , utilities , ground rent , interest on borrowing obligations and salaries and related personnel costs . we capitalize direct and indirect project costs associated with the initial construction or redevelopment of a property up to the time the property is substantially complete and ready for its intended use . we believe the completion of the building shell is the proper basis for determining substantial completion of initial construction . we also capitalize direct and indirect costs , including interest costs , on vacant space during extended lease-up periods after construction of the building shell has been completed if costs are being incurred to prepare the vacant space for its intended use . if costs and activities incurred to prepare the vacant space for its intended use cease , then cost capitalization is also discontinued until such activities are resumed . once necessary work has been completed on a vacant space , project costs are no longer capitalized . story_separator_special_tag multifamily real estate taxes increased because of the reassessment of encore apartments , the cosmopolitan and the delivery of johns hopkins village in august 2016. real estate taxes increased $ 2.0 million during the year ended december 31 , 2015 compared to the year ended december 31 , 2014 . office real estate taxes increased primarily because of the full year operation of 4525 main street . 58 retail real estate taxes increased because of property acquisitions and new real estate placed into service . multifamily real estate taxes increased because of the reassessment of encore apartments . general contracting and real estate services expenses . general contracting and real estate services expenses for the years ended december 31 , 2016 and 2015 decreased $ 12.0 million and increased $ 66.6 million compared to the respective prior years , because of lower volume on our construction contracts , primarily due to the completion of the exelon construction project in 2016. depreciation and amortization . depreciation and amortization for the year ended december 31 , 2016 increased $ 12.2 million compared to the year ended december 31 , 2015 . the increase was attributable to property acquisitions and new real estate placed into service . depreciation and amortization for the year ended december 31 , 2015 increased $ 5.6 million compared to the year ended december 31 , 2014 . the increase was attributable to property acquisitions and new real estate placed into service . general and administrative expenses . general and administrative expenses for the years ended december 31 , 2016 and 2015 increased $ 1.2 million and $ 0.7 million , respectively , compared to the respective prior years , because of higher regulatory and compliance costs as well as higher compensation and benefit costs from increased employee headcount . acquisition , development and other pursuit costs . during the year ended december 31 , 2016 , we recognized $ 1.6 million of costs primarily attributable to our acquisitions of an 11-property retail portfolio , southgate square and southshore shops . we adopted new accounting guidance on october 1 , 2016 which allowed us to capitalize $ 0.7 million in costs related to the acquisitions of renaissance square and columbus village ii . during the year ended december 31 , 2015 , we recognized $ 1.9 million of costs primarily attributable to our acquisitions of perry hall marketplace , stone house square , socastee commons , columbus village , providence plaza and an 11-property retail portfolio . during the year ended december 31 , 2014 , we recognized $ 0.2 million of costs related primarily to our acquisition of dimmock square . impairment charges . impairment charges during the year ended december 31 , 2016 were $ 0.4 million , primarily related to tenants who vacated prior to their lease expiration . impairment charges during the years ended december 31 , 2015 and 2014 were nominal . interest income . interest income is attributable to our investment in the annapolis junction and point street apartments projects through our loans to the respective mezzanine borrowers . as of december 31 , 2016 , we had funded $ 59.5 million through our mezzanine loan program . interest expense . interest expense for the year ended december 31 , 2016 increased $ 3.1 million compared to the year ended december 31 , 2015 because of new real estate placed into service , increased borrowing on our credit facility and additional debt assumed in connection with operating property acquisitions . interest expense for the year ended december 31 , 2015 increased $ 2.7 million compared to the year ended december 31 , 2014 because of new real estate placed into service and additional debt assumed in connection with operating property acquisitions , in addition to rising interest rates . loss on extinguishment of debt . during the year ended december 31 , 2016 , we recognized a $ 0.1 million loss on extinguishment of debt representing the unamortized debt issuance costs associated with our refinancing of the mortgages secured by 249 central park retail , south retail , fountain plaza , 4525 main street and encore apartments . during the year ended december 31 , 2015 , we recognized a $ 0.5 million loss on extinguishment of debt representing the unamortized debt issuance costs associated with our refinancing of the mortgage secured by smith 's landing as well as our repayment of the whetstone apartments and oceaneering construction loans . gain on real estate dispositions and acquisitions . during the year ended december 31 , 2016 , we recognized gains on real estate acquisitions of $ 30.5 million compared to $ 18.4 million for the year ended december 31 , 2015 . the 2016 gains consisted of a $ 26.2 million gain on the sale of richmond tower , $ 3.8 million gain on oyster point and a $ 0.4 million gain on the newport news economic development authority building . during the year ended december 31 , 2015 , we recognized gains on real estate dispositions of $ 18.4 million compared to $ 2.2 million of gains on real estate dispositions for the year ended december 31 , 2014 . during the year ended december 31 , 2015 , we recognized a $ 6.2 million gain on our sale of the sentara williamsburg medical office building , a $ 7.2 million gain on our sale of whetstone apartments and a $ 5.0 million gain on our sale of the oceaneering building . on november 20 , 2014 , we completed the sale of the virginia natural gas office building and recognized a gain on disposition of $ 2.2 million . 59 change in fair value of interest rate derivatives . during the year ended december 31 , 2016 , we recognized losses on changes in fair value of interest rate derivatives of $ 0.9 million , compared to $ 0.2 million for the year ended december 31 , 2015. the increase is

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liquidity and capital resources overview we believe our primary short-term liquidity requirements consist of general contractor expenses , operating expenses and other expenditures associated with our properties , including tenant improvements , leasing commissions and leasing incentives , dividend payments to our stockholders required to maintain our reit qualification , debt service , capital expenditures , new real estate development projects and strategic acquisitions . we expect to meet our short-term liquidity requirements through net cash provided by operations , reserves established from existing cash , borrowings under construction loans to fund new real estate development and construction and borrowings available under our credit facility and proceeds from the sale of common stock through our 2016 at-the-market continuous equity offering program ( “ 2016 atm equity offering program ” ) . our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at or prior to maturity , general contracting expenses , property development and acquisitions , tenant improvements and capital improvements . we expect to meet our long-term liquidity requirements with net cash from operations , long-term secured and unsecured indebtedness and the issuance of equity and debt securities . we also may fund property development and acquisitions and capital improvements using our credit facility pending long-term financing . as of december 31 , 2016 , we had unrestricted cash and cash equivalents of $ 21.9 million and restricted cash in escrow of $ 3.3 million available for both current liquidity needs as well as development activities . as of december 31 , 2016 , we had $ 43.0 million available under our credit facility and $ 19.1 million available for future issuance under our 2016 atm equity offering program to meet our short-term liquidity requirements . on february 1 , 2017 , we increased the borrowings under the senior unsecured term loan facility to $ 125.0 million and increased the total capacity of the senior unsecured credit facility to $ 275.0 million , pursuant to the accordion feature of the credit facility .

million , or a $ 1.75 loss per diluted share . our net loss from continuing operations in the year ended december 31 , 2013 was entirely due to a deferred tax valuation allowance and a trade names impairment charge recorded in the fourth quarter of 2013. see footnote 12 - income taxes , to the consolidated financial statements . during 2013 , we generated $ 8.7 million in cash flow from operations and received net cash of $ 45.7 million from the sale of our clinical trial services business , which was used , in part , to reduce our total debt by $ 25.3 million and to invest in the acquisition of the assets of on assignment 's allied healthcare staffing division . we ended the year with total debt of $ 8.6 million and $ 8.1 million of cash , resulting in a ratio of debt , net of cash , to total capitalization of 0.3 % . in general , we evaluate our financial condition and operating results by revenue , contribution income ( see segment information ) , and net ( loss ) income . we also use measurement of our cash flow generation and operating and leverage ratios to help us assess our financial condition . in addition , we monitor several key volume and profitability indicators such as number of orders , contract bookings , number of ftes , days filled and price . nurse and allied staffing our nurse and allied staffing segment provides traditional staffing , including temporary and permanent placement of travel nurses and allied professionals , and branch based local nurses and allied staffing . we provide flexible workforce solutions to the healthcare market through diversified offerings meeting the special needs of each client . our services include : msp , workforce assessment , internal resource pool consulting and development , emr transition staffing , recruitment process outsourcing services , and traditional staffing . our clients include : public and private acute-care and non-acute care hospitals , government facilities , schools , outpatient clinics , ambulatory care facilities , retailers , and many other healthcare providers . the majority of our revenue is generated from staffing rns on long-term contract assignments ( typically 13-weeks in length ) at hospitals and health systems using the following brands : cross country travcorps , novapro travel , medstaff travel , cru48 travel , and assignment america . the cru48 travel brand is used to identify and staff travel professionals on assignment who are pre-qualified and ready to begin assignments within one to two weeks ( as opposed to the typical lead time of four or five weeks for travel healthcare professionals ) at a hospital client which has an urgent need . additionally , we offer a short-term staffing solution of rns , licensed practical nurses , and certified nurse assistants on per diem and short-term assignments through our national network of local branch offices . we also provide travel allied health professionals on long-term contract assignments to hospitals , schools and skilled nursing facilities under the cross country travcorps brand , and we provide more than 100 specialties of allied professionals on local per diem and short-term assignments in a variety of clinical settings under our allied health group brand . our nurse and allied staffing revenue and earnings are impacted by the relative supply of nurse and allied healthcare professionals and demand for our contract staffing services at healthcare facilities . demand for our nurse and allied staffing services is primarily influenced by the strength or weakness of national acute care hospital admissions relative to expectations and the volume of patients at other medical facilities , as well as labor market dynamics that influence the number of hours 25 worked by healthcare professionals . we believe demand for travel nurse staffing services will be favorably impacted in the long-term by an aging population , along with the anticipated increases in utilization of healthcare services resulting from the patient protection and affordable care act ( aca ) , and an increasing shortage of nurses . we rely significantly on our ability to recruit and retain nurses and other healthcare professionals who possess the skills , experience and , as required , licensure necessary to meet the specified requirements of our clients . shortages of qualified nurses and other healthcare professionals could limit our ability to fill open orders and grow our revenue and net income . in general , we believe nurses are more willing to seek travel assignments during relatively high levels of demand for contract employment , and conversely , are more reluctant to seek travel assignments during and immediately following periods of weak demand for contract employment . typically , as admissions increase for our hospital customers , temporary employees are often added before full-time employees are hired . as admissions decline , clients tend to reduce their use of temporary employees before undertaking layoffs of their staff employees . in general , we evaluate the nurse and allied staffing business segment 's financial condition and operating results by revenue and contribution income ( see segment information ) . in addition , we monitor several key volume and profitability indicators such as number of open orders , contract bookings , number of ftes and bill rate per hour of service provided . we market our nurse and allied staffing services primarily to acute care hospitals and health systems , and provide our clients with staffing solutions through our cross country staffing ( ccs ) and allied health group brands . our clients provide health and medical services across a broad range of clinical settings in the for-profit and not-for-profit sectors throughout the u.s. , including acute care hospitals , physician practice groups , skilled nursing facilities , nursing homes and sports medicine clinics , and , to a lesser degree , and non-clinical settings such as home care and schools . ccs is our largest brand . story_separator_special_tag in accordance with the intangibles-goodwill and other topic of the fasb asc , goodwill and certain intangible assets with indefinite lives ( such as trade names ) are not subject to amortization ; instead , we review these assets for impairment annually , at december 31 , and whenever circumstances occur indicating impairment , with any related losses recognized in earnings . other identifiable intangible assets , which are subject to amortization , are being amortized using the straight-line method over their estimated useful lives ranging from 5 to 16 years . the impairment or disposal of long-lived asset subsection of the property , plant and equipment topic of the fasb asc , requires us to test the recoverability of long-lived assets , including identifiable intangible assets with definite lives , whenever events or changes in circumstances indicate that the carrying amount may not be recoverable . in testing for potential impairment , if the carrying value of the asset group exceeds the expected undiscounted cash flows , we must then determine the amount by which the fair value of those assets exceeds the carrying value and determine the amount of impairment , if any . see critical accounting principles and estimates and our consolidated financial statements note 4 – goodwill and other identifiable intangible assets , for a detailed description of the results of our impairment reviews in 2013 , 2012 and 2011 that resulted in total impairment charges for continuing operations of $ 6.4 million in the fourth quarter of 2013 , $ 18.7 million in the second quarter of 2012 and total impairment charges for discontinued operations of $ 35.4 million in our third and fourth quarter of 2012 . 29 results of operations the following table summarizes , for the periods indicated , selected consolidated statements of operations data expressed as a percentage of revenue . our historical results of operations are not necessarily indicative of future operating results . replace_table_token_3_th segment information in accordance with the segment reporting topic of the fasb asc , we report three business segments – nurse and allied staffing , physician staffing , and other human capital management services , described below . nurse and allied staffing - the nurse and allied staffing business segment provides travel nurse and allied staffing services and per diem nurse services primarily to acute care hospitals . nurse and allied staffing services are marketed to public and private healthcare and for-profit and not-for-profit facilities throughout the u.s. we aggregate our cross country staffing and allied health group brands that we market to our customers in this business segment . physician staffing – the physician staffing business segment provides multi-specialty locum tenens services to the healthcare industry throughout the u.s. other human capital management services - the other human capital management services business segment includes the combined results of our education and training and retained search businesses that both have operations within the u.s. 30 information on operating segments and reconciliation to ( loss ) income from operations for the periods indicated are as follows : replace_table_token_4_th _ ( a ) we define contribution income as ( loss ) income from operations before depreciation , amortization , acquisition costs , restructuring costs , legal settlement charges , impairment charges , and other corporate expenses not specifically identified to a reporting segment . contribution income is a measure used by management to assess operations and is provided in accordance with the segment reporting topic of the fasb asc . ( b ) in 2013 , we refined our methodology for allocating certain corporate overhead expenses to its nurse and allied staffing segment expenses to more accurately reflect this segment 's profitability . prior year information has been reclassified to conform to current year presentation . ( c ) during the year ended december 31 , 2012 , we recognized pretax impairment charges in our continuing operations of $ 18.7 million . refer to discussion in note 4-goodwill , trade names and other identifiable intangible assets . comparison of results for the year ended december 31 , 2013 compared to the year ended december 31 , 2012 revenue from services revenue from services decreased $ 4.3 million , or 1.0 % , to $ 438.3 million for the year ended december 31 , 2013 , as compared to $ 442.6 million for the year ended december 31 , 2012 . the decrease was due to lower revenue from our other human capital management services and physician staffing businesses , partially offset by an increase in revenue from our nurse and allied staffing business segment . nurse and allied staffing revenue from our nurse and allied staffing business segment increased $ 1.2 million , or 0.4 % to $ 279.0 million for the year ended december 31 , 2013 , from $ 277.8 million for the year ended december 31 , 2012 . excluding the results of the acquisition , revenue in our nurse and allied staffing business segment decreased $ 2.2 million , primarily due to lower staffing volume , partially offset by higher average bill rates . 31 the average number of nurse and allied staffing ftes on contract during the year ended december 31 , 2013 , decreased 1.1 % from the year ended december 31 , 2012 . average nurse and allied staffing revenue per fte increased approximately 1.9 % in the year ended december 31 , 2013 compared to the year ended december 31 , 2012 . physician staffing revenue from our physician staffing business decreased $ 2.2 million , or 1.8 % to $ 121.4 million for the year ended december 31 , 2013 , compared to $ 123.5 million for the year ended december 31 , 2012 . the decrease in revenue reflects lower volume , partially offset by higher bill rates . physician staffing days filled decreased 5.5 % to 80,294 in the year ended december 31 , 2013 , compared to 85,001 in the year ended december 31 ,

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cash flow comparisons year ended december 31 , 2013 compared to year ended december 31 , 2012 net cash provided by operating activities during the year ended december 31 , 2013 was $ 8.7 million compared to $ 10.1 million during the year ended december 31 , 2012. during the years ended december 31 , 2013 and 2012 , net cash provided by operating activities included $ 0.4 million and $ 3.8 million , respectively , of cash provided by discontinued operations . the decrease in cash flow from operations is primarily due to timing of payments and receipts in the year ended december 31 , 2013. cash flow from operations in the year ended december 31 , 2013 was reduced somewhat due to the acquisition in early december of on assignment 's allied healthcare staffing division , as the company did not buy their receivables . investing activities provided a net of $ 15.2 million in the year ended december 31 , 2013 compared to $ 0.2 million used in the year ended december 31 , 2012. during the year ended december 31 , 2013 , we sold the clinical trial service business for net proceeds of $ 45.7 million . in addition , we used $ 28.7 million during the year ended december 31 , 2013 to acquire the allied health business of on assignment . we used $ 1.8 million and $ 2.2 million , respectively for capital expenditures during the years ended december 31 , 2013 and 2012. in addition , other investing activities provided $ 2.7 million in year ended december 31 , 2012 related to the liquidation of our foreign long-term and short-term cash investments .

the assets and liabilities of biofuel have been brought forward at their book value and no goodwill has been recognized in connection with the transaction . as a result of the transaction , green brick changed its business direction and is now in the real estate industry . the financial statements set forth in this annual report on form 10-k for all periods prior to the reverse recapitalization are the historical financial statements of jbgl , and have been retroactively restated to give effect to the transaction . 30 overview of the business we are a real estate operator involved in the purchase and development of land for residential use , construction lending and home building operations . we are engaged in all aspects of the homebuilding process , including land acquisition and development , entitlements , design , construction , marketing and sales of various residential projects in master planned communities primarily in the high growth metropolitan areas of dallas and fort worth , texas ( “ dfw ” ) and atlanta , georgia ( “ atlanta ” ) . capital was formed in 2008 and builder finance was formed in 2010. we currently own or control approximately 4,200 home sites in prime locations in the dfw and atlanta markets . we consider prime locations to be supply constrained lots with high housing demand and where much of the surrounding property has already been developed . management believes that we are a leading land developer in our markets . we develop lots for both public builders and large private builders . we also own 50 % controlling interests in several builders and provide construction financing for approximately 1,000 homes annually . we are an active , value-added real estate investor and developer . we formed and purchased 50 % of the providence group llc ( “ tpg ” ) in 2011 and formed and purchased 50 % of cb jeni homes of dfw llc ( “ cb jeni ” ) in 2012. in 2013 , we formed and purchased 50 % of southgate homes ( “ southgate ” ) and in 2012 we formed centre living homes llc ( “ centre living ” ) . we have voting control over these builders . tpg focuses on the construction and sale of single family homes and townhomes in the atlanta market and cb jeni does the same in the dfw market . southgate is focused on the development of semi-custom homes and build-on-your-own-lot custom homes in the dfw market . centre living focuses on homes and luxury townhomes , in premier centrally located neighborhoods in the dfw market . definitions in the following discussion , “ backlog ” refers to homes under sales contracts that have not yet closed at the end of the relevant period , “ cancellation rate ” refers to sales contracts canceled divided by sales contracts executed during the relevant period , “ net new home orders ” refers to new home sales contracts reduced by the number of sales contracts canceled during the relevant period , and “ overall absorption rate ” refers to the rate at which net new home orders are contracted per selling community during the relevant period . sales contracts relating to homes in backlog may be canceled by the prospective purchaser for a number of reasons , such as the prospective purchaser 's inability to obtain suitable mortgage financing . upon a cancellation , the escrow deposit may be returned to the prospective purchaser ( other than with respect to certain design-related deposits , which we retain ) . accordingly , backlog may not be indicative of our future revenue . overview and outlook the following are our key operating metrics for the year ended december 31 , 2014 as compared to the year ended december 31 , 2013 : home deliveries increased by 5.6 % , home sales revenue increased by 19.0 % , average selling prices increased by 12.7 % , backlog units increased by 14.8 % , backlog units value increased by 34.0 % , average sales price of homes in backlog increased by 16.7 % , while net new home orders decreased by 6.7 % . the increase in the average sales price of homes in backlog is the result of changes in product mix related to higher priced single family homes over lower priced townhomes contracted for sale during the period and local market appreciation . during the year ended december 31 , 2014 , homes in the dfw and atlanta markets appreciated by 7.7 % and 4.9 % , respectively ( source : s & p/case-shiller 20-city composite home price index , november 2014 ) . during the year ended december 31 , 2014 , the housing market continued to show signs of improvement driven by rising consumer confidence , lower interest rates , high affordability metrics , and a reduction in home inventory levels . our key operating metrics improved during the year ended december 31 , 2013 as compared to the same period in 2012 primarily due to the acquisition of cb jeni in april 2012 : net new home orders increased by 80.4 % , home deliveries increased by 205.5 % , home sales revenue increased by 236.5 % , average selling prices increased by 10.1 % , backlog units increased by 100.0 % , and backlog units value increased by 129.9 % . our two primary markets , dfw and atlanta , have shown significant housing market recovery . we believe the housing market recovery is sustainable , and that we operate in two of the most desirable housing markets in the nation . among the 12 largest metropolitan areas in the country , the dfw metropolitan area ranked second in the rate of job growth and third in the number of jobs added from october 2013 to october 2014 ( source : us bureau of labor statistics , october 2014 ) . story_separator_special_tag replace_table_token_16_th 36 land development selling , general and administrative expense for the year ended december 31 , 2014 for land development was $ 2.4 million , compared to $ 0.8 million for the year ended december 31 , 2013 , an increase of 198.3 % . the increase was primarily attributable to costs incurred in connection with the transaction and growth in our land development business which resulted in additional expenditures . these additional expenditures include home owners association dues , subdivision maintenance , property taxes and rent expense . builder operations selling , general and administrative expense for the year ended december 31 , 2014 for builder operations was $ 7.7 million , compared to $ 5.8 million for the year ended december 31 , 2013 , an increase of 32.2 % . the increase was primarily attributable to increases in expenditures to support builder operations in anticipation of future growth in our business , and costs incurred in connection with the transaction . builder operations expenditures include community costs , such as , non-capitalized property taxes , rent expenses , and advertising and marketing expenses . selling , general and administrative expense as a percentage of revenue increased 11.8 % due to front end expenses incurred on new communities currently under development , scheduled to open in 2015 , that did not produce any revenues during 2014. interest expense interest expense increased $ 1.1 million , or 342.2 % , to $ 1.4 million for the year ended december 31 , 2014 , from $ 0.3 million for the year ended december 31 , 2013 . the increase was due primarily to higher average balances on our line of credit throughout the year ended december 31 , 2014 . on october 13 , 2013 , we increased the size of our revolving credit facility from $ 8.0 million to $ 25.0 million . interest and fees income interest and fees income decreased $ 2.2 million , or 89.4 % , to $ 0.3 million for the year ended december 31 , 2014 , from $ 2.5 million for the year ended december 31 , 2013 . the decrease was due to the decrease in notes receivable outstanding from $ 7.6 million as of december 31 , 2013 to $ 0.0 million as of december 31 , 2014 . other income , net other income , net , decreased $ 1.2 million , or 57.4 % , to $ 0.9 million for the year ended december 31 , 2014 , from $ 2.1 million for the year ended december 31 , 2013 . the decrease in other income , net was primarily due to a decrease in profit participation on real estate projects of approximately $ 0.6 million driven by lower notes receivable , an increase in depreciation expense of approximately $ 0.4 million due to an increase in property and equipment , and an increase in various other income ( expense ) . income tax ( benefit ) provision income tax benefit increased $ 25.2 million , or 7,700.3 % , for the year ended december 31 , 2014 , from an expense of $ 0.3 million for the year ended december 31 , 2013 . the increase in income tax benefit is due to primarily to the recognition of a $ 26.6 million income tax benefit relating to the change in tax status of the jbgl entities , from pass through entities to taxable entities , relating primarily to the tax attributes that arose from the transaction . as of december 31 , 2014 , we have federal net operating loss carryforwards of approximately $ 178.8 million , which will begin to expire beginning with the year ending december 31 , 2029. our ability to utilize our net operating loss carryforwards depends on the amount of taxable income we generate in future periods . based on our historical taxable income results through december 31 , 2014 , as well as forecasted income , management expects that the company will generate sufficient taxable income to utilize all of the federal net operating loss carryforwards before they expire . the company also has approximately $ 21.6 million of gross state net operating loss carryforwards having varying periods of expiration which the company believes on a more-likely-than-not basis , will not be utilized . the state loss carryforwards and related $ 1.2 million tax-effected valuation allowance were previously recorded by biofuel . the transaction had no effect on the state loss carryforward amount , the related valuation allowance or income tax expense . the company maintains a deferred income tax asset in the amount of $ 1.2 million for the state loss carryforwards and a related valuation allowance in the amount of $ 1.2 million . in the company 's assessment of the need for a valuation allowance , both positive and negative information was considered , including any available income tax planning . as of december 31 , 2014 , we had deferred tax assets of $ 89.2 million , which was net of a valuation allowance in the amount of $ 1.2 million relating to state loss carryforwards . the deferred tax assets are primarily related to $ 62.6 million for federal net operating loss carryforwards and $ 26.1 million for basis in partnerships . we evaluate the appropriateness of a 37 valuation allowance in future periods based on the consideration of all available evidence , including the generation of taxable income , using the more-likely-than-not standard . a valuation allowance is required to reduce our deferred tax assets if it is determined that it is more-likely-than-not that all or some portion of such assets will not be realized due to the lack of sufficient taxable income . as of december 31 , 2014 , management concluded that it was more-likely-than-not that the net deferred tax assets , except for the state loss carryforwards noted above , will be realized in accordance with u.s. gaap principles . accordingly

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cash flows the following summarizes our primary sources and uses of cash in the periods presented : cash flows — year ended december 31 , 2014 to year ended december 31 , 2013 for the year ended december 31 , 2014 as compared to the year ended december 31 , 2013 , the comparison of cash flows is as follows : operating activities . net cash provided by operating activities for the year ended december 31 , 2014 was $ 2.6 million , compared to net cash used of $ 49.3 million during the year ended december 31 , 2013 . the change was primarily attributable to changes in working capital associated with inventory , as inventory increased by 19.9 % for the year ended december 31 , 2014 compared to an increase in inventory of 72.6 % during the year ended december 31 , 2013 and an increase in net income of approximately $ 16.7 million primarily related to a $ 26.6 million income tax benefit due to jbgl 's change in partnership tax status which was triggered by the transaction , and an increase in gross profit due to increase of 31 homes delivered for the year ended december 31 , 2014 , as our builder operations continued to experience revenue growth , and an increase of an additional 77 lot sales for the year ended december 31 , 2014 , partially offset by ( i ) an increase in selling , general and administrative expense of $ 3.5 million due to increase in community costs , such as , non-capitalized property taxes , rent expenses , and advertising and marketing expenses in anticipation of future growth in our business , ( ii ) an increase in salary expense and management fees expense - related party of $ 4.9 million due to increase in employee headcount and associated costs of benefits to support the growth in our business and ( iii ) an increase in interest expense of $ 1.1 million attributable to higher average balances on our line of credit . investing activities .

% of our issued and outstanding common stock immediately prior to the closing date , at a per share value of $ 2.5183 , or $ 2,214,175 in the aggregate . we issued the remaining $ 7,785,825 of the approximately $ 10 million agreed upon consideration to fcop in the form of 123,668 shares of newly designated non-voting series a convertible preferred stock . each share of the series a convertible preferred stock was originally convertible into 25 shares of common stock , subject to the satisfaction of certain conditions , including stockholder approval of such conversion , which was obtained on october 12 , 2017. these shares were subsequently converted into common stock . the contribution agreement contemplated that additional contributions would be made prior to december 31 , 2017 if fcop completed its purchase of additional properties ; however , fcop failed to acquire those additional properties before the december 31 , 2017 deadline and , therefore , only the closing described above was completed . we elected to early adopt asu 2017-01 , business combinations ( topic 805 ) clarifying the definition of a business . accordingly , the determination of whether the transaction represents a business combination was evaluated by applying asu 2017-01 guidance . we have determined that the group of assets assumed do not include ( and also , none of them on a stand-alone basis ) include , an input and a substantive process that together significantly contribute to the ability to create output and thus it was determined that the contribution represents an acquisition of assets rather than a business combination . accordingly , the total sum of the fair value of consideration given ( i.e . the fair value of the equity interests issued ) together with the transaction costs , was allocated to the individual assets acquired and liabilities assumed based on their relative fair values at the date of acquisition . such allocation did not give rise to goodwill . see item 1 “ business—contribution transaction ” for more information . recent developments gadsden transaction on march 13 , 2019 , we entered into the gadsden purchase agreement . see item 1 “ business—gadsden transaction ” for details regarding this transaction and related termination of the merger agreement . purchase of roseville series a preferred units on january 14 , 2019 , we purchased 1,000 series a preferred units of gadsden roseville , llc , a delaware limited liability company , or gadsden roseville , for a purchase price of $ 350,000 , in accordance with an amended and restated limited liability company agreement of roseville , or the llc agreement , entered into among gadsden roseville , gadsden realty investments i , llc , a wholly owned subsidiary of gadsden , or gadsden investments , and our company , on january 14 , 2019. gadsden investments , the other member of gadsden roseville , owns 1,000 common units . gadsden roseville is the sole owner . see the roseville property described under item 1 “ business ” . the series a preferred units entitle us to priority distribution rights . in accordance with the llc agreement , net cash flow ( as defined in the llc agreement ) is distributed among the members as follows : ( i ) first , to our company , an amount equal to the series a preferred return then accrued and payable ; ( ii ) second , to our company , an amount equal to its unreturned capital ; and ( iii ) then , to gadsden investments . “ series a preferred return ” means an amount equal to a return that accrued on the capital contributions of our company at 15 % per annum compounded annually ; provided , however , that if we have not received an amount equal to our unreturned capital on or prior to may 14 , 2019 , then from and after such date , the series a preferred return shall accrue on our capital contributions at 25 % per annum compounded annually . “ unreturned capital ” means an amount equal to our aggregate capital contributions less the aggregate distributions made to us . roseville is managed by two managers - one designated by us and one designated by gadsden investments . the current managers are michael r. stewart , our chief executive officer , and john hartman , gadsden 's chief executive officer . except as otherwise provided in the llc agreement , actions by gadsden roseville require the unanimous consent of the two managers . 26 going concern the accompanying financial statements have been prepared assuming we will continue as a going concern , which contemplates the realization of assets and satisfaction of liabilities in the normal course of business . as of december 31 , 2018 , we had an accumulated deficit of approximately $ 139.7 million and incurred an operating loss for the year ended december 31 , 2018 of approximately $ 5.6 million . subsequent to the sale of our last significant business unit , we have dedicated most of our financial resources to general and administrative expenses associated with its ongoing business of real estate development and asset management . cash and cash equivalents as of december 31 , 2018 were approximately $ 1.8 million . we have historically financed our activities with cash from operations , the private placement of equity and debt securities , borrowings under lines of credit and , in the most recent periods , with the sale of certain assets and business units . we will be required to obtain additional liquidity resources in order to support our ongoing operations . story_separator_special_tag we accounted for the aforesaid option according to the provisions of asc 480 , “ distinguishing liabilities from equity ” since the option is considered freestanding , we believe it is legally detachable and separately exercisable . in addition , the option was exercisable for convertible preferred stock which was subject to possible redemption at the option of the holder . we classified the option as non-current liability , remeasured at fair value each reporting period until the option will be exercised or expired , with changes in the fair values being recognized in our statement of comprehensive loss as financial income or expense . the fair value of the option was estimated at the initial date and december 31 , 2017 by using hybrid method that includes scenario of conversion and scenario liquidation and the black-scholes option pricing model . in the first scenario , the redeemable convertible preferred stock price applied in the model was assumed based on the as-converted price on the date of estimation . expected volatility was estimated by using a group of peers in the real estate development , homebuilding and income-producing properties sectors , and applying a 75 % percentile ranking based on our total capitalization . in the second scenario , the option was estimated based on the value of the option in a proposed liquidation scenario . a probability weighting was applied to determine the expected value of the option . during the year ended december 31 , 2018 , we recorded income from revaluation of the option to purchase redeemable convertible b preferred stock in total amount of approximately $ 3.29 million . income taxes . as part of the process of preparing our consolidated financial statements , we are required to estimate our income taxes in each of the jurisdictions in which we operate . this process requires us to estimate our actual current tax exposure and make an assessment of temporary differences resulting from differing treatment of items , for tax and accounting purposes . these differences result in deferred tax assets and liabilities , which are included within our consolidated balance sheet . we must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and , to the extent we believe that recovery is more likely than not , we establish a valuation allowance . our assessment for the year ended december 31 , 2018 , is that a 100 % valuation allowance is still required . to the extent we establish a valuation allowance or increase this allowance in a period , we must include an expense within the tax provision in the consolidated statement of operations . significant management judgment is required in determining our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets . in the event that we generate taxable income in the jurisdictions in which we operate and in which we have net operating loss carry-forwards that we can utilize to offset all or part of this taxable income , we may be required to adjust our valuation allowance . on december 22 , 2017 , the u.s. government enacted comprehensive tax legislation commonly referred to as the tax cuts and jobs act , or the tax act . the tax act makes broad and complex changes to the u.s. tax code , including , but not limited to , reducing the u.s. federal corporate tax rate from 35 % to 21 % ; eliminating the corporate alternative minimum tax , or amt , and changing how existing amt credits can be realized ; creating a new limitation on deductible interest expense ; changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after december 31 , 2017 ; and changing limitations on the deductibility of certain executive compensation . in december 2017 , the sec issued staff accounting bulletin no . 118 , or sab 118 , which addresses situations where the accounting is incomplete for the income tax effects of the act . sab 118 directs taxpayers to consider the impact of the tax act as “ provisional ” when a company does not have the necessary information available , prepared or analyzed ( including computations ) to finalize the accounting for the change in tax law . companies were provided a measurement period of up to one year to obtain , prepare , and analyze information necessary to finalize the accounting for provisional amounts or amounts that can not be estimated as of december 31 , 2017. with regards to the tax act impact on the tax provision as it relates to our company for period year-ending december 31 , 2017 , we have recognized the provisional impact of tax reform related to the revaluation of deferred tax assets and liabilities from 35 % to 21 % of $ 17.2 million tax expense , which was offset by a reduction in the valuation allowance . in the years ended december 31 , 2018 and 2017 , we reported financial results for both operations and discontinued operations . asc 740-20-45 sets down the general rule for allocating income tax expense or benefit between operations and discontinued operations . the general rule requires the computation of tax expense or benefit by entity taking into consideration all items of income , expense , and tax credits . next , a computation is made taking into consideration only those items related to continuing operations . any difference is allocated to items other than continuing operations e.g . discontinued operations . under these general rules , no tax expense or benefit would be allocated to discontinued operations . 33 an exception to these rules applies under asc 740-20-45-7 where an entity has ( 1 ) a loss from continuing operations and income related to other items such as discontinued operations and ( 2 ) would not otherwise recognize a benefit for the loss

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liquidity and capital resources as of december 31 , 2018 , we had a deficit approximately $ 139.7 million and cash and cash equivalents of approximately $ 1.8 million . to date , and subsequent to the recent sale of our last significant business unit , we have dedicated most of our financial resources to general and administrative expenses . we have historically financed our activities with cash from operations , the private placement of equity and debt securities , borrowings under lines of credit and , in the most recent periods , with sale of certain assets and business units . we will be required to obtain additional liquidity resources in order to support our operations . at this time , there is no guarantee that we will be able to obtain an adequate level of financial resources required for the short and long-term support of our operations or that we will be able to obtain additional financing as needed , or meet the conditions of such financing , or that the costs of such financing may not be prohibitive . summary of cash flows the following table provides detailed information about our net cash flow for all financial statement periods presented in this report : cash flow ( in thousands ) replace_table_token_3_th net cash used in operating activities was approximately $ 2.9 million for the year ended december 31 , 2018 compared to approximately $ 9.3 million for the year ended december 31 , 2017. the primary reason for the change is the continual wind-down of the former business operations ahead of the acquisition of income-producing real estate properties . net cash used in investing activities was approximately $ 0.3 million for the year ended december 31 , 2018 compared to net cash provided by investing activities of approximately $ 6.8 million for the year ended december 31 , 2017. the primary reason for the change was the cash received from the sale of the consumer division to ictv for the year ended december 31 , 2017. net cash provided by financing activities was approximately $ 4.1 million for the year ended december 31 , 2018 compared to approximately $ 0.9 million for the year ended december 31 , 2017.

the sslp plan covers all parts , material and labor required to repair or replace participating customers ' leaking or clogged sewer lines up to an annual limit . also , in the second quarter of 2010 , the wslp plan and sslp plan were extended to include non-utility customers of artesian resource s. as of december 31 , 2014 , approximately 18,800 , or 27.1 % , of our eligible water customers signed up for the wslp plan , approximately 14,000 , or 20.2 % , of our eligible customers signed up for the sslp plan and approximately 1,000 non-customer participants signed up for either the wslp plan or sslp plan . 23 artesian development is a real estate holding company that owns properties , including land zoned for office buildings , a water treatment plant and wastewater facility , as well as property for current operations , including an office facility in sussex county , delaware . the facility consists of approximately 10,000 square feet of office space along with nearly 10,000 square feet of warehouse space . this facility allows all of our sussex county , delaware operations to be housed in one central location . artesian consulting engineers no longer offers development and architectural services to outside third parties . artesian will continue to provide design and engineering contract services through our artesian utility subsidiary . strategic direction our strategy is to significantly increase customer growth , revenues , earnings and dividends by expanding our water , wastewater and service line protection plan services across the delmarva peninsula . we remain focused on providing superior service to our customers and continuously seeking ways to improve our efficiency and performance . by providing water and wastewater services , we believe we are positioned as the primary resource for developers and communities throughout the delmarva peninsula seeking to fill both needs simultaneously . we have a proven ability to acquire and integrate high growth , reputable entities , through which we have captured additional service territories that will serve as a base for future revenue . we believe this experience presents a strong platform for further expansion and that our success to date also produces positive relationships and credibility with regulators , municipalities , developers and customers in both existing and prospective service areas . in our regulated water division , our strategy is to focus on a wide spectrum of activities , which include identifying new and dependable sources of supply , developing the wells , treatment plants and delivery systems to supply water to customers and educating customers on the wise use of water . our strategy includes focused efforts to expand in new regions added to our delaware service territory over the last 10 years . in addition , we believe growth will occur in the maryland counties on the delmarva peninsula . we plan to expand our regulated water service area in the cecil county designated growth corridor and to expand our business through the design , construction , operation , management and acquisition of additional water systems . the expansion of our exclusive franchise areas elsewhere in maryland and the award of contracts will similarly enhance our operations within the state . we believe that delaware 's generally lower cost of living in the region , availability of development sites in relatively close proximity to the atlantic ocean in sussex county , and attractive financing rates for construction and mortgages have resulted , and will continue to result , in increases to our customer base . delaware 's lower property and income tax rate make it an attractive region for new home development and retirement communities . substantial portions of delaware are currently not served by a public water system , which could also assist in an increase to our customer base as systems are added . in our regulated wastewater division , we foresee significant growth opportunities and will continue to seek strategic partnerships and relationships with developers and municipalities to complement existing agreements for the provision of wastewater service on the delmarva peninsula . artesian wastewater plans to utilize our larger regional wastewater facilities to expand service areas to new customers while transitioning our smaller treatment facilities into regional pump stations in order to gain additional efficiencies in the treatment and disposal of wastewater . we feel this will reduce operational costs at the smaller treatment facilities in the future since they will be converted from treatment and disposal plants to pump stations to assist with transitioning the flow of wastewater from one regional facility to another . the general need for increased capital investment in our water and wastewater systems is due to a combination of population growth , more protective water quality standards and aging infrastructure . our capital investment plan for the next five years includes projects for water treatment plant improvements and additions in both delaware and maryland and wastewater treatment plant improvements and additions in delaware . capital improvements are planned and budgeted to meet anticipated changes in regulations and needs for increased capacity related to projected growth . the delaware public service commission and maryland public service commission have generally recognized the operating and capital costs associated with these improvements in setting water and wastewater rates for current customers and capacity charges for new customers . in our non-regulated division , we continue pursuing opportunities to expand our contract operations . through artesian utility , we will seek to expand our contract design , engineering and construction services of water and wastewater facilities for developers , municipalities and other utilities . artesian development owns two nine-acre parcels of land , located in sussex county , delaware , which will allow for construction of a water treatment facility and wastewater treatment facility . inflation we are affected by inflation , most notably by the continually increasing costs required to maintain , improve and expand our service capability . story_separator_special_tag the decrease in 2013 followed an increase of $ 3.7 million , or 10.5 % , in 2012 , which was primarily due to an 11.13 % permanent increase in rates effective january 1 , 2012. the volume of water sold to residential customers decreased to 3,616 million gallons in 2013 compared to 3,959 million gallons in 2012 , an 8.7 % decrease , primarily the result of weather associated with the heavy precipitation experienced during 2013. the number of residential customers served increased by approximately 745 , or 1.0 % , in 2013. commercial water service revenues from commercial customers in 2013 decreased by 3.4 % , from $ 15.2 million in 2012 to $ 14.7 million in 2013 , primarily due to a decrease in water consumption . we sold 2,012 million gallons of water to commercial customers in 2013 , a slight decrease as compared to 2,118 million gallons sold in 2012. industrial water service revenues from industrial customers increased from $ 70,000 in 2012 to $ 82,000 in 2013. the volume of water sold to industrial customers increased from 8 million gallons in 2012 to 10 million gallons in 2013. government and other government and other water service revenues in 2013 increased by 3.1 % , from $ 9.2 million in 2012 to $ 9.5 million in 2013 , primarily due to an increase in consumption by re-sale customers . the volume of water sold to government and other customers increased from 645 million gallons in 2012 to 731 million gallons in 2013. other utility operating revenue other utility operating revenue , derived from contract operations , antenna leases on water tanks , finance/service charges and wastewater customer service revenues increased 2.7 % in 2013 , from $ 3.2 million in 2012 to $ 3.3 million in 2013. as a percentage of operating revenues , other utility operating revenues increased to 4.7 % from 4.5 % . the increase was primarily due to increased wastewater revenue . non-utility operating revenue non-utility operating revenue , derived from non-regulated water and wastewater operations , increased from $ 3.8 million in 2012 to $ 4.0 million in 2013. the increase was primarily due to an approximately $ 271,000 increase in water and wastewater slp plans revenue . the increase in non-utility operating revenue was partially offset by an approximately $ 92,000 decrease in artesian utility revenue , related to a decrease in contract services performed for municipalities in maryland and a decrease in design services . 29 operating expenses operating expenses , excluding depreciation and income taxes , increased $ 0.6 million , or 1.5 % , to $ 40.8 million in 2013. the components of the change in operating expenses included an increase in utility operating expenses of $ 0.4 million and an increase in property and other taxes of $ 0.2 million . the increase in utility operating expenses of $ 0.4 million , or 1.1 % , in 2013 as compared to 2012 , was primarily comprised of an increase in administration expenses , partially offset by a decrease in payroll and employee benefit costs . administration expenses increased $ 0.6 million , or 12.3 % , of which $ 0.5 million was due to increased legal costs associated with the litigation against chester water authority in regard to the proper determination of the rate charged for water purchased under contract from the chester water authority . in addition , consulting services increased primarily related to the upgrade of our customer service software . payroll and employee benefit costs decreased $ 0.2 million , or 0.8 % , primarily the result of bonuses issued to employees in 2012 not issued in 2013 , partially offset by an increase in medical benefit premiums and an increase in wages . non-utility expenses increased approximately $ 21,000 , or 1.0 % , primarily the result of increased slp plan repair costs in artesian utility , as compared to the same period in 2012. the increased repair costs are a result of increased slp plan participation . property and other taxes increased by $ 0.2 million , or 4.4 % , compared to the same period in 2012 , reflecting increases in tax rates charged for public schools in various areas where artesian holds property and an increase in utility plant subject to taxation . property taxes are assessed on land , buildings and certain utility plant , which include the footage and size of pipe , hydrants and wells primarily owned by artesian water . the ratio of operating expense , excluding depreciation and income taxes , to total operating revenues was 59.0 % for the year ended december 31 , 2013 , compared to 56.9 % for the year ended december 31 , 2012. depreciation and amortization expense increased $ 0.3 million , or 4.0 % , primarily due to continued investment in utility plant in service providing supply , treatment , storage and distribution of water . federal and state income tax expense decreased $ 1.0 million , primarily due to lower pre-tax income for the year ended december 31 , 2013 , compared to the year ended december 31 , 2012. our total effective income tax rate , or etr , for 2013 and 2012 was 40.2 % . other income , net miscellaneous income decreased $ 165,000 primarily due to a refund of assessment payments previously paid to the delaware public service commission , or depsc , received in 2012. each year public utility companies , like artesian water , are required to fund the depsc 's operations by paying an assessment based on their estimated annual gross revenues . after periodic review by the depsc , excess funds above those necessary to operate the depsc are refunded to the respective public utility company . the amount refunded to artesian in 2012 reflected an assessment that covered a 4-year period from 2007 to 2010. the amount refunded to artesian in 2013 reflects an assessment that

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liquidity and capital resources overview our primary sources of liquidity for the year ended december 31 , 2014 were $ 18.3 million provided by cash flow from operating activities , $ 3.8 million in net contributions and advances from developers and $ 1.7 million in net proceeds from the issuance of common stock . in addition , the company has a long history of paying regular quarterly dividends as approved by our board of directors using net cash from operating activities . we paid dividends totaling $ 7.5 million , $ 7.2 million and $ 6.9 million in 2014 , 2013 and 2012 , respectively . cash flow from operating activities is primarily provided by our utility operations , and is impacted by the timeliness and adequacy of rate increases and changes in water consumption as a result of year-to-year variations in weather conditions , particularly during the summer . a significant part of our ability to maintain and meet our financial objectives is to ensure that our investments in utility plant and equipment are recovered in the rates charged to customers . as such , from time to time , we file rate increase requests to recover increases in operating expenses and investments in utility plant and equipment .

our cloud connect feature provides private , secure , pre-established connectivity to leading cloud service providers . using gtt 's global network , clients can connect any office location in the world to any application in the cloud . sd-wan is an enterprise networking technology in the early stages of market adoption with high growth potential . the software-based network intelligence in sd-wan enables more efficient delivery of traffic across a mix of access types , accelerates the speed of service deployments , and improves application visibility and performance . gtt 's sd-wan delivers managed global connectivity , enhanced application performance and control , and secure access to cloud-based services and applications . our service leverages gtt 's global , tier 1 ip network , securely connecting client locations to any destination on the internet or to any cloud service provider . we offer the widest range of access options with bundled network security , making it simple and cost-effective to integrate new locations and add network bandwidth as needed . transport & infrastructure services we provide a full suite of transport and infrastructure services over our global network , enabling cloud-based applications and the transport of high volume data between data centers , large enterprise office locations , and media hubs . our service is 20 differentiated based on an expansive pan-european fiber footprint and subsea cable infrastructure , network diversity , and low latency connections between major financial and commercial centers in north america and europe . our clients for these services include internet-based technology companies and otts , large banks , and other service providers requiring network infrastructure . all services are available on a protected basis with the ability to specify pre-configured alternate routes to minimize the impact of any network disruption . gtt 's wavelength service is designed to deliver scalable high-performance optical connectivity over a state-of-the-art dense wave division multiplexing platform . we offer low latency services between the major financial centers and exchanges , tailored to meet the requirements of proprietary trading firms for the fastest connections . in particular , gtt 's express transatlantic cable offers industry leading lowest latency between north america and europe . we also offer dark fiber and duct services across our fiber network . gtt 's ethernet service enables clients to design a network environment best suited to their needs , with point-to-point and point-to-multipoint topology options , and dynamic or fixed routing . gtt 's ethernet direct service provides enhanced performance capabilities for clients seeking guaranteed routes and latency slas between key financial markets , data centers and carrier hotels over a service-specific platform . this service is particularly suited for the financial industry , including trading firms that may require a lower-bandwidth alternative to wavelength services . financial organizations can also leverage our low-latency network to access over 60 unique routes and more than 130 financial exchanges . we offer colocation services in over 50 facilities in europe and north america . the turnkey service offering includes cabinets , racks , suites , and technical support services , providing clients with efficient and secure access to other carrier networks . we offer a suite of video transport services for clients in the media and entertainment industry , designed to support broadcast quality transmission of live events , sports entertainment , and news . we can manage individual services , multicast distribution , and entire client networks , supporting all video formats required for today 's media workflow . internet we offer clients scalable , high-bandwidth global internet connectivity and ip transit with guaranteed availability and packet delivery , utilizing our tier global 1 ip network . our internet services offer flexible connectivity with multiple port interfaces including fast ethernet , gigabit ethernet , 10 gigabit ethernet , and 100 gigabit ethernet . we also offer a wide range of broadband internet and wireless internet access services . we support a dual stack of ipv4 and ipv6 protocols , enabling the delivery of seamless ipv6 services alongside existing ipv4 services . managed services we offer fully managed network services , including managed equipment , security , and managed hosting . gtt 's managed equipment provides a turnkey solution for the end-to-end management of customer premise equipment . this includes the design , procurement , implementation , monitoring , and maintenance of equipment including routers , switches , servers , and wi-fi access points . gtt 's managed security is available as a cloud-based or premises-based security service and provides a comprehensive , multi-layered security solution that protects the network while meeting the most stringent security standards . our unified threat management services include advanced firewall , intrusion detection , anti-virus , web filtering , and anti-spam . gtt 's ddos mitigation service detects and removes malicious traffic , ensuring business continuity for our clients , even in the event of a large-scale ddos attack . the service utilizes a next-generation ddos platform technology , which provides immediate threat detection , deep packet inspection analytics and filtering of compromised traffic at gtt 's scrubbing centers . we offer a full range of compliancy packages , which include developing , deploying , configuring , and monitoring network and security assets , and providing documentation to comply with audits . gtt 's managed hosting service includes application hosting and management . voice we offer local voice service in over 60 countries around the world , along with global long-distance and toll-free services . our sip trunking service delivers worldwide pstn access to client telephony equipment over an integrated data connection , driving efficiency and productivity organization-wide while allowing clients to retain control of their core voice infrastructure . our hosted pbx service allows clients to eliminate traditional voice infrastructure with communication services delivered through the cloud 21 and a wide array of features and customization choices for each site and user . story_separator_special_tag on a constant currency basis using the average exchange rates in effect during the year ended december 31 , 2017 , revenue would have been lower by $ 24.1 million for the year ended december 31 , 2018 . cost of telecommunications services cost of telecommunications services increased by $ 387.3 million , or 89.6 % , from $ 432.1 million for the year ended december 31 , 2017 to $ 819.4 million for the year ended december 31 , 2018 . recurring cost of telecommunications services was approximately 94 % and 95 % of total cost of telecommunications services for the year ended december 31 , 2018 and 2017 , respectively . consistent 27 with our increase in revenue , the increase in cost of telecommunications services was principally driven by the 2017 acquisitions and 2018 acquisitions . on a constant currency basis using the average exchange rates in effect during the year ended december 31 , 2017 , cost of telecommunications services would have been lower by $ 12.2 million for the year ended december 31 , 2018 . operating expenses selling , general and administrative expenses . selling , general and administrative expenses increased by $ 167.8 million , or 77.9 % , from $ 215.4 million for the year ended december 31 , 2017 to $ 383.2 million for the year ended december 31 , 2018 . the following table summarizes the major categories of selling , general and administrative expenses for the years ended december 31 , 2018 and 2017 ( amounts in millions ) : replace_table_token_8_th ( 1 ) includes bad debt expense , professional fees , marketing costs , facilities , and other general support costs . employee related compensation increased primarily due to the 2017 acquisitions and 2018 acquisitions . share-based compensation expense increases were driven by the recognition of share-based compensation for performance awards and an increase in the aggregate value of employee equity awards due to an overall increase in employees and an increase in fair value of the awards . transaction and integration expense increases were driven by the 2018 acquisitions . other sg & a expense increases were principally driven by the 2017 acquisitions and 2018 acquisitions . on a constant currency basis using the average exchange rates in effect during the year ended december 31 , 2017 , selling , general and administrative expenses would have been lower by $ 5.7 million for the year ended december 31 , 2018 . severance , restructuring and other exit costs . for the year ended december 31 , 2018 , we incurred severance , restructuring and other exit costs of $ 37.1 million relating to the 2018 acquisitions . we incurred severance , restructuring and other exit costs of $ 22.4 million for the year ended december 31 , 2017 relating to the 2017 acquisitions . depreciation and amortization . amortization of intangible assets increased $ 17.4 million or 25.2 % , from $ 69.0 million for the year ended december 31 , 2017 to $ 86.4 million for the year ended december 31 , 2018 , primarily due to the additional definite-lived intangible assets recorded in connection with the 2017 acquisitions and 2018 acquisitions . depreciation expense increased $ 61.4 million , or 96.5 % from $ 63.6 million to $ 125.0 million for the year ended december 31 , 2018 , primarily due to assets acquired from the interoute acquisition . other expense other expense increased by $ 209.0 million , or 262.6 % from $ 79.6 million for the year ended december 31 , 2017 to $ 288.6 million for the year ended december 31 , 2018 . this is primarily attributed to higher interest expense due to higher debt levels driven by the 2017 acquisitions and 2018 acquisitions , loss on derivative financial instruments of $ 128.6 million primarily related to the cost of the currency hedge for the interoute acquisition of $ 105.8 million , loss due to changes in fair value on the interest rate swaps of $ 22.4 million , and a loss on debt extinguishment of $ 13.8 million . benefit from ( provision for ) income taxes our benefit from income taxes for the year ended december 31 , 2018 was $ 5.5 million . our effective tax rate was lower than the u.s. federal statutory rate of 21 % primarily due to a valuation allowance recorded against u.s. and certain foreign net deferred tax assets which also offset the impacts of tax expense associated with uncertain tax positions and the tax benefit from finalizing the 2017 impacts of the tax act . the provision for income taxes for the year ended december 31 , 2017 was $ 17.3 million . our effective tax rate for the year ended december 31 , 2017 differed from the u.s. federal statutory rate of 35 % due to the recording of a $ 29.0 million valuation 28 allowance against u.s. deferred tax assets and the one-time adjustments related to the tax act for which we recorded a provisional estimate of $ 17.3 million . year ended december 31 , 2017 compared to year ended december 31 , 2016 revenue our revenue increased by $ 300.6 million , or 57.0 % , from $ 527.3 million for the year ended december 31 , 2016 to $ 827.9 million for the year ended december 31 , 2017 . recurring revenue was approximately 94 % and 92 % of total revenue for the year ended december 31 , 2017 and 2016 , respectively . the increase in revenue was primarily due to the 2017 acquisitions and the purchase of certain customer contracts . on a constant currency basis using the average exchange rates in effect during the year ended december 31 , 2016 , revenue would have been higher by $ 3.5 million for the year ended december 31 , 2017 . cost of telecommunications services cost of telecommunications services increased by $ 152.5 million ,

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cash provided by operating activities our largest source of cash provided by operating activities is monthly recurring revenue from our customers . our primary uses of cash are payments to network suppliers , compensation related costs , interest expense , and payments to third-party vendors such as agents , contractors , and professional service providers . 30 net cash flows provided by operating activities increased by $ 19.0 million , from $ 63.4 million for the year ended december 31 , 2017 to $ 82.4 million for the year ended december 31 , 2018 . this increase was primarily due to the 2017 acquisitions and 2018 acquisitions , partially offset by higher interest expense , as well as non-recurring cash payments for severance and exit costs , and for transaction and integration costs . net cash flows provided by operating activities increased by $ 3.0 million , from $ 60.4 million for the year ended december 31 , 2016 to $ 63.4 million for the year ended december 31 , 2017 . this increase was primarily due to the 2017 acquisitions and the purchase of certain customer contracts , partially offset by non-recurring cash payments for severance and exit costs , and for transaction and integration costs . cash provided by operating activities during the year ended december 31 , 2018 included $ 34.7 million cash paid for severance and exit costs and $ 34.3 million cash paid for transaction and integration costs . cash provided by operating activities during the year ended december 31 , 2017 included $ 15.9 million cash paid for severance and exit costs and $ 19.1 million cash paid for transaction and integration costs . cash provided by operating activities during the year ended december 31 , 2016 included $ 4.5 million cash paid for severance and exit costs and $ 4.8 million cash paid for transaction and integration costs .

agreements with hfc and alon we serve hfc 's refineries under long-term pipeline and terminal , tankage and throughput agreements expiring from 2019 to 2026. under these agreements , hfc agreed to transport , store and throughput volumes of refined product and crude oil on our pipelines and terminal , tankage and loading rack facilities that result in minimum annual payments to us . these minimum annual payments or revenues are subject to annual tariff rate adjustments on july 1 , based on the ppi or ferc index . as of december 31 , 2012 , these agreements with hfc will result in minimum annualized payments to us of $ 217.2 million . if hfc fails to meet its minimum volume commitments under the agreements in any quarter , it will be required to pay us in cash the amount of any shortfall by the last day of the month following the end of the quarter . under certain of the agreements , a shortfall payment may be applied as a credit in the following four quarters after minimum obligations are met . we also have a pipelines and terminals agreement with alon expiring in 2020 under which alon has agreed to transport on our pipelines and throughput through our terminals volumes of refined products that result in a minimum level of annual revenue that also is subject to annual tariff rate adjustments . the terms under this agreement expire beginning in 2018 through 2022. we also - 38 - ril 19 , have a capacity lease agreement under which we lease alon space on our orla to el paso pipeline for the shipment of refined product . as of december 31 , 2012 , these agreements with alon will result in minimum annualized payments to us of $ 31.4 million . a significant reduction in revenues under these agreements could have a material adverse effect on our results of operations . under certain provisions of the omnibus agreement that we have with hfc , we pay hfc an annual administrative fee , currently $ 2.3 million , for the provision by hfc or its affiliates of various general and administrative services to us . this fee does not include the salaries of personnel employed by hls who perform services for us or the cost of their employee benefits , which are separately charged to us by hfc . we also reimburse hfc and its affiliates for direct expenses they incur on our behalf . - 39 - ril 19 , results of operations income , distributable cash flow and volumes the following tables present income , distributable cash flow and volume information for the years ended december 31 , 2012 , 2011 and 2010 . replace_table_token_11_th - 40 - ril 19 , replace_table_token_12_th ( 1 ) the amounts presented above have been restated from those we previously reported for the respective periods . see note 2 in notes to consolidated financial statements included in item 8 for a discussion of these revisions . - 41 - ril 19 , ( 2 ) net income is allocated between limited partners and the general partner interest in accordance with the provisions of the partnership agreement . net income allocated to the general partner includes incentive distributions declared subsequent to quarter end . net income attributable to the limited partners is divided by the weighted average limited partner units outstanding in computing the limited partners ' per unit interest in net income . ( 3 ) ebitda is calculated as net income plus ( i ) interest expense , net of interest income , ( ii ) state income tax and ( iii ) depreciation and amortization . ebitda is not a calculation based upon gaap . however , the amounts included in the ebitda calculation are derived from amounts included in our consolidated financial statements , with the exception of ebitda from discontinued operations . ebitda should not be considered as an alternative to net income or operating income , as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity . ebitda is not necessarily comparable to similarly titled measures of other companies . ebitda is presented here because it is a widely used financial indicator used by investors and analysts to measure performance . ebitda is also used by our management for internal analysis and as a basis for compliance with financial covenants . see our calculation of ebitda under item 6 , “ selected financial data . ” ( 4 ) distributable cash flow is not a calculation based upon gaap . however , the amounts included in the calculation are derived from amounts presented in our consolidated financial statements , with the general exceptions of maintenance capital expenditures and distributable cash flow from discontinued operations . distributable cash flow should not be considered in isolation or as an alternative to net income or operating income as an indication of our operating performance or as an alternative to operating cash flow as a measure of liquidity . distributable cash flow is not necessarily comparable to similarly titled measures of other companies . distributable cash flow is presented here because it is a widely accepted financial indicator used by investors to compare partnership performance . it is also used by management for internal analysis and for our performance units . we believe that this measure provides investors an enhanced perspective of the operating performance of our assets and the cash our business is generating . see our calculation of distributable cash flow under item 6 , “ selected financial data . ” results of operations — year ended december 31 , 2012 compared with year ended december 31 , 2011 summary net income attributable to hep for the year ended december 31 , 2012 was $ 94.2 million , a $ 14.4 million increase compared to the year ended december 31 , 2011 . story_separator_special_tag “ maintenance capital expenditures ” represent capital expenditures to replace partially or fully depreciated assets to maintain the operating capacity of existing assets . maintenance capital expenditures include expenditures required to maintain equipment reliability , tankage and pipeline integrity , safety and to address environmental regulations . “ expansion capital expenditures ” represent capital expenditures to expand the operating capacity of existing or new assets , whether through construction or acquisition . expansion capital expenditures include expenditures to acquire assets , to grow our business and to expand existing facilities , such as projects that increase throughput capacity on our pipelines and in our terminals . repair and maintenance expenses associated with existing assets that are minor in nature and do not extend the useful life of existing assets are charged to operating expenses as incurred . each year the hls board of directors approves our annual capital budget , which specifies capital projects that our management is authorized to undertake . additionally , at times when conditions warrant or as new opportunities arise , additional projects may be approved . the funds allocated for a particular capital project may be expended over a period in excess of a year , depending on the time required to complete the project . therefore , our planned capital expenditures for a given year consist of expenditures approved for capital projects included in the current year 's capital budget as well as , in certain cases , expenditures approved for capital projects in capital budgets for prior years . the 2013 regular capital budget is comprised of $ 10.1 million for maintenance capital expenditures and $ 2.0 million for expansion capital expenditures exclusive of the projects discussed below . in addition to our capital budget , we may spend funds periodically to do capital upgrades of our assets where a customer reimburses us for such costs . these reimbursements would be required under contractual agreements and would generally benefit the customer over the remaining life of such agreements . we recently have made certain modifications to our crude oil gathering and trunk line system that effectively have increased our ability to gather and transport an additional 10,000 barrels per day ( “ bpd ” ) of delaware basin crude oil in response to increased drilling activity in southeast new mexico . we have a second project recently approved which consists of the reactivation and conversion to crude oil service of a 70-mile , 8-inch petroleum products pipeline owned by us . this project also includes the expansion and extension of several of our crude gathering systems and crude mainline pipes . once in service , this system will be capable of transporting crude oil from southeast new mexico to third-party common carrier pipelines in west texas for further transport to major crude oil markets . this project is estimated to cost approximately $ 38.5 million and could be fully operational in late 2013. we also are performing preliminary engineering , routing and cost estimates for two proposed new pipelines . the first proposed pipeline would be a new intrastate crude oil pipeline between cushing , oklahoma and hfc 's tulsa , oklahoma refinery . the 50-mile line would provide safe and reliable transport of cushing sourced domestic and canadian crude oil to hfc 's 125,000 bpd tulsa facility . the pipeline would allow for a significant portion of crude oil transported to be heavy canadian and sour crude oil . crude oil processed at hfc 's tulsa facility currently is transported on pipelines owned by sunoco logistics and magellan pipeline company . the second proposed pipeline would be a new 100-mile interstate petroleum products pipeline between hfc 's cheyenne , wyoming refinery and denver , colorado . the 52,000 bpd refinery , with its ability to process up to 35,000 bpd of heavy canadian crude and its close proximity to growing domestic crude production , is a significant supplier of petroleum products to the denver market . the project also will evaluate the construction of a new petroleum products terminal in north denver or , alternatively , the routing of the new pipeline to existing third-party product terminals in the denver area . this infrastructure addition would ensure safe and reliable transport of petroleum products from hfc 's location-advantaged refinery to its largest market . petroleum products produced at hfc 's cheyenne , wyoming refinery are currently transported to denver on the rocky mountain pipeline 's products line owned by plains all-american . we anticipate that we will be in a position to decide whether to proceed with these projects in the second quarter of 2013 when preliminary engineering and detailed project cost estimates are completed and if necessary shipper commitments can be secured . we expect that our currently planned sustaining and maintenance capital expenditures , as well as expenditures for acquisitions and capital development projects will be funded with existing cash generated by operations , the sale of additional limited partner common units , the issuance of debt securities and advances under our credit agreement , or a combination thereof . with volatility and uncertainty at times in the credit and equity markets , there may be limits on our ability to issue new debt or equity financing . additionally , due to pricing movements in the debt and equity markets , we may not be able to issue new debt and equity securities at acceptable pricing . without additional capital beyond amounts available under the credit agreement , our ability to obtain funds for some of these capital projects may be limited . on july 12 , 2012 , we acquired hfc 's 75 % interest in unev . we paid consideration consisting of $ 260.0 million in cash and 2,059,800 of our common units ( adjusted to reflect the unit split ) . we paid an additional $ 0.9 million to hfc for a post-closing working capital adjustment as provided for by the acquisition agreement . as a result

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cash and cash equivalents decreased by $ 1.1 million during the year ended december 31 , 2012 . the cash flows provided by operating activities of $ 161.4 million were less than the cash flows used for financing and investing activities of $ 119.7 million and $ 42.9 million , respectively . working capital increased by $ 5.2 million to $ 11.8 million at december 31 , 2012 from $ 6.6 million at december 31 , 2011 . cash flows—operating activities year ended december 31 , 2012 compared with year ended december 31 , 2011 cash flows from operating activities increased by $ 62.4 million from $ 99.0 million for the year ended december 31 , 2011 to $ 161.4 million for the year ended december 31 , 2012 . this increase is due principally to $ 63.0 million in additional cash collections from our customers , partially offset by payments attributable to increased operating expenses . our major shippers are obligated to make deficiency payments to us if they do not meet their minimum volume shipping obligations . under certain agreements with these shippers , they have the right to recapture these amounts if future volumes exceed minimum levels . we billed $ 4.6 million during the year ended december 31 , 2011 related to shortfalls that subsequently expired without recapture and were recognized as revenue during the year ended december 31 , 2012 . another $ 7.8 million is included in our accounts receivable at december 31 , 2012 related to shortfalls that occurred during the year ended december 31 , 2012 . - 45 - ril 19 , year ended december 31 , 2011 compared with year ended december 31 , 2010 cash flows from operating activities decreased by $ 5.7 million from $ 104.7 million for the year ended december 31 , 2010 to $ 99.0 million for the year ended december 31 , 2011. this decrease is due principally to payments attributable to increased interest and operating expenses , net of $ 11.1 million in additional cash collections from our customers .

we hold a non-controlling interest in each unconsolidated partnership , and account for such partnerships using the equity method of accounting . we do not control any of these equity method investees for the following reasons : except for three properties that we co-manage with our partner , all of the other entities are managed on a day-to-day basis by one of our other partners as the managing general partner in each of the respective partnerships . in the case of the co-managed properties , all decisions in the ordinary course of business are made jointly . the managing general partner is responsible for establishing the operating and capital decisions of the partnership , including budgets , in the ordinary course of business . 44 all major decisions of each partnership , such as the sale , refinancing , expansion or rehabilitation of the property , require the approval of all partners . voting rights and the sharing of profits and losses are generally in proportion to the ownership percentages of each partner . we record the earnings from the unconsolidated partnerships using the equity method of accounting under the statements of operations caption entitled “ equity in income of partnerships , ” rather than consolidating the results of the unconsolidated partnerships with our results . changes in our investments in these entities are recorded in the balance sheet caption entitled “ investment in partnerships , at equity . ” in the case of deficit investment balances , such amounts are recorded in “ distributions in excess of partnership investments . ” we hold our interests in three of our unconsolidated partnerships through tenancy in common arrangements . for each of these properties , title is held by us and another person or persons , and each has an undivided interest in the property . with respect to each of the three properties , under the applicable agreements between us and the other persons with ownership interests , we and such other persons have joint control because decisions regarding matters such as the sale , refinancing , expansion or rehabilitation of the property require the approval of both us and the other person ( or at least one of the other persons ) owning an interest in the property . hence , we account for each of the properties using the equity method of accounting . the balance sheet items arising from these properties appear under the caption “ investments in partnerships , at equity . ” for further information regarding our unconsolidated partnerships , see note 3 to our consolidated financial statements . the gallery joint venture in july 2014 , we entered into a 50/50 joint venture with the macerich company ( “ macerich ” ) to redevelop the gallery at market east in philadelphia , pennsylvania ( “ the gallery ” ) . in connection therewith , we contributed and sold real estate assets to the venture , and macerich acquired its interest in the venture and real estate from us for $ 106.8 million in cash . it is expected that both parties will make additional investments in the project . net proceeds after closing costs from the sale of the interests were $ 104.0 million . we used $ 25.8 million of such proceeds to repay a mortgage loan secured by 801 market street , philadelphia , pennsylvania , a property that is part of the gallery , $ 50.0 million to repay the outstanding balance on our 2013 revolving facility , and the remaining proceeds for general corporate purposes . prior to july 29 , 2014 , while it was still a consolidated property , we included the assets , liabilities and operating results of the gallery in their respective line items of our consolidated financial statements in accordance with gaap . on and after july 29 , 2014 , we account for the gallery under the equity method of accounting . under the equity method , we report our net investment in the gallery in the balance sheet line item entitled “ investments in partnerships , at equity , ” and we report our share of the operations of the property in the line item entitled “ equity in income of partnerships . ” with respect to ffo , we now calculate ffo from the gallery in the same manner as we do for all of our unconsolidated properties . we determine our share of the property 's ffo , which is calculated by making the same adjustments to net income ( determined in accordance with gaap ) as we make for our consolidated operations . as we redevelop the gallery , operating results in the short term , as measured by sales , occupancy and net operating income , will likely be negatively affected until the newly constructed space is completed , leased and occupied . springfield town center in march 2014 , we entered into a contribution agreement ( the “ contribution agreement ” ) to acquire springfield town center in springfield , virginia ( “ springfield town center ” ) for total consideration of : ( i ) an aggregate of $ 340.0 million ( subject to customary closing proration adjustments ) , in the form of cash and the assumption and payoff of certain seller debt , , and ( ii ) 6,250,000 common units of limited partnership interest ( “ op units ” ) of preit associates l.p. , our operating partnership ( the “ operating partnership ” ) , and , if our average share price is less than $ 20.00 at closing , a number of preferred units of limited partnership interest . we expect to provide the cash amount by borrowing from the amounts available under our existing credit agreements . in addition , the seller of springfield town center may be entitled to certain additional consideration based on the value of springfield town center three years after the closing date . story_separator_special_tag 6.4 million in same store noi ( presented using the “ proportionate consolidation method ; ” see “ —net operating income ” ) ; and an increase of $ 3.3 million in net operating income from 907 market street , which was acquired in april 2013 ; partially offset by impairment of assets in 2013 of $ 23.7 million related to chambersburg mall and $ 6.3 million related to north hanover mall ; and an increase of $ 13.0 million in depreciation and amortization expense . occupancy the tables below set forth certain occupancy statistics for our retail properties as of december 31 , 2014 , 2013 and 2012 : replace_table_token_16_th ( 1 ) occupancy for all periods presented includes all tenants irrespective of the term of their agreement . ( 2 ) combined occupancy is calculated by using occupied gross leasable area ( “ gla ” ) for consolidated and unconsolidated properties and dividing by total gla for consolidated and unconsolidated properties . from 2013 to 2014 , total occupancy for our retail portfolio increased 10 basis points to 95.4 % , and mall occupancy decreased 10 basis points to 95.1 % , including consolidated and unconsolidated properties ( and including all tenants irrespective of the term of their agreement ) . 49 leasing activity the table below sets forth summary leasing activity information with respect to our properties for the year ended december 31 , 2014 , including anchor and non anchor space at consolidated and unconsolidated properties : replace_table_token_17_th ( 1 ) new rent is the initial amount payable upon rent commencement . in certain cases , a lower rent may be payable until certain conditions in the lease are satisfied . ( 2 ) these leasing costs are presented as annualized costs per square foot and are spread uniformly over the initial lease term . ( 3 ) this category includes newly constructed and recommissioned space . 50 ( 4 ) this category includes leases for reconfigured spaces and lease extensions . see “ item 2. properties—retail lease expiration schedule ” for information regarding average minimum rent on expiring leases . the following table sets forth our results of operations for the years ended december 31 , 2014 , 2013 and 2012 : replace_table_token_18_th the amounts in the preceding table reflect our consolidated properties , with the exception of properties that are classified as discontinued operations , which are presented in the line items “ operating results from discontinued operations , ” “ impairment of assets of discontinued operations ” and “ gains on sales of discontinued operations , ” and unconsolidated properties , which are presented under the equity method of accounting in the line item “ equity in income of partnerships . ” real estate revenue real estate revenue decreased by $ 5.1 million , or 1 % , in 2014 as compared to 2013 , primarily due to : a decrease of $ 10.4 million in real estate revenue related to the july 2014 sale of a 50 % partnership interest in the gallery ; a decrease of $ 6.4 million in real estate revenue related to properties sold in 2013 and 2014 ; and a decrease of $ 0.5 million in same store percentage rent , primarily due to lower sales from some tenants that paid percentage rent in 2013 ; partially offset by an increase of $ 6.9 million in same store base rent due to new store openings and lease renewals with higher base rent , with notable increases at moorestown mall , cherry hill mall , woodland mall and exton square mall ; an increase of $ 3.8 million in same store expense reimbursements , following increases in snow removal expense , real estate taxes and utility expenses ( see “ —operating expenses ” ) ; and an increase of $ 1.3 million in real estate revenue related to properties acquired in 2014. real estate revenue increased by $ 17.9 million , or 4 % , in 2013 as compared to 2012 , primarily due to : an increase of $ 11.0 million in base rent , including $ 4.0 million related to the april 2013 acquisition of 907 market street , philadelphia , pennsylvania and $ 1.3 million associated with the july 2012 lease commencement date of the 51 philadelphia media network at the gallery . base rent also increased due to new store openings and lease renewals with higher base rent , with notable increases at willow grove park , cherry hill mall and plymouth meeting mall ; and an increase of $ 6.9 million in expense reimbursements , following increases in real estate tax and common area maintenance expenses ( see “ —operating expenses ” ) . in addition , utility reimbursements increased by $ 1.4 million , due primarily to an increase in tenant utility billing rates at cherry hill mall . property operating expenses property operating expenses decreased by $ 1.9 million , or 1 % , in 2014 as compared to 2013 , primarily due to : a decrease of $ 4.9 million in property operating expenses related to the july 2014 sale of a 50 % partnership interest in the gallery ; a decrease of $ 2.4 million in property operating expenses related to properties sold in 2013 and 2014 ; and a decrease of $ 1.0 million in same store marketing expenses ; partially offset by an increase of $ 2.4 million in same store non-common area utility expense as a result of a significant increase in electric rates at many of our properties in the early part of the year . the extreme cold weather during the winter of 2013-2014 , and the resulting natural gas supply constraints , led to an historic spike in wholesale electricity rates that particularly affected our properties located in pennsylvania , new jersey and maryland ; an increase of $ 2.0 million in same store real estate tax expense , including a $ 1.2

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cash flows net cash provided by operating activities totaled $ 145.1 million for 2014 compared to $ 136.2 million for 2013 and $ 120.3 million for 2012 . this increase in cash from operating activities was primarily due to the reduction in cash paid for interest and other working capital changes . cash flows provided by investing activities were $ 31.7 million for 2014 compared to cash flows used in investing activities of $ 30.7 million for 2013 and cash flows used in investing activities of $ 88.2 million for 2012 . investing activities for 2014 included $ 20.0 million used in acquiring street retail properties in philadelphia , pennsylvania , investment in construction in progress of $ 41.5 million and real estate improvements of $ 71.3 million , primarily related to tenant allowances , recurring capital expenditures and ongoing improvements at our properties , offset by proceeds of $ 190.4 million from the sale of south mall in june 2014 , the sale of a 50 % interest in the gallery in july 2014 , the sale of nittany mall and north hanover mall in september 2014 and various sales of non-operating real estate and land parcels in the fourth quarter of 2014. investing activities for 2013 reflected acquisitions of $ 60.9 million , investment in construction in progress of $ 36.5 million and real estate improvements of $ 44.8 million , primarily related to ongoing improvements at our properties .

our global delivery network , comprising of highly trained industry and process specialists across the united states , europe and asia , is a key asset . we operate sixteen operations centers in india , six operations centers in the u.s. , three operations centers in the philippines and one operations center in each of bulgaria , romania , malaysia and the czech republic . revenues for the year ended december 31 , 2013 , we had total revenues of $ 478.5 million compared to total revenues of $ 442.9 million for the year ended december 31 , 2012 , an increase of $ 35.6 million or 8.0 % . revenues from outsourcing services increased from $ 366.8 million for the year ended december 31 , 2012 to $ 395.0 million for the year ended december 31 , 2013. revenues from transformation services increased from $ 76.1 million for the year ended december 31 , 2012 to $ 83.5 million for the year ended december 31 , 2013. we serve clients mainly in the u.s. and the u.k. , with these two regions generating approximately 73.8 % and 19.4 % , respectively , of our total revenues for the year ended december 31 , 2013 and approximately 72.3 % and 20.2 % , respectively , of our total revenues for the year ended december 31 , 2012. in the years ended december 31 , 2013 and 2012 , our total revenues from our top ten clients accounted for 57.9 % and 59.1 % of our total revenues , respectively . none of the clients accounted for more than 10 % of our total revenues in the year ended december 31 , 2013 , compared to one client in the year ended december 31 , 2012. although we are increasing and diversifying our customer base , we expect in the near future that a significant portion of our revenues will continue to be contributed by a limited number of large clients . we derived revenues from 22 and 38 new clients for our services in the years ended december 31 , 2013 and 2012 , respectively . in addition , another two clients acquired during the year 2013 did not generate revenues in 2013 but are expected to start generating revenues from 2014. on november 1 , 2013 , we received a termination notice from travelers under the services agreement . travelers represented 9.7 % of our total revenues for the year ended december 31 , 2013. while this termination did not have a material impact on our calendar year 2013 revenues , we do estimate a reduction in 2014 revenues of between $ 12 million and $ 20 million due to certain services we currently provide to travelers being transitioned away from us throughout 2014. in addition , we expect that we will reimburse travelers for certain of their expenses incurred in connection with the termination , which will further reduce our revenues in 2014. we also expect that we will provide certain disentanglement services to travelers at our expense during the transition period , which will increase our expenses in 2014. we are still discussing the termination process with travelers and , as a result , at this point can not reasonably estimate the total amount of reimbursements we may make to travelers or what internal costs we will incur as a result of the termination . 42 our business we break our business into two segments : outsourcing services and transformation services . we market our services to our existing and prospective clients through our sales and client management teams , which are aligned by key industry verticals and cross-industry domains such as finance and accounting . our sales and client management teams operate from the u.s. and europe . outsourcing services : we provide our clients with a range of outsourcing services principally in the insurance , healthcare , utilities , banking and financial services , and travel , transportation and logistics sectors , as well as cross-industry outsourcing services , such as finance and accounting services . we serve primarily the needs of global 1000 companies in these sectors . our outsourcing services involve the transfer to us of select business operations of a client , such as claims processing , policy administration and finance and accounting , after which we administer and manage the operations for our client on an ongoing basis . as part of this transfer , we hire and train employees to work at our operations centers on the relevant outsourcing services , implement a process migration to these operations centers and then provide services either to the client or directly to the client 's customers . each client contract has different terms based on the scope , deliverables and complexity of the engagement . the outsourcing services we provide to any of our clients ( particularly under our general framework agreements ) , and the revenues and income that we derive from those services , may decline or vary as the type and quantity of services we provide under those contracts change over time , including as a result of a shift in the mix of products and services we provide . for most outsourcing services , we enter into long-term agreements with our clients with typical initial terms ranging from three to eight years . these contracts also usually contain provisions permitting termination of the contract after a short notice period . although these agreements provide us with a relatively predictable revenue base for a substantial portion of our business , the long selling cycle for our outsourcing services and the budget and approval processes of prospective clients make it difficult to predict the timing of new client acquisitions . revenues under new client contracts also vary depending on when we complete the selling cycle and the implementation phase . story_separator_special_tag these policies include revenue recognition , estimating tax liabilities , stock-based compensation , goodwill , intangibles and long-lived assets , derivative instruments and assets and obligations related to employee benefit plans . these accounting policies and the associated risks are set out below . future events may not develop exactly as forecast and estimates routinely require adjustment . revenue recognition we derive our revenues from outsourcing and transformation services . revenues from outsourcing services are recognized primarily on a time-and-material , cost-plus or unit-priced basis ; revenues from transformation services are recognized primarily on a time-and-material , fixed price or contingent fee basis . the services provided within our outsourcing and transformation contracts generally contain one unit of accounting except the information technology contracts involving complex implementation services and post contract maintenance services . revenues are recognized under our contracts generally when persuasive evidence of an arrangement exists , the sales price is fixed or determinable , services have been performed and collection of amounts billed is reasonably assured . revenues under time-and-material contracts are recognized as the services are performed . revenues are recognized on cost-plus contracts on the basis of contractually agreed direct and indirect costs incurred on a client contract plus an agreed-upon profit markup . such revenues are recognized as the related services are provided in accordance with the client contract . when the terms of the client contract specify service level parameters that must be met ( such as turnaround time or accuracy ) , we monitor such service level parameters to determine if any service credits or penalties have been incurred . revenues are recognized net of any service credits that are due to a client . we have experienced minimal service credits and penalties to date . revenues for our fixed-price transformation services contracts are recognized using the proportional performance method when the pattern of performance under the contracts can be reasonably determined . we estimate the proportional performance of a contract by comparing the actual number of hours or days worked to 47 the estimated total number of hours or days required to complete each engagement . the use of the proportional performance method requires significant judgment relative to estimating the number of hours or days required to complete the contracted scope of work , including assumptions and estimates relative to the length of time to complete the project and the nature and complexity of the work to be performed . we regularly monitor our estimates for completion of a project and record changes in the period in which a change in an estimate is determined . if a change in an estimate results in a projected loss on a project , such loss is recognized in the period in which it is first identified . revenues from software licensing arrangements , which does not involve significant production , modification , or customization of software , are recognized at the later of time of delivery or expiration of significant termination rights as long as other revenue recognition criteria ( mentioned above ) are met . when there are significant production modifications or customization , installation , systems integration or related services , the professional services and license revenues are combined as a single unit of account and maintenance services , if any , as a separate unit of account and the total contract fees are allocated among the two based on a residual value method . revenues related to license fees and complex information technology application development services are recognized as the service is performed using the percentage of completion method of accounting , under which the total value of revenue is recognized on the basis of the percentage that each contract 's total labor hours to date bears to the total expected labor hours ( input method ) . revenues related to maintenance services contracts , whether entered into solely for providing such services or are segregated from a multiple-element contract , are recognized on a straight-line basis over the contract term unless revenues are earned and obligations are fulfilled in a different pattern . we make accruals for revenues and receivables for services rendered between the last billing date and the balance sheet date . accordingly , our accounts receivable include amounts for services that we have performed and for which an invoice has not yet been issued to the client . these are included in accounts receivable on our consolidated balance sheet and the amounts are disclosed in the notes to our consolidated financial statements . goodwill , intangible assets and long-lived assets the purchase method of accounting is used for all business combinations . we account for our business combinations by recognizing the identifiable tangible and intangible assets and liabilities assumed , and non-controlling interest in the acquired business , measured at their acquisition date fair values . all assets and liabilities of the acquired business including goodwill are assigned to reporting units . acquisition related costs are expensed as incurred under sg & a expenses . we evaluate goodwill for impairment at least annually , or as circumstances warrant . when determining the fair value of our reporting units , we utilize various assumptions , including projections of future cash flows . any adverse changes in key assumptions about our businesses and their prospects or an adverse change in market conditions may cause a change in the estimation of fair value and could result in an impairment charge . we review long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . in general , we will recognize an impairment loss when the sum of undiscounted expected future cash flows is less than the carrying amount of such asset . the estimate of undiscounted cash flows and the fair value of assets require several assumptions and estimates like the weighted average cost of capital , discount rates , risk-free rates ,

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liquidity and capital resources replace_table_token_15_th as of december 31 , 2013 , we had $ 154.1 million in cash and cash equivalents and short-term investments ( including $ 67.2 million held by our foreign subsidiaries ) . we do not intend to repatriate our overseas funds since our future growth partially depends upon the continued infrastructure and technology investments , geographical expansions and acquisitions made outside of the u.s. therefore , we need to continuously and permanently reinvest the earnings generated outside of the u.s. if we were to repatriate our overseas funds , we would need to accrue and pay applicable taxes . 56 cash flow from operating activities : cash flows provided by operating activities increased by $ 17.0 million from $ 65.8 million in the year ended december 31 , 2012 to $ 82.8 million in the year ended december 31 , 2013. generally , factors that affect our earnings—including pricing , volume of services , costs and productivity—affect our cash flows provided by operations in a similar manner . however , while management of working capital , including timing of collections and payments affects operating results only indirectly , the impact on the working capital and cash flows provided by operating activities can be significant .

the increase in gross profit as a percentage of net sales was primarily related to a decrease in material related costs partially offset by an increase in certain overhead costs . the level of gross margin is impacted by product mix , timing of the startup of new programs , facility utilization , pricing within the electronics industry and material costs , which can fluctuate significantly from quarter to quarter and year to year . operating income as a percentage of net sales for fiscal year 2017 was 2.0 percent compared to 2.1 percent for fiscal year 2016 . the decrease in operating income as a percentage of net sales was primarily due to an increase in selling , general and administrative expenses . this increase in sg & a expenses is primarily related to an increase in legal fees . net income for fiscal year 2017 was $ 5.6 million or $ 0.51 per diluted share , as compared to net income of $ 6.5 million or $ 0.58 per diluted share for fiscal year 2016 . the decrease in net income for fiscal year 2017 as compared to fiscal year 2016 was primarily driven by the decrease in net revenue as described above . 19 we maintain a strong balance sheet with a current ratio of 2.3 and a debt to equity ratio of 0.37 . total cash provided by operating activities as defined on our cash flow statement was $ 9.4 million during fiscal year 2017 . we maintain sufficient liquidity for our expected future operations . as of july 1 , 2017 , we had $ 18.3 million outstanding on our revolving line of credit with wells fargo bank , n.a . as a result , $ 26.3 million remained available to borrow as of july 1 , 2017 . we believe cash flow from operations , our borrowing capacity , our accounts receivable sale program , and equipment financing should provide adequate capital for planned growth over the long term . results of operations comparison of the fiscal year ended july 1 , 2017 with the fiscal year ended july 2 , 2016 the following table sets forth for the periods indicated certain items of the consolidated statements of income expressed as a percentage of net sales . the financial information and discussion below should be read in conjunction with the consolidated financial statements and notes contained in this annual report . replace_table_token_5_th net sales the decrease in net sales of $ 17.2 million from prior year was primarily driven by a decrease in net sales from the former longstanding customer which has been discussed in prior quarters , partially offset by an increase in new program wins . the following table shows the revenue by industry sectors as a percentage of revenue for fiscal years 2017 and 2016 : replace_table_token_6_th we provide services to customers in a number of industries and produce a variety of products for our customers in each industry . key tronic does not target any particular industry , but rather seeks to find programs that strategically fit our vertical manufacturing capabilities . as we continue to diversify our customer base and win new customers , we will continue to see a change in the industry concentrations of our revenue . sales to foreign locations represented 22.6 percent and 28.3 percent of our total net sales in fiscal years 2017 and 2016 , respectively . 20 cost of sales total cost of sales as a percentage of net sales was 91.8 percent and 92.0 percent in fiscal years 2017 and 2016 , respectively . total cost of materials as a percentage of net sales was approximately 61.7 percent and 63.9 percent in fiscal years 2017 and 2016 , respectively . the change from year-to-year is primarily a result of improved pricing of certain raw materials as well as a more favorable product mix . production and support costs as a percentage of net sales were 30.1 percent and 28.1 percent in fiscal years 2017 and 2016 , respectively . the increase in fiscal year 2017 is primarily related absorption increasing as a percentage of sales during the fiscal year . we provide a reserve for obsolete and non-saleable inventories based on specific identification of inventory against current demand and recent usage . we also consider our customers ' ability to pay for inventory whether or not there is a lead-time assurance agreement for a specific program . the amounts charged to expense for these inventories were approximately $ 0.5 million and $ 0.8 million in fiscal years 2017 and 2016 , respectively . we provide warranties on certain products we sell and estimate warranty costs based on historical experience and anticipated product returns . warranty expense is related to workmanship claims on keyboards and ems products . the amounts charged to expense are determined based on an estimate of warranty exposure . the net warranty expense was approximately $ 68,000 and $ 95,000 in fiscal years 2017 and 2016 , respectively . gross profit gross profit as a percentage of net sales was 8.2 percent and 8.0 percent in fiscal years 2017 , and 2016 , respectively . the 0.2 percentage point increase in gross profit as a percentage of net sales during fiscal year 2017 as compared to fiscal year 2016 is primarily related to a 1.7 percentage point decrease in material related costs partially offset by a 1.5 percentage point increase in certain overhead costs . this reflects an increase in gross margin percentage year-over-year as the unprofitable manufacturing facility was closed and trimming non-profitable programs . story_separator_special_tag to determine the fair value of stock based awards on the date of grant we use the black-scholes option-pricing model . inherent in this model are assumptions related to expected stock price volatility , option life , risk-free interest rate and dividend yield . the risk-free interest rate is a less-subjective assumption as it is based on factual data derived from public sources . we use a dividend yield of zero as we have never paid cash dividends and have no intention to pay cash dividends in the foreseeable future . the expected stock price volatility and option life assumptions require a greater level of judgment . our expected stock-price volatility assumption is based upon the historical volatility of our stock which is obtained from public data sources . the expected life represents the weighted average period of time that share-based awards are expected to be outstanding , giving consideration to vesting schedules and historical exercise patterns . we determine the expected life assumption based upon the exercise and post-vesting behavior that has been exhibited historically , adjusted for specific factors that may influence future exercise patterns . if expected volatility or expected life were to increase , that would result in an increase in the fair value of our stock options which would result in higher compensation charges , while a decrease in volatility or the expected life would result in a lower fair value of our stock option awards resulting in lower compensation charges . we estimate forfeitures for all of our awards based upon historical experience of stock-based pre-vesting forfeitures . we believe that our estimates are based upon outcomes that are reasonably likely to occur . if actual forfeitures are higher than our estimates it would result in lower compensation expense and to the extent the actual forfeitures are lower than our estimate we would record higher compensation expense . impairment of long-lived assets long-lived assets , such as property , plant , and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable . the recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset . if the carrying amount of an asset exceeds its estimated undiscounted future cash flows , an impairment charge would be recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset . derivatives and hedging activity derivatives are recognized on the balance sheet at their estimated fair value . on the date a derivative contract is entered into , the company designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ( a “ cash flow ” hedge ) . the company does not enter into derivatives for speculative purposes . changes in the fair value of a derivative that qualifies as a cash flow hedge are recorded in “ accumulated other comprehensive income , ” until earnings are affected by the variability of cash flows . see note 11 of the company 's consolidated financial statements for additional information . long-term incentive compensation accrual long-term incentive compensation is recognized as expense ratably over the requisite service period of the award which is generally three years . the board of directors approve target performance measures for the three year period for each of the company 's officers and non-employee directors . performance measures are based on a combination of sales growth targets and return on invested capital targets . no cash awards will be made to participants if actual company performance does not exceed the minimum target performance measures . the calculation used to determine the necessary accrual uses a combination of actual results and projected results . we believe that our estimates are based upon outcomes that are reasonably likely to occur . these estimates and assumptions are based on historical results as well as future expectations . actual results could vary from our estimates and assumptions . 28 impairment of goodwill in accordance with asc 350 , goodwill and other intangible assets , goodwill is not amortized but is required to be reviewed for impairment at least annually or when events or circumstances indicate that carrying value may exceed fair value . the company is permitted the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the fair value of any reporting unit is less than its corresponding carrying value . if , after assessing the totality of events and circumstances , the company concludes that it is not more likely than not that the fair value of any reporting unit is less than its corresponding carrying value then the company is not required to take further action . however , if the company concludes otherwise , then it is required to perform a quantitative impairment test , including computing the fair value of the reporting unit and comparing that value to its carrying value . the company utilizes a weighting of the income approach and a market approach in the impairment test . we also consider valuation factors including the company 's market capitalization , future discounted cash flows and an estimated control premium based upon a review of comparable market transactions . our consideration of discounted future cashflows included assumptions regarding growth rates and margins based on our historical trends . in addition , we applied a market discount rate calculated based upon an analysis of companies similar in size . if our future cash flows do not meet our projections or there is an event that impacts our market capitalization , the assumptions used in our goodwill analysis could be negatively impacted . the estimated

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capital resources and liquidity operating cash flow net cash provided by operating activities for fiscal year 2017 was $ 9.4 million compared to net cash provided by operating activities of $ 4.6 million and $ 7.7 million in fiscal years 2016 and 2015 , respectively . the $ 9.4 million of net cash provided by operating activities during fiscal year 2017 is primarily related to $ 5.6 million of net income , $ 7.2 million of depreciation and amortization and a $ 4.9 million decrease in inventory , partially offset by a $ 3.5 million increase in accounts receivable and a $ 5.9 million decrease in accounts payable . the $ 4.6 million of net cash provided by operating activities during fiscal year 2016 was primarily due to $ 6.5 million of net income , $ 6.2 million of depreciation and amortization and an $ 11.1 million decrease in accounts receivable offset by a $ 16.2 million increase in inventory and a $ 2.6 million decrease in accounts payable . the $ 7.7 million of cash provided by operating activities during fiscal year 2015 was primarily due to $ 4.3 million of net income , $ 5.9 million of depreciation and amortization and an $ 18.0 million increase in accounts payable partially offset by a $ 14.7 million increase in inventory , a $ 2.1 million increase in accounts receivable and a $ 4.2 million increase in other assets . accounts receivable fluctuates based on the timing of shipments , terms offered and collections . in addition , accounts receivable will fluctuate based upon the amount of accounts receivable sold under our trade accounts receivable purchase program . during fiscal years 2017 , 2016 and 2015 , we factored receivables of $ 86.5 million , $ 78.0 million and $ 12.1 million , respectively , from accounts receivable sold to financial institutions , which are not included on our consolidated balance sheets . we purchase inventory based on customer forecasts and orders , and when those forecasts and orders change , the amount of inventory may also fluctuate .

on an ongoing basis , our management evaluates its estimates , including those related to revenue recognition , long-lived assets , insurance and legal matters , share-based payments and income taxes . we base our estimates on historical experience and on various other assumptions 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 . actual results may differ from those estimates . changes in our accounting policies and estimates could materially impact our results of operations and financial condition for any particular period . we believe that our most critical accounting policies and estimates are : revenue recognition . we earn revenues through our network of u.s. company-owned and franchised stores , dough manufacturing and supply chain centers and international operations . retail sales from franchised stores are reported to us by our franchisees and are not included in our revenues . retail sales from company-owned stores and royalty revenues resulting from the retail sales from franchised stores are recognized as revenues when the items are delivered to or carried out by customers . retail sales are generally reported , and the related royalties paid to us based on a percentage of retail sales , as specified in the related standard franchise agreement ( generally 5.5 % of u.s. franchise retail sales and were on average , 2.9 % of international franchise retail sales in 2020 ) . u.s. and international franchise fee revenue primarily relates to per-transaction technology fees that are recognized as the related sales occur . we also generate revenues from u.s. franchise advertising contributions to dnaf , our consolidated not-for-profit advertising fund ( generally 6.0 % of u.s. franchise retail sales ) . although these revenues are restricted to be used only for advertising and promotional activities to benefit franchised stores , we have determined there are not performance obligations associated with the franchise advertising contributions received by dnaf that are separate from our u.s. royalty payment stream and as a result , these franchise contributions and the related expenses are presented gross in the consolidated statements of income . revenues from company-owned stores and revenues from franchised stores ( including u.s. franchise royalties and fees and u.s. franchise advertising revenues ) can fluctuate from time-to-time as a result of store count and sales level changes . sales of food from our supply chain centers are recognized as revenues upon delivery of the food to franchisees , while sales of equipment and supplies are generally recognized as revenues upon shipment of the related products to franchisees . long-lived assets . we record long-lived assets , including property , plant and equipment and capitalized software , at cost . for acquisitions of franchise operations , we estimate the fair values of the assets and liabilities acquired based on physical inspection of assets , historical experience and other information available to us regarding the acquisition . we depreciate and amortize long-lived assets using useful lives determined by us based on historical experience and other information available to us . we evaluate the potential impairment of long-lived assets at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable . our evaluation is based on various analyses , including the projection of undiscounted cash flows . for company-owned stores , we perform related impairment tests on an operating market basis , which we have determined to be the lowest level for which identifiable cash flows are largely independent of other cash flows . if the carrying amount of a long-lived asset exceeds the amount of the expected future undiscounted cash flows of that asset , we estimate the fair value of the asset . if the carrying amount of the asset exceeds the estimated fair value of the asset , an impairment loss is recognized , and the asset is written down to its estimated fair value . we have not made any significant changes in the methodology used to project the future market cash flows of company-owned stores during the years presented . same store sales fluctuations and the rates at which operating costs will fluctuate in the future are key factors in evaluating recoverability of the related assets . if our same store sales significantly decline or if operating costs increase and we are unable to recover these costs , the carrying value of our company-owned stores , by market , may be unrecoverable and we may be required to recognize an impairment charge . insurance and legal matters . we are a party to lawsuits and legal proceedings arising in the ordinary course of business . management closely monitors these legal matters and estimates the probable costs for the resolution of such matters . these estimates are primarily determined by consulting with both internal and external parties handling the matters and are based upon an analysis of potential results , assuming a combination of litigation and settlement strategies . legal judgments can be volatile and difficult to predict . accordingly , if our estimates relating to legal matters proved inaccurate for any reason , we may be required to increase or decrease the related expense in future periods . we had accruals for legal matters of approximately $ 1.3 million and $ 1.8 million at january 3 , 2021 december 29 , 2019 , respectively . 28 for certain periods prior to december 1998 and for periods after december 2001 , we maintain insurance coverage for workers ' compensation , general liability and owned and non-owned auto liabilities . we are generally responsible for up to $ 2.0 million per occurrence under these retention programs for workers ' compensation and general liability , depending on policy year and line of coverage . story_separator_special_tag labor costs increased 1.9 percentage points to 30.9 % in 2020 , due primarily to additional compensation expense for frontline team members during the covid-19 pandemic . these increases were partially offset by reduced labor costs as a percentage of store revenues resulting from the 2019 store sale due to the higher labor rates in the market in which the sold stores operated . 33 supply chain operating margin replace_table_token_11_th supply chain operating margin increased $ 38.5 million , or 16.4 % , in 2020 , primarily driven by higher volumes from increased orders , as well as an estimated $ 6.4 million impact of the 53 rd week . as a percentage of supply chain revenues , the supply chain operating margin increased 0.1 percentage points in 2020 , due primarily to lower delivery costs as a percentage of revenues as a result of leveraging of higher same store sales and lower fuel prices , partially offset by higher food costs . general and administrative expenses general and administrative expenses increased $ 24.3 million , or 6.4 % , in 2020 , driven primarily by higher variable performance-based compensation expense and professional fees , as well as an estimated $ 5.6 million impact of the 53 rd week . these increases were partially offset by lower travel expenses resulting from travel restrictions associated with the covid-19 pandemic . u.s. franchise advertising expenses u.s. franchise advertising expenses increased $ 71.4 million , or 18.3 % , in 2020 , due to higher u.s. franchise advertising revenue , including an estimated $ 10.4 million impact of the 53 rd week . u.s. franchise advertising costs are accrued and expensed when the related u.s. franchise advertising revenues are recognized , as our consolidated not-for-profit advertising fund is obligated to expend such revenues on advertising and these revenues can not be used for general corporate purposes . interest expense , net interest expense , net , increased $ 23.7 million , or 16.1 % , in 2020 driven primarily by higher average debt balances resulting from the 2019 recapitalization and borrowings under the company 's variable funding notes in 2020 , as well as an estimated $ 2.6 million impact of the 53 rd week . our weighted average borrowing rate decreased to 3.9 % in 2020 , from 4.1 % in 2019 , resulting from the lower interest rates on the debt outstanding in 2020 as compared to the same periods in 2019. provision for income taxes provision for income taxes decreased $ 18.1 million , or 22.1 % , in 2020 and the effective tax rate decreased to 11.5 % in 2020 as compared to 17.0 % in 2019 due primarily to higher excess tax benefits on equity-based compensation , which are recorded as a reduction to the income tax provision . excess tax benefits from equity-based compensation were $ 60.4 million in 2020 and were $ 25.7 million in 2019. the increase in excess tax benefits resulted from a significant increase in stock options exercised in 2020 as compared to 2019. the decrease in provision for income taxes was partially offset by higher pre-tax income and , to a lesser extent , an increase in the valuation allowance associated with foreign tax credits and interest deductibility in separately-filed states . we estimate the 53 rd week resulted in an increase of $ 4.0 million on the provision for income taxes . segment income we evaluate the performance of our reportable segments and allocate resources to them based on earnings before interest , taxes , depreciation , amortization and other , referred to as segment income . segment income for each of our reportable segments is summarized in the table below . other segment income primarily includes corporate administrative costs that are not allocable to an operating segment , including labor , computer expenses , professional fees , travel and entertainment , rent , insurance and other corporate administrative costs . replace_table_token_12_th 34 u.s. stores u.s. stores segment income increased $ 73.4 million , or 20.3 % , in 2020 , primarily as a result of the increase in revenues from u.s. franchise royalties and fees of $ 74.7 million discussed above . u.s. franchise revenues do not have a cost of sales component , so changes in these revenues have a disproportionate effect on u.s. stores segment income . u.s. franchise advertising costs are accrued and expensed when the related u.s. franchise advertising revenues are recognized and have no impact on u.s. stores segment income . the increase in u.s. stores segment income was partially offset by the $ 1.4 million decrease in u.s. company-owned store operating margin discussed above . supply chain supply chain segment income increased $ 38.6 million , or 19.3 % , in 2020 , due primarily to the $ 38.5 million increase in operating margin described above . international franchise international franchise segment income increased $ 10.3 million , or 5.5 % , in 2020 , due primarily to the $ 8.8 million increase in international franchise revenues discussed above . international franchise revenues do not have a cost of sales component , so changes in these revenues have a disproportionate effect on international franchise segment income . lower travel expenses , primarily due to travel restrictions resulting from the covid-19 pandemic , also contributed to the increase in international franchise segment income . other other segment income decreased $ 16.6 million , or 45.1 % , in 2020 , due primarily to higher variable performance-based compensation expense . the decrease in other segment income was partially offset by higher corporate administrative costs allocated to our segments as compared to 2019. the increase in allocated costs in 2020 was due primarily to higher investments in technological initiatives to support technology for our u.s. and international franchise stores . new accounting pronouncements the impact of new accounting pronouncements adopted and the estimated impact of new accounting pronouncements that we will adopt in future years is included

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restricted cash as of january 3 , 2021 , we had approximately $ 177.1 million of restricted cash and cash equivalents held for future principal and interest payments and other working capital requirements of our asset-backed securitization structure , $ 39.6 million of restricted cash equivalents held in a three-month interest reserve as required by the related debt agreements and $ 0.8 million of other restricted cash for a total of $ 217.5 million of restricted cash and cash equivalents . as of january 3 , 2021 , we also held $ 115.9 million of advertising fund restricted cash and cash equivalents , which can only be used for activities that promote the domino 's brand . long-term debt 2019 recapitalization on november 19 , 2019 , we completed the 2019 recapitalization in which certain of our subsidiaries issued $ 675.0 million series 2019-1 3.668 % fixed rate senior secured notes , class a-2 with an anticipated term of 10 years ( the “ 2019 fixed rate notes ” ) pursuant to an asset-backed securitization . concurrently , we also issued the 2019 variable funding notes . our previous variable funding note facility was canceled . gross proceeds from the issuance of the 2019 fixed rate notes was $ 675.0 million . additional information related to the 2019 recapitalization transaction is included in note 4 to our consolidated financial statements . the proceeds from the 2019 recapitalization were used to pre-fund a portion of the principal and interest payable on the 2019 fixed rate notes , pay transaction fees and expenses and repurchase and retire shares of our common stock .

results of operations 2015 compared to 2014 consolidated results net sales for 2015 were $ 5.70 billion , a 5 % decrease as reported , and a 2 % increase in constant currency , as compared to $ 6.02 billion in 2014. net income for 2015 was $ 369.4 million , or $ 1.08 per diluted share , as compared to net income of $ 498.9 million , or $ 1.45 per diluted share , in 2014. adjusted earnings per share , including discrete tax items , in 2015 was $ 1.31 , compared to adjusted earnings per share , including discrete tax items , of $ 1.71 in 2014. adjusted earnings per share , including discrete tax items , in 2015 was negatively impacted by unfavorable foreign exchange and lower gross profit , partially offset by funding our future savings . the following table provides a summary of mattel 's consolidated results for 2015 and 2014 ( in millions , except percentage and basis point information ) : replace_table_token_5_th sales net sales for 2015 were $ 5.70 billion , a 5 % decrease as reported , and a 2 % increase in constant currency , as compared to $ 6.02 billion in 2014 . 23 the following table provides a summary of mattel 's consolidated gross sales by brand for 2015 and 2014 : replace_table_token_6_th gross sales were $ 6.28 billion in 2015 , a decrease of $ 434.8 million or 6 % as reported , and an increase of 1 % in constant currency , as compared to 2014. the decrease in gross sales in constant currency was primarily due to lower sales of other girls products , partially offset by higher sales of wheels products . of the 17 % decrease in other girls gross sales in constant currency , 16 % was due to lower sales of monster high products . of the 21 % increase in wheels gross sales in constant currency , 20 % was due to higher sales of hot wheels products . cost of sales cost of sales as a percentage of net sales was 50.8 % in 2015 , as compared to 50.2 % in 2014. cost of sales decreased by $ 126.5 million , or 4 % , from $ 3.02 billion in 2014 to $ 2.90 billion in 2015 , as compared to a 5 % decrease in net sales . within cost of sales , product and other costs decreased by $ 145.0 million , or 6 % , from $ 2.44 billion in 2014 to $ 2.30 billion in 2015 ; royalty expenses increased $ 22.2 million , or 9 % , from $ 242.4 million in 2014 to $ 264.6 million in 2015 ; and freight and logistics expenses decreased by $ 3.7 million , or 1 % , from $ 337.1 million in 2014 to $ 333.4 million in 2015. gross margin gross margin decreased from 49.8 % in 2014 to 49.2 % in 2015. adjusted gross margin decreased from 50.1 % in 2014 to 49.2 % in 2015. the decrease in adjusted gross margin was due to unfavorable foreign exchange , higher product-related costs , unfavorable product mix , and higher royalty expenses , partially offset by price increases and funding our future savings . advertising and promotion expenses advertising and promotion expenses primarily consist of : ( i ) media costs , which primarily include the media , planning , and buying fees for television , print , and online advertisements , ( ii ) non-media costs , which primarily include commercial and website production , merchandising , and promotional costs , ( iii ) retail advertising costs , which primarily include consumer direct catalogs , newspaper inserts , fliers , and mailers and ( iv ) generic advertising costs , which primarily include trade show costs . advertising and promotion expenses as a percentage of net sales increased from 12.2 % in 2014 to 12.6 % in 2015 , primarily as a result of mattel 's investments to support core brands throughout the year . other selling and administrative expenses other selling and administrative expenses , as reported , decreased from $ 1.61 billion , or 26.8 % of net sales , in 2014 to $ 1.55 billion , or 27.1 % of net sales , in 2015. adjusted other selling and administrative expenses decreased from $ 1.52 billion , or 25.2 % of net sales , in 2014 to $ 1.45 billion , or 25.4 % of net sales , in 2015. the decrease in adjusted other selling and administrative expenses was primarily due to funding our future savings of approximately $ 70 million . 24 non-operating items interest expense increased $ 6.0 million from $ 79.3 million in 2014 to $ 85.3 million in 2015 , primarily due to higher average outstanding long-term borrowings . provision for income taxes mattel 's effective tax rate on income before income taxes in 2015 was 20.4 % , as compared to 15.0 % in 2014. the 2015 and 2014 income tax provisions included net tax benefits of $ 19.1 million and $ 42.6 million , respectively . the 2015 net tax benefits primarily relate to reassessments of prior years ' tax liabilities based on the status of audits and tax filings in various jurisdictions around the world , settlements , and enacted tax law changes . the 2014 net tax benefits primarily relate to reassessments of prior year 's tax liabilities based on the status of audits and tax filings in various jurisdictions around the world , settlements , and enacted tax law changes , partially offset by a tax charge related to a 2014 tax restructuring for the hit entertainment and mega brands operations . story_separator_special_tag cost savings programs during 2013 , mattel initiated operational excellence 3.0 , which targeted cumulative gross cost savings of approximately $ 175 million by the end of 2014. mattel exceeded its operational excellence 3.0 goal by realizing approximately $ 179 million of cumulative gross cost savings throughout the program . the cost savings program was designed to generate sustainable cost savings through the following primary initiatives : manufacturing efficiencies through automation , lean manufacturing principles , design for manufacturing , enterprise quality , and packaging optimization ; indirect procurement ; and operational efficiencies related to enhanced international clustering and realignment of north america operations . during 2013 , mattel realized gross cost savings before severance charges and investments of approximately $ 60 million ( or approximately $ 39 million in net cost savings ) . of the gross cost savings realized in 2013 , approximately $ 51 million was reflected within gross profit , approximately $ 8 million within other selling and administrative expenses , and approximately $ 1 million within advertising and promotion expenses . during 2014 , mattel realized gross cost savings before severance charges and investments of approximately $ 119 million ( or approximately $ 74 million in net cost savings ) . of the gross cost savings realized in 2014 , approximately $ 77 million was reflected within gross profit , approximately $ 35 million within other selling and administrative expenses , and approximately $ 7 million within advertising and promotion expenses . beginning in 2015 , mattel initiated the next phase of its cost savings program , funding our future , which targets additional cumulative gross cost savings of approximately $ 250 million to $ 300 million by the end of 2016. the cost savings program is designed to generate cost savings through various initiatives , including structural and process improvements and supply chain optimization . during 2015 , mattel realized gross cost savings before severance charges and investments of approximately $ 153 million ( or approximately $ 92 million in net cost savings ) . of the gross cost savings realized in 2015 , approximately $ 70 million was 31 reflected within gross profit , approximately $ 73 million within other selling and administrative expenses , and approximately $ 10 million within advertising and promotion expenses . income taxes mattel 's effective tax rate on income before income taxes in 2015 was 20.4 % , as compared to 15.0 % in 2014. the 2015 income tax provision included net tax benefits of $ 19.1 million , primarily related to reassessments of prior years ' tax liabilities based on the status of audits and tax filings in various jurisdictions around the world , settlements , and enacted tax law changes . mattel 's effective tax rate on income before income taxes in 2014 and 2013 was 15.0 % and 17.8 % , respectively . the 2014 income tax provision included net tax benefits of $ 42.6 million , primarily related to reassessments of prior years ' tax liabilities based on the status of audits and tax filings in various jurisdictions around the world , settlements , and enacted tax law changes , partially offset by a tax charge related to a 2014 tax restructuring for the hit entertainment and mega brands operations . the 2013 income tax provision included net tax benefits of $ 32.2 million , primarily related to reassessments of prior years ' tax liabilities based on the status of audits and tax filings in various jurisdictions around the world , settlements , and enacted tax law changes . story_separator_special_tag o return excess funds to stockholders through dividends and share repurchases . over the long term , assuming annual cash flows from operating activities remain strong , mattel plans to use its free cash flows to invest in strategic acquisitions and to return funds to stockholders through cash dividends and share repurchases . mattel 's share repurchase program has no expiration date and repurchases will take place from time to time , depending on market conditions . the ability to successfully implement the capital deployment plan is directly dependent on mattel 's ability to generate strong annual cash flows from operating activities . there is no assurance that mattel will continue to generate strong annual cash flows from operating activities or achieve its targeted goals for investing activities . operating activities cash flows from operating activities were $ 734.6 million during 2015 , as compared to $ 888.6 million during 2014 and $ 698.4 million during 2013. the decrease in cash flows from operating activities in 2015 from 2014 was primarily due to higher working capital usage and lower net income . the increase in cash flows from operating activities in 2014 from 2013 was primarily due to lower working capital usage , partially offset by lower net income . investing activities cash flows used for investing activities were $ 282.5 million during 2015 , as compared to $ 708.6 million during 2014 and $ 242.1 million during 2013. the decrease in cash flows used for investing activities in 2015 from 2014 was primarily due to the acquisition of mega brands in 2014. the increase in cash flows used for investing activities in 2014 from 2013 was primarily due to the acquisition of mega brands . financing activities cash flows used for financing activities were $ 500.2 million during 2015 , as compared to $ 227.3 million during 2014 and $ 740.0 million during 2013. the increase in cash flows used for financing activities in 2015 from 2014 was primarily due to prior year net proceeds from long-term borrowings and lower proceeds from stock option exercises , partially offset by lower share repurchases . the decrease in cash flows used for financing activities in 2014 from 2013 was primarily due to lower repayments of long-term borrowings and lower share repurchases , partially offset by lower proceeds from stock option exercises . during 2015 , mattel did not repurchase any shares of its common

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liquidity and capital resources mattel 's primary sources of liquidity are its cash and equivalents balances , access to short-term borrowing facilities , including its $ 1.60 billion domestic unsecured committed revolving credit facility ( “ credit facility ” ) , and issuances of long-term debt securities . cash flows from operating activities could be negatively impacted by decreased demand for mattel 's products , which could result from factors such as adverse economic conditions and changes in public and consumer preferences , or by increased costs associated with manufacturing and distribution of products or shortages in raw materials or component parts . additionally , mattel 's ability to issue long-term debt and obtain seasonal financing could be adversely affected by factors such as global economic crises and tight credit environments , an inability to meet its debt covenant requirements , which include maintaining consolidated debt-to-earnings before interest , taxes , depreciation , and amortization ( “ ebitda ” ) and interest coverage ratios , or a deterioration of mattel 's credit ratings . mattel 's ability to conduct its operations could be negatively impacted should these or other adverse conditions affect its primary sources of liquidity . of mattel 's $ 892.8 million in cash and equivalents as of december 31 , 2015 , approximately $ 742 million is held by foreign subsidiaries . mattel may need to accrue and pay additional income taxes if some or all of the undistributed earnings of foreign subsidiaries were repatriated . mattel does not intend nor foresee a need to repatriate undistributed earnings of foreign subsidiaries . mattel has several liquidity options to fund its domestic operations and obligations , including investing and financing activities such as dividends , share repurchases , and debt service .

there is substantial risk that if we are unable to renew our eea marketing authorization during any annual renewal cycle , or if our product label is materially restricted , or if study 041 does not provide the data necessary to maintain our marketing authorization , we would lose all , or a significant portion of , our ability to generate revenue from sales of translarna in the eea and other territories . translarna is an investigational new drug in the united states . during the first quarter of 2017 , we filed a new drug application , or nda , for translarna for the treatment of nmdmd over protest with the united states food and drug administration , or fda . in october 2017 , the office of drug evaluation i of the fda issued a complete response letter for the nda , stating that it was unable to approve the application in its current form . in response , we filed a formal dispute resolution request with the office of new drugs of the fda . in february 2018 , the office of new drugs of the fda denied our appeal of the complete response letter . in its response , the office of new drugs recommended a possible path forward for the ataluren nda submission based on the accelerated approval pathway . this would involve a re-submission of an nda containing the current data on effectiveness of ataluren with new data to be generated on dystrophin production in nmdmd patients ' muscles . we intend to follow the fda 's recommendation and will collect , using newer technologies via procedures and methods that we designed , such dystrophin data in a new study , study 045 , which we initiated in the fourth quarter of 2018. we expect that a potential re-submission of an nda could occur in mid-year 2020. additionally , should a re-submission of an nda receive accelerated approval , the office of new drugs stated that study 041 , which is currently enrolling , could serve as the confirmatory post-approval trial required in connection with the accelerated approval framework . 110 there is substantial risk that study 045 , or any other studies we may use to collect the dystrophin data , will not provide the necessary data to support a marketing approval for translarna for the treatment of nmdmd in the u.s. we hold the rights for the commercialization of tegsedi ( inotersen ) and waylivra ( volanesorsen ) for the treatment of rare diseases in countries in latin america and the caribbean pursuant to our collaboration and license agreement with akcea therapeutics , inc. , or akcea . tegsedi has received marketing authorization in the united states , eu and brazil for the treatment of stage 1 or stage 2 polyneuropathy in adult patients with hereditary transthyretin amyloidosis , or hattr amyloidosis . waylivra has received marketing authorization in the european union , or eu , for the treatment of familial chylomicronemia syndrome , or fcs . we anticipate filing for marketing authorization with anvisa in the second half of 2020. we have a pipeline of gene therapy product candidates for rare monogenic diseases that affect the central nervous system , or cns , including ptc-aadc for the treatment of aromatic l-amino acid decarboxylase , or aadc , deficiency , or aadc deficiency , a rare cns disorder arising from reductions in the enzyme aadc that result from mutations in the dopa decarboxylase gene . we are preparing a biologics license application , or bla , for ptc-aadc for the treatment of aadc deficiency in the united states , which we anticipate submitting to the fda in the second quarter of 2020. in january 2020 , we submitted a marketing authorization application , or maa , for ptc-aadc for the treatment of aadc deficiency in the eea to the ema and we expect an opinion from the committee for medicinal products for human use , or chmp , by the end of 2020. we also have a spinal muscular atrophy , or sma , collaboration with f. hoffman-la roche ltd. and hoffman-la roche inc. , which we refer to collectively as roche , and the spinal muscular atrophy foundation , or sma foundation . the lead compound in the sma program is risdiplam ( rg7916 , ro7034067 ) . roche submitted an nda for risdiplam to the fda in the fourth quarter of 2019 and the prescription drug user fee act , or pdufa , date for a decision by the fda is may 24 , 2020. risdiplam is expected to be indicated in the united states for sma type 1 , 2 and 3 patients , if approved . roche anticipates submitting an maa for risdiplam for the treatment of sma in the eea in mid-year 2020. in 2019 , we acquired substantially all of the assets of bioelectron technology corporation , or bioelectron , including certain compounds that we have begun to develop as part of our bio-e platform . in 2020 , we plan to initiate three trials in this platform with two unique compounds that regulate inflammation and oxidative stress . in addition , we have a pipeline of product candidates and discovery programs that are in early clinical , pre-clinical and research and development stages focused on the development of new treatments for multiple therapeutic areas , including rare diseases and oncology . overview—funding the success of our products and any other product candidates we may develop , depends largely on obtaining and maintaining reimbursement from governments and third-party insurers . during 2019 , our revenues were generated from sales of translarna for the treatment of nmdmd in countries where we were able to obtain acceptable commercial pricing and reimbursement terms and in select countries where we are permitted to distribute translarna under our eap programs , and from sales of emflaza for the treatment of dmd in the united states . story_separator_special_tag this is due to the numerous risks and uncertainties associated with developing drugs , including the uncertainty of : the scope , rate of progress and expense of our clinical trials and other research and development activities ; 114 the potential benefits of our product and product candidates over other therapies ; our ability to market , commercialize and achieve market acceptance for our product or any of our product candidates that we are developing or may develop in the future , including our ability to negotiate pricing and reimbursement terms acceptable to us ; clinical trial results ; the terms and timing of regulatory approvals ; and the expense of filing , prosecuting , defending and enforcing patent claims and other intellectual property rights . a change in the outcome of any of these variables with respect to the development of any of our products or product candidates could mean a significant change in the costs and timing associated with the development of that product candidates . for example , if the ema or fda or other regulatory authority were to require us to conduct clinical trials beyond those which we currently anticipate will be required for the completion of clinical development of any of our products or product candidate or if we experience significant delays in enrollment in any of our clinical trials , we could be required to expend significant additional financial resources and time on the completion of clinical development . selling , general and administrative expense selling , general and administrative expenses consist primarily of salaries and other related costs for personnel , including share-based compensation expenses , in our executive , legal , business development , finance , accounting , information technology and human resource functions . other selling , general and administrative expenses include facility-related costs not otherwise included in research and development expense ; advertising and promotional expenses ; costs associated with industry and trade shows ; and professional fees for legal services , including patent-related expenses , accounting services and miscellaneous selling costs . we expect that selling , general and administrative expenses will increase in future periods in connection with our continued efforts to commercialize our products , including increased payroll , expanded infrastructure , commercial operations , increased consulting , legal , accounting and investor relations expenses . interest expense , net interest expense , net consists of interest income earned on investments and interest expense from the convertible notes outstanding and interest expense from the credit agreement . critical accounting policies our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which we have prepared in accordance with generally accepted accounting principles in the united states . 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 revenues and expenses during the reporting periods . actual results may differ from these estimates under different assumptions or conditions . of our policies , the following are considered critical to an understanding of our consolidated financial statements as they require the application of the most subjective and complex judgment , involving critical accounting estimates and assumptions impacting our consolidated financial statements : revenue recognition convertible notes offering income taxes business combinations and asset acquisitions indefinite-lived intangible assets revenue recognition in may 2014 , the financial accounting standards board ( “ fasb ” ) issued accounting standards update ( “ asu ” ) no . 2014-9 , “ revenue from contracts with customers ( topic 606 ) ” . asu no . 2014-9 eliminated transaction- and industry-specific revenue recognition guidance under fasb accounting standards codification ( “ asc ” ) subtopic 605-15 , revenue recognition-products ( topic 605 ) and replaced it with a principle-based approach for determining revenue recognition . asc topic 606 requires 115 entities to 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 . on january 1 , 2018 , we adopted asc topic 606 using the modified retrospective approach , a practical expedient permitted under topic 606 , and applied this approach only to contracts that were not completed as of january 1 , 2018. we calculated a one-time transition adjustment of $ 3.3 million , which was recorded on january 1 , 2018 to the opening balance of accumulated deficit , related to the product sales of emflaza . the asc 606 transition adjustment recorded for emflaza resulted in sales being recognized earlier than under topic 605 , as the deferred revenue recognition model ( sell-through ) is not allowed under topic 606. the one-time adjustment consisted of $ 3.9 million in deferred revenue offset by $ 0.6 million of variable consideration . the information presented for the periods prior to january 1 , 2018 has not been adjusted and is reported under topic 605. periods prior to january 1 , 2018 we recognize revenue when amounts are realized or realizable and earned . revenue is considered realizable and earned when the following criteria are met : ( 1 ) persuasive evidence of an arrangement exists ; ( 2 ) delivery has occurred or services have been rendered ; ( 3 ) the price is fixed or determinable ; and ( 4 ) collection of the amounts due are reasonably assured . net product sales prior to the second quarter of 2017 , our net product sales have consisted primarily of sales of translarna for the treatment of nmdmd in territories outside of the u.s. we recognize revenue from product sales when there is persuasive evidence that an arrangement exists , title to product and associated risk of loss has passed to the customer ,

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sources of liquidity since inception , we have incurred significant operating losses . as a growing commercial-stage biopharmaceutical company , we are engaging in significant commercialization efforts for our products while also devoting a substantial portion of our efforts on research and development related to our products , product candidates and other programs . to date , almost all of our product revenue has been attributable to sales of translarna for the treatment of nmdmd in territories outside of the united states and from emflaza for the treatment of dmd in the united states . our ongoing ability to generate revenue from sales of translarna for the treatment of nmdmd is dependent upon our ability to maintain our marketing authorization in brazil and in the eea and secure market access through commercial programs following the conclusion of pricing and reimbursement terms at sustainable levels in the member states of the eea or through eap programs in the eea and other territories . the marketing authorization requires annual review and renewal by the european commission following reassessment by the ema of the benefit-risk balance of the authorization and is subject to the specific obligation to 122 conduct study 041. our ability to generate product revenue from emflaza will largely depend on the coverage and reimbursement levels set by governmental authorities , private health insurers and other third-party payors . on august 23 , 2018 , we completed our acquisition of agilis for total upfront consideration comprised of $ 49.2 million in cash and 3,500,907 shares of our common stock , which was determined by dividing $ 150.0 million by the volume-weighted average price per share of our common stock on nasdaq for the 10 consecutive trading-day period ending on the second trading-day immediately preceding the closing . agilis equityholders may become entitled to receive contingent payments from us based on the achievement of certain development , regulatory and net sales milestones as well as based upon a percentage of net sales of certain products .

subscription revenues increased 3.4 % to $ 1.04 billion in 2018 compared with $ 1.01 billion in 2017 , primarily due to growth in the number of subscriptions to the company 's digital-only products . revenue from the company 's digital-only subscription products ( which include our news product , as well as our crossword and cooking products ) increased 17.7 % compared with 2017 , to $ 400.6 million . excluding the impact of the additional week in p. 24 – the new york times company 2017 , estimated subscription revenues and digital-only subscription revenues increased 5.3 % and 20.2 % , respectively , driven by the same factors identified above . paid digital-only subscriptions totaled approximately 3,360,000 as of december 30 , 2018 , a 27.1 % increase compared with year-end 2017 . news product subscriptions totaled approximately 2,713,000 at the end of 2018 , a 21.6 % increase compared with 2017 . other product subscriptions , which include subscriptions to our crossword product and cooking product , totaled approximately 647,000 at the end of 2018 , a 56.7 % increase compared with 2017 . total advertising revenues remained flat at $ 558.3 million in 2018 compared with 2017 , reflecting a 6.5 % decrease in print advertising revenues , offset by an 8.6 % increase in digital advertising revenues . the decrease in print advertising revenues resulted from a continued decline in display advertising , primarily in the luxury and entertainment categories . the increase in digital advertising revenues primarily reflected increases in revenue from both direct-sold advertising and creative services , partially offset by a decrease in revenue from programmatic advertising . print and digital advertising revenues in 2017 also benefited from an extra week in the fiscal year . excluding the impact of the additional week in 2017 , estimated advertising revenues increased 1.7 % , driven by the same factors identified above . other revenues increased 36.0 % to $ 147.8 million in 2018 compared with $ 108.7 million in 2017 , largely due to growth in our commercial printing operations , affiliate referral revenue associated with the product review and recommendation website , wirecutter , and revenue from the rental of five and a half additional floors in our new york headquarters building . digital other revenues totaled $ 49.5 million in 2018 , an 18.8 % increase compared with 2017 , driven primarily by affiliate referral revenue associated with wirecutter . excluding the impact of the additional week in 2017 , estimated other revenues increased 36.7 % , driven by the same factors identified above . operating costs increased in 2018 to $ 1.56 billion from $ 1.49 billion in 2017 , driven by higher marketing expenses incurred to promote our brand and products and grow our subscriber base , labor and raw material costs related to our commercial printing operations , and costs related to our advertising business , partially offset by lower print production and distribution costs related to our newspaper . operating costs before depreciation , amortization , severance and multiemployer pension plan withdrawal costs ( or “ adjusted operating costs , ” a non-gaap measure ) increased in 2018 to $ 1.49 billion from $ 1.40 billion in 2017 . business environment we believe that a number of factors and industry trends have had , and will continue to have , an adverse effect on our business and prospects . these include the following : competition in our industry we operate in a highly competitive environment . our print and digital products compete for subscription and advertising revenue with both traditional and other content providers , as well as search engines and social media platforms . competition among companies offering online content is intense , and new competitors can quickly emerge . some of our current and potential competitors may have greater resources than we do , which may allow them to compete more effectively than us . our ability to compete effectively depends on , among other things , our ability to continue delivering high-quality journalism and content that is interesting and relevant to our audience ; the popularity , ease of use and performance of our products compared to those of our competitors ; the engagement of our current users with our products , and our ability to reach new users ; our ability to develop , maintain and monetize our products , and the pricing of our products ; our marketing and selling efforts ; the visibility of our content and products compared with that of our competitors ; our ability to provide marketers with a compelling return on their investments ; our ability to attract , retain and motivate talented employees , including journalists and product and technology specialists ; our ability to manage and grow our business in a cost-effective manner ; and our reputation and brand strength compared with those of our competitors . evolving subscription model subscription revenue is a significant source of revenue for us and an increasingly important driver as the overall composition of our revenues has shifted in response to our “ subscription-first ” strategy and transformations in our industry . the largest portion of our subscription revenue is currently from our print newspaper , where we have experienced declining circulation volume in recent years . this is due to , among other factors , increased competition the new york times company – p. 25 from digital media formats ( which are often free to users ) , higher print subscription and single-copy prices and a growing preference among some consumers to receive their news from sources other than a print newspaper . advances in technology have led to an increased number of methods for the delivery and consumption of news and other content . these developments are also driving changes in the preferences and expectations of consumers as they seek more control over how they consume content . story_separator_special_tag display advertising revenue is principally from advertisers promoting products , services or brands in print in the form of column-inch ads , and on our digital platforms in the form of banners , video , rich media and other interactive ads . display advertising also includes branded content on the times 's platforms . other advertising primarily represents , for our print products , classified advertising revenue , including line-ads sold in the major categories of real estate , help wanted , automotive and other as well as revenue from preprinted advertising , also known as free-standing inserts . digital other advertising revenue primarily includes creative services fees associated with , among other things , our digital marketing agencies and our branded content studio ; advertising revenue from our podcasts ; and advertising revenue generated by wirecutter , our product review and recommendation website . 2018 compared with 2017 replace_table_token_10_th print advertising revenues , which represented 54 % of total advertising revenues in 2018 , declined 6.5 % to $ 299.4 million in 2018 compared with $ 320.2 million in 2017 . the decrease was driven by a continued decline in display advertising revenue , primarily in the luxury and entertainment categories , as well as a decline in classified advertising revenue , primarily in the real estate category . excluding the impact of the additional week in 2017 , estimated print advertising revenues declined 5.3 % , driven by the same factors identified above . digital advertising revenues , which represented 46 % of total advertising revenues in 2018 , increased 8.6 % to $ 258.9 million in 2018 compared with $ 238.3 million in 2017 . t he increase primarily reflected increases in revenue from both direct-sold advertising and creative services , partially offset by a decrease in revenue from programmatic advertising . excluding the impact of the additional week in 2017 , estimated digital advertising revenues increased 11.3 % , driven by the same factors identified above . the new york times company – p. 31 2017 compared with 2016 replace_table_token_11_th print advertising revenues , which represented 57 % of total advertising revenues in 2017 , declined 13.9 % to $ 320.2 million in 2017 compared with $ 372.0 million in 2016 . the decrease was driven by a continued decline in display advertising revenue , primarily in the luxury , travel and real estate categories . excluding the impact of the additional week in 2017 , estimated print advertising revenues declined 15.0 % , driven by the same factors identified above . digital advertising revenues , which represented 43 % of total advertising revenues in 2017 , increased 14.2 % to $ 238.3 million in 2017 compared with $ 208.8 million in 2016 . t he increase primarily reflected increases in display advertising revenue from mobile advertising and branded content , as well as an increase in other advertising revenue , primarily associated with growth in creative services fees . this was partially offset by a continued decline in traditional website display advertising . excluding the impact of the additional week in 2017 , estimated digital advertising revenues increased 11.5 % , driven by the same factors identified above . other revenues other revenues primarily consist of revenues from licensing , affiliate referrals , building rental revenue , commercial printing , nyt live ( our live events business ) and retail commerce . digital other revenues consists primarily of digital archive licensing and affiliate referral revenue . building rental revenue consists of revenue from the lease of floors in our new york headquarters building , which totaled $ 23.3 million , $ 16.7 million and $ 17.1 million in 2018 , 2017 and 2016 , respectively . 2018 compared with 2017 other revenues increased 36.0 % in 2018 compared with 2017 largely due to growth in our commercial printing operations , affiliate referral revenue associated with our product review and recommendation website , wirecutter , and higher rental revenue from the lease of additional space in our new york headquarters building . digital other revenues totaled $ 49.5 million in 2018 , an 18.8 % increase compared with 2017 , driven primarily by affiliate referral revenue associated with wirecutter . excluding the impact of the additional week in 2017 , estimated other revenues increased 36.7 % , driven by the same factors identified above . 2017 compared with 2016 other revenues increased 15.6 % in 2017 compared with 2016 largely due to affiliate referral revenue associated with wirecutter , which the company acquired in october 2016. digital other revenues totaled $ 41.7 million in 2017 , a 83.7 % increase compared with 2016 , driven primarily by affiliate referral revenue associated with wirecutter . excluding the impact of the additional week in 2017 , estimated other revenues increased 14.9 % , driven by the same factor identified above . p. 32 – the new york times company operating costs operating costs were as follows : replace_table_token_12_th the components of operating costs as a percentage of total operating costs were as follows : replace_table_token_13_th the components of operating costs as a percentage of total revenues were as follows : replace_table_token_14_th the new york times company – p. 33 production costs production costs include items such as labor costs , raw materials and machinery and equipment expenses related to news gathering and production activity , as well as costs related to producing branded content . 2018 compared with 2017 production costs increased in 2018 compared with 2017 , primarily driven by increases in wages and benefits ( approximately $ 17 million ) , raw materials expense ( approximately $ 10 million ) and outside services costs ( approximately $ 10 million ) . wages and benefits increased primarily as a result of increased hiring to support the company 's initiatives . raw materials expense increased due to increased commercial printing activity and higher newsprint prices . outside services costs increased primarily due to higher costs associated with the

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net cash used in investing activities in 2018 was primarily related to capital expenditures of $ 77.5 million and $ 36.5 million in net purchases of marketable securities . net cash provided by investing activities in 2017 was primarily related to maturities and disposals of marketable securities of $ 548.5 million and proceeds from the sale of our 49 % share in malbaie of $ 15.6 million , offset by purchases of marketable securities of $ 466.5 million and capital expenditures of $ 84.8 million . net cash provided by investing activities in 2016 was primarily due to maturities of marketable securities , offset by purchases of marketable securities and a cash distribution of $ 38.0 million from the liquidation of certain the new york times company – p. 45 investments related to our corporate-owned life insurance , consideration paid for acquisitions of $ 40.4 million and payments for capital expenditures of $ 30.1 million . payments for capital expenditures were approximately $ 77 million , $ 85 million and $ 30 million in 2018 , 2017 and 2016 , respectively . financing activities cash from financing activities generally includes borrowings under third-party financing arrangements , the issuance of long-term debt and funds from stock option exercises . cash used in financing activities generally includes the repayment of amounts outstanding under third-party financing arrangements , the payment of dividends , the payment of long-term debt and capital lease obligations and stock-based compensation tax withholding . net cash provided by financing activities in 2018 was primarily related to stock issuances in connection with option exercises of $ 41.3 million , partially offset by dividend payments of $ 26.4 million and stock-based compensation tax withholding of $ 10.5 million . net cash used in financing activities in 2017 was primarily related to dividend payments ( $ 26.0 million ) . net cash used in financing activities in 2016 was primarily related to the repayment , at maturity , of the $ 189.2 million remaining principal amount under our 6.625 % senior notes in december 2016 , dividend payments of $ 25.9 million and share repurchases of $ 15.7 million .

proved reserves represent estimated quantities of natural gas , crude oil , condensate , and natural gas liquids that geological and engineering data demonstrate , with reasonable certainty , to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made . the process of estimating quantities of proved oil and gas reserves is very complex , requiring significant subjective decisions in the evaluation of all available geological , engineering and economic data for each reservoir . the data for a given reservoir may also change substantially over time as a result of numerous factors including , but not limited to , additional development activity , evolving production history and continual reassessment of the viability of production under varying economic conditions . consequently , material revisions ( upward or downward ) to existing reserve estimates may occur from time to time . 29 depreciation , depletion and amortization for oil and gas properties the quantities of estimated proved oil and gas reserves are a significant component of our calculation of depletion expense and revisions in such estimates may alter the rate of future expense . holding all other factors constant , if reserves were revised upward or downward , earnings would increase or decrease respectively . depreciation , depletion and amortization of the cost of proved oil and gas properties are calculated using the unit-of-production method . the reserve base used to calculate depletion , depreciation or amortization is the sum of proved developed reserves and proved undeveloped reserves for leasehold acquisition costs and the cost to acquire proved properties . the reserve base includes only proved developed reserves for lease and well equipment costs , which include development costs and successful exploration drilling costs . estimated future dismantlement , restoration and abandonment costs , net of salvage values , are taken into account . story_separator_special_tag style= `` color : # 999999 `` width= `` 100 % `` / > monetized crude oil swaps with original settlement dates from january 2012 through december 2013 for net proceeds of $ 1.0 million . the $ 1.0 million gain associated with these early settlement transactions is included in realized gain on derivative instruments for the year ended december 31 , 2012. oil and gas prices received including the impact of derivatives but excluding the early settlement transactions were : replace_table_token_12_th we do not apply hedge accounting to any of our commodity based derivatives thus changes in the fair market value of commodity contracts held at the end of a reported period , referred to as mark-to-market adjustments , are recognized as unrealized gains and losses in the accompanying consolidated statements of operations . as oil and natural gas prices remain volatile , mark-to-market accounting treatment creates volatility in our revenues . during the year ended december 31 , 2013 , we recognized $ 0.6 million in net unrealized losses . this unrealized loss primarily relates to held crude oil and natural gas fixed swaps and collars associated with future production due to an increase in crude oil and natural gas futures market prices between january 1 , 2013 and december 31 , 2013. field service income increased $ 4.51 million , or 22 % from $ 20.42 million for the year ended december 31 , 2012 to $ 24.93 million for the year ended december 31 , 2013. this underlying increase is a result of adding service equipment and the market allowing us to charge slightly higher rates to customers . workover rig services represent the bulk of our field service operations , and those rates have all increased between the periods in our most active districts . lease operating expense increased $ 3.94 million , or 10 % from $ 39.87 million for the year ended december 31 , 2012 to $ 43.81 million for the year ended december 31 , 2013. this underlying increase is primarily due to higher pumper / labor costs and chemical expenses associated with new wells coming on line from the recent drilling success in west texas and increased expensed workovers across all districts , partially offset by decreased operating expenses on the offshore properties during 2013. field service expense increased $ 3.45 million , or 20 % from $ 17.58 million for the year ended december 31 , 2012 to $ 21.03 million for the year ended december 31 , 2013. field service expenses primarily consist of salaries and vehicle operating expenses which have increased as a direct result of increased services and utilization of the equipment during the year ended december 31 , 2013 as compared to the same period of 2012. depreciation , depletion , amortization and accretion on discounted liabilities decreased $ 1.41 million , or 6 % from $ 23.27 million for the year ended december 31 , 2012 to $ 21.86 million for the year ended december 31 , 2013. this decrease is primarily due to decreased depletion rates recognized during 2013 associated with offshore properties as our offshore properties were plugged and abandoned during 2012 , partially offset by increased depletion expenses related to new wells coming on line from the recent drilling success in west texas . general and administrative expense increased $ 0.79 million , or 5 % from $ 15.87 million for the year ended december 31 , 2012 to $ 16.66 million for the year ended december 31 , 2013. this slight increase is largely due to increased personnel costs in 2013. the largest component of these personnel costs was salaries , employee related taxes and insurance . gain on sale and exchange of assets of $ 2.82 million for the year ended december 31 , 2013 consists of sales of non-producing acreage and non-core oil and gas interests and non-essential field service equipment 32 whereas the gain on sale and exchange of assets of $ 0.73 million for the year ended december 31 , 2012 consists of sales of non-essential field service equipment . story_separator_special_tag proved reserves represent estimated quantities of natural gas , crude oil , condensate , and natural gas liquids that geological and engineering data demonstrate , with reasonable certainty , to be recoverable in future years from known reservoirs under economic and operating conditions existing at the time the estimates were made . the process of estimating quantities of proved oil and gas reserves is very complex , requiring significant subjective decisions in the evaluation of all available geological , engineering and economic data for each reservoir . the data for a given reservoir may also change substantially over time as a result of numerous factors including , but not limited to , additional development activity , evolving production history and continual reassessment of the viability of production under varying economic conditions . consequently , material revisions ( upward or downward ) to existing reserve estimates may occur from time to time . 29 depreciation , depletion and amortization for oil and gas properties the quantities of estimated proved oil and gas reserves are a significant component of our calculation of depletion expense and revisions in such estimates may alter the rate of future expense . holding all other factors constant , if reserves were revised upward or downward , earnings would increase or decrease respectively . depreciation , depletion and amortization of the cost of proved oil and gas properties are calculated using the unit-of-production method . the reserve base used to calculate depletion , depreciation or amortization is the sum of proved developed reserves and proved undeveloped reserves for leasehold acquisition costs and the cost to acquire proved properties . the reserve base includes only proved developed reserves for lease and well equipment costs , which include development costs and successful exploration drilling costs . estimated future dismantlement , restoration and abandonment costs , net of salvage values , are taken into account . story_separator_special_tag style= `` color : # 999999 `` width= `` 100 % `` / > monetized crude oil swaps with original settlement dates from january 2012 through december 2013 for net proceeds of $ 1.0 million . the $ 1.0 million gain associated with these early settlement transactions is included in realized gain on derivative instruments for the year ended december 31 , 2012. oil and gas prices received including the impact of derivatives but excluding the early settlement transactions were : replace_table_token_12_th we do not apply hedge accounting to any of our commodity based derivatives thus changes in the fair market value of commodity contracts held at the end of a reported period , referred to as mark-to-market adjustments , are recognized as unrealized gains and losses in the accompanying consolidated statements of operations . as oil and natural gas prices remain volatile , mark-to-market accounting treatment creates volatility in our revenues . during the year ended december 31 , 2013 , we recognized $ 0.6 million in net unrealized losses . this unrealized loss primarily relates to held crude oil and natural gas fixed swaps and collars associated with future production due to an increase in crude oil and natural gas futures market prices between january 1 , 2013 and december 31 , 2013. field service income increased $ 4.51 million , or 22 % from $ 20.42 million for the year ended december 31 , 2012 to $ 24.93 million for the year ended december 31 , 2013. this underlying increase is a result of adding service equipment and the market allowing us to charge slightly higher rates to customers . workover rig services represent the bulk of our field service operations , and those rates have all increased between the periods in our most active districts . lease operating expense increased $ 3.94 million , or 10 % from $ 39.87 million for the year ended december 31 , 2012 to $ 43.81 million for the year ended december 31 , 2013. this underlying increase is primarily due to higher pumper / labor costs and chemical expenses associated with new wells coming on line from the recent drilling success in west texas and increased expensed workovers across all districts , partially offset by decreased operating expenses on the offshore properties during 2013. field service expense increased $ 3.45 million , or 20 % from $ 17.58 million for the year ended december 31 , 2012 to $ 21.03 million for the year ended december 31 , 2013. field service expenses primarily consist of salaries and vehicle operating expenses which have increased as a direct result of increased services and utilization of the equipment during the year ended december 31 , 2013 as compared to the same period of 2012. depreciation , depletion , amortization and accretion on discounted liabilities decreased $ 1.41 million , or 6 % from $ 23.27 million for the year ended december 31 , 2012 to $ 21.86 million for the year ended december 31 , 2013. this decrease is primarily due to decreased depletion rates recognized during 2013 associated with offshore properties as our offshore properties were plugged and abandoned during 2012 , partially offset by increased depletion expenses related to new wells coming on line from the recent drilling success in west texas . general and administrative expense increased $ 0.79 million , or 5 % from $ 15.87 million for the year ended december 31 , 2012 to $ 16.66 million for the year ended december 31 , 2013. this slight increase is largely due to increased personnel costs in 2013. the largest component of these personnel costs was salaries , employee related taxes and insurance . gain on sale and exchange of assets of $ 2.82 million for the year ended december 31 , 2013 consists of sales of non-producing acreage and non-core oil and gas interests and non-essential field service equipment 32 whereas the gain on sale and exchange of assets of $ 0.73 million for the year ended december 31 , 2012 consists of sales of non-essential field service equipment .

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liquidity and capital resources : net cash provided by operating activities for the year ended december 31 , 2013 was $ 36 million , compared to $ 40 million in the prior year . excluding the effects of significant unforeseen expenses or other income , our cash flow from operations fluctuates primarily because of variations in oil and gas production and prices or changes in working capital accounts . our oil and gas production will vary based on actual well performance but may be curtailed due to factors beyond our control . our realized oil and gas prices vary due to world political events , supply and demand of products , product storage levels , and weather patterns . we sell the vast majority of our production at spot market prices . accordingly , product price volatility will affect our cash flow from operations . to mitigate price volatility we sometimes lock in prices for some portion of our production through the use of derivatives . if our exploratory drilling results in significant new discoveries , we will have to expend additional capital in order to finance the completion , development , and potential additional opportunities generated by our success . we believe that , because of the additional reserves resulting from the successful wells and our record of reserve growth in recent years , we will be able to access sufficient additional capital through additional bank financing . as of march 1 , 2014 , the company maintains a credit facility totaling $ 250 million , with a borrowing base of $ 140 million . the bank reviews the borrowing base semi-annually and , at their discretion , may decrease or propose an increase to the borrowing base relative to a redetermined estimate of proved oil and gas reserves . our oil and gas properties are pledged as collateral for the line of credit and we are subject to certain financial and operational covenants defined in the agreement . we are currently in compliance with these covenants and expect to be in compliance over the next twelve months .

these risks and uncertainties include but are not limited to those risks and uncertainties set forth in item 1a of this report . in light of the significant risks and uncertainties inherent in the forward-looking statements included in this report , the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved . further , these forward-looking statements reflect our view only as of the date of this report . except as required by law , we undertake no obligations to update any forward-looking statements and we disclaim any intent to update forward-looking statements after the date of this report to reflect subsequent developments . accordingly , you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the securities and exchange commission . results of operations revenues and gross profit from continuing operations were as follows ( in thousands , except percentages ) : replace_table_token_3_th 23 revenue the $ 5.4 million decrease in total revenue during the year ended december 31 , 2013 as compared to the prior year is primarily due to the non-recurrence of $ 4.3 million in upfront license fees from our commercial partners sandoz , abbott and takeda , received during the year ended december 31 , 2012 . this was partially offset by $ 0.6 million in license fee revenue in 2013 from bracco and $ 0.3 million in license fee revenue from sandoz as a result of substantive milestones received upon regulatory approvals in italy and germany , respectively . this decrease was also due to decreased contract service revenue in 2013 as compared to the prior year due to the loss of certain contract service customers in france in 2013 as compared to 2012 , following the deconsolidation of our former french subsidiaries in april 2013. we expect our cash inflows from operations during 2014 will be from licensing and milestone revenues received from commercial partners for our vitaros ® product . the timing of these revenues are uncertain , as such our revenue will vary significantly between periods . the $ 4.3 million increase in total revenue during the year ended december 31 , 2012 as compared to the prior year was primarily attributable to recognizing $ 4.3 million in upfront license fees during 2012 from sandoz , abbott and takeda compared to a total of $ 0.9 million recognized in 2011 from bracco , elis and neopharm . additionally , we recognized $ 2.9 million of revenue from contract services related to our former french subsidiaries , which were included in our statements of operations beginning in july 2012 , as well as service revenue from warner chilcott in the amount of $ 0.5 million in 2012. these increases were partially offset by the $ 2.1 decrease in contract service revenue resulting from the sale of our subsidiary , bio-quant , in june 2011 and for a $ 0.5 million reduction in grant revenue from government grants awarded to us during 2011 under the qtdp program . we did not apply for grants during 2012. cost of service revenue our cost of service revenue includes compensation , related personnel expenses and contract services to support our contract service revenue . the $ 1.6 million decrease in cost of service revenue during the year ended december 31 , 2013 , as compared to the prior year , is primarily due to contract services related to our former french subsidiaries , which were included in our statements of operations beginning july 2012 and deconsolidated in april 2013. accordingly , the 2013 results include approximately four months of expenses for the french operations and 2012 includes approximately five and one-half months of expenses . additionally , we had comparable contract service expenses in 2013 as compared to 2012 related to our warner chilcott service revenue . the $ 2.4 million increase in cost of service revenue during the year ended december 31 , 2012 , as compared to the prior year , is primarily due to contract services related to our former french subsidiaries , which were included in our statements of operations beginning in july 2012. in addition , we incurred approximately $ 0.3 million in contract service expenses related to our warner chilcott service revenue . these increases were partially offset by the $ 1.8 million decrease in expenses associated with our subsidiary , bio-quant , which was sold in june 2011. costs and expenses , net costs and expenses , net from continuing operations were as follows ( in thousands , except percentages ) : replace_table_token_4_th 24 research and development expenses research and development costs are expensed as incurred and include the cost of compensation and related expenses , as well as expenses for third parties who conduct research and development on our behalf , pursuant to development and consulting agreements in place . the $ 0.3 million decrease in our research and development expenditures during the year ended december 31 , 2013 , as compared to the prior year , reflects a decrease in license fees related to the purchase of a pediatrx license in 2012 offset by an increase in consulting services to support our regulatory filings for vitaros ® in europe . we expect to have net cash outflows from operations in 2014 as we further develop room temperature vitaros ® and seek to develop new product candidates within our pipeline using our existing technology . story_separator_special_tag as a result of the sale , we did not amortize the deferred rental income over the term of the lease and accordingly , a charge in the amount of $ 0.2 million was recorded in 2012. these impairment charges were recorded in the statement of operations and comprehensive loss in general and administrative expenses . we completed the sale of these assets in march 2013. in december 2012 , the company made the strategic decision to divest the oncology supportive care business . the decision to sell the business was a triggering event that required us to evaluate our assets held for sale including our intangible assets for impairment by comparing the book values of the company 's co-promotion rights , technology licenses and trade names against their respective estimated fair value . the evaluation of our oncology supportive care business , with the assistance of a third-party valuation firm , included estimating the fair value of the company 's co-promotion rights , technology licenses and trade names , which were determined using a discounted cash flows model and a market approach based on multiple offers the company received for certain assets of the business . the discounted cash flows model requires certain assumptions and judgments , including but not limited to : estimation of future cash flows , which is dependent on internal forecasts , estimation of the long-term rate of growth for the businesses , the useful life over which cash flows will occur , and determination of the company 's weighted average cost of capital . we determined that estimated future cash flows expected to result from the use of the assets used in that business and their eventual disposition were less than their carrying amount . we recorded an impairment charge of $ 1.8 million in december 2012 to write down our intangible assets to $ 1.9 million . income taxes we recognize deferred taxes under the asset and liability method of accounting for income taxes by which deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities at enacted statutory tax rates in effect for the years in which the differences are expected to reverse . the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date . in addition , valuation allowances are established , when necessary , to reduce deferred tax assets to the amounts expected to be realized . 30 in consideration of our accumulated losses and lack of historical ability to generate taxable income to utilize our deferred tax assets , we have determined it is not more likely than not we will be able to realize any benefit from our temporary differences and have recorded a full valuation allowance . if we become profitable in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the net operating loss carry-forward , we would record the estimated net realized value of the deferred tax asset at that time and would then provide for income taxes at a rate equal to our combined federal and state effective rates , which would be approximately 40 % under current tax laws . subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period . our policy is to recognize interest and penalties related to income tax matters in income tax expense . as the unrecognized tax benefits relate to un-utilized deferred tax assets and because we have generated net operating losses since inception for both federal and state income tax purposes through 2009 , no additional tax liability , penalties or interest have been recognized for balance sheet or statement of operations purposes as of and for the period ended december 31 , 2013 and 2012. stock based compensation in preparation of our consolidated financial statements , we calculate the value of stock options and restricted stock issued to employees , non-employee contractors and warrants issued to investors . the fair value of each option and warrant is estimated on the date of grant using the black-scholes option pricing model . the black-scholes option pricing model is a generally accepted method of estimating the fair value of stock options and warrants . the black-scholes option pricing model requires us to estimate our dividend yield rate , expected volatility and risk free interest rate over the life of the option . the use of estimates on these factors may cause the fair value of the option to be under or over estimated . see note 9 in the notes to the consolidated financial statements for the current estimates used in the black-scholes option pricing model . fair value of embedded derivative we calculate , on a monthly basis , the value of the embedded derivative as it relates to our convertible notes payable . the fair value of the derivative uses the black-scholes model and requires us to estimate our dividend yield rate , expected volatility and risk free interest rate over the life of the note . see note 7 to the consolidated financial statements for the current estimates used in the black-scholes model . item 7a . qualitative and quantitative disclosures about market risk our primary exposure to market risk is interest income sensitivity , which is affected by changes in the general level of u.s. interest rates , particularly because the majority of our investments are in short-term marketable securities . the primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk . some of the securities may be subject to market risk . this means that a change in prevailing interest rates may cause the value of the investment to fluctuate .

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cash used in operating activities was $ 15.1 million in 2013 , compared to $ 12.4 million in 2012 . the $ 2.7 million decrease in cash provided by operating activities in 2013 as compared to 2012 is due to a decrease in net loss from continuing operations of $ 9.8 million from 2012 to 2013 , adjusted for non-cash items including stock based compensation expense of $ 2.0 million , a benefit of $ 0.6 million related to the deconsolidation of our former french subsidiaries , and a $ 0.5 million gain on contract settlement . the change in net operating assets resulted mainly from a decrease in accounts payable and a decrease in accrued compensation offset by an increase in deferred revenue . cash used in operating activities was $ 12.4 million in 2012 , compared to $ 9.8 million in 2011 . the $ 2.6 million decrease in cash provided by operating activities in 2012 as compared to 2011 is due to a decrease in net loss from continuing operations of $ 7.5 million from 2011 to 2012 , adjusted for non-cash items including $ 8.3 million of impairment charges to goodwill and intangible assets , stock based compensation expense of $ 2.9 million as well as a $ 1.3 million deferred tax provision charge . the change in net operating assets resulted mainly from a decrease in prepaid expenses and other current assets offset by an increase in accounts payable . cash used in operating activities in 2011 consisted of net loss from continuing operations of $ 18.2 million offset by changes of $ 8.4 million in net operating assets , for total cash used in operating activities of $ 9.8 million . the primary non-cash expenses added back to net loss included stock based compensation expense of $ 2.1 million , a $ 2.8 million loss on the sale of our bio-quant subsidiary as well as $ 0.6 million in depreciation and amortization expense . the change in net operating assets resulted mainly from increases to accrued expenses and accounts payable .

completion of the merger is subject to certain customary conditions , including , among others : ( i ) approval of the merger agreement by holders of a majority of the outstanding common units of the partnership ; ( ii ) approval of the archrock share issuance by a majority of the shares of archrock common stock present in person or represented by proxy at the special meeting of archrock stockholders ; ( iii ) expiration or termination of applicable waiting periods under the hsr act ( early termination of the waiting period under the hsr act was granted february 9,2018 ) ; ( iv ) there being no law or injunction prohibiting consummation of the transactions contemplated under the merger agreement ; ( v ) the effectiveness of a registration statement on form s-4 relating to the archrock share issuance ; ( vi ) approval for listing on the new york stock exchange of the shares of archrock common stock issuable pursuant to the archrock share issuance ; ( vii ) subject to specified materiality standards , the accuracy of certain representations and warranties of the other party ; and ( viii ) compliance by the other party in all material respects with its covenants . as a result of the completion of the proposed merger , common units of the partnership will no longer be publicly traded . all of the partnership 's outstanding debt is expected to remain outstanding . we and the partnership expect to issue , to the extent not already in place , guarantees of the indebtedness of archrock and the partnership . subject to the satisfaction or waiver of certain conditions , including the approval of the merger agreement by the partnership 's unitholders and approval of the issuance of archrock common stock in connection with the proposed merger by archrock shareholders , the proposed merger is expected to close in the second quarter of 2018. the merger agreement contains certain termination rights , including the right for either us or the partnership , as applicable , to terminate the merger agreement if the closing of the transactions contemplated by the merger agreement has not occurred on or before september 30 , 2018. in the event of termination of the merger agreement under certain circumstances , we may be required to pay the partnership a termination fee of $ 10 million . as we control the partnership and will continue to control the partnership after the proposed merger , the change in our ownership interest will be accounted for as an equity transaction , and no gain or loss will be recognized in our consolidated statements of operations resulting from the proposed merger . the tax effects of the proposed merger will be reported as adjustments to long-term assets associated with discontinued operations , deferred income taxes , additional paid-in capital and other comprehensive income . at december 31 , 2017 , we owned all of the general partner interest , including incentive distribution rights , and a portion of the limited partner interest , which together represented an approximate 43 % ownership interest in the partnership . the equity interests in and earnings of the partnership that were owned by the public at december 31 , 2017 are reflected in “ noncontrolling interest ” and “ net ( income ) loss attributable to the noncontrolling interest ” in our consolidated balance sheets and consolidated statement of operations , respectively . our general partner incentive distribution rights will be terminated at the closing of the proposed merger . see note 1 ( “ organization and summary of significant accounting policies ” ) and note 23 ( “ proposed merger ” ) to our financial statements for details of the proposed merger . acquisitions in november 2016 , we completed the november 2016 contract operations acquisition whereby we sold to the partnership contract operations customer service agreements with 63 customers and a fleet of 262 compressor units used to provide compression services under those agreements , comprising approximately 147,000 horsepower , or approximately 4 % ( of then-available horsepower ) of our and the partnership 's combined u.s. contract operations business . total consideration for the transaction was $ 85.0 million , excluding transaction costs . 43 in march 2016 , the partnership completed the march 2016 acquisition whereby it acquired contract operations customer service agreements with four customers and a fleet of 19 compressor units used to provide compression services under those agreements , comprising approximately 23,000 horsepower , for a purchase price of $ 18.8 million . in april 2015 , we completed the april 2015 contract operations acquisition whereby we sold to the partnership contract operations customer service agreements with 60 customers and a fleet of 238 compressor units used to provide compression services under those agreements , comprising approximately 148,000 horsepower , or 3 % ( of then-available horsepower ) of the combined contract operations business of the partnership and us . the assets sold to the partnership also included 179 compressor units , comprising approximately 66,000 horsepower , previously leased by us to the partnership . total consideration for the transaction was $ 102.3 million , excluding transaction costs . see note 4 ( “ business acquisitions ” ) and note 19 ( “ transactions related to the partnership ” ) to our financial statements for further details of these transactions . trends and outlook our business environment and corresponding operating results are affected by the level of energy industry spending for the exploration , development and production of oil and natural gas reserves in the u.s. spending by oil and natural gas exploration and production companies is dependent upon these companies ' forecasts regarding the expected future supply , demand and pricing of oil and natural gas products as well as their estimates of risk-adjusted costs to find , develop and produce reserves . story_separator_special_tag these decreases were partially offset by a $ 1.5 million increase in bad debt expense , a $ 1.4 million franchise tax benefit recorded as a result of the settlement of a franchise tax refund claim during the second quarter of 2016 and $ 1.3 million of corporate office relocation costs recorded in the third quarter of 2017 ( see note 14 ( “ corporate office relocation ” ) to our financial statements . depreciation and amortization . the decrease in depreciation and amortization expense during the year ended december 31 , 2017 compared to the year ended december 31 , 2016 was primarily due to a decrease in depreciation expense resulting from certain assets reaching the end of their depreciable lives as well as the impact of asset impairments during 2016 and 2017 , partially offset by an increase in depreciation expense associated with fixed asset additions . long-lived asset impairment . during the years ended december 31 , 2017 and 2016 , we reviewed the future deployment of our idle compression assets for units that were not of the type , configuration , condition , make or model that are cost efficient to maintain and operate . in addition , we evaluated for impairment idle units that had been culled from our fleet in prior years and were available for sale . see note 12 ( “ long-lived asset impairment ” ) to our financial statements for further details . 48 the following table presents the results of our impairment review , as recorded in our contract operations segment , for the years ended december 31 , 2017 and 2016 ( dollars in thousands ) : replace_table_token_9_th in addition to the impairment discussed above , $ 2.9 million of property , plant and equipment was impaired during the year ended december 31 , 2017 as the result of physical asset observations and other events that indicated the assets ' carrying values were not recoverable , which was comprised of approximately 7,000 horsepower of idle compressor units and $ 0.8 million of leasehold improvements and furniture and fixtures that were impaired in conjunction with the relocation of our corporate office during the third quarter . see note 14 ( “ corporate office relocation ” ) to our financial statements for further details . restatement and other charges . during the years ended december 31 , 2017 and 2016 , we incurred $ 4.4 million and $ 13.5 million , respectively , of restatement and other charges primarily related to sharing a portion of professional and legal fees incurred by exterran corporation related to the restatement of prior period consolidated and combined financial statements and related disclosures and related matters described in note 20 ( “ commitments and contingencies ” ) to our financial statements . in addition , the restatement charges include separate professional expenses and legal fees incurred by archrock during the years ended december 31 , 2017 and 2016. restructuring and other charges . as discussed in note 3 ( “ discontinued operations ” ) to our financial statements , we completed the spin-off on the distribution date . during the years ended december 31 , 2017 and 2016 , we incurred $ 1.4 million and $ 3.6 million , respectively of costs associated with the spin-off which were directly attributable to archrock . these charges are reflected as restructuring and other charges in our consolidated statement of operations . in the first quarter of 2016 we determined to undertake a cost reduction program to reduce our on-going operating expenses , including workforce reductions and closure of certain of our make-ready shops . these actions were a result of our review of our businesses and efforts to efficiently manage cost and maintain our businesses in line with then current and expected activity levels and anticipated make ready demand in the u.s. market . during the year ended december 31 , 2016 , we incurred $ 13.3 million of restructuring and other charges as a result of this plan primarily related to severance benefits and consulting fees . these charges are reflected as restructuring and other charges in our consolidated statement of operations . interest expense . the increase in interest expense during the year ended december 31 , 2017 compared to the year ended december 31 , 2016 was primarily due to an increase in the weighted average effective interest rate and a $ 0.6 million write-off of deferred financing costs associated with the termination of the former credit facility , partially offset by a decrease in the average outstanding balance of long-term debt . other income , net . the decrease in other income , net during the year ended december 31 , 2017 compared to the year ended december 31 , 2016 was primarily due to a $ 2.9 million decrease in indemnification income received pursuant to our tax matters agreement with exterran corporation , a $ 0.5 million decrease in income related to transition services provided to exterran corporation in conjunction with the spin-off , a $ 0.3 million decrease in gain on sale of property , plant and equipment and a $ 0.3 million increase in merger-related expenses , partially offset by the incurrence in the year ended december 31 , 2016 of a $ 0.6 million loss on non-cash consideration and a combined $ 0.5 million of expensed acquisition cost associated with the march 2016 acquisition and the november 2016 contract operations acquisition . 49 income taxes ( dollars in thousands ) replace_table_token_10_th the increase in benefit from income taxes during the year ended december 31 , 2017 compared to the year ended december 31 , 2016 was primarily due to the tax benefit from remeasuring our deferred tax liabilities and assets due to the corporate rate reduction from the tcja ( see note 15 ( “ income taxes ” ) to our financial statements ) , the tax impact of the new share-based compensation accounting standard ( see note 2 (

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debt extinguishment . the decrease in debt extinguishment during the year ended december 31 , 2016 compared to the year ended december 31 , 2015 was associated with the redemption of our 7.25 % senior notes which included a $ 6.3 million call premium and $ 2.9 million of unamortized deferred financing costs . other income , net . the increase in other income , net during the year ended december 31 , 2016 compared to the year ended december 31 , 2015 was primarily due to a $ 4.4 million increase in gain on sale of property , plant and equipment , a $ 2.9 million increase in indemnification income received pursuant to our tax matters agreement with exterran corporation , partially offset by a $ 0.6 million loss on non-cash consideration associated with the march 2016 acquisition . 52 income taxes ( dollars in thousands ) replace_table_token_16_th the increase in our benefit from income taxes during the year ended december 31 , 2016 compared to the year ended december 31 , 2015 was a result of a valuation allowance and write off of tax attributes recorded in 2015 , which were not required in 2016. the benefit was further increased by the settlement of a state tax audit . discontinued operations ( dollars in thousands ) replace_table_token_17_th income ( loss ) from discontinued operations , net of tax , during the years ended december 31 , 2016 and 2015 includes the results of operations of the exterran corporation businesses for periods prior to the spin-off on the distribution date and our contract water treatment business . as discussed in note 3 ( “ discontinued operations ” ) to our financial statements , on the distribution date we completed the spin-off of exterran corporation .

net sales for henglong were $ 164.1 million for the year ended december 31 , 2019 , compared with $ 250.5 million for the year ended december 31 , 2018 , representing a decrease of $ 86.4 million , or 34.5 % , which was mainly due to soft demand in the china domestic brand automobile market in 2019 and the shift of production capacity to henglong kyb after its establishment . a decrease in sales volume led to a sales decrease of $ 59.9 million , a decrease in selling price led to a sales decrease of $ 15.2 million , and the effect of foreign currency translation of the rmb against the u.s. dollar led to a sales decrease of $ 11.3 million . — jiulong mainly engages in providing commercial vehicle steering systems . net sales for jiulong were $ 88.5 million for the year ended december 31 , 2019 , compared with $ 103.0 million for the year ended december 31 , 2018 , representing a decrease of $ 14.5 million , or 14.1 % . a decrease in sales volume led to a sales decrease of $ 10.3 million , an increase in selling price led to a sales increase of $ 0.2 million , and the effect of foreign currency translation of the rmb against the u.s. dollar led to a sales decrease of $ 4.4 million . — shenyang mainly engages in providing vehicle steering systems to shenyang brilliance jinbei automobile co. , ltd. , “ jinbei ” , one of the major automotive manufacturers in china . net sales for shenyang were $ 20.2 million for the year ended december 31 , 2019 , compared with $ 25.9 million for the year ended december 31 , 2018 , representing a decrease of $ 5.7 million , or 22.0 % . a decrease in sales volume led to a sales decrease of $ 2.6 million , a decrease in selling price led to a sales decrease of $ 2.2 million , and the effect of foreign currency translation of the rmb against the u.s. dollar led to a sales decrease of $ 0.9 million . — wuhu mainly engages in providing vehicle steering systems to chery automobile co. , ltd. , “ chery ” , one of the major automotive manufacturers in china . net sales for wuhu were $ 20.4 million for the year ended december 31 , 2019 , compared with $ 30.4 million for the year ended december 31 , 2018 , representing a decrease of $ 10.0 million , or 32.9 % . a decrease in sales volume led to a sales decrease of $ 8.0 million , a decrease in selling price led to a sales decrease of $ 0.6 million , and the effect of foreign currency translation of the rmb against the u.s. dollar led to a sales decrease of $ 1.4 million . — hubei henglong mainly engages in providing vehicle steering systems to chrysler and ford . net sales for hubei henglong were $ 121.7 million for the year ended december 31 , 2019 , compared with $ 123.2 million for the year ended december 31 , 2018 , representing a decrease of $ 1.5 million , or 1.2 % . a decrease in sales volume led to a sales decrease of $ 7.5 million , an increase in selling price led to a sales increase of $ 11.1 million , and the effect of foreign currency translation of the rmb against the u.s. dollar led to a sales decrease of $ 5.1 million . — henglong kyb mainly engages in providing passenger eps products . net sales for henglong kyb were $ 71.0 million for the year ended december 31 , 2019 , compared with $ 23.4 million for the year ended december 31 , 2018 , representing an increase of $ 47.6 million . an increase in sales volume led to a sales increase of $ 50.1 million , a decrease in selling price led to a sales decrease of $ 1.7 million , and the effect of foreign currency translation of the rmb against the u.s. dollar led to a sales decrease of $ 0.8 million . — net sales for other entities were $ 64.6 million for the year ended december 31 , 2019 , compared with $ 72.4 million for the year ended december 31 , 2018 , representing a decrease of $ 7.8 million , or 10.8 % , mainly contributed by jielong , which manufactures automobile steering columns for both hydraulic power steering ( “ hps ” ) and eps . 32 | page cost of products sold for the year ended december 31 , 2019 , the cost of sales was $ 368.1 million , compared with $ 430.7 million for the year ended december 31 , 2018 , representing a decrease of $ 62.6 million , or 14.5 % . the decrease in cost of sales was mainly due to the effect of the following major factors : ( i ) the change in product mix , i.e . the increase in high margin products as a portion of our sales ; ( ii ) the decrease in sales volumes with a cost of sales decrease of $ 31.7 million ; ( iii ) the decrease in unit cost with a cost of sales decrease of $ 9.6 million ; and ( iv ) the depreciation of the rmb against the u.s. dollar with a cost of sales decrease of $ 21.3 million . further analysis is as follows : — cost of sales for henglong was $ 155.7 million for the year ended december 31 , 2019 , compared to $ 235.9 million for the year ended december 31 , 2018 , representing a decrease of $ 80.2 million , or 34.0 % . story_separator_special_tag cas h requirements the following table summarizes the company 's expected cash outflows resulting from financial contracts and commitments . the company has not included information on its recurring purchases of materials for use in its manufacturing operations . these amounts are generally consistent from year to year , closely reflecting the company 's levels of production , and are not long-term in nature ( being less than three months in length ) . 38 | page replace_table_token_9_th ( 1 ) notes payable do not bear interest . ( 2 ) in november 2019 , hubei henglong entered into an agreement with other parties and committed to purchase 70 % of the shares of hefei senye light plastic technology co. , ltd. for total consideration of rmb 33.6 million , equivalent to approximately $ 4.8 million . as of december 31 , 2019 , hubei henglong has paid the amount of rmb 18 million , equivalent to approximately $ 2.6 million . according to the agreement , the remaining consideration of rmb 15.6 million , equivalent to approximately $ 2.2 million , will be paid in 2020 and 2021. in april 2019 , hubei henglong entered into an agreement with other parties and committed to contribute rmb 5.0 million , equivalent to approximately $ 0.7 million , to jiangsu intelligent networking automotive innovation center co. ltd. , “ jiangsu intelligent ” , for 19.2 % of the shares of jiangsu intelligent . as of december 31 , 2019 , hubei henglong has completed a capital contribution of rmb 3.0 million , equivalent to approximately $ 0.4 million . according to the agreement , the remaining capital commitment of rmb 2.0 million , equivalent to approximately $ 0.3 million , will be paid upon capital calls . in march 2018 , hubei henglong entered into an agreement with other parties to establish a venture capital fund , the “ hubei venture fund ” . hubei henglong has committed to make an investment of rmb 76.0 million , equivalent to approximately $ 10.9 million , in the hubei venture fund in three installments , representing 27.1 % of the hubei venture fund 's shares . as of december 31 , 2019 , hubei henglong has completed a capital contribution of rmb 60.8 million , equivalent to approximately $ 8.7 million . according to the agreement , the remaining capital commitment of rmb 15.2 million , equivalent to approximately $ 2.2 million , will be paid upon capital calls received from the hubei venture fund . short-term and long-term loans the following table summarizes the contract information of short-term and long-term borrowings between the banks , government and the company as of december 31 , 2019 ( figures are in thousands of usd ) . replace_table_token_10_th 39 | page replace_table_token_11_th ( 1 ) these bank loan s were repaid between january and april 2020 when they became due . the company must use the loans for the purpose described and repay the principal outstanding on the specified date in the table . if it fails to do so , it will be charged additional 30 % to 100 % penalty interest . 40 | page the company had complied with such financial covenants as of december 31 , 2019 , and management believes it will continue to comply with them . notes payable the following table summarizes the contract information of issuing notes payable between the banks and the company as of december 31 , 2019 ( figures are in thousands of usd ) : replace_table_token_12_th ( 1 ) the notes payable were repaid in full on their respective due dates . the company must use notes payable for the purpose described in the table . if it fails to do so , the banks will no longer issue the notes payable , and it may have an adverse effect on the company 's liquidity and capital resources . the company has to deposit a sufficient amount of cash on the due date of notes payable for payment to the suppliers . if the bank has advanced payment for the company , it will be charged an additional 50 % penalty interest . the company complied with such financial covenants as of december 31 , 2019 , and management believes it will continue to comply with them . story_separator_special_tag field : /sequence > | page recent accounting pronouncements information regarding new accounting pronouncements is included in note 2 to the consolidated financial statements . significant accounting policies and critical accounting estimates the company prepares its consolidated financial statements in accordance with accounting principles generally accepted in the united states of america . the preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods . management periodically evaluates the estimates and judgments made . management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances . actual results may differ from these estimates as a result of different assumptions or conditions . the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the company 's consolidated financial statements . the company considers an accounting estimate to be critical if : · it requires the company to make assumptions about matters that were uncertain at the time it was making the estimate ; and · changes in the estimate or different estimates that the company could have selected would have had a material impact on the company 's financial condition or results of operations . the table below presents information about the nature and rationale for the company critical accounting estimates : critical balance sheet estimate assumptions/approaches caption item nature of estimates required used key factors accrued liabilities and

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cash flows ( a ) operating activities net cash provided by operating activities for the year ended december 31 , 2019 was $ 30.3 million , compared with $ 12.5 million for the year ended december 31 , 2018 , representing an increase of $ 17.8 million , which was mainly due to ( 1 ) the increase in net income excluding non-cash items by $ 3.8 million and ( 2 ) the increase in cash inflows from movements of operating assets and liabilities by $ 14.0 million . ( b ) investing activities the company had net cash of $ 27.3 million used in investing activities for the year ended december 31 , 2019 , compared with net cash provided of $ 2.5 million in 2018 , representing an increase in cash outflow of $ 29.8 million , which was mainly due to the net effect of ( 1 ) a decrease in cash inflows due to the repayment of the loan to a related party by $ 20.4 million , ( 2 ) an increase in payments to acquire property , plant and equipment and land use rights by $ 8.6 million , and ( 3 ) a combination of other factors contributed an increase of cash outflows by $ 0.8 million , including an increase in cash prepaid for acquisition of a subsidiary by $ 2.6 million , offset by the increase in cash received from disposal of property , plant and equipment , government subsidies , and the exit from an investment . 41 | page ( c ) financing activities during the year ended december 31 , 2019 , the company had net cash of $ 10.7 million used in financing activities , compared to net cash of $ 10.1 million provided by financing activities for 2018 , representing an increase in outflow of $ 20.8

this provision for ibnr is based on an actuarial estimate provided by our independent actuary . we believe our operational policies and internal claims reporting system help to limit the amount of incurred but unreported claims . beginning in the first quarter of 2015 , we began offering healthcare coverage to eligible staffing employees in compliance with the employer mandate provision of the patient protection and affordable care act and the health care and education reconciliation act of 2010 ( collectively , the “acts” ) . the acts represent comprehensive u.s. healthcare reform legislation . in addition to other provisions , the acts subject us to potential penalties unless we offer to our employees minimum essential healthcare coverage that is affordable . while it is still early in the adoption phase of the acts ' employer mandate provision , initial price increases included in our contracts with clients appear to be sufficient to cover implementation and operating costs of offering healthcare coverage to staffing employees , but there can be no assurance that will continue to be the case . selling , general and administrative expenses represent both branch office and corporate-level operating expenses . branch operating expenses consist primarily of branch office staff payroll and personnel related costs , advertising , rent , office supplies , professional and legal fees and branch incentive compensation . corporate-level operating expenses consist primarily of executive and office staff payroll and personnel related costs , professional and legal fees , travel , occupancy costs , information systems costs , and executive and corporate staff incentive compensation . - 35 - depreciation and amortization represent depreciation of property and equipment and amortization of intangible assets consisting of the amortization of software costs , covenants not to compete , and if material , customer related intangibles . property and equipment are depreciated using the straight-line method over their estimated useful lives , which range from one to 39 years . intangible assets are amortized using the straight-line method over their estimated useful lives , which generally range from two to 15 years . critical accounting policies we have identified the following policies as critical to our business and the understanding of our results of operations . for a detailed discussion of the application of these and other accounting policies , see note 1 in the notes to the consolidated financial statements incorporated into item 8 of part ii of this report . the preparation of this annual report on form 10-k requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements , and the reported amounts of revenue and expenses during the reporting period . management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . revenue recognition . we recognize peo service and staffing service revenue as services are rendered by our workforce . peo services are normally used by organizations to satisfy ongoing needs related to the management of human capital and are governed by the terms of a client services agreement which covers all employees at a particular work site . our client services agreements have a minimum term of one year , are renewable on an annual basis and typically require 30 days ' written notice to cancel or terminate the contract by either party . in addition , our client services agreements provide for immediate termination upon any default of the client regardless of when notice is given . we report peo revenues on a net basis because we are not the primary obligor for the services provided by our clients to their customers pursuant to our client services agreements . we reduce these service fee revenues by the amounts invoiced to our clients for direct payroll expenses such as salaries , wages , health insurance , employee out-of-pocket expenses incurred incidental to employment and safety incentives . safety incentives represent cash incentives paid to certain client companies for maintaining safe-work practices and minimizing workplace injuries . the safety incentive is based on a percentage of annual payroll and is paid annually to clients who meet predetermined workers ' compensation claims cost objectives . workers ' compensation reserves . we are self-insured for workers ' compensation coverage in a majority of our employee work sites in oregon , maryland , delaware and colorado and for staffing services and management employees only in washington . we were self-insured in california through december 31 , 2014. we now maintain individual policies for all california-based clients , along with clients in delaware , virginia , pennsylvania and the district of columbia , through our fronted insurance arrangement with ace . our employees working in arizona , utah and nevada are eligible for coverage through ecole , our wholly owned insurance company . - 36 - the estimated liability for unsettled workers ' compensation claims represents our best estimate , utilizing actuarial expertise and projection techniques , at a given reporting date . our estimate is based on an evaluation of information provided by our internal claims adjusters and tpa , coupled with management 's use of an independent actuary to provide an actuarial estimate of future ibnr costs . these elements serve as the basis for our overall estimate for workers ' compensation claims liabilities , which include more specifically the following components : case reserve estimates for reported losses , plus additional amounts for estimated future adverse cost development of ibnr , legal costs and mcc expenses , as well as estimates for unallocated loss adjustment expenses . story_separator_special_tag during 2015 , the company served approximately 4,195 peo clients , compared to approximately 3,665 peo clients during 2014. during 2015 , the company served approximately 1,770 staffing services customers , compared to 1,825 during 2014. gross margin for 2015 totaled approximately $ 129.5 million or 17.5 % of revenue compared to $ 33.4 million or 5.2 % of revenue for 2014. the 12.3 % increase in gross margin percentage was primarily due to decreases in workers ' compensation expense and direct payroll costs , partially offset by a slight increase in payroll taxes and benefits . workers ' compensation expense , in terms of dollars and as a percentage of revenues , decreased from $ 213.5 million or 33.5 % in 2014 to $ 171.1 million or 23.1 % in 2015. the increase was primarily driven by the company 's large worker 's compensation expense change of $ 84.7 million taken in the second quarter of 2014 ( as restated ) . in 2014 after extensive analysis , management concluded that a significant increase of workers ' compensation liability was needed , primarily to reflect the potential adverse development of prior period claims . management 's primary considerations in determining to record a large increase in the company 's estimate of workers ' compensation liability in 2014 included the large increase in the company 's business in recent years , the potential for large future adverse development of open claims , and the increasing complexity and uncertainty surrounding healthcare costs . in 2015 as the actuarial data began to stabilize we did not see the significant adverse development on prior years ' claims as seen in 2014. the company recorded $ 255.7 million and $ 225.3 million at december 31 , 2015 and 2014 , respectively , as an estimated future liability for unsettled workers ' compensation claims liabilities . the estimated liabilities for unsettled workers ' compensation claims represent management 's best estimate based upon an actuarial valuation provided by a third party actuary at december 31 , 2015 and 2014. included in the estimate for workers ' compensation claims liabilities are case reserve estimates for reported losses , plus additional amounts for estimated future adverse cost development of ibnr claims , legal costs , mcc expenses , and unallocated loss adjustment expenses , including future administrative fees to be paid to third party service providers . these estimates are reviewed at least quarterly and adjustments to estimated liabilities are reflected in current operating results as they become known . management believes it has improved the company 's procedures in many areas of its workers ' compensation program over the past three years . see note 6 to the consolidated financial statements incorporated into item 8 of part ii of this report . we believe these efforts have improved management 's ability to estimate workers ' compensation expense . - 43 - direct payroll costs as a percentage of revenues decreased to 17.3 % for 2015 from 19.9 % for 2014 , primarily due to the increase in our mix of professional employer services in the company 's customer base compared to 2014. payroll taxes and benefits as a percentage of revenues for 2015 was 42.1 % compared to 41.4 % for 2014. the percentage rate increase was primarily due to the effect of growth in professional employer services , where payroll taxes and benefits are presented at gross cost , whereas the related direct payroll costs are netted against professional employer services revenue . the effect of the growth in professional employer services on payroll taxes and benefits was partially offset by a decline in the overall state unemployment tax rates where the company does business . selling , general and administrative ( “sg & a” ) expenses consist of compensation and other expenses relating to the operation of our headquarters and our branch offices and the marketing of our services . sg & a expenses for 2015 amounted to approximately $ 90.2 million , an increase of $ 16.1 million or 21.8 % over 2014. the increase was primarily attributable to an increase in management payroll , incentive bonus pay to field personnel , legal fees , and other variable expense components within sg & a to support our business growth . sg & a expenses as a percentage of revenues increased from 11.6 % in 2014 to 12.2 % in 2015. other expense for 2015 totaled approximately $ 1.3 million as compared to other income of $ 522,000 for 2014 due to an increase in interest expense of $ 1.8 million resulting from the company 's $ 40.0 million term loan entered into on december 29 , 2014. our effective income tax rate for 2015 was 27.5 % , compared to ( 40.1 ) % for 2014. our income tax rate typically differs from the federal statutory tax rate of 35 % primarily due to federal and state tax credits . see note 10 to the consolidated financial statements incorporated into item 8 of part ii of this report for additional information regarding income taxes . years ended december 31 , 2014 and 2013 net loss for 2014 ( as restated ) was $ 25.5 million compared to net income of $ 15.7 million for 2013. the net loss in 2014 was primarily due to the large increase in workers ' compensation expense . diluted loss per share for 2014 was $ 3.57 compared to a diluted earnings per share of $ 2.12 for 2013. revenues for 2014 of $ 636.4 million reflect an increase in the company 's professional employer service fee revenue of $ 77.4 million or 19.7 % , coupled with an increase in staffing services revenue of $ 22.0 million or 15.3 % . approximately 77 % and 74 % , respectively , of our total net revenues during 2014 and 2013 was attributable to our california operations . our growth in professional employer service revenues was attributable to both new

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liquidity and capital resources the company 's cash position of $ 25.2 million at december 31 , 2015 increased $ 13.7 million compared to december 31 , 2014. the increase in cash at december 31 , 2015 , as compared to december 31 , 2014 , was primarily due to net income of $ 25.5 million , proceeds from sales and maturities of securities of $ 291.7 million and an increase in workers ' compensation claims liabilities of $ 30.4 million , partially offset by purchases of securities of $ 344.3 million and payments of long-term debt of $ 25.2 million . net cash provided by operating activities for 2015 amounted to $ 100.6 million , compared to $ 69.6 million for 2014. for 2015 , cash flow was primarily provided by net income of $ 25.5 million , an increase in workers ' compensation claims liabilities of $ 30.4 million and safety incentive liability of $ 7.0 million , and a decrease in trade accounts receivable of $ 12.1 million and income taxes receivable of $ 10.5 million . net cash used in investing activities totaled $ 55.6 million for 2015 , compared to $ 182.5 million for 2014. for 2015 cash used in investing activities consisted primarily of purchases of restricted marketable securities of $ 211.7 million , restricted certificates of deposit of $ 124.3 million and marketable securities of $ 8.2 million , partially offset by proceeds from sales and maturities of restricted certificates of deposit of $ 228.7 million , marketable securities of $ 53.0 million and restricted marketable securities of $ 10.0 million . the company presently has no material long-term capital commitments . to monitor our overall investment risk and to assess the fair values of assets within our investment portfolio , we review our investment portfolio on a quarterly basis for significant unrealized gains or losses . we define significant to be in excess of 5 % of cost basis . when we identify significant unrealized gains or losses , we inquire as to the reasons with our investment advisors .

47 our segments our three reportable segments are information & transaction processing solutions ( “ itps ” ) , healthcare solutions ( “ hs ” ) , and legal & loss prevention services ( “ llps ” ) . these segments are comprised of significant strategic business units that align our tps and eim products and services with how we manage our business , approach our key markets and interact with our customers based on their respective industries . itps : our largest segment , itps , provides a wide range of solutions and services designed to aid businesses in information capture , processing , decisioning and distribution to customers primarily in the financial services , commercial , public sector and legal industries . our major customers include 9 of the top 10 u.s. banks , 7 of the top 10 u.s. insurance companies , 5 of the top u.s. telecom companies , over 40 utility companies , over 30 state and county departments , and over 80 government entities . our itps offerings enable companies to increase availability of working capital , reduce turnaround times for application processes , increase regulatory compliance and enhance consumer engagement . hs : hs operates and maintains a consulting and outsourcing business specializing in both the healthcare provider and payer markets . we serve the top 5 healthcare insurance payers and over 900 healthcare providers . llps : our llps segment provides a broad and active array of support services in connection with class action , bankruptcy labor , claims adjudication and employment and other legal matters . our customer base consists of corporate counsel , government attorneys , and law firms . acquisitions in april 2018 exela completed the acquisition of asterion international group ( “ asterion , ” the “ asterion business combination ” ) , a well-established provider of technology driven business process outsourcing , document management and business process automation across europe . the acquisition comes with minimal customer overlap and is strategic to expanding exela 's european business . through the acquisition of asterion , we expect to leverage brand awareness , strengthen margins , and expand the existing asterion sales channels . in july 2017 , we completed the novitex business combination . sourcehov was deemed to be the accounting acquirer , and is a leading provider of platform‑based enterprise information management and transaction processing solutions primarily for the healthcare , banking and financial services , commercial , public sector and legal industries . through the acquisition of sourcehov and novitex , we expect to realize revenue synergies , leverage brand awareness , strengthen margins , generate greater free cash flow , expand the existing novitex sales channels , and increase utilization of the existing workforce . we anticipate opportunities for growth through the ability to leverage additional future services and capabilities . prior to the novitex business combination , sourcehov transformed into an industry‑agnostic solution provider and acquired key technology through the acquisition of transcentra , inc. ( “ transcentra ” ) in september 2016 , a provider of integrated outsourced billing , remittance processing and imaging software and consulting services . the addition of transcentra increased sourcehov 's footprint in the remittance transaction processing and presentment area , expanded its mobile banking offering and enabled significant cross‑selling and up‑selling opportunities . revenues itps revenues are primarily generated from a transaction‑based pricing model for the various types of volumes processed , licensing and maintenance fees for technology sales , and a mix of fixed management fee and transactional revenue for document logistics and location services . hs revenues are primarily generated from a transaction‑based pricing model for the various types of volumes processed for healthcare payers and providers . llps revenues are primarily based on time and materials pricing as well as through transactional services priced on a per item basis . 48 people we draw on the business and technical expertise of our talented and diverse global workforce to provide our customers with high‑quality services . our business leaders bring a strong diversity of experience in our industry and a track record of successful performance and execution . as of december 31 , 2018 , we had approximately 22,000 employees globally , with 46 % located in the united states and the remainder located primarily in europe , india , the philippines , canada , mexico , and china . costs associated with our employees represent the most significant expense for our business . we incurred personnel costs of $ 687.3 million , $ 532.3 million , and $ 373.2 million for the years ended december 31 , 2018 , 2017 and 2016 , respectively . the majority of our personnel costs are variable and are incurred only while we are providing our services . facilities we lease and own numerous facilities worldwide with larger concentrations of space in texas , michigan , connecticut , california , india , mexico , the philippines , and china . our owned and leased facilities house general offices , sales offices , service locations , and production facilities . the size of our active property portfolio as of december 31 , 2018 was approximately 4.4 million square feet at an annual operating cost of approximately $ 38.9 million and comprised of 178 leased properties and 7 owned properties . we believe that our current facilities are suitable and adequate for our current businesses . because of the interrelation of our business segments , each of the segments uses substantially all of these properties at least in part . key performance indicators we use a variety of operational and financial measures to assess our performance . among the measures considered by our management are the following : · revenue by segment ; · ebitda ; and · adjusted ebitda . story_separator_special_tag ( 7 ) represents the impact of changes in the fair value of an interest rate swap entered into during the fourth quarter of 2017. year ended december 31 , 2018 compared to the year ended december 31 , 2017 ebitda and adjusted ebitda ebitda was $ 144.5 million for the year ended december 31 , 2018 compared to $ ( 37.2 ) million for the year ended december 31 , 2017. adjusted ebitda was $ 283.8 million for the year ended december 31 , 2018 compared to $ 208.8 million for the year ended december 31 , 2017. the increase in ebitda was primarily due to a lower net loss amount for the year ended december 31 , 2018 resulting from an increase in revenue , decrease in selling , general and administrative expenses , decrease in related party expense , and decrease in loss on extinguishment of debt compared to the year ended december 31 , 2017. the increase in adjusted ebitda was primarily due to lower transaction and integration costs for the year ended december 31 , 2018 compared to the year ended december 31 , 2017 , along with lower impairment charges incurred in 2018 compared to 2017. year ended december 31 , 2017 compared to the year ended december 31 , 2016 ebitda and adjusted ebitda ebitda was $ ( 37.2 ) million for the year ended december 31 , 2017 compared to $ 129.2 million for the year ended december 31 , 2016. adjusted ebitda was $ 208.8 million for the year ended december 31 , 2017 compared to $ 173.2 million for the year ended december 31 , 2016. the decrease in ebitda was primarily due to a higher net loss amount for the year ended december 31 , 2017 resulting from an increase in selling , general and administrative expenses , related party expense , and loss on extinguishment of debt compared to the year ended december 31 , 2016. the increase in adjusted ebitda was primarily due higher overall gross profit for the year ended december 31 , 2017 compared to the year ended december 31 , 2016 , along with lower recurring expenses as part of on‑going operations . liquidity and capital resources overview our primary source of liquidity is principally cash generated from operating activities supplemented as necessary on a short‑term basis by borrowings against our senior secured revolving credit facility . we believe our current level of cash and short term financing capabilities along with future cash flows from operations are sufficient to meet the needs of the business . we currently expect to spend approximately $ 35.0 to $ 40.0 million on total capital expenditures over the next twelve months . we believe that our operating cash flow and available borrowings under our credit facility will be sufficient to fund our operations for at least the next twelve months . on july 13 , 2018 , exela successfully repriced the $ 343.4 million of term loans outstanding under its senior secured credit facilities ( the “ repricing ” ) . the interest rates applicable to the repricing term loans are 100 basis points lower than the interest rates applicable to the existing senior secured term loans that were incurred on july 12 , 2017 pursuant to the first lien credit agreement . the repricing term loans will mature on july 12 , 2023 , the same maturity date as the existing senior secured term loans . at december 31 , 2018 , cash and cash equivalents totaled $ 43.9 million including restricted cash , and we had availability of $ 79.4 million under our senior secured revolving credit facility . in connection with the novitex business combination , we acquired debt facilities and issued notes totaling $ 1.4 billion . proceeds from the acquired debt were used to refinance the existing debt of sourcehov , settle the 57 outstanding debt facilities for novitex , and pay fees and expenses incurred in connection with the novitex business combination . we entered into a credit agreement with a $ 350.0 million senior secured term loan , a $ 100.0 million senior secured revolving facility , and $ 1.0 billion in first priority senior secured notes ( the “ senior secured notes ” ) . the $ 100.0 million revolver remained undrawn ( net of letters of credit ) at the time of compilation of this report . on november 8 , 2017 , the company 's board of directors authorized a share buyback program ( the “ share buyback program ” ) , pursuant to which the company may , from time to time , purchase up to 5,000,000 shares of its common stock . share repurchases may be executed through various means , including , without limitation , open market transactions , privately negotiated transactions or otherwise . the decision as to whether to purchase any shares and the timing of purchases , if any , will be based on the price of the company 's common stock , general business and market conditions and other investment considerations and factors . the share buyback program does not obligate the company to purchase any shares and expires 24 months after authorization . the share buyback program may be terminated or amended by the company 's board of directors in its discretion at any time . as of december 31 , 2018 , 2,549,185 shares had been repurchased under the share buyback program . cash flows the following table summarizes our cash flows for the periods indicated : replace_table_token_6_th analysis of cash flow changes between the years ended december 31 , 2018 , december 31 , 2017 , and december 31 , 2016 operating activities—net cash provided by operating activities was $ 30.5 million for the year ended december 31 , 2018 , compared to $ 23.5 million for the year ended december 31 , 2017. the increase of $ 7.0 million in cash flow from operating activities was primarily

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loss on extinguishment of debt loss on extinguishment of debt for the year ended december 31 , 2018 and 2017 was $ 1.1 million and $ 35.5 million . the decrease is directly related to the restructuring and novitex business combination in 2017. sundry expense ( income ) sundry expense increased by $ 5.6 million to $ ( 3.3 ) million for the year ended december 31 , 2018 compared to $ 2.3 million for the year ended december 31 , 2017. the increase was mainly attributable to foreign currency transaction losses associated with exchange rate fluctuations . other income other income for the year ended december 31 , 2018 and 2017 was $ 2.9 million and $ 1.3 million . the interest rate swap was not designated as a hedge . as such , changes in the fair value of the derivative of $ 2.5 million are recorded directly in earnings . income tax ( expense ) benefit income tax benefit decreased $ 68.7 million to $ ( 8.4 ) million for the year ended december 31 , 2018 compared to $ 60.2 million for the year ended december 31 , 2017. the december 31 , 2018 federal tax expense is primarily due to the impact of the tcja .

we completed the second reduction in force and the laboratory closings in december 2012. following completion of the second workforce reduction , we are no longer devoting resources to drug discovery or preclinical research activities . except for a small number of periods in which we generated net income due primarily to the recognition into revenue of amounts received under collaboration agreements , we have not been profitable . as of december 31 , 2012 , we had an accumulated deficit of $ 233.9 million . we expect that we may incur losses in future periods as our product candidates advance into later-stage development and as we progress our programs and invest in additional product opportunities . drug development , including clinical trials in particular , is time-consuming , expensive and may never yield a product that will generate revenue . as a clinical-stage company , our revenues , expenses and results of operations are likely to fluctuate significantly from quarter to quarter and year to year . we believe that period-to-period comparisons of our results of operations should not be relied upon as indicative of our future performance . revenue in january 2010 , we received the $ 200.0 million upfront payment under our mdd agreement with astrazeneca , which we recorded as deferred revenue and began recognizing into revenue on a straight-line basis over the estimated period of our substantive performance obligations under the agreement . in the first quarter of 2012 , we and astrazeneca announced that , based on the totality of the results of the phase 3 program , a regulatory filing for tc-5214 as an adjunct therapy for mdd would not be pursued and we reported the discontinuation of a “switch” monotherapy trial . these events resulted in a change in the estimated period of our substantive performance obligations under the agreement . accordingly , we revised the revenue recognition period for the upfront payment that we previously received and began recognizing the portion of the upfront payment not yet recognized into revenue on a straight-line basis over the remainder of the revised period . we had recognized the full amount of the upfront payment into revenue as of june 30 , 2012. pursuant to an april 2010 amendment to our ongoing collaboration agreement with astrazeneca related to an expansion of the development program for tc-5619 , we received an $ 11.0 million payment in may 2010 , which we recorded as deferred revenue and recognized into revenue on a straight-line basis over the estimated period of our research and development obligations for tc-5619 under the agreement . we completed our research and development obligations for tc-5619 in the second quarter of 2011. pursuant to a september 2010 amendment to our ongoing collaboration agreement with astrazeneca related to a clinical trial of tc-1734 in mild to moderate alzheimer 's disease , we received a $ 500,000 payment in the fourth quarter of 2010 and cumulative payments of $ 5.5 million in the second half of 2011. we recorded all of these payments as deferred revenue and began recognizing them into revenue on a straight-line basis over the estimated period of our obligations with respect to the study . as a result of astrazeneca 's exercise of its right to terminate tc-1734 from the agreement in march 2013 , we expect to recognize into revenue the remaining unrecognized deferred amount , totaling $ 3.5 million , during 2013. as of december 31 , 2012 , we had received $ 61.6 million in aggregate upfront fees and milestone payments under our ongoing collaboration agreement with astrazeneca and recognized an additional $ 26.5 million in 58 collaboration research and development revenue for research services that we provided in the preclinical research collaboration conducted under that agreement . we immediately recognized an aggregate of $ 32.6 million of the amounts received under the agreement for achievement of milestone events , because each event met the conditions required for immediate recognition under our revenue recognition policy . we deferred recognition of an aggregate of $ 29.0 million received under the agreement and are recognizing , or in some cases have fully recognized , these deferred amounts into revenue over the respective periods discussed in note 12 to our audited financial statements included in this annual report . as of december 31 , 2012 , we had $ 3.5 million of the amounts received under our ongoing collaboration agreement with astrazeneca that remained to be recognized into revenue for future periods . we received $ 45.0 million in aggregate payments under our now terminated product development and commercialization agreement and a related stock purchase agreement with glaxosmithkline . we immediately recognized an aggregate of $ 4.0 million of the amounts received under the product development and commercialization agreement for achievement of milestone events , because each event met the conditions required for immediate recognition under our revenue recognition policy . we deferred recognition of $ 29.5 million received under the two agreements and were recognizing it into revenue over the period discussed in note 12 to our audited financial statements included in this annual report . as a result of our receipt in february 2011 of notice of termination of the agreement , we recognized the remaining unrecognized deferred amount , $ 18.4 million , into revenue for the first quarter of 2011. we recorded $ 11.5 million of the amounts received under the stock purchase agreement , which reflected the fair value of shares of our common stock sold to glaxosmithkline in 2007 , as capital in excess of par value . from time to time we seek and are awarded grants or perform work under grants awarded to third-party collaborators from which we derive revenue . during the third quarter of 2011 , we were awarded a third grant from the michael j. fox foundation for parkinson 's research , or mjff . story_separator_special_tag this process involves reviewing open contracts and purchase orders , communicating with our applicable personnel to identify services that have been performed on our behalf , estimating level of services performed and the associated cost incurred for the services when we have not yet been invoiced or otherwise notified of actual cost and reviewing invoices received that have not yet become due and payable . we make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us . we periodically confirm the accuracy of our estimates with the service providers and 63 make adjustments if necessary . if we do not identify costs that we have begun to incur or if we underestimate or overestimate the level of services performed or the costs of these services , our actual expenses could differ from our estimates . examples of estimated accrued expenses include : fees for services performed by contract research organizations in connection with clinical trials and non-clinical studies ; fees for services performed by clinical trial sites in connection with clinical trials ; fees for services performed by contract manufacturers in connection with the production of clinical trial materials ; and professional service fees . stock-based compensation we record the grant date fair value of stock options issued to employees and non-employee directors as stock-based compensation expense over the requisite service periods , which are typically the vesting periods . we currently use the black-scholes-merton formula to estimate grant date fair value and expect to continue to use this valuation model in the future . the black-scholes-merton formula requires us to make various assumptions , including among others the expected term of the award and expected volatility of our common stock . in the event a modification is made to a stock option after the grant date , we record additional stock-based compensation expense equal to the incremental fair value of the stock option immediately subsequent to the modification as compared to the fair value of the stock option immediately preceding the modification . during 2012 , we modified some outstanding stock options held by executive and non-executive employees who departed targacept to partially accelerate vesting and or extend the permitted period for exercise . these modifications resulted in incremental compensation cost for the year ended december 31 , 2012 of $ 1.4 million . we recorded stock-based compensation expense related to stock options granted to employees and directors of $ 7.8 million ( inclusive of expense resulting from stock option modifications ) for the year ended december 31 , 2012 , $ 8.5 million for the year ended december 31 , 2011 and $ 4.9 million for the year ended december 31 , 2010. as of december 31 , 2012 , we had $ 9.2 million in total unrecognized compensation cost related to non-vested stock-based compensation arrangements , which we expect to record over a weighted average period of 3.1 years . results of operations years ended december 31 , 2012 and december 31 , 2011 net operating revenues replace_table_token_5_th net operating revenues for the year ended december 31 , 2012 decreased by $ 39.8 million as compared to the year ended december 31 , 2011. the lower net operating revenues for 2012 were primarily attributable to a decrease of $ 39.6 million in license fees and milestones from collaborations . the lower license fees and milestones from collaborations principally resulted from decreases in recognition of deferred revenue of : $ 18.4 million related to our now concluded strategic alliance with glaxosmithkline , as all remaining deferred revenue was recognized in the 2011 period in connection with termination of the alliance ; $ 18.1 million associated with our now concluded mdd agreement with astrazeneca due to the completion of our performance obligations in mid-2012 ; and 64 $ 4.8 million related to the development of tc-5619 under our ongoing collaboration agreement with astrazeneca , as the tc-5619-related payments became fully recognized in the second quarter of 2011. these decreases were partially offset by an increase of $ 1.8 million in recognition of deferred revenue related to the development of tc-1734 under our ongoing collaboration agreement with astrazeneca . we expect our net operating revenues for 2013 to be substantially lower than 2012 , primarily due to the upfront payment received under our mdd agreement with astrazeneca becoming fully recognized in the second quarter of 2012. in future periods , we are eligible to receive additional milestone payments under our ongoing collaboration agreement with astrazeneca . the amount of milestone payments will depend on whether we achieve development , regulatory and commercial milestone events that are inherently uncertain and , if so , when . we expect that the amount of our milestone-based revenue , if any , will continue to vary from period to period . research and development expenses year ended december 31 , 2012 2011 change ( in thousands ) research and development expenses $ 49,087 $ 95,215 $ ( 46,128 ) research and development expenses for the year ended december 31 , 2012 decreased by $ 46.1 million as compared to the year ended december 31 , 2011. the lower research and development expenses for 2012 were principally attributable to decreases of : $ 29.9 million in costs incurred related to our mdd agreement with astrazeneca , to $ 2.2 million for 2012 , from $ 32.0 million for 2011 , as the development program conducted under the agreement wound down to completion ; $ 7.5 million in other research and development-related operating costs , including infrastructure costs and stock-based compensation and other compensation-related expenses for research and development personnel , to $ 25.6 million for 2012 , from $ 33.1 million for 2011 ; this decrease resulted primarily from the workforce reductions completed in the second and fourth quarters of 2012 discussed above ; $ 5.4 million in costs incurred for third-party research and development services in connection with preclinical programs

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liquidity and capital resources sources of liquidity we have historically financed our operations and internal growth primarily through public and private offerings of our securities , payments received under collaboration and alliance agreements , including upfront fees , payments for research and development services and payments upon achievement of milestone events , grants and equipment financing . 68 our cash , cash equivalents and investments in marketable securities were $ 184.9 million as of december 31 , 2012 and $ 249.3 million as of december 31 , 2011. as of december 31 , 2012 , we had $ 77.8 million of cash in bank depository accounts and institutional money market funds at branch banking and trust company , pnc bank and wells fargo & company . substantially all of our remaining cash , cash equivalents and investments were invested as of december 31 , 2012 in u.s. treasury notes and bonds , u.s. and state government agency-backed securities , corporate debt securities that are rated at least a quality or equivalent and certificates of deposit . stock offerings in may 2011 , we completed an underwritten public offering of 3,658,537 shares of our common stock . in june 2011 , we sold an additional 548,780 shares of our common stock upon the exercise of the overallotment option granted to the underwriters . our net proceeds from the offering , after deducting underwriters ' discounts and commissions and offering expenses paid by us , were $ 80.8 million . beginning with our initial public offering in april 2006 , we have derived aggregate net proceeds of $ 195.1 million from public offerings of our common stock . we have also derived aggregate net proceeds of $ 121.8 million from private placements of convertible preferred stock , all of which occurred prior to our initial public offering .

for a further discussion of factors that could impact operating results , including the current economic environment and the steps we are taking to address this environment , see the section entitled “ factors that may affect future performance ” included within this section and in item 1a under part i of this report . 33 strategy our goal is to become the world 's favorite mattress and pillow brand . in order to achieve this long-term goal while managing through the current economic and competitive environment , we plan to complete the proposed acquisition of sealy , and to continue to pursue certain key tempur-pedic ® strategic goals using the related strategies discussed below . ● make sure everyone knows that they would sleep better on a tempur-pedic ® mattress – we plan to continue to invest in our global brand awareness through advertising campaigns that further associate our brand name with overall sleep and premium quality products . ● make sure there is a tempur-pedic ® bed and pillow that appeals to everyone – we plan to continue to maintain our focus on premium products at the high end of the category price range that are preferred by consumers . ● make sure that tempur-pedic ® products are available to everyone – we plan to expand our points of distribution and the effectiveness of our distribution channels by ensuring our retailers are provided attractive incentives to sell our products . ● make sure that tempur-pedic ® bedding products continue to deliver the best sleep – we plan to continue to invest in product research and development to systematically innovate and improve our products in consumer relevant ways . in pursuing these strategic goals , we expect to continue to optimize our cost structure in order to enable these marketing and product development investments . on september 27 , 2012 , we announced we had entered into an agreement and plan of merger ( “ merger agreement ” ) to acquire sealy corporation ( “ sealy ” ) , by merging sealy with a newly-formed subsidiary of the company ( the “ merger ” ) ( collectively , the “ sealy acquisition ” ) . sealy , headquartered in trinity , north carolina , owns one of the largest bedding brands in the world , and manufactures and markets a complete line of bedding products . subject to the terms and conditions of the merger agreement , at the effective time and as a result of the merger , each share of common stock of sealy issued and outstanding immediately prior to the effective time of the merger will be cancelled and ( other than shares held by sealy or tempur-pedic or their subsidiaries or sealy stockholders who properly exercise appraisal rights ) converted into the right to receive $ 2.20 in cash . the company anticipates that the total consideration to be paid , including payments on account of existing sealy options and equity share units and the assumption of outstanding indebtedness of sealy less cash assumed , will be approximately $ 1,300.0 million . the transaction is expected to be completed in the first half of calendar 2013 and is subject to regulatory clearance under the hart-scott-rodino antitrust improvements act of 1976 and other customary conditions . the merger agreement contains certain termination rights for both the company and sealy and further provides that , upon termination of the merger agreement under certain circumstances , sealy may be obligated to pay the company a termination fee of $ 25.0 million . in addition , if antitrust enforcement agencies either commence or inform the parties that they intend to commence an action to enjoin the merger , ( i ) the company may be required to pay sealy a termination fee of $ 90.0 million if both parties elect to terminate the merger agreement or ( ii ) a termination fee of $ 90.0 million ( or $ 40.0 million if the company elects to terminate the merger agreement but sealy does not so elect to terminate ) if the merger does not close due to a failure to receive antitrust approval in the nine months following the execution of the merger agreement , subject to certain extensions . in order to finance the sealy acquisition , on december 12 , 2012 , tempur-pedic international and certain subsidiaries of tempur-pedic international as borrowers and guarantors , entered into the 2012 credit agreement with a syndicate of banks . the 2012 credit agreement provides for ( i ) the $ 350.0 million revolver , ( ii ) the term a facility of $ 550.0 million and ( iii ) the term b facility of $ 870.0 million . the revolver includes a sublimit for letters of credit and swingline loans , subject to certain conditions and limits . the revolver and the term a facility will mature on the fifth anniversary of the closing and the term b facility will mature on the seventh anniversary of the closing . the revolver , the term a facility and the term b facility are expected to close and fund in connection with the sealy acquisition . the obligations of the lenders to the 2012 credit agreement to make the initial loans at the closing of the sealy acquisition and the loans subsequent to closing are subject to certain customary closing conditions . our existing credit facilities will remain in place until the closing of the sealy acquisition . in addition , on december 19 , 2012 , tempur-pedic international issued $ 375.0 million aggregate principal amount of 6.875 % senior notes ( the “ senior notes ” ) to qualified institutional buyers pursuant to rule 144a of the securities act , and to certain non-u.s. persons in accordance with regulation s under the securities act . story_separator_special_tag 38 general , administrative and other expenses . general , administrative and other expenses include management salaries , information technology , professional fees , depreciation of furniture and fixtures , leasehold improvements and computer equipment , expenses for administrative functions , and research and development costs . general , administrative and other expenses as a percentage of net sales was 10.5 % for the year ended december 31 , 2012 as compared to 8.9 % for the same period in 2011. general , administrative and other expenses increased to $ 147.2 million for the year ended december 31 , 2012 as compared to $ 125.7 million for the year ended december 31 , 2011 , an increase of $ 21.5 million , or 17.1 % . the increase in general , administrative and other expenses are primarily a result of increased legal and professional fees of $ 16.1 million , driven by transaction costs related to the sealy acquisition of $ 8.9 million and integration costs of $ 2.2 million , along with an increase of $ 5.0 million related to increased litigation costs and strategic initiatives . during 2012 , we also incurred an additional $ 5.2 million related to incremental investments in information technology and associated depreciation expense . also , in 2011 , we recorded a benefit for favorable settlements of indirect taxes with certain regulatory authorities of $ 3.5 million that did not recur in 2012. these increases were offset by an $ 8.0 million benefit recorded for prsus following our re-evaluation of the probability of meeting certain required financial metrics related to the grants . we expect general , administrative and other expenses to continue to be impacted by transaction and integration costs related to the proposed sealy acquisition . research and development expenses for the year ended december 31 , 2012 were $ 15.6 million compared to $ 9.9 million for the same period in 2011 , an increase of $ 5.7 million , or 57.6 % . consistent with our strategy , we continue to invest in research and development in order to improve our existing product line and continue to introduce new and differentiated products . interest expense , net . interest expense , net includes the interest costs associated with our borrowings and the amortization of deferred financing costs related to those borrowings . interest expense , net , increased to $ 18.8 million for the year ended december 31 , 2012 as compared to $ 11.9 million for the year ended december 31 , 2011 , an increase of $ 6.9 million , or 58.0 % . the increase in interest expense is primarily attributable to an increase in our debt outstanding at december 31 , 2012 compared to our debt outstanding at december 31 , 2011 and an increase in our effective interest rate . the senior notes also contributed $ 0.9 million of interest expense in 2012. income before income taxes . income before income taxes for the year ended december 31 , 2012 decreased to $ 229.2 million from $ 328.4 million for the same period in 2011 , a decrease of $ 99.2 million , or 30.2 % . north america income before income taxes for the year ended december 31 , 2012 decreased to $ 126.2 million from $ 224.6 million for the same period in 2011 , a decrease of $ 98.4 million , or 43.8 % . international income before income taxes for the year ended december 31 , 2012 decreased to $ 103.0 million from $ 103.8 million for the same period in 2011 , a decrease of $ 0.8 million , or 0.8 % . the decrease in income before income taxes was a result of the items discussed above . income tax provision . income tax provision includes income taxes associated with taxes currently payable and deferred taxes , and includes the impact of net operating losses for certain of our foreign operations . our effective tax rate was 53.4 % and 33.1 % for the years ended december 31 , 2012 and 2011 , respectively . during the three months ended september 30 , 2012 , we changed the classification of our undistributed earnings from non-u.s. operations on which no historical provision for u.s. federal and or state income tax and foreign withholdings had been provided because we intended to reinvest such earnings indefinitely outside of the united states . the tax of our undistributed earnings reflects a change in management 's strategic objectives that could require the repatriation of foreign earnings . as a result of this change , we recognized $ 48.1 million of additional income tax expense during the six months ended december 31 , 2012 to record the applicable u.s. deferred income tax liability . we expect to repatriate non-u.s. cash holdings upon the closing of the proposed sealy acquisition . 39 year ended december 31 , 2011 compared with year ended december 31 , 2010 a summary of net sales , by channel and by segment , is set forth below : replace_table_token_7_th a summary of net sales , by product and by segment , is set forth below : replace_table_token_8_th 40 net sales . net sales for the year ended december 31 , 2011 increased to $ 1,417.9 million from $ 1,105.4 million , an increase of $ 312.5 million , or 28.3 % . we believe our revenues have continued gaining momentum primarily as a result of investments made in marketing , the ongoing success of new product introductions and expanding points of distribution . consolidated mattress sales increased $ 208.8 million , or 28.4 % , compared to the full year 2010. the increase in mattress sales occurred primarily in our retail channel with net sales increasing to $ 1,245.6 million from $ 953.2 million in the same period in 2010 , an increase of $ 292.4 million , or 30.7 % . consolidated pillow sales increased approximately $ 21.2 million

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liquidity our principal sources of funds are cash flows from operations , borrowings made pursuant to our debt arrangements and cash and cash equivalents on hand . principal uses of funds consist of share repurchases made from time to time pursuant to share repurchase authorizations , payments of principal and interest on our debt agreements , acquisition of certain former third party distributors , capital expenditures and working capital . at december 31 , 2012 , we had working capital of $ 609.0 million , including cash and cash equivalents of $ 179.3 million as compared to working capital of $ 212.2 million including $ 111.4 million in cash and cash equivalents as of december 31 , 2011. working capital increased primarily due to the receipt and deposit into escrow of the gross proceeds from the sale of the senior notes and the increase in cash and cash equivalents . cash provided by operating activities decreased $ 58.8 million to $ 189.9 million for the year ended december 31 , 2012 , as compared to $ 248.7 million for the same period in 2011. the decrease in cash provided by operating activities was due to a decrease in net income of $ 112.8 million , and a decrease in stock-based compensation amortization of $ 11.0 million primarily related to our re-evaluation of the probability of meeting certain required financial metrics related to our prsu grants , partially offset by increased deferred income taxes related to the repatriation of foreign cash strategy and an increase in changes in operating assets and liabilities .

in particular , it facilitates comparisons of the core operating performance of our company from period to period on a consistent basis and helps us to identify underlying trends in our business . we believe it provides useful information about our operating results , enhances the overall understanding of our past performance and future prospects and allows for greater transparency with respect to key metrics used by the management in our financial and operational decision-making . we use this measure to establish operational goals for managing our business and evaluating our performance . adjusted ebitda has limitations as an analytical tool and should not be considered in isolation or as a substitute for results reported under gaap . some of these limitations are : · adjusted ebitda does not reflect tax payments and such payments reflect a reduction in cash available to us ; · adjusted ebitda does not reflect changes in , or cash requirements for , our working capital needs and for our cash expenditures or future requirements for capital expenditures or contractual commitments ; · adjusted ebitda excludes the potential dilutive impact of stock-based compensation expense related to our workforce , interest income ( expense ) and net loss attributable to noncontrolling interests , and these items may represent a reduction or increase in cash available to us ; 27 · although depreciation and amortization are non-cash charges , the assets being depreciated and amortized may have to be replaced in the future , and adjusted ebitda does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements ; and · other companies , including companies in our own industry , may calculate adjusted ebitda differently from our calculation , limiting its usefulness as a comparative measure . adjusted ebitda should be considered as a supplement to , and not as a substitute for , or superior to , gaap net income . the following table shows a reconciliation from net income ( loss ) to adjusted ebitda for the periods presented ( in thousands ) : replace_table_token_5_th results of operations we acquired mediamiser on july 28 , 2014. the results of operations reflect the operations of mediamiser only for the period beginning on july 29 , 2014 and ending on december 31 , 2014. we acquired bulldog reporter on december 23 , 2014. the results of operations reflect the operations of bulldog reporter only for the period beginning on december 24 , 2014 and ending on december 31 , 2014. year ended december 31 , 2014 compared to the year ended december 31 , 2013 revenues total revenues were $ 59.1 million for the year ended december 31 , 2014 , an 8 % decline from $ 64.2 million for the year ended december 31 , 2013. revenues from the cs segment were $ 56.8 million and $ 63.1 million for the years ended december 31 , 2014 and 2013 , respectively . revenues from the iads segment were $ 0.6 million and $ 1.1 million for the years ended december 31 , 2014 and 2013 , respectively . revenues from the mis segment were $ 1.7 million for the year ended december 31 , 2014. the $ 6.3 million revenue decrease in the cs segment is principally attributable to a $ 5.4 million decline in revenues from non e-book related services that we perform for one of our significant clients and by a $ 0.9 million decrease in revenues from our e-book related services . two clients generated approximately 27 % , 26 % and 41 % of our total revenues in the fiscal years ended december 31 , 2014 , 2013 and 2012 , respectively . another client accounted for 14 % and 15 % of our total revenues for the year ended december 31 , 2014 and 2013 , respectively , but accounted for less than 10 % for the years ended december 31 , 2012. one other client accounted for less than 10 % of our total revenues for the years ended december 31 , 2014 and 2012 but accounted for 15 % of our total revenues for the year ended december 31 , 2013. no other client accounted for 10 % or more of total revenues during these periods . further , in the years ended december 31 , 2014 , 2013 and 2012 , revenues from non-us clients accounted for 47 % , 35 % and 24 % , respectively , of our revenues . 28 direct operating costs direct operating costs were approximately $ 43.9 million and $ 49.1 million for the years ended december 31 , 2014 and 2013 , respectively , a decrease of $ 5.2 million or approximately 11 % . direct operating costs for the cs segment were $ 38.4 million and $ 43.9 million for the years ended december 31 , 2014 and 2013 , respectively , a decrease of $ 5.5 million or approximately 13 % . direct operating costs for the iads segment were approximately $ 4.5 million and $ 5.2 million for the respective periods , net of intersegment profits . direct operating costs for the mis segment was $ 1.0 million for the year ended december 31 , 2014. direct operating costs as a percentage of total revenues decreased to 74 % for the year ended december 31 , 2014 compared to 76 % for the year ended december 31 , 2013. direct operating costs for the cs segment as a percentage of cs segment revenues were 68 % for the year ended december 31 , 2014 compared to 70 % for the year ended december 31 , 2013. the decline in direct operating costs for the cs segment and as a percentage of cs segment revenues was principally attributable to a decrease in production headcount due to a decline in cs revenues and a restructuring of our operations , and achieving productivity gains . story_separator_special_tag selling and administrative costs for the cs segment were $ 15.2 million and $ 19.3 million in these respective periods . selling and administrative expenses for the iads segment for the respective periods were $ 2.1 million and $ 2.9 million , net of intersegment profits . we restructured our operations during the fourth quarter of 2012 and the first half of 2013 , resulting in cost savings in the second half of 2013. this led to a decline in selling and administrative expenses for the cs segment during the year ended december 31 , 2013 compared to the year ended december 31 , 2012. selling and administrative expenses for the cs segment , as a percentage of cs segment revenues , increased to 24 % for the year ended december 31 , 2013 , from 23 % for the year ended 2012 , primarily as a result of lower revenues and the fixed component of our selling and administrative expenses . a significant portion of our selling and administrative expenses is fixed in nature . the decline in selling and administrative expenses for the iads segment is primarily on account of restructuring our docgenix operations in the fourth quarter of 2012. income taxes for the year ended december 31 , 2013 , we recorded a provision for income taxes in accordance with local tax regulations for our foreign subsidiaries . some of our foreign subsidiaries are subject to tax holidays or preferential tax rates which reduce our overall effective tax rate when compared to the u.s. statutory tax rate . in addition , the earnings of our foreign subsidiaries are not subject to tax in the u.s. unless the earnings are repatriated . the synodex subsidiary of our iads segment has not achieved significant revenue to date and has incurred losses since inception . our u.s. entity incurred losses primarily on account of the losses of synodex . in assessing the realization of deferred tax assets , we considered whether it is more likely than not that all or some portion of the u.s. deferred tax assets will not be realizable . as the expectation of future taxable income resulting from synodex could not be predicted with certainty , we created a valuation allowance against all the u.s. deferred tax assets starting in the third quarter of 2013 . as of december 31 , 2013 , we maintained a valuation allowance of $ 8.1 million against all of our u.s. deferred tax assets . for the year ended december 31 , 2012 , our u.s. entity recorded a benefit from income tax on account of losses incurred by our u.s. entity . with respect to our foreign subsidiaries , we recorded a provision for income taxes in accordance with the local tax regulations . as some of our foreign subsidiaries are subject to tax holidays or preferential tax rates , our overall effective tax rate was lower compared to the u.s. statutory tax rate . in addition , the earnings of our foreign subsidiaries are not subject to tax in the u.s. unless the earnings are repatriated . 33 beginning in 2002 , unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the united states taxes that may be payable on distribution to the united states , because such earnings are not anticipated to be remitted to the united states . if such earnings were to be distributed , we could be subject to united states income taxes that may not be fully offset by foreign tax credits . it is not practicable at this time to determine the amount of unrecognized deferred tax liability related to these earnings . in january 2013 , one of our philippine subsidiaries received an informal tax assessment from the internal revenue service of the philippines for an amount totaling $ 3.8 million for the year ended december 31 , 2009. we disagreed with the basis of the informal tax assessment and contested it vigorously . the ultimate outcome was favorable , and , accordingly , we did not record any tax provision . we had unrecognized tax benefits of $ 2.5 million and $ 2.4 million at december 31 , 2013 and 2012 , respectively . the portion of unrecognized tax benefits relating to interest and penalties was $ 0.8 million and $ 0.7 million at december 31 , 2013 and 2012 , respectively . the unrecognized tax benefits as of december 31 , 2013 and 2012 , if recognized , would have an impact on our effective tax rate . we are subject to various tax audits and claims which arise in the ordinary course of business . management currently believes that the ultimate outcome of these audits and claims will not have a material adverse effect on our consolidated financial position , results of operations or cash flows . net loss we generated a net loss of $ 10.6 million in the year ended december 31 , 2013 , compared to net income of $ 7.5 million in the year ended december 31 , 2012. the loss is primarily attributable to the $ 7.1 million valuation allowance referred to in “ income taxes , ” the $ 5.0 million impairment charge referred to in “ impairment charge , ” a decline in gross margins of the cs segment resulting from lower revenues offset in part by a decline in selling and administrative expenses , and continuing losses from operations of the iads segment . net income for the cs segment was $ 1.2 million for the year ended december 31 , 2013 compared to $ 13.8 million for the year ended december 31 , 2012. net loss for the iads segment was $ 11.8 million for the year ended december 31 , 2013 compared to $ 6.3 million for the year ended december 31 , 2012 , net of intersegment profits . adjusted ebitda adjusted ebitda for the year ended december 31

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net cash provided by operating activities cash provided by our operating activities in 2014 was $ 4.6 million , resulting from net loss of $ 1.9 million , adjustments for non-cash items of $ 4.9 million , and $ 1.6 million from working capital . adjustments for non-cash items principally consisted of $ 3.0 million for depreciation and amortization , stock compensation expense of $ 1.2 million , pension costs of $ 0.7 million and an impairment charge of approximately $ 0.4 million . working capital activities primarily consisted of a source of cash of $ 1.9 million as a result of a decrease in accounts receivable and $ 0.7 million used for other working capital accounts . cash provided by our operating activities in 2013 was $ 0.6 million , resulting from a net loss of $ 12.8 million , adjustments for non-cash items of $ 15.2 million , and $ 1.8 million used for working capital . adjustments for non-cash items principally consisted of $ 3.7 million for depreciation and amortization , stock compensation expense of $ 1.0 million and an impairment charge of approximately $ 5.5 million relating to the iads segment . working capital activities primarily consisted of a source of cash of $ 2.4 million as a result of a decrease in accounts receivable , use of cash of $ 1.9 million from a decrease in accrued salaries , wages and related benefits , use of cash of $ 1.2 million from a decrease in income and other taxes and use of cash of $ 1 million from a decrease in accounts payable and accrued expenses . cash provided by our operating activities in 2012 was $ 17.8 million , resulting from net income of $ 5.7 million , adjustments for non-cash items of $ 5.3 million , and $ 6.8 million provided for working capital . adjustments for non-cash items principally consisted of $ 3.9 million for depreciation and amortization , stock compensation expense of $ 1.0 million and an impairment charge of approximately $ 0.5 million relating to the iads segment .

the company 's credit quality remained strong as non-performing assets represented 0.46 % of total assets at december 31 , 2018 compared to 0.58 % at december 31 , 2017. the ratio of net charge-offs to average loans was 0.01 % for 2018 , compared to 0.04 % for the prior year . 30 total assets at december 31 , 2018 increased 51 % compared to december 31 , 2017. this increase was primarily the result of the acquisition of washingtonfirst 's $ 2.1 billion of assets . total loans at december 31 , 2018 , were $ 6.6 billion compared to $ 4.3 billion at december 31 , 2017. post-acquisition asset growth has been primarily the result of net loan growth in 2018. loan balances increased 52 % compared to the prior year end as a result of the acquisition with post-acquisition portfolio growth of 9 % driven by the 13 % post-acquisition growth in commercial loans . the growth in commercial loans was driven by double digit increases in all commercial lending categories . customer funding sources , which include deposits plus other short-term borrowings from core customers , increased 6 % compared to post-acquisition balances . the increase in customer funding sources was driven by increases of 17 % in certificates of deposit and 22 % in money market savings accounts . the company utilizes low cost fhlb borrowings to assist in the management of the net interest margin . the effect on the net interest margin partially mitigates the increased rates offered on certificates of deposit and money market accounts to retain these deposit relationships in the rising interest rate environment . during the same period , stockholders ' equity increased to $ 1.1 billion at december 31 , 2018 from $ 564 million at december 31 , 2017 primarily due to the issuance of common stock to effect the acquisition of washingtonfirst . an additional portion of the growth in capital was due to net income in 2018 , which effect was partially offset by dividends paid to stockholders during 2018. net interest income increased 54 % compared to 2017 , due to the combination of the acquisition and organic loan growth . for the year ended december 31 , 2018 , the net interest margin was 3.60 % compared to 3.55 % for the prior year . net interest income for the year ended december 31 , 2018 includes $ 2.4 million in recovered interest income on acquired credit impaired loans . this amount compares to interest recoveries of $ 1.1 million for 2017. excluding these recoveries , the net interest margin would have been 3.58 % for the year ended december 31 , 2018 compared to 3.53 % for the year ended december 31 , 2017. the amortization of the fair value adjustments for 2018 was estimated to be 13 basis points on an annual basis . this favorable margin effect was partially offset by the impact that the current year 's reduction in the tax rate had on the tax-advantaged securities in the investment portfolio , which adversely affected the margin by 5 basis points . compared to the prior year , average interest-earning assets grew 48 % with an increase of 39 basis points in the yield while the rate on average interest-bearing liabilities , which grew 51 % from the prior year , increased 47 basis points over the same period . exclusive of investment securities gains of $ 0.2 million in 2018 and $ 1.3 million in 2017 , non-interest income increased 22 % for 2018 compared to 2017 due to increases in income from mortgage banking activities , wealth management and mortality insurance proceeds received during 2018 as compared to 2017. non-interest expenses for the year ended december 31 , 2018 increased 39 % to $ 179.8 million compared to $ 129.1 million for the prior year . the year-over-year increase in non-interest expense was 36 % excluding merger expense from both years in addition to the prior year 's prepayment penalties on the early pay-off of high rate fhlb advances . the majority of the increase was the result of the increase in the number of employees , additional branch and office locations and associated operating expenses that resulted from the acquisition of washingtonfirst . the net income for 2018 included the effect of merger expenses totaling $ 11.8 million and $ 2.4 million in recovered interest income from previously acquired credit impaired loans . the additional merger expenses , net of the interest recoveries , resulted in an after-tax reduction to earnings per share of approximately $ 0.19 per share for 2018. the net income for 2017 included the effects of the tax rate reduction associated with tax reform legislation passed at the end of 2017. this resulted in $ 5.5 million of additional income tax expense and in addition to merger expenses , net of tax , resulted in a reduction of 2017 earnings per share of approximately $ 0.34 per share . pre-tax , pre-provision income which adjusts for these items for both years , in addition to the provision for loan losses , increased 61 % from full-year 2017 to full-year 2018 to a record $ 153.5 million . critical accounting policies the company 's consolidated financial statements are prepared in accordance with generally accepted accounting principles ( “ gaap ” ) in the united states of america and follow general practices within the banking industry . application of these principles requires management to make estimates , assumptions , and judgments that affect the amounts reported in the financial statements and accompanying notes . these estimates , assumptions , and judgments are based on information available as of the date of the financial statements ; accordingly , as this information changes , the financial statements may reflect different estimates , assumptions , and judgments . story_separator_special_tag on those assets . on a tax-equivalent basis , net interest income for 2017 was $ 176.2 million compared to $ 156.3 million for 2016. the following table provides an analysis of net interest income performance that reflects a net interest margin that increased to 3.55 % for 2017 compared to 3.49 % for 2016. net interest income for 2017 included $ 1.1 million in interest recoveries on previously charged-off loans . exclusive of these recoveries the net interest margin would have been 3.53 % . average interest-earning assets increased by 11 % while average interest-bearing liabilities increased 10 % in 2017. the growth and increased rates earned on the interest-earning assets exceeded the growth and rates paid on interest-bearing liabilities , which resulted in the 13 % increase in net interest income year over year . average noninterest-bearing deposits increased 14 % in 2017 while the percentage of average noninterest-bearing deposits to total deposits increased to 33 % for 2017 compared to 32 % for 2016 . 35 replace_table_token_1_th 36 effect of volume and rate changes on net interest income the following table analyzes the reasons for the changes from year-to-year in the principal elements that comprise net interest income : 2018 vs. 2017 2017 vs. 2016 increase increase or due to change in average : * or due to change in average : * ( dollars in thousands and tax equivalent ) ( decrease ) volume rate ( decrease ) volume rate interest income from earning assets : residential mortgage loans $ 10,980 $ 8,959 $ 2,021 $ 2,317 $ 1,645 $ 672 residential construction loans 1,997 1,611 386 1,123 914 209 commercial ad & c loans 20,214 17,569 2,645 1,645 744 901 commercial investor real estate loans 49,567 43,978 5,589 9,448 10,272 ( 824 ) commercial owner occupied real estate loans 14,953 15,604 ( 651 ) 4,922 4,493 429 commercial business loans 15,914 11,993 3,921 835 203 632 consumer loans 6,634 2,830 3,804 1,338 271 1,067 loans held for sale 966 941 25 ( 108 ) ( 170 ) 62 taxable securities 6,990 6,342 648 2,449 1,487 962 tax-exempt securities ( 2,574 ) ( 581 ) ( 1,993 ) 803 747 56 interest-bearing deposits with banks 894 558 336 197 ( 19 ) 216 federal funds sold 4 ( 5 ) 9 22 13 9 total interest income 126,539 109,799 16,740 24,991 20,600 4,391 interest expense on funding of earning assets : interest-bearing demand deposits 376 95 281 61 61 - regular savings deposits 354 45 309 34 11 23 money market savings deposits 13,688 3,769 9,919 3,080 184 2,896 time deposits 11,465 8,931 2,534 1,920 1,012 908 other borrowings 832 122 710 47 34 13 advances from fhlb 8,982 6,656 2,326 816 1,903 ( 1,087 ) subordinated debentures 1,909 1,893 16 ( 931 ) ( 906 ) ( 25 ) total interest expense 37,606 21,511 16,095 5,027 2,299 2,728 net interest income $ 88,933 $ 88,288 $ 645 $ 19,964 $ 18,301 $ 1,663 * variances that are the combined effect of volume and rate , but can not be separately identified , are allocated to the volume and rate variances based on their respective relative amounts . 37 interest income 2018 vs. 2017 the company 's total tax-equivalent interest income increased 63 % during 2018 compared to the prior year as average loans and investments and their associated yields increased during the year . in 2018 , the average balance of the loan portfolio increased 52 % and average investments increased 25 % compared to the prior year . the increase in loans was primarily the result of the washingtonfirst acquisition coupled with the 9 % post-acquisition growth of the total loan portfolio . the post-acquisition organic loan growth was the result of greater market presence and the improvement in the regional economy . the yield on average loans increased by 48 basis points compared to the prior year due to higher yields on the entire loan portfolio due to the effect of the rising interest rate environment during 2018 from the multiple rate increases by the federal reserve . interest income for the year ended december 31 , 2018 included $ 2.4 million in recovered interest income on acquired credit impaired loans . this amount compares to interest recoveries of $ 1.1 million for 2017. exclusive of these recoveries , the yield on loans would have increased 46 basis points for the year ended december 31 , 2018 compared to the year ended december 31 , 2017. the average yield on total investment securities decreased 23 basis points while the average balance of the portfolio increased 25 % in 2018 compared to 2017. the decrease in the yield on investments was driven by the effect that the current year 's reduction in the corporate tax rate had on the tax-advantaged securities in the investment portfolio which caused a 70 basis point erosion in the yield on tax-exempt securities . 2017 vs. 2016 the company 's total tax-equivalent interest income increased 14 % for 2017 compared to the prior year as average loans and investments and their associated yields increased during the year . in 2017 , the average balance of the loan portfolio increased 11 % and average investments increased 10 % compared to the prior year . the growth in the loan portfolio was primarily in the commercial investor real estate and owner occupied portfolios . these increases were driven by organic loan growth as the regional economy continued to improve . the yield on average loans increased by 10 basis points compared to the prior year due to higher yields on the entire loan portfolio , as the commercial portfolio increased 5 basis points compared to the prior year . the yield on the portfolio benefited from the impact of multiple rate increases by the federal reserve during the year . exclusive of the $ 1.1 million in interest recoveries recognized during 2017 , the yield on the average loan portfolio would

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liquidity management liquidity is measured by a financial institution 's ability to raise funds through loan repayments , maturing investments , deposit growth , borrowed funds , capital and the sale of highly marketable assets such as investment securities and residential mortgage loans . the company 's liquidity position , considering both internal and external sources available , exceeded anticipated short-term and long-term needs at december 31 , 2018. management considers core deposits , defined to include all deposits other than time deposits of $ 100 thousand or more , to be a relatively stable funding source . core deposits equaled 63 % of total interest-earning assets at december 31 , 2018 . in addition , loan payments , maturities , calls and pay downs of securities , deposit growth and earnings contribute a flow of funds available to meet liquidity requirements . in assessing liquidity , management considers operating requirements , the seasonality of deposit flows , investment , loan and deposit maturities and calls , expected funding of loans and deposit withdrawals , and the market values of available-for-sale investments , so that sufficient funds are available on short notice to meet obligations as they arise and to ensure that the company is able to pursue new business opportunities . in addition to factors discussed above that can affect liquidity , the company 's growth , mortgage banking activities and changes in the liquidity of the investment portfolio due to fluctuations in interest rates are also taken into consideration .

ebitda and adjusted ebitda are non-gaap financial measures of performance and or liquidity that have limitations and should not be considered as a substitute for net income or cash provided by ( used in ) operating activities which are us gaap . 51 overview we are a limited partnership formed to engage in the wholesale distribution of motor fuels , consisting of gasoline and diesel fuel , and to own and lease real estate used in the retail distribution of motor fuels . since our predecessor was founded in 1992 , we have generated revenues from the wholesale distribution of motor fuels to sites and from real estate leases . on the closing date , the partnership completed the offering . the partnership received aggregate proceeds of $ 125.7 million from the sale , net of underwriting discounts and structuring fees , and other offering expenses of $ 2.6 million . of this amount , the proceeds from the over-allotment option of approximately $ 16.7 million were distributed to joseph v. topper jr. , the chairman of the board of directors and chief executive officer of the general partner of the partnership , and to certain of mr. topper 's affiliates and family trusts , and to john b. reilly , iii , a member of the board of directors of the general partner of the partnership our primary business objective is to make quarterly cash distributions to our unitholders and , over time , to increase our quarterly cash distributions . initially , we intend to make minimum quarterly distributions of $ 0.4375 per unit , per quarter ( or $ 1.75 per unit on an annualized basis ) . cash flows from the wholesale distribution of motor fuels will be generated primarily by a per gallon margin that is either a fixed mark-up per gallon or a variable rate mark-up per gallon . by delivering motor fuels through independent carriers on the same day we purchase the motor fuels from suppliers , we seek to minimize the commodity risks typically associated with the purchase and sale of motor fuels . we generate cash flows from rental income primarily by collecting rent from lessee dealers and lgo pursuant to lease agreements . the lease agreements we have with lessee dealers had an average of 2.2 years remaining on the lease terms as of december 31 , 2012. we believe that consistent demand for motor fuels in the areas where we operate and the contractual nature of our rental income provides a stable source of cash flow . for the year ended december 31 , 2012 , we distributed an aggregate of approximately 606 million gallons of motor fuels to 782 sites , including 193 new sites purchased or leased in the second half of 2012 which we did not distribute motor fuels in 2011. over 60 % of the sites to which we distribute motor fuels are owned or leased by us . in addition , we have agreements requiring the operators of these sites to purchase motor fuels from us . as of december 31 , 2012 , we distributed motor fuels to the following classes of business : 225 sites operated by independent dealers ; 362 sites owned or leased by us that have been operated by lgo following the closing of the offering ; 149 sites owned or leased by us and operated by lessee dealers ; and 46 sites distributed through eight sub-wholesalers . we are focused on owning and leasing sites primarily located in metropolitan and urban areas . we own and lease sites located in pennsylvania , new jersey , ohio , new york , massachusetts , kentucky , new hampshire and maine , and florida with our recent express lane acquisition , as further described below . according to the energy information agency , of the nine legacy states in which we own and lease sites , five are among the top ten consumers of gasoline in the united states and four are among the top ten consumers of on-highway diesel fuel in the united states . over 85 % of our sites are located in high-traffic metropolitan and urban areas . we believe the limited availability of undeveloped real estate in these areas presents a high barrier to entry for new or existing retail gas station owners to develop competing sites . 52 recent developments dunmore purchase agreement on december 21 , 2012 , we completed ( the `` dunmore closing `` ) our acquisition of certain assets of dunmore oil company , inc. and jojo oil company , inc. ( together , the `` dunmore sellers `` ) as contemplated by the asset purchase agreement , as amended ( the `` dunmore purchase agreement `` ) , by and among the partnership , a subsidiary of the partnership , the dunmore sellers , and , for limited purposes , joseph gentile , jr. pursuant to the dunmore purchase agreement , the dunmore sellers sold to us all of the assets ( collectively , the `` dunmore assets `` ) held and used by the dunmore sellers in connection with their gasoline and diesel retail outlet business and their related convenience store business ( the `` dunmore retail business `` ) . in connection with this transaction , we will acquire 24 motor fuel service stations , 23 of which will be fee simple interests and one of which will be a leasehold interest . lgo operates the dunmore retail business . in addition , as contemplated by the dunmore purchase agreement , certain of the non-qualified dunmore assets and certain non-qualified liabilities of the dunmore sellers were assigned by us to lgo . lgo paid the partnership $ 0.5 million for up-front rent . the dunmore sellers are permitted to continue to operate certain portions of their business relating to sales of heating oil , propane and unbranded motor fuels . story_separator_special_tag the aggregate gross profit from fuel sales amounted to $ 42.8 million for the year ended december 31 , 2012 , an increase of $ 4.4 million or 11.5 % as compared to $ 38.3 million in the same period of the prior year . the increase in gross profit was principally driven by an increase in volume of gallons distributed ( as more fully discussed below ) , partially offset by slightly lower margin per gallon of $ 0.071 for the year ended december 31 , 2012 , as compared to $ 0.072 in the same period in the prior year . the increase in aggregate revenues from fuel sales noted above resulted from an increase of $ 225.3 million related to an increase in volume of gallons distributed along with an increase of $ 35.8 million related to higher selling prices per gallon , which was $ 3.078 for the year ended december 31 , 2012 , an increase of $ 0.059 or 2.0 % , as compared to $ 3.019 for the same period in the prior year . the volume of gallons distributed amounted to 605.2 million gallons for the year ended december 31 , 2012 , an increase of 74.7 million gallons , or 14.1 % , as compared to 530.5 million gallons for the same period in the prior year . the increase in volume of gallons distributed was principally due to : distributing motor fuels to lgo beginning in 2012 , which accounted for 98.8 million gallons , along with an increase of 42.6 million gallons associated with commencement of distributing motor fuels to the newly leased getty sites and an increase of 1.0 million gallons related to the express lane acquisition , offset by decreases of an aggregate of 57.6 million gallons resulting from lost business . the decrease from lost business consisted primarily of decreases of 38.0 million gallons due to the expiration of our lease to distribute motor fuels at ohio turnpike plazas , 12.3 million gallons related to terminated dealer supply agreements , and 7.3 million gallons related to marketplace competition . the increase in volume distributed for the year ended december 31 , 2012 , was offset further by decreases of 7.1 million gallons related to the divesture of sunoco sites and 3.0 million gallons associated with closing of low volume sites . rental income aggregate rental income , including rental income from affiliates , for 2012 was $ 21.2 million compared to $ 20.4 million in 2011 , resulting in a net increase of $ 0.8 million . this increase is a result of incremental rental income primarily attributable to rental income from the getty lease sites in new england and pennsylvania , which were entered into in may 2012 , and the additional getty sites in new jersey , which were entered into in december 2012 , resulting in a total increase of $ 2.4 million . also contributing to the increase was incremental net rental income of $ 1.3 million related to the shell acquisitions ( second and third quarters of 2011 ) and the additional december 2012 acquisitions . in addition , rental income for certain sites was recorded by an affiliate not included in the predecessor entity through october 30 , 2012. these sites were contributed to the partnership , resulting in an increase in rental income of $ 1.1 million . offsetting these increases was $ 2.5 million related to lgo in connection with a transition , starting in 2012 to align rental income from affiliates with the rental income to be received by us from lgo pursuant to the contractual arrangement entered into with lgo . also , closed sites resulted in a decrease of rental income of $ 1.3 million . rent expense rent expense for 2012 was $ 11.6 million , an increase of $ 2.2 million , as compared to $ 9.4 million in 2011 , with the increase primarily driven by an increased number of leasehold locations . 58 operating expenses operating expenses decreased $ 1.3 million to $ 5.3 million for 2012 compared with $ 6.6 million in 2011. the decrease was primarily due to the classification of the management fee charged by the predecessor entity to lgp . lgp classifies the management fee as a general and administrative expense whereas the predecessor classified certain costs incorporated into the management fee within operating expenses . the total management fee charged by lgc to lgp was $ 1.1 million for the period from october 31 , 2012 through december 31 , 2012. also partially offsetting this decrease was the increased costs from operating the shell sites acquired in the second and third quarters of 2011 and getty sites from the may and december 2012 transactions . depreciation and amortization depreciation and amortization for 2012 , was $ 16.3 million compared to $ 12.0 million for 2011. the increase of $ 4.3 million , or 36.1 % was principally due to an increase in depreciation expense of $ 4.0 million . the depreciation expense increase was due to sites acquired in our shell acquisitions in the second and third quarters of 2011 , which accounted for $ 1.0 million of the increase , an impairment charge due to assets held for sale , which accounted for $ 1.2 million of the increase , and the may 2012 transaction involving our getty sites which accounted for $ 1.8 million of the increase . the remaining increase is primarily driven by purchases of capital equipment during 2012. selling , general and administrative expenses selling , general and administrative expenses for 2012 were $ 19.5 million compared with $ 12.7 million in 2011 , an increase of $ 6.8 million . the increase was primarily attributable to $ 6.3 million of non-recurring expenses related to the offering . gain/loss on sale of assets gain on sale of assets that did not meet the criteria to be classified as discontinued operations for

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extinguishment of debt upon the second amendment of our credit facility , financing costs of $ 4.1 million paid for the amendment as well as financing costs of $ 3.1 million associated with the predecessor entity 's credit facility , were deferred and are being amortized to interest expense over the life of the credit facility . approximately $ 0.6 million of the deferred financing costs associated with the predecessor entity 's credit facility was also written off at this time in accordance with the applicable accounting guidance for debt modifications and extinguishments and was included in the consolidated statements of operations as a loss on extinguishment of debt . 59 other income , net other income , net for 2012 was $ 0.8 million compared with $ 1.2 million in 2011. this decrease of $ 0.4 million is primarily attributable to a $ 1.0 million charge associated with the termination fees associated with the cancellation of the mandatorily redeemable preferred equity , partially offset by termination fees received from dealers electing to early terminate their supply contracts . income tax expense from continuing operations no provision for income taxes was recorded in 2011 as the predecessor entity was not a taxable entity . however , our wholly owned , c-corporation subsidiary , lgws , is a taxable entity . accordingly , we have recorded a tax provision for lgws for the period from october 31 , 2012 through december 31 , 2012. lgp recorded a $ 0.3 million current tax provision . in addition , we recorded a $ 0.3 million deferred tax benefit with a full valuation allowance against the deferred tax asset . ( loss ) income from discontinued operations discontinued operations generated income of $ 0.3 million in 2012 compared with a loss of $ 0.8 million in 2011. the primary driver of this change was a gain on sale of assets of $ 0.2 million in 2012 versus a loss on sale of assets of $ 0.5 million in 2011 .

further , we undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information , future events or otherwise . critical accounting policies our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the united states . preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses and the related disclosures of contingent assets and liabilities . we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances . actual results may differ from estimates . 28 our significant accounting policies are discussed in note 2 to our consolidated financial statements . the accounting policies discussed below are both important to the presentation of our financial condition and results of operations and require management to make difficult , subjective or complex accounting estimates . accordingly , these critical accounting policies are reviewed periodically by the audit committee of the board of directors . regulation — our natural gas distribution and regulated transmission and storage operations are subject to regulation with respect to rates , service , maintenance of accounting records and various other matters by the respective regulatory authorities in the states in which we operate . we meet the criteria established within accounting principles generally accepted in the united states of a cost-based , rate-regulated entity , which requires us to reflect the financial effects of the ratemaking and accounting practices and policies of the various regulatory commissions in our financial statements in accordance with applicable authoritative accounting standards . we apply the provisions of this standard to our regulated operations and record regulatory assets for costs that have been deferred for which future recovery through customer rates is considered probable and regulatory liabilities when it is probable that revenues will be reduced for amounts that will be credited to customers through the ratemaking process . as a result , certain costs that would normally be expensed under accounting principles generally accepted in the united states are permitted to be capitalized or deferred on the balance sheet because it is probable they can be recovered through rates . discontinuing the application of this method of accounting for regulatory assets and liabilities could significantly increase our operating expenses as fewer costs would likely be capitalized or deferred on the balance sheet , which could reduce our net income . further , regulation may impact the period in which revenues or expenses are recognized . the amounts to be recovered or recognized are based upon historical experience and our understanding of the regulations . the impact of regulation on our regulated operations may be affected by decisions of the regulatory authorities or the issuance of new regulations . unbilled revenue — sales of natural gas to our natural gas distribution customers are billed on a monthly basis ; however , the billing cycle periods for certain classes of customers do not necessarily coincide with accounting periods used for financial reporting purposes . we follow the revenue accrual method of accounting for natural gas distribution segment revenues whereby revenues applicable to gas delivered to customers , but not yet billed under the cycle billing method , are estimated and accrued and the related costs are charged to expense . on occasion , we are permitted to implement new rates that have not been formally approved by our regulatory authorities , which are subject to refund . we recognize this revenue and establish a reserve for amounts that could be refunded based on our experience for the jurisdiction in which the rates were implemented . financial instruments and hedging activities — we use financial instruments to mitigate commodity price risk and interest rate risk . the objectives for using financial instruments have been tailored to meet the needs of our regulated and nonregulated businesses . these objectives are more fully described in note 4 to the consolidated financial statements . we record all of our financial instruments on the balance sheet at fair value as required by accounting principles generally accepted in the united states , with changes in fair value ultimately recorded in the income statement . market value changes result in a change in the fair value of these financial instruments . the recognition of the changes in fair value of these financial instruments are recorded in the income statement is contingent upon whether the financial instrument has been designated and qualifies as a part of a hedging relationship or if regulatory rulings require a different accounting treatment . we have elected to treat forward gas supply contracts used in our regulated operations to deliver gas as normal purchases and normal sales . financial instruments used to manage commodity price risk in our natural gas distribution segment do not impact this segment 's results of operations as the realized gains and losses are ultimately recovered from ratepayers through our rates . our nonregulated segment also utilizes financial instruments to manage commodity price risk . we have designated the natural gas inventory held by this operating segment as the hedged item in a fair-value hedge . the financial instruments associated with this natural gas inventory have been designated as fair-value hedges . changes in the fair value of the inventory and designated hedges are recognized in purchased gas cost in the period of change . 29 additionally , we have elected to treat fixed-price forward contracts used in our nonregulated segment to deliver gas as normal purchases and normal sales . financial instruments used to mitigate the commodity price risk associated with these contracts have been designated as cash flow hedges of anticipated purchases and sales at indexed prices . story_separator_special_tag our ability to earn our authorized rates is based primarily on our ability to improve the rate design in our various ratemaking jurisdictions by reducing or eliminating regulatory lag and , ultimately , separating the recovery of our approved margins from customer usage patterns . improving rate design is a long-term process and is further complicated by the fact that we operate in multiple rate jurisdictions . the “ratemaking activity” section of this form 10-k describes our current rate strategy , progress towards implementing that strategy and recent ratemaking initiatives in more detail . we are generally able to pass the cost of gas through to our customers without markup under purchased gas cost adjustment mechanisms ; therefore the cost of gas typically does not have an impact on our gross profit as increases in the cost of gas are offset by a corresponding increase in revenues . accordingly , we believe gross profit is a better indicator of our financial performance than revenues . however , gross profit in our texas and mississippi service areas include franchise fees and gross receipts taxes , which are calculated as a percentage of revenue ( inclusive of gas costs ) . therefore , the amount of these taxes included in revenues is influenced by the 34 cost of gas and the level of gas sales volumes . we record the tax expense as a component of taxes , other than income . although changes in revenue-related taxes arising from changes in gas costs affect gross profit , over time the impact is offset within operating income . as discussed above , the cost of gas typically does not have a direct impact on our gross profit . however , higher gas costs may adversely impact our accounts receivable collections , resulting in higher bad debt expense , and may require us to increase borrowings under our credit facilities resulting in higher interest expense . in addition , higher gas costs , as well as competitive factors in the industry and general economic conditions may cause customers to conserve or , in the case of industrial consumers , to use alternative energy sources . however , gas cost risk has been mitigated in recent years through improvements in rate design that allow us to collect from our customers the gas cost portion of our bad debt expense on approximately 75 percent of our residential and commercial margins . as discussed above , on august 1 , 2012 , we completed the sale of substantially all of our natural gas distribution operations in missouri , illinois and iowa . on august 8 , 2012 we entered into a definitive agreement to sell our natural gas distribution operations in georgia . the results of these operations have been separately reported in the following tables and exclude general corporate overhead and interest expense that would normally be allocated to these operations . review of financial and operating results financial and operational highlights for our natural gas distribution segment for the fiscal years ended september 30 , 2012 , 2011 and 2010 are presented below . replace_table_token_17_th 35 fiscal year ended september 30 , 2012 compared with fiscal year ended september 30 , 2011 the $ 4.8 million increase in natural gas distribution gross profit was primarily due to a $ 17.7 million net increase in rate adjustments , primarily in the mid-tex , louisiana , mississippi , west texas and kentucky service areas . these increases were partially offset by the following : Ÿ $ 11.1 million decrease in revenue-related taxes in our mid-tex , west texas and mississippi service areas , primarily due to lower revenues on which the tax is calculated . Ÿ $ 1.6 million decrease due to an eight percent decrease in consolidated throughput caused principally by lower residential and commercial consumption combined with warmer weather in the current year compared to last year in most of our service areas . operating expenses , which include operation and maintenance expense , provision for doubtful accounts , depreciation and amortization expense and taxes , other than income increased $ 22.4 million primarily due to the following : Ÿ $ 11.2 million increase in legal costs , primarily due to settlements . Ÿ $ 10.6 million increase in employee-related costs . Ÿ $ 8.4 million increase in depreciation and amortization associated with an increase in our net plant as a result of our capital investments in the prior year . Ÿ $ 2.6 million increase in software maintenance costs . these increases were partially offset by the following : Ÿ $ 6.8 million decrease in operating expenses due to increased capital spending and warmer weather allowing us time to complete more capital work than in the prior year . Ÿ $ 2.9 million decrease due to the establishment of regulatory assets for pension and postretirement costs . miscellaneous income decreased $ 28.9 million primarily due to the absence of a $ 21.8 million pre-tax gain recognized in the prior year as a result of unwinding two treasury locks ( $ 13.6 million , net of tax ) and a $ 10.0 million one-time donation to a donor advised fund in the current year . interest charges decreased $ 5.1 million compared to the prior year due primarily to the prepayment of our 5.125 % $ 250 million senior notes in the fourth quarter of fiscal 2012 , refinancing long-term debt at reduced interest rates and reducing commitment fees from decreasing the number of credit facilities and extending the length of their terms in fiscal 2011. additionally , results for fiscal 2012 were favorably impacted by a state tax benefit of $ 11.3 million . due to the completion of the sale of our missouri , iowa and illinois service areas in the fiscal fourth quarter , the company updated its analysis of the tax rate at which deferred taxes would reverse in the future to reflect the sale of these service areas . the

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cash flows from financing activities for the fiscal year ended september 30 , 2012 , our financing activities used $ 44.8 million in cash , while financing activities for the fiscal year ended september 30 , 2011 generated $ 44.0 million in cash compared with cash of $ 163.0 million used for the fiscal year ended september 30 , 2010. our significant financing activities for the fiscal years ended september 30 , 2012 , 2011 and 2010 are summarized as follows : 2012 during the fiscal year ended september 30 , 2012 , we : Ÿ paid $ 257.0 million for long-term debt repayments , including the early redemption of our $ 250 million 5.125 % senior notes that were scheduled to mature in january 2013 . 44 Ÿ borrowed $ 260 million under a short-term loan to finance the repayment of our $ 250 million 5.125 % senior notes . Ÿ borrowed a net $ 94.1 million under our short-term facilities , excluding the $ 260 million short-term loan used to finance the early redemption of our $ 250 million 5.125 % senior notes , to fund working capital needs . Ÿ paid $ 125.8 million in cash dividends , which reflected a payout ratio of 58 percent of net income . Ÿ paid $ 12.5 million for the repurchase of common stock as part of our share buyback program . Ÿ paid $ 5.2 million for the repurchase of equity awards . 2011 during the fiscal year ended september 30 , 2011 , we : Ÿ received $ 394.5 million net cash proceeds in june 2011 related to the issuance of $ 400 million 5.50 % senior notes due 2041 . Ÿ borrowed a net $ 83.3 million under our short-term facilities to fund working capital needs . Ÿ received $ 27.8 million cash in march 2011 related to the unwinding of two treasury locks .

38 operating results our total revenue , net income available to common shareholders and funds from operations as adjusted ( `` ffoaa `` ) are detailed below for the years ended december 31 , 2014 and 2013 ( in millions , except per share information ) : replace_table_token_13_th year ended december 31 , 2014 our total revenue , net income available to common shareholders of epr properties and ffoaa per diluted share for the year ended december 31 , 2014 were favorably impacted by the results of investment spending in 2013 and 2014 , a $ 5.0 million prepayment fee , lower financing rates and lower bad debt expense . our net income available to common shareholders of epr properties for the year ended december 31 , 2014 was favorably impacted by a $ 3.4 million reversal of a liability that was established related to the acquisition of toronto dundas square ( now sold ) as well as gains from property dispositions of $ 1.4 million . our net income available to common shareholders of epr properties for the year ended december 31 , 2014 was unfavorably impacted by the sale of four public charter schools , the december payoff of various mortgage notes due from peak resorts , inc. ( `` peak `` ) , a $ 3.8 million provision for loan loss , higher general and administrative costs , as well as higher income tax expense related to our canadian operations . our per share results for the year ended december 31 , 2014 were also unfavorably impacted by lower average leverage ( measured by debt to gross assets ) than in the prior year . year ended december 31 , 2013 our total revenue , net income available to common shareholders of epr properties and ffoaa per diluted share for the year ended december 31 , 2013 were favorably impacted by the recognition of $ 1.2 million in other income related to option payments received in connection with the adelaar casino and resort project in sullivan county , new york . our net income available to common shareholders of epr properties for the year ended december 31 , 2013 was also favorably impacted by a $ 4.5 million gain on early extinguishment of debt , a combined gain of $ 7.9 million related to the purchase and consolidation of our previously held equity interests in two joint ventures , the recognition of a net $ 14.2 million income tax benefit ( primarily triggered by tax law changes related to our real estate assets in canada ) , and gains of $ 4.3 million on sales of vineyard and winery properties as we exit that business . our net income available to common shareholders of epr properties and per share results for the year ended december 31 , 2013 were negatively impacted by $ 6.2 million in costs associated with loan refinancing . ffoaa is a non-gaap financial measure . for the definitions and further details on the calculations of ffoaa and certain other non-gaap financial measures , see section below titled `` funds from operations ( ffo ) , funds from operations as adjusted ( ffoaa ) and adjusted funds from operations ( affo ) . `` investment spending overview during 2014 , our total investment spending of $ 612.7 million was an increase of 52 % over our investment spending in 2013 with increases coming in each of our primary segments of entertainment , education and recreation . during 2014 , our investment spending in our entertainment segment was $ 170.8 million compared to $ 115.7 million in the prior year and included an acquisition of an 11 theatre portfolio for approximately $ 118 million . we continued to have build-to-suit opportunities available for megaplex theatres at attractive terms with both existing and new tenants . additionally , many megaplex theatre operators are expanding their food and beverage options and are now including in-theatre dining options , luxury seating and alcohol availability . this trend is expected to continue to provide build-to-suit opportunities for us in the future as well . 39 during 2014 , our investment spending in our education segment was $ 225.0 million compared to $ 155.5 million in the prior year , and included build-to-suit public charter schools , early childhood education centers and private schools . we continued to establish our position as a leading owner of public charter school real estate and expect this momentum to continue into 2015. we continued to diversify our tenant base , and as of year-end we had 33 different public charter school operators and we expect to continue to expand this number in 2015. during 2014 , we increased our investments in early childhood education centers and private schools and expect to continue to do so as we move forward . during 2014 , our investment spending in our recreation segment was $ 212.2 million compared to $ 127.3 million in the prior year , and primarily related to golf entertainment complexes as well as the funding of the water-park hotel at camelback mountain ski resort . we plan to continue to seek attractive investments in this segment in 2015. during 2014 , our investment spending in our other segment was $ 4.7 million and related to the adelaar casino and resort project in sullivan county , new york . this project is further discussed below under “ recent developments `` . capitalization strategies our property acquisitions and financing commitments are financed by cash from operations , borrowings under our unsecured revolving credit facility and unsecured term loan facility , long-term mortgage debt , the sale of debt and equity securities and the periodic sale of properties . during the past several years , we have taken significant steps to implement our strategy of migrating to an unsecured debt structure and maintaining significant liquidity by issuing $ 875.0 million of unsecured notes and paying off secured debt . story_separator_special_tag in conjunction with this payoff , we received a prepayment fee of $ 5.0 million which is included in mortgage and other financing income in the 44 accompanying consolidated statements of income for the year ended december 31 , 2014 in this annual report on form 10-k. the maturity dates of the remaining mortgage notes receivable totaling $ 93.6 million at december 31 , 2014 were extended to december 31 , 2034. additionally , $ 301 thousand of prepaid mortgage fees were written off which are included in costs associated with loan refinancing in the accompanying consolidated statements of income for the year ended december 31 , 2014 in this annual report on form 10-k. note receivable during the year ended december 31 , 2014 , we recognized a provision for loan loss of $ 3.8 million that relates to the full amount outstanding of one note receivable that was originated in january 2006. this note was made originally as a bridge loan to an anticipated larger transaction that we chose not to pursue in that same year . recent changes in the borrower 's financial status are such that future payments are no longer considered likely . imagine schools as of december 31 , 2014 , we have 17 schools that are occupied and operated by imagine , three schools that have been subleased by imagine , and three schools that remain non-operational . for those remaining non-operational schools , imagine continues to seek further opportunities for sale or sublease . imagine remains responsible for payments on all 23 properties under the master lease and was current as of december 31 , 2014. we do not anticipate any delay in future payments under the master lease , and as additional credit support we continue to hold a $ 9.0 million letter of credit from imagine and require them to maintain a $ 7.4 million escrow reserve . adelaar casino and resort project in sullivan county , new york the proposed ground lease tenant for a portion of our sullivan county , new york property , empire resorts , announced on june 30 , 2014 that it submitted an application to the new york state gaming facility location board ( “ flb ” ) for a class iii gaming license to operate a full-scale casino to be named montreign resort casino ( `` montreign `` ) . on december 17 , 2014 , the flb announced its recommendation for a license for montreign . with this recommendation , empire resorts is now applying to the new york state gaming commission for the official gaming license . if the casino license is granted and the parties proceed with the development of the project as set forth in the master plan submitted to sullivan county , new york , the total combined investment in the adelaar casino and resort project could be in excess of $ 1.0 billion , which may include land held for development ( $ 201.5 million at december 31 , 2014 ) , and additional investments outside of the casino by the company and others in excess of $ 200.0 million for infrastructure , a waterpark hotel , a redesign of the existing golf course and retail , restaurant , shopping and entertainment properties . in addition to the company , sources of this additional investment may include funding by tenants , joint venture partners , developers and purchasers of the land . empire resorts has reported that they plan to invest up to $ 630.0 million for the casino project . the adelaar casino and resort project also has been approved for up to $ 75.0 million in industrial development bonds to fund portions of the project . the size of the overall project , including the amount of capital necessary to complete it , will vary based upon a number of contingencies . we have received from empire resorts non-refundable option payments totaling $ 3.8 million through december 31 , 2014 which have been deferred and are expected to be recognized in income in the future as a part of lease accounting should a lease agreement be finalized with empire resorts . as further described in note 20 to the consolidated financial statements in this annual report on form 10-k , the adelaar casino and resort project is the subject of ongoing litigation for which we believe we have meritorious defenses . chief executive officer retirement on february 24 , 2015 , we announced that our president and chief executive officer , david brain , was retiring from the company . in connection with this change , we accrued for anticipated severance amounts ( including stock based compensation costs ) , which resulted in a charge to earnings in the first quarter of 2015 of approximately $ 18.5 million . results of operations year ended december 31 , 2014 compared to year ended december 31 , 2013 rental revenue was $ 286.7 million for the year ended december 31 , 2014 compared to $ 248.7 million for the year ended december 31 , 2013 . rental revenue increased $ 38.0 million from the prior period , of which $ 39.6 million was 45 related to acquisitions or build-to-suit projects completed in 2014 and 2013 and was partially offset by a net decrease of $ 1.6 million in rental revenue on existing properties due in part by the impact of a weaker canadian exchange rate . percentage rents of $ 2.0 million and $ 2.6 million were recognized during the years ended december 31 , 2014 and 2013 , respectively . straight-line rents of $ 8.7 million and $ 4.8 million were recognized during the years ended december 31 , 2014 and 2013 , respectively . during the year ended december 31 , 2014 , we experienced an increase of approximately 4.1 % in rental rates on approximately 91,000 square feet with respect to two lease renewals . additionally , we have funded or have agreed to

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liquidity requirements short-term liquidity requirements consist primarily of normal recurring corporate operating expenses , debt service requirements and dividends to shareholders . we meet these requirements primarily through cash provided by operating activities . net cash provided by operating activities was $ 250.3 million , $ 234.1 million and $ 207.4 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . net cash used by investing activities was $ 376.2 million , $ 336.5 million and $ 255.8 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . net cash provided by financing activities was $ 121.6 million , $ 100.2 million and $ 44.2 million for the years ended december 31 , 2014 , 2013 and 2012 , respectively . we anticipate that our cash on hand , cash from operations , and funds available under our unsecured revolving credit facility will provide adequate liquidity to fund our operations , make interest and principal payments on our debt , and allow dividends to be paid to our shareholders and avoid corporate level federal income or excise tax in accordance with reit internal revenue code requirements . liquidity requirements at december 31 , 2014 consisted primarily of maturities of debt . contractual obligations as of december 31 , 2014 are as follows ( in thousands ) : replace_table_token_15_th commitments as of december 31 , 2014 , we had seven entertainment development projects for which we have commitments to fund approximately $ 29.8 million of additional improvements , 16 education development projects for which we have commitments to fund approximately $ 107.0 million of additional improvements and nine recreation development projects for which we have commitments to fund approximately $ 110.9 million . of these amounts , approximately $ 215.0 million is expected to be funded in 2015. development costs are advanced by us in periodic draws . if we determine that construction is not being completed in accordance with the terms of the development agreements , we can discontinue funding construction draws .

we believe the most significant of these challenges include increasing competition in the markets for both our consumer and government and industrial products , our ability to obtain u.s. federal government funding for research and development programs , and our ability to successfully develop and introduce products and product enhancements . 28 revenue we currently derive revenue from product sales , government research and development contracts , and commercial research and development contracts . product revenue is derived from the sale of our various home cleaning robots and government and industrial robots and related accessories . research and development revenue is derived from the execution of contracts awarded by the u.s. federal government , other governments and a small number of other partners . in the future , we expect to derive increasing revenue from product maintenance and support services due to a focused effort to market these services to the expanding installed base of our robots . we currently derive a majority of our product revenue from the sale of our home cleaning robots , and our packbot and sugv tactical military robots . for the fiscal years ended january 1 , 2011 and january 2 , 2010 , product revenues accounted for 89.9 % and 87.8 % of total revenue , respectively . for the fiscal years ended january 1 , 2011 and january 2 , 2010 , our funded research and development contracts accounted for approximately 10.1 % and 12.2 % of our total revenue , respectively . we expect to continue to perform funded research and development work with the intent of leveraging the technology developed to advance our new product development efforts . in the future , however , we expect that revenue from funded research and development contracts could grow modestly on an absolute dollar basis and represent a decreasing percentage of our total revenue due to the anticipated growth in consumer and military product revenue . for the fiscal years ended january 1 , 2011 and january 2 , 2010 , approximately 65.7 % and 56.0 % , respectively , of our home robot product revenue resulted from sales to 15 customers . for fiscal 2010 and fiscal 2009 , the customers were comprised of both u.s. retailers and international distributors . direct-to-consumer revenue generated through our domestic and international on-line stores accounted for 11.5 % of our home robot product revenue for the fiscal year ended january 1 , 2011 compared to 17.1 % in the fiscal year ended january 2 , 2010. in addition , 87.6 % and 78.6 % of military product revenue , and 96.5 % and 94.5 % of funded research and development contract revenue , resulted from orders and contracts or subcontracts with the u.s. federal government in the fiscal years ended january 1 , 2011 and january 2 , 2010 , respectively . for the fiscal years ended january 1 , 2011 and january 2 , 2010 , sales to non-u.s. customers accounted for 41.1 % and 33.3 % of total revenue , respectively . our revenue from product sales is generated through sales to our retail distribution channels , our distributor network and to certain u.s. and foreign governments . we recognize revenue from the sales of home robots under the terms of the customer agreement upon transfer of title and risk of loss to the customer , net of estimated returns , provided that collection is determined to be reasonably assured and no significant obligations remain . revenue from our military robot sales and revenue from funded research and development contracts are occasionally influenced by the september 30 fiscal year-end of the u.s. federal government . in addition , our revenue can be affected by the timing of the release of new products and the size and timing of contract awards from military and other government agencies . historically , revenue from consumer product sales has been significantly seasonal , with a majority of our consumer product revenue generated in the second half of the year ( in advance of the holiday season ) . as a result of the growth of our international consumer business , which is less seasonal than our domestic consumer business , our consumer product revenue is spread more evenly throughout the year . cost of revenue cost of product revenue includes the cost of raw materials and labor that go into the development and manufacture of our products as well as manufacturing overhead costs such as manufacturing engineering , quality assurance , logistics and warranty costs . for the fiscal years ended january 1 , 2011 and january 2 , 2010 , cost of product revenue was 63.4 % and 67.4 % of total product revenue , respectively . raw material costs , which are our most significant cost items , can fluctuate materially on a periodic basis , although many components have been historically stable . additionally , unit costs can vary significantly depending on the mix of products sold . there can be no assurance that our costs of raw materials will not increase . labor costs also comprise a significant portion of our cost of revenue . we outsource the manufacture of our home robots to contract manufacturers in china . while labor costs in china traditionally have been favorable compared to labor costs elsewhere in the world , including the 29 united states , we believe that labor in china is becoming more scarce . consequently , the labor costs for our home robots could increase in the future . cost of contract revenue includes the direct labor costs of engineering resources committed to funded research and development contracts , as well as third-party consulting , travel and associated direct material costs . additionally , we include overhead expenses such as indirect engineering labor , occupancy costs associated with the project resources , engineering tools and supplies and program management expenses . story_separator_special_tag percentage points and the government and industrial division gross margin increasing 2.9 percentage points . the 7.8 percentage point increase in the home robots division is attributable to lower return provisions , the increase in units shipped through our higher-margin international channel , price increases on certain international products , continued product cost reduction efforts , lower excess and obsolete inventory provisions and improved leverage of our overhead expense against higher revenue in fiscal 2010 as compared to fiscal 2009. the 2.9 percentage point increase in the government and industrial division is primarily attributable to leveraging our overhead expense against higher revenue , and an increase in higher-margin product life cycle revenue , partially offset by a decrease due to product mix primarily attributable to a significant number of sugv 310 units shipped in fiscal 2010 as compared to fiscal 2009. our margins relating to contract revenue increased in fiscal 2010 as compared to fiscal 2009 due to higher-margin firm-fixed-priced contracts awarded in 2010. research and development replace_table_token_9_th research and development expenses increased by $ 10.1 million , or 68.2 % , to $ 24.8 million ( 6.2 % of revenue ) in fiscal 2010 , from $ 14.7 million ( 4.9 % of revenue ) for fiscal 2009. the increase in research and development expenses is primarily due to increases in compensation , recruiting , employee benefits , materials and consulting 36 costs associated with internal research and development projects in our home robots division and expenses related to our healthcare research . the increase in our home robots division is primarily the result of our increased efforts in the areas of product development and advanced development relating to our consumer products . in addition to our research and development activities classified as research and development expense , we incur research and development expenses under funded development arrangements with governments and industrial third parties . for fiscal 2010 , these expenses amounted to $ 27.1 million compared to $ 30.8 million for fiscal 2009. in accordance with generally accepted accounting principles , these expenses have been classified as cost of contract revenue rather than research and development expense . the combined investment in future technologies , classified as cost of revenue and research and development expense , was $ 51.9 million for fiscal 2010 , compared to $ 45.5 million for fiscal 2009. selling and marketing replace_table_token_10_th selling and marketing expenses increased by $ 9.6 million , or 23.6 % , to $ 50.5 million ( 12.6 % of revenue ) in fiscal 2010 from $ 40.9 million ( 13.7 % of revenue ) in fiscal 2009. this was driven by an increase in our home robots division of $ 7.9 million attributable to increases in advertising , promotions , on-line media , sales commission expenses as a result of higher sales , and an increase in compensation and employee-related expense supporting our international home robot sales for fiscal 2010 as compared to fiscal 2009. selling and marketing expenses in our government and industrial division increased by $ 1.7 million attributable to an increase in compensation expenses and other expenses relating to bid and proposal activities , and sales commissions as a result of higher sales in fiscal 2010 as compared to fiscal 2009. in fiscal 2011 , we expect to continue to invest in sales and marketing to increase brand awareness . accordingly , we anticipate selling and marketing expenses will increase in absolute dollars but remain at the same level or slightly above fiscal 2010 as a percentage of revenue . general and administrative replace_table_token_11_th general and administrative expenses increased by $ 6.5 million , or 21.6 % , to $ 36.6 million ( 9.1 % of revenue ) in fiscal 2010 from $ 30.1 million ( 10.1 % of revenue ) in fiscal 2009. this increase is attributable to increased compensation , benefit and recruiting expenses related to increased headcount and an increase in incentive compensation expense , stock based compensation , and an increase in legal expense , primarily attributable to our international expansion and intellectual property prosecution and enforcement , for fiscal 2010 as compared to fiscal 2009. other income ( expense ) , net replace_table_token_12_th 37 other income ( expense ) , net amounted to $ 0.5 million in fiscal 2010 compared to $ ( 0.1 ) million in fiscal 2009. other income ( expense ) , net , for fiscal 2010 was related to interest income of $ 0.8 million offset by foreign currency exchange losses of $ 0.3 million resulting from foreign currency exchange rate fluctuations . other income ( expense ) , net , for fiscal 2009 was directly related to foreign currency exchange losses resulting from foreign currency exchange rate fluctuations . income tax provision replace_table_token_13_th in fiscal 2010 , we recorded a $ 8.5 million tax provision based on an effective income tax rate of 24.9 % . the provision for income taxes for fiscal 2010 consists of $ 10.2 million of federal taxes , $ 0.1 million of foreign taxes and $ ( 1.8 ) million of state taxes , which includes the $ 2.3 million associated with the full release of our valuation allowance relating to state deferred tax assets . in fiscal 2009 , we recorded a $ 2.0 million tax provision based on an effective income tax rate of 38 % . the provision for income taxes for fiscal 2009 consists of $ 1.6 million of federal taxes and $ 0.4 million of state taxes . included in the 2009 provision is a $ 0.2 million provision associated with an out-of-period error correction with respect to the earnings of our india subsidiary and a $ 0.3 million one-time benefit from the conversion of incentive stock options to non-qualified stock options as a result of our stock option exchange program which concluded in our second fiscal quarter of 2009. comparison of years ended january 2 , 2010 and december 27 , 2008 revenue replace_table_token_14_th our

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liquidity and capital resources at january 1 , 2011 , our principal sources of liquidity were cash and cash equivalents totaling $ 108.4 million , short-term investments of $ 13.9 million and accounts receivable of $ 34.1 million . we manufacture and distribute our products through contract manufacturers and third-party logistics providers . we believe that this approach gives us the advantages of relatively low capital investment and significant flexibility in scheduling production and managing inventory levels . by leasing our office facilities , we also minimize the cash needed for expansion . accordingly , our capital spending is generally limited to leasehold improvements , computers , office furniture , product-specific production tooling , internal use software and test equipment . in the fiscal years ended january 1 , 2011 and january 2 , 2010 , we spent $ 12.6 million and $ 5.0 million , respectively , on capital equipment . our strategy for delivering products to our retail customers gives us the flexibility to provide container shipments directly to the retailer from china and , alternatively , allows our retail partners to take possession of product on a domestic basis . accordingly , our home robots product inventory consists of goods shipped to our third-party logistics providers for the fulfillment of retail orders and direct-to-consumer sales . our inventory of government and industrial products is relatively low as they are generally built to order . our contract manufacturers are responsible for purchasing and stocking the majority of components required for the production of our products , and they invoice us when the finished goods are shipped .

at december 31 , 2015 , consumer loans represented 31.0 % of the company 's total gross loan portfolio , down from 34.7 % at december 31 , 2014 , as real estate loan originations have increased at a faster pace than consumer loan originations during the year ended december 31 , 2015 . 55 indirect home improvement lending is dependent on the company 's relationships with home improvement contractors and dealers . the company funded $ 67.3 million , or 4,000 loans during the year ended december 31 , 2015 , using its indirect home improvement contractor/dealer network located throughout washington , oregon , idaho , and california with four contractor/dealers responsible for 53.2 % of the funded loans dollar volume . the company began originating consumer indirect loans in the state of california in 2012 with $ 2.5 million in these loans originated during 2012. in 2015 , the company originated $ 22.6 million in the state of california and held $ 28.9 million in california originated consumer loans at december 31 , 2015. management has established a concentration limit of no more than 100 % of the bank 's total risk-based capital . at december 31 , 2015 , the limit would be $ 85.6 million . see item 1a , “ risk factors - our business could suffer if we are unsuccessful in making , continuing and growing relationships with home improvement contractors and dealers ” of this form 10-k. since 2012 , the company has had an emphasis on diversifying lending products by expanding commercial real estate , commercial business and residential lending , while maintaining the current size of the consumer loan portfolio . the company 's lending strategies are intended to take advantage of : ( 1 ) historical strength in indirect consumer lending , ( 2 ) recent market consolidation that has created new lending opportunities and the availability of experienced bankers , and ( 3 ) strength in relationship lending . retail deposits will continue to serve as an important funding source . see item 1 , “ business : lending activities- iv ” and item 1a , “ risk factors - risks related to our business ” in this form 10-k. the company generally underwrites the one-to-four-family loans based on the applicant 's ability to repay . this includes employment and credit history and the appraised value of the subject property . the company lends up to 100 % of the lesser of the appraised value or purchase price for one-to-four-family first mortgage loans . for first mortgage loans with a loan-to-value ratio in excess of 80 % , the company generally requires either private mortgage insurance or government sponsored insurance in order to mitigate the higher risk level associated with higher loan-to-value loans . fixed-rate loans secured by one-to-four-family residences have contractual maturities of up to 30 years and are generally fully amortizing , with payments due monthly . adjustable-rate mortgage loans may pose different credit risks than fixed-rate loans , primarily because as interest rates increase , the borrower 's payments rise , increasing the potential for default . properties securing the one-to-four-family loans are appraised by independent fee appraisers who are selected in accordance with industry and regulatory standards . the company requires borrowers to obtain title and hazard insurance , and flood insurance , if necessary . loans are generally underwritten to the secondary market guidelines with additional requirements as determined by the internal underwriting department . the company is significantly affected by prevailing economic conditions , as well as government policies and regulations concerning , among other things , monetary and fiscal affairs . deposit flows are influenced by a number of factors , including interest rates paid on time deposits , other investments , account maturities , and the overall level of personal income and savings . lending activities are influenced by the demand for funds , the number and quality of lenders , and regional economic cycles . sources of funds for lending activities include primarily deposits , including brokered deposits , borrowings , payments on loans and income provided from operations . the company 's earnings are primarily dependent upon net interest income , the difference between interest income and interest expense . interest income is a function of the balances of loans and investments outstanding during a given period and the yield earned on these loans and investments . interest expense is a function of the amount of deposits and borrowings outstanding during the same period and interest rates paid on these deposits and borrowings . the company 's earnings are also affected by the provision for loan losses , service charges and fees , gains from sales of assets , operating expenses and income taxes . the secondary influence on the company 's earnings is fee income from mortgage banking activities . critical accounting policies and estimates certain of the company 's accounting policies are important to the portrayal of the company 's financial condition , since they require management to make difficult , complex or subjective judgments , some of which may relate to matters that are inherently uncertain . estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances . facts and circumstances which could affect these judgments include , but are not limited to , changes in interest rates , changes in the performance of the economy and changes in the financial condition of borrowers . management believes that its critical accounting policies include determining the allowance for loan losses , the fair value of servicing rights , derivatives and hedging activity , and the accounting 56 for deferred income taxes . the company 's accounting policies are discussed in detail in note 1 of the notes to consolidated financial statements included in item 8 , “ financial statements and supplementary data ” of this form 10-k. allowance for loan loss . story_separator_special_tag deposit , $ 16.7 million of online certificates of deposit , and $ 1.7 million of public funds , increased to $ 46.3 million as of december 31 , 2015 , compared to $ 36.4 million at december 31 , 2014. the company continues its focus on relationship deposit growth with new and existing customers as the primary source of funds for loan growth . the branch purchase provides immediate core deposit liquidity to support lending growth and asset/liability objectives and expands the bank 's footprint into contiguous markets . borrowings , which consisted of fhlb advances and fhlb fed funds , increased $ 81.7 million , or 479.8 % , to $ 98.8 million at december 31 , 2015 , from $ 17.0 million at december 31 , 2014. the increase in borrowings was primarily due to timing differences between the branch purchase and loan growth prior to the acquisition . in addition to our borrowings , on october 15 , 2015 ( the “ closing date ” ) , fs bancorp , inc. closed on a third-party loan commitment by the issuance of an unsecured subordinated term note in the aggregate principal amount of $ 10.0 million due october 1 , 2025 ( the “ subordinated note ” ) . the subordinated note bears interest at an annual interest rate of 6.50 % , payable by the company quarterly in arrears on january 1 , april 1 , july 1 and october 1 of each year , commencing on the first such date following the closing date and on the maturity date . the subordinated note will mature on october 1 , 2025 but may be prepaid at the company 's option and with regulatory approval at any time on or after five years after the closing date or at any time upon certain events , such as a change in the regulatory capital treatment of the subordinated note or the interest on the subordinated note no longer being deductible by the company for united states federal income tax purposes . the company contributed $ 9.0 million of the proceeds from the subordinated note as additional capital to the bank in the fourth quarter of 2015 in anticipation of the branch purchase and intends to use the balance to fund general working capital and operating expenses . see item 8 , “ financial statements and supplementary data - notes to consolidated financial statements - note 8 debt . ” . stockholders ' equity . total stockholders ' equity increased $ 9.5 million , or 14.4 % , to $ 75.3 million at december 31 , 2015 , from $ 65.8 million at december 31 , 2014. the increase in stockholders ' equity was primarily a result of net income of $ 8.9 million . book value per common diluted shares outstanding was $ 25.18 at december 31 , 2015 , compared to $ 22.48 at december 31 , 2014 . 60 average balances , interest and average yields/cost the following table sets forth for the periods indicated , information regarding average balances of assets and liabilities as well as the total dollar amounts of interest income from average interest-earning assets and interest expense on average interest-bearing liabilities , resultant yields , interest rate spread , net interest margin ( otherwise known as net yield on interest-earning assets ) , and the ratio of average interest-earning assets to average interest-bearing liabilities . also presented is the weighted average yield on interest-earning assets , rates paid on interest-bearing liabilities and the resultant spread at december 31 , 2015. income and all average balances are monthly average balances . non-accruing loans have been included in the table as loans carrying a zero yield . replace_table_token_25_th _ ( 1 ) the average loans receivable , net balances include non-accruing loans . 61 rate/volume analysis the following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities . it distinguishes between the changes related to outstanding balances and that due to the changes in interest rates . for each category of interest-earning assets and interest-bearing liabilities , information is provided on changes attributable to ( i ) changes in volume ( i.e . , changes in volume multiplied by old rate ) and ( ii ) changes in rate ( i.e . , changes in rate multiplied by old volume ) . for purposes of this table , changes attributable to both rate and volume , which can not be segregated , have been allocated proportionately to the change due to volume and the change due to rate . replace_table_token_26_th ( 1 ) the average loans receivable , net balances include non-accruing loans . ( 2 ) includes interest-bearing deposits at other financial institutions . comparison of results of operations for the years ended december 31 , 2015 and 2014 general . net income for the year ended december 31 , 2015 , increased $ 4.3 million , or 95.5 % , to $ 8.9 million , from $ 4.5 million for the year ended december 31 , 2014. the increase in net income was primarily a result of a $ 7.6 million , or 75.4 % increase in noninterest income , and a $ 6.9 million , or 27.6 % increase in interest income , partially offset by a $ 5.7 million , or 24.0 % increase in noninterest expense , a $ 2.9 million , or 152.4 % increase in the provision for income tax expense and $ 1.0 million , or 35.4 % increase in interest expense . net interest income . net interest income increased $ 5.9 million , or 26.7 % , to $ 28.0 million for the year ended december 31 , 2015 , from $ 22.1million for the year ended december 31 , 2014. the increase in net interest income was primarily attributable to a $ 6.8 million , or 28.8 % increase in

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liquidity management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit runoff that may occur in the normal course of business . the company relies on a number of different sources in order to meet potential liquidity demands . the primary sources are increases in deposit accounts , fhlb advances , purchases of fed funds , sale of securities available-for-sale , cash flows from loan payments and maturing securities , and sales of one-to-four-family loans held for sale . in addition , during the year ended december 31 , 2015 , the company issued the subordinated note to provide additional capital to the bank in anticipation of the branch purchase and intends to use the balance to fund general working capital and operating expenses . at december 31 , 2015 , the bank 's total borrowing capacity was $ 153.8 million with the fhlb of des moines , with unused borrowing capacity of $ 55.1 million at that date . the fhlb borrowing limit is based on certain categories of loans , primarily real estate loans that qualify as collateral for fhlb advances . at december 31 , 2015 , the bank held approximately $ 206.2 million in loans that qualify as collateral for fhlb advances .

we believe our vertical retail strategy allows us to interact more directly with and gain insights from our customers while providing us with greater control of our brand . in fiscal 2011 , 43 % of our net revenue was derived from sales of our products in canada , 53 % of our net revenue was derived from the sales of our products in the united states and 4 % of our net revenue was derived from sales of our products outside of north america . in fiscal 2010 , 52 % of our net revenue was derived from sales of our products in canada , 46 % of our net revenue was derived from the sales of our products in the united states and 2 % of our net revenue was derived from sales of our products outside of north america . in fiscal 2009 , 60 % of our net revenue was derived from sales of our products in canada , 40 % of our net revenue was derived from the sales of our products in the united states and an immaterial amount of our net revenue was derived from sales of our products outside of north america . our net revenue increased from $ 711.7 million in fiscal 2010 to $ 1,000.8 million in fiscal 2011 , representing a 41 % increase . our increase in net revenue from fiscal 2010 to fiscal 2011 resulted from the net addition of 41 retail locations , including our remaining four reacquired franchises , and comparable store sales growth of 22 % in fiscal 2011. our ability to open new stores and grow sales in existing stores has been driven by increasing demand for our technical athletic apparel and a growing recognition of the lululemon athletica brand . we believe our superior products , strategic store locations , inviting store environment , grassroots marketing approach and distinctive corporate culture are responsible for our strong financial performance . we have three reportable segments : corporate-owned stores , direct to consumer and other . we report our segments based on the financial information we use in managing our businesses . while we receive financial information for each corporate-owned store , we have aggregated all of the corporate-owned stores into one reportable segment due to the similarities in the economic and other characteristics of these stores . our direct to consumer segment accounted for 11 % of our net revenue in fiscal 2011 , 8 % in fiscal 2010 and 4 % in fiscal 2009. our other segment , consisting of franchise sales , wholesale accounts , sales from company-operated showrooms , warehouse sales and outlets , each accounted for less than 10 % of our net revenue in each of fiscal 2011 , fiscal 2010 and fiscal 2009. we previously reported our franchise channel as an operating segment ; however , we reacquired our remaining four franchised stores in fiscal 2011 and opening new franchise stores is not part of our growth strategy . as of january 29 , 2012 , we sold our products through 174 corporate-owned stores located in canada , the united states , australia , and new zealand . we plan to increase our net revenue in north america and australia by opening additional corporate-owned stores in new and existing markets . corporate-owned stores accounted for 82 % of total net revenue in fiscal 2011 , 83 % of total net revenue in fiscal 2010 and 87 % of total net revenue in fiscal 2009. as of january 29 , 2012 , our direct to consumer segment included our e-commerce website . e-commerce sales are taken directly from retail customers through www.lululemon.com . our direct to consumer segment is an increasingly substantial part of our growth strategy , and now represents more than 10 % of our net revenue . in addition to deriving revenue from sales through our corporate-owned stores and direct to consumer , we also derive other net revenue , which includes wholesale customers , as well as franchise sales , warehouse sales and sales through a number of company-operated showrooms . wholesale customers include select premium yoga studios , health clubs and fitness centers . we reacquired our four remaining franchise stores during fiscal 2011 , 26 and as such , franchise sales , which included inventory sales and royalties , will no longer be a part of our other net revenue in future fiscal years . warehouse sales are typically held one or more times a year to sell slow moving inventory or inventory from prior seasons to retail customers at discounted prices . our showrooms are typically small locations that we open from time to time when we enter new markets and feature a limited selection of our product offering during select hours . other net revenue accounted for 7 % of total revenue in fiscal 2011 , 9 % of total net revenue in fiscal 2010 and 9 % of total net revenue in fiscal 2009. we believe that our athletic apparel has and will continue to appeal to consumers outside of north america who value its technical attributes as well as its function and style . in 2004 , we opened our first store in australia which was operated under a franchise license . in fiscal 2009 we made a 13 % equity investment in lululemon athletica australia pty , our franchise operator . during fiscal 2010 we increased our investment to 80 % which has provided us control over lululemon athletica australia pty . in fiscal 2008 , we opened a company-operated showroom in hong kong . in the past , we have entered into franchise agreements to distribute lululemon athletica branded products to more quickly disseminate our brand name and increase our net revenue and net income . story_separator_special_tag net income from our corporate-owned stores segment increased $ 91.0 million , or 44 % , to $ 299.0 million for fiscal 2011 from $ 208.0 million for fiscal 2010 primarily due to an increase of $ 137.2 million in gross profit , which was offset partially by a natural increase in selling , general and administrative expenses related to employee costs as well as operating expenses associated with new stores and net revenue growth at existing stores . income from operations as a percentage of corporate-owned stores revenue increased by 140 basis points primarily from leverage gained over fixed costs . direct to consumer . net income from our direct to consumer segment increased $ 30.2 million , or 215 % , to $ 44.2 million in fiscal 2011 from $ 14.0 million in fiscal 2010 due to increasing traffic and conversion rates on our e-commerce website . income from operations as a percentage of direct to consumer revenue increased by 1710 basis points in fiscal 2011 compared to fiscal 2010 due to decreased professional fees paid as our e-commerce operations were brought in-house near the beginning of fiscal 2011. we discontinued our phone sales channel during fiscal 2011 , and therefore our direct to consumer segment will only include e-commerce sales in future fiscal years . other . net income from our other segment increased $ 4.2 million , or 24 % , to $ 21.2 million in fiscal 2011 from $ 17.1 million in fiscal 2010. this increase was primarily the result of temporary locations open in the fourth quarter of fiscal 2011 and additional warehouse sales held during the fourth quarter of fiscal 2011 compared to fiscal 2010. this increase was also a result of increased income from strategic sales , showrooms and outlets , partially offset by decreased income from our franchise operating channel . we reacquired our four remaining franchised locations during the third quarter of fiscal 2011 ; as a result , income from operations from the reacquired stores is now included in our corporate-owned stores segment . 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 . income from operations also includes general corporate expenses . general corporate expenses increased $ 18.7 million , or 32 % , to $ 77.4 million in fiscal 2011 from $ 58.7 million in fiscal 2010. this increase was 33 primarily due to an increase in expenses related to our head office growth of $ 14.8 million , which was largely related to the growth of our information technology and human resources departments to support the growth of our business . income from operations also increased as a result of increased stock-based compensation expense of $ 2.2 million , an increase in foreign exchange losses of $ 1.2 million , and increased depreciation and amortization expense of $ 0.5 million . the increase was partially offset by a decreased provision for impairment and lease exit costs of $ 1.8 million . general corporate expenses are expected to continue to increase in future years as we grow our overall business and require increased efforts at our head office to support our corporate-owned stores , franchises and other segments . other income ( expense ) , net other income ( expense ) , net decreased $ 0.4 million , to $ 2.5 million in fiscal 2011 from $ 2.9 million in fiscal 2010. the decrease was primarily a result of re-measuring our 13 percent non-controlling equity investment in australia immediately prior to obtaining control of the business , which led to a $ 1.8 million gain on investment in fiscal 2010. this was offset by increased interest income earned in fiscal 2011 compared to fiscal 2010 on our increased cash balances . provision for income taxes provision for income taxes increased $ 43.4 million , or 71 % , to $ 104.5 million in fiscal 2011 from $ 61.1 million in fiscal 2010. in fiscal 2011 , our effective tax rate was 36.1 % compared to 33.3 % in fiscal 2010. the higher effective tax rate was due to the proportional increase of taxable income in the united states in fiscal 2011 compared to taxable income in canada which is taxed at a rate lower than the us statutory rate combined with the declining canadian corporate tax rate . we expect this trend to continue as we expect to generate a higher proportion of our future taxable income in the united states . we have not recorded deferred taxes on undistributed earnings and other temporary differences of our canadian subsidiary which are considered to be indefinitely reinvested . if management 's intentions with respect to these undistributed earnings and other temporary differences were to change in the future , deferred taxes may need to be provided that could materially impact our financial results . net income net income increased $ 62.2 million , or 51 % , to $ 184.1 million in fiscal 2011 from $ 121.8 million in fiscal 2010. the increase in net income in fiscal 2011 was primarily due to a $ 174.3 million increase in gross profit resulting from sales growth at existing and additional corporate-owned stores opened during fiscal 2011 and increasing traffic on our e-commerce website , offset by an increase of $ 67.8 million in selling , general and administrative expenses , including provision for impairment and lease exit costs , an increase of $ 43.4 million in provision for income taxes , and a $ 0.4 million decrease in other income ( expense ) , net . comparison of fiscal 2010 to fiscal 2009 net revenue net revenue increased $ 258.8 million , or 57 % , to $ 711.7 million in fiscal 2010 from $ 452.9 million in fiscal 2009. assuming the average exchange rate between the canadian and united states dollars in fiscal 2009 remained constant , our net revenue would have increased

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liquidity and capital resources our primary sources of liquidity are our current balances of cash and cash equivalents , cash flows from operations and borrowings available under our revolving credit facility . our primary cash needs are capital expenditures for opening new stores and remodeling existing stores , making information technology system enhancements and funding working capital requirements . cash and cash equivalents in excess of our needs are held in interest bearing accounts with financial institutions . as of january 29 , 2012 , our working capital ( excluding cash and cash equivalents ) was $ 3.6 million and our cash and cash equivalents were $ 409.4 million . the following table summarizes our net cash flows provided by and used in operating , investing and financing activities for the periods indicated : replace_table_token_14_th operating activities operating activities consist primarily of net income adjusted for certain non-cash items , including depreciation and amortization , deferred income taxes , realized gains and losses on disposal of property and equipment , stock-based compensation expense and the effect of the changes in non-cash working capital items , principally accounts receivable , inventories , accounts payable and accrued expenses . in fiscal 2011 , cash provided by operating activities increased $ 23.6 million , to $ 203.6 million compared to cash provided by operating activities of $ 180.0 million in fiscal 2010. the increase was primarily a result of increased net income , an increase in items not affecting cash , and an increase in accrued liabilities , offset by increased inventory purchases . the net increase in items not affecting cash was primarily due to an increase in depreciation and amortization related to our increased store base , and an increase in stock-based compensation . the increase in accrued liabilities was primarily a result of increased sales tax collected as a result of our increased sales . depreciation and amortization relate almost entirely to leasehold improvements , furniture and fixtures , computer hardware and software , equipment and vehicles in our stores and other corporate buildings .

in any given area , sustained warmer than normal temperatures will tend to result in reduced propane , fuel oil and natural gas consumption , while sustained colder than normal temperatures will tend to result in greater consumption . 25 hedging and risk management activities we engage in hedging and risk management activities to reduce the effect of price volatility on our product costs and to ensure the availability of product during periods of short supply . we enter into propane forward , options and swap agreements with third parties , and use futures and options contracts traded on the new york mercantile exchange ( “ nymex ” ) to purchase and sell propane , fuel oil , crude oil and natural gas at fixed prices in the future . the majority of the futures , forward and options agreements are used to hedge price risk associated with propane and fuel oil physical inventory , as well as , in certain instances , forecasted purchases of propane or fuel oil . in addition , we sell propane and fuel oil to customers at fixed prices , and enter into derivative instruments to hedge a portion of our exposure to fluctuations in commodity prices as a result of selling the fixed price contracts . forward contracts are generally settled physically at the expiration of the contract whereas futures , options and swap contracts are generally settled at the expiration of the contract through a net settlement mechanism . although we use derivative instruments to reduce the effect of price volatility associated with priced physical inventory and forecasted transactions , we do not use derivative instruments for speculative trading purposes . risk management activities are monitored by an internal commodity risk management committee , made up of six members of management and reporting to our audit committee , through enforcement of our hedging and risk management policy . critical accounting policies and estimates our significant accounting policies are summarized in note 2—summary of significant accounting policies included within the notes to consolidated financial statements section elsewhere in this annual report . certain amounts included in or affecting our consolidated financial statements and related disclosures must be estimated , requiring management to make certain assumptions with respect to values or conditions that can not be known with certainty at the time the financial statements are prepared . the preparation of financial statements in conformity with us gaap requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . we are also subject to risks and uncertainties that may cause actual results to differ from estimated results . estimates are used when accounting for depreciation and amortization of long-lived assets , employee benefit plans , self-insurance and litigation reserves , environmental reserves , allowances for doubtful accounts , asset valuation assessments and valuation of derivative instruments . we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . any effects on our business , financial position or results of operations resulting from revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known to us . management has reviewed these critical accounting estimates and related disclosures with the audit committee of our board of supervisors . we believe that the following are our critical accounting estimates : allowances for doubtful accounts . we maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments . we estimate our allowances for doubtful accounts using a specific reserve for known or anticipated uncollectible accounts , as well as an estimated reserve for potential future uncollectible accounts taking into consideration our historical write-offs . if the financial condition of one or more of our customers were to deteriorate resulting in an impairment in their ability to make payments , additional allowances could be required . as a result of our large customer base , which is comprised of approximately 1.0 million customers , no individual customer account is material . therefore , while some variation to actual results occurs , historically such variability has not been material . schedule ii , valuation and qualifying accounts , provides a summary of the changes in our allowances for doubtful accounts during the period . pension and other postretirement benefits . we estimate the rate of return on plan assets , the discount rate used to estimate the present value of future benefit obligations and the expected cost of future health care benefits in determining our annual pension and other postretirement benefit costs . we use the society of actuaries ' mortality scale ( mp-2014 ) and other actuarial life expectancy information when developing the annual mortality assumptions for our pension and postretirement benefit plans , which are used to measure net periodic benefit costs and the obligation under these plans . while we believe that our assumptions are appropriate , significant differences in our actual experience or significant changes in market conditions may materially affect our pension and other postretirement benefit obligations and our future expense . 26 accrued insurance . our accrued insurance represent s the estimated costs of known and anticipated or unasserted claims for incidents related to general and product , workers ' compensation and automobile liability . for each claim , we record a provision up to the estimated amount of the probable claim utilizing actuarially determined loss development factors applied to actual claims data . our insurance provisions are susceptible to change to the extent that actual claims development differs from historical claims development . story_separator_special_tag loss on sale of business during the first quarter of fiscal 2018 , we sold certain assets and operations in a non-strategic market of our propane segment for $ 2.8 million plus working capital consideration , resulting in a loss of $ 4.8 million . the corresponding net assets and results of operations were not material to our results of operations , financial position and cash flows . net income and adjusted ebitda net income for fiscal 2019 amounted to $ 68.6 million , or $ 1.11 per common unit , compared to $ 76.5 million , or $ 1.24 per common unit , in fiscal 2018. earnings before interest , taxes , depreciation and amortization ( “ ebitda ” ) for fiscal 2019 amounted to $ 267.0 million , compared to $ 278.5 million for fiscal 2018. net income and ebitda for fiscal 2018 included a $ 4.8 million loss from the sale of certain assets and operations in a non-strategic market of the propane segment . excluding the effects of this item , as well as the unrealized ( non-cash ) mark-to-market adjustments on derivative instruments in both years , adjusted ebitda amounted to $ 275.0 million for fiscal 2019 , compared to adjusted ebitda of $ 283.0 million for fiscal 2018. ebitda represents net income before deducting interest expense , income taxes , depreciation and amortization . adjusted ebitda represents ebitda excluding the unrealized net gain or loss on mark-to-market activity for derivative instruments and other items , as applicable , as provided in the table below . our management uses ebitda and adjusted ebitda as supplemental measures of operating performance and we are including them because we believe that they provide our investors and industry analysts with additional information to evaluate our operating results . ebitda and adjusted ebitda are not recognized terms under us gaap and should not be considered as an alternative to net income or net cash provided by operating activities determined in accordance with us gaap . because ebitda and adjusted ebitda as determined by us excludes some , but not all , items that affect net income , they may not be comparable to ebitda and adjusted ebitda or similarly titled measures used by other companies . 31 the following table sets forth our calculations of ebitda and adjusted ebitda : replace_table_token_8_th fiscal year 2018 compared to fiscal year 2017 revenues replace_table_token_9_th total revenues increased $ 156.5 million , or 13.2 % , to $ 1,344.4 million for fiscal 2018 compared to $ 1,187.9 million for the prior year due to higher average selling prices associated with higher wholesale costs and higher volumes sold . as discussed above , average temperatures ( as measured in heating degree days ) across all of our service territories for fiscal 2018 were 8 % cooler than the prior year , albeit 7 % warmer than normal . the cooler temperatures compared to the prior year were experienced throughout the majority of our service territories , which contributed to an increase in customer demand for heating needs . revenues from the distribution of propane and related activities of $ 1,153.3 million for fiscal 2018 increased $ 142.2 million , or 14.1 % , compared to $ 1,011.1 million for the prior year , primarily due to higher average retail selling prices associated with a rise in wholesale costs , coupled with higher retail volumes sold . average propane selling prices for fiscal 2018 increased 10.5 % compared to the prior year , resulting in a $ 107.8 million increase in revenues . retail propane gallons sold in fiscal 2018 increased 19.2 million gallons , or 4.6 % , to 440.0 million gallons , resulting in an increase in revenues of $ 44.7 million . included within the propane segment are revenues from risk management activities of $ 19.5 million for fiscal 2018 , which decreased $ 10.3 million due to a lower notional amount of hedging contracts that were settled physically . revenues from the distribution of fuel oil and refined fuels of $ 91.5 million for fiscal 2018 increased $ 13.4 million , or 17.1 % , from $ 78.1 million for the prior year , primarily due to an increase in average selling prices associated with higher wholesale costs . volumes sold of 31.0 million gallons were up slightly from the prior year . average selling prices in our fuel oil and refined fuels segment increased 16.4 % , resulting in a $ 12.8 million increase in revenues , with the remainder of the increase in revenues coming from the aforementioned increase in gallons sold . revenues in our natural gas and electricity segment decreased $ 0.8 million , or 1.4 % , to $ 54.3 million in fiscal 2018 compared to $ 55.1 million in the prior year as a result of lower electricity usage . 32 cost of products sold replace_table_token_10_th from a commodity perspective , propane inventory levels in the united states increased slightly during fiscal 2018 yet remained slightly lower than historical levels due to , among other things , continued strength in the export of propane to international markets , which put significant upward pressure on propane prices . as of september 2018 , inventory levels in the united states were 1 % higher than september 2017 but approximately 10 % lower than the 5-year average . overall , average posted propane prices ( basis mont belvieu , texas ) and fuel oil prices during fiscal 2018 were 36.0 % and 29.5 % higher than the prior year , respectively . the net change in the fair value of derivative instruments during the period resulted in unrealized ( non-cash ) gains of $ 0.3 million and $ 6.3 million reported in cost of products sold in fiscal 2018 and 2017 , respectively , resulting in an increase of $ 6.0 million in cost of products sold in fiscal 2018 compared to the prior year , all of which

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liquidity and capital resources analysis of cash flows operating activities . net cash provided by operating activities for fiscal 2019 amounted to $ 226.8 million , an increase of $ 16.4 million compared to the prior year . the increase was primarily attributable to a smaller increase in working capital compared to the prior year , stemming from a decline in average wholesale costs of propane , offset to an extent by lower earnings ( discussed above ) . investing activities . net cash used in investing activities of $ 48.5 million for fiscal 2019 consisted of capital expenditures of $ 35.0 million ( including $ 21.1 million to support the growth of operations and $ 13.9 million for maintenance expenditures ) and $ 19.3 million used in the acquisition of three retail propane businesses ( see part iv , note 4 of this annual report ) , partially offset by $ 5.8 million in net proceeds from the sale of property , plant and equipment . net cash used in investing activities of $ 39.1 million for fiscal 2018 consisted of capital expenditures of $ 32.9 million ( including $ 19.7 million to support the growth of operations and $ 13.2 million for maintenance expenditures ) and $ 14.9 million used in the acquisition of two retail propane businesses ( see part iv , note 4 of this annual report ) , partially offset by $ 5.9 million in net proceeds from the sale of property , plant and equipment and $ 2.8 million in proceeds from the sale of assets and operations in a non-strategic market . financing activities . net cash used in financing activities for fiscal 2019 of $ 181.0 million reflected the quarterly distribution to common unitholders at a rate of $ 0.60 per common unit paid in respect of the fourth quarter of fiscal 2018 and the first three quarters of fiscal 2019 , net repayments of borrowings under the revolving credit facility of $ 30.1 million , and other financing activities of $ 3.0 million .

our net earnings decreased in 2015 compared to 2014. the primary driver of the lower net earnings was expense incurred in connection with the biomet merger . as a result of the merger , we recognized significant expenses due to stepping up the acquired inventory to fair value , intangible asset amortization , the acceleration of the vesting of unvested lvb stock options and lvb stock-based awards , retention bonuses paid to biomet employees and third-party sales agents who remained with biomet through the closing date , severance expense , contract termination expense related to agreements with independent agents , distributors , suppliers and lessors , a loss related to a call premium on biomet debt we redeemed , third party fees , and other acquisition and integration charges . interest expense also increased due to financing-related costs for the merger . 2016 outlook we expect our sales in the first half of 2016 to be higher than in the first half of 2015 , on a reported basis , since the biomet merger was completed midway through 2015. on a pro forma basis , we expect revenues to be approximately flat in 2016 compared to 2015. this estimate assumes foreign currency exchange rates will decrease revenues by approximately 2 percent , continued pricing pressure will decrease revenues by approximately 2 percent , and our volume/mix growth will be approximately 4 percent . we expect pro forma sales growth will improve in the last half of the year compared to the first half as our sales force stabilizes , we take advantage of cross-selling opportunities and we anniversary out of many sales force dissynergies caused by the merger . we expect cost of products sold to continue to realize significant expense related to stepping up acquired biomet inventory to fair value . similarly , our intangible asset amortization expense will increase significantly as we recognize a full year of intangible asset amortization from the biomet merger . we expect research and development ( “r & d” ) expense for the year to be in a range of 4.5 to 5.0 percent of sales . selling , general and administrative ( “sg & a” ) expense is expected to approximate 37 percent of sales , which is an improvement from 2015 as we realize synergies from the merger . we estimate special items expense will continue to be significant as we continue our integration activities . however , we expect special items expense will be less in 2016 compared to 2015 due to the significant , initial expenses incurred in 2015 for the integration . interest expense will increase in 2016 compared to 2015 due to the debt borrowed in 2015 to fund the biomet merger . results of operations we analyze sales by three geographies , the americas , emea and asia pacific , and by the following product 22 zimmer biomet holdings , inc. 2015 form 10-k annual report categories : knees , hips , s.e.t . , dental , spine & cmf and other . this sales analysis differs from our reportable operating segments , which are based upon our senior management organizational structure and how we allocate resources towards achieving operating profit goals . we analyze sales by geography because the underlying market trends in any particular geography tend to be similar across product categories and because we primarily sell the same products in all geographies . net sales by geography the following tables present net sales by geography and the components of the percentage changes ( dollars in millions ) : replace_table_token_4_th replace_table_token_5_th “foreign exchange” as used in the tables in this report represents the effect of changes in foreign currency exchange rates on sales growth . the following table presents our pro forma net sales by geography and the components of the percentage changes ( dollars in millions ) : replace_table_token_6_th 23 zimmer biomet holdings , inc. 2015 form 10-k annual report net sales by product category the following tables present net sales by product category and the components of the percentage changes ( dollars in millions ) : replace_table_token_7_th replace_table_token_8_th the following tables present our pro forma net sales by product category and the components of the percentage changes ( dollars in millions ) : replace_table_token_9_th 24 zimmer biomet holdings , inc. 2015 form 10-k annual report the following table presents net sales by product category by geography for our knees and hips product categories , which represent our most significant product categories ( dollars in millions ) : replace_table_token_10_th the following table presents our pro forma net sales by product category by geography for our knees and hips product categories , which represent our most significant product categories ( dollars in millions ) : replace_table_token_11_th demand ( volume and mix ) trends increased volume and changes in the mix of product sales contributed 36.7 percentage points of year-over-year sales growth during 2015. volume/mix growth was driven by the biomet merger , new product introductions and sales in key emerging markets . we believe long-term indicators point toward sustained growth driven by an aging global population , growth in emerging markets , obesity , proven clinical benefits , new material technologies , advances in surgical techniques and more active lifestyles , among other factors . in addition , demand for clinically proven premium products and patient specific devices are expected to continue to positively affect sales growth in markets that recognize the value of these advanced technologies . pricing trends global selling prices had a negative effect of 2.0 percentage points on year-over-year sales during 2015. the negative 2.0 percent effect on year-over-year sales is consistent with what we have experienced over the past three years . the majority of countries in which we operate continued to experience pricing pressure from governmental healthcare cost containment efforts and from local hospitals and health systems . story_separator_special_tag the following table illustrates our contractual obligations ( in millions ) : replace_table_token_16_th $ 93.5 million of the other long-term liabilities on our balance sheet as of december 31 , 2015 are liabilities related to defined benefit pension plans . defined benefit plan liabilities are based upon the underfunded status of the respective plans ; they are not based upon future contributions . due to uncertainties regarding future plan asset performance , changes in interest rates and our intentions with respect to voluntary contributions , we are unable to reasonably estimate future contributions beyond 2016. therefore , this table does not include any amounts related to future contributions to our plans . see note 15 to our consolidated financial statements for further information on our defined benefit plans . also included in other long-term liabilities on our balance sheet are liabilities related to unrecognized tax benefits and corresponding interest and penalties thereon . due to the uncertainties inherent in these liabilities , such as the ultimate timing and resolution of tax audits , we are unable to reasonably estimate the amount or period in which potential tax payments related to these positions will be made . therefore , this table does not include any obligations related to unrecognized tax benefits . we have also excluded long-term deferred tax liabilities from this table , as they do not represent liabilities that will be settled in cash . see note 16 to our consolidated financial statements for further information on these tax-related accounts . we have entered into various agreements that may result in future payments dependent upon various events such as the achievement of certain product r & d milestones , sales milestones , or , at our discretion , to maintain exclusive rights to distribute a product . since there is uncertainty on the timing or whether such payments will have to be made , we have not included them in this table . these payments could range from $ 0 to $ 45 million . critical accounting estimates our financial results are affected by the selection and application of accounting policies and methods . significant accounting policies which require management 's judgment are discussed below . excess inventory and instruments – we must determine as of each balance sheet date how much , if any , of our inventory may ultimately prove to be unsaleable or unsaleable at our carrying cost . similarly , we must also determine if instruments on hand will be put to productive use or remain undeployed as a result of excess supply . accordingly , inventory and instruments are written down to their net realizable value . to determine the appropriate net realizable value , we evaluate current stock levels in relation to historical and expected patterns of demand for all of our products and instrument systems and components . the basis for the determination is generally the same for all inventory and instrument items and categories except for work -in-process inventory , which is recorded at cost . obsolete or discontinued items are generally destroyed and completely written off . management evaluates the need for changes to inventory and instruments net realizable values based on market conditions , competitive offerings and other factors on a regular basis . income taxes – our income tax expense , deferred tax assets and liabilities and reserves for unrecognized tax benefits reflect management 's best assessment of estimated future taxes to be paid . we are subject to income taxes in the u.s. and numerous foreign jurisdictions . significant judgments and estimates are required in determining the consolidated income tax expense . we estimate income tax expense and income tax liabilities and assets by taxable jurisdiction . realization of deferred tax assets in each taxable jurisdiction is dependent on our ability to generate future taxable income sufficient to realize the benefits . we evaluate deferred tax assets on an ongoing basis and provide valuation allowances unless we determine it is “more likely than not” that the deferred tax benefit will be realized . federal income taxes are provided on the portion of the income of foreign subsidiaries that is expected to be remitted to the u.s. 30 zimmer biomet holdings , inc. 2015 form 10-k annual report the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations . we are subject to regulatory review or audit in virtually all of those jurisdictions and those reviews and audits may require extended periods of time to resolve . we record our income tax provisions based on our knowledge of all relevant facts and circumstances , including existing tax laws , our experience with previous settlement agreements , the status of current examinations and our understanding of how the tax authorities view certain relevant industry and commercial matters . we recognize tax liabilities in accordance with the financial accounting standards board 's ( “fasb” ) guidance on income taxes and we adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available . due to the complexity of some of these uncertainties , the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities . these differences will be reflected as increases or decreases to income tax expense in the period in which they are determined . commitments and contingencies – accruals for product liability and other claims are established with the assistance of internal and external legal counsel based on current information and historical settlement information for claims , related legal fees and for claims incurred but not reported . we use an actuarial model to assist management in determining an appropriate level of accruals for product liability claims . historical patterns of claim loss development over time are statistically analyzed to arrive at factors which are then applied to loss estimates in the

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liquidity and capital resources cash flows provided by operating activities declined to $ 816.7 million in 2015 , compared to $ 1,052.8 million in 2014. the decreased cash flows provided by operating activities in 2015 were primarily due to higher expenses related to the biomet merger , a $ 97.6 million loss on our forward starting interest rate swaps we settled in march 2015 when we issued senior notes for the biomet merger and inventory investments . these unfavorable items were partially offset by lower tax payments and the receipt of insurance proceeds related to durom cup product liability claims in the 2015 period . in 2014 , we made significant tax payments for certain unresolved matters in order to limit the potential impact of irs interest charges . in 2016 , we estimate operating cash flows to be in a range of $ 1,650.0 million to $ 1,750.0 million , inclusive of approximately $ 290.0 million of outflows related to integration expenses to drive synergies . cash flows used in investing activities were $ 7,557.9 million in 2015 compared to $ 469.4 million in 2014. the primary investing activity in 2015 was the biomet merger . we continued to invest in instruments for significant product launches , such as persona the personalized knee system , as we deploy that system around the world . in 2016 , we expect instrument investments to be in a range of $ 300.0 million to $ 325.0 million in support of our cross-sell initiatives as well as new product introductions . in 2015 , we continued to invest in other property , plant and equipment at levels necessary to complete new product-related investments and to replace older machinery and equipment . in 2016 , we expect to spend approximately $ 250.0 million on property , plant and equipment , including $ 105.0 million necessary to rationalize facilities and it systems as well as to optimize our manufacturing and logistics network .

approximately 36 % of our net sales for 2010 were to other advanced markets and we anticipate that these markets will continue to grow and will represent a larger portion of our revenue . a significant portion of our net sales is to operations in international markets . international net sales include sales by our foreign subsidiaries , but exclude direct export sales . during the years 2010 , 2009 and 2008 , international net sales accounted for approximately 43 % , 46 % and 44 % of our net sales , respectively . a significant portion of our international net sales were sales in japan . we expect that international net sales will continue to represent a significant percentage of our total net sales . 20 critical accounting policies and estimates management 's discussion and analysis of financial condition and results of operations discusses our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . on an on-going basis , we evaluate our estimates and judgments , including those related to revenue recognition and allowance for doubtful accounts , inventory , warranty costs , stock-based compensation expense , intangible assets , goodwill and other long-lived assets , in-process research and development and income taxes . we base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances , the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies affect the most significant judgments , assumptions and estimates we use in preparing our consolidated financial statements : revenue recognition and accounts receivable allowances . revenue from product sales is recorded upon transfer of title and risk of loss to the customer provided that there is evidence of an arrangement , the sales price is fixed or determinable , and collection of the related receivable is reasonably assured . in most transactions , we have no obligations to our customers after the date products are shipped other than pursuant to warranty obligations . in some instances , we provide installation , training , support and services to customers after the product has been shipped . we defer the fair value of any undelivered elements until the undelivered element is delivered . fair value is the price charged when the element is sold separately . shipping and handling fees billed to customers , if any , are recognized as revenue . the related shipping and handling costs are recognized in cost of sales . we monitor and track the amount of product returns , provide for accounts receivable allowances and reduce revenue at the time of shipment for the estimated amount of such future returns , based on historical experience . while product returns have historically been within our expectations and the provisions established , there is no assurance that we will continue to experience the same return rates that we have in the past . any significant increase in product return rates could have a material adverse impact on our operating results for the period or periods in which such returns materialize . while we maintain a credit approval process , significant judgments are made by management in connection with assessing our customers ' ability to pay at the time of shipment . despite this assessment , from time to time , our customers are unable to meet their payment obligations . we continuously monitor our customers ' credit worthiness , and use our judgment in establishing a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified . while such credit losses have historically been within our expectations and the provisions established , there is no assurance that we will continue to experience the same credit loss rates that we have in the past . a significant change in the liquidity or financial position of our customers could have a material adverse impact on the collectability of accounts receivable and our future operating results . inventory . we value our inventory at the lower of cost ( first-in , first-out method ) or market . we regularly review inventory quantities on hand and record a provision to write-down excess and obsolete inventory to its estimated net realizable value , if less than cost , based primarily on our estimated forecast of product demand . once our inventory value is written-down and a new cost basis has been established , the inventory value is not increased due to demand increases . demand for our products can fluctuate significantly . a significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases as a result of supply shortages or a decrease in the cost of inventory purchases as a result of volume discounts , while a significant decrease in demand could result in an increase in the charges for excess inventory quantities on hand . in addition , our industry is subject to technological change , new product development and product technological obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand . therefore , any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results . story_separator_special_tag our domestic product revenues decreased by $ 127.4 million or 40.3 % during 2009 compared to the same period for the prior year mainly due to a high concentration of sales to the semiconductor capital equipment and device manufacturer customers . our international product revenues decreased $ 85.5 million or 38.5 % during 2009. this decrease consists of a $ 39.4 million decrease in product revenues from our semiconductor customers and a decrease in product revenues of $ 46.1 million related to other markets . service revenues consisted mainly of fees for services related to the maintenance and repair of our products , software maintenance , installation services and training . service revenues increased $ 21.9 million or 32.4 % during 2010 compared to 2009 as a result of the improvement in the global economy in 2010. service revenues decreased $ 15.9 million or 19.0 % during 2009 compared to 2008 due to lower spending by our customers on these services as a result of the weakened global economic conditions in 2009. total international net revenues , including product and service , were $ 369.0 million for 2010 or 43.2 % of net sales compared to $ 180.1 million for 2009 or 45.8 % of net sales and $ 275.0 million or 44.2 % of net sales for 2008. gross profit replace_table_token_5_th gross profit on product revenues increased by 12.4 percentage points during 2010 compared to the prior year . the increase was mainly due to an increase in product revenue volumes which accounted for 8.2 percentage points of the overall increase and an increase of 1.6 percentage points due to favorable product mix . in addition , our gross profit increased by 2.4 percentage points due to lower excess and obsolete inventory related net charges . the higher excess and obsolete inventory related charges in 2009 were primarily a result of a lower inventory consumption plan in the first quarter of 2009 that we implemented in response to the weakness in the markets we served during that period . gross profit on product revenues decreased by 8.2 percentage points during 2009 compared to the prior year . the decrease was due to an unfavorable product mix of 3.1 percentage points and a reduction in product revenue volumes partially offset by lower overhead spending , which total 2.6 percentage points . in addition , a decrease of 2.2 percentage points was a result of excess and obsolete inventory related charges . the excess and obsolete inventory related charges were primarily a result of a lower inventory consumption plan in the first quarter of 2009 that we implemented in response to the weakness in the markets we served during that period . cost of service revenues consists primarily of costs of providing services for repair and training which includes salaries and related expenses and other fixed costs . service gross profit for 2010 increased 4.2 percentage points compared to the same period for the prior year . the increase is mainly a result of higher service revenue since a portion of our overhead costs are fixed . service gross profit for 2009 increased modestly compared to the same period for the prior year . 26 research and development replace_table_token_6_th research and development expenses increased $ 12.5 million or 24.8 % during 2010 compared to the prior year . the increase includes a $ 5.9 million increase in compensation expense , a $ 2.4 million increase in spending on project materials , a $ 3.0 million increase in consulting and other costs and a $ 1.1 million increase in patent and other legal related costs . the increase in compensation expense is primarily due to the restoration of both the incentive compensation plan and certain employee benefits which were suspended as part of cost control measures in 2009. our favorable operating profit levels resulted in an increase in incentive compensation expense , since our incentive compensation plan is based on achieving certain operating profit levels . research and development expenses decreased $ 22.5 million or 31.0 % during 2009 compared to the prior year . the decrease includes a $ 12.0 million decrease in compensation expense , a $ 4.7 million reduction in spending on project materials , a $ 1.4 million decrease in consulting costs and a $ 4.5 million decrease in other discretionary spending . the decrease in compensation expense is mainly due to cost reduction measures that started in the third quarter of 2008 and continued through the third quarter of 2009 , including workforce reductions that took place from the third quarter of 2008 through the first quarter of 2009. our research and development is primarily focused on developing and improving our instruments , components , subsystems and process control solutions to improve process performance and productivity . we have thousands of products and our research and development efforts primarily consist of a large number of projects related to these products and new product development , none of which is individually material to us . current projects typically have a duration of 3 to 30 months depending upon whether the product is an enhancement of existing technology or a new product . our current initiatives include projects to enhance the performance characteristics of older products , to develop new products and to integrate various technologies into subsystems . these projects support in large part the transition in the semiconductor industry to smaller integrated circuit geometries and in the flat panel display and solar markets to larger substrate sizes , which require more advanced process control technology . research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development , fees paid to consultants , material costs for prototypes and other expenses related to the design , development , testing and enhancement of our products as well as legal costs associated with maintaining and defending our intellectual property . we believe that the continued investment in research and development and ongoing development

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liquidity and capital resources cash , cash equivalents and short-term marketable securities totaled $ 431.9 million at december 31 , 2010 , an increase of $ 160.1 million compared to $ 271.8 million at december 31 , 2009. this increase was mainly due to the net cash provided by operating activities as a result of our net income of $ 142.6 million . the primary driver in our current and anticipated future cash flows is and will continue to be cash generated from operations , consisting mainly of our net income and changes in operating assets and liabilities . in periods when our sales are growing , higher sales to customers will result in increased trade receivables , and inventories will generally increase as we build products for future sales . this may result in lower cash generated from operations . conversely , in periods when our sales are declining , our trade accounts receivable and inventory balances will generally decrease , resulting in increased cash from operations . net cash provided by operating activities was $ 163.5 million for 2010 and resulted mainly from net income of $ 142.6 million , a $ 52.1 million increase in operating liabilities , a $ 22.8 million decrease in income taxes receivable , non-cash charges of $ 13.2 million provision for excess or obsolete inventory , $ 13.8 million for depreciation and amortization and $ 10.6 million for stock-based compensation . these increases were partially offset by an increase of $ 94.7 million in operating assets and a $ 4.4 million gain on the disposal of two discontinued operations . the $ 52.1 million increase in operating liabilities was due to an $ 11.2 million increase in accounts payable related to inventory purchases to support our increased business levels , an increase of $ 20.6 million in accrued compensation related to increases in incentive compensation and accrued salaries and benefits , a $ 5.0 million increase in customer deposits and a $ 3.3 million increase in the product warranty reserve .