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substantially all of our revenue is derived from sales of high-performance analog semiconductor solutions for use in wireless and wireline applications across the rf , microwave and millimeterwave spectrum and in high-speed communications . we design , integrate , manufacture and package differentiated product solutions that we sell to customers through our direct sales organization , our network of independent sales representatives , and our distributors . we believe the primary drivers of our future revenue growth will include : engaging early with our lead customers to develop products and solutions that can be driven across multiple growth markets ; leveraging our core strength and leadership position in standard , catalog products that service all of our end applications ; increasing content of our semiconductor solutions in our customers ' systems through cross-selling of our more than 42 product lines ; introducing new products through internal development and acquisitions with market reception that command higher prices based on the application of advanced technologies such as gan , added features , higher levels of integration and improved performance ; and realizing growth in the market for high-performance analog semiconductors generally , and in our four primary markets in particular . our core strategy is to develop innovative , high-performance products that address our customers ' most difficult technical challenges in our primary markets : networks , a & d , automotive and multi-market . while sales in any or all of our primary markets may slow or decline from period to period , over the long-term we generally expect to benefit from strength in these markets . we expect our revenue in the networks market to be primarily driven by continued upgrades and expansion of communications equipment to support expansion in the internet of things ( iot ) , driven by the proliferation of mobile computing devices such as smartphones and tablets , coupled with bandwidth rich services such as video on demand and cloud computing , as well as demand for higher bandwidth wired and wireless services , the rapid adoption of cloud-based services and the migration to an application centric architecture , which we expect will drive faster adoption of higher speed , low latency optical and wireless links . 47 we expect our revenue in the a & d market to be driven by the upgrading of radar applications and modern battlefield communications devices designed to improve situational awareness . growth in this market is subject to changes in governmental programs and budget funding , which is difficult to predict . we expect our revenue in the automotive market to be subject to fluctuations in our largest customer 's market share and overall macroeconomic conditions . we expect revenue in multi-market to be driven by diverse demand for our multi-purpose catalog products . cost of revenue . cost of revenue primarily consists of the cost of semiconductor wafers and other materials used in the manufacture of our products , and the cost of assembly and testing of our products , whether performed by our internal manufacturing personnel or outsourced vendors . cost of revenue also includes costs associated with personnel engaged in our manufacturing operations , such as wages and share-based compensation expense , as well as costs and overhead related to our manufacturing operations , including lease occupancy and utility expense related to our manufacturing operations , depreciation , production computer services and equipment costs and the cost of our manufacturing quality assurance and supply chain activities . further , cost of revenue includes the impact of warranty and inventory adjustments , including write-downs for excess and obsolete inventory , and for fair market value adjustments related to the accounting for acquisitions , as well as amortization of intangible assets related to acquired technology . our gross margin in any period is significantly affected by industry demand and competitive factors in the markets into which we sell our products . gross margin is also significantly affected by our product mix , that is , the percentage of our revenue in that period that is attributable to relatively higher or lower-margin products . additional factors affecting our gross margin include fluctuations in the cost of wafers and materials , including precious metals , utilization of our wafer fabrication operation , level of usage of outsourced manufacturing , assembly , and test services , changes in our manufacturing yields , changes in foreign currencies , and numerous other factors , some of which are not under our control . as a result of these or other factors , we may be unable to maintain or increase our gross margin in future periods , and our gross margin may fluctuate from period to period . research and development . r & d expense consists primarily of costs relating to our employees engaged in the design and development of our products and technologies , including wages and share-based compensation . r & d expense also includes costs for consultants , facilities , services related to supporting computer design tools used in the engineering and design process , prototype development and project materials . we expense all research and development costs as incurred . we expect to maintain or increase the dollar amount of r & d investment in future periods as we continue to invest in new product development , although amounts may increase or decrease in any individual quarter . selling , general and administrative . sg & a expense consists primarily of costs of our management , sales and marketing , finance , human resources and administrative organizations , including wages and share-based compensation . sg & a expense also includes costs associated with being a public company , professional fees , sales commissions paid to independent sales representatives , costs of advertising , trade shows , marketing , promotion , travel , occupancy and equipment costs , computer services costs , costs of providing customer samples , amortization of certain acquisition-related intangible assets relating to customer relationships and costs and expenses to acquire businesses . contingent consideration . story_separator_special_tag contingent earn-out consideration represents expense in which we have agreed to pay contingent amounts to the previous owners of acquired businesses based upon those businesses achieving contractual milestones . we record these obligations as liabilities at fair value and any changes in fair value are reflected in our earnings . as of october 3 , 2014 , we had approximately $ 0.8 million of outstanding earn-out obligations . 48 restructuring charges . restructuring expense consists of severance and related costs incurred in connection with reductions in staff relating to initiatives designed to lower our manufacturing and operating costs and integrate acquired businesses , including restructuring actions taken following the mindspeed and nitronex acquisitions . other income ( expense ) . other income ( expense ) consists of our stock warrant liability expense and or gain , interest expense , income from transition services provided related to sales of businesses and assets , and income from our administrative and business development services agreement with gaas labs , which is one of our stockholders and an affiliate of our directors and majority stockholders john and susan ocampo . we expect interest expense to be higher in future periods due to increased borrowing to fund the mindspeed , nitronex and expected binoptics acquisitions , as well as to provide additional liquidity . critical accounting policies and estimates our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements . the preparation of financial statements , in conformity with generally accepted accounting principles in the u.s. ( gaap ) , requires management 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 revenue and expenses during the reporting period . by their nature , these estimates and judgments are subject to an inherent degree of uncertainty . on an ongoing basis , we re-evaluate our estimates and judgments . we base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances , the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . the accounting policies which our management believes involve the most significant application of judgment , or involve complex estimation , include revenue recognition , inventory valuation , share-based compensation , income tax expense and deferred tax accounting , fair value measurements and impairment of long-lived assets . actual results could differ from those estimates , and material effects on our operating results and financial position may result . as discussed in part i , item 1a . risk factors , as an emerging growth company and pursuant to section 102 ( 6 ) ( 1 ) of the jobs act , we have elected to delay adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies , and thus our financial statements may not be comparable to those of other companies that comply with public company effective dates . revenue recognition . we recognize revenue when : ( i ) there is persuasive evidence that an arrangement exists ; ( ii ) delivery has occurred or services have been rendered ; ( iii ) the price is fixed or determinable ; and ( iv ) collectability is reasonably assured . in circumstances with our distribution customers where we are unable to establish that certain sales prices are fixed and determinable , we defer the recognition of revenue , and the related costs , under agreements providing for rights of return and price protection until such time as our products are sold by the distributors to their customers . as of october 3 , 2014 , we have deferred revenue of $ 17.0 million and related cost of $ 4.6 million . in circumstances with distributor customers where returns are reasonably estimable and the sales price is fixed and determinable , we recognize revenue with the transfer of title and risk of loss , and provide for reserves for returns and other allowances . historically , such returns and allowances have not been material based on the terms of our arrangements . we generally do not provide customers other than distributors the right to return product , with the exception of warranty related matters . accordingly , we do not generally maintain a reserve for sales returns for such customers . inventory valuations . inventory is stated at the lower of cost or market . we use a combination of standard cost and moving weighted-average cost methodologies to determine the cost basis for inventories , approximating a first-in , first-out basis . the standard cost of finished goods and work-in-process inventory is composed of material , labor and manufacturing overhead , which approximates actual cost . in addition to stating inventory at 49 the lower of cost or market , we also evaluate inventory each quarter for excess quantities and obsolescence , establishing reserves when necessary based upon historical experience , assessment of economic conditions , and expected demand . estimating demand is inherently difficult , particularly given the cyclical nature of the semiconductor industry , and can result in excess or obsolete inventory . once we write down inventory to its estimated net realizable value , we establish a new cost basis for that item and do not increase its carrying value due to subsequent changes in demand forecasts . accordingly , if inventory previously written down is subsequently sold , we may realize higher than normal gross margin on these transactions . neither inventory write-downs nor sales of previously written down inventory had a material impact on our operating results for any period presented in this annual report . share-based compensation .
| ( 6 ) in fiscal year 2014 , cost of revenue , research and development , and selling , general , and administrative includes approximately $ 1.4 million , $ 4.5 million and $ 13.9 million , respectively , of costs related to the acquisition and integration of mindspeed . the following table sets forth , for the periods indicated , our statement of operations data expressed as a percentage of our revenue : replace_table_token_8_th comparison of fiscal year ended october 3 , 2014 to fiscal year ended september 27 , 2013 revenue . in fiscal year 2014 , our revenue increased $ 95.6 million , or 29.6 % , to $ 418.7 million from $ 323.1 million for fiscal year 2013. the increase in revenue was primarily due to the acquisition of mindspeed , which expanded our product offerings significantly . 53 revenue from our primary markets , the percentage of change between the years , and revenue by primary markets expressed as a percentage of total revenue were ( in thousands , except percentages ) : replace_table_token_9_th in fiscal year 2014 , our networks market revenue increased by $ 99.6 million , or 118.9 % , compared to fiscal year 2013. the increase in revenue was primarily from sales of our newly acquired products from our mindspeed acquisition addressing carrier infrastructure , fiber-to-the-home access networks , physical media devices and broadcast video , as well as increased sales of our products targeting wireless backhaul and optical applications , partly offset by continued weakness in our products targeting set top box products . in fiscal year 2014 , our a & d market revenue decreased by $ 3.8 million , or 4.1 % , compared to fiscal year 2013. we attribute this decrease to ramp down of certain legacy radar programs as well as cyclical demand for radar applications . in fiscal year 2014 , our multi-market revenues increased $ 3.3 million , or 5.2 % , compared to fiscal year 2013. the modest increase in revenue in the 2014 period was primarily from sales of our newly acquired cpe products , as partly offset by softness in demand
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fiscal year comparisons net sales replace_table_token_7_th 25 net sales increased by approximately $ 184.6 million , or 9 % , between 2015 and 2014 . comparable sales increased 6 % in 2015 compared to 2014 . the increase in comparable sales resulted primarily from an increase in average dollar sales per transaction . we attribute the increase in average dollar sales per transaction to our strong product assortment and reduced promotional activity in 2015. non-comparable sales increased $ 69.9 million , driven primarily by new outlet store openings , partially offset by closed retail stores . net sales decreased by approximately $ 53.6 million , or 2 % , between 2014 and 2013. comparable sales decreased 5 % in 2014 compared to 2013. the decrease in comparable sales resulted from decreased transactions and average dollar sales in our retail stores offset by growth in e-commerce sales . we attribute the decrease in average dollar sales to a highly promotional retail landscape , as a result of continued decreased traffic . non-comparable sales increased $ 51.8 million , primarily due to the opening of 41 new outlet stores . 26 gross profit the following table shows cost of goods sold , buying and occupancy costs , gross profit in dollars , and gross margin for the stated periods : replace_table_token_8_th the 330 basis point increase in gross margin , or gross profit as a percentage of net sales , in 2015 compared to 2014 was comprised of a 200 basis point increase in merchandise margin and a 130 basis point decrease in buying and occupancy costs as a percentage of net sales . the increase in merchandise margin was driven by a better product assortment , a reduction in promotional activities , and more disciplined inventory management which led to fewer markdowns . the decrease in buying and occupancy costs as a percentage of sales was primarily the result of the leveraging effect of the increase in sales and the fact that we recognized a $ 1.8 million impairment charge related to store fixed assets in 2015 versus a $ 10.5 million impairment charge in 2014. assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable . the reviews are conducted at the store level , the lowest identifiable level of cash flow . factors used to assess stores for impairment include , but are not limited to , plans for future operations , brand initiatives , recent operating results , and projected future cash flows . significant changes in any of these factors could lead to future impairments . the 180 basis point decrease in gross margin , or gross profit as a percentage of net sales , in 2014 compared to 2013 was comprised of a 180 basis point increase in buying and occupancy costs as merchandise margin remained flat . the increase in buying and occupancy costs was primarily the result of increased depreciation expense , increased rent and related charges , and an increase in base payroll expense primarily due to additional headcount at our home office to support our outlet expansion . depreciation expense was impacted by the opening of our two flagship stores in new york city and san francisco as well as impairment charges of $ 10.5 million related to leasehold improvements at certain under-performing stores . selling , general , and administrative expenses the following table shows selling , general , and administrative expenses in dollars and as a percentage of net sales for the stated periods : replace_table_token_9_th the $ 63.7 million increase in selling , general , and administrative expenses in 2015 compared to 2014 was the result of additional payroll related expenses of approximately $ 42.5 million . the additional payroll expenses were primarily related to incentive compensation and store payroll resulting from improved performance and store payroll associated with new outlet stores , partially offset by payroll savings from retail store closures . in addition , there was an increase of $ 10.9 million in information technology expenses primarily related to the previously mentioned upgrades to our systems and processes and an increase of $ 5.3 million in marketing expenses primarily related to increased digital and television marketing . the $ 19.8 million increase in selling , general , and administrative expenses in 2014 compared to 2013 was primarily the result of increased marketing expenses in 2014 associated with the led sign at our flagship store in new york city , increased spending on digital marketing to continue to increase our visibility with our customers and potential customers , and expenses related to our brand ambassadors . 27 interest expense , net the following table shows interest expense in dollars for the stated periods : year ended 2015 2014 2013 ( in thousands ) interest expense , net $ 15,882 $ 23,896 $ 19,522 the $ 8.0 million decrease in interest expense is primarily attributable to the reduction in interest expense following the redemption of our 8 3 / 4 % senior notes due 2018 ( the `` senior notes '' ) in the first quarter of 2015 , partially offset by a $ 9.7 million loss on extinguishment of debt in connection with the redemption . the increase in interest expense , net in 2014 compared to 2013 resulted from the accounting rules related to our flagship stores in new york city and san francisco that require a portion of the rent payments to be allocated to interest expense . refer to note 5 of the consolidated financial statements for additional information . income tax expense the following table shows income tax expense in dollars for the stated periods : year ended 2015 2014 2013 ( in thousands ) income tax expense $ 74,171 $ 43,231 $ 76,627 the effective tax rate was 38.9 % in 2015 compared to 38.8 % in 2014 . we anticipate our effective tax rate will be approximately 39 % in 2016. the effective tax rate for 2014 was 38.8 % compared to 39.7 % for 2013 . story_separator_special_tag the reduction in the tax rate for 2014 was primarily related to the release of uncertain tax positions following the conclusion of an irs examination . refer to note 7 of the consolidated financial statements for additional information regarding the tax rate . adjusted net income the following table presents adjusted net income and adjusted earnings per diluted share for the stated periods which eliminate the non-core operating costs incurred in connection with the redemption of our senior notes in the first quarter of 2015 : replace_table_token_10_th * no adjustments were made to net income or earnings per diluted share for 2014 and 2013. we supplement the reporting of our financial information determined under gaap with certain non-gaap financial measures : adjusted net income and adjusted earnings per diluted share . we believe that these non-gaap measures provide meaningful information to assist stockholders in understanding our financial results and assessing our prospects for future performance . management believes adjusted net income and adjusted earnings per diluted share are important indicators of our operations because they exclude items that may not be indicative of , or are unrelated to , our core operating results , and provide a better baseline for analyzing trends in our underlying business . in addition , adjusted earnings per diluted share is used as a performance measure in our executive compensation program for purposes of determining the number of equity awards that are ultimately earned . because non-gaap financial measures are not standardized , it may not be possible to compare these financial measures with other companies ' non-gaap financial measures having the same or similar names . these adjusted financial measures should 28 not be considered in isolation or as a substitute for reported net income and reported earnings per diluted share . these non-gaap financial measures reflect an additional way of viewing our operations that , when viewed with our gaap results and the below reconciliations to the corresponding gaap financial measures , provide a more complete understanding of our business . we strongly encourage investors and stockholders to review our consolidated financial statements in their entirety and not to rely on any single financial measure . the table below reconciles the non-gaap financial measures , adjusted net income and adjusted earnings per diluted share , with the most directly comparable gaap financial measures , net income and earnings per diluted share . no adjustments were made to net income or earnings per diluted share for 2014 and 2013 , and therefore no tabular reconciliation has been included for those periods . replace_table_token_11_th ( a ) includes the redemption premium paid , the write-off of unamortized debt issuance costs , and the write-off of the unamortized debt discount related to the redemption of all $ 200.9 million of our senior notes . * items were tax affected at our statutory rate of approximately 39 % for 2015. liquidity and capital resources a summary of cash provided by or used in operating , investing , and financing activities are shown in the following table : replace_table_token_12_th our business relies on cash flows from operations as our primary source of liquidity , with the majority of that cash flow being generated in the fourth quarter of the year . our primary operating cash needs are for merchandise inventories , payroll , store rent , and marketing . net cash provided by operating activities was $ 229.6 million in 2015 compared to $ 156.6 million in 2014 . the increase in cash flows in 2015 was primarily driven by the improved profitability of the business . our liquidity position also benefits from the fact that we generally collect cash from sales to customers the same day or , in the case of credit or debit card transactions , within three to five days of the related sale , and have up to 75 days to pay certain merchandise vendors and 45 days to pay the majority of our non-merchandise vendors . in addition to cash flow from operations , we have access to additional liquidity , if needed , through borrowings under our revolving credit facility . as of january 30 , 2016 , we had $ 240.6 million available for borrowing under our revolving credit facility . refer to note 8 of our consolidated financial statements for additional information on our revolving credit facility . we also use cash for capital expenditures and financing transactions . capital expenditures consist primarily of new and remodeled store construction and fixtures and information technology projects . we had capital expenditures of approximately $ 115.3 million in 2015 , $ 115.1 million in 2014 , and $ 105.4 million in 2013 . the increase in 2014 and 2015 was primarily driven by investment in systems that will support our continued evolution into an omni-channel brand . these new systems are expected to become operational in 2016 . 29 in addition to the cash uses noted previously , in 2015 , we redeemed all $ 200.9 million of our senior notes for an aggregate amount equal to $ 205.3 million , including the applicable redemption premium . we also repurchased $ 68.6 million of our common stock , including commissions , in 2015 and $ 35.1 million of our common stock , including commissions , in 2013. forward-looking liquidity discussion in 2016 , we plan to open approximately 21 factory outlet stores , two of which will be converted from existing retail locations . we expect capital expenditures for 2016 to be approximately $ 110.0 million to $ 115.0 million , primarily driven by remodels of existing stores , new factory outlet store openings , and continued investments in multiple information technology initiatives , including our new order management , retail management , and enterprise planning systems . these capital expenditures do not include the impact of landlord allowances , which are expected to be approximately $ 5.0 million to $ 8.0 million for 2016 .
| 2015 store openings and closures : opened 40 new factory outlet stores in the u.s. , two of which were converted from existing retail locations ; opened one new u.s. retail store ; and closed 29 u.s. retail stores , two of which were converted to outlet locations . the remaining 27 stores were permanently closed pursuant to our previously announced plan to close approximately 50 retail stores over a 36 month time period , primarily at lease expiration . expectations for 2016 : open 21 factory outlet stores , two of which will be converted from existing retail locations ; and close 19 u.s. retail stores , two of which will be converted to outlet locations . e-commerce other initiatives in 2015 , our e-commerce sales increased 11 % compared to 2014. the increase was primarily driven by : improved product assortment , including new product categories ; improved customer experience , including same day delivery and featured brands ; website improvements allowing us to better showcase our full priced product online ; and improved mobile web and app capabilities allowing more effective and personalized engagement with our customers . e-commerce sales represented 17 % of our total net sales in 2015 . 2015 objectives . in 2015 , we made significant progress against each of the objectives we set forth at the beginning of the year , including increasing profitability , further developing our people , sharpening our brand positioning , elevating the customer experience , and continuing to upgrade our systems and processes . international . at the end of 2015 , we made the strategic decision to shift our international focus to growth within the americas . as a result we have terminated our franchise agreements covering the middle east and south africa and all stores in these areas are expected to be closed in 2016. systems and processes . in 2015 , we continued to invest in new systems that will allow us to enhance our omni-channel capabilities and enable future growth . in 2016 , we expect to launch several of these new systems , including a new retail management system , a new enterprise planning system , and a new order management system . together , we believe these
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in april 2020 , the pds-nci crada was expanded beyond pds0101 to include clinical and preclinical development of pds0103 . pds0103 is an investigational immunotherapy owned by us and designed to treat cancers associated with the mucin-1 , ormuc-1 , oncogenic protein . these include cancers such as ovarian , breast , colorectal and lung cancers . pds0103 combines versamune ® with novel highly immunogenic agonist epitopes of muc-1 developed by the nci and licensed by pds . pds0103 is currently in late preclinical development . the pds0103 immunotherapy combines the utility of the versamune® platform with novel and proprietary , highly immunogenic peptides derived from the cancer-associated protein known as mucin-1 - or muc1 . muc1 is highly expressed in several types of cancer and has been shown to be associated with drug resistance and poor disease prognosis in breast , colorectal , lung and ovarian cancers , for which pds0103 is being developed . expression of muc-1 is often associated with poor disease prognosis , due in part to drug resistance . in preclinical studies , and similarly to pds0101 , pds0103 demonstrated the ability to generate powerful muc-1-specific cd8 killer t-cells . in october 2020 , a third pds0101 phase 2 clinical study was initiated with the university of texas md anderson cancer center and is actively recruiting patients . this clinical study is investigating the safety and anti-tumor efficacy of pds0101 in combination with standard-of-care chemo-radiotherapy , or crt , and their correlation with critical immunological biomarkers in patients with locally advanced cervical cancer . pds believes that versamune ® 's strong t-cell induction has the potential to meaningfully enhance efficacy of the current standard of care crt treatment in this indication . our expanded infectious diseases pipeline now covers three infectious pathogens and vaccines . based on the key characteristics of versamune ® we are progressing preclinical development of pds0202 , a universal influenza vaccine candidate , which combines versamune ® with novel influenza vaccine antigens . pds0202 pre-clinical development is being supported by an agreement with the national institute of allergy and infectious diseases collaborative influenza vaccine innovation centers , or civics , program , with a goal of progressing into a human clinical trial . pds0203 is being designed with the goal to potentially provide long-term and broad protection against infection from covid-19 and its potential mutations , based on the understood potential of versamune ® 's to prime the immune system to generate both antibodies for near term protection and t-cell responses for long term protection against pathogens . we are jointly developing pds0203 under a collaboration agreement with farmacore . in december 2019 , we entered into an amended and restated material transfer agreement ( mta ) with the brazilian pharmaceutical company farmacore biotechnology to develop a novel tuberculosis , or tb , immunotherapy based on a combination of farmacore 's proprietary tb antigens with versamune ® however testing to be performed in brazil has been significantly hampered by the covid-19 pandemic . 66 index we have never been profitable and have incurred net losses in each year since inception . our net losses were $ 14.8 million , and $ 7.0 million for the years ended december 31 , 2020 and 2019 , respectively . as of december 31 , 2020 , we had an accumulated deficit of $ 43.8 million . substantially all of our net losses have resulted from costs incurred in connection with its research and development programs and from general and administrative costs associated with these operations . as of december 31 , 2020 , we had $ 28.8 million in cash and cash equivalents . our future funding requirements will depend on many factors , including the following : ● the timing and costs of our planned clinical trials ; ● the timing and costs of our planned preclinical studies of our versamune® platform ; ● the outcome , timing and costs of seeking regulatory approvals ; ● the terms and timing of any future collaborations , licensing , consulting or other arrangements that we may enter into ; ● the amount and timing of any payments we may be required to make in connection with the licensing , filing , prosecution , maintenance , defense and enforcement of any patents or patent applications or other intellectual property rights ; and ● the extent to which we license or acquire other products and technologies . corporate information we currently operate the existing business of private pds ( as defined below ) as a publicly traded company under the name pds biotechnology corporation . we were incorporated as edge therapeutics , inc. , or edge , on january 22 , 2009. upon closing of the merger ( as defined below ) , we suspended edge 's prior business and prioritized the business of pds biotechnology corporation , a privately held delaware corporation , which we refer to as private pds , which is a clinical-stage biopharmaceutical company developing multi-dimensional cancer immunotherapies that are designed to overcome the limitations of the current approaches . on march 15 , 2019 , we completed our previously disclosed reverse merger with private pds , which we refer to as the merger , pursuant to and in accordance with the terms of the agreement and plan of merger , dated as of november 23 , 2018 , as amended on january 24 , 2019 , by and among edge , echos merger sub , a wholly-owned subsidiary of edge , which we refer to as merger sub , and private pds , whereby private pds merged with and into merger sub , with private pds surviving as our wholly-owned subsidiary . in connection with and immediately following completion of the merger , we effected a 1-for-20 reverse stock split , or the reverse stock split , and changed our corporate name from edge therapeutics , inc. to pds biotechnology corporation , and private pds changed its name to pds operating corporation . story_separator_special_tag all of the outstanding stock of private pds was converted into shares of our common stock or canceled upon closing of the merger . see “ note 1 – nature of operations ” and “ note 4 – reverse merger ” in our financial statements in part i for more information on the merger . selected financial operations overview revenue we have not generated any revenues from commercial product sales and do not expect to generate any such revenue in the near future . we may generate revenue in the future from a combination of research and development payments , license fees and other upfront payments or milestone payments . research and development expenses research and development expenses include employee-related expenses , licensing fees to use certain technology in our research and development projects , costs of acquiring , developing and manufacturing clinical trial materials , as well as fees paid to consultants and various entities that perform certain research and testing on our behalf . costs for certain development activities , such as clinical trials , are recognized based on an evaluation of the progress to completion of specific tasks using data such as patient enrollment , clinical site activations or information provided by vendors on their actual costs incurred . payments for these activities are based on the terms of the individual arrangements , which may differ from the pattern of costs incurred , and are reflected in the consolidated financial statements as prepaid or accrued expenses . costs incurred in connection with research and development activities are expensed as incurred . 67 index as a result of the merger , we acquired an in-process research and development asset ( ipr & d ) for $ 2,974 relating to edge 's newton 2 trials that we initially sought to find partners interested in continuing the development of these product candidates . following the discontinuation of the newton 2 trial for eg-1962 , edge had ceased all research and development efforts related to eg-1962 and suspended efforts on other legacy edge product candidates . as of december 31 , 2019 , based on the limited prospects for partners we were no longer actively seeking partners to continue the development of these product candidates and pursue them to commercialization . accordingly , we recorded an impairment charge ipr & d of $ 2,974 in our consolidated statements of operations and comprehensive loss . we expect that our research and development expenses will increase significantly over the next several years as we advance our versamune®-based immuno-oncology , or i-o , candidates into and through clinical trials , pursues regulatory approval of our injectable versamune® candidates and prepare for a possible commercial launch , all of which will also require a significant investment in contract and internal manufacturing and inventory related costs . the process of conducting human clinical trials necessary to obtain regulatory approval is costly and time consuming . we may never succeed in achieving marketing approval for our injectable i-o candidates . the probability of successful commercialization of our i-o candidates may be affected by numerous factors , including clinical data obtained in future trials , competition , manufacturing capability and commercial viability . as a result , we are unable to determine the duration and completion costs of our research and development projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates . the following table summarizes our research and development expenses incurred for the periods indicated ( in thousands ) : replace_table_token_1_th general and administrative expenses general and administrative expenses consist primarily of salaries and related benefits , including stock-based compensation , related to our executive , finance , legal , business development and support functions . other general and administrative expenses include travel expenses , professional fees for auditing , tax and legal services and facility-related costs . lease termination and disposal costs there were no lease termination or disposal costs in 2020. the lease termination costs relate to moving our corporate offices in 2019 , consists of $ 0.7 million for lease termination fees and $ 0.3 million for disposal of leasehold improvements and office furniture . other income other income consists of interest income consists of interest income earned on our cash and cash equivalents and interest expense . critical accounting policies our management 's discussion and analysis of our financial condition and results of operations is based on our financial statements , which have been prepared in accordance with u.s. gaap . the preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements , as well as the reported revenue generated and expenses incurred during the reporting periods . our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances , the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources . while our significant accounting policies are described in the notes to our financial statements appearing in this annual report , we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results in 2020 and 2019 . 68 index acquisition our consolidated financial statements include the operations of an acquired business after the completion of the acquisition in 2019. we account for acquired businesses using the acquisition method of accounting , which requires , among other things , that most assets acquired , and liabilities assumed be recognized at their estimated fair values as of the acquisition date and that the fair value of ipr & d be recorded on the balance sheet . transaction costs are expensed as incurred . amounts recorded in connection with an acquisition can result from a complex series of judgments about future events and uncertainties and can rely heavily on estimates and assumptions .
| interest income , net interest income , net was $ 0.1 million during the year ended december 31 , 2020 , a decrease of $ 0.3 million compared to the year ended december 31 , 2019 , due primarily to interest received on invested cash and cash equivalents . liquidity and capital resources on july 29 , 2019 , we entered into a common stock purchase agreement , or the aspire purchase agreement , with aspire capital pursuant to which , we have the right , in our sole discretion , to present aspire capital fund , llc , or aspire capital , with a purchase notice , directing aspire capital ( as principal ) to purchase up to 100,000 shares of our common stock per business day , in an aggregate amount of up to $ 20.0 million of our common stock , or the purchased shares , over the term of the aspire purchase agreement . we may sell an aggregate of 1,034,979 shares of our common stock ( which represented 19.99 % of our outstanding shares of common stock on the date of the aspire purchase agreement ) without stockholder approval . we may sell additional shares of our common stock above the 19.99 % limit provided that ( i ) we obtain stockholder approval or ( ii ) stockholder approval has not been obtained at any time the 1,034,979 share limitation is reached and at all times thereafter the average price paid for all shares issued under the aspire purchase agreement , is equal to or greater than $ 5.76 , which was the consolidated closing bid price of our common stock on july 26 , 2019. the minimum price at which we can sell shares under the aspire purchase agreement is $ 0.50. on july 29 , 2019 , we issued 100,654 shares of our common stock to aspire capital , as consideration for entering into the aspire purchase agreement , which we refer to as the commitment shares . we recorded the fair value of the shares at july 29 , 2019 of $ 603,924 as an expense in the third quarter of 2019. concurrently with the aspire
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after several years of high levels of capital expenditures ( averaging $ 7.0 million per year over the last seven fiscal years ) , we are expecting significantly lower capital spending in the foreseeable future . we are currently planning for capital expenditures of $ 4.0 million in fiscal 2012. our shareholders ' equity was $ 80.3 million at may 1 , 2011 , an increase of 27 % from $ 63.0 million at may 2 , 2010 , and an increase of 67 % from $ 48.0 million at may 3 , 2009. in the third quarter of fiscal 2011 , we have established a wholly-owned subsidiary in poland , called culp europe . we plan for this operation to sell and distribute fabrics and manufacture and sell cut and sewn kits in europe , using fabrics primarily sourced from our china platform and other direct suppliers . our sales and marketing efforts in europe also include a program for shipping containers of fabric and cut and sewn kits directly from our operations located in china to customers in europe . this operation is still in its early stages , as sales activities commenced in the fourth quarter of fiscal 2011. on june 16 , 2011 , our board of directors authorized the expenditure of up to $ 5.0 million for the repurchase of shares of our common stock . under the common stock repurchase program , shares may be purchased from time to time in open market transactions , block trades , and through plans established under the securities exchange act rule 10b5-1 . the amount of shares purchased and the timing of such purchases will be based on working capital requirements , market and general business conditions and other factors including alternative investment opportunities . 25 story_separator_special_tag increased raw material costs , and a significant increase in the provision for returns , allowances , and discounts in fiscal 2010 that did not recur in fiscal 2011. although we experienced favorable sales growth in this segment during the past two years , we do not expect net sales to grow significantly in the near future due to unfavorable macro-economic trends such as a continuing weak housing market , high unemployment , and a shortage of consumer credit . our upholstery fabric net sales continue to be driven by our operations located in china , accounting for 86 % and 84 % of total upholstery fabric net sales in fiscal 2011 and 2010 , respectively . net sales of upholstery fabrics produced outside our u.s. manufacturing operations were $ 81.2 million in fiscal 2011 , an increase of 5 % from $ 77.3 million in fiscal 2010. net sales of u.s.-produced upholstery fabrics were $ 13.2 million in fiscal 2011 , a decrease of 8 % from $ 14.3 million in fiscal 2010. these trends represent our continued shift toward production outside our u.s. manufacturing operations and are the result of our long-term strategy to build a wholly-owned and low-cost business located in china that is scalable , and not capital intensive . our china-produced products have been traditionally sold to our u.s. customers . however , we are continuing to look for opportunities to expand our sales of china-produced products to both the local china market and other international customers . european sales and marketing initiatives in the third quarter of fiscal 2011 , we established a wholly-owned subsidiary in poland , called culp europe . we plan for this operation to sell and distribute fabrics and manufacture and sell cut and sewn kits in europe , using fabrics primarily sourced from our china platform and other direct suppliers . our sales and marketing efforts in europe also include a program for shipping containers of fabric and cut and sewn kits directly from our operations located in china to customers in europe . this operation is still in its early stages , as sales activities commenced in the fourth quarter of fiscal 2011 . 30 we previously announced in the third quarter of fiscal 2011 our plans to establish a joint venture in the united kingdom to sell and distribute upholstery fabrics throughout the u.k. however , with the significant opportunities for our culp europe operation in poland and the internal resources required to build that business , we have decided to pursue the u.k. market through a more traditional customer/supplier approach rather than a joint venture . while we are optimistic about the market opportunities in the u.k. , our primary focus in europe for fiscal 2012 will be on our sales and marketing efforts with our culp europe subsidiary . gross profit and operating income gross profit was $ 13.6 million in fiscal 2011 , or 14.4 % of net sales , compared with $ 15.2 million , or 16.6 % of net sales , in fiscal 2010. sg & a expenses were $ 9.2 million for both fiscal 2011 and 2010. operating income was $ 4.4 million in fiscal 2011 , a decrease of 27 % compared with $ 6.0 million in fiscal 2010. operating margins were 4.6 % and 6.5 % of net sales for fiscal 2011 and 2010 , respectively . although net sales increased 3.1 % in fiscal 2011 compared with fiscal 2010 , gross profit and operating income decreased by 11 % and 27 % , respectively . this trend in profitability is primarily due to higher raw material costs which began to increase in the second quarter of fiscal 2011 and weaker operating performance of our one remaining u.s. facility as compared to the prior year . our one remaining u.s. facility experienced weaker performance in fiscal 2011 due to the higher raw material costs as mentioned above and a decrease in net sales of 8 % . although we are beginning to see some stabilization in raw material costs , these costs remain significantly higher than a year earlier . story_separator_special_tag in response to these increased costs , the upholstery segment announced customer price increases in the fourth quarter of fiscal 2011 and also took steps to re-engineer products and yarns where possible without sacrificing quality , and enhance production efficiencies . segment assets segment assets consist of accounts receivable , inventory , property , plant and equipment , and assets held for sale . as of may 1 , 2011 , and may 2 , 2010 , accounts receivable and inventory totaled $ 23.5 million . at may 1 , 2011 , assets held for sale totaled $ 61,000 compared with $ 89,000 at may 2 , 2010. at may 1 , 2011 , property , plant , and equipment totaled $ 967,000 compared with $ 989,000 at may 2 , 2010. the $ 967,000 at may 1 , 2011 , represents property , plant , and equipment located in the u.s. of $ 727,000 , located in china of $ 184,000 , and located in poland of $ 56,000. the $ 989,000 at may 2 , 2010 , represents property , plant , and equipment of $ 887,000 and $ 102,000 located in the u.s. and china , respectively . other income statement categories selling , general and administrative expenses – sg & a expenses for the company as a whole were $ 21.1 million for fiscal 2011 compared with $ 22.8 million for fiscal 2010 , a decrease of 8 % . this decrease primarily pertains to ( i ) a decrease in stock-based compensation expense reflecting a decrease in stock-based awards and the company 's stock price , ( ii ) a decrease in incentive bonus accruals reflecting weaker financial results in relation to pre-established performance targets , and ( iii ) a decrease in bad debt expense reflecting management 's assessment of estimated credit exposures within its accounts receivable portfolio . 31 interest expense ( income ) -- interest expense was $ 881,000 for fiscal 2011compared with $ 1.3 million for fiscal 2010. this trend reflects lower outstanding balances on our long-term debt . interest income was $ 240,000 in fiscal 2011 compared with $ 116,000 for fiscal 2010. our increase in interest income is primarily due to higher cash and cash equivalent and short-term investment balances during fiscal 2011 compared with fiscal 2010 , and a higher rate of return in fiscal 2011 on short-term investment purchases that did not commence until the third quarter of fiscal 2010. other expense – other expense was $ 40,000 for fiscal 2011 compared with $ 828,000 for fiscal 2010. this decrease reflects fluctuations in the foreign exchange rate for our subsidiaries domiciled in canada and china and our ability to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in canadian dollars during fiscal 2011. although , we will try to maintain this natural hedge , there is no assurance that we will be able to continue to do so in future reporting periods . income taxes significant judgment is required in determining the provision for income taxes . during the ordinary course of business , there are many transactions and calculations for which the ultimate tax determination is uncertain . we account for income taxes using the asset and liability approach as prescribed by asc topic 740 , “ income taxes. ” this approach requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements or income tax returns . using the enacted tax rates in effect for the fiscal year in which differences are expected to reverse , deferred tax assets and liabilities are determined based on the differences between financial reporting and tax basis of an asset or liability . if a change in the effective tax rate to be applied to a timing difference is determined to be appropriate , it will affect the provision for income taxes during the period that the determination is made . effective income tax rate we recorded an income tax benefit of $ 1.1 million , or 7.3 % of income before income tax expense in fiscal 2011 compared with income tax expense of $ 1.1 million , or 7.9 % of income before income tax expense , in fiscal 2010. the income tax benefit for fiscal 2011 is different from the amount obtained by applying our statutory rate of 34 % to income before income taxes for the following reasons : ● the income tax rate was reduced by 42 % or an income tax benefit of $ 6.4 million was recorded for the reduction in the valuation allowance recorded against our net deferred tax assets associated with our u.s. and china operations . this income tax benefit of $ 6.4 million represents a $ 2.8 million realization of u.s. loss carryforwards associated with fiscal 2011 pre-tax income from our u.s. operations , a $ 2.3 million adjustment pertaining to a change in judgment about the future realization of our u.s. net deferred tax assets , and a $ 1.3 million adjustment pertaining to a change in judgment about the future realization of our china net deferred tax assets . ● the income tax rate was reduced by 7 % for taxable income subject to lower statutory income rates in foreign jurisdictions ( canada and china ) compared with the statutory income tax rate of 34 % for the united states . ● the income tax rate was reduced by 2 % for adjustments made to our canadian deferred tax liabilities associated with our election to file our canadian income tax returns in u.s. dollars commencing with our fiscal 2011 tax year . our canadian income tax returns were filed in canadian dollars for fiscal years prior to fiscal 2011. this adjustment totaled $ 315,000 and represented a discrete event in which the full tax effects were recorded in the first quarter and the full year of fiscal 2011 .
| ( 2 ) n.m. - not meaningful 28 2011 compared with 2010 segment analysis mattress fabrics segment net sales net sales were $ 122.4 million for fiscal 2011 , an increase of 6.6 % compared with $ 114.8 million for fiscal 2010. also , we reported net sales of $ 35.2 million in the fourth quarter of fiscal 2011 , an increase of 5.3 % compared with $ 33.4 million in the fourth quarter of fiscal 2010. the $ 35.2 million reported in the fourth quarter of fiscal 2011 was the highest quarterly net sales in fiscal 2011. these results reflect favorable growth trends as a result of a stronger competitive position and small price increases we implemented in the fourth quarter of fiscal 2011 to partially offset increased raw material costs and customer pricing pressure . mattress fabrics net sales are not expected to grow significantly in the near future due to the macro-economic trends related to a weak housing market , high unemployment , and a shortage of consumer credit , which tend to depress demand for bedding products . gross profit and operating income gross profit was $ 23.2 million in fiscal 2011 , or 19 % of net sales , compared with $ 23.7 million , or 20.6 % of net sales , in fiscal 2010. sg & a expenses for fiscal 2011 were $ 7.9 million compared with $ 8.2 million for fiscal 2010. operating income was $ 15.3 million in fiscal 2011 , a decrease of 0.7 % compared with $ 15.5 million in fiscal 2010. operating margins were 12.6 % and 13.5 % of net sales for fiscal 2011 and 2010 , respectively . although net sales increased 6.6 % in fiscal 2011 compared with fiscal 2010 , gross profit and operating income decreased by 1.7 % and 0.7 % , respectively . this trend in profitability is primarily due to increased competitive pricing pressure and higher raw material costs that we began to experience in the second quarter of fiscal 2011. although we are beginning to see some stabilization in raw material costs , these costs remain significantly higher than a year earlier . in response to these increased costs , we announced small customer price increases in the fourth quarter of fiscal 2011 and have taken steps to re-engineer products and yarns where possible without sacrificing quality , and enhance production efficiencies . during fiscal 2011 , we completed a multi-year expansion of our mattress fabrics business which included the expansion of internal production capacity for our knitted fabrics product line , our fastest growing product category , and the completion of an energy initiative in our canadian operation that we expect to have an environmental benefit and reduce future operating costs . the total
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we seek to provide plastic surgeons with differentiated services , including enhanced customer service offerings and an industry-leading ten‑year limited warranty that provides patients with the largest cash reimbursement for certain out‑of‑pocket costs related to revision surgeries in a covered event ; a lifetime no‑charge implant replacement program for covered ruptures ; and our industry‑first capcon care program , or c3 program , through which we offer no‑charge replacement implants to breast augmentation patients who experience capsular contracture within the first five years after implantation with our smooth or textured breast implants . we continue to focus our efforts on securing and qualifying an alternate manufacturing supplier . in july 2017 , we entered into a settlement agreement with silimed , our previous contract manufacturer . on august 9 , 2016 , we announced our collaboration with vesta intermediate funding , inc. , or vesta , a lubrizol lifesciences company , pursuant to which we are working with vesta towards establishing a dedicated contract manufacturing facility for our breast implants . on march 14 , 2017 , we announced that we had executed a definitive manufacturing agreement with vesta for the manufacture and supply of our breast implants and that we had submitted a pma supplement to the fda for the manufacturing of our pma-approved breast implants by vesta . on january 30 , 2018 , we announced the fda has granted approval of the site-change pre-market approval , or pma , supplement for our contract manufacturer , vesta , to manufacture our silicone gel breast implants . in support of the move to the vesta manufacturing facility , we also implemented new manufacturing process improvements which , in consultation with the fda , required three ( 3 ) additional pma supplements . in addition to approving the manufacturing site-change supplement , the fda has approved two ( 2 ) of these three ( 3 ) process enhancement supplements , while requesting additional information for the third submission . we continue to work closely with the fda to address their information requests related to this third and final outstanding submission in order to resolve these matters in a timely manner . miradry segment in july 2017 , we completed our acquisition of miradry , following which we began selling the miradry system , the only fda cleared device to reduce underarm sweat , odor and hair of all colors through the precise and non-invasive delivery of microwave energy to the region where sweat glands reside . the energy generates heat at the dermal-fat interface which results in destruction of the sweat glands . at the same time , a continuous hydro-ceramic cooling system protects the superficial dermis and keeps the heat focused at the dermal-fat interface where the sweat glands reside . because sweat glands do not regenerate after the procedure , we believe the results are lasting . microwaves are the ideal technology as the energy can be focused directly at the dermal-fat interface where the glands reside . the miradry system has been cleared by the fda as indicated for use in the treatment of primary axillary hyperhidrosis , or a condition characterized by abnormal sweating in excess of that required for regulation of body temperature , plus unwanted underarm hair removal , and permanent reduction of underarm hair of all colors for fitzpatrick skin types i – iv . permanent hair reduction is defined as long-term , stable reduction in the number of hairs regrowing when measured at 6 , 9 and 12 months after the completion of a treatment regime . when used for the treatment of primary axillary hyperhidrosis , the miradry system may reduce underarm odor . in addition , the 64 miradry system received ce mark approval for the treatment of primary axillary hyperhidrosis and approv al in several other countries . the miradry system provides patients with a non-invasive and durable procedure to selectively destroy underarm sweat glands for both severely hyperhidrotic patients and those that are bothered by their underarm sweat . the miradry system is clinically proven to reduce sweat in one or more procedures of approximately 60-minutes , allowing most patients to achieve immediately noticeable and durable results without the pain , expense , downtime , or repeat visits associated with surgical and minimally-invasive procedures . the sweat glands in the treated area are destroyed through targeted heating of the tissue , and because the body does not regenerate sweat glands , we believe the results will be lasting , although some patients may need to repeat the miradry procedure to achieve the lasting results . the miradry system consists of a console and a handheld device which uses consumable single-use biotips . the miradry procedure is not technique-dependent , does not require significant training or skill for the treatment provider , and the user-interface guides the provider through each step of the procedure for each treatment . we sell our miradry system and consumable single-use biotips only to physicians , consisting of dermatologists , plastic surgeons , aesthetic specialists and physicians specializing in the treatment of hyperhidrosis . aesthetic specialists are physicians who elect to offer aesthetic procedures as a significant part of their practices but are generally not board-certified dermatologists or plastic surgeons . physicians can market the miradry procedure as a premium , highly-differentiated , non-surgical sweat reduction procedure . we are approved to sell the miradry system in over 40 international markets outside of north america , including countries in asia , europe , the middle east and south america . the miradry segment generated net sales of $ 5.1 million for the year ended december 31 , 2017 from the acquisition date on july 25 , 2017. with the acquisition of miradry , we expect net sales , cost of goods sold , sales and marketing , general and administrative , and research and development expenses to increase in 2018 when compared to 2017 and prior periods . story_separator_special_tag components of operating results net sales we recognize revenue on breast implants and tissue expanders , net of sales discounts and estimated returns , as the customer has a standard six-month window to return purchased breast implants and tissue expanders . our breast products segment net sales for the year ended december 31 , 2017 and 2016 reflects the combined effect of the temporary hold on sales and implanting of breast products manufactured by silimed until march 1 , 2016 , our controlled re-entry to market designed to optimize our supply of breast implant inventory , the commercial introductions of our scar management products as of march 2016 and our tissue expander portfolio as of november 2016. net sales for our miradry segment include net sales of the miradry system and consumable biotips as of the acquisition date of july 25 , 2017. we expect that , in the future , our net sales will fluctuate on a quarterly basis due to a variety of factors , including seasonality of breast augmentation procedures and purchase of miradry procedures . we believe that aesthetic procedures are subject to seasonal fluctuation due to patients planning their procedures leading up to the summer season and in the period around the winter holiday season . cost of goods sold and gross margin cost of goods sold consists primarily of costs of finished products purchased from our third‑party manufacturers , reserve for product warranties , inventory fair market value adjustment , royalty costs , and warehouse and other related costs . with the acquisition of miradry , cost of goods sold also consists of raw material , labor , overhead , and variable manufacturing costs associated with the manufacturing of the miradry systems and biotips . with respect to our supplier contracts , all our products and raw materials are manufactured under contracts with fixed unit costs . 65 we provid e a commercial warranty on our silicone gel breast implants and a standard warranty on our miradry systems , handpieces and biotips . the estimated warranty costs are recorded at the time of sale . in addition , the inventory fair market value associated with non-cash purchase accounting adjustments and royalty costs related to both the ssp and miradry acquisitions are recorded at the time of sale . we expect our overall gross margin , which is calculated as net sales less cost of goods sold for a given period divided by net sales , to fluctuate in future periods primarily as a result of quantity of units sold , manufacturing price increases , the changing mix of products sold with different gross margins , overhead costs and targeted pricing programs . sales and marketing expenses our sales and marketing expenses primarily consist of salaries , bonuses , benefits , incentive compensation and travel for our sales , marketing and customer support personnel . our sales and marketing expenses also include expenses for trade shows , our no‑charge customer shipping program and no-charge product evaluation units , as well as educational , promotional and marketing activities , including direct and online marketing . we expect our sales and marketing expenses to fluctuate in future periods as a result of headcount and timing of our marketing programs . however , we generally expect these costs will increase in absolute dollars . research and development expenses our research and development , or r & d , expenses primarily consist of clinical expenses , product development costs , regulatory expenses , consulting services , outside research activities , quality control and other costs associated with the development of our products and compliance with good clinical practices , or cgcp , requirements . r & d expenses also include related personnel and consultant compensation and stock‑based compensation expense . we expense r & d costs as they are incurred . we expect our r & d expenses to vary as different development projects are initiated , including improvements to our existing products , expansions of our existing product lines , new product acquisitions and our fda‑required pma post‑approval studies of our breast implants . however , we generally expect these costs will increase in absolute terms over time as we continue to expand our product portfolio and add related personnel . general and administrative expenses our general and administrative , or g & a , expenses primarily consist of salaries , bonuses , benefits , incentive compensation and stock-based compensation for our executive , financial , legal , business development and administrative functions . other g & a expenses include outside legal counsel and litigation expenses , independent auditors and other outside consultants , corporate insurance , facilities , information technologies expenses and changes in the valuation of deferred and contingent consideration . in 2015 , g & a expenses also include the federal excise tax on the sale of our medical devices in the united states . in 2016 and 2017 , we did not have expense for the federal excise tax on the sale of our medical devices , as the tax was suspended for 2016 and 2017 . 66 we expect future g & a expenses to increase as we continue to build our finance , legal , information technology , human resources and other general administ ration resources to continue to advance the commercialization of our products . in addition , we expect to continue to incur g & a expenses in connection with operating as a public company , which may increase further when we are no longer able to rely on the “ emerging growth company ” exemption we are afforded under the jumpstart our business startups act , or the jobs act . other income ( expense ) , net other income ( expense ) , net primarily consists of interest income , interest expense , changes in the fair value of common stock warrants and amortization of issuance costs associated with our credit agreements .
| 70 cost of goods sold and gross margin cost of goods sold increased $ 7.3 million , or 106 % , to $ 14.2 million for the year ended december 31 , 2017 , as compared to $ 6.9 million for the year ended december 31 , 2016. this increase was due to an increase in sales volume of the breast products segment and a $ 2.3 million reserve of excess and obsolete inventory in 2017 , mainly related to breast products that are not expected to be sold prior to expiration in 2018. in addition , the acquisition of miradry increased cost of goods by $ 2.7 million since the acquisition on july 25 , 2017. the gross margins for the years ended december 31 , 2017 and 2016 were 61.2 % and 66.8 % , respectively . the decrease for the year ended december 31 , 2017 was primarily due to the inclusion of miradry which carries a lower margin and an increase in excess and obsolete inventory reserves . the increase in inventory reserves resulted from the timing and recognition of products anticipated to expire prior to being sold and discontinuation of certain product lines . sales and marketing expenses sales and marketing expenses increased $ 13.3 million , or 64.6 % , to $ 33.9 million for the year ended december 31 , 2017 , as compared to $ 20.6 million for the year ended december 31 , 2016. the increase is primarily due to the increase in employee related costs as a result of increased sales and headcount . the acquisition of miradry increased sales and marketing expenses by $ 5.4 million since the acquisition on july 25 , 2017. research and development expenses r & d expenses increased $ 0.1 million , or 1.1 % , to $ 9.8 million for the year ended december 31 , 2017 , as compared to $ 9.7 million for the year ended december 31 , 2016. the acquisition of miradry increased research and development expenses by $ 0.9 million since the acquisition on july 25 , 2017. general and administrative expenses g & a expenses increased $ 9.5 million , or 43.6 % , to $ 31.5 million for the year ended december 31 , 2017 , as compared to $ 22.0 million for the year ended december 31 , 2016 .
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however , in the second half of 2017 , we anticipate a more neutral pricing environment as we anniversary many comparisons on various key ingredients . future changes in ingredient costs , as well as other material costs , will be influenced by the size of agricultural harvests in both the u.s. and other parts of the world and related global demand , economic conditions and the regulatory environment . overall , we continue to limit some of our exposure to volatile swings in food commodity costs through a structured forward purchasing program for certain key materials such as soybean oil and flour . for a more-detailed discussion of the effect of commodity costs , see the “ impact of inflation ” section of this md & a below . changes in other notable recurring costs , such as marketing , transportation and production costs , may also impact our overall results . we will continue to periodically reassess our allocation of capital to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders . story_separator_special_tag style= '' line-height:120 % ; padding-top:12px ; text-indent:32px ; font-size:10pt ; '' > selling , general and administrative expenses for 2016 totaled $ 115.1 million and increased 12 % as compared with the 2015 total of $ 102.8 million , which had increased 8 % from the 2014 total of $ 94.8 million . the 2016 increase in these costs reflected the influence of overall higher sales volumes , higher levels of consumer spending on our key retail product lines , as well as the new consumer and trade activities related to flatout and amortization expense attributable to the flatout intangible assets . the 2015 increase in these costs reflected higher consumer promotional spending on new products , transaction expenses related to the flatout acquisition and increased amortization expense attributable to the flatout intangible assets . operating income replace_table_token_6_th due to the factors discussed above , the specialty foods segment 's operating income for 2016 totaled $ 196.6 million , an 18 % increase from 2015 operating income of $ 167.1 million . the 2015 total was 1 % higher than 2014 operating income of $ 165.4 million . the level of the 2016 corporate expenses presented above was consistent with our expectations and was similar to those of 2015 and 2014 . 18 income from continuing operations before income taxes as affected by the factors discussed above , our income from continuing operations before income taxes for 2016 of $ 184.6 million increased 19 % from the 2015 total of $ 154.6 million . the 2014 income from continuing operations before income taxes was $ 153.3 million . taxes based on income our effective tax rate was 34.1 % , 34.2 % and 34.1 % in 2016 , 2015 and 2014 , respectively . given the nature of our operations ( predominately u.s. based for both sales and manufacturing ) , our effective tax rates typically stay within a fairly narrow range . see note 9 to the consolidated financial statements for a reconciliation of the statutory rate to the effective rate for each year . income from continuing operations income from continuing operations for 2016 of $ 121.8 million increased from 2015 income from continuing operations of $ 101.7 million . income from continuing operations was $ 101.0 million in 2014 . diluted weighted average common shares outstanding for each of the years ended june 30 , 2016 , 2015 and 2014 have remained relatively stable . as a result , and due to the change in income from continuing operations for each year , diluted income from continuing operations per share totaled $ 4.44 , $ 3.72 and $ 3.69 for 2016 , 2015 and 2014 , respectively . discontinued operations there were no discontinued operations in 2016 and 2015 . in 2014 , we recorded a loss from discontinued operations of $ 26.0 million , net of tax , or $ 0.95 per diluted share , including an after-tax loss of $ 29.1 million on the sale of our candle manufacturing and marketing operations in january 2014. income from discontinued operations , net of tax , was $ 3.1 million in 2014. net income as influenced by the factors discussed above , net income for 2016 of $ 121.8 million increased from the 2015 net income of $ 101.7 million , which had increased from 2014 net income of $ 75.0 million . diluted net income per share totaled $ 4.44 in 2016 , an increase from the 2015 total of $ 3.72 per diluted share . the 2014 net income per share totaled $ 2.74 per diluted share , which included the loss on the sale of discontinued operations . financial condition liquidity and capital resources we maintain sufficient flexibility in our capital structure to ensure our capitalization is adequate to support our future internal growth prospects , acquire food businesses consistent with our strategic goals , and maintain cash returns to our shareholders through cash dividends and share repurchases . our balance sheet maintained fundamental financial strength during 2016 as we ended the year with $ 118 million in cash and equivalents , along with shareholders ' equity of $ 514 million and no debt . under our unsecured revolving credit facility ( “ facility ” ) , we may borrow up to a maximum of $ 150 million at any one time . we had no borrowings outstanding under the facility at june 30 , 2016 . at june 30 , 2016 , we had $ 4.7 million of standby letters of credit outstanding , which reduced the amount available for borrowing on the facility . the facility expires in april 2021 , and all outstanding amounts are then due and payable . interest is variable based upon formulas tied to libor or an alternative base rate defined in the facility , at our option . we must also pay facility fees that are tied to our then-applicable consolidated leverage ratio . story_separator_special_tag loans may be used for general corporate purposes . due to the nature of its terms , when we have outstanding borrowings under the facility , they will be classified as long-term debt . the facility contains certain restrictive covenants , including limitations on indebtedness , asset sales and acquisitions , and financial covenants relating to interest coverage and leverage . at june 30 , 2016 , we were in compliance with all applicable provisions and covenants of the facility , and we exceeded the requirements of the financial covenants by substantial margins . at june 30 , 2016 , we were not aware of any event that would constitute a default under the facility . we currently expect to remain in compliance with the facility 's covenants for the foreseeable future . however , a default under the facility could accelerate the repayment of any outstanding indebtedness and limit our access to $ 75 million of additional credit available under the facility . such an event could require a reduction in or curtailment of cash dividends or share repurchases , reduce or delay beneficial expansion or investment plans , or otherwise impact our ability to meet our obligations when due . 19 we believe that cash provided by operating activities and our existing balances in cash and equivalents , in addition to that available under the facility , should be adequate to meet our cash requirements through 2017 . if we were to borrow outside of the facility under current market terms , our average interest rate may increase significantly and have an adverse effect on our results of operations . cash flows replace_table_token_7_th cash provided by operating activities remains the primary source of financing for our internal growth . cash provided by operating activities in 2016 totaled $ 142.6 million , an increase of 7 % as compared with the 2015 total of $ 132.8 million , which increased 3 % from the 2014 total of $ 129.1 million . the 2016 increase was due to an increase in net income and depreciation and amortization as partially offset by higher working capital requirements . in general , the increased levels of working capital requirements reflect higher sales volumes and the impact of our flatout acquisition . additionally , the changes in other current assets and accounts payable and accrued liabilities reflect the timing of estimated tax payments and the favorable tax impact of the loss on sale of discontinued operations in prior years . the increase in depreciation and amortization reflects the amortization of intangibles relating to the flatout acquisition and the related depreciation on its acquired fixed assets , as well as additional depreciation on recent capital expenditures . the 2015 increase in cash provided by operating activities was largely influenced by the discontinued operations resulting from the sale of our candle manufacturing and marketing operations , which were sold in january 2014. see note 3 to the consolidated financial statements for further information regarding this sale . cash used in investing activities totaled $ 17.4 million in 2016 as compared to a use of $ 112.3 million in 2015 and a source of $ 8.5 million in 2014 . the 2016 decrease in cash used in investing activities reflects the $ 92.2 million paid for the acquisition of flatout in march 2015 , as well as a planned lower level of capital expenditures in 2016. the 2015 increase in cash used in investing activities reflects cash paid for the 2015 acquisition of flatout , proceeds from the sale of our candle manufacturing and marketing operations in 2014 and a higher level of capital expenditures compared to 2014. our 2015 capital expenditures included a processing capacity expansion project at our horse cave , kentucky dressing facility which was essentially complete at december 31 , 2014. capital expenditures totaled $ 16.7 million in 2016 , compared to $ 18.3 million in 2015 and $ 16.0 million in 2014 . based on our current plans and expectations , we believe our capital expenditures for 2017 could total approximately $ 20 to $ 22 million . financing activities used net cash totaling $ 189.3 million , $ 49.8 million and $ 49.4 million in 2016 , 2015 and 2014 , respectively . the higher level in 2016 was due to higher dividend payments , including the $ 5.00 per share special dividend that was paid in december 2015. the special dividend payment , which totaled $ 136.7 million , led to the decline in retained earnings since june 30 , 2015 and also resulted in the decrease of corporate assets from that presented in the business segment information disclosed in our 2015 annual report on form 10-k. the dividend payout rate for 2016 was $ 1.96 per share , excluding the special dividend , as compared to $ 1.82 per share in 2015 and $ 1.72 per share in 2014 . this past fiscal year marked the 53 rd consecutive year in which our dividend rate was increased . cash utilized for share repurchases totaled $ 0.2 million , $ 0.6 million and $ 3.1 million in 2016 , 2015 and 2014 , respectively . our board of directors approved a share repurchase authorization of 2,000,000 shares in november 2010. at june 30 , 2016 , 1,418,152 shares from this authorization remained authorized for future purchase . the future levels of share repurchases and declared dividends are subject to the periodic review of our board of directors and are generally determined after an assessment is made of various factors , such as anticipated earnings levels , cash flow requirements and general business conditions . our ongoing business activities continue to be subject to compliance with various laws , rules and regulations as may be issued and enforced by various federal , state and local agencies . with respect to environmental matters , costs are incurred pertaining to regulatory compliance and , upon occasion , remediation . such costs have not been , and are not anticipated to become , material .
| the significantly higher egg costs attributed to the avian influenza outbreak we experienced in the first half of the year were more than offset by lower costs of certain other raw materials throughout the year , specifically soybean oil , dairy-based products , flour and resin packaging . excluding any pricing actions , total raw-material costs positively affected our gross margins by less than 1 % of net sales . 2015 to 2014 consolidated net sales for the year ended june 30 , 2015 increased 6 % to a then record of $ 1,105 million from the prior-year record total of $ 1,041 million . this growth was primarily driven by volume and mix . retail net sales increased 6 % due to higher sales of new york brand ® frozen garlic bread and olive garden ® retail dressings and the impact of flatout , but were offset in part by increased promotional spending on some retail product offerings and placement costs for new products . foodservice net sales also improved 6 % primarily due to increased sales to national chain restaurants . our overall sales volume , as measured by pounds shipped , improved by 5 % . incremental net sales from flatout accounted for less than 1 % of the volume increase . the influence of a more favorable sales mix was estimated to be less than 1 % . the net impact of pricing for both retail and foodservice was insignificant . as a percentage of net sales , sales of retail products remained relatively unchanged at 51 % . our gross margin declined to 23.3 % in 2015 compared with 23.9 % in 2014 as the benefits from the improved sales volumes and modestly lower material costs were offset by increased operating costs due to capacity constraints in our dressing manufacturing , higher freight expense , increased placement costs for new products and certain nonrecurring charges related to flatout . the higher levels of operating inefficiencies were most pronounced during the first half of 2015. we estimate that lower ingredient costs beneficially affected our gross margins by less than 1 % of net sales . selling , general and administrative expenses
| 10,985 |
included in the $ 6.6 million total external clinical and preclinical study fees and expenses noted in the table above for the year ended december 31 , 2011 , was $ 3.6 million related to our lorcaserin program , $ 1.7 million related to our apd811 program for the potential treatment of pulmonary arterial hypertension , $ 0.7 million related to our apd334 program for the potential treatment of autoimmune diseases , and $ 0.2 million related to our gpr119 program for the potential treatment of type 2 diabetes . included in the $ 10.6 million total external clinical and preclinical study fees and expenses noted in the table above for the year ended december 31 , 2010 , was $ 7.5 million related to our lorcaserin program , $ 1.4 million related to our apd811 program , $ 1.1 million related to our apd334 program and $ 0.5 million related to apd916 ( which we formerly studied for the potential treatment of narcolepsy with cataplexy and have since abandoned ) . cumulatively through december 31 , 2011 , we have recognized external clinical and preclinical study fees and other related expenses of $ 258.4 million for lorcaserin , $ 43.7 million for nelotanserin ( formerly apd125 ) , $ 7.3 million for temanogrel ( formerly apd791 ) , $ 4.5 million for apd811 , $ 2.8 million for apd916 and $ 1.7 million for apd334 . we previously studied nelotanserin for insomnia and temanogrel for the potential treatment of arterial thrombosis and other related conditions . while expenditures on current and future clinical development programs are expected to be substantial , they are subject to many uncertainties , including whether we have adequate funds and develop our drug candidates with one or more collaborators or independently . as a result of such uncertainties , we can not predict with any significant degree of certainty the duration and 61 completion costs of our research and development projects or whether , when and to what extent we will generate revenues from the commercialization and sale of any of our drug candidates . the duration and cost of clinical trials may vary significantly over the life of a project as a result of unanticipated events arising during clinical development and a variety of factors , including : the nature and number of trials and studies in a clinical program ; the number of patients who participate in the trials ; the number of sites included in the trials ; the rates of patient recruitment and enrollment ; the duration of patient treatment and follow-up ; the costs of manufacturing drug candidates ; and the costs , requirements , timing of , and the ability to secure regulatory approvals . general and administrative expenses . general and administrative expenses decreased by $ 3.7 million to $ 24.2 million for the year ended december 31 , 2011 , from $ 27.9 million for the year ended december 31 , 2010. this was primarily due to decreases of ( i ) $ 2.1 million in legal fees , including litigation and patent legal fees , ( ii ) $ 0.8 million in salary and other personnel costs and ( iii ) $ 0.7 million in marketing research expenses . we expect that our 2012 general and administrative expenses will be lower than in 2011 , primarily as a result of lower salary and personnel costs and patent legal fees . restructuring charges . we recognized $ 3.5 million of restructuring charges for the year ended december 31 , 2011 , in connection with one-time employee termination costs , including severance and other benefits related to our 2011 workforce reduction , compared to no restructuring charges in the year ended december 31 , 2010. amortization of acquired technology and other intangibles . we recognized $ 1.0 million for amortization of acquired technology and other intangibles for the year ended december 31 , 2011 , compared to $ 2.2 million for the year ended december 31 , 2010. this $ 1.2 million decrease was primarily due to reaching the end of the 10-year estimated useful life of the melanophore screening technology in the first quarter of 2011. the remaining amortization expense relates to the manufacturing facility production licenses we acquired in january 2008 , which are being amortized over their estimated useful life of 20 years . using the exchange rate in effect on december 31 , 2011 , we expect to record amortization expense of $ 0.7 million per year through 2027 for the manufacturing facility production licenses . interest and other expense , net . interest and other expense , net , decreased by $ 1.8 million to $ 26.4 million for the year ended december 31 , 2011 , from $ 28.2 million for the year ended december 31 , 2010. this was primarily due to ( i ) a $ 7.4 million decrease in interest expense primarily related to the deerfield loan as a result of principal repayments totaling $ 67.7 million that we made in 2010 and early 2011 and ( ii ) a $ 1.8 million reduction in the non-cash loss on extinguishment of debt . these decreases were partially offset by a ( i ) $ 4.3 million reduction in the non-cash gain from revaluation of our derivative liabilities and ( ii ) a $ 2.0 million write-down of the balance of our investment in taigen . the interest expense recognized in 2010 included the non-cash correction of prior period errors which resulted in a $ 3.0 million decrease to interest expense . we recognized interest expense of $ 6.6 million related to the deerfield loan for the year ended december 31 , 2011 , which included $ 2.3 million we paid deerfield in cash . for the year ended december 31 , 2010 , we recognized interest expense of $ 14.0 million on the deerfield loan , which included $ 6.1 million we paid deerfield in cash . story_separator_special_tag although the debt prepayments we made have reduced our future interest payments , we expect that our interest expense will continue to be substantial due to both the remaining principal balance and accretion on the deerfield loan , as well as payments on our lease financing obligations . at december 31 , 2011 , we expect interest expense of $ 2.6 million to be paid in cash over the remaining term of the deerfield loan . 62 deemed dividend related to beneficial conversion feature of convertible preferred stock . we recorded a deemed dividend of $ 2.3 million for the year ended december 31 , 2011 , upon the issuance of our then-outstanding series c convertible preferred stock , or series c preferred , related to the beneficial conversion feature of the series c preferred . we did not record any such dividends for the year ended december 31 , 2010. year ended december 31 , 2010 , compared to year ended december 31 , 2009 revenues . we recognized revenues of $ 16.6 million for the year ended december 31 , 2010 , compared to $ 10.4 million for the year ended december 31 , 2009. our revenues for the year ended december 31 , 2010 , included ( i ) $ 7.1 million under our manufacturing services agreement with siegfried , ( ii ) $ 4.0 million of deferred non-cash revenues recognized from our license agreement with taigen , ( iii ) $ 3.2 million for patent activities , primarily related to our former collaboration with ortho-mcneil-janssen , ( iv ) $ 1.9 million from amortization of the $ 50.0 million non-refundable , upfront payment we received from eisai and ( v ) $ 0.4 million related to a technology license agreement with gsk . our revenues for the year ended december 31 , 2009 , included $ 6.6 million under our manufacturing services agreement with siegfried and $ 3.8 million for patent activities and additional sponsored research from our former collaborations with ortho-mcneil-janssen and merck & co. , inc. , or merck . cost of manufacturing services . we recognized cost of manufacturing services of $ 7.4 million and $ 6.5 million for the years ended december 31 , 2010 , and 2009 , respectively . research and development expenses . research and development expenses decreased by $ 34.7 million to $ 75.5 million for the year ended december 31 , 2010 , from $ 110.2 million for the year ended december 31 , 2009. this difference was primarily due to decreases of ( i ) $ 30.8 million in external clinical and preclinical study fees and expenses , including manufacturing costs , primarily due to completing our lorcaserin phase 3 clinical trials , ( ii ) $ 2.0 million in salary and other personnel costs as a result of a 2009 reduction of our us workforce of approximately 31 % , or 130 employees , which we refer to as our 2009 workforce reduction , and ( iii ) $ 1.2 million in facility and equipment costs . included in the $ 10.6 million total external clinical and preclinical study fees and expenses noted in the table above for the year ended december 31 , 2010 , was $ 7.5 million related to our lorcaserin program , $ 1.4 million related to our apd811 program , $ 1.1 million related to our apd334 program and $ 0.5 million related to apd916 . included in the $ 41.4 million total external clinical and preclinical study fees and expenses noted in the table above for the year ended december 31 , 2009 , was $ 38.9 million related to our lorcaserin program , $ 1.3 million related to our apd811 program and $ 0.5 million related to nelotanserin . general and administrative expenses . general and administrative expenses increased by $ 2.7 million to $ 27.9 million for the year ended december 31 , 2010 , from $ 25.2 million for the year ended december 31 , 2009. this was primarily due to increases of ( i ) $ 1.7 million in legal fees , including litigation and patent legal fees , ( ii ) $ 0.8 million in salary and other personnel costs and ( iii ) $ 0.7 million in non-cash share-based compensation . restructuring charges . we recognized no restructuring charge for the year ended december 31 , 2010 , compared to $ 3.3 million for the year ended december 31 , 2009 , which was in connection with our 2009 workforce reduction . amortization of acquired technology and other intangibles . we recognized $ 2.2 million for amortization of acquired technology and other intangibles for the year ended december 31 , 2010 , compared to $ 3.5 million for the year ended december 31 , 2009. this decrease was primarily due to the workforce we acquired from siegfried in january 2008 , which was amortized over its estimated benefit of two years through the end of 2009. interest and other expense , net . interest and other expense , net , increased by $ 13.4 million to $ 28.2 million for the year ended december 31 , 2010 , from $ 14.8 million for the year ended december 31 , 2009. this increase was primarily due to increases of ( i ) $ 9.9 million in non-cash loss on extinguishment of debt and ( ii ) $ 3.0 million in interest expense related to the loan we received from deerfield in july 2009. this increase was partially offset by ( i ) a $ 1.0 million decrease in the non-cash gain from revaluation of our derivative liabilities and ( ii ) a $ 0.9 million gain on investments . 63 liquidity and capital resources we have accumulated a large deficit since inception that has primarily resulted from the significant research and development expenditures we have made in seeking to identify and validate new drug targets and develop compounds that could become marketed drugs .
| the $ 1.8 million decrease in manufacturing services revenues comparing 2011 to 2010 is comprised of $ 1.4 million related to reductions in sales prices agreed to in the amended agreements with siegfried , with the balance related to changes in volume and product mix . when collaborators pay us before revenues are earned , we record such payments as deferred revenues until earned . as of december 31 , 2011 , we had a total of $ 44.7 million in deferred revenues . all of our deferred revenues are attributable to our marketing and supply agreement with eisai and are being recognized as revenue ratably over the period in which we expect to have significant involvement . at inception of this agreement , we estimated the period of significant involvement at 13 years and , in 2011 , based on revised expectations of the timing of regulatory approval for lorcaserin , if ever , we re-assessed such period to be 14.5 years . absent any new collaborations , we expect our 2012 revenues will primarily consist of amortization of the $ 50.0 million non-refundable , upfront payment we received from eisai and manufacturing services revenue from siegfried . we expect the revenues we recognize in 2012 under this manufacturing services agreement will be lower than in 2011 due to further pricing discounts and decreased units of drug product manufactured under the amended agreements with siegfried . if lorcaserin is approved for us marketing , and upon the delivery of product supply for launch , we will also receive a milestone payment from eisai of $ 40.0 million or $ 60.0 million , depending on the approved drug label . in addition , if the fda requires any development work following us approval of lorcaserin , eisai will reimburse us for 90 % of such expenses , which will be recognized as revenues . revenues for milestones that may be achieved in the future are difficult to predict , and our revenues may vary significantly from quarter to quarter and
| 10,986 |
we estimate that we will have annual savings of between $ 10 million and $ 15 million beginning in 2018 ; we continue to experience pressure from our customers to reduce the selling price for our products , and we expect future improvements in net income to result primarily from increases in sales volume and improvements in product mix , as well as manufacturing cost reductions in order to offset any reduction in average selling prices of our products ; in terms of our end markets , our automotive business reached 8 % of revenue ; and during 2017 , we invested approximately $ 100.3 million in our manufacturing and wafer fabrication facilities in china , and we expect to continue to invest in our facilities , although the amount to be invested will depend on product demand and new product developments . our wafer fabrication plants use epitaxial wafers . currently there is a supply shortage of these types of wafers , which may impact our ability to meet market demand for our products . description of sales and expenses net sales the principal factors that have affected or could affect our net sales from period to period are : the condition of the economy in general and of the semiconductor industry in particular ; our customers ' adjustments in their order levels ; changes in our pricing policies or the pricing policies of our competitors or suppliers ; the addition or termination of key supplier relationships ; the rate of introduction and acceptance by our customers of new products ; our ability to compete effectively with our current and future competitors ; our ability to enter into and renew key corporate and strategic relationships with our customers , vendors and strategic alliances , changes in foreign currency exchange rates ; a major disruption of our information technology infrastructure ; unforeseen catastrophic events , such as armed conflict , terrorism , fires , typhoons and earthquakes ; and any other disruptions , such as change in the political or governmental policies , labor shortages , unplanned maintenance or other manufacturing problems . cost of goods sold cost of goods sold includes manufacturing costs for our semiconductors and our wafers . these costs include raw materials used in our manufacturing processes as well as labor costs and overhead expenses . cost of goods sold is also impacted by yield improvements , capacity utilization and manufacturing efficiencies . in addition , cost of goods sold includes the cost of products that we purchase from other manufacturers and sell to our customers . cost of goods sold is also affected by inventory obsolescence if our inventory management is not efficient . selling , general and administrative selling , general and administrative expenses relate primarily to compensation and associated expenses for personnel in general management , sales and marketing , information technology , engineering , human resources , procurement , planning and finance , and sales commissions , as well as outside legal , investor relations , accounting , consulting and other operating expenses . also included in selling , general and administrative expenses are acquisition costs from business combinations . research and development research and development expenses consist of compensation and associated costs of employees engaged in research and development projects , as well as materials and equipment used for these projects . research and development expenses are primarily - 32 - associated with our wafer facilities in china , lee 's summit , missouri and oldham , u.k. and our manufacturing facilities in taiwan a nd china , as well as with our engineers in the u.s. and taiwan . all research and development expenses are expensed as incurred . amortization of acquisition-related intangible assets amortization of acquisition-related intangible assets consists of assets such as developed technologies and customer relationships . impairment of fixed assets impairment of fixed assets consists of the impairment amount recognized as a result of the fair value of an asset being below its recorded value . restructuring restructuring are one-time charges that must be paid by the company due to reorganizing or restructuring a part of the business . interest income / expense interest income consists of interest earned on our cash and investment balances . interest expense consists of interest payable on our outstanding credit facilities and other debt instruments . gain ( loss ) on securities carried at fair value from time to time we may hold investments in the form of common stock or some other similar equivalent and have elected fair value accounting treatment . foreign currency ( loss ) gain , net this income account is used to show the amount gained or lost as a result of foreign currency transactions . income tax provision our global presence requires us to pay income taxes in a number of jurisdictions . see note 11 of “ notes to consolidated financial statements ” for additional information . net income attributable to noncontrolling interest this represents the minority investors ' share of our subsidiaries ' earnings . net income attributable to common stockholders net income attributable to common stockholders is net income less net income attributable to noncontrolling interest . u.s. tax reform the tax cuts and jobs act ( the “ tax act ” ) was enacted on december 22 , 2017. the tax act reduces the u.s. federal corporate tax rate from 35 % to 21 % , requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred , provides an exemption from u.s. federal tax for dividends received from foreign subsidiaries , and creates new taxes on certain foreign sourced earnings . story_separator_special_tag as of the completion of these financial statements and related disclosures , we have not completed our accounting for the tax effects of the tax act ; however , as described below , we have made a reasonable estimate of such effects and recorded a provisional tax expense of approximately $ 45.9 million , which is included as a component of income tax expense from continuing operations in the fourth quarter of 2017. this provisional tax expense incorporates assumptions made based upon the company 's current interpretation of the tax act , and may change as we receive additional clarification and implementation guidance and as the interpretation of the tax act evolves . in accordance with sec staff accounting bulletin no . 118 , the company will finalize the accounting for the effects of the tax act no later than the fourth quarter of 2018. future adjustments made to the provisional effects will be reported as a component of income tax expense from continuing operations in the reporting period in which any such adjustments are determined . the table below reflects the significant components of the provisional amount of tax expense recorded in the fourth quarter of 2017 and included as a component of income tax expense from continuing operations : component provisional amount remeasurement of u.s. deferred tax assets and liabilities $ 2,913 transition tax on foreign earnings 104,327 foreign tax credits used to offset transition tax ( 58,975 ) other adjustments ( 2,357 ) total net tax expense related to the tax act $ 45,908 - 33 - the company expects to use net operating loss carryforwards and tax credits to completely offset any cash tax obligations resulting from the transition tax . the other components shown above represent noncash adjustments to tax expense . remeasurement of u.s. deferred tax assets and liabilities we remeasured certain u.s. deferred tax assets and liabilities using the lower corporate income tax rate of 21 % . however , we are still analyzing certain aspects of the tax act and refining our calculations , which could potentially affect the measurement of these deferred tax balances . transition tax on foreign earnings the one-time transition tax is based on our total post-1986 earnings and profits ( “ e & p ” ) that we previously deferred from u.s. income taxes , and is net of indirect effects of unrecognized tax benefits . we have not yet completed our analysis of the total post-1986 e & p for the majority of our foreign subsidiaries . further , the transition tax is based in part on the amount of those earnings held in cash and other specified assets . this amount may change when we finalize the calculation of post-1986 foreign e & p previously deferred from u.s. federal taxation and finalize the amounts held in cash or other specified assets . no additional income taxes have been provided for any remaining undistributed foreign earnings not subject to the transition tax , or any additional outside basis difference inherent in these entities . our undistributed foreign earnings , including those subject to the transition tax , continue to be indefinitely reinvested in foreign operations , with limited exceptions related to earnings of european subsidiaries . determining the amount of unrecognized deferred tax liability related to any remaining undistributed foreign earnings not subject to the transition tax and additional outside basis difference in these entities ( i.e. , basis difference in excess of that subject to the one-time transition tax ) is not practicable . we continue to evaluate the potential effects the tax act may have on our long-term plans for capital investment across the geographies in which we operate . foreign tax credits used to offset transition tax the company is able to claim foreign tax credits against the incremental u.s. tax due on its previously deferred foreign earnings . however , we have not yet completed our calculation of the total amount of foreign taxes previously paid or accrued by the majority of our foreign subsidiaries that may be creditable against the transition tax . we expect these tax credits to generally be available to offset any cash tax liability resulting from the transition tax . other adjustments we have not yet completed our analysis of the direct and indirect implications of the tax act on the company 's tax attributes , such as tax credit carryforwards . included in the provisional tax expense is the estimated effect of our change in judgment regarding realizability of foreign tax credits and r & d credits . - 34 - story_separator_special_tag by the impact of the fire at kfab and weaker consumer market and weaker domestic demand in china . cost of goods sold cost of goods sold increased approximately $ 54.9 million for the twelve months ended december 31 , 2016 , compared to the same period last year . the increase in cost of goods sold was driven by cost of goods sold from pericom of $ 69.3 million for the twelve months ended december 31 , 2016 compared to pericom cost of goods sold of $ 10.7 million in 2015. the increase in cost of goods sold related to pericom was partially offset by the impact of the kfab fire resulting in lower costs and the related business interruption insurance recovery . as a percent of sales , cost of goods sold was 69.5 % and 70.7 % for the twelve months ended december 31 , 2016 and 2015 , respectively . excluding pericom , average unit cost decreased 1.4 % for the twelve months ended december 31 , 2016 , compared to the same period last year . including pericom , average unit cost increased 6.6 % for the twelve months ended december 31 , 2016 , compared to the same period last year . for the twelve months ended december 31 , 2016 , gross profit increased approximately 15.4 % when compared to the same period last year . gross profit margin for the twelve months ended december 31 , 2016 and 2015 was 30.5 % and 29.3 % , respectively .
| gross profit margin for the twelve month periods ended december 31 , 2017 and 2016 was 33.8 % and 30.5 % , respectively . operating expenses operating expenses for the twelve months ended december 31 , 2017 increased approximately $ 27.5 million , or 11.1 % , compared to the same period last year . selling , general and administrative expenses ( “ sg & a ” ) increased approximately $ 9.4 million . the increase in sg & a was driven by an increase in wages and benefits , partially offset by decreases in other sg & a expense categories . research and development expenses ( “ r & d ” ) increased approximately $ 7.9 million , tracking with the increase in sales . amortization of acquisition- related intangibles decreased approximately $ 1.7 million reflecting the overall reduction in the balance of intangible assets subject to amortization . during the twelve months ended december 31 , 2017 , we recognized impairment of fixed assets of $ 2.2 million , primarily related to the kfab shutdown , and also recognized restructuring costs of $ 10.1 million related to the kfab shutdown . sg & a , as a percentage of sales , was 15.9 % and 16.8 % for the twelve months ended december 31 , 2017 and 2016 , respectively . r & d , as a percentage of sales , was constant at 7.4 % for the twelve months ended december 31 , 2017 and 2016. other ( expense ) /income interest income increased for the twelve months ended december 31 , 2017 due to a higher amount of invested funds . the increase in interest expense for the twelve months ended december 31 , 2017 is due to higher interest rates on the borrowing to effect the pericom acquisition . foreign currency losses increased during the twelve months ended december 31 , 2017 due to the weakness of the u.s. dollar when compared to the currencies in the foreign countries in which we operate . these losses were partially offset by $ 1.5 million in hedging gains . - 36 - income tax provision
| 10,987 |
the increase in our net income for the year ended december 31 , 2014 , as compared to the prior year , was not as large as the increase in our income before income taxes and income from equity investees because our provision for income taxes for the year ended december 31 , 2014 , increased significantly as compared to prior years . for 2013 our benefit for income taxes was primarily the result of the $ 29,853 reversal of our valuation allowance on most of our deferred tax assets in the fourth quarter of 2013. factors affecting comparability recently acquired sites from the beginning of 2011 through december 31 , 2014 , we acquired 34 travel centers and 31 gasoline station/convenience stores . we invested $ 222,178 to acquire these 65 properties and , through december 31 , 2014 , have invested $ 124,296 to renovate and upgrade these acquired properties . we expect to invest an additional $ 41,023 to complete the renovation and upgrade of certain of the acquired properties . while the interest , depreciation , maintenance and similar expenses related to or resulting from our acquisition and ownership of these sites are reflected in our results for the periods since each acquisition , the returns we expect from these acquired properties are not yet fully reflected in our results of operations . we believe that the improvements we have made and plan to make at our recently acquired travel centers may continue to improve the financial results at these locations . typical improvements we make at acquired travel centers include adding truck repair facilities and nationally branded qsrs , paving parking lots , replacing outdated fuel dispensers , installing diesel exhaust fluid dispensing systems , changing signage , installing point of sale and other it systems and general building and cosmetic upgrades . the improvements to travel center properties we acquire are often substantial and require a long period of time to plan , design , permit and complete , and after completed then require a period of time to become part of our customers ' supply networks and produce stabilized financial results . we estimate that the travel centers we acquire generally will reach financial stabilization in approximately the third year after acquisition , but the actual result can vary widely from this estimate due to many factors , some of which are outside our control . we acquired 31 gasoline station/convenience store properties for $ 67,922 on december 16 , 2013. these gasoline stations/convenience stores are high volume fuel locations with larger interior space for merchandise and food offerings than typical convenience stores and had limited need for near term capital investment . we do not expect these gasoline stations/convenience stores to require a lengthy period to achieve stabilized financial results . 40 the table below shows the number of properties we acquired by year , the amounts we have invested or currently expect to invest through and as of december 31 , 2014 , in these properties . replace_table_token_6_th ( 1 ) includes only cash amounts paid that were recorded as property and equipment or intangible assets . excludes working capital assets and asset retirement obligation assets . ( 2 ) includes 31 gasoline stations/convenience stores acquired in december 2013. the operations at many of the 34 travel centers acquired since the beginning of 2011 have not yet reached the stabilized levels we currently expect to achieve . as of december 31 , 2014 , these travel centers have been owned by us for an average of 26 months , and the planned renovations have been completed at 24 acquired travel centers for an average of 25 months . the 31 gasoline stations/convenience stores we acquired on december 16 , 2013 , did not require significant renovations at the time we acquired them . the table below shows the gross revenues in excess of cost of goods sold and site level operating expenses for the properties we began to operate for our own account since the beginning of 2011 , whether by way of acquisition from franchisees or others or takeover of operations upon termination of a franchisee sublease , from the beginning of the period shown or the date we began to operate such property for our own account , if later . the amounts presented in the table below also reflect the other trends in our business described above , including with respect to the improved fuel gross margin . replace_table_token_7_th ( 1 ) includes 31 gasoline stations/convenience stores acquired in december 2013. summary of site counts the changes in the number of our sites and in their method of operation ( company operated , franchisee leased and operated or franchisee owned and operated ) can be significant factors influencing 41 the changes in our results of operations . the following table summarizes the changes in the composition of our business during the past three years : replace_table_token_8_th ( 1 ) includes at each period presented two travel centers we operate that are owned by a joint venture in which we own a noncontrolling interest . ( 2 ) includes at each period presented two gasoline stations/convenience stores we operate that are owned by a joint venture in which we own a noncontrolling interest . from december 31 , 2014 , through the date of this annual report , we acquired one additional travel center and 26 additional gasoline stations/convenience stores that we now operate . we currently intend to continue to selectively acquire additional travel centers and gasoline stations/convenience stores and to otherwise expand our business . fuel revenues and fuel volumes due to the price volatility of fuel products and our pricing to fuel customers , we believe that fuel revenue is not a reliable metric for analyzing our results of operations from period to period . story_separator_special_tag as a result solely of changes in fuel prices , our fuel revenue may materially increase or decrease , in both absolute amounts and on a percentage basis , without a comparable change in fuel sales volumes or in fuel gross margin . we consider fuel volumes and fuel gross margin to be better measures of comparative performance than fuel revenues . however , fuel pricing and revenues can impact our working capital requirements ; see `` liquidity and capital resources '' below . same site comparisons as part of this discussion and analysis of our operating results we refer to increases and decreases in results on a same site basis . we include a location in the same site comparisons only if we continuously operated it for the entire duration of both comparative periods presented , or , for rent and royalty revenues , if during that period the location was continuously operated by one of our franchisees . we do not exclude locations from the same site comparisons as a result of expansions in their size , capital improvements to the site or changes in the services offered . 42 story_separator_special_tag href= '' https : //www.sec.gov/archives/edgar/data/0001378453/000104746915002130/ # bg75901a_main_toc '' > site basis for 2014 improved to 51.4 % , compared to 52.0 % in 2013. the decrease in site level operating expenses as a percentage of nonfuel revenues was due primarily to certain of our expenses being fixed in nature , or otherwise not varying directly with sales , so that increases in our revenues did not result in corresponding increases in those site level operating expenses . selling , general and administrative expenses . selling , general and administrative expenses for 2014 were $ 106,823 , compared to $ 107,447 during 2013 , a decrease of $ 624 or 0.6 % . the decrease in selling , general and administrative expenses primarily was attributable to a $ 10,000 legal settlement expense in 2013 that did not recur in 2014 , and the settlement of this and other litigation early in 2014 resulted in an additional $ 3,848 reduction in legal expense in 2014 versus 2013. this decrease was largely offset by increased audit fees , personnel costs and contractor fees . audit expense increased $ 761 in connection with additional audit work in connection with the delayed filing of our annual report on form 10-k for the year ended december 31 , 2013. personnel costs increased due to annual compensation increases , an increase in share based compensation expense as result of an increase in the market price of our shares , increased headcount in support of the growth in our business , including the acquisition of the minit mart gasoline stations/convenience stores in december 2013 , and as a result of $ 508 of a planned transition bonus expense recognized and paid to certain minit mart corporate employees in connection with the acquisition of the minit mart sites . contractor fees increased $ 4,617 largely due to fees paid in connection with completing our 2013 annual and 2014 quarterly financial reporting , and fees paid in connection with improving the design , operation and documentation of our internal control over financial reporting . real estate rent expense . rent expense for 2014 , was $ 217,155 , an increase of $ 7,835 , or 3.7 % , compared to 2013 that is largely attributable to rent increases of $ 5,644 related to improvements we sold to hpt since january 1 , 2013 , and an increase of $ 934 for percentage rent recognized under the hpt leases based on increases in 2014 fuel and nonfuel revenues over base amounts at the properties leased from hpt . depreciation and amortization expense . depreciation and amortization expense for 2014 , was $ 65,584 , an increase of $ 6,656 , or 11.3 % , compared to 2013 , that primarily resulted from the acquisitions and other capital investments we completed ( and did not subsequently sell to hpt ) since january 1 , 2013. income tax provision . our provision for income taxes was $ 38,023 and a benefit of $ 26,618 for the years ended december 31 , 2014 and 2013 , respectively . the income tax provision for 2014 reflects an effective tax rate of 38.2 % which is higher than the u.s. federal statutory tax rate primarily due to the impact of state income taxes and various items recognized as expenses that are not deductible for income tax purposes , partially offset by the impact of federal tax credits and incentives . for 2013 our benefit for income taxes differed from the u.s. federal statutory tax rate primarily as a result of the reversal of our valuation allowance on most of our deferred tax assets in the fourth quarter of 2013. for further information regarding our income taxes , see note 10 to the notes to consolidated financial statements included in part iv , item 15 of this annual report . 46 results of operations ( dollars and gallons in thousands ) year ended december 31 , 2013 compared to december 31 , 2012 the following table presents changes in our operating results for the year ended december 31 , 2013 , as compared with the year ended december 31 , 2012. replace_table_token_12_th 47 the following table presents our same site operating results for the year ended december 31 , 2013 , as compared to the year ended december 31 , 2012. replace_table_token_13_th ( 1 ) includes amounts for locations that were company operated during the entirety of each of the periods presented . revenues . revenues for 2013 , were $ 7,944,731 , which represented a decrease from 2012 , of $ 50,993 , or 0.6 % , primarily resulting from a decrease in fuel revenue that was partially offset by an increase in nonfuel revenue .
| the decrease in wholesale fuel sales was primarily a result of our acquisition during the fourth quarter of 2013 of the operations of a franchised site that formerly purchased fuel from us . nonfuel revenues for 2014 , were $ 1,616,802 , an increase of $ 166,010 , or 11.4 % , compared to 2013. the majority of the change between periods resulted from increases in revenues at sites we acquired since january 1 , 2013 , but also reflected a same site nonfuel revenue increase . on a same site basis for our company operated sites , nonfuel revenues increased by $ 58,217 or 4.1 % , during 2014 , compared to 2013. we believe this same site increase is attributable to the improved results at those sites we acquired during 2011 and 2012 , as well as certain price increases and the favorable effects of certain of our marketing initiatives . rent and royalty revenues for 2014 , were $ 12,382 , a decrease of $ 305 , or 2.4 % , compared to 2013. rent and royalties decreased largely as a result of our acquisitions during 2013 of four franchise locations that we now operate , including one that we had subleased to a franchisee . this decrease was partially offset by increased rents that became effective during the second half of 2013 at the five sites we continue to sublease to franchisees and increased royalties at our continuing franchises . cost of goods sold ( excluding depreciation ) . cost of goods sold for 2014 , was $ 6,459,820 , a decrease of $ 332,084 , or 4.9 % , compared to 2013. fuel cost of goods sold for 2014 , was $ 5,720,949 , a decrease of $ 418,131 , or 6.8 % , compared to 2013. the decrease in fuel cost of goods sold primarily resulted from the same factors as described above for fuel revenue . fuel gross margin for 2014 , was $ 428,500 , compared to $ 342,172 during 2013. the fuel gross margin per gallon of
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our history our business generally represents a reorganization of the former technology , data and analytics segment of lender processing services , inc. ( `` lps '' ) , a former provider of integrated technology , data and services to the mortgage industry in the united states that fidelity national financial , inc. ( `` fnf '' ) acquired in january 2014. our business also includes the businesses of fidelity national commerce velocity , llc ( `` commerce velocity '' ) and property insight , llc ( `` property insight '' ) , two companies that were contributed to us by fnf . servicelink holdings , llc ( `` servicelink '' ) , another majority-owned subsidiary of fnf , operates the transaction services businesses of the former lps as well as fnf 's legacy servicelink businesses . we were a majority-owned subsidiary of fnf prior to the distribution as described in the `` distribution of fnf 's ownership interest and related transactions '' section below . 31 acquisition of lps by fnf and internal reorganization on january 2 , 2014 , fnf acquired lps ( the `` acquisition '' ) and , as a result , lps became an indirect , wholly-owned subsidiary of fnf . following the acquisition , on january 3 , 2014 , a series of transactions were effected ( the `` internal reorganization '' ) . see note 1 to the notes to consolidated financial statements for a more detailed discussion of the internal reorganization . initial public offering on may 26 , 2015 , we completed our initial public offering ( `` ipo '' ) in which we issued and sold 20,700,000 shares of bkfs class a common stock at a price of $ 24.50 per share . in connection with our ipo , we effected several reorganization transactions ( the `` offering reorganization '' ) . see note 1 to the notes to consolidated financial statements for a more detailed discussion of the ipo . 2016 acquisitions on may 16 , 2016 , we completed our acquisition of elynx holdings , inc. ( `` elynx '' ) , a leading lending document and data delivery platform that we now refer to as our elending business . our elending business helps clients in the financial services and real estate industries electronically capture and manage documents and associated data throughout the document lifecycle . we purchased elynx to augment our origination software business . this acquisition positions us to electronically support the full mortgage origination process . on june 22 , 2016 , we completed our acquisition of motivity solutions , inc. ( `` motivity '' ) , which provides customized mortgage business intelligence software solutions . motivity , along with our loansphere product suite , including the loansphere data hub , provides clients with deeper insights into their origination and servicing operations and portfolios . recent developments realignment of property insight effective january 1 , 2017 , property insight realigned its commercial relationship with fnf . in connection with the realignment , property insight employees responsible for title plant posting and maintenance were transferred to fnf . under the new commercial arrangement , we continue to own the title plant technology and retain sales responsibility for third parties , other than fnf . as a result of the realignment , we no longer recognize revenues or expenses related to title plant posting and maintenance , but charge fnf a license fee for use of the technology to access and maintain the title plant data . had the realignment taken place on january 1 , 2016 , our 2016 revenues and expenses would have been lower by approximately $ 30 million with essentially no effect to operating income . this transaction did not result in any gain or loss . share repurchase program during the year ended december 31 , 2017 , we repurchased approximately 1.2 million shares of bkfs class a common stock and 2.0 million shares of black knight , inc. common stock for an aggregate purchase price of $ 136.7 million , or an average of $ 42.87 per share . as of december 31 , 2017 , we had approximately 6.8 million shares remaining under our share repurchase authorization . refer to note 1 of the notes to consolidated financial statements for additional information related to our share repurchase program . on february 15 , 2018 , we repurchased 2.0 million shares of our common stock for $ 92.8 million , or at a price of $ 46.41 per share . term b loan repricing on february 27 , 2017 , we repriced our term b loan , as described in note 11 to the notes to consolidated financial statements . refer to note 11 to the notes to consolidated financial statements for additional information related to the term b loan repricing . debt refinancing and senior notes redemption on april 26 , 2017 , we refinanced our term a loan and revolving credit facility and redeemed the outstanding senior notes , as described in note 11 to the notes to consolidated financial statements . refer to note 11 to the notes to consolidated financial statements for additional information related to the debt refinancing and senior notes redemption . distribution of fnf 's ownership interest and related transactions on september 29 , 2017 , we completed a tax-free plan whereby fnf distributed all 83.3 million shares of bkfs common stock that it owned to fnf group shareholders through a series of transactions ( the `` distribution '' ) as described in note 1 of the notes to consolidated financial statements . following the closing of the transactions , shares of black knight , inc. common stock are listed on the new york stock exchange under the trading symbol “ bki ” , and began trading on october 2 , 2017. under the organizational documents of black 32 knight , inc. , the rights of the holders of shares of black knight , inc. common stock are substantially the same as the rights of former holders of bkfs class a common stock . story_separator_special_tag as a result of the distribution and related transactions , our consolidated statements of earnings will reflect a higher effective tax rate more closely aligned with other c-corporations in the u.s. and will no longer reflect net earnings attributable to noncontrolling interests . our corporate structure prior to the distribution , bkfs conducted its business through black knight financial services , llc ( `` bkfs llc '' ) and its subsidiaries . we had a sole managing member interest in bkfs llc , which granted us the exclusive authority to manage , control and operate the business and affairs of bkfs llc and its subsidiaries , pursuant to the terms of its second amended and restated limited liability company agreement ( `` llc agreement '' ) . under the terms of the llc agreement , we are authorized to manage the business of bkfs llc , including enter into contracts , manage bank accounts , hire employees and agents , incur and pay debts and expenses , merge or consolidate with other entities and pay taxes . we consolidated bkfs llc in our consolidated financial statements and reported noncontrolling interests related to the membership interests ( `` units '' ) in bkfs llc held by black knight holdings , inc. ( `` bkhi '' ) and certain affiliates of thl ( `` thl affiliates '' ) . our shareholders indirectly controlled bkfs llc through our managing member interest . fnf , through bkhi , and certain thl affiliates held units and a number of shares of bkfs class b common stock equal to the number of units held by each such owner . prior to the distribution , our corporate structure , as described above , was commonly referred to as an `` up-c '' structure , which is often used by partnerships and limited liability companies when they undertake an initial public offering . our up-c structure allowed the owners of bkfs llc to realize tax benefits associated with ownership interests in an entity that was treated as a partnership , or `` passthrough '' entity , for income tax purposes . these benefits included limiting entity level corporate taxes . because units were exchangeable for cash from bkfs llc or , at our option , shares of bkfs class a common stock , the up-c structure also provided the owners of bkfs llc potential liquidity that holders of privately held limited liability companies are not typically afforded . the owners of bkfs llc also had voting rights in black knight equal to those of holders of bkfs class a common stock through their ownership of shares of bkfs class b common stock . bkfs also held units and received the same benefits as the other holders of units on account of its ownership in an entity treated as a partnership , or passthrough entity , for income tax purposes . meanwhile , holders of bkfs class a common stock had economic and voting rights similar to those of holders of common stock of non-up-c structured public companies . generally , we received a pro-rata share of any distributions made by bkfs llc to its members , which included us , bkhi and certain thl affiliates . however , pursuant to the llc agreement , bkfs llc was required to make tax distributions to help each of the holders of the units pay taxes according to such holder 's allocable share of taxable income rather than on a pro-rata basis . additionally , tax distributions were required to be made based upon an assumed tax rate . funds used by bkfs llc to satisfy its tax distribution obligations were not available for reinvestment in our business . bkfs was a holding company and its sole asset was its interest in bkfs llc . bkfs , through its sole managing member interest , had 100 % of the voting power in bkfs llc and , through its ownership of units , had 44.5 % of the economic interests in bkfs llc immediately following the ipo . investors in bkfs held an indirect interest in bkfs llc through us . subsequent to the distribution and related transactions , bkfs llc is an indirect wholly-owned subsidiary of black knight , inc. and there are no noncontrolling interests in bkfs llc . in addition , the up-c structure is no longer in place . basis of presentation as a result of the internal reorganization , ipo and offering reorganization and distribution , and for the purposes of this `` management 's discussion and analysis of financial condition and results of operations , '' our financial position , results of operations and cash flows include : the consolidated financial position , results of operations and cash flows of black knight , inc. for the period september 30 , 2017 , the day subsequent to the distribution , through december 31 , 2017 ; the consolidated financial position , results of operations and cash flows of bkfs for the period following the completion of our ipo on may 26 , 2015 through september 29 , 2017 , the date of the distribution ; and the consolidated financial position , results of operations and cash flows of bkfs llc for the period from january 1 , 2015 through may 25 , 2015 , the day prior to the completion of our ipo . business trends and conditions general the u.s. mortgage market is large , and the loan lifecycle is complex and consists of several stages . the mortgage loan lifecycle includes origination , servicing and default . mortgages are originated to finance home purchases or refinance existing mortgages . 33 once a mortgage is originated , it is serviced on a periodic basis by mortgage servicers , which may not be the lenders that originated the mortgage . furthermore , if a mortgage experiences default , it triggers a set of multifaceted processes with an assortment of potential outcomes depending on a mix of variables .
| had the realignment taken place on january 1 , 2016 , revenues for 2016 would have been lower by $ 30.1 million . operating expenses consolidated operating expenses were $ 569.5 million in 2017 compared to $ 582.6 million in 2016 , a decrease of $ 13.1 million , or 2 % . the changes in operating expenses are discussed further at the segment level below . 41 the following table sets forth operating expenses by segment for the periods presented ( in millions ) : replace_table_token_16_th software solutions operating expenses were $ 370.8 million in 2017 compared to $ 368.0 million in 2016 , an increase of $ 2.8 million , or 1 % . the increase was primarily due to the elynx acquisition . data and analytics operating expenses were $ 130.4 million in 2017 compared to $ 151.0 million in 2016 , a decrease of $ 20.6 million , or 14 % . the decrease was primarily driven by the property insight realignment , partially offset by the motivity acquisition and the effect of costs associated with the data hub . corporate and other operating expenses were $ 68.3 million in 2017 compared to $ 63.6 million in 2016 , an increase of $ 4.7 million , or 7 % . the increase was primarily driven by higher equity-based compensation and professional fees , partially offset by lower incentive bonus accruals . depreciation and amortization consolidated depreciation and amortization was $ 206.5 million in 2017 compared to $ 208.3 million in 2016 , a decrease of $ 1.8 million , or 1 % . the changes in depreciation and amortization are discussed further at the segment level below . the following table sets forth depreciation and amortization by segment for the periods presented ( in millions ) : replace_table_token_17_th _ ( 1 ) depreciation and amortization for corporate and other primarily represents net incremental depreciation and amortization adjustments associated with the application of purchase accounting recorded in
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our tonnage carried on vessels that we operated during the twelve month period ended march 31 , 2017 decreased by 5.4 % compared to the year ended march 31 , 2016. during the twelve month period ended march 31 , 2017 , our construction aggregates tonnage hauled decreased 12.3 % , compared to the twelve month period ended march 31 , 2016 due to weaker customer demand . our coal tonnage decreased 36.2 % compared to the twelve month period ended march 31 , 2016 due to weaker customer demand and timing difference of shipments . salt tonnage 28 decreased by 22.6 % compared to the twelve month period ended march 31 , 2016 due to below average precipitation in the great lakes region during the past winter . total iron ore tons carried increased by 5 % during the year ended march 31 , 2017 compared to the year ended march 31 , 2017 due to new business wins and a customer reverting back to its traditional trade pattern . we operated fourteen vessels ( the “ operated vessels ” ) during the year ended march 31 , 2017 , compared to operating fifteen vessels during the year ended march 31 , 2016 ( excluding the m.v . manitoulin which was placed into service on november 22 , 2015 ) . we operated a total of 3,601 sailing days in the year ended march 31 , 2017 , compared to 3,911 sailing days in the prior year period . management believes that each of our operated vessels should achieve a theoretical maximum of 275 sailing days in the sailing season , assuming average weather conditions , no major repairs , incidents or vessel layups . the company 's operated vessels sailed an average of approximately 257 sailing days during the year ended march 31 , 2017 compared to an average of 241 sailing days during the year ended march 31 , 2016 . this change in sailing days was due to weaker customer demand at the start of the 2016 sailing season compared to the start of the 2017 sailing season . our operated vessels operated for 93.5 % of the theoretical maximum sailing days for the year ended march 31 , 2017 , compared to 93.4 % of the theoretical maximum sailing days for the year ended march 31 , 2016 . we also measure `` delay days , '' which we define as the lost time incurred by our vessels while in operation , and includes delays caused by inclement weather , dock delays , traffic congestion , vessel mechanical issues and other varied events . we experienced 285 delay days during the year ended march 31 , 2017 compared to 343 delay days during the year ended march 31 , 2016 . such delay days represent a lost time factor , calculated as delay days as a percentage of sailing days , of 7.9 % during the year ended march 31 , 2017 compared to 8.8 % during the year ended march 31 , 2016 . freight and related revenue per sailing day decreased to $ 30,690 per sailing day during the year ended march 31 , 2017 compared to $ 31,601 per sailing day during the year ended march 31 , 2016 . this revenue decrease was primarily due to a change in the mix of cargos carried , partially offset by reduced delay days . on a constant currency basis , freight and related revenue per sailing day decreased $ 217 per sailing day during the year ended march 31 , 2017 compared to the year ended march 31 , 2016 . we had no outside voyage charter revenue in the year ended march 31 , 2017 compared to $ 13.3 million during the year ended march 31 , 2016 . we have transferred tonnage carried on outside chartered vessels during the 2015 sailing season to our newest vessel , which was placed into service in november 2015. our customer contracts have fuel surcharge provisions whereby changes in our fuel costs are passed on to our customers . fuel and other surcharges decreased $ 6.6 million , or 57.3 % , to $ 4.9 million during the year ended march 31 , 2017 compared to $ 11.5 million during the year ended march 31 , 2016 . fuel and other surcharges per sailing day decreased by $ 1,582 , or 53.6 % , to $ 1,370 per sailing day during the year ended march 31 , 2017 compared to $ 2,952 per sailing day during the year ended march 31 , 2016 . these decreases were primarily attributable to reduced fuel prices during the year ended march 31 , 2017 compared to the year ended march 31 , 2016 . on a constant currency basis , fuel and other surcharges decreased 57.0 % or $ 6.6 million , during the year ended march 31 , 2017 compared to the year ended march 31 , 2016 . vessel operating expenses decreased $ 16.2 million , or 19.4 % , to $ 67.2 million during the year ended march 31 , 2017 compared to $ 83.4 million during the year ended march 31 , 2016 . the decrease was primarily due to reduced sailing days , reduced fuel prices and operating efficiencies as a result of cost efficiency initiatives undertaken during the year ended march 31 , 2017 compared to the year ended march 31 , 2016 . vessel operating expenses per sailing day decreased $ 2,657 , or 12.5 % , to $ 18,658 per sailing day during the year ended march 31 , 2017 from $ 21,315 per sailing day during the year ended march 31 , 2016 . on a constant currency basis , vessel operating expenses decreased 18.9 % , or $ 15.8 million , during the year ended march 31 , 2017 compared to the year ended march 31 , 2016 . repairs and maintenance expenses , which primarily consist of expensed winter work , were relatively flat at $ 5.9 million during the year ended march 31 , 2017 . story_separator_special_tag repairs and maintenance expenses per sailing day increased $ 151 to $ 1,647 per sailing day during the year ended march 31 , 2017 compared to $ 1,496 per sailing day during the year ended march 31 , 2016. on a constant currency basis , repairs and maintenance expenses increased $ 115 thousand during the year ended march 31 , 2017 compared to the year ended march 31 , 2016 . our general and administrative expenses were $ 15.5 million during the year ended march 31 , 2017 compared to $ 13.9 million during the year ended march 31 , 2016 . approximately $ 0.6 million of the increase in general and administrative expenses relates to a one-time third-party strategic review to evaluate a number of capital allocation and cost reduction opportunities and to one time fees and expenses associated with obtaining waivers from our lenders under our credit facilities . the remainder of the increase is attributable to duplicative headcount costs associated with the streamlining of certain functions , locations and the 29 management structure to support our business . excluding these one-time charges , compensation and benefits expenses increased modestly . our general and administrative expenses equaled 14.0 % and 11.3 % of freight and related revenue for the years ended march 31 , 2017 and march 31 , 2016 , respectively . in connection with cost-reduction and operating efficiency initiatives , which primarily include the streamlining of certain functions , locations and the management structure to support the business , and implementing the necessary system changes to support these initiatives , we recorded expenses of $ 2,375 as restructuring costs . we believe that this initiative has been completed . we expect to realize the benefits of our restructuring costs through lower costs and increased operating efficiencies in future periods . approximately 63 % of the restructuring charge relates to contractual severance payments to our former executive vice chairman and president of our subsidiaries , lower lakes towing and grand river navigation . depreciation expense was $ 20.9 million during the year ended march 31 , 2017 and $ 18.9 million for the year ended march 31 , 2016 . this increase of $ 2.0 million was primarily attributable to winter 2016 capital expenditures and depreciation attributable to our newest vessel that was placed in service in november 2015. amortization of drydock costs was $ 3.1 million during the year ended march 31 , 2017 compared to $ 3.5 million for the year ended march 31 , 2016 . the company amortized the deferred drydock costs of eleven vessels during the year ended march 31 , 2017 compared to thirteen vessels during the year ended march 31 , 2016 . gain on foreign exchange during the year ended march 31 , 2017 was $ 2.1 million compared to a gain of $ 0.1 million during the year ended march 31 , 2016 . gain or loss on foreign exchange primarily relates to a translation of $ 41.6 million usd denominated debt incurred and carried on the balance sheet of the canadian subsidiary and a foreign currency hedge related to the debt . as of june 30 , 2016 , we determined that our smallest carrying capacity canadian flag bulk carrier was unlikely to generate a sufficient long term return on capital given the operating and capitalized expenses necessary to continue operating the vessel . as a result , we retired this vessel as of june 30 , 2016. we also determined that the carrying value of the vessel is greater than the fair value based on the price in the international market of similar vessels and scrap prices and hence we recorded impairment charges of $ 1.9 million including write-off of unamortized drydock costs . the operating loss of the vessel , included in the consolidated statement of operations for the year ended march 31 , 2017 was $ 107 thousand versus operating income of $ 0.9 million for the year ended march 31 , 2016. as a result of the items described above , operating loss during the year ended march 31 , 2017 was $ 0.3 million compared to operating income of $ 8.4 million during the year ended march 31 , 2016 . operating income plus depreciation , amortization of drydock costs , amortization of intangibles , ( gain ) loss on foreign exchange , one-time equity based severance costs , restructuring charges , and impairment charges on retired assets decreased $ 5.6 million , or 17.2 % , to $ 26.8 million during the year ended march 31 , 2017 from $ 32.4 million during the year ended march 31 , 2016 . interest expense , which is net of capitalized interest and includes $ 5.1 million of amortization of deferred financing costs , increased by $ 7.0 million or 56.2 % to $ 19.5 million during the year ended march 31 , 2017 from $ 12.5 million during the year ended march 31 , 2016 . this increase in interest expense was primarily attributable to accelerated amortization of deferred financing costs of $ 3.8 million related to second lien debt , additional pay-in-kind interest of $ 1.0 million related to the first quarter covenant breach of our credit facilities and a higher average debt balance compared to the year ended march 31 , 2016 related to borrowing for the new vessel . there was no capitalized interest for the year ended march 31 , 2017 versus $ 1.2 million for the year ended march 31 , 2016. cash interest expense during the year ended march 31 , 2017 equaled $ 13.4 million compared to $ 12.3 million for the year ended march 31 , 2016 . our loss before income taxes was $ 19.7 million during the year ended march 31 , 2017 compared to a loss of $ 4.0 million during the year ended march 31 , 2016 .
| lower lakes towing was organized in march 1994 under the laws of canada to provide marine transportation services to dry bulk goods suppliers and purchasers operating in ports on the great lakes . lower lakes has grown from its origin as a small tug and barge operator to a full-service shipping company with a combined fleet of fifteen cargo-carrying vessels operating in canada and the united states . we have grown to become one of the largest bulk shipping companies operating on the great lakes and a leading service provider in the river class market segment . we transport construction aggregates , salt , grain , coal , iron ore and other dry bulk commodities for customers in the construction , electric utility , food and integrated steel industries . we believe that lower lakes is the only company providing significant domestic port-to-port services to both canada and the united states in the great lakes region . lower lakes maintains this operating flexibility by operating both u.s. and canadian-flagged vessels in compliance with the shipping act , 1916 , and the merchant marine act , 1920 , commonly referred to as the jones act in the u.s. and the coasting trade act in canada , respectively . lower lakes ' fleet consists of six self-unloading bulk carriers and three conventional bulk carriers in canada ( excluding a retired vessel ) and six self-unloading bulk carriers in the u.s. , including three articulated tug and barge units . lower lakes towing owns ten canadian vessels . lower lakes transportation time charters the six u.s. vessels , including the three tug and barge units , from grand river . with the exception of two of the articulated tug and barge units ( which grand river bareboat charters from black creek ) , grand river owns the vessels that it time charters to lower lakes transportation . 25 vessel acquisition and retirement on march 11 , 2014 , lower lakes ( 17 ) acquired the lalandia swan from uni-tankers m/t ( `` lalandia swan '' ) for a purchase price of $ 7.0 million . the lalandia swan was a danish flagged chemical tanker that was converted with a new forebody into a canadian flagged river class self-unloader vessel . after conversion to
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— in december 2016 , the company completed the underwritten public offering of 2,135,000 shares of common stock at a public offering price of $ 41.50 per share resulting in net proceeds to the company of $ 84,105 . 37 — in august 2016 , the company completed the public offering and sale of $ 60,000 of the company 's 5.00 % fixed-to-floating rate subordinated notes due september 1 , 2026 , and $ 40,000 of its 5.50 % fixed-to-floating rate subordinated notes due september 1 , 2031 ( collectively , the `` notes '' ) . the sale of the notes resulted in net proceeds to the company of $ 98,167 and qualify as tier 2 capital . a portion of the proceeds was used to prepay approximately $ 38,900 in borrowings from the fhlb resulting in a penalty charge of approximately $ 2,200. together with other penalties incurred in the prepayment of other borrowings in 2016 , the penalty had an impact to diluted eps of $ 0.04 . — net interest income increased 11.93 % to $ 336,897 for 2017 as compared to $ 300,991 for 2016 ; net interest income was $ 241,358 for 2015. interest income on a tax equivalent basis increased 14.11 % to $ 383,596 for 2017 from $ 336,149 for 2016. the increase since 2015 was due primarily to the increase in average earnings assets from the acquisitions of metropolitan and keyworth , as well as the full-year impact of the earning assets acquired in connection with the heritage acquisition completed in july 2015 , and loan growth in the company 's non purchased loan portfolio as well as an increase in loan yields due to higher levels of accretable yield from the purchased loan portfolios . the increases to the target federal funds rate implemented by the federal reserve board in each of december 2015 , december 2016 , and march , june and december 2017 resulted in higher yields on loans in our portfolio that earn a variable rate of interest . the company was able to manage the cost of its deposits with these interest rate increases such that interest expense increased at a much lower rate during this time . — net charge-offs as a percentage of average loans decreased to 0.06 % in 2017 compared to 0.12 % in 2016. net charge-offs as a percentage of average loans was 0.10 % in 2015. the provision for loan losses was $ 7,550 for 2017 compared to $ 7,530 for 2016 and $ 4,750 for 2015 . — noninterest income was $ 132,140 for 2017 compared to $ 137,415 for 2016 and $ 108,270 for 2015. the overall growth in noninterest income since 2015 is primarily attributable to the metropolitan and keyworth acquisitions , as well as the twelve-month impact of the heritage acquisition , and organic growth in our mortgage division . the decrease in noninterest income from 2016 to 2017 is primarily attributable to a year-over-year decrease in mortgage banking income , which was driven by lower mortgage loan originations . — noninterest expense was $ 301,618 , $ 295,099 and $ 245,114 for 2017 , 2016 and 2015 , respectively . the increase in noninterest expense and its related components since 2015 is primarily attributable to the metropolitan and keyworth acquisitions , as well as the twelve-month impact of the heritage acquisition . the company recorded merger expense related to its recent acquisitions of $ 10,378 , $ 4,023 and $ 11,614 in 2017 , 2016 and 2015 , respectively , which impacted diluted eps in each year by $ 0.15 , $ 0.06 and $ 0.23 , respectively . — loans , net of unearned income , were $ 7,620,322 at december 31 , 2017 compared to $ 6,202,709 in 2016 and $ 5,413,462 in 2015. excluding purchased loans of $ 2,031,766 at december 31 , 2017 , the portfolio increased by $ 874,984 , or 18.56 % , from december 31 , 2016 . — deposits totaled $ 7,921,075 at december 31 , 2017 compared to $ 7,059,137 at december 31 , 2016 and $ 6,218,602 at december 31 , 2015. the growth in deposits from 2016 to 2017 was partially attributable to the acquisition of metropolitan , which added $ 942,084 in deposits at acquisition . noninterest bearing deposits averaged $ 1,724,834 , or 22.64 % of average deposits , for 2017 compared to $ 1,467,881 , or 22.00 % of average deposits , for 2016 and $ 1,125,969 , or 20.29 % of average deposits , for 2015. a historical look at key performance indicators is presented below . replace_table_token_11_th ( 1 ) these performance indicators are non-gaap financial measures . a reconciliation of these financial measures from gaap to non-gaap can be found under the “ non-gaap financial measures ” heading below . 38 critical accounting policies our financial statements are prepared using accounting estimates for various accounts . wherever feasible , we utilize third-party information to provide management with estimates . although independent third parties are engaged to assist us in the estimation process , management evaluates the results , challenges assumptions and considers other factors which could impact these estimates . we monitor the status of proposed and newly issued accounting standards to evaluate the impact on our financial condition and results of operations . our accounting policies , including the impact of newly issued accounting standards , are discussed in further detail in note 1 , “ significant accounting policies , ” in the notes to consolidated financial statements in item 8 , financial statements and supplementary data . the following discussion presents some of the more significant estimates used in preparing our financial statements . allowance for loan losses the accounting policy most important to the presentation of our financial statements relates to the allowance for loan losses and the related provision for loan losses . the allowance for loan losses is available to absorb probable credit losses inherent in the entire loan portfolio . story_separator_special_tag the appropriate level of the allowance is based on an ongoing analysis of the loan portfolio and represents an amount that management deems adequate to provide for inherent losses , including collective impairment as recognized under the financial accounting standards board accounting standards codification topic ( “ asc ” ) 450 , “ contingencies ” ( “ asc 450 ” ) . collective impairment is calculated based on loans grouped by grade . another component of the allowance is losses on loans assessed as impaired under asc 310 , “ receivables ” ( “ asc 310 ” ) . the balance of the loans determined to be impaired under asc 310 and the related allowance is included in management 's estimation and analysis of the allowance for loan losses . the determination of the appropriate level of the allowance is sensitive to a variety of internal factors , primarily historical loss ratios and assigned risk ratings , and external factors , primarily the economic environment . while no one factor is dominant , each could cause actual loan losses to differ materially from originally estimated amounts . for more information about the considerations in establishing the allowance for loan losses and our loan policies and procedures for addressing credit risk , please refer to the disclosures in this item under the heading “ risk management – credit risk and allowance for loan losses. ” certain loans purchased in acquisitions or mergers are accounted for under asc 310-30 , “ loans and debt securities acquired with deteriorated credit quality ” ( “ asc 310-30 ” ) . asc 310-30 prohibits the carryover of an allowance for loan losses for loans purchased in which the acquirer concludes that it will not collect the contractual amount . as a result , these loans are carried at values which represent management 's estimate of the future cash flows of these loans . increases in expected cash flows to be collected from the contractual cash flows are required to be recognized as an adjustment of the loan 's yield over its remaining life , while decreases in expected cash flows are required to be recognized as an impairment . a more detailed discussion of loans accounted for under asc 310-30 , which were acquired in connection with our mergers , including our acquisitions of metropolitan , keyworth and heritage , is set forth below under the heading “ risk management – credit risk and allowance for loan losses ” and in note 5 , “ purchased loans ” in the notes to consolidated financial statements in item 8 , financial statements and supplementary data . other-than-temporary-impairment on investment securities on a quarterly basis , we evaluate our investment portfolio for other-than-temporary-impairment ( “ otti ” ) in accordance with asc 320 , “ investments – debt and equity securities. ” an investment security is considered impaired if the fair value of the security is less than its cost or amortized cost basis . impairment is considered to be other-than-temporary if the company intends to sell the investment security or if the company does not expect to recover the entire amortized cost basis of the security before the company is required to sell the security or the security 's maturity . when impairment of an equity security is considered to be other-than-temporary , the security is written down to its fair value and an impairment loss is recorded in earnings . when impairment of a debt security is considered to be other-than-temporary , the security is written down to its fair value . the amount of otti recorded as a loss in earnings depends on whether we intend to sell the debt security and whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis . if we intend to sell the debt security or more likely than not will be required to sell the security before recovery of its amortized cost basis , the entire difference between the security 's amortized cost basis and its fair value is recorded as an impairment loss in earnings . if we do not intend to sell the debt security and it is not more likely than not that we will be required to sell the security before recovery of its amortized cost basis , otti is separated into the amount representing credit loss and the amount related to all other market factors . the amount related to credit loss is recognized in earnings . the amount related to other market factors is recognized in other comprehensive income , net of applicable taxes . the amount of otti recorded in earnings as a credit loss is dependent upon management 's estimate of discounted future cash flows expected from the investment security . the difference between the expected cash flows and the amortized cost basis of the security is considered to be credit loss . the remaining difference between the fair value and the amortized cost basis of the security is considered to be related to all other market factors . our estimate of discounted future cash flows incorporates a number of 39 assumptions based on both qualitative and quantitative factors . performance indicators of the security 's underlying assets , including credit ratings and current and projected default and deferral rates , as well as the credit quality and capital ratios of the issuing institutions are considered in the analysis . changes in these assumptions could impact the amount of otti recognized as a credit loss in earnings . for additional information regarding the evaluation of our securities portfolio for otti , please refer to note 1 , “ significant accounting policies , ” and note 3 , “ securities , ” in the notes to consolidated financial statements in item 8 , financial statements and supplementary data . intangible assets our intangible assets consist primarily of goodwill , core deposit intangibles , and customer relationship intangibles . goodwill arises from business combinations and represents the value attributable to unidentifiable intangible elements of the business acquired .
| the increases to the target federal funds rate implemented by the federal reserve board in each of december 2015 , december 2016 , and march , june and december 2017 resulted in higher yields on loans in our portfolio that earn a variable rate of interest . net interest margin , the tax equivalent net yield on earning assets , was 4.16 % for 2017 compared to 4.22 % for 2016 and 4.16 % for 2015 . net interest margin , excluding the impact from interest income collected on problem loans and purchase accounting adjustments on purchased loans , was 3.78 % for 2017 compared to 3.76 % for 2016 and 3.79 % for 2015 . the following table presents the reconciliation of these non-gaap measures to reported net interest margin for the periods presented . replace_table_token_25_th ( 1 ) includes additional interest income recognized in connection with the acceleration of paydowns and payoffs from purchased loans of $ 10,932 , $ 14,555 and $ 9,201 for the twelve months ended december 31 , 2017 , 2016 and 2015 , respectively , which increased net interest margin by 13 basis points , 20 basis points and 15 basis points for the same periods , respectively . 51 net interest margin and net interest income are influenced by internal and external factors . internal factors include balance sheet changes on both volume and mix and pricing decisions . external factors include changes in market interest rates , competition and the shape of the interest rate yield curve . interest income , on a tax equivalent basis , was $ 383,596 for 2017 compared to $ 336,149 for 2016 , an increase of $ 47,447 . interest income , on a tax equivalent basis , was $ 270,278 for 2015 . this increase in interest income , on a tax equivalent basis , is due primarily to the additional earning assets from the metropolitan and keyworth acquisitions and loan growth in the company 's non purchased loan portfolio as well as an overall increase in the yield on the company 's earning assets due to replacing maturing assets with assets earning similar or higher
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we have a 150 -year heritage in the coatings industry and are known for manufacturing high-quality products with well-recognized brands supported by market-leading technologies and customer service . our diverse global footprint of 36 manufacturing facilities , four technology centers , 46 customer training centers and approximately 12,800 employees allows us to meet the needs of customers in over 130 countries . we serve our customers through an extensive sales force and technical support organization , as well as through over 4,000 independent , locally based distributors . we operate our business in two segments , performance coatings and transportation coatings . our segments are based on the type and concentration of customers served , service requirements , methods of distribution and major product lines . through our performance coatings segment we provide high-quality liquid and powder coatings solutions to a fragmented and local customer base . we are one of only a few suppliers with the technology to provide precise color matching and highly durable coatings systems . the end-markets within this segment are refinish and industrial . through our transportation coatings segment we provide advanced coating technologies to oems of light and commercial vehicles . these increasingly global customers require a high level of technical support coupled with cost-effective , environmentally responsible coatings systems that can be applied with a high degree of precision , consistency and speed . the end-markets within this segment are light vehicle and commercial vehicle . 37 in november 2014 , we priced our initial public offering ( the `` offering '' , or the `` ipo '' ) , in which certain selling shareholders affiliated with carlyle sold 57,500,000 common shares at a price of $ 19.50 per share . in april 2015 , we completed a secondary offering ( the `` secondary offering '' ) in which carlyle sold an aggregate of 46,000,000 common shares at a price of $ 28.00 per share . in addition , carlyle also sold 20,000,000 common shares in a private placement to an affiliate of berkshire hathaway inc. ( together with the secondary offering , the `` april 2015 secondary offerings '' ) for $ 28.00 per share . following the april 2015 secondary offerings , carlyle ceased to control a majority of our common shares . in august 2015 , we completed a secondary offering ( together with the ipo and the april 2015 secondary offerings , the `` carlyle offerings '' ) in which carlyle sold an aggregate of 34,500,000 common shares at a public offering price of $ 29.75 per share . we did not receive any proceeds from the sale of common shares in any of the carlyle offerings . business highlights and trends from 2012 to 2014 , we managed the transition of ownership and operational separation resulting from the planned divestiture of our business by dupont and ultimately the acquisition , including significant changes to our senior leadership team . during 2015 , we continued to focus on our productivity initiatives , capacity expansions , and operational excellence . since 2012 , our adjusted ebitda has grown at a 15 % cagr primarily as the result of several strategic initiatives focused on margin improvement . in addition to regular price increases in our refinish end-market , these initiatives included selective price increases in other end-markets , reducing sales with lower margin customers and productivity improvements , which collectively drove adjusted ebitda growth in both of our segments . from 2012 to 2014 , our net sales increased at a 2 % cagr with net sales growth in both our transportation coatings segment and our performance coatings segment . net sales in our transportation coatings segment grew at a 1 % cagr , driven by consistent net sales in our light vehicle end-market and increasing sales in our commercial vehicle end-market , primarily as a result of increased vehicle production in north america and asia pacific and improvements in average selling price , driven by new product and color introductions . net sales in our performance coatings segment increased at a 2 % cagr over the same period as a result of higher average selling prices , partially offset by lower volumes in both our refinish and industrial end-markets in developed markets as well as unfavorable impacts of currency exchange . in emea , volumes declined as a result of a difficult economic environment . in north america , our lack of participation in the mso market prior to the acquisition had a negative impact on our volumes as mso body shops increased the number of vehicles serviced at the expense of independent body shop customers . these factors in developed markets were partially offset by continued refinish net sales growth in the emerging markets . our net sales decreased approximately 6.3 % for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 , primarily due to a decline of approximately 11.6 % from unfavorable currency translation . excluding the impact of currency translation , our net sales increased approximately 5.3 % as a result of an increase in net sales volumes in all regions and increases in average selling prices primarily in latin america . the following trends have impacted our segment and end-market sales performance for the year ended december 31 , 2015 : performance coatings : net sales excluding currency translation increased approximately 5.2 % driven by increases in average selling price within our refinish end-market , particularly in latin america , and increased volumes in both our refinish and industrial end-markets . transportation coatings : net sales excluding currency translation increased approximately 5.4 % driven primarily by volume growth in both our light vehicle and commercial vehicle end-markets from new business wins and increased vehicle builds , particularly in north america and asia pacific . since the acquisition , we have implemented numerous initiatives to reduce our fixed and variable costs that have improved our adjusted ebitda margin . story_separator_special_tag examples include transitioning our it systems to more cost-effective solutions that better meet our needs as an independent company , developing a global procurement organization to reduce procurement costs and investing in a european manufacturing re-alignment to position the region for profitable growth . additionally in 2015 , we commenced a new `` axalta way '' initiative which focuses on commercial alignment and cost reduction . these initiatives are contributing to our financial results and we believe they will continue to drive profitability improvements over the next several years . 38 our business serves four end-markets globally as follows : replace_table_token_4_th acquisition accounting we allocated the purchase price paid to acquire the dpc business to the acquired assets and liabilities assumed based on their respective estimated fair value as of the acquisition date . the application of acquisition accounting resulted in an increase in amortization and depreciation expense relating to our acquired intangible assets and property , plant and equipment . in addition to the increase in the net carrying value of property , plant and equipment , we revised the remaining depreciable lives of property , plant and equipment to reflect the estimated remaining useful lives for purposes of calculating periodic depreciation expense . we adjusted the carrying values of the joint ventures to reflect their estimated fair values at the date of purchase . we adjusted the value of inventory to its estimated fair value , which increased the costs recognized upon the sale of this acquired inventory . we also provided for deferred income taxes for the future tax consequences of acquisition date basis differences between the carrying amounts of assets and liabilities utilized for financial reporting purposes and the respective amounts used for income tax purposes . the excess of the purchase price over the estimated fair value of assets and liabilities was assigned to goodwill , which is not amortized for accounting purposes but is subject to testing for impairment at least annually . see note 5 to our consolidated and combined financial statements included elsewhere in this annual report on form 10-k for further discussion on the acquisition . factors affecting our operating results the following discussion sets forth certain components of our statements of operations as well as factors that impact those items . net sales we generate revenue from the sale of our products across all major geographic areas . our net sales include total sales less estimates for returns and price allowances . price allowances include discounts for prompt payment as well as volume-based incentives . our overall net sales are generally impacted by the following factors : fluctuations in overall economic activity within the geographic markets in which we operate ; underlying growth in one or more of our end-markets , either worldwide or in particular geographies in which we operate ; the type of products used within existing customer applications , or the development of new applications requiring products similar to ours ; changes in product sales prices ( including volume discounts and cash discounts for prompt payment ) ; changes in the level of competition faced by our products , including price competition and the launch of new products by competitors ; our ability to successfully develop and launch new products and applications ; and fluctuations in foreign exchange rates . while the factors described above impact net sales in each of our operating segments , the impact of these factors on our operating segments can differ , as described below . for more information about risks relating to our business , see part i , item 1a , `` risk factors—risks related to our business . '' 39 other revenue other revenue consists primarily of consulting and other service revenue and royalty income . cost of goods sold ( `` cost of sales '' ) our cost of sales consists principally of the following : production materials costs . we purchase a significant amount of the materials used in production on a global lowest-cost basis . employee costs . these include the compensation and benefit costs for employees involved in our manufacturing operations . these costs generally increase on an aggregate basis as production volumes increase and may decline as a percent of net sales as a result of economies of scale associated with higher production volumes . depreciation expense . property , plant and equipment are stated at cost and depreciated or amortized on a straight-line basis over their estimated useful lives . property , plant and equipment acquired through the acquisition were recorded at their estimated fair value on the acquisition date resulting in a new cost basis for accounting purposes . other . our remaining cost of sales consists of freight costs , warehousing expenses , purchasing costs , costs associated with closing or idling of production facilities , functional costs supporting manufacturing , product claims and other general manufacturing expenses , such as expenses for utilities and energy consumption . the main factors that influence our cost of goods sold as a percentage of net sales include : changes in the price of raw materials ; production volumes ; the implementation of cost control measures aimed at improving productivity , including reduction of fixed production costs , refinements in inventory management and the coordination of purchasing within each subsidiary and at the business level ; and fluctuations in foreign exchange rates . selling , general and administrative expenses our selling , general and administrative expense consists of all expenditures incurred in connection with the sales and marketing of our products , as well as administrative overhead costs , including : compensation and benefit costs for management , sales personnel and administrative staff , including share-based compensation expense . expenses relating to our sales personnel increase or decrease principally with changes in sales volume due to the need to increase or decrease sales personnel to meet changes in demand . expenses relating to administrative personnel generally do not increase or decrease directly with changes in sales volume ; and depreciation , advertising and other selling expenses , such as expenses incurred in connection with travel and communications .
| % . cost of sales cost of sales decreased $ 299.9 million , or 10.4 % , to $ 2,597.3 million for the year ended december 31 , 2015 compared to $ 2,897.2 million for the year ended december 31 , 2014 . the decrease for the year ended december 31 , 2015 compared to the year ended december 31 , 2014 resulted primarily from a 9.4 % decrease associated with currency exchange due to the impact of the weakening euro and certain currencies within latin america and asia . the decrease from currency translation was slightly offset by higher volumes of 3.9 % , as well as the impacts of stock-based compensation resulting primarily from the impact of the accelerated vesting of all outstanding stock options issued under the 2013 plan . cost of sales as a percentage of net sales decreased from 66.4 % for the year ended december 31 , 2014 to 63.5 % for the year ended december 31 , 2015 primarily as a result of reductions associated with our cost-savings initiatives as well as lower raw material prices . 44 selling , general and administrative expenses selling , general and administrative expenses decreased $ 76.7 million , or 7.7 % , to $ 914.8 million for the year ended december 31 , 2015 compared to $ 991.5 million for the year ended december 31 , 2014 . selling , general and administrative expenses for the year ended december 31 , 2015 included $ 64.4 million of costs related to our 2015 cost-savings initiatives as compared to $ 127.1 million of costs for the year ended december 31 , 2014 associated with our transition-related activities and cost-savings initiatives , resulting in a decrease of $ 62.7 million over the comparable period . in addition , favorable impacts of currency exchange during the year ended december 31 , 2015 contributed to an approximately 10.4 % reduction in selling , general and administrative expenses due to
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net income totaled approximately $ 95.8 million in 2012 , or $ 3.51 per diluted share , compared to net income of $ 106.4 million , or $ 3.84 per diluted share , in 2011. net income in 2010 totaled approximately $ 115.0 million , or $ 4.07 per diluted share . looking forward factors that will affect our future performance include the impact of several recently-introduced retail food products , as well as the expansion of existing product lines with current customers or into new geographic markets . we will also continue to review acquisition opportunities within the specialty foods segment that are consistent with our growth strategy and represent good value or otherwise provide significant strategic benefits . however , unsettled economic conditions affecting consumer and retailer buying patterns , as well as recent drought conditions adversely affecting domestic crop yields , are among the many influences that may impact our ability to improve sales and operating margins in the coming year . within our specialty foods segment , we anticipate that our overall material input costs should begin the year somewhat below the comparable 2012 levels . it is possible that future changes in the economy and regulatory environment could cause increases in these costs . to help offset or stabilize the impact of such increases , we have historically pursued various pricing actions and operational strategies that we believe will aid our future results . for example , as part of our cost reduction efforts , we consolidated our wilson , new york and atlanta , georgia production operations into our other existing facilities in the second quarter of 2010 and early 2009 , respectively . further , the 2011 expansion of our frozen roll capacity has improved , and is expected to further improve , production throughput . we are also continuing to limit some of our exposure to volatile swings in food commodity costs through a structured purchasing program for certain future requirements . 18 with respect to our glassware and candles segment , in 2012 we experienced lower sales levels , especially for holiday products , as some lower-margin business was not retained . looking forward to 2013 influences , we expect growth in our seasonal sales and higher production levels . for a more-detailed discussion of the effect of commodity costs , see the impact of inflation section of this md & a below . in order to ensure that our capitalization is adequate to support our future internal growth prospects , acquire food businesses consistent with our strategic goals , and maintain cash returns to our shareholders through cash dividends and share repurchases , we will need to maintain sufficient flexibility in our future capital structure . we will continue to reassess our allocation of capital periodically to ensure that we maintain adequate operating flexibility while providing appropriate levels of cash returns to our shareholders , whether through share repurchases or cash dividends , including special dividends , if appropriate . story_separator_special_tag size= '' 2 '' style= '' font-family : times new roman '' > interest income and other was income of less than $ 0.1 million , approximately $ 0.1 million and less than $ 0.1 million in 2012 , 2011 and 2010 , respectively . income before income taxes as affected by the factors discussed above , our income before income taxes for 2012 of approximately $ 146.0 million decreased 10 % from the 2011 total of $ 161.5 million . the 2010 total income before income taxes was approximately $ 175.1 million . our effective tax rate was 34.4 % , 34.1 % and 34.4 % in 2012 , 2011 and 2010 , respectively . net income net income for 2012 of approximately $ 95.8 million decreased from 2011 net income of $ 106.4 million . net income was approximately $ 115.0 million in 2010. diluted net income per share totaled approximately $ 3.51 in 2012 , a 9 % decrease from the prior-year total of $ 3.84. the latter amount was 6 % lower than 2010 diluted earnings per share of $ 4.07. income per share in each of the last three years has been beneficially affected by share repurchases , which have totaled approximately $ 55.8 million over the three-year period ended june 30 , 2012. segment review specialty foods during 2012 , net sales of the specialty foods segment set a new record level , surpassing the previous record set in 2011. net sales for 2012 totaled approximately $ 988.9 million , an increase from the 2011 total of $ 922.9 million . sales for 2011 increased 3 % from the 2010 total of approximately $ 893.3 million . operating income of approximately $ 151.5 million decreased 2 % from the 2011 level of $ 155.2 million . comparatively higher costs for raw materials and freight were primarily responsible for the lower level of operating income . the percentage of retail customer sales within the segment was approximately 52 % during 2012 and 2011 , compared to 53 % in 2010. in 2012 , net sales of the specialty foods segment increased approximately 7 % . higher product pricing totaled approximately 4 % of segment net sales . the retail sales increase of over 5 % also reflected the incremental benefit from some recently introduced food products . the segment 's foodservice sales increased approximately 9 % on expanded volumes associated with programs among existing customers . in 2011 , net sales of the specialty foods segment increased by approximately 3 % . contribution from higher pricing was 21 approximately 1 % of net sales . the segment 's foodservice net sales rose approximately 9 % in 2011 on increased volumes , particularly from new programs with existing large chain restaurants , and higher pricing . retail net sales declined approximately 1 % in 2011 as influenced by the prior year rationalization of some product lines associated with the mid-year 2010 closing of one of our dressing facilities . story_separator_special_tag also , sales of produce dips declined , reflecting a weaker category and the loss of placement for certain products at one of our customers . mitigating these 2011 declines were increased retail sales of frozen rolls and the success of several recently-introduced products . operating income of the specialty foods segment in 2012 totaled approximately $ 151.5 million , a 2 % decrease from the 2011 level of $ 155.2 million . the 2011 level decreased 12 % from the 2010 record level of $ 176.2 million . the 2012 decrease reflected a somewhat less favorable sales mix , as well as comparatively higher costs for a wide variety of raw materials ( especially for soybean oil and flour ) and freight , as partially offset by higher pricing . we estimate that higher material costs in 2012 adversely affected comparative results by approximately 5 % of segment net sales . the 2011 decrease reflected broadly higher ingredient and freight costs , a less favorable sales mix and increased marketing costs . we estimate that higher material costs in 2011 adversely affected the segment 's comparative results by approximately 3 % of net sales . segment review glassware and candles glassware and candles segment net sales totaled approximately $ 142.4 million during 2012 , as compared to $ 167.1 million in 2011 and $ 163.4 million in 2010. the 2012 decrease primarily reflected lower candle volumes . in 2012 , we exited certain lower-margin business , including some seasonal candle programs . higher pricing helped to offset some of the 2012 volume declines . the 2011 increase reflected higher candle sales volumes , mainly product placement into new accounts that began in the fourth quarter of 2010. the segment recorded operating income of approximately $ 2.1 million in 2012 , $ 3.8 million in 2011 and $ 9.4 million in 2010. the 2012 decrease reflected higher wax costs , lower sales and reduced production levels . these factors were somewhat mitigated by modestly higher pricing and an improved sales mix . in 2011 , despite the benefits of achieving higher sales volumes , operating results were adversely affected by higher wax costs and , to a lesser extent , lower production volumes . we estimate that higher wax costs in the glassware and candles segment adversely affected the segment 's comparative results in 2012 by over 1 % of net sales , and by approximately 5 % of 2011 net sales compared to 2010. corporate expenses the 2012 corporate expenses totaled approximately $ 10.3 million as compared to $ 12.0 million in 2011 and $ 11.4 million in 2010. the 2012 decrease reflected lower expenses related to real estate available for sale . the increase in expenses in 2011 from 2010 related to increased professional fees and personnel related costs . financial condition liquidity and capital resources in order to ensure that our capitalization is adequate to support our future internal growth prospects , acquire food businesses consistent with our strategic goals , and maintain cash returns to our shareholders through cash dividends and share repurchases , we will need to maintain sufficient flexibility in our future capital structure . our balance sheet retained fundamental financial strength during 2012 , and we ended the year with approximately $ 191.6 million in cash and equivalents , along with shareholders ' equity of approximately $ 564 million and no debt . under our unsecured revolving credit facility , we may borrow up to a maximum of $ 120 million at any one time . loans may be used for general corporate purposes . we had no borrowings outstanding under this facility at june 30 , 2012. at june 30 , 2012 , we had approximately $ 6.2 million of standby letters of credit outstanding , which reduced the amount available for borrowing on the unsecured revolving credit facility . the facility expires in april 2017 , and all outstanding amounts are then due and payable . interest is variable based upon formulas tied to libor or an alternative base rate defined in the credit agreement , at our option . we must also pay facility fees that are tied to our then-applicable consolidated leverage ratio . based on the 22 long-term nature of this facility , when we have outstanding borrowings under this facility , we will classify the outstanding balance as long-term debt . the facility contains certain restrictive covenants , including limitations on indebtedness , asset sales and acquisitions , and financial covenants relating to interest coverage and leverage . at june 30 , 2012 , we were in compliance with all applicable provisions and covenants of the facility , and we exceeded the requirements of the financial covenants by substantial margins . we currently expect to remain in compliance with the facility 's covenants for the foreseeable future . a default under the facility could accelerate the repayment of any outstanding indebtedness and limit our access to additional credit available under the facility . such an event could require curtailment of cash dividends or share repurchases , reduce or delay beneficial expansion or investment plans , or otherwise impact our ability to meet our obligations when due . at june 30 , 2012 , we were not aware of any event that would constitute a default under the facility . we believe that internally generated funds and our existing balances in cash and equivalents , in addition to our currently available bank credit arrangements , should be adequate to meet our foreseeable cash requirements . if we were to borrow outside of our credit facility under current market terms , our average interest rate may increase significantly and have an adverse effect on our results of operations . for additional information regarding our credit facility , see note 4 to the consolidated financial statements . cash flows replace_table_token_9_th our cash flows for the years 2010 through 2012 are presented in the consolidated statements of cash flows . cash flow generated from operations remains the primary source of financing for our internal growth .
| the increase in sales of the glassware and candles segment primarily reflected higher candle volumes from product placement into new accounts that began in the fourth quarter of 2010 . 19 our gross margin as a percentage of net sales was approximately 21.2 % in 2012 compared with 22.2 % in 2011 and 25.6 % in 2010. gross margin percentages in the specialty foods segment declined in 2012 , reflecting a somewhat less favorable sales mix , as well as comparatively higher costs for a wide variety of raw materials ( especially for soybean oil and flour ) and freight , as partially offset by higher pricing . in the glassware and candles segment , gross margin percentages improved slightly primarily due to the impact of higher pricing and an improved sales mix . these factors were somewhat mitigated by higher wax costs , lower sales and reduced production levels . for 2011 , as a percentage of net sales , higher material costs were estimated to have impacted gross margin comparisons by approximately 3 % . in the specialty foods segment , gross margin percentages declined in 2011 , reflecting broadly-higher ingredient and freight costs and a less favorable sales mix . gross margin percentages in the glassware and candles segment declined in 2011 due to higher wax costs and , to a lesser extent , lower production volumes . selling , general and administrative expenses replace_table_token_7_th selling , general and administrative expenses for 2012 totaled approximately $ 96.8 million and increased 1 % as compared with the 2011 total of $ 95.4 million , which had increased 2 % from the 2010 total of $ 93.8 million . the 2012 increase was influenced by the higher levels of food sales . for 2011 , higher sales-based expenses , increased compensation expense and greater consumer-directed marketing costs contributed to the overall increase , although as a percentage of net sales the 2011 expenses were comparable to 2010. restructuring and impairment charges in 2010 , we closed our dressings and sauces manufacturing operation located in wilson , new york . during
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53 we have expanded our sales organization to include 52 territory managers as of december 31 , 2014 , an expansion of 68 % from our 31 territory managers as of december 31 , 2013. we intend to continue to grow our sales force in order to expand our communication of the benefits of our steroid releasing implants to our physician customers . we have developed a base of recurring revenue that we expect will support future revenue growth , with approximately 85 % of our 2014 revenue coming from reordering customers . in addition , we intend to seek to add new physician users and to expand the frequency of use among current users who only use propel for a portion of their surgeries , in july 2014 , we completed our initial public offering , or ipo , by issuing 5,750,000 shares of common stock at an offering price of $ 11.00 per share , for net proceeds of $ 55.8 million , after deducting underwriting discounts and commissions and offering expenses . prior to our ipo , we financed our operations primarily through private placements of our convertible preferred securities and , to a lesser extent , certain debt financing arrangements . components of our results of operations revenue all of our revenue is currently derived from sales of propel and propel mini in the united states . we expect our revenue to increase as we expand our sales , marketing and reimbursement infrastructure and increase awareness of our products . we also expect our revenue to fluctuate from quarter to quarter due to a variety of factors . in the first quarter , our results can be impacted by adverse weather and by resetting of annual patient healthcare insurance plan deductibles , both of which may cause patients to delay elective procedures such as functional endoscopic sinus surgery , or fess . in the second quarter , demand may be impacted by the seasonal nature of allergies and the resultant onset of sinus-related symptoms . in the third quarter , the number of fess procedures nationwide is historically lower than other quarters throughout the year , which we believe is attributable to the summer vacations of ent physicians and their patients . in the fourth quarter , demand may be impacted by the onset of the cold and flu season and related symptoms , as well as the desire of patients to spend their remaining balances in flexible-spending accounts or because they have met their annual deductibles under their health insurance plans . our currently approved products are commonly treated as general supplies utilized in sinus surgery and are paid for as part of the fess procedure . we believe that establishment of reimbursement codes specific to the use of drug releasing implants for chronic sinusitis is an important factor in expanding access to our products , especially in the physician office setting . all of our revenue is based in the u.s. and no single customer accounted for more than 10 % of our revenue during the years ended december 31 , 2014 , 2013 and 2012. cost of sales and gross profit we manufacture propel and propel mini at our facility in menlo park , california . cost of sales consists primarily of manufacturing overhead costs , material costs , direct labor and other direct costs such as shipping costs . a significant portion of our cost of sales currently consists of manufacturing overhead costs . these overhead costs include the cost of quality assurance , material procurement , inventory control , facilities , equipment and operations supervision and management . we expect overhead costs as a percentage of revenue to become less significant as our production volume increases . we expect cost of sales to increase in absolute dollars primarily as , and to the extent , our revenue grows . we calculate gross margin as gross profit divided by revenue . our gross margin has been and will continue to be affected by a variety of factors , primarily production volumes , manufacturing costs and product yields , and to a lesser extent the implementation of cost-reduction strategies . we expect our gross margin to increase over 54 the long term as our production volume increases and as we spread the fixed portion of our manufacturing overhead costs over a larger number of units produced , thereby reducing our per unit manufacturing costs . however , our gross margin will likely fluctuate from quarter to quarter . selling , general and administrative expenses selling , general and administrative , or sg & a , expenses consist primarily of compensation for personnel , including stock-based compensation , related to selling , marketing , finance , information technology , human resource functions and business development . additional sg & a expenses include commissions , training , travel expenses , promotional activities , conferences , trade shows , professional services fees , audit fees , insurance costs and general corporate expenses including allocated facilities-related expenses . we expect sg & a expenses to continue to increase in absolute dollars for the foreseeable future as we expand our commercial infrastructure to drive and support the anticipated growth in revenue and incur additional legal , accounting , insurance and other professional service fees associated with being a public company . research and development expenses research and development , or r & d , expenses consist primarily of product development , clinical and regulatory affairs , consulting services and other costs associated with products and technologies in development . these expenses include employee compensation , stock-based compensation , supplies , quality assurance and related travel and facilities expenses . clinical expenses include clinical trial design , clinical site reimbursement , data management and travel expenses , and the cost of manufacturing products for clinical trials . we expect r & d expenses to increase in absolute dollars for the foreseeable future as we continue to develop , enhance and commercialize new products and technologies . story_separator_special_tag however , we expect r & d expenses as a percentage of revenue to vary over time depending on the level and timing of initiating new product development efforts as well as our clinical development activities . story_separator_special_tag style= '' margin-top:18pt ; margin-bottom:0pt ; font-size:10pt ; font-family : times new roman '' > interest and other income ( expense ) , net interest and other income , net , decreased $ 0.5 million to an expense of $ 0.4 million during the year ended december 31 , 2013 , compared to an income of $ 0.1 million during the year ended december 31 , 2012. the decrease in interest and other income , net was primarily attributable to a fair value adjustments of the preferred stock financing option in connection with our series d convertible preferred stock financing , the fair value adjustment of the preferred stock warrants , which are accounted for as liabilities and marked-to-market at each reporting period , and interest expense related to our debt financing arrangements . liquidity and capital resources overview as of december 31 , 2014 , we had cash , cash equivalents and short-term investments of $ 48.4 million and an accumulated deficit of $ 96.6 million , compared to cash and cash equivalents of $ 12.3 million and an accumulated deficit of $ 78.3 million as of december 31 , 2013. in july 2014 , we completed our ipo , issuing 57 5,750,000 shares of common stock at an offering price of $ 11.00 per share yielding net proceeds of $ 55.8 million after deducting underwriting discounts and commissions and offering expenses . our primary sources of capital prior to our ipo were from private placements of convertible preferred securities and debt financing . to date , we have raised $ 91.4 million from private placements of convertible preferred securities from our investors . cash flows replace_table_token_6_th net cash used in operating activities during the year ended december 31 , 2014 , net cash used in operating activities was $ 18.0 million , consisting primarily of a net loss of $ 18.4 million and an increase in net operating assets of $ 2.2 million , partially offset by non-cash charges of $ 2.6 million . the cash used in operations was primarily due to the ongoing commercialization of propel and propel mini . to support the ongoing commercialization of these products , we continued to expand our sales , marketing and reimbursement organizations resulting in an increase in accounts receivable , partially offset by an increase in accrued compensation . the non-cash charges primarily consisted of stock-based compensation expense , depreciation and amortization and the change in fair value of convertible preferred stock warrants . as of december 31 , 2014 and 2013 , 86 % and 87 % , respectively , of accounts receivable was less than 60 days old . net cash used in operating activities during the year ended december 31 , 2013 , was $ 19.1 million , consisting primarily of a net loss of $ 18.4 million and an increase in net operating assets of $ 2.1 million , partially offset by non-cash charges of $ 1.4 million . the cash used in operations was primarily due to the expansion our sales , marketing and reimbursement organizations to support the ongoing commercialization of propel and propel mini resulting in increases in accounts receivable and inventory , partially offset by an increase in accrued compensation due to the growth in our sales , marketing and reimbursement organizations . non-cash charges consisted primarily of depreciation and stock-based compensation . net cash used in operating activities during the year ended december 31 , 2012 , was $ 16.1 million , consisting primarily of a net loss of $ 16.4 million and an increase in net operating assets of $ 0.4 million , partially offset by non-cash charges of $ 0.6 million . the increase in net operating assets was primarily due to increases in accounts receivable and inventory as we accelerated our commercial launch of propel and introduced propel mini , partially offset by an increase in accrued compensation related to expansion of our sales , marketing and reimbursement organizations . non-cash charges consisted primarily of depreciation and stock-based compensation . net cash ( used in ) provided by investing activities during the year ended december 31 , 2014 , net cash used in investing activities was $ 35.5 million , consisting of purchases of short-term investments , available-for-sale , of $ 35.1 million and property and equipment of $ 0.4 million . 58 net cash used in investing activities during the year ended december 31 , 2013 , was $ 0.5 million , consisting of purchases of property and equipment . net cash provided by investing activities during the year ended december 31 , 2012 , was $ 6.0 million , consisting primarily of net proceeds from short-term investments of $ 7.3 million , partially offset by purchases of property and equipment of $ 1.4 million . net cash provided by financing activities during the year ended december 31 , 2014 , net cash provided by financing activities was $ 54.6 million , consisting primarily of net proceeds from our ipo of $ 55.8 million , partially offset by the repayments in full of our equipment loan and capital lease of $ 1.5 million . net cash provided by financing activities during the year ended december 31 , 2013 , was $ 29.8 million , consisting primarily of net proceeds from the issuance of our series d convertible preferred stock of $ 30.1 million . net cash provided by financing activities during the year ended december 31 , 2012 , was $ 2.3 million , primarily from proceeds of a $ 2.0 million equipment loan .
| gross margin for the year ended december 31 , 2014 , increased to 74 % , compared to 55 % for the year ended december 31 , 2013. the increase in gross margin was primarily due to the growth in unit sales during the year ended december 31 , 2014 , which allowed us to spread the fixed portion of our manufacturing overhead costs over more production units , and the impact of the qualification of our new facility and the charge related to a packaging issue during the year ended december 31 , 2013. the fixed portion of our manufacturing overhead allows our costs of sales to grow at a slower rate than our revenue . selling , general and administrative expenses sg & a expenses increased $ 17.9 million , or 98 % , to $ 36.1 million during the year ended december 31 , 2014 , compared to $ 18.2 million during the year ended december 31 , 2013. the increase in sg & a expenses was primarily due to the build out of our infrastructure to support the ongoing commercialization of propel and propel mini . the primary driver of this increase was employee-related expenses of our sales , marketing and reimbursement organizations which increased $ 14.0 million , as we increased headcount to 97 as of december 31 , 2014 , compared to 55 at december 31 , 2013. in addition , other sg & a expenses increased $ 3.9 million , primarily due to an increase in headcount and expenses associated with being a public company . research and development expenses r & d expenses increased $ 0.8 million , or 9 % , to $ 10.3 million during the year ended december 31 , 2014 , compared to $ 9.5 million during the year ended december 31 , 2013. the increase in r & d expenses was primarily due to an increase in personnel costs as we increased headcount . interest and other income ( expense ) , net interest and other expense , net , decreased $ 0.1 million to $ 0.3 million during the year ended december 31 , 2014 , compared to $ 0.4 million during the year ended december 31 , 2013. the changes in interest and other expense , net were primarily attributable to the fair value adjustments of the convertible preferred stock financing option and preferred stock warrants . the preferred stock warrants were converted to common stock warrants upon the completion of our ipo in july 2014 , and are no longer required to be marked-to-market at each reporting period . comparison of years ended december 31 , 2013 and 2012 revenue revenue increased $ 12.0 million , or 206 % , to $
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the information in this section should be read in connection with the information in `` non-gaap measure of financial performance . '' because we generated a majority of our net revenues internationally , including the years ended december 31 , 2015 , 2014 and 2013 , we are subject to the risks of doing business in foreign countries as discussed under `` part i - item 1a - risk factors . '' the following table sets forth a reconciliation of fx-neutral gmv and fx-neutral net revenues ( each as defined below ) to our reported gmv and net revenues for the periods presented : replace_table_token_6_th 34 replace_table_token_7_th ( 1 ) we define exchange rate effect as the year-over-year impact of foreign currency movements using prior period foreign currency rates applied to current year transactional currency amounts . ( 2 ) we define fx-neutral gross merchandise volume as gross merchandise volume minus the exchange rate effect . we define the non-gaap financial measures of fx-neutral net revenue as net revenue minus the exchange rate effect . ( 3 ) we define gross merchandise volume ( `` gmv '' ) as the total value of all successfully closed transactions between users on our marketplace and stubhub platforms during the applicable period regardless of whether the buyer and seller actually consummated the transaction . we believe that gmv provides a useful measure of the overall volume of closed transactions that flow through our platforms in a given period , notwithstanding the inclusion in gmv of closed transactions that are not ultimately consummated . ( 4 ) during the first quarter of 2014 , we revised our definition of gmv for certain transactions to align more closely with our operating metrics . 2013 amounts have been revised to conform to the current period reporting definition . in 2015 , foreign currency movements relative to the u.s. dollar positively impacted cost of net revenues by $ 80 million ( inclusive of a positive impact of approximately $ 24 million from hedging activities ) . in 2014 , foreign currency movements relative to the u.s. dollar had an immaterial impact on cost of net revenues . in 2015 , foreign currency movements relative to the u.s. dollar positively impacted operating expenses by $ 194 million ( inclusive of a positive impact of approximately $ 47 million from hedging activities ) . in 2014 , foreign currency movements relative to the u.s. dollar had an immaterial impact on operating expenses . the effect of foreign currency exchange rate movements during 2015 was due to the strengthening of the u.s. dollar against other currencies , primarily the euro , the british pound , and the korean won . 35 results of operations story_separator_special_tag respective periods . net transaction revenues earned internationally as a percentage of total net transaction revenue decreased in 2015 compared to 2014 , primarily due to a negative impact from foreign currency movements relative to the u.s. dollar . net transaction revenues earned internationally as a percentage of total net transaction revenue increased in 2014 compared to 2013 , primarily due to a greater increase in revenues earned internationally . marketing services and other revenues marketing services and other revenues decreased $ 46 million , or 3 % , in 2015 compared to 2014 , and represented 21 % of total net revenues in both periods . the decrease was driven primarily by a negative impact from foreign currency movements relative to the u.s. dollar . fx-neutral marketing services and other revenues increased 8 % in 2015 compared to 2014 . the fx-neutral marketing services and other revenues increase was driven by increased fx-neutral classifieds revenue , and to a lesser extent , increased fx-neutral revenue in our marketplace marketing services . marketplace marketing services and other revenues decreased $ 25 million , or 2 % , in 2015 compared to 2014. the decrease was driven primarily by a negative impact from foreign currency movements relative to the u.s. dollar . fx-neutral marketplace marketing services and other revenues increased by 4 % in 2015 compared to 2014. the increase in fx-neutral marketplace marketing services and other revenues was primarily driven by increased fees earned for referral services offset by decreased revenue in local currencies from advertising display on our marketplace international platforms . the increase in fees earned for referral services consist primarily of fees for customers acquired and incentives for the usage of paypal products on certain marketplace platforms , which were not included in marketing services and other revenues prior to the distribution . 38 classifieds marketing services and other revenues decreased $ 13 million , or 2 % , in 2015 compared to 2014. the decrease was driven primarily by a negative impact from foreign currency movements relative to the u.s. dollar . fx-neutral classifieds marketing services and other revenues increased by 15 % in 2015 compared to 2014. the increase in fx-neutral classifieds marketing services and other revenues was driven primarily by increased revenue from our classifieds platforms in our developed markets of germany , canada and the uk . marketing services and other revenues increased $ 106 million , or 6 % , in 2014 compared to 2013 , and represented 21 % of total net revenues for both periods . the increase in marketing services and other revenues was driven primarily by increased classifieds revenue , and to a lesser extent , increased revenue in our marketplace marketing services . marketplace marketing services and other revenues increased $ 13 million , or 1 % , in 2014 compared to 2013. the increase in marketplace marketing services and other revenues was primarily driven by revenue from advertising displayed on our marketplace international platforms . classifieds marketing services and other revenues increased $ 95 million , or 15 % , in 2014 compared to 2013. the increase in classifieds marketing services and other revenues was driven primarily by increased revenue from our classifieds platforms in our developed markets of germany , canada and the uk . story_separator_special_tag summary of cost of net revenues the following table summarizes changes in cost of net revenues for the periods presented : replace_table_token_11_th cost of net revenues consists primarily of costs associated with customer support , site operations , and payment processing . significant components of these costs include employee compensation , contractor costs , facilities costs , depreciation of equipment and amortization expense , bank transaction fees , and credit card interchange and assessment fees . cost of net revenues increased $ 108 million , or 6 % , in 2015 compared to 2014 . the increase was due primarily to continued investment in our site operations and data centers and an increase in transaction fees for payment services offset by a favorable impact due to foreign currency movements relative to the u.s. dollar . the increase in transaction fees for payment services consists primarily of the impact of transaction fees for payment services provided by paypal which were not included in cost of net revenues prior to the distribution . cost of net revenues as a percentage of net revenues was 20.6 % and 18.9 % respectively , in 2015 and 2014 . cost of net revenues increased $ 171 million , or 11 % , in 2014 compared to 2013 . the increase was due primarily to an increase in volume and continued investment in our site operations , data centers and customer support . cost of net revenues as a percentage of net revenues was 18.9 % and 18.1 % respectively , in 2014 and 2013 . 39 summary of operating expenses , interest and other , net , and provision for income taxes the following table summarizes changes in operating expenses , interest and other , net and provision for income taxes for the periods presented : replace_table_token_12_th the following table summarizes operating expenses , interest and other , net and provision for income taxes as a percentage of net revenues for the periods presented : replace_table_token_13_th sales and marketing sales and marketing expenses consist primarily of advertising costs and marketing programs ( both online and offline ) , employee compensation , contractor costs , facilities costs and depreciation on equipment . online marketing expenses represent traffic acquisition costs in various channels such as paid search , affiliates marketing and display advertising . offline advertising includes primarily brand campaigns and buyer/seller communications . sales and marketing expense decreased by $ 175 million , or 7 % , in 2015 compared to 2014 . the decrease in sales and marketing expense was due primarily to the positive impact from foreign currency movements relative to the u.s. dollar , a decrease in marketing program costs due in part to a shift in certain buyer and seller incentives ( for which associated expenses are recorded as a reduction in revenue instead of sales and marketing expense ) and employee-related savings from our global workforce reduction . sales and marketing expense as a percentage of net revenues were 26 % and 28 % in 2015 and 2014 , respectively . sales and marketing expense increased by $ 298 million , or 14 % , in 2014 compared to 2013 . the increase in sales and marketing expense was due primarily to an increase in marketing program costs ( both online and offline programs ) , our brand campaign and higher employee-related expenses ( including consultant costs ) . sales and marketing expense as a percentage of net revenues were 28 % and 26 % in 2014 and 2013 , respectively . product development product development expenses consist primarily of employee compensation , contractor costs , facilities costs and depreciation on equipment . product development expenses are net of required capitalization of major platforms and other product development efforts , including the development of our platform architecture , migration of certain platforms , and seller tools . our top technology priorities include structured data , multi-screen capabilities , improved seller tools and buyer experiences . capitalized internal use and platform development costs were $ 136 million and $ 144 million in 2015 and 2014 , respectively , and are primarily reflected as a cost of net revenues when amortized in future periods . 40 product development expenses decreased by $ 60 million , or 6 % , in 2015 compared to 2014 . the decrease was due primarily to the positive impact from foreign currency movements and hedging relative to the u.s. dollar . product development expenses as a net percentage of revenues were 11 % in both 2015 and 2014 . product development expenses increased by $ 68 million , or 7 % , in 2014 compared to 2013 . the increase was due primarily to higher employee-related costs ( including consultant costs ) driven by increased investment in platforms and mobile . product development expenses as a net percentage of revenues were 11 % in both 2014 and 2013 . general and administrative general and administrative expenses consist primarily of employee compensation , contractor costs , facilities costs , depreciation of equipment , employer payroll taxes on stock-based compensation , legal expenses , restructuring , insurance premiums and professional fees . our legal expenses , including those related to various ongoing legal proceedings , may fluctuate substantially from period to period . general and administrative expenses increased $ 233 million , or 26 % , in 2015 compared to 2014 . the increase was due primarily to restructuring costs related to our global workforce reduction , costs related to the distribution ( as discussed in overview above ) , expenses related to craigslist , inc. litigation proceedings and an increase in corporate costs due to a reduction in synergies that existed prior to the distribution . general and administrative expenses as a percentage of net revenues were 13 % in 2015 and 10 % in 2014 . general and administrative expenses increased $ 9 million , or 1 % , in 2014 compared to 2013 . the increase was due primarily to higher employee-related costs .
| seasonality the following table sets forth , for the periods presented , our total net revenues and the sequential quarterly movements of these net revenues : replace_table_token_10_th we expect transaction activity patterns on our platforms to mirror general consumer buying patterns . we expect that these trends will continue . net transaction revenues net transaction revenues decreased $ 152 million , or 2 % , while gmv decreased 1 % , in 2015 compared to 2014 . net transaction revenue represented 79 % of total net revenues in both 2015 in 2014. the decrease in net transaction revenues and gmv was driven primarily by a negative impact from foreign currency movements relative to the u.s. dollar . fx-neutral net transaction revenue and fx-neutral gmv increased 4 % and 5 % respectively , in 2015 compared to 2014 . the fx-neutral gmv increase of 5 % was driven by an increase in fx-neutral marketplace gmv , and to a lesser extent , stubhub gmv . the total transaction take rate was lower in 2015 compared to 2014 due to decrease in our marketplace transaction take rate , partially offset by an increase in our stubhub transaction take rate . 37 marketplace net transaction revenues decreased $ 248 million , or 4 % , while marketplace gmv decreased 2 % , in 2015 compared to 2014 . the decrease in marketplace net transaction revenues and marketplace gmv was driven primarily by a negative impact from foreign currency movements relative to the u.s. dollar . fx-neutral marketplace net transaction revenue and fx-neutral marketplace gmv increased 3 % and 5 % respectively , in 2015 compared to 2014. the fx-neutral marketplace gmv increase of 5 % was driven primarily by an increase in volume in local currencies on our marketplace platforms internationally and to a lesser extent , the u.s. the increase in fx-neutral marketplace net transaction revenue was less than the increase in fx-neutral marketplace gmv due to a lower marketplace transaction take rate . the marketplace transaction take rate was lower in 2015 compared to 2014 due to a shift in geographical and
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beginning on january 1 , 2018 we adopted asc 606 revenue from contracts with customers and as a result , we no longer present service revenue and revenue associated with reimbursable out-of-pocket expenses separately in our consolidated statements of operations . reimbursable out-of-pocket expenses can fluctuate significantly from period to period based on the timing of program initiation or closeout and the mix of program complexity , and therefore the anticipated timing and the associated impact of asc 606 on revenue can be difficult to predict . as a result , we have not adjusted our backlog or net new business awards information included below to incorporate revenue associated with reimbursable out-of-pocket expenses and have instead presented these metrics as if the previous accounting guidance ( asc 605 ) had been in effect . backlog our backlog consists of anticipated future service revenue from business awards that either have not started , or that are in process and have not been completed . our backlog also reflects any cancellation or adjustment activity related to these awards . the average duration of our contracts will fluctuate from period to period in the future based on the contracts comprising our backlog at any given time . the majority of our contracts can be terminated by the customer with a 30-day notice . the following table sets forth backlog as of the following dates under asc 605 ( dollars in millions ) : replace_table_token_3_th ( a ) following our merger with inventiv and beginning january 1 , 2018 , we began reporting information related to backlog associated with the selling solutions service offering within our commercial solutions segment , as well as new business awards associated with our commercial solutions segment . this information is not presented for periods prior to 2018. we expect approximately $ 2.49 billion of our backlog at december 31 , 2018 will be recognized as revenue during 2019 . we adjust the amount of our backlog each quarter for the effects of fluctuations in foreign currency exchange rates . 61 net new business awards the following table sets forth new business awards , net of cancellations under asc 605 ( dollars in millions ) : replace_table_token_4_th ( a ) following our merger with inventiv and beginning january 1 , 2018 , we began reporting information related to backlog associated with the selling solutions service offering within our commercial solutions segment , as well as new business awards associated with our commercial solutions segment . this information is not presented for periods prior to 2018. new business awards have varied and may continue to vary significantly from quarter to quarter . fluctuations in our net new business award levels often result from the fact that we may receive a small number of relatively large orders in any given reporting period . because of these large orders , our backlog and net new business awards in a reporting period may reach levels that are not sustainable in subsequent reporting periods . we believe that our backlog and net new business awards might not be consistent indicators of future revenue because they have been , and likely will be , affected by a number of factors , including the variable size and duration of projects , many of which are performed over several years , and cancellations and changes to the scope of work during the course of projects . additionally , projects may be canceled or delayed by the customer or regulatory authorities . we generally do not have a contractual right to the full amount of the awards reflected in our backlog . if a customer cancels an award , we might be reimbursed for the costs we have incurred . as we increasingly compete for and enter into large contracts that are more global in nature , we expect that the rate at which our backlog and net new business awards convert into revenue is likely to decrease , and the duration of projects and the period over which related revenue is recognized to lengthen . for more information about risks related to our backlog see part i , item 1a `` risk factors—risks related to our business—our backlog might not be indicative of our future revenues , and we might not realize all of the anticipated future revenue reflected in our backlog '' in this annual report on form 10-k. 62 story_separator_special_tag style= '' font-family : arial ; font-size:10pt ; '' > direct costs for our clinical solutions segment , excluding share-based compensation expense , were as follows ( dollars in thousands ) : replace_table_token_8_th 65 for the year ended december 31 , 2018 , clinical solutions direct costs increased by $ 1.55 billion , or 166.4 % , as compared to the year ended december 31 , 2017 . the increases in direct costs associated with our clinical solutions segment during 2018 compared to the prior year were primarily due to inclusion of reimbursable out-of-pocket expenses in direct costs in 2018 and the overall increase in compensation costs as a result of increased headcount from the merger . for the year ended december 31 , 2017 , clinical solutions direct costs increased by $ 318.0 million , or 51.9 % , as compared to the year ended december 31 , 2016 . the increases in direct costs in 2017 compared to 2016 were primarily due to increased compensation costs as a result of increased headcount from the merger and retention of underutilized staff . gross margin for the clinical solutions segment was 22.8 % , 36.3 % and 40.0 % for the years ended december 31 , 2018 , 2017 and 2016 , respectively . story_separator_special_tag gross margin was lower during the year ended december 31 , 2018 compared to 2017 primarily due to : ( i ) inclusion of revenue and costs associated with reimbursable out-of-pocket expenses as components of service revenue and direct costs , respectively ; ( ii ) the elimination , due to purchase accounting requirements , of $ 12.7 million of revenue from 2018 results that otherwise would have been recognized by inventiv ; and ( iii ) the mix of customers and service offerings added as a result of the merger having lower gross margin profile compared to our historical mix of customers and services . specifically , inventiv 's clinical solutions business has historically had a higher proportion of contracts from the top 20 biopharmaceutical companies and a higher proportion of fsp services revenue , both of which typically have a lower margin profile than our historical mix of customers and services . the impact of these items on gross margin was partially offset by revenue growth and realized synergies and other cost savings . gross margin declined in 2017 compared to 2016 primarily due to : ( i ) the mix of customers and services obtained in the merger having a lower gross margin profile compared to our historical mix of customers and services ; ( ii ) the elimination of $ 28.6 million of revenue in purchase accounting that otherwise would have been recognized by inventiv ; and ( iii ) the impact of carrying excess staff throughout 2017. commercial solutions direct costs for our commercial solutions segment , excluding share-based compensation expense , were as follows ( dollars in thousands ) : replace_table_token_9_th the increase in direct costs associated with our commercial solutions segment in 2018 compared to 2017 was due to the inclusion of the reimbursable out-of-pocket expenses in direct costs in 2018 and an increase in compensation costs as a result of the merger . the increase in direct costs in 2017 as compared to 2016 was primarily due to the increased compensation expense as a result of the merger . gross margin for the commercial solutions segment was 20.5 % , 25.9 % and 15.4 % for the years ended december 31 , 2018 , 2017 and 2016 , respectively . the decrease in gross margin in 2018 compared to 2017 was primarily due to ( i ) the inclusion of revenue and costs associated with reimbursable out-of-pocket expenses as components of service revenue and direct costs , respectively , in 2018 ; and ( ii ) a less favorable revenue mix . these decreases were partially offset by cost containment activities initiated after the merger . the increase in gross margin in 2017 compared to 2016 was due to the merger , as the businesses added as a result of the merger have historically had a higher margin profile than our legacy consulting business . 66 selling , general and administrative expenses for the years ended december 31 , 2018 , 2017 and 2016 , selling , general and administrative expenses were as follows ( dollars in thousands ) : replace_table_token_10_th the increases in selling , general , and administrative expenses during 2018 and 2017 compared to the prior year were due to the merger with inventiv in august 2017 , which increased our overall employee base by approximately 15,000. selling , general and administrative expense as a percentage of total service revenue has declined to 9.3 % for the year ended december 31 , 2018 from 15.3 % and 16.7 % for the years ended december 31 , 2017 and 2016 , respectively . the decrease in 2018 compared to 2017 was primarily a result of the inclusion of reimbursable out-of-pocket expenses as a component of service revenue in 2018 as required by the new revenue recognition standard . these impacts were partially offset by underlying revenue growth and the impact of realized synergies and other cost savings . restructuring and other costs restructuring and other costs were $ 50.8 million , $ 33.3 million , and $ 13.6 million for the years ended december 31 , 2018 , 2017 and 2016 , respectively . during 2017 , in connection with the merger , we established a restructuring plan to eliminate redundant positions and reduce our facility footprint worldwide . we expect to continue the ongoing evaluations of our workforce and facilities infrastructure needs through 2020 in an effort to optimize our resources . additionally , during the years ended december 31 , 2018 and 2017 we incurred employee severance costs and facility closure costs for non-merger related restructuring activities . during 2017 , we also assumed certain liabilities related to employee severance and facility closure costs as a result of actions taken by inventiv prior to the merger . in march 2016 , management approved a global plan to eliminate certain positions worldwide in an effort to ensure that our organizational focus and resources were properly aligned with our strategic goals and to continue strengthening the delivery of our growing backlog to customers . accordingly , we made changes to our therapeutic unit structure designed to realign with management focus and optimize the efficiency of our resourcing to achieve our strategic plan and eliminated approximately 200 positions . all actions under this plan were completed by december 31 , 2017. in addition , during the third quarter of 2016 , we also announced the closure of one of our facilities associated with this restructuring .
| million for the year ended december 31 , 2016. the increase in our service revenue during 2017 was due solely to the merger with inventiv in august 2017 , which resulted in an increase in service revenue of $ 839.0 million . this increase was partially offset by a year-over-year decline in organic revenue resulting from significant customer , regulatory , and other delays impacting our awarded projects during 2017 , and higher than normal levels of cancellations . our service revenue for the year ended december 31 , 2017 was negatively impacted by fluctuations in foreign exchange rates and contractual currency adjustment provisions of $ 4.8 million , as the u.s. dollar strengthened during 2017 compared to the prior year . service revenue from our top five customers accounted for approximately 24 % , 22 % and 33 % of service revenue for the years ended december 31 , 2018 , 2017 and 2016 , respectively . during the year ended december 31 , 2018 , one customer accounted for approximately 11 % of our service revenue which was primarily earned in our clinical solutions segment . no single customer accounted for greater than 10 % of our service revenue for the years ended december 31 , 2017 or 2016 . service revenue for each of our segments consisted of the following ( dollars in thousands ) : replace_table_token_6_th clinical solutions for the year ended december 31 , 2018 , our service revenue attributable to the clinical solutions segment increased compared to the same period in the prior year primarily due to : ( i ) the merger with inventiv in august 2017 ; ( ii ) the inclusion of revenue associated with reimbursable out-of-pocket expenses as a component of service revenue in 2018 ; and ( iii ) net new business growth . for the year ended december 31 , 2017 , our service revenue attributable to the clinical solutions segment increased compared to the same period in 2016 solely due to
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we originate one- to four-family mortgage loans , multifamily loans , commercial real estate loans , commercial business loans and construction loans . to a lesser extent , we originate various consumer loans including home equity lines of credit . at september 30 , 2016 , residential mortgage loans totaled $ 178.4 million , or 32.2 % of total loans , compared to $ 181.9 million , or 37.2 % of total loans at september 30 , 2015. total residential mortgage loan balances decreased in 2016 primarily due to repayments and refinancings that were sold in the secondary market . we generally originate loans for investment purposes , although , depending on the interest rate environment , we typically sell 25-year and 30-year fixed-rate residential mortgage loans that we originate into the secondary market in order to limit exposure to interest rate risk and to earn noninterest income . management intends to continue offering short-term adjustable rate residential mortgage loans and generally sell long-term fixed rate mortgage loans in the secondary market with servicing released . 37 commercial real estate loans totaled $ 217.4 million , or 39.3 % of total loans at september 30 , 2016 , compared to $ 173.0 million , or 35.9 % of total loans at september 30 , 2015. the balance of commercial real estate loans has increased primarily due to the previously discussed lending program that is focused on loans secured by low loan-to-value , single-tenant commercial properties that are generally leased to investment grade national-brand retailers , the borrowers and collateral properties for which are outside of our primary market area . management continues to focus on pursuing nonresidential loan opportunities in order to further diversify the loan portfolio . multi-family real estate loans totaled $ 18.4 million , or 3.3 % of total loans at september 30 , 2016 , compared to $ 21.6 million , or 4.5 % of total loans at september 30 , 2015. these loans are primarily secured by apartment buildings and other multi-tenant developments in our primary market area . residential construction loans totaled $ 24.3 million , or 4.4 % of total loans , at september 30 , 2016 of which $ 10.6 million were speculative construction loans . at september 30 , 2015 , residential construction loans totaled $ 19.7 million , or 4.1 % of total loans , of which $ 8.9 million were speculative loans . the increase in residential construction loans is due primarily to the continuing recovery of the housing market . commercial construction loans totaled $ 33.7 million , or 6.1 % of total loans , at september 30 , 2016 compared to $ 15.5 million , or 3.2 % of total loans at september 30 , 2015. the increase is due primarily to the increase of commercial construction in our primary market area . land and land development loans totaled $ 11.1 million , or 2.0 % of total loans at september 30 , 2016 , compared to $ 11.1 million , or 2.3 % of total loans at september 30 , 2015. these loans are primarily secured by vacant lots to be improved for residential and nonresidential development , and farmland . commercial business loans totaled $ 42.0 million , or 7.6 % of total loans , at september 30 , 2016 compared to $ 32.6 million , or 6.8 % of total loans , at september 30 , 2015. the increase is due primarily to the increase of commercial business lending opportunities in our primary market area . management continues to focus on pursuing commercial business loan opportunities in order to further diversify the loan portfolio . consumer loans totaled $ 28.3 million , or 5.1 % of total loans , at september 30 , 2016 compared to $ 27.0 million , or 5.6 % of total loans , at september 30 , 2015. in general , organic consumer loans including automobile loans , home equity lines of credit , unsecured loans and loans secured by deposits , has only slightly increased due to pay-downs , payoffs , charge-offs and management 's decision to focus on other lending opportunities with less inherent credit risk . home equity lines of credit increased $ 1.9 million , or 10.0 % , while automobile loans decreased $ 594,000 , or 10.9 % , and other consumer loans decreased $ 57,000 , or 2.6 % , from september 30 , 2015 to september 30 , 2016 . 38 the following table sets forth the composition of our loan portfolio at the dates indicated . replace_table_token_8_th 39 loan maturity the following table sets forth certain information at september 30 , 2016 regarding the dollar amount of loan principal repayments becoming due during the period indicated . the table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below . demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less . replace_table_token_9_th ( 1 ) includes multi-family loans . ( 2 ) includes farmland and land and land development loans . ( 3 ) includes construction loans for which the bank has committed to provide permanent financing . fixed vs. adjustable rate loans the following table sets forth the dollar amount of all loans at september 30 , 2016 that are due after september 30 , 2017 , and have either fixed interest rates or adjustable interest rates . the amounts shown below exclude unearned loan origination fees . replace_table_token_10_th ( 1 ) includes multi-family loans . ( 2 ) includes farmland and land and land development loans . 40 trading account securities . our trading account securities represent an investment in a managed brokerage account that invests in small and medium lot , investment grade municipal bonds . the brokerage account is managed by an investment advisory firm registered with the story_separator_special_tag we originate one- to four-family mortgage loans , multifamily loans , commercial real estate loans , commercial business loans and construction loans . to a lesser extent , we originate various consumer loans including home equity lines of credit . at september 30 , 2016 , residential mortgage loans totaled $ 178.4 million , or 32.2 % of total loans , compared to $ 181.9 million , or 37.2 % of total loans at september 30 , 2015. total residential mortgage loan balances decreased in 2016 primarily due to repayments and refinancings that were sold in the secondary market . we generally originate loans for investment purposes , although , depending on the interest rate environment , we typically sell 25-year and 30-year fixed-rate residential mortgage loans that we originate into the secondary market in order to limit exposure to interest rate risk and to earn noninterest income . management intends to continue offering short-term adjustable rate residential mortgage loans and generally sell long-term fixed rate mortgage loans in the secondary market with servicing released . 37 commercial real estate loans totaled $ 217.4 million , or 39.3 % of total loans at september 30 , 2016 , compared to $ 173.0 million , or 35.9 % of total loans at september 30 , 2015. the balance of commercial real estate loans has increased primarily due to the previously discussed lending program that is focused on loans secured by low loan-to-value , single-tenant commercial properties that are generally leased to investment grade national-brand retailers , the borrowers and collateral properties for which are outside of our primary market area . management continues to focus on pursuing nonresidential loan opportunities in order to further diversify the loan portfolio . multi-family real estate loans totaled $ 18.4 million , or 3.3 % of total loans at september 30 , 2016 , compared to $ 21.6 million , or 4.5 % of total loans at september 30 , 2015. these loans are primarily secured by apartment buildings and other multi-tenant developments in our primary market area . residential construction loans totaled $ 24.3 million , or 4.4 % of total loans , at september 30 , 2016 of which $ 10.6 million were speculative construction loans . at september 30 , 2015 , residential construction loans totaled $ 19.7 million , or 4.1 % of total loans , of which $ 8.9 million were speculative loans . the increase in residential construction loans is due primarily to the continuing recovery of the housing market . commercial construction loans totaled $ 33.7 million , or 6.1 % of total loans , at september 30 , 2016 compared to $ 15.5 million , or 3.2 % of total loans at september 30 , 2015. the increase is due primarily to the increase of commercial construction in our primary market area . land and land development loans totaled $ 11.1 million , or 2.0 % of total loans at september 30 , 2016 , compared to $ 11.1 million , or 2.3 % of total loans at september 30 , 2015. these loans are primarily secured by vacant lots to be improved for residential and nonresidential development , and farmland . commercial business loans totaled $ 42.0 million , or 7.6 % of total loans , at september 30 , 2016 compared to $ 32.6 million , or 6.8 % of total loans , at september 30 , 2015. the increase is due primarily to the increase of commercial business lending opportunities in our primary market area . management continues to focus on pursuing commercial business loan opportunities in order to further diversify the loan portfolio . consumer loans totaled $ 28.3 million , or 5.1 % of total loans , at september 30 , 2016 compared to $ 27.0 million , or 5.6 % of total loans , at september 30 , 2015. in general , organic consumer loans including automobile loans , home equity lines of credit , unsecured loans and loans secured by deposits , has only slightly increased due to pay-downs , payoffs , charge-offs and management 's decision to focus on other lending opportunities with less inherent credit risk . home equity lines of credit increased $ 1.9 million , or 10.0 % , while automobile loans decreased $ 594,000 , or 10.9 % , and other consumer loans decreased $ 57,000 , or 2.6 % , from september 30 , 2015 to september 30 , 2016 . 38 the following table sets forth the composition of our loan portfolio at the dates indicated . replace_table_token_8_th 39 loan maturity the following table sets forth certain information at september 30 , 2016 regarding the dollar amount of loan principal repayments becoming due during the period indicated . the table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below . demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less . replace_table_token_9_th ( 1 ) includes multi-family loans . ( 2 ) includes farmland and land and land development loans . ( 3 ) includes construction loans for which the bank has committed to provide permanent financing . fixed vs. adjustable rate loans the following table sets forth the dollar amount of all loans at september 30 , 2016 that are due after september 30 , 2017 , and have either fixed interest rates or adjustable interest rates . the amounts shown below exclude unearned loan origination fees . replace_table_token_10_th ( 1 ) includes multi-family loans . ( 2 ) includes farmland and land and land development loans . 40 trading account securities . our trading account securities represent an investment in a managed brokerage account that invests in small and medium lot , investment grade municipal bonds . the brokerage account is managed by an investment advisory firm registered with the
| excluding the impact of this nonrecurring item , the company would have reported net income of $ 6.1 million and net income available to common shareholders of $ 5.9 million , or $ 2.64 per diluted share , for the year ended september 30 , 2015. net interest income . net interest income increased $ 1.1 million or 4.5 % , from $ 24.2 million for the year ended september 30 , 2015 to $ 25.3 million for the year ended september 30 , 2016 , primarily as the result of an increase in the average balance of interest earning assets from 2015 to 2016 , which more than offset a decrease in the interest rate spread from 2015 to 2016. the interest rate spread , the difference between the average tax-equivalent yield on interest-earning assets and the average cost of interest-bearing liabilities , decreased from 3.74 % for 2015 to 3.71 % for 2016 due primarily to an increase in the average balance of interest-bearing liabilities from $ 565.9 million for 2015 to $ 591.1 million for 2016 , and an increase in the average cost of interest-bearing liabilities from 0.67 % for 2015 to 0.70 % for 2016. total interest income increased $ 1.5 million , or 5.2 % , from $ 28.0 million for the year ended september 30 , 2015 to $ 29.5 million for the year ended september 30 , 2016. the increase in total interest income is due primarily to an increase in the average balance of interest earning assets of $ 35.0 million , from $ 661.6 million for 2015 to $ 696.6 million for 2016 , with the average tax-equivalent yield on interest-earning assets of 4.41 % for both 2015 and 2016. the increase in the average balance of interest-earning assets primarily relates to increases in the average balance of loans of $ 36.3 million and interest-bearing deposits with banks of $ 4.5 million . interest income on loans increased $ 1.5 million , or 6.7 % , from $ 21.4 million for 2015 to $ 22.9 million for 2016 , due primarily to an increase in
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the ipo closed on september 30 , 2010 , at which time we sold 5,300,000 shares of our common stock and received cash proceeds of $ 78.9 million from this transaction , net of underwriting discounts and commissions , and in october 2010 we subsequently sold an additional 795,000 shares to the underwriters pursuant to their over-allotment option , raising an additional $ 11.8 million of net proceeds . we incurred offering costs of $ 5.2 million related to the offering . the shares of series d preferred stock purchased by total prior to the ipo had a variable conversion rate into our common stock that depended on the price of the ipo . as a result of this conversion feature as well as the conversion of shares of amyris brasil held by other investors , we recorded a one-time beneficial conversion feature of $ 42.0 million upon the completion of the ipo that impacted earnings per share for the year ended december 31 , 2010. critical accounting policies and estimates our 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. the preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues , expenses and related disclosures . we base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances . we evaluate our estimates and assumptions on an ongoing basis . the results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources . our actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies involve significant areas of management 's judgments and estimates in the preparation of our financial statements . revenue recognition we currently recognize revenues from the sale of ethanol and reformulated ethanol-blended gasoline , from the delivery of collaborative research services and from government grants . revenues are recognized when all of the following criteria are met : persuasive evidence of an arrangement exists , delivery has occurred or services have been rendered , the fee is fixed or determinable and collectability is reasonably assured . 49 if sales arrangements contain multiple elements , we evaluate whether the components of each arrangement represent separate units of accounting . we have determined that all of our revenue arrangements should be accounted for as a single unit of accounting . application of revenue recognition standards requires subjective determination and requires management to make judgments about the fair values of each individual element and whether it is separable from other aspects of the contractual relationship . for each source of revenues , we apply the above revenue recognition criteria in the following manner : product sales we sell ethanol under short-term agreements and in spot transactions at prevailing market prices . revenues are recognized , net of discounts and allowances , once passage of title and risk of loss have occurred , provided all other revenue recognition criteria have also been met . shipping and handling costs charged to customers are recorded as revenues . shipping costs are included in cost of product revenues . such charges were not significant in any of the periods presented . grants and collaborative research services revenues from collaborative research services are recognized as the services are performed consistent with the performance requirements of the contract . in cases where the planned levels of research services fluctuate over the research term , we recognize revenues using the proportionate performance method based upon actual efforts to date relative to the amount of expected effort to be incurred by us . when up-front payments are received and the planned levels of research services do not fluctuate over the research term , revenues are recorded on a ratable basis over the arrangement term , up to the amount of cash received . when up-front payments are received and the planned levels of research services fluctuate over the research term , revenues are recorded using the proportionate performance method , up to the amount of cash received . where arrangements include milestones that are determined to be substantive and at risk at the inception of the arrangement , revenues are recognized upon achievement of the milestone and is limited to those amounts whereby collectability is reasonably assured . government grants are made pursuant to agreements that generally provide cost reimbursement for certain types of expenditures in return for research and development activities over a contractually defined period . revenues from government grants are recognized in the period during which the related costs are incurred , provided that the conditions under which the government grants were provided have been met and only perfunctory obligations are outstanding . consolidations we have interests in certain joint venture entities that are variable interest entities ( vie ) . determining whether to consolidate a variable interest entity may require judgment in assessing ( i ) whether an entity is a variable interest entity and ( ii ) if we are the entity 's primary beneficiary and thus required to consolidate the entity . to determine if we are the primary beneficiary of a vie , we evaluate whether we have ( i ) the power to direct the activities that most significantly impact the vie 's economic performance and ( ii ) the obligation to absorb losses or the right to receive benefits of the vie that could potentially be significant to the vie . our evaluation includes identification of significant activities and an assessment of our ability to direct those activities based on governance provisions and arrangements to provide or receive product and process technology , product supply , operations services , equity funding and financing and other applicable agreements and circumstances . story_separator_special_tag our assessment of whether we are the primary beneficiary of our vies requires significant assumptions and judgment . 50 impairment of long-lived assets we assess impairment of long-lived assets , which include property and equipment , on at least an annual basis and test long-lived assets for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable . circumstances which could trigger a review include , but are not limited to , significant decreases in the market price of the asset ; significant adverse changes in the business climate or legal factors ; accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset ; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset ; or expectations that the asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life . recoverability is assessed based on the fair value of the asset , which is calculated as the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset . an impairment loss is recognized in the consolidated statements of operations when the carrying amount is determined to be not recoverable and exceeds fair value , which is determined on a discounted cash flow basis . we make estimates and judgments about future undiscounted cash flows and fair values . although our cash flow forecasts are based on assumptions that are consistent with our plans , there is significant exercise of judgment involved in determining the cash flow attributable to a long-lived asset over its estimated remaining useful life . our estimates of anticipated cash flows could be reduced significantly in the future . as a result , the carrying amounts of our long-lived assets could be reduced through impairment charges in the future . stock-based compensation we recognize compensation expense related to stock-based transactions , including the awarding of employee stock options , based on the grant date estimated fair value . we amortize the fair value of the employee stock options on a straight-line basis over the requisite service period of the award , which is generally the vesting period . we account for stock options issued to nonemployees based on the estimated fair value of the awards using the black-scholes option pricing model . we account for restricted stock units issued to nonemployees based on the estimated fair value of our common stock . the measurement of stock based compensation is subject to periodic adjustments as the underlying equity instruments vest , and the resulting change in value , if any , is recognized in our consolidated statement of operations during the period the related services are rendered . there is inherent uncertainty in these estimates and if different assumptions had been used , the fair value of the equity instruments issued to nonemployee consultants could have been significantly different . in future periods , our stock-based compensation expense is expected to increase as a result of our existing unrecognized stock-based compensation still to be recognized and as we issue additional stock-based awards in order to attract and retain employees and nonemployee consultants . significant factors , assumptions and methodologies used in determining fair value we utilize the black-scholes option pricing model to estimate the fair value of our share-based payment awards . the black-scholes option pricing model requires inputs such as the expected term of the grant , expected volatility and risk-free interest rate . further , the forfeiture rate also affects the amount of aggregate compensation that we are required to record as an expense . these inputs are subjective and generally require significant judgment . 51 the fair value of employee stock options was estimated using the following weighted-average assumptions : replace_table_token_4_th our expected term is derived from a comparable group of publicly listed companies that has a similar industry , life cycle , revenue , and market capitalization . our expected volatility is derived from the historical volatilities of comparable group of publicly listed companies within our industry over a period equal to the expected term of our options because we do not yet have a long trading history to use for calculating the volatility of our own common stock . our risk-free interest rate is the market yield currently available on united states treasury securities with maturities approximately equal to the option 's expected term . our expected dividend yield was assumed to be zero as we have not paid , and do not anticipate paying , cash dividends on our shares of common stock . we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience , analysis of employee turnover and other factors . quarterly changes in the estimated forfeiture rate can have a significant effect on reported stock-based compensation expense , as the cumulative effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed . if a revised forfeiture rate is higher than the previously estimated forfeiture rate , an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements . if a revised forfeiture rate is lower than the previously estimated forfeiture rate , an adjustment is made that will result in an increase to the stock-based compensation expense recognized in the consolidated financial statements . we will continue to use judgment in evaluating the expected term , volatility and forfeiture rate related to our own stock-based compensation on a prospective basis and incorporating these factors into the black-scholes option pricing model . each of these inputs is subjective and generally requires significant management and director judgment to determine .
| research and development expenses included stock-based compensation expense of $ 2.2 million in 2010 compared to $ 0.8 million in 2009. sales , general and administrative expenses our sales , general and administrative expenses increased by $ 16.8 million to $ 40.4 million in 2010 compared to the prior year , primarily the result of a $ 10.9 million increase in personnel-related costs associated with higher stock based compensation , headcount growth and higher bonus expenses , a $ 1.8 million increase in professional service expense related primarily to higher legal cost to support business development and higher accounting fees and a $ 1.0 million increase in recruitment and relocation expenditures associated with headcount increase . sales , general and administrative expenses included stock-based compensation of $ 8.3 million compared to $ 2.5 million in 2009. restructuring and asset impairment ( income ) charges in june 2009 , we initiated a restructuring plan to reduce our cost structure . the restructuring plan resulted in the consolidation of our headquarter facility located in emeryville , california , which is under an operating lease . we ceased using a certain part of our headquarter facility in august 2009 and recorded approximately $ 5.4 million of restructuring charges associated with the facility lease costs after the operations ceased . in addition , as a result of the consolidation of the headquarter facility , we recorded approximately $ 3.1 million related to asset impairments and reversed $ 2.7 million related to deferred rent associated with the leased facility . in september 2010 , our board of directors approved our plan to reoccupy the part of our headquarter facility which was previously the subject of the 2009 restructuring . this reoccupied space will be used to meet our expansion requirements . as a result , we reversed approximately $ 4.6 million of our restructuring liability that had been accrued in connection with the 2009 restructuring and
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the companies in such restricted accounts list are of varying sizes , operate in diverse geographical locations and conduct business in different sectors . we believe linkedin designated these particular companies in its restricted account list because linkedin has established business relationships with these companies and feels that these companies are potential purchasers of diversity recruitment services . we are permitted , however , to market and sell our products to any company that is not on such restricted account list after our exclusive agreement with monster worldwide expired on december 31 , 2012. our agreement with monster worldwide requires us to maintain the diversity-based job postings that originated from monster worldwide prior to december 31 , 2012. we are not restricted to sell those companies any additional products or services nor are we prevented from selling those companies directly upon the end of the fulfillment period . we have invested in our direct sales infrastructure and expect to continue to do so in the future . we have budgeted approximately 15 % of the net proceeds of the offering for sales and marketing expenses , including approximately 5 % for additional payroll for additional employees in our direct sales team . these costs are primarily for sales personnel and to support the sales team with tools such as client relationship management systems , personal computers and travel expenses . the sales expenses are variable and can be adjusted to meet market conditions . however , there is a risk that we will not successfully sell our products and services directly to employers at a level that supports the cost of providing those services . we will not be able to generate any recruitment revenue unless and until we are able to market our diversity recruitment services to businesses directly , or alternatively , successfully develop our relationship with linkedin corporation . revenue from our recruitment sector will be impacted positively and negatively by certain general macroeconomic conditions , such as the national unemployment rate . an increase in demand for employees should create market conditions favorable to recruitment companies like ourselves . conversely , a weak employment environment should have a negative impact . we believe that our focus on diverse professionals mitigates this risk because of the social and political environment in the united states . we believe recent trends indicate an increased focus by companies on hiring diverse americans for both compliance and business reasons . for example , as the hispanic population grows and companies seek to conduct business with this population , we expect companies will hire aggressively within the hispanic community , resulting in a robust demand for bilingual english/spanish speakers and writers . because of our specialization and focus in diversity recruitment , as opposed to general recruitment , we have not yet experienced negative pricing pressure associated with product commoditization ( which is the act of making a product or service easy to obtain by making it as uniform , plentiful and affordable as possible ) . on november 12 , 2012 , we entered into a diversity recruitment partnership agreement with linkedin , which became effective on january 1 , 2013. pursuant to our agreement , linkedin may resell to its customers diversity-based job postings and recruitment advertising on our websites . our agreement with linkedin provides that linkedin will make fixed quarterly payments to us in the amount of $ 500,000 per quarter . this amount is half of the fixed quarterly payments we received from monster worldwide . under the linkedin agreement , we will also earn commission for sales of our services in excess of certain thresholds . the fixed quarterly payments are payable regardless of sales volumes or any other performance metric . although such fixed quarterly payments are significantly less than the fixed quarterly payments that we receive from monster worldwide , we believe that we have the potential to exceed our revenues from our previous agreement with monster worldwide because ( i ) we may earn additional commission payments with linkedin , if certain sales levels are achieved , and ( ii ) we may earn revenue by selling our services directly , as described above . under our agreement with linkedin , we will receive ( i ) no commissions on the first $ 10 million of linkedin 's revenue from the sale of our services during each calendar year , ( ii ) 20 % commission on linkedin 's revenue from the sale of our services during each calendar year that is in excess of $ 10 million and less than $ 50 million , and ( iii ) 15 % commission on linkedin 's revenue from the sale of our services during each calendar year that is in excess of $ 50 million . however , there can be no assurance that we will meet or exceed revenues earned through monster worldwide in prior periods . as an example solely to illustrate the stair-step structure of our commission schedule with linkedin , if linkedin sells $ 60 million of our services during any calendar year , we would receive $ 9.5 million in commission revenue for such year , in addition to our fixed payments , because we would earn no commission revenue for the first $ 10 million of linkedin sales of our services , $ 8 million in commission revenue for the next $ 40 million of linkedin sales of our services and $ 1.5 million in commission revenue for the remaining $ 10 million of linkedin sales of our services . we will not obtain information about commissions earned from linkedin , if any , until within 60 days following the end of any fiscal quarter . because our agreement with linkedin became effective on january 1 , 2013 , we do not expect to have information about first quarter commissions , if any , until may 30 , 2013 . 29 during the term of our agreement with linkedin , we may not permit any competitor of linkedin to resell our diversity-based recruitment services . story_separator_special_tag our agreement does not prohibit linkedin from selling its own or any third party 's diversity recruitment services , however , during the term of our agreement with linkedin and for a period of one year thereafter , we may not sell our diversity-based recruitment services , directly or indirectly , to any of the 1,000 companies on linkedin 's restricted account list . the companies in such restricted accounts list range are of varying sizes , operate in diverse geographical locations and conduct business in different sectors . we believe linkedin designated these particular companies in its restricted account list because linkedin has established business relationships with these companies and feels that these companies are potential purchasers of diversity recruitment services . we are permitted , however , to market and sell our products to any company that is not on such restricted account list after our exclusive agreement with monster worldwide expired on december 31 , 2012. the term of our agreement with linkedin is three years , subject to linkedin 's right , in its sole and absolute discretion , to terminate our agreement on the six-month anniversary of the effective date , january 1 , 2013 , upon not less than 30 days ' prior notice and during the fourth calendar quarter of the first and second years of the term of our agreement upon not less than 90 days ' prior notice . if not terminated sooner , the term of our agreement with linkedin will automatically renew for successive one-year terms unless either party delivers a notice of non-renewal with 90 days ' prior notice . for additional information about our business arrangements with linkedin , please see the section entitled “ business - linkedin . ” advertising . we generate most of our advertising revenue from our exclusive advertising relationship with apollo group , for which we place advertising on our websites and to whose website we direct our members to help advance their education . under our agreement with apollo group , we may not provide advertising services for any other institution of higher education , whether for-profit or non-profit , other than apollo group . because we have an exclusivity arrangement with apollo group , our revenue growth in this market segment is dependent on the volume of students interested in , and the success of , apollo group 's university of phoenix and their use of our websites . please see the section entitled “ business - advertising revenue - university of phoenix ” for further information about our business arrangement with apollo group . the majority of our advertising revenue from apollo group is recognized based upon fixed fees with certain minimum monthly website visits or fixed fee for revenue sharing agreements in which payment is required at the time of posting . unless we earn additional advertising revenue from clients outside of the higher education sector , our ability to generate additional advertising revenue is limited , unless we are able to negotiate more favorable terms with apollo group . we believe that we have an opportunity for long-term growth with apollo group . in the short term , we are focused on maintaining our relationship with apollo group . if our relationship with apollo group is discontinued , we would suffer a loss in advertising revenue in the short-term . however , in the long-term , we feel that the for-profit education market sector is large enough and competitive enough to allow us to positively adjust to the potential loss of this client because we believe our target audience of diverse professionals is highly sought after . we believe we have significant opportunities to grow our advertising revenue from clients outside of the education sector . cost of growth in the fiscal year ended december 31 , 2012 , we began to increase our sales and marketing , as well as , product development expenses . such expenses will not be capitalized under our financial statements , and we do not expect to see increased revenues resulting from these investments until the first quarter of 2013 at the earliest . therefore , as we execute our strategy to increase advertising and recruitment revenue by hiring additional personnel , expanding our marketing efforts and building a sales team , our profitability has declined and may continue to decline in the short-term . we may increase our office space to accommodate additional personnel . story_separator_special_tag administrative expense was primarily due to an increase of approximately $ 275,000 in additional compensation payments paid to one of the members . the increase in additional compensation payments consists of $ 263,000 to compensate the member for additional income taxes resulting from money paid in 2010 for a condominium apartment in miami , florida which was primarily used by the company and an increase of $ 12,000 in expenses related to the condominium ( please see “ agreements with directors and executive officers ” for further information regarding the additional compensation payments ) , an increase in audit and accounting fees of approximately $ 141,000 , increases in personnel expenses of $ 83,000 related to the hiring of additional personnel to support our planned initial public offering and a $ 49,000 increase in bad debt expense as we determined the outstanding balance of certain advertising revenue invoices were uncollectible , offset by a decrease in public relations expense of $ 14,000 as we scaled back our press release efforts due to the ipo process and a decrease in cam charges related to our office lease of $ 35,000. depreciation and amortization expense : the $ 4,351 increase in depreciation and amortization expense for the year ended december 31 , 2012 , as compared to the year ended december 31 , 2011 was due to a $ 3,000 increase in amortization expense for additions to capitalized software related to updates and enhancements to our technology platforms and a $ 1,000 increase in depreciation expense related to computer equipment purchased in 2012. other expenses and income interest and other income : interest and other
| the number of persons we referred to the university of phoenix who expressed an interest in obtaining information about attending the university of phoenix . these increases were offset by a $ 172,391 decrease in advertising revenue and a $ 8,495 decrease in partner job posting revenue . the reasons for these decreases was that we allocated additional advertising inventory to the monster worldwide recruitment channel , which is covered by our flat fee arrangement with monster worldwide , and demand for media and partner services is slightly softer in 2012 than 2011 . 31 operating expenses cost of services expense : our cost of services expense for the year ended december 31 , 2012 was $ 805,447 , a decrease of $ 11,807 , or 1.4 % , as compared to $ 817,254 for the year ended december 31 , 2011. the year over year decrease was primarily attributable to net decrease of $ 34,000 related to the maintenance and operation of our systems and websites consisting of computer programmer services expense decrease of $ 5,000 and web hosting expense increase of $ 47,000 , both due to increased traffic and functionality for our websites , offset by a decrease in web development expense $ 76,000 as we brought more of those expenses in-house in 2012 and this amount is now included in salaries and wages . offsetting the decrease in cost of services above was an increase in consulting expense related to our advertising and media services and our apollo group agreement which increased $ 71,000 , and an increase in salaries and benefits of $ 59,000 resulting from hiring additional operations personnel in the fourth quarter of 2011 to support our revenue and traffic growth and the hiring of additional operations personnel in the second quarter of 2012. the increase in cost of services expense was offset by a $ 109,000 decrease in revenue sharing costs as we focused
| 10,999 |
previously , same-store sales growth represented the estimated percentage change in sales of all restaurants in the company system that have been open for one year or more , including stores temporarily closed , and the base stores changed on a rolling basis from month to month . this revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores . prior years have been adjusted accordingly . company sales represent revenues from company-owned restaurants . company restaurant profit ( “ restaurant profit ” ) is defined as company sales less expenses incurred directly by our company-owned restaurants in generating company sales . company restaurant margin percentage is defined as restaurant profit divided by company sales . within the company sales and restaurant profit analysis , store portfolio actions represent the net impact of new-unit openings , acquisitions , refranchising and store closures , and other primarily represents the impact of same-store sales as well as the impact of changes in restaurant operating costs such as inflation/deflation . 72 2020 form 10-k story_separator_special_tag style= '' text-align : justify ; margin-bottom:0pt ; margin-top:0pt ; font-weight : normal ; font-style : normal ; color : # auto ; text-transform : none ; font-variant : normal ; letter-spacing:0pt ; font-family : times new roman ; font-size:10pt ; '' > in february 2020 , the company granted partner psu awards to select employees who were deemed critical to the company 's execution of its strategic operating plan . these psu awards will only vest if threshold performance goals are achieved over a four-year performance period , with the payout ranging from 0 % to 200 % of the target number of shares subject to the psu awards . partner psu awards were granted to address increased competition for executive talent , motivate transformational performance and encourage management retention . given the unique nature of these grants , the compensation committee does not intend to grant similar , special grants to the same employees during the performance period . the impact from these special awards is excluded from metrics that management uses to assess the company 's performance . the company recognized share-based compensation cost of $ 7 million associated with the partner psu awards for the year ended december 31 , 2020 . 76 2020 form 10-k ( c ) in the quarter ended june 30 , 2020 , the company derecognized a $ 3 million indemnification asset previously recorded for the daojia acquisition as the indemnification right expired pursuant to the purchase agreement . the amount was included in other income , net , but was not allocated to any segment for performance reporting purposes . ( d ) during the years ended december 31 , 2019 and 2018 , we recorded impairment charges of $ 11 million and $ 12 million , respectively , on intangible assets and goodwill attributable to the daojia business . the amount was included in closures and impairment expenses in our consolidated statements of income , but was not allocated to any segment for performance reporting purposes . for the years ended december 31 , 2019 and 2018 , we recorded tax benefits of $ 1 million and $ 3 million , respectively , associated with the daojia impairment , and allocated $ 2 million and $ 1 million of the after-tax impairment charges to noncontrolling interests , respectively . ( see note 5 for additional information . ) ( e ) tax effect was determined based upon the nature , as well as the jurisdiction , of each special item at applicable tax rate . ( f ) in the fourth quarter of 2018 , we recognized a tax benefit of $ 36 million as a result of adjusting the provisional amount of the transition tax previously recorded . we completed the evaluation of the impact on our transition tax computation based on the final regulations that were released by the u.s. treasury department and the u.s. internal revenue service and became effective in the first quarter of 2019 , and recorded an additional tax expense of $ 8 million for the transition tax accordingly . the company excludes impact from special items for the purpose of evaluating performance internally . special items are not included in any of our segment results . in addition , the company provides adjusted ebitda because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax , interest income , net , investment gain or loss , depreciation and amortization , store impairment charges , and special items . store impairment charges included as an adjustment item in adjusted ebitda primarily resulted from our semi-annual impairment evaluation of long-lived assets of individual restaurants , and additional impairment evaluation whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable . if these restaurant-level assets were not impaired , depreciation of the assets would have been recorded and included in ebitda . therefore , store impairment charges were a non-cash item similar to depreciation and amortization of our long-lived assets of restaurants . the company believes that investors and analyst may find it useful in measuring operating performance without regard to such non-cash item . these adjusted measures are not intended to replace the presentation of our financial results in accordance with gaap . rather , the company believes that the presentation of these adjusted measures provides additional information to investors to facilitate the comparison of past and present results , excluding those items that the company does not believe are indicative of our ongoing operations due to their nature . 77 2020 form 10-k segment results kfc kfc delivered a resilient performance in 2020 by accelerating store expansion with attractive returns and maintaining solid profitability . kfc continued focus on innovative products , creating abundant value to our customers as well as upgrading ingredients to meet chinese consumers ' needs . kfc also continued with its digital and delivery initiatives to enhance the customer experience . story_separator_special_tag kfc 's loyalty program members exceeded 275 million at year-end 2020 and contributed approximately 62 % of system sales at kfc in 2020. delivery sales accounted for approximately 28 % of company sales at kfc in 2020 with store and city coverage of 85 % and 97 % , respectively , at the end of 2020. replace_table_token_11_th replace_table_token_12_th replace_table_token_13_th replace_table_token_14_th 78 2020 form 10-k replace_table_token_15_th ( a ) as a result of the acquisition of suzhou kfc as disclosed in note 1 , the units of suzhou kfc were transferred from unconsolidated affiliates to company-owned . company sales and restaurant profit the changes in company sales and restaurant profit were as follows : replace_table_token_16_th replace_table_token_17_th in 2020 , the decrease in company sales , excluding the impact of f/x , was primarily driven by the same-store sales decline and temporary store closures due to the impact of the covid-19 pandemic , partially offset by net unit growth including the impact from the acquisition of suzhou kfc . the decrease in restaurant profit , excluding the impact of f/x , was primarily driven by the decrease in company sales , increased rider cost associated with the rise in delivery volume , higher promotion costs and wage inflation of 3 % , partially offset by labor efficiency , utility savings , one-time reductions in social security contributions and lease concessions . in 2019 , the increase in company sales and restaurant profit , excluding the impact of f/x , was mainly driven by same-store sales growth , net unit growth , labor efficiency and a decrease in utilities expenses and other restaurant operating costs , partially offset by commodity inflation of 4 % , wage inflation of 5 % and higher promotion cost . franchise fees and income in 2020 , the decrease in franchise fees and income , excluding the impact of f/x , was primarily driven by the impact from the acquisition of suzhou kfc and same-store sales decline of restaurants operated by unconsolidated affiliates and franchisees due to the impact of the covid-19 pandemic , partially offset by the net unit growth of restaurants operated by unconsolidated affiliates and franchisees . 79 2020 form 10-k in 2019 , the increase in franchise fees and income , excluding the impact of f/x , was primarily driven by same-store sales growth and net unit growth for the unconsolidated affiliates and franchisees , partially offset by the impact from the acquisition of wuxi kfc in 2018. g & a expenses in 2020 , the decrease in g & a expenses , excluding the impact of f/x , was primarily driven by realignment of cost structure , one-time reductions in social security contributions , higher government incentives received and a decrease in performance-based compensation , partially offset by merit increases . in 2019 , the increase in g & a expenses , excluding the impact of f/x , was primarily driven by higher compensation costs mainly due to merit increases and higher performance-based compensation associated with strong operating results of kfc . operating profit in 2020 , the decrease in operating profit , excluding the impact of f/x , was primarily driven by the decrease in restaurant profit and higher closure and store impairment expenses . in 2019 , the increase in operating profit , excluding the impact of f/x , was primarily driven by the increase in restaurant profit , partially offset by higher g & a expenses . pizza hut during 2020 , we continued to focus on strengthening the fundamentals , including investments in products , strengthening our digital capabilities , developing delivery and other channels and enhancing asset portfolio to drive growth . pizza hut 's loyalty program members exceeded 85 million at year-end 2020 and contributed approximately 52 % of system sales at pizza hut in 2020. delivery sales accounted for approximately 36 % of company sales at pizza hut in 2020 with store and city coverage of 92 % and 99 % , respectively , at the end of 2020. replace_table_token_18_th 80 2020 form 10-k replace_table_token_19_th replace_table_token_20_th replace_table_token_21_th replace_table_token_22_th company sales and restaurant profit the changes in company sales and restaurant profit were as follows : replace_table_token_23_th replace_table_token_24_th in 2020 , the decrease in company sales and restaurant profit , excluding the impact of f/x , was primarily driven by same-store sales decline and temporary store closures due to the impact of the covid-19 pandemic , increased rider cost associated with the rise in delivery volume , and commodity and wage inflation of 3 % each , partially offset by labor efficiency , lower promotion costs , one-time reductions in social security contributions , and savings in utilities and other restaurant operating costs including lease concessions . 81 2020 form 10-k in 2019 , the increase in company sales and restaurant profit , excluding the impact of f/x , was primarily driven by same-store sales growth , store portfolio actions , labor efficiency , commodity deflation of 2 % , and savings in utilities and other restaurant operating costs , partially offset by higher promotion costs and wage inflation of 5 % . g & a expenses in 2020 , the decrease in g & a expenses , excluding the impact of f/x , was primarily driven by the realignment of cost structure and one-time reductions in social security contributions . in 2019 , the increase in g & a expenses , excluding the impact of f/x , was primarily driven by higher compensation costs due to higher performance-based compensation and merit increases , and lower government incentives received , partially offset by lower shared cost allocation associated with store development activities . operating profit in 2020 , the decrease in operating profit , excluding the impact of f/x , was primarily driven by the decrease in restaurant profit and higher closure and store impairment expenses , partially offset by lower g & a expenses .
| the increase was also attributable to new-unit openings of 1,006 or 8 % net unit growth , bringing total store count to 9,200 in more than 1,300 cities . the increase in operating profit , excluding the impact of f/x , was primarily driven by strong sales and margin expansion , partially offset by the negative impact from lapping a gain recognized from re-measurement of our previously held equity interest in wuxi kfc at fair value upon acquisition in 2018 , and higher g & a expenses in 2019. net income for 2019 increased 1 % or 6 % , excluding f/x , mainly due to investment gain and the increase in operating profit , partially offset by the impact from the tax act , while adjusted net income , excluding f/x , increased 26 % . 2020 financial highlights are below : replace_table_token_4_th nm refers to changes over 100 % , from negative to positive amounts or from zero to an amount . ( a ) system sales and same-store sales percentages as shown in 2020 financial highlights exclude the impact of f/x . effective january 1 , 2018 , temporary store closures are normalized in the same-store sales calculation by excluding the period during which stores are temporarily closed . 73 2020 form 10-k ( b ) sales from non-company-owned restaurants , for which we do not receive a sales-based royalty , are excluded from system sales and same-store sales . the consolidated results of operations for the years ended december 31 , 2020 , 2019 and 2018 and other data are presented below : replace_table_token_5_th ( a ) represents year-over-year change in percentage . performance metrics replace_table_token_6_th 74 2020 form 10-k replace_table_token_7_th ( a ) as a result of the acquisition of suzhou kfc as disclosed in note 1 , the units of suzhou kfc were transferred from unconsolidated affiliates to company-owned . non-gaap measures in addition to the results provided in accordance with gaap throughout this md & a , the company provides non-gaap measures adjusted for special items , which include adjusted operating profit , adjusted net income , adjusted earnings per common share ( “ eps ” ) , adjusted effective tax rate and adjusted ebitda ,
| 11,000 |
long-lived assets and real estate held for sale we review the recoverability of long-lived assets , consisting of equipment and leasehold improvements , and of real estate held for sale , when events or changes in circumstances occur that indicate carrying values may not be recoverable . stock-based compensation we recognize compensation expense for all share-based awards made to employees and directors . the fair value of share-based awards is estimated at the grant date using the black-scholes option-pricing model . the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method . - 14 - the determination of fair value using the black-scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables , including expected stock price volatility , risk-free interest rate , expected dividends and projected employee stock option exercise behavior . we estimate stock price volatility based on two factors : ( a ) the measurement date ( typically the grant date ) and ( b ) the expected life of the option , which we calculate using the staff accounting bulletin no . 107 simplified method . income taxes we recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers . deferred tax assets at june 30 , 2012 and 2011 consisted primarily of basis differences related to research and development tax credit utilization , net operating loss carryovers , intangible assets , accrued expenses and inventories . significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets . such determination is based on our historical taxable income , with consideration given to our estimates of future taxable income and the periods over which deferred tax assets will be recoverable . we record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized . when we establish or reduce the valuation allowance against deferred tax assets , the provision for income taxes will increase or decrease , respectively , in the period such determination is made . at june 30 , 2012 and 2011 , we maintained a valuation allowance against the entire balance of our deferred tax assets , net of deferred tax liabilities . story_separator_special_tag in accounts receivable of $ 418,000 and inventories of $ 475,000 , both increases due primarily to the high sales volumes during the 2011 period . net cash used in investing activities during the year ended june 30 , 2012 consisted of purchases of equipment amounting to $ 341,000 , net of proceeds received , amounting to $ 82,000 , from the sale of equipment in connection with the sale of the astromec business ( see note 3 of notes to consolidated financial statements ) . net cash used in investing activities during the corresponding period in 2011 consisted of purchases of equipment , amounting to $ 265,000. net cash used in financing activities during the year ended june 30 , 2012 was $ 362,000 , and consisted primarily of reductions in the principal balance of our bank term loan , amounting to $ 357,000. for the year ended june 30 , 2011 , net cash used in financing activities amounted to $ 1.7 million . comprising this amount were principal reductions , amounting to $ 236,000 , to our term loan with wells fargo bank ( until february 2011 ) and with union bank ( commencing february 2011 ) , and the payment , in september 2010 , of the remaining $ 1.5 million balance due on a mortgage loan , held by union bank and collateralized by our carson city , nevada property , fully retiring such indebtedness . ( see note 5 of notes to consolidated financial statements . ) our bank credit facility agreements contain various covenants , including certain covenants measured annually based on fiscal year results , concerning our financial performance . at june 30 , 2012 , we were in violation of profitability-based covenants , for which the bank had the right to declare us in default of the bank credit facility agreements and the entire amount owing under the facility , consisting of a term loan , to become immediately due and payable . we have historically not made any borrowings against our bank lines of credit , and believe that existing cash balances and cash flows from operations will be sufficient to fund operations for the next twelve months and to fully repay the term loan . accordingly , on august 30 , 2012 , we notified the bank of our intent to terminate the credit facility agreements and repay the term loan in full on or before september 30 , 2012. by letter to us dated september 4 , 2012 , the bank waived , through october 1 , 2012 , the rights it otherwise would have had pursuant to the covenant violations described above . accordingly , we have classified all amounts owing under the term loan as current liabilities as of june 30 , 2012 in the consolidated financial statements appearing elsewhere in this report . reduction in large customer orders in december 2009 our largest customer informed us that it was in the process of developing , and planned to eventually manufacture , its own surgical devices which were functionally comparable to the products the company provided to the customer at that time . pro-dex had been the exclusive manufacturer of these products since they were developed . the resulting reduction in orders from our largest customer and its expected future impact on our business is more fully described in description of business under item 1 . - 17 - changes in bank debt story_separator_special_tag long-lived assets and real estate held for sale we review the recoverability of long-lived assets , consisting of equipment and leasehold improvements , and of real estate held for sale , when events or changes in circumstances occur that indicate carrying values may not be recoverable . stock-based compensation we recognize compensation expense for all share-based awards made to employees and directors . the fair value of share-based awards is estimated at the grant date using the black-scholes option-pricing model . the portion that is ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method . - 14 - the determination of fair value using the black-scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables , including expected stock price volatility , risk-free interest rate , expected dividends and projected employee stock option exercise behavior . we estimate stock price volatility based on two factors : ( a ) the measurement date ( typically the grant date ) and ( b ) the expected life of the option , which we calculate using the staff accounting bulletin no . 107 simplified method . income taxes we recognize deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities along with net operating loss and tax credit carryovers . deferred tax assets at june 30 , 2012 and 2011 consisted primarily of basis differences related to research and development tax credit utilization , net operating loss carryovers , intangible assets , accrued expenses and inventories . significant management judgment is required in determining our provision for income taxes and the recoverability of our deferred tax assets . such determination is based on our historical taxable income , with consideration given to our estimates of future taxable income and the periods over which deferred tax assets will be recoverable . we record a valuation allowance against deferred tax assets to reduce the net carrying value to an amount that we believe is more likely than not to be realized . when we establish or reduce the valuation allowance against deferred tax assets , the provision for income taxes will increase or decrease , respectively , in the period such determination is made . at june 30 , 2012 and 2011 , we maintained a valuation allowance against the entire balance of our deferred tax assets , net of deferred tax liabilities . story_separator_special_tag in accounts receivable of $ 418,000 and inventories of $ 475,000 , both increases due primarily to the high sales volumes during the 2011 period . net cash used in investing activities during the year ended june 30 , 2012 consisted of purchases of equipment amounting to $ 341,000 , net of proceeds received , amounting to $ 82,000 , from the sale of equipment in connection with the sale of the astromec business ( see note 3 of notes to consolidated financial statements ) . net cash used in investing activities during the corresponding period in 2011 consisted of purchases of equipment , amounting to $ 265,000. net cash used in financing activities during the year ended june 30 , 2012 was $ 362,000 , and consisted primarily of reductions in the principal balance of our bank term loan , amounting to $ 357,000. for the year ended june 30 , 2011 , net cash used in financing activities amounted to $ 1.7 million . comprising this amount were principal reductions , amounting to $ 236,000 , to our term loan with wells fargo bank ( until february 2011 ) and with union bank ( commencing february 2011 ) , and the payment , in september 2010 , of the remaining $ 1.5 million balance due on a mortgage loan , held by union bank and collateralized by our carson city , nevada property , fully retiring such indebtedness . ( see note 5 of notes to consolidated financial statements . ) our bank credit facility agreements contain various covenants , including certain covenants measured annually based on fiscal year results , concerning our financial performance . at june 30 , 2012 , we were in violation of profitability-based covenants , for which the bank had the right to declare us in default of the bank credit facility agreements and the entire amount owing under the facility , consisting of a term loan , to become immediately due and payable . we have historically not made any borrowings against our bank lines of credit , and believe that existing cash balances and cash flows from operations will be sufficient to fund operations for the next twelve months and to fully repay the term loan . accordingly , on august 30 , 2012 , we notified the bank of our intent to terminate the credit facility agreements and repay the term loan in full on or before september 30 , 2012. by letter to us dated september 4 , 2012 , the bank waived , through october 1 , 2012 , the rights it otherwise would have had pursuant to the covenant violations described above . accordingly , we have classified all amounts owing under the term loan as current liabilities as of june 30 , 2012 in the consolidated financial statements appearing elsewhere in this report . reduction in large customer orders in december 2009 our largest customer informed us that it was in the process of developing , and planned to eventually manufacture , its own surgical devices which were functionally comparable to the products the company provided to the customer at that time . pro-dex had been the exclusive manufacturer of these products since they were developed . the resulting reduction in orders from our largest customer and its expected future impact on our business is more fully described in description of business under item 1 . - 17 - changes in bank debt
| gross profit as a percentage of sales was 31 % for the year ended june 30 , 2012 , compared to 42 % for the year ended june 30 , 2011. of this eleven percentage point decrease , the aforementioned product mix changes and manufacturing inefficiencies were the primary causes , each contributing five percentage points . selling expenses decreased $ 69,000 , or 4 % , to $ 1.5 million in 2012 from $ 1.6 million in 2011 , due primarily to reduced website enhancement costs and departmental compensation expense of $ 130,000 and $ 95,000 , respectively , offset by increased advertising and trade show participation , the costs of which grew $ 92,000 and $ 65,000 , respectively , from 2011 to 2012. general and administrative expenses were relatively unchanged , amounting to $ 3.2 million in both 2012 and 2011. underlying the absence of a year-over-year change were decreases in employee compensation , primarily attributable to a decrease from 2011 to 2012 in performance-based bonuses , and legal expense of $ 247,000 and $ 128,000 , respectively , offset by an increase of $ 339,000 , related to costs incurred in connection with the resignation of our former chief executive officer ( see note 8 of notes to consolidated financial statements ) . research and development costs , which include costs related to development of new products and enhancements to existing products , increased $ 179,000 , or 9 % , to $ 2,068,000 in 2012 from $ 1,889,000 in 2011 due primarily to increases of $ 83,000 and $ 84,000 in small motor development costs and employee related expenses , respectively , from 2011 to 2012. interest expense in 2012 was $ 36,000 , compared to $ 148,000 in 2011. this decrease was due to the effects of ( a ) the refinancing of our bank term loan in february 2011 , and ( b ) the repayment and retirement in september 2010 , prior to its maturity , of the mortgage collateralized by the land and building then owned in carson city , nevada ( see note 5 of notes to consolidated financial statements ) . our effective combined federal and state tax benefit rate in 2012 was 31 % , as compared to a 16 % tax provision rate in 2011. the benefit generated in 2012 is
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our challenge continues to be operating in a cyclical and rapidly evolving industry environment . we are continuing our efforts to balance industry changes , industry partnerships , new technologies , business geography shifts , exchange rate volatility , trade issues and tariffs , increasing costs and strategic investments in our business with the level of demand and mix of business we expect . we continue to manage our costs carefully and execute strategies for cost reduction . we are focusing our research and development efforts in our strategic growth markets , namely automotive electronics and iot new programming technologies , secure supply chain solutions , automated programming systems and their enhancements for the manufacturing environment and software . we are currently focusing our research and development efforts on strategic growth markets , including automotive electronics and iot . we are developing technology to securely provision new categories of semiconductors , including secure elements , authentication chips , and secure microcontrollers . we plan to deliver new programming technology and automated handling systems for managed and secure programming in the manufacturing environment . we continue to focus on extending the capabilities and support for our product lines and supporting the latest semiconductor devices , including various configurations of nand flash , e-mmc , ufs and microcontrollers on our newer products . our customer focus has been on global and strategic high volume manufacturers in key market segments like automotive electronics , iot , industrial controls and consumer electronics as well as programming centers . critical accounting policy judgments and estimates the preparation of financial statements in accordance with accounting principles generally accepted in the united states of america requires that we make estimates and judgments , which affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosures of contingent assets and liabilities . on an on-going basis , we evaluate our estimates , including those related to revenue recognition , sales returns , bad debts , inventories , intangible assets , income taxes , warranty obligations , restructuring charges , contingencies such as litigation and contract terms that have multiple elements and other complexities typical in the capital equipment industry . we base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances . actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements : 20 revenue recognition : effective january 1 , 2018 , the company adopted asu 2014-09 , revenue ( “ topic 606 ” ) : revenue from contracts with customers , using the modified retrospective method . topic 606 provides a single , principles-based five-step model to be applied to all contracts with customers . it generally provides for the recognition of revenue in an amount that reflects the consideration to which the company expects to be entitled , net of allowances for estimated returns , discounts or sales incentives , as well as taxes collected from customers when control over the promised goods or services are transferred to the customer . our basic revenue recognition remains essentially the same as it was in 2017. the adoption of topic 606 did not have a material impact on our 2018 financial statement line items , either individually or in the aggregate , and would not have been material to 2017 financial results . we have elected the practical expedient to expense contract acquisition costs , primarily sales commissions , for contracts with terms of one year or less and will capitalize and amortize incremental costs with terms that exceed one year . during 2018 , the impact of capitalization of incremental costs for obtaining contracts was $ 8,193. we have made a sales tax policy election to exclude sales , use , value added , some excise taxes and other similar taxes from the measurement of the transaction price . we recognize revenue upon transfer of control of the promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services . we have determined that our programming equipment has reached a point of maturity and stability such that product acceptance can be assured by testing at the factory prior to shipment and that the installation meets the criteria to be a separate performance obligation . these systems are standard products with published product specifications and are configurable with standard options . the evidence that these systems could be deemed as accepted was based upon having standardized factory production of the units , results from batteries of tests of product performance to our published specifications , quality inspections and installation standardization , as well as past product operation validation with the customer and the history provided by our installed base of products upon which the current versions were based . the revenue related to products requiring installation that is perfunctory is recognized upon transfer of control of the product to customers , which generally is at the time of shipment . installation that is considered perfunctory includes any installation that is expected to be performed by other parties , such as distributors , other vendors , or the customers themselves . this takes into account the complexity , skill and training needed as well as customer expectations regarding installation . we enter into arrangements with multiple performance obligations that arise during the sale of a system that includes an installation component , a service and support component and a software maintenance component . the transaction price is allocated to the separate performance obligations on relative standalone sales price . we allocate the transaction price of each element based on relative selling prices . story_separator_special_tag relative selling price is based on the selling price of the standalone system . for the installation and service and support performance obligations , we use the value of the discount given to distributors who perform these components . for software maintenance performance obligations , we use what we charge for annual software maintenance renewals after the initial year the system is sold . revenue is recognized on the system sale based on shipping terms , installation revenue is recognized after the installation is performed , and hardware service and support and software maintenance revenue is recognized ratably over the term of the agreement , typically one year . deferred revenue includes service , support and maintenance contracts and represents the undelivered performance obligation of agreements that are typically for one year . when we sell software separately , we recognize revenue upon the transfer of control of the software , which is generally upon shipment , provided that only inconsequential performance obligations remain on our part and substantive acceptance conditions , if any , have been met . we recognize revenue when there is an approved contract that both parties are committed to perform , both parties rights have been identified , the contract has substance , collection of substantially all the consideration is probable , the transaction price has been determined and allocated over the performance obligations , the performance obligations including substantive acceptance conditions , if any , in the contract have been met , the obligation is not contingent on resale of the product , the buyer 's obligation would not be changed in the event of theft , physical destruction or damage to the product , the buyer acquiring the product for resale has economic substance apart from us and we do not have significant obligations for future performance to directly bring about the resale of the product by the buyer . we establish a reserve for sales returns based on historical trends in product returns and estimates for new items . payment terms are generally 30 days from shipment . we transfer certain products out of service from their internal use and make them available for sale . the products transferred are typically our standard products in one of the following areas : service loaners , rental or test units ; engineering test units ; or sales demonstration equipment . once transferred , the equipment is sold by our regular sales channels as used equipment inventory . these product units often involve refurbishing and an equipment warranty , and are conducted as sales in our normal and ordinary course of business . the transfer amount is the product unit 's net book value and the sale transaction is accounted for as revenue and cost of goods sold . 21 allowance for doubtful accounts : we base the allowance for doubtful accounts receivable on our assessment of the collectability of specific customer accounts and the aging of accounts receivable . if there is deterioration of a major customer 's credit worthiness or actual defaults are higher than historical experience , our estimates of the recoverability of amounts due to us could be adversely affected . inventory : inventories are stated at the lower of cost or net realizable value . adjustments are made to standard cost , which approximates actual cost on a first-in , first-out basis . we estimate reductions to inventory for obsolete , slow-moving , excess and non-salable inventory by reviewing current transactions and forecasted product demand . we evaluate our inventories on an item by item basis and record inventory adjustments accordingly . if there is a significant decrease in demand for our products , uncertainty during product line transitions , or a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements , we may be required to increase our inventory adjustments and our gross margin could be adversely affected . warranty accruals : we accrue for warranty costs based on the expected material and labor costs to fulfill our warranty obligations . if we experience an increase in warranty claims , which are higher than our historical experience , our gross margin could be adversely affected . tax valuation allowances : given the uncertainty created by our loss history , as well as the ongoing cyclical uncertain economic outlook for our industry and capital and geographic spending as well as income and net deferred tax assets by entity and country , we expect to continue to limit the recognition of net deferred tax assets and accounting for uncertain tax positions and maintain the tax valuation allowances . at the current time , we expect , therefore , that reversals of the tax valuation allowance will take place as we are able to take advantage of the underlying tax loss or other attributes in carry forward or their use by future income or circumstances allow us to realize these attributes . the transfer pricing and expense or cost sharing arrangements are complex areas where judgments , such as the determination of arms-length arrangements , can be subject to challenges by different tax jurisdictions . share-based compensation : we account for share-based awards made to our employees and directors , including employee stock option awards and restricted stock unit awards , using the estimated grant date fair value method of accounting . for options , we estimate the fair value using the black-scholes valuation model and an estimated forfeiture rate , which requires the input of highly subjective assumptions , including the option 's expected life and the price volatility of the underlying stock . the expected stock price volatility assumption was determined using the historical volatility of our common stock .
| we are developing technology to securely program new categories of semiconductors , including secure elements , authentication chips , and secure microcontrollers . we delivered new enhanced programming technology and automated handling systems for managed and secure programming in the manufacturing environment and extending the capabilities and support for our programmer architecture . our r & d spending fluctuates based on the number , type , and the development stage of our product initiatives and projects . selling , general and administrative replace_table_token_6_th selling , general and administrative ( “ sg & a ” ) expenses increased $ 141,000 for the year ended december 31 , 2018 compared to 2017. the increase was primarily related to higher employee related costs , facilities and depreciation , offset in part by lower incentive compensation and sales commissions . interest replace_table_token_7_th interest income was higher for the year ended december 31 , 2018 compared to 2017 , primarily due to higher invested cash balances . income taxes 2018 change 2017 ( in thousands ) income tax ( expense ) benefit ( $ 291 ) * $ 288 * not meaningful income tax ( expense ) increased by $ 579,000 for the year ended december 31 , 2018 compared to 2017. the increase was primarily a result of the tax cuts and jobs act of 2017 , when we recorded the impact of a $ 531,000 net benefit in the fourth quarter of 2017. this was made up of $ 67,000 of additional tax relating to the “ deemed repatriation ” of previously deferred foreign subsidiary “ post 1986 earnings & profits ” , and recognizing a tax benefit of $ 598,000 related to refundable “ alternative minimum tax credits ” in carryforward . income tax ( expense ) in 2018 is primarily the result of foreign subsidiary income tax and minimal us state income tax . the effective tax rate for 2018 of 15.3 % differed from the statutory tax rates in our tax reporting jurisdictions primarily due to the effect of valuation allowances as well as foreign tax incentives and credits . we have a valuation allowance of $ 7.0
| 11,002 |
we believe that continued diversification of our business and share capture are important parts of our strategy and necessary for continued revenue growth . our strategy to capitalize on these market dynamics and drive the profitable growth of our business includes the initiatives set forth in the “ strategy ” section of the description of our business in item 1 of part 1 of this annual report . competitive landscape the markets in which we compete are characterized by rapidly advancing technologies , frequent introduction of new networking solutions and aggressive selling and pricing efforts to gain or retain market share . the markets for our solutions are both highly competitive and fragmented , as we regularly compete with number of large , multi-national vendors with greater financial , operational and marketing resources , and significantly broader product offerings . our sales of converged packet optical solutions face an intense competitive environment as we and our competitors introduce new , higher-capacity , higher-speed network solutions with improved reach , spectral efficiency , automation , power consumption and cost per bit . we expect competition in our industry to continue to broaden and to remain challenging and dynamic . as we expand our packet networking solutions and our waveserver dci platform , our solutions have become increasingly competitive with ip router vendors , data center switch providers , and other it suppliers or integrators . similarly , as we seek increased customer adoption of our blue planet software platform , we expect to compete more directly with additional software vendors and information technology vendors or integrators of these solutions . network operators are pursuing a variety of “ consumption models , ” or approaches to the design and procurement of their network infrastructure . while broader adoption of procurement models that emphasize disaggregation of hardware and software remains uncertain , we expect that a diversity of consumption models will require us and other system vendors to broaden our existing offering and commercial models over time . we may face competition from component vendors , including those in our supply chain , that develop networking products based on off-the-shelf or commoditized hardware technology , referred to as “ white box ” hardware . further , some of our competitors , both large and small , are not vertically integrated in their packet optical supply chain , and sell solutions that rely upon third-party coherent modem technology from merchant modem providers . we may compete with these providers as we pursue merchant modem sales opportunities . we have entered into global distribution relationships to sell our wavelogic coherent optical technology into this market through lumentum , neophotonics and oclaro . each has the unrestricted ability to sell such optical modules to end users , including our customers , our competitors , and other vendors or network operators that plan to build or use “ white box ” hardware . accordingly , we may ultimately compete with these partners in the marketplace . in connection with consumption models involving greater disaggregation , the continued use of such third-party modem technology and or the availability of such technology in the market may increase overall pricing pressure in this space and may negatively impact our ability to derive higher gross margins for converged packet optical solutions . see the “ industry background ” and “ competition ” sections of the description of our business in item 1 of part 1 of this annual report for more information related to the competitive landscape of our markets . balance sheet initiatives share repurchase authorization . on december 7 , 2017 , we announced that our board of directors authorized a program to repurchase up to $ 300 million of our outstanding common stock through the end of fiscal 2020. we may purchase shares at management 's discretion in the open market , in privately negotiated transactions , in transactions structured through investment banking institutions , or a combination of the foregoing . we may also , from time to time , enter into rule 10b5-1 plans to facilitate repurchases of shares under this authorization . the amount and timing of repurchases are subject to a variety of factors including liquidity , cash flow , stock price , and general business and market conditions . exchange offer for 2018 convertible notes to add cash settlement conversion options . on august 2 , 2017 , we completed an offer to exchange our currently outstanding 3.75 % convertible senior notes due 2018 ( the “ original notes ” ) for a new series of 3.75 % convertible senior notes due 2018 ( the “ new notes ” ) and an exchange fee of $ 2.50 per $ 1,000 original principal amount . the new notes give us the option , at our election , to settle conversions of the new notes for cash , shares of our common stock , or a combination of cash and shares . it is our current intent that upon any conversion of the new notes we will settle the principal amount thereof in cash . accordingly , we used the treasury stock method for the new notes in our diluted earnings per share calculation starting in the fourth quarter of fiscal 2017. following settlement of the exchange offer , approximately $ 61.3 million in aggregate principal amount at maturity of original notes and $ 288.7 million in aggregate principal amount at maturity of new notes were outstanding . see note 16 to our consolidated financial statements included in item 8 of part ii of this annual report for more information relating to our outstanding convertible notes . 40 repurchase and repayment at maturity of 0.875 % convertible senior notes due june 15 , 2017. during fiscal 2017 , we repurchased $ 46.3 million of the outstanding aggregate principal amount of our 0.875 % convertible senior notes due june 15 , 2017 ( the “ 2017 notes ” ) in private transactions . story_separator_special_tag we repaid in cash the remaining $ 185.3 million in aggregate principal amount outstanding of the 2017 notes at maturity on june 15 , 2017. term loan refinancing . on january 30 , 2017 , we refinanced our existing term loans in the aggregate principal amount of $ 250 million , maturing on july 15 , 2019 ( the `` 2019 term loan '' ) and $ 250 million , maturing on april 25 , 2021 ( the `` 2021 term loan '' ) into a single term loan with an aggregate principal amount of $ 400 million maturing on january 30 , 2022 ( the “ 2022 term loan ” ) . the remaining balances under the 2019 term loan and 2021 term loan were refinanced and replaced by the 2022 term loan and the aggregate amount of borrowing was reduced . this arrangement was accounted for as a modification of debt . see note 16 to our consolidated financial statements included in item 8 of part ii of this annual report for more information relating to our term loan refinancing . reversal of deferred tax asset valuation allowance our fourth quarter of fiscal 2017 and fiscal 2017 results of operations reflect a non-cash $ 1.1 billion deferred tax asset valuation allowance reversal . see note 20 to our consolidated financial statements included in item 8 of part ii of this annual report for more information relating to this reversal . the value of the deferred tax assets on our balance sheet as of october 31 , 2017 would decrease significantly if the u.s. corporate income tax rate is reduced , as proposed in tax reform legislation recently passed by both houses of the u.s. congress on december 20 , 2017. consequently , if the president signs this proposed legislation into law as expected , we expect that our results of operations for the first quarter of fiscal 2018 would be materially adversely affected by a non-cash charge to reflect the reduction in value of these assets . financial results for fourth quarter of fiscal 2017 and sequential comparison revenue for the fourth quarter of fiscal 2017 was $ 744.4 million , representing a sequential increase of 2.2 % from $ 728.7 million in the third quarter of fiscal 2017 . revenue-related details reflecting sequential changes from the third quarter of fiscal 2017 include the following : product revenue for the fourth quarter of fiscal 2017 increased by $ 5.5 million , primarily reflecting an increase of $ 6.6 million in networking platforms partially offset by a decrease of $ 1.1 million in software platforms within our software-related services segment . services revenue for the fourth quarter of fiscal 2017 increased by $ 10.2 million . north america revenue for the fourth quarter of fiscal 2017 was $ 440.5 million , a decrease from $ 465.2 million in the third quarter of fiscal 2017 . this primarily reflects decreases of $ 27.4 million in networking platforms and $ 1.0 million in software and software-related services . these decreases were partially offset by an increase of $ 3.7 million in global services . europe , middle east and africa ( `` emea '' ) revenue for the fourth quarter of fiscal 2017 was $ 110.7 million , an increase from $ 96.1 million in the third quarter of fiscal 2017 . this primarily reflects increases of $ 8.5 million in networking platforms and $ 6.5 million in global services . caribbean and latin america ( “ cala ” ) revenue for the fourth quarter of fiscal 2017 was $ 43.5 million , a decrease from $ 51.7 million in the third quarter of fiscal 2017 , primarily reflecting a decrease of $ 9.0 million in networking platforms . asia pacific ( “ apac ” ) revenue for the fourth quarter of fiscal 2017 was $ 149.7 million , an increase from $ 115.7 million in the third quarter of fiscal 2017 . this reflects an increase of $ 34.5 million in networking platforms partially offset by a decrease of $ 1.2 million in global services . for the fourth quarter fiscal 2017 , at & t accounted for 16.7 % and verizon accounted for 11.0 % of total revenue . at & t accounted for 16.6 % and verizon accounted for 11.4 % of total revenue for the third quarter of fiscal 2017 . gross margin for the fourth quarter of fiscal 2017 was 43.7 % , a decrease from 45.0 % in the third quarter of fiscal 2017 . the reduced gross margin was primarily due to aggressive efforts to take market share from competitors and secure new customers and the effects of the early stages of these deployments . our gross margin can fluctuate , particularly when viewed on a quarterly basis , as a result of a number of factors , including the additional costs we incur associated with the early stages of new network deployments that typically include a higher concentration of lower margin “ common ” equipment sales . part of our strategy for fiscal 2018 is to leverage our technology leadership and to aggressively capture additional market share and displace competitors , particularly with communications service providers internationally . accordingly , we may encounter fluctuations or reductions in quarterly gross margin during this period . 41 operating expense was $ 269.9 million for the fourth quarter of fiscal 2017 , a $ 23.8 million increase from $ 246.1 million in the third quarter of fiscal 2017 . this reflects increases of $ 9.1 million in selling and marketing expense , primarily due to increased incentive sales compensation and $ 1.4 million in research and development expenses . operating expense also reflects a $ 13.7 million significant asset impairment related to a trade receivable for a single customer in the apac region .
| million of our 3000 and 5000 families of service delivery and aggregation switches , $ 11.9 million in initial sales of packet networking platform independent software and $ 10.2 million of our 8700 packetwave platform . ◦ optical transport sales have continued to experience significant declines , as expected . our optical transport products have either been previously discontinued , or are expected to be discontinued , reflecting network operators ' transition toward next-generation converged network architectures addressed by solutions within our converged packet optical product line . accordingly , commencing in fiscal 2018 , sales of optical transport will be reflected within the converged packet optical product line of our networking platforms segment . software and software-related services revenue increased , primarily reflecting sales increases of $ 19.0 million in software-related services and $ 17.2 million of our software platforms . the increase in software-related services is primarily due to sales increases of $ 12.5 million of software subscription services , $ 4.2 million of services supporting our blue planet software platform and advance software applications and $ 1.5 million of software-enabled services . the increase in software platform sales primarily reflects increases of $ 9.0 million in sales of our blue planet software platform and advanced software applications and $ 6.5 million in sales of our onecontrol unified management system . global services revenue decreased , primarily reflecting sales decreases of $ 13.4 million of our installation and deployment services , $ 3.9 million of our consulting and network design services and $ 1.6 million of our maintenance support and training services . these sales decreases were primarily due to reduced activity in the north america and cala regions as described below . our operating segments each engage in business and operations across four geographic regions : north america ; emea ; cala ; and apac . results for north america include only activities in the united states and canada . part of our business and growth
| 11,003 |
our asp for homes closed during the fiscal year ended september 30 , 2018 was $ 360.2 thousand , up 5.0 % compared to the prior year . the year-over-year improvement in asp on closings was primarily a function of geographic mix and product shift , though we also benefited from pricing power in some markets . in addition , we ended fiscal 2018 with an asp of $ 384.8 thousand for our units in backlog , indicating that price growth should continue to persist in the near future . our targeted “ 2b-10 ” metric for asp was a range of $ 340.0 thousand to $ 350.0 thousand . homebuilding gross margin excluding impairments and abandonments and interest for the fiscal year ended september 30 , 2018 was 21.2 % , which remains consistent with the prior year . the current year adjusted gross margin is within the “ 2b-10 ” target for our homebuilding margin of between 21.0 % and 22.0 % ( excluding impairments and abandonments and interest amortized to homebuilding cost of sales ) . sg & a for the fiscal year ended september 30 , 2018 was 11.8 % of total revenue compared with 12.4 % a year earlier . sg & a as a percentage of total revenue declined in the current year due to our continued focus on improving overhead cost management in relation to our revenue growth . we completed the year with sg & a as a percentage of total revenue within the `` 2b-10 '' target range of 11.0 % to 12.0 % . seasonal and quarterly variability : our homebuilding operating cycle generally reflects escalating new order activity in the second and third fiscal quarters and increased closings in the third and fourth fiscal quarters . the following tables present new order and closings data for the periods presented : replace_table_token_8_th 26 story_separator_special_tag the decline in units in backlog was primarily driven by a rise in the pace of closings compared to the prior fiscal year and disruptions related to hurricane florence in north and south carolina . 28 the aggregate dollar value of homes in backlog as of september 30 , 2017 increased 2.0 % compared to september 30 , 2016 due to a 5.4 % increase in the asp of homes in backlog , partially offset by a 3.2 % decline in units in backlog . the decline in units in backlog was primarily due to shorter cycle times , disruptions related to hurricanes harvey and irma in houston and certain markets in our southeast segment , and lower community counts in fiscal 2017 as compared to fiscal 2016. homebuilding revenue , average selling price , and closings the tables below summarize homebuilding revenue , the asp of our homes closed , and closings by reportable segment for the periods presented : replace_table_token_12_th replace_table_token_13_th the increase in asp across all segments for the year ended september 30 , 2018 was impacted by a change in the mix of closings between geographies , products , and communities within each individual market as compared with the prior fiscal year . it was also positively impacted by our operational strategies as well as improved market conditions in certain geographies . these same dynamics enhanced our ability to generate a higher asp during fiscal 2017 when compared with fiscal 2016 ; in particular , a higher proportion of closings generated from certain markets with higher asps , including california . on average , we anticipate that our asp will likely continue to increase in the near-term as indicated by our asp for homes in backlog as of september 30 , 2018 . for fiscal year 2018 , the year-over-year increase in closings in our west segment was primarily driven by strong growth in our las vegas and phoenix markets , where we sold a significant number of homes in certain communities . closings in our east segment declined due to lower closings in our indianapolis market , partially offset by growth in our maryland market . closings increased in our southeast segment primarily due to growth in the atlanta market related to the venture homes acquisition , which added 70 closings in the fourth quarter of fiscal 2018 , partially offset by disruption from hurricane florence which caused us to push a small number of closings into the first quarter of fiscal year 2019. closings for fiscal year 2017 increased compared to fiscal year 2016 in all markets of our west segment except for texas . the decrease in texas was due to a year-over-year decline in community count and , to a lesser extent , weather-related conditions in houston that resulted in home construction delays in the fiscal fourth quarter of 2017. the decline in texas was offset by growth in our sacramento division , which continued to gain momentum after being re-activated , and our las vegas division , where certain communities continued to mature . in our east segment , we experienced increases in closings in our indianapolis and nashville divisions , offset by decreases in our maryland division , where community count declined slightly and less emphasis was placed in 2017 on building and closing spec homes than in the prior year . in our southeast segment , the increase in closings was primarily driven by our atlanta , charleston , and myrtle beach divisions , partially offset by declines in our orlando division . our overall higher asp coupled with the increase in closings described above resulted in homebuilding revenue growth for fiscal 2018 as compared to fiscal 2017 and fiscal 2016 . 29 homebuilding gross profit and gross margin the following tables present our homebuilding ( hb ) gross profit and gross margin by reportable segment and in total . in addition , such amounts are presented excluding inventory impairments and abandonments and interest amortized to cost of sales ( cos ) . story_separator_special_tag homebuilding gross profit is defined as homebuilding revenue less home cost of sales ( which includes land and land development costs , home construction costs , capitalized interest , indirect costs of construction , estimated warranty costs , closing costs , and inventory impairment and abandonment charges ) . for fiscal 2016 , we have shown the gross profit and gross margin impact of unexpected warranty costs related to the florida stucco issues ( net of expected insurance recoveries ) as well as additional insurance recoveries from a third-party insurer , both of which we consider to be non-recurring items . ( $ in thousands ) fiscal year ended september 30 , 2018 hb gross profit ( loss ) hb gross margin impairments & abandonments ( i & a ) hb gross profit ( loss ) w/o ( a ) i & a hb gross margin w/o i & a interest amortized to cos ( interest ) hb gross profit w/o i & a and interest hb gross margin w/o i & a and interest west $ 228,637 22.9 % $ — $ 228,637 22.9 % $ — $ 228,637 22.9 % east 102,346 20.0 % — 102,346 20.0 % — 102,346 20.0 % southeast 104,051 18.3 % 793 104,844 18.5 % — 104,844 18.5 % corporate & unallocated ( 86,759 ) 212 ( 86,547 ) 91,132 4,585 total homebuilding $ 348,275 16.8 % $ 1,005 $ 349,280 16.8 % $ 91,132 $ 440,412 21.2 % ( $ in thousands ) fiscal year ended september 30 , 2017 hb gross profit ( loss ) hb gross margin impairments & abandonments ( i & a ) hb gross profit ( loss ) w/o i & a hb gross margin w/o i & a interest amortized to cos ( interest ) hb gross profit w/o i & a and interest hb gross margin w/o i & a and interest west $ 186,629 21.9 % $ 1,625 $ 188,254 22.1 % $ — $ 188,254 22.1 % east 109,289 20.5 % 188 109,477 20.5 % — 109,477 20.5 % southeast 103,193 20.2 % — 103,193 20.2 % — 103,193 20.2 % corporate & unallocated ( 86,910 ) 68 ( 86,842 ) 88,764 1,922 total homebuilding $ 312,201 16.5 % $ 1,881 $ 314,082 16.6 % $ 88,764 $ 402,846 21.2 % ( $ in thousands ) fiscal year ended september 30 , 2016 hb gross profit ( loss ) hb gross margin impairments & abandonments ( i & a ) hb gross profit ( loss ) w/o i & a hb gross margin w/o i & a interest amortized to cos ( interest ) hb gross profit w/o i & a and interest hb gross margin w/o i & a and interest west $ 169,603 20.7 % $ 6,729 $ 176,332 21.6 % $ — $ 176,332 21.6 % east 89,572 17.7 % 5,894 95,466 18.9 % — 95,466 18.9 % southeast 92,573 20.1 % 788 93,361 20.2 % — 93,361 20.2 % corporate & unallocated ( 57,888 ) 1,101 ( 56,787 ) 77,941 21,154 total homebuilding $ 293,860 16.5 % $ 14,512 $ 308,372 17.3 % $ 77,941 $ 386,313 21.6 % unexpected warranty costs related to florida stucco issues ( net of expected insurance recoveries ) ( 3,612 ) ( 3,612 ) additional insurance recoveries from third-party insurer ( 15,500 ) ( 15,500 ) adjusted homebuilding $ 274,748 15.4 % $ 367,201 20.6 % ( a ) w/o - without 30 our overall homebuilding gross profit increased to $ 348.3 million for the fiscal year ended september 30 , 2018 , from $ 312.2 million in the prior year . the increase was driven by growth in homebuilding revenue of $ 181.5 million combined with slightly higher gross margin . however , as shown in the tables above , the comparability of our gross profit and gross margin was modestly impacted by certain items . specifically , interest amortized to homebuilding cost of sales increased by $ 2.4 million year-over-year , and impairment and abandonment charges decreased by $ 0.9 million over the same period ( refer to note 5 and note 6 of the notes to our consolidated financial statements in this form 10-k for additional details ) . when excluding the impact of impairments and abandonments , interest , and non-recurring items , year-over-year gross profit increased by $ 37.6 million while our gross margin remained flat at 21.2 % . the year-over-year stability in gross margin is due to a variety of factors , including : ( 1 ) mix of closings between geographies/markets , individual communities within each market , and product type ; ( 2 ) our pricing strategies , including margin impact on homes closed during the current fiscal year ; ( 3 ) increased focus on managing our house costs and improving cycle times ; ( 4 ) fluctuations in discrete items in the current period such as warranty costs ; and ( 5 ) the impact of purchase accounting related to our acquisition of venture homes . going forward , our gross margin will continue to be impacted by several headwinds , including activation of land assets formerly classified as land held for future development , which generally have lower margins , the structure of some of our land purchase transactions , such as finished lot purchases , which tend to result in lower gross margins , and increasing land and direct homebuilding costs . our overall homebuilding gross profit increased to $ 312.2 million for the fiscal year ended september 30 , 2017 , from $ 293.9 million in the prior year . the increase was due to additional gross profit generated on the $ 111.1 million increase in homebuilding revenue , while our gross margin remained flat year-over-year .
| average active communities were relatively flat compared to the prior year , with 156 average active communities during fiscal 2018 compared to 155 during fiscal 2017. for the fiscal year ended september 30 , 2018 , the 11.5 % increase in net new orders in our west segment was primarily attributable to a significant year-over-year increase in our las vegas and dallas markets . net new orders declined by 19.4 % in the east as we work to rebuild community counts by making new investments . the 3.0 % increase in net new orders in the southeast segment was primarily due to 100 net new orders in the fourth quarter of fiscal 2018 within communities acquired from venture homes . additionally , net new orders were impacted in north and south carolina in the southeast segment due to hurricane florence , which impacted our ability to sell homes in the affected areas for a number of weeks . sales per active community per month were 2.9 for fiscal year 2017 compared to 2.7 for fiscal year 2016 , an increase of 10.5 % . our ability to drive sales pace also reflected the robust demand we witnessed throughout the spring and summer selling seasons in the majority of our markets as well as our community mix and the maturation of certain communities versus the prior year . our average active communities declined from 166 during fiscal 2016 to 155 during fiscal 2017 , partially offsetting our stronger absorptions and ultimately resulting in a 3.2 % increase in net new orders for the fiscal year . for the fiscal year ended september 30 , 2017 , the 8.3 % increase in net new orders in our west segment was due to stronger sales in our las vegas , phoenix , and southern california markets , where we activated several new communities during fiscal 2016 , offset by a decline in net new orders in our houston market due to severe weather-related conditions as well as lower community count in response to local economic conditions in prior periods . the 1.6 % increase in net new orders in our east segment during our fiscal 2017 was mainly driven by improved sales absorptions in our virginia market . finally , the year-over-year decline in net new orders in our southeast segment
| 11,004 |
we record a valuation allowance to reduce deferred tax assets to the amount of future tax benefit that we believe is more likely than not to be realized . significant assumptions regarding future profitability is required to estimate the value of these deferred tax assets . we consider recent earnings projections , allowable tax carryforward periods , tax planning strategies and historical earnings performance to determine the amount of the valuation allowance . changes in these factors could cause us to adjust our valuation allowance , which would impact our income tax expense and the carrying value of these assets when we determine that these factors have changed . as of december 31 , 2012 we had net deferred tax assets of $ 14.0 million , net of a $ 2.2 million valuation allowance . as of december 31 , 2011 , we had net deferred tax assets of $ 10.2 million , net of a $ 1.9 million valuation allowance . these assets principally relate to goodwill and intangible assets , employee benefit liabilities , asset reserves , depreciation and state and foreign general business tax credit carry-forwards . because of the uncertainty as to the company 's ability to generate sufficient future taxable income in certain states , the company has recorded valuation allowances accordingly . impairment of long-lived assets goodwill impairment testing our goodwill is the result of the excess of purchase price over net assets acquired from acquisitions . as of december 31 , 2012 , we had approximately $ 21.9 million of goodwill . as of december 31 , 2011 , we had approximately $ 17.2 million of goodwill . the change in goodwill is due primarily to the acquisition of max-viz in july 2012 , increasing goodwill by $ 4.7 million . we identify our reporting units by assessing whether the components of our operating segments constitute businesses for which discrete financial information is available and segment management regularly reviews the operating results of those components . the test systems operating segment is its own reporting unit while the other reporting units are one level below our aerospace operating segment . companies may perform a qualitative assessment as the initial step in the annual goodwill impairment testing process for all or selected reporting units . companies are also allowed to bypass the qualitative analysis and perform a quantitative analysis if desired . economic uncertainties and the length of time from the calculation of a baseline fair value are factors that we would consider in determining whether to perform a quantitative test . when we evaluate the potential for goodwill impairment using a qualitative assessment , we consider factors including , but not limited to , macroeconomic conditions , industry conditions , the competitive environment , changes in the market for our products and services , regulatory and political developments , entity specific factors such as strategy and changes in key personnel and overall financial performance . if , after completing this assessment , it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value , we proceed to a quantitative two-step impairment test . quantitative testing first requires a comparison of the fair value of each reporting unit to the carrying value . we use the discounted cash flow method to estimate the fair value of each of our reporting units . the discounted cash flow method incorporates various assumptions , the most significant being projected revenue growth rates , operating profit margins and cash flows , the terminal growth rate and the discount rate . management projects revenue growth rates , operating margins and cash flows based on each reporting unit 's current business , expected developments and operational strategies . if the carrying value of the reporting unit exceeds its fair value , goodwill is considered impaired and any loss must be measured . in measuring the impairment loss , the implied fair value of goodwill is determined by assigning a fair value to all of the reporting unit 's assets and liabilities , including any unrecognized intangible assets , as if the reporting unit had been acquired in a business combination at fair value . if the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill , an impairment loss would be recognized in an amount equal to that excess . we performed qualitative assessments for the four reporting units which have goodwill and concluded that it is more likely than not that their fair values exceed their carrying values . based on our annual qualitative assessments of our reporting units , we concluded that goodwill was not impaired . amortized intangible asset impairment testing amortizable intangible assets with a carrying value of $ 16.0 million at december 31 , 2012 are amortized over their assigned useful lives . we test these long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable . the recoverability test consists of comparing the projected undiscounted cash flows , with its carrying amount . an impairment loss would then be recognized for the carrying amount in excess of its fair value . 16 depreciable asset impairment testing property , plant and equipment with a carrying value of $ 53.5 million at december 31 , 2012 are depreciated over their assigned useful lives . we test these long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable . the recoverability test consists of comparing the projected undiscounted cash flows , with its carrying amount . an impairment loss would then be recognized for the carrying amount in excess of its fair value . supplemental executive retirement plan ( serp ) we maintain two non-qualified defined benefit supplemental retirement plans ( serp and serp ii ) for certain executive officers and retired former executive officers . expense for these plans in 2012 was $ 1.4 million . story_separator_special_tag plan obligations and the related costs are determined using actuarial valuations that involve several assumptions that may be highly uncertain and may have a material impact on the financial statements if different reasonable assumptions had been used . the most critical assumptions include the discount rate , future wage increases , retirement age and life expectancy . the discount rate is used to state expected future cash flows at present value . using a lower discount rate increases the present value of pension obligations and increases pension expense . for determining the discount rate the company considers long-term interest rates for high-grade corporate bonds . the discount rate for determining the expense recognized in 2012 was 4.5 % compared with 5.5 % in 2011. we will use a discount rate of 4.2 % in determining our 2013 expense . the assumption for compensation increases takes a long-term view of inflation and performance based salary adjustments based on the company 's approach to executive compensation . the rate used for future wage increases was 5.0 % . it was assumed that each participant retires after fully vesting in the plan at age 62 or 65. a 100 point increase in the discount rate we used would negligibly impact our annual pension expense for 2013. if we had assumed annual wage increases of 6 % our 2013 pension expense would increase approximately $ 0.1 million . stock-based compensation we have stock-based compensation plans , which include non-qualified stock options as well as incentive stock options . expense recognized for stock-based compensation was $ 1.4 million for the year ended 2012 , $ 1.1 million for the year ended 2011 and $ 0.9 million for the year ended 2010. we determine the fair value of the option awards at the date of grant using a black-scholes model . option pricing models require management to make assumptions and to apply judgment to determine the fair value of the award . these assumptions and judgments include estimating the future volatility of our stock price , expected dividend yield , future employee stock option exercise behaviors and future employee turnover rates . changes in these assumptions can materially affect the fair value estimate . consolidated results of operations and outlook replace_table_token_6_th ( 1 ) our results of operations for 2011 include the operations of ballard technology inc. beginning november 30 , 2011 , the effective date of the acquisition . ( 2 ) our results of operations for 2012 include the operations of max-viz , inc. beginning july 30 , 2012 , the effective date of the acquisition . a discussion by segment can be found at segment results of operations and outlook in this md & a . consolidated overview of operations the increase in consolidated sales in 2012 compared to 2011 and 2011 compared to 2010 was due to sales volume growth in our aerospace segment offset partially by reduced sales volume in our test systems segment . gross margins decreased in 2012 to 26.1 % compared with 2011 at 26.5 % . the slight decrease in margins were primarily the result increased engineering and development ( e & d ) expense and lower margins in our test systems segment due to lower sales levels . 17 gross margins improved in 2011 to 26.5 % compared with 2010 at 24.3 % . the improved margins were a result of increased margins in the aerospace segment due to leverage on increased sales volume offset somewhat by lower margins in our test systems segment and increased engineering and development ( e & d ) expense . selling , general and administrative ( sg & a ) expenses were $ 36.8 million or 13.8 % of sales in 2012 , compared with $ 27.2 million , or 11.9 % of sales in 2011. the sg & a increase in 2012 compared with 2011 was due primarily to higher legal expenses and the inclusion of ballard , acquired in november 2011 and the addition of max-viz , acquired in july of 2012. sg & a costs relating to the ballard and max-viz sg & a added $ 6.1 million in 2012 compared to 2011 and legal costs increased $ 1.4 million in 2012 compared with 2011. additionally , compensation costs increased in 2012 compared to 2011primarilly as a result of increased pension expense . selling , general and administrative ( sg & a ) expenses were $ 27.2 million or 11.9 % of sales in 2011 , compared to $ 23.2 million , or 11.8 % of sales in 2010. the sg & a increase in 2011 compared with 2010 was due primarily to higher legal costs of $ 1.4 million , increased bad debt expenses of $ 0.5 million and increased compensation costs as compared with the prior year . in 2011 , as a result of declining sales and low new orders , our forecast future cash flow for our test systems segment indicated that its carrying value exceeded its book value . as a result we recorded an impairment charge of $ 2.5 million to write down the carrying value of our test systems goodwill to zero and certain intangible assets to fair value . there were no impairment charges in 2012 and 2010. interest expense decreased in 2012 compared to 2011 as well as 2011 compared to 2010 , due to a combination of lower rates and reduced debt levels when compared with the same period in the prior year . the effective tax rate for 2012 is higher than 2011 primarily from the 2011 reduction of reserves for uncertain tax positions that did not occur in 2012. the effective tax rate for 2011 is lower than 2010 primarily from the reduction of reserves for uncertain tax positions relating to the tax years 2006 through 2010 and a higher domestic production activity deduction .
| maintaining and growing our sales to the commercial transport market will depend on airlines capital spending budgets for cabin up-grades as well as the purchase of new aircraft such as the boeing 787 , airbus a380 and airbus a350 . this spending by the airlines is impacted by their profits , cash flow and available financing as well as competitive pressures between the airlines to improve the travel experience for their passengers . we expect that these new aircraft , once in production will be equipped with more ife and in-seat power than previous generation aircraft . our ability to maintain and grow sales to this market depends on our ability to maintain our technological advantages over our competitors and maintain our relationships with major in-flight entertainment suppliers and global airlines . sales to the military aerospace market includes our aircraft lighting , airframe power and avionics products . in 2012 , aerospace military sales represented approximately 13.7 % of consolidated sales . the military market is dependent on governmental funding which can change from year to year . risks are that overall spending may be reduced in the future , specific programs may be eliminated or that we fail to win new business through the competitive bid process . astronics does not have significant reliance on any one program such that cancellation of a particular program will cause material financial loss . we believe that we will continue to have opportunities similar to past years regarding this market . sales to the business jet market are primarily aircraft lighting , airframe power and avionics products . sales to the business jet market accounted for approximately 11.0 % of our consolidated sales in 2012. sales to the business jet market are driven by our ship set content on new aircraft and build rates of new aircraft . business jet oem build rates continue to be significantly impacted by slow global wealth creation and corporate profitability which have been negatively affected during the past several years by
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the insurance entities also remain responsible for insured losses notwithstanding the failure of any reinsurer to make payments otherwise due to the insurance entities . the insurance entities ' inability to satisfy valid insurance claims resulting from catastrophic events could have a material adverse effect on our results of operations , financial condition and liquidity . upcic reinsurance program effective june 1 , 2013 , upcic entered into two quota share reinsurance contracts , both of which provide coverage through may 31 , 2014 and one of which extends and provides coverage through may 31 , 2015. under the quota share contracts , through may 31 , 2014 , upcic cedes 45 % of its gross written premiums , losses and loss adjustment expenses for policies with coverage for wind risk with a ceding commission equal to 26.7 % of ceded gross written premiums . in addition , the quota share contract has a limitation for any one occurrence not to exceed $ 125 million from losses arising out of events that are assigned a catastrophe serial number by the property claims services ( pcs ) office ( of which upcic 's net liability on the first $ 125 million of losses in a first , second and third event scenario is $ 27.5 million for events affecting florida ; $ 16.5 million in a first and second event scenario for events affecting georgia , maryland , massachusetts , north carolina and south carolina ; and $ 5.5 million in a first and second event scenario for events affecting hawaii ) , and an aggregate limitation from losses arising out of events that are assigned a catastrophe serial number by the pcs office not to exceed $ 280 million . the contracts limit the amount of premium which can be deducted for inuring reinsurance . effective june 1 , 2013 through may 31 , 2014 , under various excess catastrophe contracts , upcic obtained catastrophe coverage of 45 % of $ 698.5 million in excess of the quota share occurrence cap of $ 125 million , covering certain loss occurrences including hurricanes . the catastrophe coverage has a second full limit available with additional premium calculated pro rata as to amount and 100 % as to time , as applicable . effective june 1 , 2013 through may 31 , 2014 , under various excess catastrophe contracts , upcic also obtained catastrophe coverage of 55 % of $ 773.5 million in excess of $ 50 million , covering certain loss occurrences including hurricanes . of this capacity , 7.6 % has two free reinstatements , 29.3 % has one free reinstatement , and 63.1 % has a second full limit available with additional premium calculated pro rata as to amount and 100 % as to time , as applicable . for capacity with reinstatement premium , upcic purchased reinstatement premium protection which reimburses upcic for its cost to reinstate the catastrophe coverage up to the top of the estimated fhcf . the total cost of upcic 's private catastrophe reinsurance program , effective june 1 , 2013 through may 31 , 2014 , is $ 104.889 million to upcic and $ 60.781 million to the quota share reinsurers . in addition , upcic purchased reinstatement premium protection as described above , the cost of which is $ 11.511 million . effective june 1 , 2013 through may 31 , 2014 , upcic purchased subsequent catastrophe event excess of loss reinsurance to cover certain levels of loss through three catastrophe events including hurricanes . specifically , upcic obtained catastrophe coverage in two separate contracts for a third event . the first contract covers 45 % of $ 95 million in excess of $ 30 million in excess of $ 190 million otherwise recoverable . the total cost of the first third event catastrophe excess of loss reinsurance contract is $ 5.567 million , of which upcic 's cost is $ 0 , and the quota share reinsurer 's cost is the entire amount . the second contract covers 15 % of $ 25 million in excess of $ 100 million in excess of $ 50 million otherwise recoverable . the total cost of the second third event catastrophe excess of loss reinsurance contract is $ 187.5 thousand , of which upcic is responsible for the entire amount . effective june 1 , 2013 through may 31 , 2014 , upcic entered into a multiple line excess per risk contract with various reinsurers . under the multiple line excess per risk contract , upcic obtained coverage of $ 1.4 million in excess of $ 600 thousand ultimate net loss for each risk and each property loss , and $ 1 million in excess of $ 300 thousand for each casualty loss . the contract has a limitation for any one occurrence not to exceed $ 1.4 million and a $ 7 million aggregate limit that applies to the term of the contract . 20 effective june 1 , 2013 through may 31 , 2014 , upcic entered into a property per risk excess contract covering its policies that do not provide wind coverage . under the property per risk excess contract , upcic obtained coverage of $ 350 thousand in excess of $ 250 thousand for each property loss . the contract has a limitation for any one occurrence not to exceed $ 1.050 million and a $ 1.750 million aggregate limit that applies to the term of the contract . the total cost of upcic 's multiple line excess and property per risk reinsurance program , effective june 1 , 2013 through may 31 , 2014 , is $ 4.450 million , of which upcic 's cost is $ 2.673 million , and the quota share reinsurers ' cost is the remaining $ 1.778 million . story_separator_special_tag effective june 1 , 2013 through june 1 , 2014 , under an excess catastrophe contract specifically covering risks located in georgia , maryland , massachusetts , north carolina and south carolina , upcic obtained catastrophe coverage consisting of three layers of 55 % of $ 20 million in excess of $ 30 million , 55 % of $ 25 million in excess of $ 50 million and 55 % of $ 50 million in excess of $ 75 million covering certain loss occurrences including hurricanes . all three layers of coverage have a second full limit available to upcic with additional premium calculated pro rata as to amount and 100 % as to time , as applicable . the cost of upcic 's excess catastrophe contracts specifically covering risks in georgia , maryland , massachusetts , north carolina and south carolina is $ 3.412 million . effective june 1 , 2013 through june 1 , 2014 , under an excess catastrophe contract specifically covering risks located in hawaii , upcic obtained catastrophe coverage of 55 % of $ 20 million in excess of $ 10 million covering certain loss occurrences including hurricanes . the layer of coverage has a second full limit available to upcic with additional premium calculated pro rata as to amount and 100 % as to time , as applicable . the cost of upcic 's excess catastrophe contract specifically covering risks in hawaii is $ 330 thousand . upcic also obtained coverage from the fhcf . the approximate coverage is estimated to be 90 % of $ 1.158 billion in excess of $ 423.1 million . the estimated premium that upcic plans to cede to the fhcf for the 2013 hurricane season is $ 77.993 million of which upcic 's cost is 55 % , or $ 42.896 million , and the quota share reinsurers ' cost is the remaining 45 % . the largest private participants in upcic 's reinsurance program include leading reinsurance companies such as odyssey re , everest re , renaissance re and lloyd 's of london syndicates . with the implementation of the company 's 2013-2014 reinsurance program at june 1 , 2013 , the company retains a maximum pre-tax net liability of $ 27.5 million for the first catastrophic event up to $ 1.868 billion of losses relating to the upcic florida program , a maximum pre-tax net liability of $ 16.5 million for the first catastrophic event up to $ 125 million of losses relating to the upcic georgia , maryland , massachusetts , north carolina and south carolina program , and a maximum pre-tax net liability of $ 5.5 million for the first catastrophic event up to $ 30 million of losses relating to the upcic hawaii program . appcic reinsurance program effective june 1 , 2013 through may 31 , 2014 , under three layers in an excess catastrophe contract , appcic obtained catastrophe coverage of $ 20.250 million in excess of $ 2.5 million covering certain loss occurrences including hurricanes . the coverage of $ 20.250 million in excess of $ 2.5 million has a second full limit available to appcic ; additional premium is calculated pro rata as to amount and 100 % as to time , as applicable . the total cost of appcic 's private catastrophe reinsurance program effective june 1 , 2013 through may 31 , 2014 is $ 2.763 million . effective june 1 , 2013 through may 31 , 2014 , appcic purchased reinstatement premium protection which reimburses appcic for its cost to reinstate the entire $ 20.250 million of catastrophe coverage in one contract . the cost of appcic 's purchased reinstatement premium protection is $ 388 thousand . appcic also obtained coverage from the fhcf . the approximate coverage is estimated to be 90 % of $ 39.084 million in excess of $ 14.276 million . the estimated premium that appcic plans to cede to the fhcf for the 2013 hurricane season is $ 2.632 million . effective june 1 , 2013 through may 31 , 2014 , appcic entered into a multiple line excess per risk contract with various reinsurers . under the current multiple line excess per risk contract , appcic has coverage of $ 8.7 million in excess of $ 300 thousand ultimate net loss for each risk and each property loss , and $ 1 million in excess of $ 300 thousand for each casualty loss . a $ 21.5 million aggregate limit applies to the term of the contract for property related losses and a $ 2 million aggregate limit applies to the term of the contract for casualty related losses . the total cost of the appcic multiple line excess reinsurance program effective june 1 , 2013 through may 31 , 2014 is $ 3.3 million . 21 the largest private participants in appcic 's reinsurance program include leading reinsurance companies such as ace tempest re , everest re , hiscox , odyssey re , hannover ruck , amlin bermuda and lloyd 's of london syndicates . with the implementation of the company 's 2013-2014 reinsurance program at june 1 , 2013 , the company retains a maximum pre-tax net liability of $ 2.5 million for the first catastrophic event up to $ 59.36 million of losses relating to the appcic program . uih program separately from the insurance entities ' reinsurance programs , uih protected its own assets against diminution in value due to catastrophe events by purchasing $ 75 million in coverage through a catastrophe risk-linked transaction contract , effective june 1 , 2013 through december 31 , 2013. the contract provides for recovery by uih in the event of exhaustion of upcic 's catastrophe coverage for the state of florida . the total cost to uih of the risk-linked transaction contract is $ 6.0 million .
| these rate increases , along with strategic initiatives we have undertaken to manage our exposure such as the decision not to renew certain policies we believe had inadequate premiums relative to projected risks and expenses , have resulted in a reduction in the number of policies in force in florida . the benefit from the rate increases continued to be partially offset by wind mitigation credits within the state of 30 florida . ceded earned premiums remained relatively unchanged for each of the years ended december 31 , 2013 and 2012 reflecting a reduction in the quota-share cession rate from 50 % for the 2011-2012 reinsurance program to 45 % currently in effect beginning with the 2012-2013 reinsurance program , offset by the cost of reinsurance in 2013 that replaced coverage under the t25 arrangement utilized by the company during 2012. see the discussion above on segregated account t25 . net investment income for the year ended december 31 , 2013 was $ 1.9 million , compared to $ 441 thousand for the same period in the prior year . the increase in net investment income of $ 1.5 million reflects an increase in the amount of interest earning and dividend paying securities held in the investment portfolio partially offset by an increase in investment expenses associated with asset management fees charged by our investment advisers to manage certain segments of the available for sale portfolio . when the portfolio was classified as trading , all fees were paid in the form of commission on investment trades and reflected in net realized gains and losses on investments and changes in unrealized gains and losses on investments . net realized losses on investments of $ 14.7 million were recorded during the year ended december 31 , 2013 , compared to $ 11.9 million of net realized losses recorded in 2012. the net realized losses of $ 14.7 million for the year ended december 31 , 2013 includes realized losses of $ 16.0 million recorded upon the liquidation of our trading portfolio during the first quarter of 2013 and realized gains of $ 1.3 million generated from the sale of securities available for sale . the realized losses for both
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valuation allowances are based , in part , on predictions that management must make as to our results in future periods . the outcome of events could differ over time which would require that we make changes in our valuation allowance . 42 use of estimates the preparation of consolidated financial statements in conformity with accounting principles generally accepted in the united states requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods . actual results could differ from these estimates . significant estimates and assumptions include reserves and write-downs related to receivables and inventories , the recoverability of long-lived assets , the valuation allowance related to our deferred tax assets , valuation of equity and derivative instruments , debt discounts , valuation of investments and the estimated amortization periods of upfront product licensing fees received from customers . deconsolidation of ruthigen , inc. on march 26 , 2014 , we deconsolidated our formerly wholly-owned subsidiary ruthigen in connection with the completion of ruthigen 's initial public offering of its common stock . as a result of the initial public offering , our ownership interest in ruthigen decreased to approximately 43 % . ruthigen 's results of operations and cash flows through march 26 , 2014 have been included in our consolidated financial statements . recent accounting pronouncements the financial accounting standards board , or fasb , has issued accounting standards update , or asu , no . 2014-12 , compensation – stock compensation ( topic 718 ) : accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period . this asu requires that a performance target that affects vesting , and that could be achieved after the requisite service period , be treated as a performance condition . as such , the performance target should not be reflected in estimating the grant date fair value of the award . this update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period ( s ) for which the requisite service has already been rendered . the amendments in this asu are effective for annual periods and interim periods within those annual periods beginning after december 15 , 2015. earlier adoption is permitted . we do not expect that the adoption of this standard has a material impact on our consolidated financial position and results of operations . the fasb has issued asu no . 2014-09 , revenue from contracts with customers . this asu supersedes the revenue recognition requirements in accounting standards codification 605 – revenue recognition and most industry-specific guidance throughout the codification . the standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services . this asu is effective on january 1 , 2017 ( subject to a proposed additional one-year deferral ) and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the asu recognized at the date of initial application . we are currently evaluating the impact of the adoption of this standard on our consolidated financial position and results of operations . the fasb has issued asu no . 2014-15 , presentation of financial statements-going concern ( subtopic 205-40 ) : disclosure of uncertainties about an entity 's ability to continue as a going concern . the guidance , which is effective for annual reporting periods ending after december 15 , 2016 , extends the responsibility for performing the going-concern assessment to management and contains guidance on how to perform a going-concern assessment and when going-concern disclosures would be required under u.s. gaap . we elected to early adopt the provisions of asu 2014-15 in connection with the issuance of these consolidated financial statements . accounting standards that have been issued or proposed by the fasb , sec and or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the condensed consolidated financial statements upon adoption . comparison of the years ended march 31 , 2015 and 2014 revenues total revenues increased by $ 186,000 to $ 13,854,000 for the year ended march 31 , 2015 , as compared to $ 13,668,000 for the year ended march 31 , 2014. total revenues were up 1 % from the same period last year , with increases in product revenue for the united states , europe , mexico , middle east and singapore , which were largely offset by decreases in revenues related to product licensing and royalty fees . product revenues in the united states were $ 1,978,000 for the year ended march 31 , 2015 , as compared to $ 1,406,000 for the year ended march 31 , 2014. product revenue increased by $ 572,000 , or 41 % , from the same period last year as a result of the launch of our dermatology and animal health care products as well as increases in our advanced wound tissue products . during the second half of the year ended march 31 , 2015 , we hired a direct sales force focused on dermatology and launched three new dermatology products . additionally , at the end of the quarter ended march 31 , 2015 , we launched our animal health care products with our new animal health care partner , sla brands . 43 product revenue in mexico for the year ended march 31 , 2015 increased by $ 1,295,000 , or 34 % , to $ 5,053,000 when compared to the same period in the prior year . story_separator_special_tag the increase in revenue is due to strong growth in sales of our 120ml liquid products . on january 6 , 2015 , our customer in mexico , more pharma , notified us they had been acquired by laboratorios sanfer , s.a. de c.v. , a mexican based pharmaceutical company . product revenue in europe and the rest of the world for the year ended march 31 , 2015 increased by $ 862,000 , or 42 % , to $ 2,908,000 as compared to the same period in the prior year , with increases in europe , middle east , singapore , partially offset by a sales decrease in india . the increase in europe is primarily the result of multiple new advanced wound tissue product line extensions including a gel product , as well as the addition of new european distributors . the following table shows our product revenues by geographic region : replace_table_token_3_th in the year ended march 31 , 2015 , product license fees and royalties revenue declined primarily as a result of the termination of our agreement with innovacyn and a decline in unit volume sold by exeltis/quinnova . additionally , in the year ended march 31 , 2014 our agreement with onset/precision was terminated . the following table shows our product license fees and royalties revenue by partner : replace_table_token_4_th service revenues were $ 859,000 and $ 945,000 for the years ended march 31 , 2015 and 2014 , respectively , due to a decrease in the number of tests provided by our services business . gross profit we reported gross profit related to our products of $ 7,087,000 or 55 % of product revenues , during the year ended march 31 , 2015 , compared to a gross profit of $ 8,213,000 , or 65 % of product revenues , for the same period in the prior year . licensing and royalty revenues are included in our calculation of product revenues and gross profit for the year ended march 31 , 2015 and 2014. gross margins declined primarily as a result of the decline in royalties related to innovacyn . research and development expense we reported research and development expense of $ 1,533,000 for the year ended march 31 , 2015 , representing a decrease of $ 1,354,000 , or 47 % , when compared to the same period in the prior year . the decrease is largely due to $ 1,378,000 of expenses incurred during the year ended march 31 , 2014 by our formerly wholly-owned subsidiary ruthigen , partially offset by an increase of $ 152,000 incurred during the year ended march 31 , 2015 related to stock compensation expense . we expect our research and development expenses will remain relatively flat over the next year . 44 selling , general and administrative expense selling , general and administrative expense increased by $ 853,000 , or 7 % , to $ 12,414,000 for the year ended march 31 , 2015 , compared to $ 11,561,000 for the same period in the prior year . the increase for the year ended march 31 , 2015 was primarily due to higher sales and marketing expenses in the united states , mexico and europe due to the hiring of a direct dermatology sales force and costs related to the launch of three new dermatology products . these increases were partially offset by a decrease of $ 1,329,000 related to expenses incurred by our formerly wholly-owned subsidiary ruthigen in the prior period . we expect selling , general and administrative expenses to increase over the next several quarters , as we intend to increase our direct sales force and we launch additional products . interest expense and interest income interest expense decreased by $ 1,055,000 to $ 3,000 for the year ended march 31 , 2015 , when compared to the same period in the prior year . the decrease for the year ended march 31 , 2015 was related to decreases of $ 863,000 of non-cash interest expense and $ 192,000 of cash interest expense incurred , when compared to the same period in the prior year . the cash and non-cash interest during the year ended march 31 , 2014 was primarily related to borrowings from venture lending & leasing v , inc. and venture lending & leasing vi , inc. , or collectively vll . as of march 16 , 2014 , the outstanding debt and all interest payments due to vll were settled in full . interest income for the year ended march 31 , 2015 showed no material change as compared to the same period in the prior year . gain due to change in fair value of derivative liabilities in connection with our december 9 , 2013 and february 26 , 2014 registered direct offerings we issued a series of common stock purchase warrants , which contain cash settlement provisions . during the year ended march 31 , 2015 , we recorded a decrease in the fair value of our derivative liabilities of $ 3,164,000 , primarily due to a decrease in our common stock price and the decreasing contractual term of the warrants . impairment loss on long-term investment in connection with entering into agreements to sell our ruthigen shares at a fixed price of $ 2.75 per share , we determined that the carrying value of the ruthigen shares is impaired . as a result , during the year ended march 31 , 2015 , we recorded an impairment loss in the amount of $ 4,650,000 which represents the difference between cost and aggregate purchase price . we will continue to monitor our investment for potential impairment in future periods , and may determine that partial or full impairment may be necessary . other expense , net other expense , net of $ 56,000 for the year ended march 31 , 2015 , decreased $ 25,000 , or 31 % , from $ 81,000 for the same period in the prior year .
| these clinical studies and usage of our products in the united states also suggest that our 510 ( k ) -cleared products may shorten hospital stays , lower aggregate patient care costs and , in certain cases , reduce the need for systemic antibiotics . outside of the united sates , we sell our products for dermatological and advanced tissue care with a european conformity marking ( known as conformité européenne or ce ) covering ten of our products , 14 approvals from the mexican ministry of health , and various approvals in china , southeast asia , and the middle east . in 2013 and 2014 , we added new members to our board of directors , thus enhancing our expertise in sales , marketing , strategy and dermatology , and we hired new managers to complement our executive team . our new team commenced a strategic realignment of our business with a sharp focus on dermatology markets . our decision to focus on dermatology was based on our already strong presence in this market and the ability of our core hypochlorous acid-based technology , microcyn® , to address other dermatological indications including acne , atopic dermatitis , anti-itch and scar management . our plan is to evolve into a leading dermatology and advanced tissue care company , providing innovative and cost-effective solutions to patients , while generating strong , consistent revenue growth and maximizing long-term shareholder value . 40 critical accounting policies the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the united states requires management to exercise its judgment . we exercise considerable judgment with respect to establishing sound accounting policies and in making estimates and assumptions that affect the reported amounts of our assets and liabilities , our recognition of revenues and expenses , and disclosure of commitments and contingencies at the date of the consolidated financial statements . on an ongoing basis , we evaluate our estimates and judgments . areas in which we exercise significant judgment include , but are not necessarily limited to , our valuation of accounts receivable , inventory , income taxes , equity transactions ( compensatory and financing ) and contingencies . we have also adopted certain polices with respect to our recognition of revenue that we believe
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we had no real estate owned or troubled debt restructurings at june 30 , 2011. we intend to continue to stress maintaining high asset quality even as we continue to grow our institution and diversity our loan portfolio . 30 · cross-selling products and services and emphasizing local decision . we have promoted cross-selling products and services in our branch offices and emphasized our local decision making and streamlined loan approval process . critical accounting policies in reviewing and understanding financial information for home federal bancorp , you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements . these policies are described in note 1 of the notes to our consolidated financial statements included in item 8 of this document . our accounting and financial reporting policies conform to accounting principles generally accepted in the united states of america and to general practices within the banking industry . accordingly , the consolidated financial statements require certain estimates , judgments , and assumptions , which are believed to be reasonable , based upon the information available . these estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the periods presented . the following accounting policies comprise those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results . these policies require numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations which may significantly affect our reported results and financial condition for the period or in future periods . allowance for loan losses . we have identified the evaluation of the allowance for loan losses as a critical accounting policy where amounts are sensitive to material variation . the allowance for loan losses represents management 's estimate for probable losses that are inherent in our loan portfolio but which have not yet been realized as of the date of our consolidated balance sheet . it is established through a provision for loan losses charged to earnings . loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely . subsequent recoveries are added to the allowance . the allowance is an amount that management believes will cover known and inherent losses in the loan portfolio , based on evaluations of the collectability of loans . the evaluations take into consideration such factors as changes in the types and amount of loans in the loan portfolio , historical loss experience , adverse situations that may affect the borrower 's ability to repay , estimated value of any underlying collateral , estimated losses relating to specifically identified loans , and current economic conditions . this evaluation is inherently subjective as it requires material estimates including , among others , exposure at default , the amount and timing of expected future cash flows on impacted loans , value of collateral , estimated losses on our commercial and residential loan portfolios and general amounts for historical loss experience . all of these estimates may be susceptible to significant changes as more information becomes available . while management uses the best information available to make loan loss allowance evaluations , adjustments to the allowance may be necessary based on changes in economic and other conditions or changes in accounting guidance . historically , our estimates of the allowance for loan loss have not required significant adjustments from management 's initial estimates . in addition , the office of the comptroller of the currency as an integral part of their examination processes , periodically reviews our allowance for loan losses . the office of the comptroller of the currency may require the recognition of adjustments to the allowance for loan losses based on their judgment of information available to them at the time of their examinations . to the extent that actual outcomes differ from management 's estimates , additional provisions to the allowance for loan losses may be required that would adversely impact earnings in future periods . income taxes . deferred income tax assets and liabilities are determined using the liability ( or balance sheet ) method . under this method , the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various assets and liabilities and gives current recognition to changes in tax rates and laws . realizing our deferred tax assets principally depends upon our achieving projected future taxable income . we may change our judgments regarding future profitability due to future market conditions and other factors . we may adjust our deferred tax asset balances if our judgments change . changes in financial condition home federal bancorp 's total assets increased $ 48.2 million , or 26.0 % , to $ 233.3 million at june 30 , 2011 compared to $ 185.1 million at june 30 , 2010. this increase was primarily due to an increase in loans receivable , net of $ 32.3 million , an increase in investment securities of $ 14.9 million , an increase of $ 5.6 million in cash surrender value of bank owned life insurance , an increase in premises and equipment of $ 888,000 and an increase in cash and cash equivalents of $ 762,000 , compared to the prior year . these increases were partially offset by a decrease in loans available-for-sale of $ 6.8 million . story_separator_special_tag 31 loans receivable , net increased $ 32.3 million , or 34.7 % , from $ 93.1 million at june 30 , 2010 to $ 125.4 million at june 30 , 2011. the increase in loans receivable , net was attributable primarily to increases in commercial real estate of $ 17.3 million , land loans of $ 2.8 million , construction loans of $ 2.5 million and commercial business loans of $ 783,000 , at june 30 , 2011 compared to june 30 , 2010. one-to-four family residential loans increased $ 9.3 million , and home equity and second mortgage loans decreased $ 1.4 million at june 30 , 2011 compared to the prior year period . at june 30 , 2011 , the balance of purchased loans approximated $ 8.8 million , which consisted solely of one-to-four family residential loans , including $ 8.7 million of loans from the mortgage originator in arkansas . we did not purchase any loans in fiscal 2010 or 2011. as part of implementing our business strategy , in recent periods we diversified the loan products we offer and increased our efforts to originate higher yielding commercial real estate loans and lines of credit and commercial business loans . in february 2009 , we hired three commercial loan officers and began offering commercial real estate loans and lines of credit and commercial business loans which were deemed attractive due to their generally higher yields and shorter anticipated lives compared to single-family residential mortgage loans . as of june 30 , 2011 , home federal bank had $ 32.8 million of commercial real estate loans and $ 10.2 million of commercial business loans compared to $ 15.4 million of commercial real estate loans and $ 9.5 million of commercial business loans at june 30 , 2010. although commercial loans are generally considered to have greater credit risk than other certain types of loans , we attempt to mitigate such risk by originating such loans in our market area to known borrowers . securities available-for-sale increased $ 11.4 million , or 17.8 % , from $ 63.7 million at june 30 , 2010 to $ 75.0 million at june 30 , 2011. this increase resulted primarily from new investment acquisitions of $ 36.9 million , partially offset by the sale of securities , normal principal paydowns , and by market value declines in the portfolio . during the past two years , there have been significant loan prepayments due to the heavy volume of loan refinancing . however , with interest rates at their cyclical lows , management is reluctant to invest in long-term , fixed rate mortgage loans for the portfolio and instead sold the majority of the long-term , fixed rate mortgage loan production . prior to fiscal 2010 , we attempted to strengthen our interest-rate risk position and favorably structure our balance sheet to take advantage of a rising rate environment by purchasing investment securities classified as available-for-sale . new investment acquisitions during fiscal 2011 consisted of u.s. government agency notes maturing within three years . cash and cash equivalents increased $ 762,000 , or 8.6 % , from $ 8.8 million at june 30 , 2010 to $ 9.6 million at june 30 , 2011. the net increase in cash and cash equivalents was attributable primarily to the growth in our deposits and sales and principal payments from our securities , offset by the funding of our loan growth and repayment of advances from the federal home loan bank . total liabilities increased $ 30.4 million , or 20.0 % , from $ 151.8 million at june 30 , 2010 to $ 182.1 million at june 30 , 2011 due primarily to an increase of $ 35.9 million , or 30.5 % , in our deposits , offset by a decrease in advances from the federal home loan bank of $ 4.6 million , or 14.7 % . the increase in deposits was attributable primarily to increases in our now accounts , money market accounts and certificates of deposit . money market accounts increased $ 10.8 million as the result of an expansion of commercial deposit accounts . certificates of deposit increased $ 11.8 million , or 15.9 % , from $ 73.9 million at june 30 , 2010 to $ 85.7 million at june 30 , 2011. now accounts increased $ 6.3 million from $ 8.2 million at june 30 , 2010 to $ 14.5 million at june 30 , 2011 and non-interest bearing deposit accounts increased $ 4.9 million from $ 9.9 million at june 30 , 2010 to $ 14.8 million at june 30 , 2011. stockholders ' equity increased $ 17.8 million , or 53.4 % , to $ 51.2 million at june 30 , 2011 from $ 33.4 million at june 30 , 2010 , due primarily to net proceeds from common stock issuance of $ 16.9 million from our second step conversion offering completed on december 22 , 2010 , net income of $ 1.9 million for the year ended june 30 , 2011 , and the vesting of restricted stock awards , stock options and release of employee stock ownership plan shares totaling $ 233,000. these increases were partially offset by decrease in the company 's accumulated other comprehensive income of $ 670,000 , dividends paid of $ 511,000 and treasury stock acquisitions of $ 46,000 during the year ended june 30 , 2011. the change in accumulated other comprehensive income was primarily due to the change in net unrealized loss on securities available for sale due to recent declines in interest rates . the net unrealized loss on securities available-for-sale is affected by interest rate fluctuations . generally , an increase in interest rates will have an adverse impact while a decrease in interest rates will have a positive impact . 32 average balances , net interest income , yields earned and rates paid .
| home federal bancorp 's average cost of funds decreased 59 basis points in fiscal 2011 compared to fiscal 2010. lower certificate of deposit interest rates in our market area led us to decrease the average rates paid on certificates of deposit 55 basis points in fiscal 2011 compared to fiscal 2010. net interest margin increased to 3.60 % in fiscal 2011 compared to 3.48 % for fiscal 2010. interest income increased $ 1.1 million , or 12.3 % , to $ 10.3 million for fiscal 2011 compared to $ 9.2 million for fiscal 2010. such increase was primarily due to an increase in the average balance of loans receivable . a decrease in average yields on interest earning assets primarily resulted from the decrease in the average balance of investment securities due to security sales and normal principal payments and the purchase of low yielding short term u.s. government agency securities . the increase in the average balance of loans receivable was primarily due to new loans originated by our new commercial lending activities . the average yield of the loan portfolio decreased 8 basis points during fiscal 2011 . 34 interest expense decreased $ 272,000 , or 7.9 % , to $ 3.2 million for fiscal 2011 compared to fiscal 2010 primarily as a result of decreases in the average rates paid on interest-bearing liabilities , partially offset by increases in the average balance of interest-bearing deposits . provision for loan losses . the allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred in our loan portfolio . loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed . subsequent recoveries , if any , are credited to the allowance . the allowance for loan losses is evaluated on a regular basis by management and is based upon management 's periodic review of the collectability of the loans in light of historical experience , the nature and volume of the loan portfolio , adverse situations that may affect the borrower 's ability to repay , estimated value of the underlying collateral and prevailing economic conditions . the evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available . a loan is considered impaired when , based on current information or events , it is probable that we will
| 11,008 |
in our opinion , the company maintained , in all material respects , effective internal control over financial reporting as of december 31 , 2019 , based on the coso criteria . we also have audited , in accordance with the standards of the public company accounting oversight board ( united states ) ( “ pcaob ” ) , the consolidated balance sheets of the company and subsidiaries as of december 31 , 2019 and 2018 , the related consolidated statements of operations and comprehensive loss , stockholders ' equity , and cash flows for each of the two story_separator_special_tag you should read the following discussion and analysis together with the consolidated financial statements and related notes included elsewhere in this annual report on form 10-k. the following discussion contains forward-looking statements that involve risks and uncertainties . our actual results could differ materially from those expressed or implied in any forward-looking statements as a result of various factors , including those set forth under the caption “ item 1a . risk factors. ” overview background we are a biopharmaceutical company focused on developing novel , small molecule therapeutics for the treatment of serious diseases with unmet medical needs and a commercial focus on the united states market . our current strategy is to focus our development activities on mn-166 ( ibudilast ) for neurological disorders such as progressive multiple sclerosis ( ms ) , amyotrophic lateral sclerosis ( als ) , chemotherapy-induced peripheral neuropathy , degenerative cervical myelopathy , glioblastoma , and substance dependence and addiction ( e.g. , methamphetamine dependence , opioid dependence , and alcohol dependence ) , and mn-001 ( tipelukast ) for fibrotic diseases such as nonalcoholic steatohepatitis ( nash ) and idiopathic pulmonary fibrosis ( ipf ) . our pipeline also includes mn-221 ( bedoradrine ) for the treatment of acute exacerbation of asthma and mn-029 ( denibulin ) for solid tumor cancers . we were incorporated in delaware in september 2000. we have incurred significant net losses since our inception . for the year ended december 31 , 2019 , we had a net loss of $ 12.9 million . at december 31 , 2019 , from inception , our accumulated deficit was $ 369.1 million . we expect to incur substantial net losses for the next several years as we continue to develop certain of our existing product development programs , and over the long-term if we expand our research and development programs and acquire or in-license products , technologies or businesses that are complementary to our own . upon completion of proof-of-concept phase 2 clinical trials , we intend to discuss strategic alliances with leading pharmaceutical or biotechnology companies who seek late stage product candidates to support further clinical development and product commercialization . depending on decisions we may make as to further clinical development , we may seek to raise additional capital . we may also pursue potential partnerships and potential acquirers of license rights to our programs in markets outside the united states . we entered into an agreement to form a joint venture company with zhejiang medicine co. , ltd. and beijing medfron medical technologies co. ltd. , ( formerly beijing make-friend medicine technology co. , ltd. ) effective september 27 , 2011. the joint venture agreement provided for the joint venture company , zhejiang sunmy bio-medical co. , ltd. ( zhejiang sunmy ) , to develop and commercialize mn-221 ( bedoradrine ) in china and search for additional compounds to develop . on july 24 , 2017 , the company and beijing medfron medical technologies co. , ltd. agreed to dissolve zhejiang sunmy , subject to approval by applicable chinese regulatory authorities which was granted on december 11 , 2017. in 2018 , we received proceeds of $ 0.6 million from the dissolution of the joint venture and liquidation of our investment , resulting in an immaterial gain recorded within other expense , net in the statement of operations and comprehensive loss for the year ended december 31 , 2018. critical accounting policies our management 's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements , which have been prepared in accordance with accounting principles generally accepted in the united states . the preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets , liabilities , revenues and expenses and the related disclosure of contingent liabilities . we review our estimates on an ongoing basis , including those related to our significant accruals . 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 . actual results may differ from these estimates . our significant accounting policies are more fully described in note 1 to our consolidated financial statements included elsewhere in this annual report on form 10-k. our most critical accounting estimates include research , development and patent expenses which impacts operating expenses and accrued liabilities , stock-based 52 compensation which impacts operating expenses and goodwill and purchased intangibles . we review our estimates and assumptions periodically and reflect the effects of revisions in the p eriod in which they are deemed to be necessary . we believe that the following accounting policies are critical to the judgments and estimates used in preparation of our consolidated financial statements . story_separator_special_tag research , development and patent expenses research , development and patent costs are expensed as incurred based on certain contractual factors such as estimates of work performed , milestones achieved , patient enrollment and experience with similar contracts . as actual costs become known , accruals are adjusted . to date , our accrued research , development and patent expenses have not differed significantly from the actual expenses incurred . the following table summarizes our research , development and patent expenses for the periods indicated for each of our product development programs . to the extent that costs , including personnel costs , are not tracked to a specific product development program , such costs are included in the “ other r & d expense ” category ( in thousands ) : replace_table_token_1_th stock-based compensation we use the black-scholes option pricing model to estimate the fair value of stock option awards including performance-based options . the black-scholes model requires the use of highly subjective and complex assumptions , including the company 's stock price , expected volatility , expected term , risk-free interest rate , and expected dividend yield . for expected volatility , we base the assumption on the historical volatility of the company 's common stock . the expected term of the awards is based on historical data regarding employees ' option exercise behaviors . the risk-free interest rate assumption is based on observed interest rates appropriate for the terms of the awards . the dividend yield assumption is based on the company 's history and expectation of dividend payouts . only expenses associated with awards that are ultimately expected to vest are included in our financial statements . changes to our estimations and assumptions could have a significant impact on the stock-based compensation amount recognized . in-process research and development ( “ ipr & d ” ) and goodwill as a result of our acquisitions we have recorded goodwill and other identifiable finite and indefinite lived acquired intangibles . the identification and valuation of these intangible assets at the time of acquisition require significant management judgment and estimates , including the amount and timing of future cash flows , growth rates , discount rates and useful lives . we review ipr & d and goodwill for impairment annually or more frequently whenever events or changes in circumstances indicate that the carrying amount of the asset might not be recoverable . when evaluating for impairment of indefinite lived intangible assets , we may first perform a qualitative assessment to determine whether it is more likely than not that our indefinite-lived intangible assets are impaired . the criteria used for these evaluations include management 's estimate of the asset 's continuing ability to generate income from operations and 53 positive cash flows in future periods , busines s and economic trends as well as the strategic significance of any intangible assets in our business objectives . additionally , we consider the reasonableness of the various inputs and assumption s used in determining the ipr & d fair value , including a probab ility of success factor , a debt free working capital requirement , costs to complete , our tax rate , peak sales years , potential market size , a royalty rate and any up-front milestone revenue payments . if assets are considered to be impaired , the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets . recent accounting pronouncements the impact of recent accounting pronouncements is more fully described in note 1 of our consolidated financial statements included elsewhere in this annual report on form 10-k. story_separator_special_tag > public offering on february 12 , 2018 , we completed a firm-commitment underwritten public offering of 4,419,890 shares of common stock at a purchase price of $ 9.05 per share for aggregate gross proceeds of $ 40.0 million , and received aggregate net proceeds of approximately $ 37.4 million , net of underwriting discounts and commissions and offering expenses . additionally , we granted the underwriters a 30-day option to purchase up to an additional 662,983 shares of common stock at the public offering price , and on february 21 , 2018 , we sold an additional 126,038 shares of common stock for gross proceeds of $ 1.1 million pursuant to the partial exercise by the underwriters of their over-allotment option . 55 warrants during the year ended december 31 , 2018 , warrants to purchase 750,000 shares were exercised for gross proceeds of $ 2.4 million . no warrants were outstanding in 2019. factors that may affect future financial condition and liquidity as of december 31 , 2019 , we had available cash and cash equivalents of $ 63.8 million and working capital of $ 62.1 million . as of the date of this report , we believe we have sufficient working capital to fund operations at least through the end of 2021. our future funding requirements will depend on many factors , including , but not limited to : progress in , and the costs of , future planned clinical trials and other research and development activities ; the scope , prioritization and number of our product development programs ; our obligations under our license agreements , pursuant to which we may be required to make future milestone payments upon the achievement of various milestones related to clinical , regulatory or commercial events ; our ability to establish and maintain strategic collaborations , including licensing and other arrangements , and to complete acquisitions of additional product candidates ; the time and costs involved in obtaining regulatory approvals ; the costs of securing manufacturing arrangements for clinical or commercial production of our product candidates ; the costs associated with any expansion of our management , personnel , systems and facilities ; the costs associated with any litigation ; the costs associated with the operations or wind-down of any business we may acquire ; the costs involved
| our operating losses to date have been funded primarily through the private placement of our equity securities , the public sale of our common stock , long-term debt , development agreements with partners and the exercise of warrants , net of treasury stock repurchases . 54 the following table shows a summary of our cash flows for the years ended december 31 , 2019 and 2018 ( in thousands ) : replace_table_token_2_th equity financing on may 22 , 2015 , we entered into an at-the-market issuance sales agreement ( the “ 2015 atm agreement ” ) with mlv & co. llc ( mlv ) , pursuant to which we could sell common stock through mlv from time to time up to an aggregate offering price of $ 30.0 million . sales of our common stock through mlv , if any , were to be made by any method that is deemed to be an “ at-the-market ” equity offering as defined in rule 415 promulgated under the securities act of 1933 , as amended , including sales made directly on nasdaq , on any other existing trading market for the common stock or to or through a market maker . mlv could also sell the common stock in privately negotiated transactions , subject to our prior approval . we agreed to pay mlv an aggregate commission rate of up to 4.0 % of the gross proceeds of any common stock sold under this agreement . proceeds from sales of common stock depended on the number of shares of common stock sold to mlv and the per share purchase price of each transaction . we were not obligated to make any sales of common stock under the sales agreement and could terminate the sales agreement at any time upon written notice . on september 16 , 2016 , we entered into an amendment no . 1 to the 2015 atm agreement with mlv to also include fbr capital markets & co ( fbr ) as a sales agent . the 2015 atm agreement was terminated on august 23 , 2019. on august 23 , 2019 , we entered into an at market issuance sales agreement ( the “ 2019 atm agreement ” ) with b. riley fbr , inc. ( b .
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pursuant to our established accounting policies , we conducted the fiscal 2013 annual analysis of our intangible asset as of december 31 , 2013 by comparing the estimated fair value of the licensed technology based on the income approach ( which utilizes forecasted discounted cash flows to estimate the fair value of the licensed technology ) against the then carrying value . as we concluded that , as of december 31 , 2013 , the fair value according to the income approach exceeded book value , we concluded there was no impairment of the subject intangible asset . during the third quarter of fiscal 2014 , our evaluation of the company 's progress in its new product development pipeline and delays in phusion product development caused management to reassess projections ( including income projections ) relied upon in december 2013. accordingly , management performed an impairment analysis for the period ended september 30 , 2014 for the licensed technology . as a consequence of our impairment assessment , we determined that a full impairment occurred of the intangible asset , licensed technology . as a consequence , we charged to operations a $ 3.6 million impairment charge during the third quarter of fiscal 2014. on october 17 , 2014 , we initiated a demand for arbitration with the american arbitration association . this demand for arbitration pertains to the phusion joint venture and the matter is against the phosphagenics entities . the phosphagenics entities have made counter claims of breaches against the company and phusion . this matter is at its preliminary stage and at this time , no prediction as to the outcome of this action can be made . seasonality of the business our sales are derived principally from our otc cold remedy products . a significant portion of our business is highly seasonal , which causes major variations in operating results from quarter to quarter . the third and fourth quarters generally represent the largest sales volume for our otc cold remedy products with a corresponding increase in marketing and advertising expenditures designed to promote our products during the cold season . in addition , our sales are influenced by and subject to fluctuations in the timing of purchase and the ultimate level of demand for our products which are a function of the timing , length and severity of each cold season . we track health and wellness trends and develop retail promotional strategies to align our production scheduling , inventory management and marketing programs to optimize consumer purchases . income taxes as of december 31 , 2014 , we have net operating loss carry-forwards of approximately $ 38.6 million for federal purposes that will expire beginning in fiscal 2020 through 2033. additionally , there are net operating loss carry-forwards of $ 20.1 million for state purposes that will expire beginning in fiscal 2018 through 2033. until sufficient taxable income to offset the temporary timing differences attributable to operations , and the tax deductions attributable to option , warrant and stock activities are assured , a valuation allowance equaling the total deferred tax asset is being provided . as a consequence of the accumulated losses of the company , we believe that this allowance is required due to the uncertainty of realizing these tax benefits in the future . story_separator_special_tag 66.6 % for fiscal 2013 , as compared to 63.6 % in fiscal 2012 , an increase of 3.0 % . the increase of 3.0 % in gross margin is principally due to fluctuations in our product mix shipped from period to period and the improved absorption of fixed production costs . gross margins are principally influenced by fluctuations in quarter-to-quarter production volume , fixed production costs and related overhead absorption , raw ingredient costs , inventory mark to market write-downs , if any , retail cooperative incentive promotion and the timing of shipments to customers which are factors of the seasonality of our sales activities and products . sales and marketing expense for fiscal 2013 increased $ 592,000 to $ 9.5 million as compared to $ 8.9 million for fiscal 2012. the increase in sales and marketing expense for fiscal 2013 as compared to fiscal 2012 was principally due to an increase in advertising expenditures as we expanded the scope and timing of our media and product promotion advertising campaigns from period to period . we continue to make significant , strategic marketing investments in an effort to build and grow the sales of our otc cold remedy products . general and administrative ( “ g & a ” ) expenses decreased $ 234,000 for fiscal 2013 to $ 5.9 million as compared to $ 6.1 million in fiscal 2012. the decrease in g & a expense for fiscal 2013 as compared to fiscal 2012 was primarily due to a decrease in personnel expenses and professional fees . research and development costs for fiscal 2013 and 2012 were $ 824,000 and $ 1.3 million , respectively . the decrease of $ 477,000 in research and development costs for fiscal 2013 as compared to fiscal 2012 was principally due a decrease in the scope , timing , cost and amount of research and development activity from period to period . in february 2013 , we introduced to the retail trade two new products , cold-eeze ® cold remedy plus immune support + energy quickmelts ® and cold-eeze ® cold remedy plus immune support quickmelts ® which began shipping to our retailer customers in july 2013. additionally , we continue to engage in other research and development activities that we determine are appropriate and we may increase our research and development activities in future periods . in fiscal 2012 as a result of the godfrey settlement agreement , we realized $ 1.0 million benefit as a consequence of a reduction of the previously recorded accrued royalties and commission obligation of $ 3.5 million . under the godfrey settlement agreement , the godfreys assigned , transferred and conveyed to us all of their right , title , and interest in u.s. trademark registration no . story_separator_special_tag 1,838,542 for the trademark cold-eeze ® , among other intellectual property associated with such trademark . interest and other income for fiscal 2013 was $ 2,000 as compared to $ 7,000 for fiscal 2012. the decrease of $ 5,000 for fiscal 2013 as compared to fiscal 2012 was principally the result of decreased bank balances during fiscal 2013 and lower interest rates . interest expense for fiscal 2013 was $ 13,000 as compared to zero for fiscal 2012 as a consequence of interest paid pursuant to the terms of the settlement agreement consummated in december 2012. as noted above , we have net operating loss carry-forwards for both federal and certain states . as a consequence of these loss carry-forwards , we did not incur income tax expense for fiscal 2013 or fiscal 2012. as a consequence of the effects of the above , the net income for fiscal 2013 , was $ 405,000 , or $ 0.03 per share , as compared to a net loss of $ 1.1 million , or ( $ 0.07 ) per share , for fiscal 2012. liquidity and capital resources our aggregate cash and cash equivalents as of december 31 , 2014 were $ 2.9 million as compared to $ 1.6 million at december 31 , 2013. our working capital was $ 8.2 million and $ 6.7 million as of december 31 , 2014 and december 31 , 2013 , respectively . changes in working capital for fiscal 2014 were principally due to the net effect of ( i ) cash used in operations of $ 3.2 million comprised principally of ( a ) net loss of $ 7.8 million , inclusive of the non-cash charges of ( x ) $ 3.6 million impairment ( y ) $ 1.0 million share based compensation and stock grants and ( b ) an increase in accrued advertising of $ 838,000 , ( c ) increase to inventory of $ 771,000 ( d ) increase to accounts receivable of $ 517,000 , ( ii ) capital expenditures of $ 312,000 and ( iii ) the installment payment of $ 100,000 pursuant to the terms of the godfrey settlement agreement , offset by ( iv ) net proceeds of $ 4.9 million from the sales of our common stock . - 23 - 2012 equity line of credit on november 21 , 2012 , we entered into the 2012 equity line with dutchess whereby dutchess committed to purchase , subject to certain restrictions and conditions , up to 2,500,000 shares of our common stock , over a period of 36 months following the effectiveness of the registration statement registering the resale of shares purchased by dutchess . we also terminated the 2012 equity line as of may 28 , 2014. in december 2012 , we sold an aggregate of 883,722 shares of common stock to dutchess under and pursuant to the 2012 equity line . we derived approximately $ 1.1 million in net proceeds through the usage of the 2012 equity line of which we received $ 839,000 of such proceeds prior to december 31 , 2012 and $ 230,000 which we received on january 4 , 2013. in march 2013 and december 2013 , we sold an aggregate of 125,000 and 164,474 shares of our common stock , respectively , under and pursuant to the 2012 equity line and derived net proceeds of $ 195,000 and $ 250,000 , respectively . we have included in receivables $ 250,000 derived from the december 2013 sale of shares ; we received the proceeds on january 8 , 2014. during the period january 1 , 2014 through may 23 , 2014 , we sold an aggregate of 698,207 shares of common stock to dutchess under and pursuant to the 2012 equity line and we derived net proceeds of $ 1.2 million . the sales of the shares under the 2012 equity line were deemed to be exempt from registration under the securities act of 1933 , as amended in reliance upon section 4 ( 2 ) ( or regulation d promulgated thereunder ) . 2014 equity line of credit the company and dutchess executed the 2014 equity line dated may 28 , 2014 whereby dutchess committed to purchase , subject to certain restrictions and conditions , up to 3,000,000 shares of the company 's common stock , over a period of 36. on may 29 , 2014 , we filed a registration statement with the sec to register for sale up to 3,000,000 shares of our common stock and the registration statement was declared effective by the sec on june 4 , 2014. see market for registrant 's common equity , related stockholder matters and issuer purchases of equity securities – 2014 equity line of credit for more information about the terms and conditions of the 2014 equity line . during the period june 13 , 2014 through december 31 , 2014 , we sold an aggregate of 2,561,520 shares of our common stock to dutchess under and pursuant to the 2014 equity line and we derived net proceeds of $ 3.7 million . the sales of the shares under the 2014 equity line were deemed to be exempt from registration under the securities act of 1933 , as amended in reliance upon section 4 ( 2 ) ( or regulation d promulgated thereunder ) . at december 31 , 2014 , we have 438,480 shares of our common stock available for sale , at our discretion , under the terms of the 2014 equity line and covered pursuant to a registration statement . as a consequence of the seasonally of our business , we realize variations in operating results and demand for working capital from quarter to quarter . as of december 31 , 2014 , we had working capital of approximately $ 8.2 million and 438,480 shares of common stock available for sale under the 2014 equity line .
| the decrease of 2.4 % in gross margin from the prior period is principally due to ( i ) an increase in our cooperative incentive promotion and coupon costs and ( ii ) a reduction in the absorption of fixed production costs as a consequence of a decline in net sales , ( iii ) fluctuations in our product mix shipped from period to period and ( iv ) the initial expenses incurred as a consequence of a packaging transition to a slightly narrower package of our cold-eeze ® cold remedy lozenges at certain retail accounts to obtain additional/new distribution of our cold-eeze ® cold remedy quickmelts ® products for fiscal 2014. gross margins are principally influenced by fluctuations in quarter-to-quarter production volume , fixed production costs and related overhead absorption , raw ingredient costs , inventory mark to market write-downs , if any , retail cooperative incentive promotion and the timing of shipments to customers which are factors of the seasonality of our sales activities and products . sales and marketing expense for fiscal 2014 decreased $ 573,000 to $ 9.0 million as compared to $ 9.5 million for fiscal 2013. the decrease in sales and marketing expense for fiscal 2014 as compared to fiscal 2013 was principally due to a decrease in advertising expenditures as we managed the scope and timing of our media and product promotion advertising campaigns from period to period . we continue to make significant , strategic marketing investments in an effort to build and grow the sales of our otc cold remedy products . general and administrative ( “ g & a ” ) expenses increased $ 2.2 million for fiscal 2014 to $ 8.1 million as compared to $ 5.9 million in fiscal 2013. the increase in g & a expense for fiscal 2014 as compared to fiscal 2013 was primarily due to an increase in professional and legal fees related to certain , now resolved , litigation matters , and in personnel expenses . research and development costs for fiscal 2014 and 2013 were $ 1.3 million and $ 824,000 , respectively . the increase of $ 498,000 in research and development costs for fiscal 2014 as compared to fiscal 2013 was principally due an increase in the scope , timing , cost and amount of research and development activity from period to period . additionally , we continue to engage in other research and development activities that we determine are appropriate and we may increase our research and development activities in future periods . as a consequence of our impairment assessment , we determined that a full impairment occurred of the phusion intangible asset , license technology . as a consequence ,
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27 net loss for the year ended december 31 , 2015 , the company had a net loss of $ 17.9 million , as compared to a net loss of $ 19.0 million for the year ended december 31 , 2014 , a decrease of $ 1.1 million or 6 % . the decrease in net loss is due cost cutting measures implemented during 2015 and the unrealized gain in the change in fair value of derivative liabilities . liquidity and capital resources our operations primarily have been funded through cash generated by debt and equity financing . cash comprises cash on hand and demand deposits . our cash balances were as follows ( in thousands ) : replace_table_token_2_th 28 cash flows the following table sets forth the major components of our statements of cash flows data for the periods presented ( in thousands ) . replace_table_token_3_th operating activities net cash used in operating activities for the year ended december 31 , 2015 totaled $ 7.7 million as compared to $ 14.9 million for the year ended december 31 , 2014. of the $ 7.7 million , $ 0.3 million to the increase of our payables and $ 1.1 million from the increase in accrued expense and the remaining consisted principally of the net loss from operations . investing activities net cash used in investing activities for the year ended december 31 , 2015 was $ 2.2 million as compared to $ 1.9 million for the year ended december 31 , 2014. this represents capital expenditures primarily associated with the investment in product and technology development . we have invested in product and technology development , with $ 2.2 million accounted for as investment in intangible assets in the year ended december 31 , 2015 , and $ 1.8 million in the year ended december 31 , 2014. in addition , the company 's investment in property and equipment , comprising of the purchase of two cell-on-wheels and a deployment vehicle in 2015 of $ 0.34 million in the year ended december 31 , 2015 , and $ 0.13 million in the year ended december 31 , 2014. financing activities our net cash provided by financing activities for the year ended december 31 , 2015 was $ 9.5 million as compared to $ 12.0 million for 2014. the proceeds of $ 9.7 million in 2015 primarily consisted of proceeds from the issuance of common and preferred stock advances from related parties , warrant exercises , and short-term convertible notes . during 2015 , there were net proceeds from the august financing totaling $ 4.0 million ; net proceeds from the conversion of the august financing series b , c and d warrants totaling $ 1.8 million , net proceeds from the series b and c preferred stock totaling $ 2.0 million ; and net proceeds from a short term convertible note totaling $ 1.5 million during the year ended december 31 , 2014 , the proceeds of $ 12.0 million primarily consisted of proceeds from the issuance of common and preferred stock . during 2014 , we raised $ 8.8 million through the third offering ; $ 1.0 million from the $ 1 million purchase agreement ; $ 1.3 million from various investors through financing under our s-3 registration statement ; and $ 0.7 million through the sale of convertible preferred stock . the ability to recognize revenue and ultimately cash receipts is contingent upon , but not limited to , acceptable performance of the delivered equipment and services . if we are unable to raise additional capital and or close on some of our revenue producing opportunities in the near term , the carrying value our assets may be materially impacted . the financial statements do not include any adjustments related to the recovery and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern . 29 cost reduction initiatives in 2015 , we implemented cost reduction initiatives that included a decrease in our current full , part-time and contracted workforce . these initiatives resulted in a reduction in monthly operating expenses to approximately $ 800,000 – an improvement of over 30 percent . this saved us approximately $ 3,500,000 in 2015. on april 6 , 2016 , we announced the implementation of further additional cost reduction initiatives that will include a decrease in our current , full , part-time and contracted workforce , transitioning other employees to non-cash compensation agreements , and other reductions in operating expenses . these initiatives are expected to result in a monthly decrease of $ 300,000 in our operating expenses . subsequent financing events $ 500,000 securities purchase agreement on january 29 , 2016 , we entered into a securities purchase agreement ( the ‘ ‘ securities purchase agreement '' ) pursuant to which we sold 5 % senior secured convertible promissory notes ( the ‘ ‘ 5 % convertible notes '' ) to accredited investors ( each , a ‘ ‘ holder '' , and collectively , the ‘ ‘ holders '' ) for an aggregate purchase price of $ 500,000 for net proceeds of $ 500,000. in connection with the february 2016 offering , all of our obligations under the 5 % convertible notes have been extinguished . february 2016 financing on february 29 , 2016 , we closed a public offering of 3,556,660 units , at a price of $ 1.00 per unit , each of which consists of one share of its series b convertible preferred stock and 0.5 of a warrant to purchase one share of its common stock at an exercise price of $ 0.21 per warrant . we received approximately $ 3,556,660 in gross proceeds from the offering , before deducting placement agent fees and offering expenses payable by the company . roth capital partners acted as sole placement agent for the offering . the company used $ 1,456,660 of the gross proceeds and repaid the outstanding principal balance and interest on the 8 % and 5 % convertible notes . story_separator_special_tag our future capital requirements may vary materially from those currently planned and will depend on many factors , including our rate of revenue growth , the timing and extent of spending to support development efforts , the timing of new product introductions , market acceptance of our products and overall economic conditions . our ability to continue as a going concern is dependent upon its ability to raise additional capital , obtain other means of financing , and to fulfill purchase orders . the ability to recognize revenue and ultimately cash receipts , on purchase orders is contingent upon , but not limited to , acceptable performance of the delivered equipment and services . off-balance sheet arrangements as of december 31 , 2015 and 2014 we had no off-balance sheet arrangements . recent accounting pronouncements we are an ‘ ‘ emerging growth company '' as defined in the jumpstart our business startups act of 2012 , or jobs act . we will remain an emerging growth company for up to five years , or until the earliest of ( i ) the last day of the first fiscal year in which our annual gross revenue exceed $ 1 billion , ( ii ) the date that we become a ‘ ‘ large accelerated filer '' as defined in rule 12b-2 under the exchange act , which would occur if the market value of our common stock that is held by non-affiliates exceeds $ 700 million as of the last business day of our most recently completed second fiscal quarter or ( iii ) the date on which we have issued more than $ 1 billion in non-convertible debt during the preceding three-year period . pursuant to section 107 of the jobs act , we have elected to utilize the extended transition period provided in section 7 ( a ) ( 2 ) ( b ) of the securities act for complying with new or revised accounting standards . 30 the financial accounting standards board ( the “ fasb ” ) has issued accounting standards update ( “ asu ” ) 2016-02 , leases ( topic 842 ) . asu 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases . a lessee should recognize in the statement of financial position a liability to make lease payments ( the lease liability ) and a right-of-use asset representing its right to use the underlying asset for the lease term . for leases with a term of 12 months or less , a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities . in transition , lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach . public business entities are required to apply the amendments in asu 2016-02 for fiscal years beginning after december 15 , 2018 , including interim periods within those fiscal years . early application is permitted for all public business entities and all nonpublic business entities upon issuance . the company has not yet determined the effect of the adoption of this standard on the company 's financial position and results of operations . in january 2016 , the fasb issued asu no . 2016-01 , financial instruments – overall ( subtopic 825-10 ) ( “ asu 2016-01 ” ) , which updates certain aspects of recognition , measurement , presentation and disclosure of financial instruments . the new guidance is effective for public companies for fiscal years beginning after december 15 , 2017 , including interim periods within those fiscal years . for private companies , not-for-profit organizations , and employee benefit plans , the new guidance becomes effective for fiscal years beginning after december 15 , 2018 , and for interim periods within fiscal years beginning after december 15 , 2019. the company has not yet determined the effect of the adoption of this standard will have on the company 's financial position and results of operations . in august 2015 , the fasb issued fasb asu no . 2015-15 , “ interest—imputation of interest ( subtopic 835-30 ) : presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements ” . asu 2015-15 clarified the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements . such costs may be presented in the balance sheet as an asset and subsequently amortized ratably over the term of the line-of-credit arrangement , regardless of whether there are any outstanding borrowings on the line-of-credit arrangement . asu 2015-15 is effective for fiscal years beginning after december 15 , 2015 , including interim periods within those fiscal years . earlier adoption is permitted for financial statements that have not been previously issued . the adoption of this standard is not expected to have a material impact on the company 's financial position and results of operations . the fasb has issued asu no . 2014-09 , revenue from contracts with customers . this asu supersedes the revenue recognition requirements in accounting standards codification 605 - revenue recognition and most industry-specific guidance throughout the codification . the standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services . this asu is effective on january 1 , 2017 and should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the asu recognized at the date of initial application . for all other entities , the amendments in this asu are effective for annual reporting periods beginning after december 15 , 2017 , and interim periods within annual periods beginning after december 15 , 2018. early adoption is permitted commencing january 1 , 2017. a nonpublic entity may elect to apply this guidance earlier , however , only as prescribed in this asu .
| inventory valuation adjustments increased by $ 0.7 million or 350 % , from $ 0.2 million in the year ended december 31 , 2014 to $ 0.9 million in the year ended december 31 , 2015. the increase is primarily due to reserving all the xmod finished goods due to lack of sales for that product in 2015. general and administrative expenses general and administrative expenses are the expenses of operating the business on a daily basis and include salary and benefit expenses and payroll taxes , as well as the costs of trade shows , marketing programs , promotional materials , professional services , facilities , general liability insurance , and travel . 26 general and administrative expenses decreased by $ 1.1 million , or 17 % , from $ 7.4 million in the year ended december 31 , 2014 to $ 6.3 million in the year ended december 31 , 2015. the change is primarily due to decreases of $ 0.3 million in salary and benefit expenses due to a reduction in personnel ; $ 0.3 million in advertising due to not attending as many trade shows in 2015 as we did in 2014 ; $ 0.2 million in legal fees ; $ 0.2 million of travel expenses ; $ 0.1 million in taxes and licenses associated with paying less in delaware franchise tax in 2015 than we did in 2014. research and development research and development expenses consist primarily of salary and benefit expenses and payroll taxes , as well as costs for prototypes , facilities and travel . development expenses decreased by $ 2.9 million , or 38 % , from $ 7.6 million in the year ended december 31 , 2014 to $ 4.7 million in the year ended december 31 , 2015. the change is primarily due to due to decreases of $ 1.0 million in payroll and $ 0.5 in consulting services due to a reduction in personnel and contracted workforce ; $ 0.4 million in materials used for research and development purposes ; $ 0.2 million in costs related to maintaining existing patents ; $ 0.5 million in additional payroll capitalization ; $ 0.1 in office , computer-it expenses ; and $ 0.1 million in insurances . we expect our development costs to continue to decrease going forward due to the implemented cost saving measures in 2015 , which included a reduction in the full-time , part-time and contracted workforce by 22 employees ; and
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as a consequence , management continues to employ a well-defined credit policy focusing on quality underwriting and close management and board monitoring . see “ risk factors – increased emphasis on commercial lending may expose the bank to increased lending risks ” . increasing core deposits the bank seeks to increase core deposit market share in its primary market area by improving market penetration . deposits increased by $ 2.271 billion , to $ 4.188 billion at december 31 , 2016 , from $ 1.917 billion at december 31 , 2015 , including deposits of $ 2.140 billion acquired from cape , ocean shore and the retail branch purchase . excluding these transactions , deposits increased $ 130.7 million , while core deposits ( all deposits excluding time deposits ) increased $ 169.7 million . the loan to deposit ratio was 90.8 % at december 31 , 2016 . core account development has benefited from bank efforts to attract business deposits in conjunction with its commercial lending operations and from an expanded mix of retail core account products . as a result of these efforts the bank 's core deposit ratio has grown to 84.5 % at december 31 , 2016 , as compared to 84.2 % at december 31 , 2011 and only 33.0 % at december 31 , 1997. enhancing non-interest income management continues to diversify the bank 's product line and expand related resources in order to enhance non-interest income . the bank is focused on growth opportuni ties in areas such as wealth management services and in bankcard services , which includes interchange revenue , merchant services and atm fees . the bank also offers alternative investment products ( annuities , mutual funds and life insurance ) for sale through its retail branch network . income from fees and service charges continues to be an area of focus , increasing $ 3.8 million , or 27.6 % , to $ 17.7 million , for the year ended december 31 , 2016 , as compared to the prior year . of the total increase $ 3.1 million was related to the colonial american , cape and ocean shore acquisitions . by comparison , income from fees and service charges was $ 13.8 million for the year ended december 31 , 2011 and only $ 1.4 million for the year ended december 31 , 1997. branch rationalization and service delivery in light of the recent acquisition activity , management performed a comprehensive review of the bank 's branch network , which resulted in the january 2017 announcement of the consolidation of ten branches in the legacy cape and ocean shore market area by mid-year 2017 , with expected annualized cost savings of $ 3.6 million . further , the bank expects to consolidate other branches in its central new jersey market area by the end of the year . in addition to branch consolidation , the bank has adapted to the industry wide trend of declining branch activity by transitioning to a universal banker staffing model , with a smaller branch staff handling sales and service transactions . in certain locations , routine transactions are handled through “ personal teller machines ” , an advanced technology with a live team member in a remote location who performs transactions for multiple personal teller machines . the bank is also investing in its multiple electronic delivery channels to enhance the customer exper ience . capital management in addition to the objectives described above , the company determined to more actively manage its capital position to improve return on equity . the company has , over the past few years , implemented or announced , three stock repurchase programs . the most recent plan to repurchase up to 5 % of outstanding common stock was announced on july 24 , 2014. for the year ended december 31 , 2016 , the company repurchased 90,000 shares of common stock for $ 1.9 million . at december 31 , 2016 , there were 154,804 shares remaining to be repurchased under the existing stock repurchase plan . story_separator_special_tag assumptions or estimates about highly uncertain matters . the use of different judgments , assumptions and estimates could result in material differences in the results of operations or financial condition . these critical accounting policies and their application are reviewed periodically and , at least annually , with the audit committee of the board of directors . allowance for loan losses the allowance for loan losses is a valuation account that reflects probable incurred losses in the loan portfolio . the adequacy of the allowance for loan losses is based on management 's evaluation of the company 's past loan loss experience , known and inherent risks in the portfolio , adverse situations that may affect the borrower 's ability to repay , estimated value of any underlying collateral and current economic conditions . additions to the allowance arise from charges to operations through the provision for loan losses or from the recovery of amounts previously charged-off . the allowance is reduced by loan charge-offs . the allowance for loan losses is maintained at an amount management considers sufficient to provide for probable losses . the analysis considers known and inherent risks in the loan portfolio resulting from management 's continuing review of the factors underlying the quality of the loan portfolio . the bank 's allowance for loan losses includes specific allowances and a general allowance , each updated on a quarterly basis . a specific allowance is determined for all non-accrual loans ( excluding pci loans ) where the value of the underlying collateral can reasonably be evaluated . for these loans , the specific allowance represents the difference between the bank 's recorded investment in the loan , net of any interim charge-offs , and the estimated fair value of the collateral , less estimated selling costs . acquired loans are marked to fair value on the date of acquisition . story_separator_special_tag in conjunction with the quarterly evaluation of the adequacy of the allowance for loan losses , the company performs an analysis on acquired loans to determine whether or not there has been 35 subsequent deterioration in relation to those loans . if deterioration has occurred , the company will include these loans in the calculation of the allowance for loan losses after the initial valuation , and provide accordingly . if a loan becomes 90 days delinquent , the bank obtains an updated collateral appraisal . for residential real estate loans , the appraisal is updated annually if the loan remains delinquent for an extended period . for non-accrual commercial real estate loans , the bank assesses whether there has likely been an adverse change in the collateral value supporting the loan . the bank utilizes information based on its knowledge of changes in real estate conditions in its lending area to identify whether a possible deterioration of collateral value has occurred . based on the severity of the changes in market conditions , management determines if an updated commercial real estate appraisal is warranted or if downward adjustments to the previous appraisal are warranted . if it is determined that the deterioration of the collateral value is significant enough to warrant ordering a new appraisal , an estimate of the downward adjustments to the existing appraised value is used in assessing if additional specific reserves are necessary until the updated appraisal is received . a general allowance is determined for all loans that are not individually evaluated for a specific allowance ( excluding purchased loans ) . in determining the level of the general allowance , the bank segments the loan portfolio into various loan segments as follows : residential real estate ; commercial real estate ; consumer ; and commercial and industrial . the loan portfolio is further segmented by delinquency status and risk rating ( pass , special mention , substandard and doubtful ) . an estimated loss factor is then applied to each risk rating tranche . to determine the loss factor , the bank utilizes historical loss experience as a percent of loan principal adjusted for certain qualitative factors and the loss emergence period . the bank 's historical loss experience is based on a rolling 24-month look-back period for all loan segments . this was selected based on ( 1 ) management 's judgment that this period captures sufficient loss events ( in both dollar terms and number of individual events ) to be relevant ; and ( 2 ) that the bank 's underwriting criteria and risk characteristics have remained relatively stable throughout this period . the historical loss experience is adjusted for certain qualitative factors including , but not limited to , ( 1 ) delinquency trends , ( 2 ) net charge-off trends , ( 3 ) nature and volume of the loan portfolio , ( 4 ) loan policies and underwriting standards , ( 5 ) experience and ability of lending personnel , ( 6 ) changes in current economic conditions , ( 7 ) concentrations of credit , ( 8 ) loan review system , and external factors such as ( 9 ) local competition and ( 10 ) regulation . existing economic conditions which the bank considered to estimate the allowance for loan losses include local and regional trends in economic growth , unemployment and real estate values . the bank considers the applicability of each of these qualitative factors in estimating the general allowance for each loan portfolio segment . each quarter , the conditions that existed in the 24-month look-back period are compared to current conditions to support a conclusion as to which qualitative adjustments are ( or are not ) deemed necessary for a particular portfolio segment . the bank calculates and analyzes the loss emergence period on an annual basis or more frequently if conditions warrant . the bank 's methodology is to use loss events in the past 8 quarters to determine the loss emergence period for each loan segment . the loss emergence period is specific to each loan segment and determined based on ( 1 ) the occurrence of a loss event which resulted in a potential loss and ( 2 ) confirmation of the potential loss is deemed to occur when the bank records an initial charge-off on the loan or downgrades the risk-rating to substandard or doubtful . the bank also maintains an unallocated portion of the allowance for loan losses . the primary purpose of the unallocated component is to account for the inherent imprecision of the overall loss estimation process including the periodic updating of appraisals , commercial loan risk ratings , and continued economic uncertainty that may not be fully captured in the company 's loss history or the qualitative factors . upon completion of the aforementioned procedures , an overall management review is performed including ratio analyses to identify divergent trends compared with the bank 's own historical loss experience , the historical loss experience of the bank 's peer group , and management 's understanding of general regulatory expectations . based on that review , management may identify issues or factors that previously had not been considered in the estimation process , which may warrant further analysis or adjustments to estimated loss factors or the allowance for loan losses . of the bank 's loan portfolio , 96.0 % is secured by real estate , whether residential or commercial . additionally , most of the bank 's borrowers are located in central and southern new jersey and the surrounding area . these concentrations may adversely affect the bank 's loan loss experience should local real estate values decline further or should the markets served experience difficult economic conditions including increased unemployment or should the area be affected by a natural disaster such as a hurricane or flooding . management believes the primary risk characteristics for each portfolio segment are a decline in the economy generally , including elevated levels of unemployment , a decline in real estate market values and increases in interest rates .
| net income for the years ended december 31 , 2016 and 2015 includes merger related expenses , net of tax benefit , of $ 11.8 million and $ 1.3 million , respectively . the merger related expenses reduced diluted earnings per share by $ 0.50 and $ 0.08 , respectively , for the years ended december 31 , 2016 and 2015. non-performing loans decreased 25.8 % , to $ 13.6 million , at december 31 , 2016 , from $ 18.3 million at december 31 , 2015 . non-performing loans as a percent of total loans receivable decreased to 0.35 % at december 31 , 2016 , from 0.91 % at december 31 , 2015 , the lowest level in the past 10 years . risk management activities related to the acquisitions included the sale of certain higher risk loan pools , including 63 residential loans with a carrying value of $ 4.4 million , 72 sba loans with a carrying value of $ 8.4 million , and 61 commercial loans with a carrying value of $ 17.5 million . the company remains well-capitalized with a tangible common equity ratio of 8.30 % at december 31 , 2016 . critical accounting policies note 1 to the company 's audited consolidated financial statements for the year ended december 31 , 2016 contains a summary of significant accounting policies . various elements of these accounting policies , by their nature , are inherently subject to estimation techniques , valuation assumptions and other subjective assessments . certain assets are carried in the consolidated statements of financial condition at estimated fair value or the lower of cost or estimated fair value . policies with respect to the methodology used to determine the allowance for loan losses and judgments regarding securities and goodwill impairment are the most critical accounting policies because they are important to the presentation of the company 's financial condition and results of operations , involve a higher degree of complexity and require management to make difficult and subjective judgments which often
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research and development expenses research and development expenses consist of costs incurred for the development of cochleate delivery technology and mat2203 and mat2501 , which include : ● the cost of conducting pre-clinical work ; ● the cost of acquiring , developing and manufacturing pre-clinical and human clinical trial materials ; ● costs for consultants and contractors associated with chemistry and manufacturing controls ( cmc ) , pre-clinical and clinical activities and regulatory operations ; ● expenses incurred under agreements with contract research organizations , or cros , including the national institutes of health ( nih ) , that conduct our pre-clinical or clinical trials ; and ● employee-related expenses , including salaries and stock-based compensation expense for those employees involved in the research and development process . the table below summarizes our direct research and development expenses for our product candidates and development platform for the years ended december 31 , 2017 , 2016 and 2015. our direct research and development expenses consist principally of external costs , such as fees paid to contractors , consultants , analytical laboratories and cros and or the nih , in connection with our development work . we typically use our employee and infrastructure resources for manufacturing clinical trial materials , conducting product analysis , study protocol development and overseeing outside vendors . included in “ internal staffing , overhead and other ” below is the cost of laboratory space , supplies , r & d employee costs ( including stock option expenses ) , travel and medical education . - 63 - replace_table_token_2_th research and development activities are central to our business model . we expect our research and development expenses to increase because product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development , primarily due to the increased size and duration of later-stage human trials . in addition , we will look to strategically expand the use of our drug platform technology through additional development work . during 2018 , we will be focused on completion of our phase ii studies for mat2203 , starting a new study , and moving mat2501 and our delivery platform forward in development . general and administrative expenses general and administrative expenses consist principally of salaries and related costs for personnel in executive and finance functions . other general and administrative expenses include facility costs , insurance , investor relations expenses , professional fees for legal , patent review , consulting and accounting/audit services . we anticipate that our general and administrative expenses will increase during 2018 due to the increased expenses related to our status as a publicly traded company , including expenses in support of compliance with the requirements of section 404 of the sarbanes oxley act as well as increase investor relations , protection of our intellectual property and insurance costs sale of net operating losses ( nols ) constitutes income obtained from selling unused net operating losses ( nols ) and unused research tax credits under the new jersey technology business tax certificate program . other income ( expense ) , net other income and expense , net is largely comprised of interest income/ ( expense ) and franchise taxes . application of critical accounting policies our discussion and analysis of our financial condition and results of operations are based on our financial statements , which have been 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 judgments that affect the reported amounts of assets , liabilities and expenses and the disclosure of contingent assets and liabilities in our financial statements . on an ongoing basis , we evaluate our estimates and judgments . we base our estimates on historical experience , known trends and events , and 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 . - 64 - our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this annual report . we believe the following accounting procedures to be most critical to the judgments and estimates used in the preparation of our financial statements . accrued research and development expenses as part of the process of preparing our financial statements , we are required to estimate our accrued expenses , particularly for product development costs . this process involves reviewing open contracts and purchase orders , communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost . the majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met . we make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at that time . we periodically confirm the accuracy of our estimates with the service providers and make adjustments as necessary . examples of estimated accrued research and development expenses include : ● fees paid to contractors in connection with the development of manufacturing processes for products in development ; ● fees paid to cros in connection with preclinical and clinical development activities ; ● fees paid to contractors in connection with preparation of regulatory submissions ; and ● fees paid to vendors related to product manufacturing , development and distribution of clinical study supplies . we base our expenses related to pre-clinical and human studies on our estimates of the services received and efforts expended pursuant to contracts with multiple development contractors that conduct and manage development work and studies on our behalf . story_separator_special_tag the financial terms of these agreements are subject to negotiation , vary from contract to contract and may result in uneven payment flows . there may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense . payments under some of these contracts may depend on factors such as the successful enrollment of subjects and the completion of specific study milestones . in accruing service fees , we will estimate the time period over which services will be performed , the completion of certain tasks , enrollment of subjects , study center activation and the level of effort to be expended in each period . if the actual timing of the performance of services or the level of effort varies from our estimate , we will adjust the accrual or prepayment accordingly . although we do not expect our estimates to be materially different from amounts actually incurred , our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in us reporting amounts that are too high or too low in any particular period . based on limited historical experience , actual results have not been materially different from our estimates . - 65 - identifiable intangible assets identifiable intangible assets are measured at their respective fair values and are not amortized until commercialization . once commercialization occurs , these intangible assets will be amortized over their estimated useful lives . the fair values assigned to our intangible assets are based upon reasonable estimates and assumptions given available facts and circumstances . unanticipated events or circumstances may occur that may require us to review the assets for impairment . events or circumstances that may require an impairment assessment include negative clinical trial results , material delays in our development program or sustained decline in market capitalization . indefinite-lived intangible assets are not subject to periodic amortization . rather , indefinite-lived intangibles are reviewed for impairment by applying a fair value based test on an annual basis or more frequently if events or circumstances indicate impairment may have occurred . events or circumstances that may require an interim impairment assessment are consistent with those described below . we perform our annual impairment test in december of each year . research and development expenses research and development expenses are charged to operations as they are incurred . stock-based compensation option grants we account for all share-based compensation payments issued to employees , directors , and non-employees using an option pricing model for estimating fair value . accordingly , share-based compensation expense is measured based on the estimated fair value of the awards on the date of grant , net of forfeitures . we recognize compensation expense for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to us using the straight-line single option method . in accordance with authoritative guidance , we re-measure the fair value of non-employee share-based awards as the awards vest , and recognize the resulting value , if any , as expense during the period the related services are rendered . significant factors , assumptions and methodologies used in determining fair value we apply the fair value recognition provisions of asc topic 718 , compensation-stock compensation , which we refer to as asc 718. we recognize share-based compensation expense ratably over the requisite service period , which in most cases is the vesting period of the award . calculating the fair value of share-based awards requires that we make highly subjective assumptions . we use the black-scholes option pricing model to value our stock option awards . use of this valuation methodology requires that we make assumptions as to the volatility of our common stock , the expected term of our stock options , the risk free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield . as a publicly-held company , we utilized our historical data to estimate expected stock price volatility . we use the simplified method as prescribed by the securities and exchange commission staff accounting bulletin no . 107 , share-based payment , to calculate the expected term of stock option grants to employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term of stock options granted to employees . we recognize compensation expense for stock option awards on a straight-line basis over the applicable service period of the award . the service period is generally the vesting period , with the exception of options granted subject to a consulting agreement , whereby the option vesting period and the service period defined pursuant to the terms of the consulting agreement may be different . stock options issued to consultants are revalued quarterly until fully vested , with any change in fair value expensed . for awards subject to performance conditions , the company recognizes stock-based compensation expense using the accelerated attribution recognition method when it is probable that the performance condition will be achieved . the following range of assumptions were used to value options granted for the years ended december 31 , 2017 , 2016 and 2015 and to re-measure stock options issued to consultants . - 66 - replace_table_token_3_th the expected stock price volatility assumption was determined by examining the company 's historical volatility . we will continue to analyze our expected term assumptions as more historical data for our common stock becomes available . the risk-free interest rate assumption is based on the u.s. treasury instruments whose term was consistent with the expected term of our stock options . the expected dividend assumption is based on our history and expectation of dividend payouts . we have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future .
| in 2016 , significant resources have been targeted to mat2301 and mat2501 , limiting resources spent on mat9001 . general and administrative expenses . general and administrative expense for the year ended december 31 , 2016 was $ 4.3 million compared to $ 4.8 million for the year ended december 31 , 2015 , a decrease of $ 0.5 million . the decrease in general and administrative expense was primarily due to decreases in employee compensation , legal and accounting fees . liquidity and capital resources sources of liquidity we have funded our operations since inception through private placements of our preferred stock and our common stock and common stock warrants . as of december 31 , 2017 , we have raised a total of approximately $ 50.2 million in gross proceeds and $ 44.5 million net , from sales of our equity securities . as of december 31 , 2017 , we had cash and cash equivalents totaling $ 7.3 million . 2017 controlled equity offering we entered into a controlled equity offering sm sales agreement with cantor fitzgerald & co. “ cantor ” , pursuant to which , subject to certain limited restrictions and daily sales limits , we may sell shares of common stock having an offering price of up to $ 30 million . through december 31 , 2017 , we raised approximately $ 1.1 million through this agreement . 2017 warrant tender offer and excercised warrants on january 13 , 2017 , we completed a tender offer to amend and exercise certain categories of existing warrants . pursuant to the offer to amend and exercise , an aggregate of 30,966,350 warrants were tendered by their holders . the gross cash proceeds from such exercises were approximately $ 13.5 million and the net cash proceeds after deducting warrant solicitation agent fees and other estimated offering expenses were approximately $ 12.7 million . prior to the offer to amend and exercise , we had 58,159,495 shares of common stock outstanding and warrants to purchase an aggregate of 40,255,234
| 11,013 |
management actively monitors and manages its interest rate risk exposure . although the bank manages other risks , such as credit quality and liquidity risk , in the normal course of business management considers interest rate risk to be its most significant market risk that could potentially have the largest material effect on the bank 's financial condition and results of operations . the bank does not maintain a trading account for any class of financial instruments nor does it engage in hedging activities . furthermore , the bank is not subject to foreign currency exchange rate risk or commodity price risk . qualitative aspects of market risk . the bank 's principal financial objective is to achieve long-term profitability while reducing its exposure to fluctuating market interest rates . the bank has sought to reduce the exposure of its earnings to changes in market interest rates by attempting to manage the difference between asset and liability maturities and interest rates . the principal element in achieving this objective is to increase the interest rate sensitivity of the bank 's interest-earning assets by retaining in its portfolio , short-term loans and loans with interest rates subject to periodic adjustments . the bank relies on retail deposits as its primary source of funds . as part of its interest rate risk management strategy , the bank promotes transaction accounts and certificates of deposit with terms of up to five years . the bank has adopted a strategy that is designed to substantially match the interest rate sensitivity of assets relative to its liabilities . the primary elements of this strategy involve originating arm loans for its portfolio , maintaining residential construction loans as a portion of total net loans receivable because of their generally shorter terms and higher yields than other one- to four-family residential mortgage loans , matching asset and liability maturities , investing in short-term securities , and originating fixed-rate loans for retention or sale in the secondary market while retaining the related servicing rights . sharp increases or decreases in interest rates may adversely affect the bank 's earnings . management of the bank monitors the bank 's interest rate sensitivity through the use of a model provided by nxtsoft data analytics , llc ( “ nxtsoft ” ) , a company that specializes in providing interest rate risk and balance sheet management services to the financial services industry . based on a rate shock analysis prepared by nxtsoft based on data at september 30 , 2019 , an immediate increase in interest rates of 100 basis points would increase the bank 's projected net interest income by approximately 4.1 % , primarily because a larger portion of the bank 's interest rate sensitive assets than interest rate sensitive liabilities would reprice within a one year period . conversely , an immediate decrease in interest rates of 100 basis points would decrease the bank 's projected net interest income by approximately 6.9 % . see “ quantitative aspects of market risk ” below for additional information . management has sought to sustain the match between asset and liability maturities and rates , while maintaining an acceptable interest rate spread . pursuant to this strategy , the bank actively originates adjustable-rate loans for retention in its loan portfolio . fixed-rate mortgage loans with maturities greater than seven years generally are originated for the immediate or future resale in the secondary mortgage market . although the bank has sought to originate arm loans , the ability to originate such loans depends to a great extent on market interest rates and borrowers ' preferences . in lower interest rate environments , borrowers often prefer fixed-rate loans . 55 consumer , commercial business and construction loans typically have shorter terms and higher yields than permanent residential mortgage loans , and accordingly reduce the bank 's exposure to fluctuations in interest rates . at september 30 , 2019 , the consumer , commercial business and construction loan portfolios amounted to $ 44.50 million , $ 64.76 million and $ 223.53 million , or 4.5 % , 6.5 % and 22.5 % of total loans receivable , respectively . quantitative aspects of market risk . the model provided for the bank by nxtsoft estimates the changes in net portfolio value ( `` npv '' ) and net interest income in response to a range of assumed changes in market interest rates . the model first estimates the level of the bank 's npv ( market value of assets , less market value of liabilities , plus or minus the market value of any off-balance sheet items ) under the current rate environment . in general , market values are estimated by discounting the estimated cash flows of each instrument by appropriate discount rates . the model then recalculates the bank 's npv under different interest rate scenarios . the change in npv under the different interest rate scenarios provides a measure of the bank 's exposure to interest rate risk . the following table is provided by nxtsoft based on data at september 30 , 2019 : replace_table_token_25_th _ ( 1 ) does not include loan fees . ( 2 ) includes boli income , which is included in non-interest income in the consolidated financial statements . ( 3 ) no rates in the model are allowed to go below zero . computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions , including relative levels of market interest rates , loan repayments and deposit decay , and should not be relied upon as indicative of actual results . furthermore , the computations do not reflect any actions management may undertake in response to changes in interest rates . in the event of a 100 basis point decrease in interest rates , the bank would be expected to experience an 8.3 % decrease in npv and a 6.9 % decrease in net interest income . story_separator_special_tag in the event of a 100 basis point increase in interest rates , a 5.5 % increase in npv and a 4.1 % increase in net interest income would be expected . based upon the modeling described above , the bank 's asset and liability structure generally results in increases in net interest income and npv in a rising interest rate scenario and decreases in net interest income and npv in a declining interest rate scenario . as with any method of measuring interest rate risk , certain shortcomings are inherent in the method of analysis presented in the foregoing table . for example , although certain assets and liabilities may have similar maturities or periods to repricing , they may react in different degrees to changes in market interest rates . also , the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates , while interest rates on other types may lag behind changes in market rates . additionally , certain assets have features which restrict changes in interest rates on a short-term basis and over the life of the asset . further , in the event of a change in interest rates , expected rates of prepayments on loans and early withdrawals from certificates of deposit could possibly deviate significantly from those assumed in calculating the table . comparison of financial condition at september 30 , 2019 and september 30 , 2018 the company 's total assets increased by $ 228.84 million , or 22.5 % , to $ 1.25 billion at september 30 , 2019 from $ 1.02 billion at september 30 , 2018 . the increase in total assets was primarily due to the south sound acquisition , which resulted in 56 a $ 183.10 million increase in total assets ( including goodwill and net of cash consideration paid ) at the acquisition date ( october 1 , 2018 ) and to a lesser extent , organic growth . net loans receivable increased by $ 161.27 million , or 22.2 % , to $ 886.66 million at september 30 , 2019 from $ 725.39 million at september 30 , 2018 , primarily due to loans acquired in the south sound acquisition ( $ 121.54 million at the acquisition date ) and , to a lesser extent , organic loan growth . total deposits increased by $ 178.72 million , or 20.1 % , to $ 1.07 billion at september 30 , 2019 from $ 889.51 million at september 30 , 2018 , primarily due to deposits acquired in the south sound acquisition ( $ 151.54 million at the acquisition date ) and , to a lesser extent , organic deposit growth . shareholders ' equity increased by $ 46.41 million , or 37.2 % , to $ 171.07 million at september 30 , 2019 from $ 124.66 million at september 30 , 2018 . the increase was primarily due to $ 28.27 million in common stock issued in the south sound acquisition and net income for the year ended september 30 , 2019 of $ 24.02 million which was partially offset by dividends paid to shareholders of $ 6.50 million . a more detailed explanation of the changes in significant balance sheet categories follows : cash and cash equivalents : cash and cash equivalents decreased by $ 5.85 million , or 3.9 % , to $ 143.02 million at september 30 , 2019 from $ 148.86 million at september 30 , 2018 . the decrease was primarily a result of the company investing a portion of its overnight liquidity into cds held for investment and investment securities . cds held for investment : cds held for investment increased by $ 15.06 million , or 23.8 % , to $ 78.35 million at september 30 , 2019 from $ 63.29 million . the level of cds held for investment increased as a portion of the company 's overnight liquidity was invested in cds earning higher interest . investment securities and investments in equity securities : investment securities and investments in equity securities increased by $ 40.63 million , or 290.9 % , to $ 54.59 million at september 30 , 2019 from $ 13.96 million at september 30 , 2018 . the increase was primarily due to investment securities that were acquired in the south sound acquisition ( $ 24.72 million at the acquisition date ) and the purchase of additional investment securities during the year ended september 30 , 2019. partially offsetting these increases was the sale of several investment securities acquired in the south sound acquisition along with maturities , prepayments and scheduled amortization of other investment securities . for additional details on investment securities , see `` item 1. business - investment activities '' and note 4 to the consolidated financial statements contained in `` item 8. financial statements and supplementary data . '' fhlb stock : fhlb stock increased by $ 247,000 , or 20.8 % , to $ 1.44 million at september 30 , 2019 from $ 1.11 million at september 30 , 2018 , due to fhlb stock acquired in the south sound acquisition and purchases required by the fhlb due to the increase in total assets . other investments : other investments consist solely of the company 's investment in the solomon hess sba loan fund llc , which was unchanged at both september 30 , 2019 and september 30 , 2018. this investment is utilized to help satisfy compliance with the company 's community reinvestment act ( `` cra '' ) investment test requirements . loans held for sale : loans held for sale increased to $ 6.07 million , or 240.1 % , at september 30 , 2019 from $ 1.79 million at september 30 , 2018 , primarily due to the timing and volume of mortgage banking loan sales . the company sells longer-term fixed-rate residential loans and the guaranteed portion of sba commercial business loans for asset-liability management purposes and to generate non-interest income .
| lending activities have been focused primarily on the origination of loans secured by real estate , including residential construction loans , one- to four-family residential loans , multi-family loans and commercial real estate loans . the bank originates adjustable-rate residential mortgage loans , some of which do not qualify for sale in the secondary market . the bank also originates commercial business loans and other consumer loans . the profitability of the company 's operations depends primarily on its net interest income after provision for ( recapture of ) loan losses . net interest income is the difference between interest income , which is the income that the company earns on interest-earning assets , which are primarily loans and investments , and interest expense , the amount the company pays on its interest-bearing liabilities , which are primarily deposits and borrowings ( as needed ) . net interest income is affected by changes in the volume and mix of interest-earning assets , the interest earned on those assets , the volume and mix of interest-bearing liabilities and the interest paid on those interest-bearing liabilities . management attempts to maintain a net interest margin placing it within the top quartile of its washington state peers . the provision for ( recapture of ) loan losses is dependent on changes in the loan portfolio and management 's assessment of the collectability of the loan portfolio as well as prevailing economic and market conditions . the allowance for loan losses reflects the amount that the company believes is adequate to cover probable credit losses inherent in its loan portfolio . net income is also affected by non-interest income and non-interest expense . for the year ended september 30 , 2019 , non-interest income consisted primarily of service charges on deposit accounts , gain on sales of loans , atm and debit card interchange transaction fees , a boli death benefit claim , an increase in the cash surrender value of boli , servicing income on loans sold and other operating income . non-interest income is also increased by net recoveries on investment securities and reduced by net otti losses
| 11,014 |
in developing a strategy for a company brand , we conduct product and packaging research , establish brand positioning , develop precise consumer communications and solicit consumer feedback . our integrated marketing activities include , but are not limited to , advertising , point-of-sale merchandising , sales promotions and digital marketing . we are focusing on marketing strategies to drive volume growth in emerging markets , increase our brand value in developing markets , and grow net operating revenues and profit in our developed markets . in emerging markets , we are investing in infrastructure programs that drive volume through increased access to consumers . in developing markets , where consumer access has largely been established , our focus is on differentiating our brands . in our developed markets , we continue to invest in brands and infrastructure programs but generally at a slower rate than gross profit growth . commercial leadership the coca-cola system has millions of customers around the world who sell or serve our products directly to consumers . we focus on enhancing value for our customers and providing solutions to grow their beverage businesses . our approach includes understanding each customer 's business and needs — whether that customer is a sophisticated retailer in a developed market or a kiosk owner in an emerging market . we focus on ensuring that our customers have the right product and package offerings and the right promotional tools to create enhanced value for themselves and the company . we are constantly looking to build new beverage consumption occasions in our customers ' outlets through unique and innovative consumer experiences , product availability and delivery systems , and beverage merchandising and displays . we participate in brand-building initiatives with our customers in order to drive consumer preference for our brands . through our commercial leadership initiatives , we embed ourselves further into our retail customers ' businesses while developing strategies for better execution at the point of sale . franchise leadership we must continue to improve our franchise leadership capabilities to give our company and our bottling partners the ability to grow together through shared values , aligned incentives and a sense of urgency and flexibility that supports consumers ' always changing needs and tastes . the financial health and success of our bottling partners are critical components of the company 's 35 success . we work with our bottling partners to identify processes that enable us to quickly achieve scale and efficiencies , and we share best practices throughout the bottling system . with our bottling partners , we work to produce differentiated beverages and packages that are appropriate for the right channels and consumers . we also design business models in specific markets to ensure that we appropriately share the value created by our beverages with our bottling partners . we must also continue to build a supply chain network that leverages the size and scale of the coca-cola system to gain a competitive advantage . challenges and risks being global provides unique opportunities for our company . challenges and risks accompany those opportunities . our management has identified certain challenges and risks that demand the attention of the nonalcoholic beverage segment of the commercial beverage industry and our company . of these , five key challenges and risks are discussed below . obesity the rates of obesity affecting communities , cultures and countries worldwide continue to be too high . there is growing concern among consumers , public health professionals and government agencies about the health problems associated with obesity . this concern represents a significant challenge to our industry . we understand and recognize that obesity is a complex public health challenge and are committed to being a part of the solution . we recognize the uniqueness of consumers ' lifestyles and dietary choices . commercially , we continue to : offer reduced- , low- and no-calorie beverage options ; provide transparent nutrition information , featuring calories on the front of most of our packages ; provide our beverages in a range of packaging sizes ; and market responsibly , including no advertising targeted to children under 12. the heritage of our company is to lead , and innovation is critical for leadership . as such , we are resolute in continuing to innovate and are committed to partnering to find winning solutions in the area of noncaloric sweeteners . this includes working to reduce sugar and calories in many of our beverages . we want to be a more helpful and credible partner in the fight against obesity . across the coca-cola system , we are mobilizing our assets in marketing and in community outreach to increase awareness and spur action . evolving consumer product and shopping preferences we are impacted by shifting consumer demographics and needs , on-the-go lifestyles and consumers who are empowered with more information than ever . as a consequence of these changes , many consumers want more choices , personalization , a focus on sustainability and recyclability , and transparency related to our products and packaging . we are committed to meeting their needs and to generating new growth through our evolving portfolio of beverage brands and products ( including numerous low- and no-calorie products ) , new product offerings , innovative and sustainable packaging , and ingredient education efforts . we are also committed to continuing to expand the variety of choices we provide to consumers and to providing options that reflect consumer concerns about impacts to the planet . increased competition and capabilities in the marketplace our company faces strong competition from well-established global companies as well as numerous regional and local companies . additionally , the rapidly evolving digital landscape and growth of e-commerce has led to dramatic shifts in consumer shopping patterns and presents new challenges to competitively maintain the relevancy of our brands . story_separator_special_tag we must continuously strengthen our capabilities in marketing and innovation in order to compete in a digital environment and maintain our brand loyalty and market share , while we selectively expand into other profitable categories of the nonalcoholic beverage segment of the commercial beverage industry . product safety and quality we strive to meet the highest standards in both product safety and product quality . we are aware that some consumers have concerns and negative viewpoints regarding certain ingredients used in our products . the coca-cola system works every day to share safe and refreshing beverages with consumers around the world . we have rigorous product and ingredient safety and quality standards designed to ensure safety and quality in each of our products , and we drive innovation that provides new beverage options to meet consumers ' evolving needs and preferences . we work to ensure consistent safety and quality through strong governance and compliance with applicable regulations and standards . we stay current with new regulations , industry best practices and marketplace conditions , and we engage with standard-setting and industry organizations . additionally , we manufacture and distribute our products according to strict policies , requirements and specifications set forth in an integrated quality management program that continually measures all 36 operations within the coca-cola system against the same stringent standards . our quality management system also identifies and mitigates risks and drives improvement . in our quality laboratories , we stringently measure the quality attributes of ingredients as well as samples of finished products collected from the marketplace . we perform due diligence to ensure that product and ingredient safety and quality standards are maintained in the more than 200 countries and territories where our products are sold . we regularly assess the relevance of our requirements and standards and continually work to improve and refine them across our entire supply chain . ingredient quality and quantity water quality and quantity is an issue that requires our company 's sustained attention and collaboration with other companies , suppliers , governments , nongovernmental organizations and communities where we operate . water is a main ingredient in substantially all of our products , is vital to the production of the agricultural ingredients on which our business relies , and is needed in our manufacturing process . it also is critical to the prosperity of the communities we serve . water is a critical natural resource facing unprecedented challenges from overexploitation , increased food demand , increasing pollution , poor management and the effects of climate change . our company regularly assesses the specific water-related risks that we and many of our bottling partners face and has implemented a formal water risk management program . mitigation of water risk forms the basis of our water stewardship strategic framework . this strategy is executed at the local level where we operate and includes the following elements : water use efficiency and wastewater treatment in manufacturing operations ; shared watershed protection efforts ; engaging local communities ; and addressing water resource management in our agricultural ingredient supply chain . such efforts are conducted in collaboration and partnership with others and are intended to help address local needs . many of these efforts help us in achieving our goal of replenishing the water that we and our bottling partners source and use in our finished products . we are also collaborating with other companies , governments , nongovernmental organizations and communities to advocate for needed water policy reforms and action to protect water availability and quality around the world . we believe that our company can leverage the water-related knowledge we have developed in the communities we serve through source water availability assessments and planning , water resource management , water treatment , wastewater treatment systems and models for working with communities and partners in addressing water and sanitation needs . as demand for water continues to increase around the world , we expect continued action on our part will help with the successful long-term stewardship of this critical natural resource , both for our business and the communities we serve . in addition , increased demand for commodities and decreased agricultural productivity in certain regions of the world as a result of changing weather patterns may limit the availability or increase the cost of key agricultural commodities , such as sugarcane , corn , sugar beets , citrus , coffee and tea , which are important sources of ingredients for our products , and could impact the food security of communities around the world . we are dedicated to implementing our sustainable sourcing commitment , which is founded on principles that protect the environment , uphold workplace rights and help build more sustainable communities . to support this commitment , our programs focus on economic opportunity , with an emphasis on female farmers , and environmental sustainability designed to help address these agricultural challenges . through joint efforts with farmers , communities , bottlers , suppliers and key partners , as well as our increased and continued investment in sustainable agriculture , we can together help make a positive strategic impact on food security . all of these challenges and risks — obesity ; evolving consumer preferences ; increased competition and capabilities in the marketplace ; product safety and quality ; and ingredient quality and quantity — have the potential to have a material adverse effect on the nonalcoholic beverage segment of the commercial beverage industry and on our company ; however , we believe our company is well positioned to appropriately address these challenges and risks . see `` item 1a . risk factors '' in part i of this report for additional information about risks and uncertainties facing our company . 37 critical accounting policies and estimates our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the united states ( `` u.s. gaap '' ) , which require management to make estimates , judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes .
| our company markets , manufactures and sells : beverage concentrates , sometimes referred to as `` beverage bases , '' and syrups , including fountain syrups ( we refer to this part of our business as our `` concentrate business '' or `` concentrate operations '' ) ; and finished sparkling soft drinks and other nonalcoholic beverages ( we refer to this part of our business as our `` finished product business '' or `` finished product operations '' ) . generally , finished product operations generate higher net operating revenues but lower gross profit margins than concentrate operations . our concentrate operations typically generate net operating revenues by selling concentrates , syrups and certain finished beverages to authorized bottling operations ( to which we typically refer as our `` bottlers '' or our `` bottling partners '' ) . our bottling partners either combine concentrates with sweeteners ( depending on the product ) , still water or sparkling water , or combine syrups with still or sparkling water , to produce finished beverages . the finished beverages are packaged in authorized containers , such as cans and refillable and nonrefillable glass and plastic bottles , bearing our trademarks or trademarks licensed to us and are then sold to retailers directly or , in some cases , through wholesalers or other bottlers . in addition , outside the united states , our bottling partners are typically authorized to manufacture fountain syrups , using our concentrate , which they 33 sell to fountain retailers for use in producing beverages for immediate consumption , or to authorized fountain wholesalers who in turn sell and distribute the fountain syrups to fountain retailers . our concentrate operations are included in our geographic operating segments and our global ventures operating segment . our finished product operations generate net operating revenues by selling sparkling soft drinks and a variety of other finished nonalcoholic beverages , such as water , enhanced water and sports drinks ; juice , dairy and plant-based beverages ; tea and coffee ; and energy drinks , to retailers , or to distributors and wholesalers who in turn sell the beverages to retailers . these
| 11,015 |
each project represents only a portion of the overall pipeline , and none is individually material to our consolidated research and development expense . while we do accumulate certain research and development costs on a project level for internal reporting purposes , we must make significant cost estimations and allocations , some of which rely on data that are neither reproducible nor validated through accepted control mechanisms . therefore , we do not have sufficiently reliable data to report on total research and development costs by project , by preclinical versus clinical spend , or by therapeutic category . other matters elanco animal health we are reviewing strategic alternatives for elanco animal health ( our animal health segment ) , including an initial public offering , merger , sale , or retention of the business , and will provide an update no later than the middle of 2018. patent matters we depend on patents or other forms of intellectual-property protection for most of our revenue , cash flows , and earnings . we lost patent exclusivity for the schizophrenia and bipolar mania indications for zyprexa ® in japan in december 2015 and april 2016 , respectively . generic versions of zyprexa launched in japan in june 2016. the loss of exclusivity for zyprexa in japan has caused a rapid and severe decline in revenue for the product . we lost our patent exclusivity for strattera ® in the u.s. in may 2017 , and generic versions of strattera were approved in the same month . as described in note 15 to the consolidated financial statements , following the settlement related to the compound patent challenge for effient ® , generic products launched in the u.s. in the third quarter of 2017. the entry of generic competition for these products has caused a rapid and severe decline in revenue , which will , in the aggregate , have a material adverse effect on our consolidated results of operations and cash flows . our compound patent protection for cialis ® ( tadalafil ) and adcirca ® ( tadalafil ) expired in major european markets and the u.s. in november 2017. however , cialis is protected by a unit dose patent in the u.s. , where we expect exclusivity to end in late september 2018 at the earliest . we expect that the entry of generic competition into these markets following the loss of exclusivity will cause a rapid and severe decline in 34 revenue for the affected products , which will , in the aggregate , have a material adverse effect on our consolidated results of operations and cash flows . additionally , as described in note 15 to the consolidated financial statements , the alimta ® vitamin regimen patents , which provide us with patent protection for alimta through june 2021 in japan and major european countries , and through may 2022 in the u.s. , have been challenged in each of these jurisdictions . our vitamin regimen patents have also been challenged in other smaller european jurisdictions . our compound patent for alimta expired in the u.s. in january 2017 , and expired in major european countries and japan in december 2015. we expect that the entry of generic competition for alimta following the loss of effective patent protection will cause a rapid and severe decline in revenue for the product , which will , in the aggregate , have a material adverse effect on our consolidated results of operations and cash flows . while the u.s. patent and trademark office recently ruled in our favor regarding the validity of the vitamin regimen patent , the generic companies which filed petitions seeking inter partes review of our vitamin regimen patent have appealed these rulings as further described in note 15 to the consolidated financial statements . we are aware that generic competitors have received approval to market generic versions of pemetrexed in major european markets , and that a generic product is currently on the market in at least one major european market . in light of the united kingdom ( u.k. ) supreme court 's judgment finding infringement in the u.k. , italy , france , and spain , actavis has withdrawn its previously launched-at-risk generic products from these markets . we will continue to seek to remove any generic pemetrexed products launched at risk in other european markets . notwithstanding our patents , generic versions of alimta were also approved in japan starting in february 2016. as described in note 15 to the consolidated financial statements , we do not currently anticipate that generic versions of alimta will proceed to pricing approval . the compound patent for humalog ® ( insulin lispro ) has expired in major markets . thus far , the loss of compound patent protection for humalog has not resulted in a rapid and severe decline in revenue . global regulators have different legal pathways to approve similar versions of insulin lispro . a similar version of insulin lispro has received approval in the u.s. and could launch soon . we are also aware that a competitor 's insulin lispro product has launched in certain european markets . other manufacturers have efforts underway to bring to market a similar version of insulin lispro in the u.s. and europe . while it is difficult to estimate the severity of the impact of similar insulin lispro products entering the market , we do not expect a rapid and severe decline in revenue ; however , we expect competitive pressure and some loss of market share initially that would continue over time . foreign currency exchange rates as a global company with substantial operations outside the u.s. , we face foreign currency risk exposure from fluctuating currency exchange rates , primarily the u.s. dollar against the euro , japanese yen , and british pound . story_separator_special_tag while we manage a portion of these exposures through hedging and other risk management techniques , significant fluctuations in currency rates can have a substantial impact , either positive or negative , on our revenue , cost of sales , and operating expenses . over the past two years , we have seen significant foreign currency rate fluctuations between the u.s. dollar and several other foreign currencies , including the euro , british pound , and japanese yen . while there is uncertainty in the future movements in foreign exchange rates , these fluctuations could negatively impact our future consolidated results of operations and cash flows . the impact of the venezuelan financial crisis , including the significant deterioration of the bolívar , resulted in a charge of $ 203.9 million in 2016. see note 17 to the consolidated financial statements for additional information related to the charge . as of december 31 , 2017 , our venezuelan subsidiaries represented a de minimis portion of our consolidated assets and liabilities . we continue to monitor other deteriorating economies and it is possible that additional charges may be recorded in the future . any additional charges are not expected to have a material adverse effect on our future consolidated results of operations . 35 trends affecting pharmaceutical pricing , reimbursement , and access united states in the u.s. , public concern over access to and affordability of pharmaceuticals continues to drive the regulatory and legislative debate . these policy and political issues increase the risk that taxes , fees , rebates , or other federal and state measures may be enacted . key health policy proposals affecting biopharmaceuticals include a reduction in biologic data exclusivity , modifications to medicare parts b and d , language that would allow the department of health and human services to negotiate prices for biologics and drugs in medicare , proposals that would require biopharmaceutical manufacturers to disclose proprietary drug pricing information , and state-level proposals related to prescription drug prices and reducing the cost of pharmaceuticals purchased by government health care programs . several states enacted legislation in 2017 related to prescription drug pricing transparency . savings projected under these proposals are targeted as a means to fund both health care expenditures and non-health care initiatives , or to manage federal and state budgets . the bipartisan budget act , enacted on february 9 , 2018 , will require manufacturers of brand-name drugs , biologics , and biosimilars to pay a 70 percent discount in the medicare part d coverage gap , up from the current 50 percent discount . this increase in coverage gap discounts will be effective beginning in 2019. in the private sector , consolidation and integration among healthcare providers is also a major factor in the competitive marketplace for human pharmaceuticals . health plans , pharmaceutical benefit managers , wholesalers , and other supply chain stakeholders have been consolidating into fewer , larger entities , thus enhancing their purchasing strength and importance . payers typically maintain formularies which specify coverage ( the conditions under which drugs are included on a plan 's formulary ) and reimbursement ( the associated out-of-pocket cost to the consumer ) . formulary placement can lead to reduced usage of a drug for the relevant patient population due to coverage restrictions , such as prior authorizations and formulary exclusions , or due to reimbursement limitations which result in higher consumer out-of-pocket cost , such as non-preferred co-pay tiers , increased co-insurance levels and higher deductibles . consequently , pharmaceutical companies compete for formulary placement not only on the basis of product attributes such as greater efficacy , fewer side effects , or greater patient ease of use , but also by providing rebates . price is an increasingly important factor in formulary decisions , particularly in treatment areas in which the payer has taken the position that multiple branded products are therapeutically comparable . these downward pricing pressures could negatively affect future consolidated results of operations and cash flows . the main coverage expansion provisions of the affordable care act ( aca ) are currently in effect through both state-based exchanges and the expansion of medicaid . a trend has been the prevalence of benefit designs containing high out-of-pocket costs for patients , particularly for pharmaceuticals . in addition to the coverage expansions , many employers in the commercial market , driven in part by aca changes such as the 2022 implementation of the excise tax on employer-sponsored health care coverage for which there is an excess benefit ( the so-called `` cadillac tax '' ) , continue to evaluate strategies such as private exchanges and wider use of consumer-driven health plans to reduce their healthcare liabilities over time . repealing and replacing the aca remains a priority for president trump and congress . provisions included in final legislation could have a material adverse effect on our consolidated results of operations and cash flows . at the same time , the broader paradigm shift towards performance-based reimbursement and the launch of several value-based purchasing initiatives have placed demands on the pharmaceutical industry to offer products with proven real-world outcomes data and a favorable economic profile . international international operations also are generally subject to extensive price and market regulations . cost-containment measures exist in a number of countries , including additional price controls and mechanisms to limit reimbursement for our products . such policies are expected to increase in impact and reach , given the pressures on national and regional health care budgets that come from a growing aging population and ongoing economic challenges . in addition , governments in many emerging markets are becoming increasingly active in expanding health care system offerings . given the budget challenges of increasing health care coverage for citizens , policies may be proposed that promote generics and biosimilars only and reduce current and future access to branded human pharmaceutical products . 36 tax matters we are subject to income taxes
| debt repurchase ( notes 7 and 10 to the consolidated financial statements ) we recognized net charges of $ 152.7 million ( pretax ) , or $ 0.09 per share , attributable to the debt extinguishment loss of $ 166.7 million from the purchase and redemption of certain fixed-rate notes , partially offset by net gains from non-hedging interest rate swaps and foreign currency transactions associated with the related issuance of lower interest rate euro-denominated notes . 41 revenue the following table summarizes our revenue activity by region : replace_table_token_11_th numbers may not add due to rounding . ( 1 ) u.s. revenue includes revenue in puerto rico . the following are components of the change in revenue compared to the prior year : replace_table_token_12_th numbers may not add due to rounding . in the u.s. , the volume increase in 2016 was driven by sales of several pharmaceutical products , including trulicity , humalog , erbitux ( due to the transfer of commercialization rights to us in the u.s. and canada effective october 1 , 2015 ) , taltz , and jardiance , partially offset by decreased volume for zyprexa . u.s. revenue also benefited from reductions to the cymbalta reserve for expected product returns of approximately $ 175 million in 2016 , favorably affecting both volume and price . outside the u.s. , the volume increase in 2016 was driven by sales of several new pharmaceutical products , including cyramza and trulicity , partially offset by the losses of exclusivity for cymbalta in europe and canada , zyprexa in japan , as well as alimta in several countries . 42 the following table summarizes our revenue activity in 2016 compared with 2015 : replace_table_token_13_th numbers may not add due to rounding . ( 1 ) u.s. revenue includes revenue in puerto rico . ( 2 ) trajenta revenue includes jentadueto . nm - not meaningful revenue of humalog decreased 5 percent in the u.s. , driven by lower realized prices , partially offset by increased demand . revenue outside the u.s. increased 1 percent , driven by increased volume and , to a lesser extent , higher realized prices , partially offset by the unfavorable impact of foreign exchange rates . revenue of cialis increased 17 percent in the u.s. , driven by higher realized prices . revenue
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we plan to improve store productivity and profitability by strategically closing 50 to 60 stores during the next two years and reducing the square footage of an additional 10 to 15 stores by relocating them within the same malls . this initiative will allow us to focus on our business and align all operations around our goals of improving our comparable stores sales performance and store productivity , while also building our long term brand value . we currently expect to transfer , on average , approximately 20 % of the sales from the closed stores to other stores in the same markets . in 2013 , through march 8 , we have closed 15 stores . our current plans also include the relocation or remodel of approximately 25 locations in 2013 with the complete new design that feature a bold new look and enhanced experience as we continue to lead in the interactive experiential retail space . while build-a-bear workshop in north america will operate fewer stores that we expect will have higher sales volumes and profitability , we will continue to grow internationally , primarily through our franchisees . we also intend to increase shopping frequency by increasing new guest traffic to its stores , specifically focusing on families with children and intensifying digital engagement to increase visits from our existing guests and by reinforcing our store as a top destination for gifts . in 2009 , we implemented cost reduction initiatives that resulted in approximately $ 25 million in pre-tax savings . we were able to maintain these savings in 2010 and 2011 and saved an additional $ 3 million in 2011. we achieved an additional $ 7.5 million in savings in 2012 that were used to support sales-driving marketing initiatives and were partially offset by product cost increases . we ended fiscal 2012 with no borrowings under our bank loan agreement and with $ 45 million in cash and cash equivalents after investing $ 17 million in capital projects and $ 1 million in share repurchases . following is a description and discussion of the major components of our statement of operations : revenues net retail sales : net retail sales are revenues from retail sales ( including our web store and other non-store locations ) , are net of discounts , exclude sales tax , include shipping and handling costs billed to customers , and are recognized at the time of sale . revenues from gift cards are recognized at the time of redemption . our guests use cash , checks , gift cards and third party credit cards to make purchases . we classify stores as new , non-comparable and comparable stores . stores enter the comparable store calculation in their thirteenth full month of operation . our web store and temporary , seasonal and event-based locations are not included in our store count or in our comparable store calculations . non-comparable stores also result from a store relocation or remodel that results in a significant change in square footage . the net retail sales for that location are excluded from comparable store sales calculations until the thirteenth full month of operation after the date of the change . we have a loyalty program with a frequent shopper reward feature , the stuff fur stuff club . members of the program receive one point for every dollar spent and receive awards after reaching certain point thresholds . on a quarterly basis , an estimate of the obligation related to the program , based on actual points and awards outstanding and historical point conversion and award redemption patterns , is recorded as an adjustment to deferred revenue and net retail sales . at the time of redemption of the award , the deferred revenue obligation is reduced , and a corresponding amount is recognized in net retail sales . as the awards can be earned or redeemed at any of our store locations , we account for changes in the deferred revenue account at the total company level only . therefore , when we refer to net retail sales by location , such as comparable stores or new stores , these amounts do not include any changes in the deferred revenue amount . see “ -- -critical accounting estimates ” for additional details on the accounting for the deferred revenue under our customer loyalty program . 26 we use net retail sales per gross square foot and comparable store sales as performance measures for our business . the following table details net retail sales per gross square foot by age of store for the periods presented : replace_table_token_4_th ( 1 ) net retail sales per gross square foot represents net retail sales from north american stores open throughout the entire period divided by the total gross square footage of such stores . calculated on an annual basis only . ( 2 ) excludes our web store , temporary and seasonal and event-based locations . the percentage increase ( or decrease ) in comparable store sales for the periods presented below is as follows : replace_table_token_5_th ( 1 ) comparable store sales percentage changes are based on net retail sales and stores are considered comparable beginning in their thirteenth full month of operation . ( 2 ) excludes our web store , temporary and seasonal and event-based locations . fiscal 2012 consolidated comparable store sales decreased by 3.3 % , including an 8.4 % decrease in europe and a 2.0 % decrease in north america ( full year comparable store sales are compared to the 52 week period ended dec. 31 , 2011 ) . we believe the primary drivers of the overall decline in consolidated comparable store sales for the full year were as follows : in the first half of 2012 , we had benefit from higher redemption rates and transaction value of our holiday gift cards and from a promotion in the united states with mcdonald 's happy meals® that drove awareness of our brand and brought traffic to our stores resulting in slightly positive comparable store sales in north american through the first twenty-six weeks . story_separator_special_tag in the fiscal 2012 third quarter , we experienced a decline in the number of transactions compared to the 2011 third quarter which benefitted from a strong product offering that was tied to a major theatrical release supported by studio marketing and advertising . in the fiscal 2012 fourth quarter , we believe our new brand building marketing campaign in the united states along with a return to traditional holiday product offerings resulted in an increase in north american comparable store sales . in the united kingdom , we believe the negative economic conditions contributed to a continued decline in consumer sentiment and a corresponding decline in spending that negatively impacted our comparable store sales throughout the year . 27 fiscal 2011 consolidated comparable store sales decreased by 2.1 % , including a 0.2 % decrease in europe and a 2.5 % decrease in north america ( full year comparable store sales are compared to the 52 week period ended jan. 1 , 2011 ) . we believe the overall decline in consolidated comparable store sales for the full year was attributed primarily to the following factors : · through the third quarter , we had experienced a 0.9 % decrease in consolidated comparable store sale . growth in third quarter sales , which resulted from improved merchandise assortments and successful promotional events , only partially offset comparable stores sales declines in the first half of the year , which were primarily driven by a decline in transactions and negative consumer sentiment and spending in the uk . · further sales declines in the fourth quarter , attributable to underperforming licensed movie product , resulted in a decline for the full year . commercial revenue : commercial revenue includes the company 's transactions with other businesses , mainly through wholesale and licensing transactions . revenue from licensing activities is generally based on a percentage of sales made by licensees to third parties and is recognized at the time the product is shipped by the licensee or at the point of sale . we have entered into a number of licensing arrangements whereby third parties manufacture and sell to other retailers merchandise carrying the build-a-bear workshop trademark . revenue from wholesale product sales includes revenue from merchandise sold at stores operated by third parties under licensing agreements like landry 's restaurants . in 2010 , it also includes two transactions totaling $ 6.4 million with no associated gross margin . franchise fees : we receive an initial , one-time franchise fee for each master franchise agreement which is amortized to revenue over the life of the respective franchise agreements , which extend for periods up to 25 years . master franchise rights are typically granted to a franchisee for an entire country or countries . continuing franchise fees are based on a percentage of sales made by the franchisees ' stores and are recognized as revenue at the time of those sales . as of december 29 , 2012 , we had 91 stores , including 17 opened and five closed in fiscal 2012 , operating under franchise arrangements in the following countries : replace_table_token_6_th ( 1 ) gulf states agreement includes kuwait , bahrain , qatar , oman and the united arab emirates costs and expenses cost of merchandise sold and retail gross margin : cost of merchandise sold includes the cost of the merchandise , including royalties paid to licensors of third party branded merchandise ; store occupancy cost , including store depreciation and store asset impairment charges ; cost of warehousing and distribution ; packaging ; stuffing ; damages and shortages ; and shipping and handling costs incurred in shipment to customers . retail gross margin is defined as net retail sales less the cost of retail merchandise sold , which excludes cost of wholesale merchandise sold . selling , general and administrative expense : these expenses include store payroll and benefits , advertising , credit card fees , store supplies and preopening expenses as well as central office general and administrative expenses , including costs for virtual world maintenance , management payroll , benefits , stock-based compensation , travel , information systems , accounting , insurance , normal store closings , legal and public relations . these expenses also include depreciation and amortization of central office leasehold improvements , furniture , fixtures and equipment as well as the amortization of intellectual property costs . 28 in 2009 , we achieved $ 22 million in savings in selling , general and administrative expenses including marketing , central office payroll and outside services . we were able to maintain these savings in 2010 and 2011. in 2012 , we saved an additional $ 4 million in selling general and administrative expenses that were used to support sales driving marketing initiatives . other store expenses such as credit card fees and supplies historically have increased or decreased proportionately with net retail sales . we have share-based compensation plans covering the majority of our management groups and our board of directors . we account for share-based payments utilizing the fair value recognition provisions of accounting standards codification ( asc ) section 718 – stock compensation . we recognize compensation cost for equity awards over the requisite service period for the entire award . in 2012 , 2011 and 2010 , we recorded stock based compensation of approximately $ 3.6 million , $ 4.6 million and $ 4.8 million , respectively . 29 stores company-owned stores : the number of build-a-bear workshop stores in the united states , canada , puerto rico , the united kingdom , ireland and france for the last three fiscal years along with the projections for fiscal 2013 can be summarized as follows : replace_table_token_7_th replace_table_token_8_th replace_table_token_9_th our long term store real estate goal is to improve our stores ' sales productivity and profitability . today we believe that the optimal number of build-a-bear workshop stores in north america is between 225 and 250 and approximately 60 to 70 in the united kingdom and ireland for a total of 285 to 320 stores .
| percentages will not total due to cost of merchandise sold being expressed as a percentage of net retail sales and commercial revenue and immaterial rounding : replace_table_token_11_th ( 1 ) cost of merchandise sold is expressed as a percentage of net retail sales and commercial revenue . ( 2 ) retail gross margin represents net retail sales less cost of retail merchandise sold , which excludes cost of wholesale merchandise sold . retail gross margin was $ 145.7 million , $ 154.5 million and $ 155.1 million in 2012 , 2011 and 2010 , respectively . retail gross margin percentage represents retail gross margin divided by net retail sales . 32 fiscal year ended december 29 , 2012 ( 52 weeks ) compared to fiscal year ended december 31 , 2011 ( 52 weeks ) total revenues . net retail sales were $ 374.6 million for fiscal 2012 , compared to $ 387.0 million for fiscal 2011 , a decrease of $ 12.5 million . comparable store sales decreased $ 11.6 million in fiscal 2012 , or 3.3 % . other decreases include $ 4.3 million in sales from non-comparable locations , comprised primarily of relocated and remodeled locations , $ 1.0 million in deferred revenue adjustment as compared to the prior year , $ 0.9 million from the impact of foreign exchange rates and $ 0.6 million in sales from non-store locations which includes temporary locations . partially offsetting these decreases are increases of $ 5.0 million from sales in new stores and $ 1.0 million in e-commerce sales . commercial revenue was $ 2.8 million in fiscal 2012 compared to $ 3.9 million in fiscal 2011 , a decrease of $ 1.2 million . this decrease was primarily due to an overall decrease in licensing activity in 2012. revenue from international franchise fees increased to $ 3.6 million for fiscal 2012 from $ 3.4 million for fiscal 2011 , an increase of $ 0.2 million . this increase was primarily due to the increase in the number of franchise locations from 79
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during this period , our sales were adversely impacted by the following items : volatility in core automotive , premium audio and consumer accessories sales due to increased competition , lower selling prices , changes in technology and demand , and the volatility of the national and global economy ; the discontinuance and reduction of various high volume/low margin product lines such as camcorders , clock radios , digital players , digital voice recorders , and portable dvd players ; the sale of certain branded product inventory of the company to a third party in order to license the brand name for a commission ; political and economic volatility in venezuela ; and euro devaluation against the u.s. dollar . these items were partially offset by : the introduction of new products and lines across the automotive , premium audio and consumer accessories segments , such as : mobile multi-media devices ; various bluetooth and wireless speaker products ; neckband , on-ear , in-ear and over-ear headphones ; mobile ipad and ipod interfaces ; and nursery products . critical accounting policies and estimates general our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the united states of america . the preparation of these financial statements requires us to make certain estimates , judgments and assumptions that we believe are reasonable based upon the information available . these estimates and assumptions can be subjective and complex and may affect the reported amounts of assets and liabilities , revenues and expenses reported in those financial statements . as a result , actual results could differ from such estimates and assumptions . the significant accounting policies and estimates which we believe are the most critical in fully understanding and evaluating the reported consolidated financial results include the following : revenue recognition we recognize revenue from product sales at the time title and risk of loss passes to the customer either at fob shipping point or fob destination , based upon terms established with the customer . any customer acceptance provisions , which are related to product testing , are satisfied prior to revenue recognition . we have no further obligations subsequent to revenue recognition except for returns of product from customers . we accept returns of products only if properly requested , authorized and approved . we continuously monitor and track such product returns and record the provision for the estimated amount of such future returns at point of sale , based on historical experience . sales incentives we offer sales incentives to our customers in the form of ( 1 ) co-operative advertising allowances ; ( 2 ) market development funds ; ( 3 ) volume incentive rebates ; and ( 4 ) other trade allowances . we account for sales incentives in accordance with asc 605-50 `` customer payments and incentives '' ( `` asc 605-50 '' ) . except for other trade allowances , all sales incentives require the customer to purchase our products during a specified period of time . all sales incentives require customers to claim the sales incentive within a certain time period ( referred to as the `` claim period '' ) . all costs associated with sales incentives are classified as a reduction of net sales . 25 the accrual balance for sales incentives at february 28 , 2018 and february 28 , 2017 was $ 14,020 and $ 13,154 , respectively . although we make our best estimate of sales incentive liabilities , many factors , including significant unanticipated changes in the purchasing volume and the lack of claims from customers could have a significant impact on the liability for sales incentives and reported operating results . unearned sales incentives are volume incentive rebates where the customer did not purchase the required minimum quantities of product during the specified time . volume incentive rebates are reversed into income in the period when the customer did not reach the required minimum purchases of product during the specified time . unclaimed sales incentives are sales incentives earned by the customer , but the customer has not claimed payment within the claim period ( period after program has ended ) . unclaimed sales incentives are investigated in a timely manner after the end of the program and reversed if deemed appropriate . accounts receivable we perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and current credit worthiness , as determined by a review of current credit information . we continuously monitor collections from our customers and maintain a provision for estimated credit losses based upon historical experience and any specific customer collection issues that have been identified . while such credit losses have historically been within management 's expectations and the provisions established , we can not guarantee that we will continue to experience the same credit loss rates that have been experienced in the past . since our accounts receivable are concentrated in a relatively few number of large customers , a significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of accounts receivable and our results of operations . the company has supply chain financing agreements and factoring agreements with certain financial institutions for the purpose of accelerating receivable collection and better managing cash flow . under the agreements , the company has agreed to sell certain of its accounts receivable balances to these institutions , who have agreed to advance amounts equal to the net accounts receivable balances due , less a discount as set forth in the respective agreements . the balances under these agreements are accounted for as sales of accounts receivable , as they are sold without recourse . cash proceeds from these agreements are reflected as operating activities included in the change in accounts receivable in the company 's consolidated statements of cash flows . story_separator_special_tag total balances sold , net of discounts , for the years ended february 28 , 2018 , february 28 , 2017 and february 29 , 2016 were approximately $ 142,000 , $ 141,000 and $ 154,000 , respectively . fees incurred in connection with the agreements totaled $ 957 , $ 877 and $ 770 for the years ended february 28 , 2018 , february 28 , 2017 and february 29 , 2016 , respectively , and are recorded as interest expense by the company . inventory we value our inventory at the lower of the actual cost to purchase or the net realizable value of the inventory . net realizable value is defined as estimated selling prices , less cost of completion , disposal , and transportation . we regularly review inventory quantities on-hand and record a provision in cost of sales for excess and obsolete inventory based primarily on selling prices , indications from customers based upon current price negotiations , and purchase orders . the cost of the inventory is determined primarily on a weighted moving average basis , with a portion valued at standard cost , which approximates actual costs on the first in , first out basis . our industry is characterized by rapid technological change and frequent new product introductions that could result in an increase in the amount of obsolete inventory quantities on-hand . in addition , and as necessary , specific reserves for future known or anticipated events may be established . during the years ended february 28 , 2018 , february 28 , 2017 and february 29 , 2016 , we recorded inventory write-downs of $ 2,733 , $ 1,987 and $ 1,008 , respectively . estimates of excess and obsolete inventory may prove to be inaccurate , in which case we may have understated or overstated the provision required for excess and obsolete inventory . although we make every effort to ensure the accuracy of our forecasts of future product demand , any significant unanticipated changes in demand or technological developments could have a significant impact on the carrying value of inventory and our results of operations . asset impairments as of february 28 , 2018 , intangible assets totaled $ 150,320 and property , plant and equipment totaled $ 61,717 ( excluding venezuelan investment properties of $ 3,542 , which are discussed below ) . management makes estimates and assumptions in preparing the consolidated financial statements for which actual results will emerge over long periods of time . this includes the recoverability of long-lived assets employed in the business , including assets of acquired businesses . these estimates and assumptions are closely monitored by management and periodically adjusted as circumstances warrant . for instance , expected asset lives may be shortened or an impairment recorded based upon a change in the expected use of the asset or performance of 26 the related asset group . at the present time , management intends to continue the development , marketing and selling of products associated with its intangible assets , and there are no known restrictions on the continuation of their use . certain indefinite lived trademarks were impaired during the second and fourth quarter of fiscal 2016 , resulting in impairment charges of $ 6,210 and $ 2,860 , respectively . no impairment losses were recorded related to indefinite lived intangible assets during fiscal 2018 and fiscal 2017. the cost of other intangible assets with definite lives and long-lived assets are amortized on a straight-line basis over their respective lives . management has determined that the current lives of these assets are appropriate . management has determined that there were no indicators of impairment that would cause the carrying values related to intangible assets with definite lives to exceed their expected future cash flows at february 28 , 2018 . approximately 52.7 % of our indefinite-lived trademarks ( $ 53,444 ) are at risk of impairment as of february 28 , 2018 . the company uses an income approach , based on the relief from royalty method , to value the indefinite-lived trademarks as part of its impairment test . this impairment test involves the use of accounting estimates and assumptions , changes in which could materially impact our financial condition or operating performance if actual results differ from such estimates and assumptions . the critical assumptions in the discounted cash flow model include revenues , long-term growth rates , royalty rates , and discount rates . management exercises judgment in developing these assumptions . certain of these assumptions are based upon industry projections , facts specific to the trademarks and consideration of our long-term view for the trademark and the markets we operate in . if we were to experience sales declines , a significant change in operating margins which may impact estimated royalty rates , an increase in our discount rates , and or a decrease in our projected long-term growth rates , there would be an increased risk of impairment of these indefinite-lived trademarks . voxx 's goodwill totaled $ 54,785 as of february 28 , 2018 . goodwill is tested for impairment as of the last day of each fiscal year at the reporting unit level . application of the goodwill impairment test requires judgment , including the identification of reporting units , assignment of assets and liabilities to reporting units , assignment of goodwill to reporting units , and estimation of the fair value of each reporting unit . based on the company 's goodwill impairment assessment , all the reporting units with goodwill had estimated fair values as of february 28 , 2018 that exceeded their carrying values . as a result of the annual assessment , no impairment charges were recorded related to goodwill during fiscal 2018 , fiscal 2017 or fiscal 2016. goodwill allocated to our klipsch , invision , and rosen reporting units was 84.9 % ( $ 46,533 ) , 13.5 % ( $ 7,372 ) , and 1.6 % ( $ 880 ) , respectively .
| the company experienced a decrease in automotive sales during the year ended february 28 , 2018 partially due to the continued decline in satellite radio sales , as a result of most vehicles being built equipped with these products as standard vehicle options . additionally , the company had a decrease in sales during the year ended february 28 , 2018 related to its international oem manufacturing line as a result of the completion of a program with bentley during the first quarter of fiscal 2018 , with final spare parts shipments during the first half of the fiscal year . within the company 's domestic oem manufacturing lines , there was a slight decrease in sales during the year ended february 28 , 2018 related to the winding down of certain headrest programs with general motors and ford in preparation for new programs which experienced delayed launches . these programs began at the end of the third quarter of fiscal 2018. the decreases in sales were partially offset by a net increase in aftermarket product sales primarily due to overhead and headrest dvd player sales resulting from the company 's acquisition of rosen electronics llc during the first quarter of fiscal 2018 , as well as increases to domestic oem sales during the year ended february 28 , 2018 due to additional vehicle models added to existing programs with subaru . premium audio sales represented 34.0 % of net sales for the year ended february 28 , 2018 as compared to 32.4 % in the prior year . sales in premium audio increased for the year ended february 28 , 2018 partially as a result of an increase in sales of several of its existing lines of home entertainment speakers due to successful marketing and promotional activity . additionally , sales have increased in this segment as a result of the introduction of several new products , including various lines of hd wireless speakers , wireless soundbars , klipsch heritage products , and wireless and multi-room streaming audio systems , including capital records branded products , which launched throughout fiscal 2018. the company also offered several close out promotions on certain soundbar models that have been
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the partial settlement agreement also includes agreement among all parties to accelerate the depreciation of colstrip units 3 & 4 , to reflect a remaining useful life of those units through december 31 , 2025. the other remaining issues to be resolved in the case include the erm-contested issues and the extension of the electric and natural gas decoupling mechanisms . see `` decoupling and earnings sharing mechanisms '' section below . as it relates to erm-contested issues , the primary issue is related to the cost of replacement power incurred in july and august 2018 due to a forced outage at colstrip units 3 & 4. that outage occurred due to the plant exceeding certain air quality standards . in testimony filed by wutc staff and public counsel on january 10 , 2020 , the parties recommend the wutc disallow $ 3.3 million in replacement power costs . avista corp. filed testimony on january 23 , 2020 , and provided support for no disallowance , but if the wutc believes a disallowance is appropriate , the level of disallowance would be $ 2.4 million . the parties have agreed that the final erm rebate determined by the wutc , after it resolves the remaining erm contested issues , should be returned to customers over a two-year period . the erm rebate is approximately $ 37.0 to $ 38.0 million with interest . the proposed rates under the partial settlement agreement are designed to increase annual base electric revenues by $ 28.5 million , or 5.7 percent , and annual natural gas base revenues by $ 8.0 million , or 8.5 percent , effective april 1 , 2020. the partial settlement revenue increases are based on a 9.4 percent roe with a common equity ratio of 48.5 percent and a rate of return ror of 7.21 percent . in addition to avista corp. , the parties to the electric and natural gas rate cases include the staff of the wutc , the public counsel , the alliance of western energy consumers , the nw energy coalition , the energy project , and sierra club . the recommendation to the commission by the parties to approve the partial settlement is not binding on the wutc itself . we originally filed our general rates cases on april 30 , 2019 , which were two-year rate plans , and requested the following electric and natural gas base rate changes each year , which were designed to result in the following increases in annual revenues ( dollars in millions ) : replace_table_token_13_th our original requests were based on a proposed ror of 7.52 percent with a common equity ratio of 50 percent and a 9.9 percent roe . the wutc has up to 11 months to review our request and issue a decision . 2020 general rate cases we expect to file electric and natural gas general rate cases with the wutc in the second or third quarter of 2020. idaho general rate cases and other proceedings 2017 general rate cases on december 28 , 2017 , the ipuc approved a settlement agreement between us and other parties to our electric and natural gas general rate cases . new rates were effective on january 1 , 2018 and january 1 , 2019. the settlement agreement was a two-year rate plan and had the following electric and natural gas base rate changes each year , which were designed to result in the following increases in annual revenues ( dollars in millions ) : replace_table_token_14_th 35 avista corporation the settlement agreement was based on a ror of 7.61 percent with a common equity ratio of 50.0 percent and a 9.5 percent roe . tcja proceedings on may 31 , 2018 , the ipuc approved an all-party settlement agreement related to the income tax benefits associated with the tcja . effective june 1 , 2018 , current customer rates were reduced to reflect the reduction of the federal income tax rate to 21 percent , and the amortization of the regulatory liability for plant-related excess deferred income taxes . this reduction reduces annual electric rates by $ 13.7 million ( or 5.3 percent reduction to base rates ) and natural gas rates by $ 2.6 million ( or 6.1 percent reduction to base rates ) . in march 2019 , the ipuc approved an all-party settlement agreement related to the electric tax benefits that were set aside for colstrip in the 2017 general rate case order . in the approved settlement agreement , the parties agreed to utilize approximately $ 6.4 million ( $ 5.1 million when tax-effected ) of the electric tax benefits to offset costs associated with accelerating the depreciation of colstrip units 3 & 4 , to reflect a remaining useful life of those units through december 31 , 2027. the remaining tax benefits of approximately $ 5.8 million will be returned to customers through a temporary rate reduction over a period of one year beginning on april 1 , 2019. the tax benefits being utilized are related to non-plant excess deferred income taxes , and the customer refund liability that was established in 2018 related to the change in federal income tax expense for the period january 1 , 2018 to may 31 , 2018 . 2019 general rate case on october 11 , 2019 , avista corp. and all parties to our electric general rate case reached a settlement agreement that was approved by the ipuc . new rates went into effect on december 1 , 2019. the rates that went into effect are designed to decrease annual base electric revenues by $ 7.2 million ( or 2.8 percent ) , effective december 1 , 2019. the settlement revenue decreases are based on a 9.5 percent roe with a common equity ratio of 50 percent and a rate of return ror on rate base of 7.35 percent , which is a continuation of current levels . this outcome is in line with our expectations . story_separator_special_tag the primary element of the difference in the agreed upon base revenues in the settlement agreement from our original request is that the settlement includes the continued recovery of costs for our wind generation power purchase agreements , which will include palouse wind and rattlesnake flat , through the pca mechanism rather than through base rates . our original request included an increase of annual electric base revenues of $ 5.3 million or 2.1 percent , effective january 1 , 2020. the electric request was based on a proposed ror on rate base of 7.55 percent with a common equity ratio of 50 percent and a 9.9 percent roe , as well as the inclusion of wind power purchase costs in base rates rather than receiving recovery through the pca . 2020 general rate cases we expect to file electric and natural gas general rate cases with the ipuc in the second half of 2020. oregon general rate cases and other proceedings 2019 general rate case on october 9 , 2019 , the opuc approved the all-party settlement agreements filed in the third quarter of 2019. new rates went into effect on january 15 , 2020. opuc approved rates that are designed to increase annual natural gas billed revenues by $ 3.6 million , or 4.2 percent . the opuc 's decision reflects a ror on rate base of 7.24 percent , with a common equity ratio of 50 percent and a 9.4 percent roe , both of which represent a continuation of existing authorized levels . in addition , the approved settlement agreements included agreement among the parties to a future independent review of our interest rate hedging practices , with any recommendations based on the results and findings in the final report to be applicable only on a prospective basis and do not apply to any prior interest rate hedging activity . tcja proceedings in february 2019 , the opuc approved the deferral amount of $ 3.8 million related to 2018 income tax benefits associated with the tcja . the 2018 deferred benefits will be returned to customers through a temporary rate reduction over a period of one year beginning march 1 , 2019. we continued the deferral of the tcja benefits during 2019 for later return to customers , until such time as these changes can be reflected in base rates . 36 avista corporation petition for judicial review of the deferral of capital projects in february 2019 and october 2018 , the opuc issued orders which concluded that , contrary to the opuc 's past practice , oregon statutes that authorize the deferral of expense for later recovery from customers do not authorize the opuc to allow deferrals of any costs related to capital investments ( utility plant ) . in april 2019 , avista corp. and other petitioners filed a petition for judicial review with the oregon court of appeals seeking review of the above opuc orders . the company can not predict the outcome of this matter at this time , including whether or not any decision of the court would have retroactive effect . 2020 general rate case we expect to file a natural gas general rate case with the opuc in the first quarter of 2020. ami project in march 2016 , the wutc granted our petition for an accounting order to defer and include in a regulatory asset the undepreciated value of our existing washington electric meters for the opportunity for later recovery . this accounting treatment is related to our plans to replace our existing electric meters with new two-way digital meters and the related software and support services through our ami project in washington state . as of december 31 , 2019 , the estimated future undepreciated value for the existing electric meters was $ 21.2 million . in september 2017 , the wutc also approved our request to defer the undepreciated net book value of existing natural gas encoder receiver transmitters ( ert ) ( consistent with the accounting treatment we obtained on our existing electric meters ) that will be retired as part of the ami project . as of december 31 , 2019 , the estimated future undepreciated value for the existing natural gas erts was $ 4.4 million . replacement of the electric meters and natural gas erts began during the second half of 2018 and is ongoing . in september 2017 , the wutc approved a petition to defer the depreciation expense associated with the ami project , along with a carrying charge , and to seek recovery of the deferral and carrying charge in a future general rate case . cost savings , such as reduced meter reading costs , will occur during the implementation period , and will offset a portion of the ami costs not being deferred . in may 2017 , we filed petitions with the ipuc and the opuc requesting a depreciable life of 12.5 years for the meter data management system ( mdm ) related to the ami project . both the ipuc and the opuc approved our request . in addition , in connection with the 2017 idaho electric general rate case ( discussed above ) , the settling parties agreed to cost recovery of idaho 's share of the mdm system , effective january 1 , 2019. in connection with the approval of the oregon general rate case settlement in 2017 , the opuc approved cost recovery of oregon 's share of the mdm system , effective november 1 , 2017. alaska electric light and power company alaska general rate case in november 2017 , the rca approved an all-party settlement agreement related to ael & p 's electric general rate case , which was originally filed in september 2016. the settlement agreement was designed to increase base electric revenue by 3.86 percent or $ 1.3 million , making permanent the interim rate increase approved by the rca in 2016. the agreement reflects an 8.91 percent ror with a common equity ratio of 58.18 percent and an 11.95 percent roe .
| we expect these cases to provide rate relief in 2020 and start reducing the regulatory lag that we have been experiencing . going forward , we will continue to strive to reduce the regulatory timing lag and more closely align our earned returns with those authorized by 2022. this will require adequate and timely rate relief in our jurisdictions . see `` regulatory matters '' for additional discussion of the 2019 general rate cases . regulatory matters general rate cases we regularly review the need for electric and natural gas rate changes in each state in which we provide service . we will continue to file for rate adjustments to : seek recovery of operating costs and capital investments , and seek the opportunity to earn reasonable returns as allowed by regulators . with regards to the timing and plans for future filings , the assessment of our need for rate relief and the development of rate case plans takes into consideration short-term and long-term needs , as well as specific factors that can affect the timing of rate filings . such factors include , but are not limited to , in-service dates of major capital investments and the timing of changes in major revenue and expense items . avista utilities washington general rate cases and other proceedings 2015 general rate cases in january 2016 we received an order which was reaffirmed by the wutc in february 2016 that concluded our electric and natural gas general rate cases that were originally filed with the wutc in february 2015. new electric and natural gas rates were effective on january 11 , 2016 . 33 avista corporation in march 2016 , the public counsel unit of the washington state office of the attorney general ( public counsel ) filed in thurston county superior court a petition for judicial review of the wutc 's orders that concluded our 2015 electric and natural gas general rate cases . in april 2016 , this matter was certified for review directly by the
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this year-over-year increase was offset in part by : ( 1 ) an increase of $ 3.5 million in net after-tax losses on our financial derivatives ; ( 2 ) an increase in general and administrative ( `` g & a '' ) expenses of $ 3.0 million after-tax ; and ( 3 ) an increase in compensation and employee benefits expenses of $ 2.6 million after-tax . g & a expenses and compensation and employee benefits expenses increased by $ 7.0 million , or 17.5 % , in 2018 compared to 2017. farmer mac previously disclosed its expectation that these expenses would increase by approximately 15 % , or $ 6.0 million , in 2018 compared to 2017. the incremental $ 1.0 million increase in these expenses compared to the original expectation was primarily due to nonrecurring hiring expenses of $ 0.6 million , primarily related to the search process for farmer mac 's current president and chief executive officer and two other key hires . the $ 7.1 million increase in net income attributable to common stockholders for 2017 compared to 2016 was primarily driven by increases of $ 11.3 million after-tax in net interest income and a $ 1.1 million after-tax increase in net realized gains on the sale of real estate owned properties . the year-over-year increase was offset in part by : ( 1 ) a $ 2.7 million after-tax decrease in gains in the fair value of financial derivatives and hedged assets ; ( 2 ) a $ 1.6 million after-tax increase in non-interest expense in 2017 primarily due to higher g & a expenses and higher compensation and employee benefits expenses ; and ( 3 ) the re-measurement of net deferred tax asset due to the enactment of the tax cuts and jobs act , which resulted in a $ 1.4 million increase to income tax expense in 2017. our non-gaap core earnings for 2018 were $ 84.0 million , compared to $ 65.6 million in 2017 and $ 53.5 million in 2016. the $ 18.4 million increase in core earnings for 2018 compared to 2017 was primarily due to a $ 16.8 million decrease in income tax expense resulting from the lower federal corporate income tax rate and a $ 7.8 million after-tax increase in net effective spread resulting primarily from an increase in outstanding business volume . the increases to core earnings were partially offset by a $ 3.0 million after-tax increase in g & a expenses related to continued investments in farmer mac 's technology and business infrastructure and a $ 2.6 million after-tax increase in compensation and employee benefits expenses . a significant factor contributing to the increase in compensation expense in 2018 compared to 2017 was the absence in 2018 of the recoupment of approximately $ 1.1 million after-tax in compensation costs related to the forfeiture of unvested equity awards and annual variable incentive compensation resulting from the termination of employment of farmer mac 's former president and chief executive officer in december 2017. the $ 12.1 million increase in core earnings for 2017 compared to 2016 was primarily due to : ( 1 ) an $ 11.9 million after-tax increase in net effective spread ; ( 2 ) a $ 1.1 million after-tax increase in net realized gains on the sale of real estate owned properties ; and ( 3 ) a $ 0.8 million after-tax increase in guarantee and commitment fee income . the increase in core earnings in 2017 was offset in part primarily by a $ 1.5 million after-tax increase in operating expenses , driven by higher compensation and employee benefits 72 and g & a expenses . the $ 0.9 million after-tax increase in compensation and employee benefits expenses was due primarily to an increase in headcount and employee health insurance costs . the $ 0.6 million after-tax increase in g & a expenses was primarily due to : ( 1 ) continued investments in technology and business infrastructure ; ( 2 ) higher legal fees related to general corporate matters , including fees related to the termination of employment of farmer mac 's former president and chief executive officer in december 2017 ; ( 3 ) an increase in building lease expenses due to new leases for office space entered into during 2017 ; and ( 4 ) expenses related to business development efforts . for more information about net income attributable to common stockholders , the composition of core earnings , and a reconciliation of net income attributable to common stockholders to core earnings , see `` management 's discussion and analysis of financial condition and results of operations—results of operations . '' for more information about the non-gaap measures farmer mac uses , see `` management 's discussion and analysis of financial condition and results of operations—use of non-gaap measures . '' net interest income and net effective spread net interest income was $ 174.4 million for 2018 , compared to $ 157.6 million for 2017 and $ 140.3 million for 2016. the overall net interest yield was 0.96 % for 2018 , compared to 0.94 % for 2017 and 0.90 % for 2016. the $ 16.8 million increase in net interest income for 2018 compared to 2017 was primarily due to net growth in on-balance sheet agvantage securities , farm & ranch loans , and usda securities , which contributed to a $ 10.1 million increase in net interest income . another factor contributing to the year-over-year increase in net interest income were the f air value changes on financial derivatives and corresponding financial assets and liabilities in fair value hedge relationships . effective first quarter 2018 , farmer mac adopted accounting standard update ( `` asu '' ) 2017-12 , `` derivatives and hedging ( topic 815 ) : targeted improvements to accounting for hedging activities. story_separator_special_tag `` the new accounting guidance requires the changes in the fair value of both the financial derivative designated in a fair value hedge relationship and the corresponding hedged item to be recorded in the same line item in farmer mac 's consolidated statements of operations . thus , farmer mac recognizes changes in fair value of both the financial derivatives and corresponding hedged items within net interest income in its consolidated statements of operations , which contributed $ 4.9 million in net interest income during 2018. before first quarter 2018 , changes in the fair value of financial derivatives designated in a fair value hedge relationship were recognized in `` gains/ ( losses ) on financial derivatives '' in farmer mac 's consolidated statements of operations . another factor contributing to the year-over-year increase in net interest income was an increase in the amount of cash basis interest income recognized on non-accrual farm & ranch loans , which contributed $ 1.5 million in net interest income during 2018. the year-over-year increase in net interest income was partially offset by the full amortization of the remaining $ 2.0 million in premium of an interest-only security held in farmer mac 's investment portfolio ( the `` interest-only amortization '' ) because the issuer called the security upon full prepayment of the underlying mortgage loan that collateralized the security . the $ 17.3 million increase in net interest income for 2017 compared to 2016 was driven by net growth in farm & ranch loans , on-balance sheet agvantage securities , and usda securities . also contributing to the increase was the effect of an increase in short-term interest rates on assets and liabilities indexed to libor due to the federal reserve 's monetary policy decisions since december 2016 to raise the target range for the federal funds rate . this effect on net interest income occurred because interest expense used to calculate net interest income does not include all the funding expenses related to these assets , specifically the expense on financial derivatives not designated in hedge accounting relationships . this 73 increase in short-term rates on assets and liabilities indexed to libor did not have a similar effect on net effective spread because net effective spread includes interest expense from all funding related to those assets , including interest expense from financial derivatives not designated in hedge accounting relationships . also contributing to the year-over-year increase was an increase in the net effect of consolidated trusts resulting from an increase in securitization activity of farm & ranch loans throughout 2016 and 2017. farmer mac earns the difference between the interest income recognized on loans in consolidated trusts and the related interest expense recognized on debt securities of consolidated trusts held by third parties . the increase in net interest income was offset in part by an increase in net yield adjustments related to amortization of premiums and discounts on assets consolidated at fair value . the 4 basis point increase in net interest yield in 2017 compared to 2016 was primarily due to a reduction in the average balance of lower-earning cash and cash equivalents and investment securities . net effective spread , a non-gaap measure , was $ 151.2 million in 2018 , compared to $ 141.3 million in 2017 and $ 123.1 million in 2016. in percentage terms , net effective spread was 0.91 % in 2018 , compared to 0.91 % in 2017 and 0.84 % in 2016. farmer mac uses net effective spread as an alternative measure to net interest income because management believes it is a useful metric that reflects the economics of the net spread between all the assets owned by farmer mac and all related funding , including any associated derivatives , some of which may not be included in net interest income . the $ 9.9 million increase in net effective spread in dollars for 2018 compared to 2017 was primarily due to : ( 1 ) growth in outstanding business volume , which increased net effective spread by approximately $ 10.1 million ; and ( 2 ) a $ 1.5 million increase in the amount of cash basis interest income received from non-accrual farm & ranch loans . this increase in net effective spread was partially offset by the interest-only amortization described above . in percentage terms , net effective spread remained at 0.91 % in both 2018 and 2017 primarily because the positive impact of the cash basis interest income was offset by the negative impact of the interest-only amortization . for 2017 compared to 2016 , the $ 18.2 million increase in net effective spread in dollars was primarily due to : ( 1 ) growth in on-balance sheet agvantage securities , farm & ranch loans , and other business volume , which increased net effective spread by approximately $ 15.1 million in 2017 ; and ( 2 ) changes in our funding strategies and improvements in libor-based short-term funding costs for floating rate assets indexed to libor , which added approximately $ 4.0 million in 2017. net effective spread in percentage terms increased 7 basis points in 2017 compared to 2016 primarily due to the decrease in the average balance of lower-earning cash and cash equivalents and investment securities , which added approximately 5 basis points to net effective spread . also contributing to the increase were the effects of changes in our funding strategy and a favorable libor-based funding market , which added approximately 3 basis points in 2017. for more information about farmer mac 's use of net effective spread as a financial measure , see `` management 's discussion and analysis of financial condition and results of operations—use of non-gaap measures . '' for a reconciliation of net interest income to net effective spread , see table 7 in `` management 's discussion and analysis of financial condition and results of operations—results of operations—net interest income . ''
| ( 3 ) includes interest income and interest expense related to consolidated trusts owned by third parties reclassified from net interest income to guarantee and commitment fees to reflect management 's view that the net interest income farmer mac earns is effectively a guarantee fee on the consolidated farmer mac guaranteed securities . ( 4 ) reflects reconciling adjustments for the reclassification to exclude expenses related to interest rate swaps not designated as hedges and terminations or net settlements on financial derivatives , and reconciling adjustments to exclude fair value adjustments on financial derivatives and trading assets and the recognition of deferred gains over the estimated lives of certain farmer mac guaranteed securities and usda securities . ( 5 ) includes the tax impact of non-gaap reconciling items between net income attributable to common stockholders and core earnings . table 2 replace_table_token_19_th 84 replace_table_token_20_th the non-gaap reconciling items between net income attributable to common stockholders and core earnings are : 1. gains/ ( losses ) on financial derivatives due to fair value changes are presented by two reconciling items in table 1 above : ( 1 ) gains on undesignated financial derivatives due to fair value changes ; and ( 2 ) gains/ ( losses ) on hedging activities due to fair value changes . the table below calculates the non-gaap reconciling item for gains/ ( losses ) on hedging activities due to fair value changes : table 3 replace_table_token_21_th ( 1 ) relates to initial cash payments received at the inception of a swap designated in a fair value hedge . these initial cash payments were previously recognized in `` ( losses ) /gains on financial derivatives `` in the statement of operations . upon adoption of asu 2017-12 , `` derivatives and hedging ( topic 815 ) : targeted improvements to accounting for hedging activities , '' for financial derivatives designated in fair value hedge relationships , the changes in the fair values of the derivative and the associated hedged item are recorded within net interest income . for core earnings purposes , these initial cash payments are deferred and amortized as net yield adjustments over
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accordingly , our management believes that these measures are useful for comparing general operating performance from period to period . other companies may define these measures differently and , as a result , our measures of ebitda and adjusted ebitda may not be directly comparable to the measures of other companies . although we use ebitda and adjusted ebitda as financial measures to assess the performance of our business , the use of these measures is limited because they do not include certain material costs , such as interest and taxes , necessary to operate our business . ebitda and adjusted ebitda should be considered in addition to , and not as a substitute for , net income in accordance with gaap as a measure of performance . our presentation of ebitda and adjusted ebitda should not be construed as an indication that our future results will be unaffected by unusual or non-recurring items . our use of ebitda and adjusted ebitda is limited as an analytical tool , and you should not consider these measures in isolation or as substitutes for analysis of our results as reported under gaap . please see “ —non-gaap measures ” for reconciliations of ebitda and adjusted ebitda to net income , which is the gaap financial measure that our management believes to be most directly comparable . 39 year ended december 31 , 2020 compared to year ended december 31 , 2019 homes sales . our home sales revenues , home closings , average sales price per home closed ( asp ) , average community count , average monthly absorption rate and closing community count by reportable segment for the years ended december 31 , 2020 and 2019 were as follows ( revenues in thousands ) : replace_table_token_7_th replace_table_token_8_th our results of operations for the year ended december 31 , 2020 reflect a significant rebound following the slowdown related to the covid-19 pandemic that occurred during march and april 2020. since may 2020 , we have seen a continued and material increase in the demand for our homes driven by a renewed interest in the benefits of homeownership , low interest rates and an undersupply of new and existing homes available for sale . despite high levels of demand , our closings in july and august 2020 were limited by our decision to pause our construction and land acquisition activities in march and april as we evaluated the potential impacts of the covid-19 pandemic on our business . beginning in may 2020 , we resumed construction activities and accelerated the pace of our new home starts . home sales revenues . home sales revenues for the year ended december 31 , 2020 were $ 2.4 billion , an increase of $ 529.8 million , or 28.8 % , from $ 1.8 billion for the year ended december 31 , 2019. the increase in home sales revenues is primarily due to a 21.4 % increase in homes closed , a 16.8 % increase in average community count and an increase in the average sales price per home closed during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019. we closed 9,339 homes during 2020 , as compared to 7,690 homes closed during 2019. the average sales price per home closed during the year ended december 31 , 2020 was $ 253,553 , an increase of $ 14,521 , or 6.1 % , from the average sales price per home closed of $ 239,032 for the year ended december 31 , 2019. this increase in the average sales price per home closed was primarily due to a favorable pricing environment , increased closings at higher price points in certain markets and changes in product mix . the overall increase in home closings was largely due to deepening our presence within certain markets in the southeast and florida reportable segments during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 and strong demand resulting in an increase in the number of homes closed on average on a per community basis . we continued to diversify our operations outside of our central reportable segment during 2020. we increased our home sales revenues in our reportable segments other than our central reportable segment by $ 404.4 million during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 , representing a 29.6 % increase in the number of homes closed in these reportable segments and increased average community count on a consolidated basis during 2020 as compared to 2019 . 40 home sales revenues in our central reportable segment increased by $ 125.4 million , or 17.3 % , during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 , primarily due to an increase in the average sales price per home closed and increased community count at a higher absorption rate . home sales revenues in our southeast reportable segment increased by $ 211.4 million , or 60.8 % , during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 , primarily due to an increase in community count associated with deepening our presence within existing markets and to a lesser extent our geographic expansion into certain markets in north carolina and south carolina at december 31 , 2020 as compared to december 31 , 2019. home sales revenues in our northwest reportable segment increased by $ 85.2 million , or 28.0 % , during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 , primarily due to a 20.9 % increase in the number of homes closed in this reportable segment , as a result of increased demand slightly offset by a lower average community count at a higher absorption rate . story_separator_special_tag home sales revenues in our west reportable segment increased by $ 14.9 million , or 5.5 % , during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 , primarily due to an increase of 6.8 % in the average sales price per home closed in this reportable segment offset by lower home closings , largely due to close out of or transition between , and to a lesser extent available inventory in , certain active communities . home sales revenues in our florida reportable segment increased by $ 92.8 million , or 48.9 % , primarily due to an increased community count with an increase of 7.6 % in the average sales price per home closed during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019. cost of sales and gross margin ( home sales revenues less cost of sales ) . cost of sales increased for the year ended december 31 , 2020 to $ 1.8 billion , an increase of $ 363.2 million , or 25.9 % , from $ 1.4 billion for the year ended december 31 , 2019. this increase is primarily due to a 21.4 % increase in homes closed , as well as higher vertical and lot costs recognized as a percentage of revenues during 2020 as compared to 2019. gross margin for the year ended december 31 , 2020 was $ 603.1 million , an increase of $ 166.6 million , or 38.2 % , from $ 436.5 million for the year ended december 31 , 2019. gross margin as a percentage of home sales revenues was 25.5 % for the year ended december 31 , 2020 and 23.7 % for the year ended december 31 , 2019. this increase in gross margin as a percentage of home sales revenues during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 is primarily due to an increase in homes closed with a higher average sales price per home closed , which was primarily driven by a favorable pricing environment , operating leverage obtained and product mix , partially offset by an increase in wholesale home closings as a percentage of total home closings . selling expenses . selling expenses for the year ended december 31 , 2020 were $ 148.4 million , an increase of $ 16.8 million , or 12.8 % , from $ 131.6 million for the year ended december 31 , 2019. sales commissions increased to $ 89.2 million for the year ended december 31 , 2020 from $ 68.1 million for the year ended december 31 , 2019 largely due to a 28.8 % increase in home sales revenues during 2020 as compared to 2019. selling expenses as a percentage of home sales revenues were 6.3 % and 7.2 % for the years ended december 31 , 2020 and 2019 , respectively . the decrease in selling expenses as a percentage of home sales revenues was driven primarily by cost saving measures implemented and the increased demand for our homes in response to the covid-19 pandemic , as well as operating leverage realized from the increase in home sales revenues during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019. general and administrative . general and administrative expenses for the year ended december 31 , 2020 were $ 90.0 million , an increase of $ 12.6 million , or 16.3 % , from $ 77.4 million for the year ended december 31 , 2019. the increase in the amount of general and administrative expenses is primarily due to increased personnel and other costs associated with an increase of active communities during 2020 as compared to 2019. general and administrative expenses as a percentage of home sales revenues were 3.8 % and 4.2 % for the years ended december 31 , 2020 and 2019 , respectively . the decrease in general and administrative expenses as a percentage of home sales revenues reflects operating leverage realized from the increase in home sales revenues and cost saving measures implemented as a result of covid-19 during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019. operating income and net income before income taxes . operating income for the year ended december 31 , 2020 was $ 364.7 million , an increase of $ 137.2 million , or 60.3 % , from $ 227.5 million for the year ended december 31 , 2019. net income before income taxes for the year ended december 31 , 2020 was $ 367.8 million , an increase of $ 136.0 million , or 58.7 % , from $ 231.8 million for the year ended december 31 , 2019. our reportable segments contributed the following amounts and percentages of net income before income taxes during 2020 : central - $ 154.8 million or 42.1 % ; southeast - $ 79.4 million or 21.6 % ; northwest - $ 71.3 million or 19.4 % ; west - $ 35.8 million or 9.7 % ; and florida - $ 32.6 million or 8.8 % . the increases in operating income and net income before income taxes are primarily attributed to higher gross margins during the year ended december 31 , 2020 as compared to the year ended december 31 , 2019. income taxes .
| in response to these declarations and the rapid spread of covid-19 , federal , state and local governments imposed varying degrees of restrictions on business and social activities to contain covid-19 , including business shutdowns and closures , travel restrictions , quarantines , curfews , shelter-in-place orders and “ stay-at-home ” orders in certain of our markets . state and local authorities have also implemented multi-step policies with the goal of re-opening various sectors of the economy . however , certain jurisdictions began re-opening only to return to restrictions in the face of increases in new covid-19 cases , while other jurisdictions are continuing to re-open or have nearly completed the re-opening process despite increases in covid-19 cases . the covid-19 outbreak may significantly worsen in the united states during the upcoming months , which may cause federal , state and local governments to reconsider restrictions on business and social activities . in the event governments increase restrictions , the re-opening of the economy may be further curtailed . we have experienced some resulting disruptions to our business operations , as these restrictions have significantly impacted , and may continue to impact , many sectors of the economy , with various businesses curtailing or ceasing normal operations and subsequently attempting to resume operations . in march 2020 , we were required to temporarily stop our construction of homes in certain markets in which we do business . beginning in april 2020 , we resumed construction of homes in those markets . although we continued to build and sell homes in all of our markets , at that time the pace of sales declined and we experienced an increase in the rate of contract cancellations . since may 2020 , the pace of sales has rebounded and we have experienced a sustained increase in demand in our markets . there is considerable uncertainty regarding the extent to which covid-19 will continue to spread and the extent and duration of governmental and other measures implemented to try to slow the spread of covid-19 . such measures have caused , and may continue to cause , us , our subcontractors , suppliers and other business counterparties to experience operational delays . demand for our homes is dependent on a variety of macroeconomic factors , such as employment levels , interest rates , changes in stock market valuations ,
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our returns policy allows for new and saleable parts to be returned , subject to inspection and a restocking charge which is included in net sales . whole goods are not returnable . shipping costs charged to customers are included in net sales . freight costs incurred are included in cost of goods sold . in certain circumstances , upon the customer 's written request , we may recognize revenue when production is complete and the good is ready for shipment . at the buyer 's request , we will bill the buyer upon completing all performance obligations , but before shipment . the buyer dictates that we ship the goods per their direction from our manufacturing facility , as is customary with this type of agreement , in order to minimize shipping costs . the written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer , with a final specified delivery date , and that we will segregate the goods from our inventory , such that they are not available to fill other orders . this agreement also specifies that the buyer is required to purchase all goods manufactured under this agreement . title of the goods will pass to the buyer when the goods are complete and ready for shipment , per the customer agreement . at the transfer of title , all risks of ownership have passed to the buyer , and the buyer agrees to maintain insurance on the manufactured items that have not yet been shipped . we have operated using bill and hold agreements with certain customers for many years , with consistent satisfactory results for both buyer and seller . the credit terms on this agreement are consistent with the credit terms on all other sales . all risks of loss are shouldered by the buyer , and there are no exceptions to the buyer 's commitment to accept and pay for these manufactured goods . revenues recognized at the completion of production in 2015 and 2014 were approximately $ 634,000 and $ 628,000 , respectively . our modular buildings segment is in the construction industry , and , as such , accounts for long-term contracts on the percentage-of-completion method . revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion . contract losses are recognized when current estimates of total contract revenue and contract cost indicate a loss . estimated contract costs include any and all costs appropriately allocable to the contract . the provision for these contract losses will be the excess of estimated contract costs over estimated contract revenues . 13 costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities . story_separator_special_tag decrease of $ 115,000 or 12.9 % . this decrease is largely due to administrative staffing reductions and a better experience on our self-funded health insurance plan . trends and uncertainties we are subject to a number of trends and uncertainties that may affect our short-term or long-term liquidity , sales revenues and operations . similar to other farm equipment manufacturers , we are affected by items unique to the farm industry , including fluctuations in farm income resulting from the change in commodity prices , crop damage caused by weather and insects , government farm programs , interest rate fluctuations , and other unpredictable variables . other uncertainties include our oem customers and the decisions they make regarding their current supply chain structure , inventory levels , and overall business conditions . management believes that our business is dependent on the farming industry for the bulk of our sales revenues . as such , our business tends to reap the benefits of increases in farm net income , as farmers tend to purchase equipment in lucrative times and forgo purchases in less profitable years . direct government payments are declining and costs of agricultural production are increasing ; therefore , we anticipate that further increases in the value of production will benefit our business , while any future decreases in the value of production will decrease farm net income and may harm our financial results . as with other farm equipment manufacturers , we depend on our network of dealers to influence customers ' decisions , and dealer influence is often more persuasive than a manufacturer 's reputation or the price of the product . seasonality sales of our agricultural products are seasonal ; however , we have tried to decrease this impact of seasonality through the development of beet harvesting machinery coupled with private labeled products , as the peak periods for these different products occur at different times . we believe that our pressurized vessel and tool sales are not seasonal . our modular building sales are somewhat seasonal , and we believe that this is due to the budgeting and funding cycles of the universities that commonly purchase our modular buildings . we believe that this cycle can be offset by building backlogs of inventory and by increasing sales to other public and private sectors . liquidity and capital resources our main source of funds during fiscal 2015 was cash generated by operating activities . art's-way used $ 293,000 of cash to update facilities and equipment . we have an $ 8,000,000 revolving line of credit with u.s. bank , pursuant to which we had borrowed $ 3,959,656 as of november 30 , 2015. on july 16 , 2015 , we obtained an additional $ 1,500,000 revolving line of credit from u.s. bank that matures on may 1 , 2016 , as of november 30 , 2015 , we had a principal balance of $ 0 outstanding against the 2015 line of credit , with $ 1,500,000 remaining available . we have six term loans from u.s. bank , which had outstanding story_separator_special_tag our returns policy allows for new and saleable parts to be returned , subject to inspection and a restocking charge which is included in net sales . whole goods are not returnable . shipping costs charged to customers are included in net sales . freight costs incurred are included in cost of goods sold . in certain circumstances , upon the customer 's written request , we may recognize revenue when production is complete and the good is ready for shipment . at the buyer 's request , we will bill the buyer upon completing all performance obligations , but before shipment . the buyer dictates that we ship the goods per their direction from our manufacturing facility , as is customary with this type of agreement , in order to minimize shipping costs . the written agreement with the customer specifies that the goods will be delivered on a schedule to be determined by the customer , with a final specified delivery date , and that we will segregate the goods from our inventory , such that they are not available to fill other orders . this agreement also specifies that the buyer is required to purchase all goods manufactured under this agreement . title of the goods will pass to the buyer when the goods are complete and ready for shipment , per the customer agreement . at the transfer of title , all risks of ownership have passed to the buyer , and the buyer agrees to maintain insurance on the manufactured items that have not yet been shipped . we have operated using bill and hold agreements with certain customers for many years , with consistent satisfactory results for both buyer and seller . the credit terms on this agreement are consistent with the credit terms on all other sales . all risks of loss are shouldered by the buyer , and there are no exceptions to the buyer 's commitment to accept and pay for these manufactured goods . revenues recognized at the completion of production in 2015 and 2014 were approximately $ 634,000 and $ 628,000 , respectively . our modular buildings segment is in the construction industry , and , as such , accounts for long-term contracts on the percentage-of-completion method . revenue and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at completion . contract losses are recognized when current estimates of total contract revenue and contract cost indicate a loss . estimated contract costs include any and all costs appropriately allocable to the contract . the provision for these contract losses will be the excess of estimated contract costs over estimated contract revenues . 13 costs and profit in excess of amounts billed are classified as current assets and billings in excess of cost and profit are classified as current liabilities . story_separator_special_tag decrease of $ 115,000 or 12.9 % . this decrease is largely due to administrative staffing reductions and a better experience on our self-funded health insurance plan . trends and uncertainties we are subject to a number of trends and uncertainties that may affect our short-term or long-term liquidity , sales revenues and operations . similar to other farm equipment manufacturers , we are affected by items unique to the farm industry , including fluctuations in farm income resulting from the change in commodity prices , crop damage caused by weather and insects , government farm programs , interest rate fluctuations , and other unpredictable variables . other uncertainties include our oem customers and the decisions they make regarding their current supply chain structure , inventory levels , and overall business conditions . management believes that our business is dependent on the farming industry for the bulk of our sales revenues . as such , our business tends to reap the benefits of increases in farm net income , as farmers tend to purchase equipment in lucrative times and forgo purchases in less profitable years . direct government payments are declining and costs of agricultural production are increasing ; therefore , we anticipate that further increases in the value of production will benefit our business , while any future decreases in the value of production will decrease farm net income and may harm our financial results . as with other farm equipment manufacturers , we depend on our network of dealers to influence customers ' decisions , and dealer influence is often more persuasive than a manufacturer 's reputation or the price of the product . seasonality sales of our agricultural products are seasonal ; however , we have tried to decrease this impact of seasonality through the development of beet harvesting machinery coupled with private labeled products , as the peak periods for these different products occur at different times . we believe that our pressurized vessel and tool sales are not seasonal . our modular building sales are somewhat seasonal , and we believe that this is due to the budgeting and funding cycles of the universities that commonly purchase our modular buildings . we believe that this cycle can be offset by building backlogs of inventory and by increasing sales to other public and private sectors . liquidity and capital resources our main source of funds during fiscal 2015 was cash generated by operating activities . art's-way used $ 293,000 of cash to update facilities and equipment . we have an $ 8,000,000 revolving line of credit with u.s. bank , pursuant to which we had borrowed $ 3,959,656 as of november 30 , 2015. on july 16 , 2015 , we obtained an additional $ 1,500,000 revolving line of credit from u.s. bank that matures on may 1 , 2016 , as of november 30 , 2015 , we had a principal balance of $ 0 outstanding against the 2015 line of credit , with $ 1,500,000 remaining available . we have six term loans from u.s. bank , which had outstanding
| consolidated net loss for the 2015 fiscal year was $ ( 558,000 ) , compared to net income of $ 935,000 in the 2014 fiscal year , a decrease of $ 1,493,000. this decrease is primarily a result of impairment of goodwill but also due to lower net sales by our agricultural products , pressurized vessels , and tools segments , but offset somewhat by increased sales at our modular buildings segment . our effective tax rate for the years ending november 30 , 2015 and 2014 was 35.5 % and 28.2 % , respectively . agricultural products . our agricultural products segment 's sales revenue for the fiscal year ended november 30 , 2015 was $ 20,756,000 , compared to $ 27,952,000 during the same period of 2014 , a decrease of $ 7,196,000 , or 25.7 % . the decrease was due most significantly to decreased sales of our uhc product lines ( reels for combines and swathers ) , but we saw decreased sales in nearly every product manufactured in our agricultural products segment . gross profit for the fiscal year ended november 30 , 2015 was 25.6 % , unchanged from fiscal 2014. we were able to maintain our gross margin on decreased sales volume with various cost cutting measures , as well as utilizing our inventory more efficiently . the decrease in sales in our agricultural products segment is not unlike all other companies that serve this market , both large and small . we do not believe that the sales decreases in fiscal 2015 represent a loss of market share , but rather lower demand in the overall market place for agricultural equipment . we anticipate the decreased market demand to continue through fiscal 2016. our agricultural products segment 's operating expenses for the fiscal year ended november 30 , 2015 were $ 5,394,000 , compared to $ 5,051,000 for the same period in 2014 , an increase of $ 343,000 or 6.8 % . as previously discussed , these operating
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% of our net revenues for fiscal 2011 , 2010 and 2009 , respectively . the following direct customers accounted for 10 % or more of our net revenues in one or more of the following periods : 30 replace_table_token_6_th cisco systems , our largest oem customer , purchases our products primarily through its consignment warehouses , smart modular technologies , jabil circuit and flextronics technology , and also purchases some products through its contract manufacturers and directly from us . historically , purchases by cisco systems have fluctuated from period to period . based on information provided to us by cisco systems ' consignment warehouses and contract manufacturers , purchases by cisco systems represented approximately 37 % , 35 % and 26 % of our net revenues in fiscal 2011 , 2010 and 2009 , respectively . our revenues have been substantially impacted by the fluctuations in sales to cisco systems , and we expect that future direct and indirect sales to cisco systems will continue to fluctuate significantly on a quarterly basis and that such fluctuations may significantly affect our operating results in future periods . to our knowledge , none of our other oem customers accounted for more than 10 % of our net revenues in fiscal 2011 , 2010 or 2009 . cost of revenues . our cost of revenues consists primarily of wafer fabrication costs , wafer sort , assembly , test and burn-in expenses , the amortized cost of production mask sets , stock-based compensation and the cost of materials and overhead from operations . all of our wafer manufacturing and assembly operations , and a significant portion of our wafer sort testing operations , are outsourced . accordingly , most of our cost of revenues consists of payments to tsmc and independent assembly and test houses . because we do not have long-term , fixed-price supply contracts , our wafer fabrication and other outsourced manufacturing costs are subject to the cyclical fluctuations in demand for semiconductors . cost of revenues also includes expenses related to supply chain management , quality assurance , and final product testing and documentation control activities conducted at our headquarters in sunnyvale , california and our branch operations in taiwan . gross profit . our gross profit margins vary among our products and are generally greater on our higher density products and , within a particular density , greater on our higher speed and industrial temperature products . we expect that our overall gross margins will fluctuate from period to period as a result of shifts in product mix , changes in average selling prices and our ability to control our cost of revenues , including costs associated with outsourced wafer fabrication and product assembly and testing . research and development expenses . research and development expenses consist primarily of salaries and related expenses for design engineers and other technical personnel , the cost of developing prototypes , stock-based compensation and fees paid to consultants . we charge all research and development expenses to operations as incurred . we charge mask costs used in production to costs of revenues over a 12-month period . however , we charge costs related to pre-production mask sets , which are not used in production , to research and development expenses at the time they are incurred . these charges often arise as we transition to new process technologies and , accordingly , can cause research and development expenses to fluctuate on a quarterly basis . we believe that continued investment in research and development is critical to our long-term success , and we expect to continue to devote significant resources to product development activities . accordingly , we expect that our research and development expenses will increase in future periods , although such expenses as a percentage of net revenues may fluctuate . selling , general and administrative expenses . selling , general and administrative expenses consist primarily of commissions paid to independent sales representatives , salaries , stock-based compensation and related expenses for personnel engaged in sales , marketing , administrative , finance and human resources activities , professional fees , costs associated with the promotion of our products and other corporate expenses . we expect that our sales and marketing expenses will increase in absolute dollars in future periods as we continue to grow and expand our sales force but that , to the extent our revenues increase in future periods , these expenses will generally decline as a percentage of net revenues . we also expect that , in support of our continued growth and our operations as a public company , general and administrative expenses will continue to increase in absolute dollars for the foreseeable future but will fluctuate as a percentage of net revenues . 31 acquisition on august 28 , 2009 , we acquired substantially all of the assets related to the sram memory device product line of sony corporation and its subsidiaries ( collectively , `` sony '' ) . as part of the transaction , we also entered into an intellectual property agreement with sony under which we acquired certain patents and license rights to other intellectual property used in connection with the acquired product line . the acquisition was undertaken in order to increase our market share in the sram memory business , expand our relationships with our major customers and expand our product portfolio . the acquisition resulted in a bargain purchase as sony had been incurring significant losses on an annual basis , had a minimal product offering , had only one customer and declining annual revenues at the time of the acquisition and was therefore motivated to sell the assets of its sram product line . we adopted authoritative guidance for business combinations as a result of this acquisition . the acquisition has been accounted for as a purchase under authoritative guidance for business combinations . story_separator_special_tag acquisition related costs of approximately $ 533,000 incurred in connection with this acquisition have been expensed in accordance with the authoritative guidance and are included in selling , general and administrative expenses in the consolidated statement of operations for the year ended march 31 , 2010 . contingent consideration was recognized at the date of the acquisition and recorded at its fair value . changes to the fair value of the contingent consideration subsequent to september 30 , 2009 have been recorded in general and administrative expense and amounted to $ 105,000 and $ 64,000 in fiscal 2010 and 2011 , respectively . the purchase price of the acquisition has been preliminarily allocated to the net tangible and intangible assets acquired , with the excess of the fair value of assets acquired over the purchase price recorded as a bargain purchase gain . the results of operations and estimated fair value of assets acquired and liabilities assumed were included in our consolidated financial statements beginning august 29 , 2009. the total purchase consideration is expected to be approximately $ 7.1 million in cash , of which approximately $ 5.2 million was paid at the closing and $ 1.2 million was paid in october 2009 following a post-closing adjustment to reflect actual product inventory on hand at the closing . the purchase consideration also includes contingent consideration of $ 681,000 , which represents the fair value of future cash payments that we expect to make based on the sale of certain acquired sram products over an eight quarter period commencing with the quarter ended september 30 , 2009 , the quarter in which we first derived revenue from shipments of such products . we estimated the contingent consideration based on probability weighted expected future cash flows . as of march 31 , 2011 , approximately $ 334,000 of contingent consideration had been paid and $ 347,000 was included under accrued expenses and other liabilities in the consolidated balance sheet . the allocation of the purchase price to acquired tangible and identifiable intangible assets was based on their estimated fair values at the date of acquisition . prior to the closing of the acquisition , there were no material relationships between us and sony or any related parties or affiliates of sony . 32 story_separator_special_tag were acquired in the sony acquisition and are being amortized over four quarters . gross profit . gross profit increased by 10.0 % from $ 26.6 million in fiscal 2009 to $ 29.2 in fiscal 2010. gross margin increased from 42.8 % in fiscal 2009 to 43.2 % in fiscal 2010. the increase in gross margin was primarily related to a shift in product mix to higher density , higher margin products , partially offset by a reduction in the percentage of sales of products for military applications , the adverse impact of the sale of inventories acquired from sony and increased depreciation and amortization expense related to assets acquired from sony . research and development expenses . research and development expenses increased 58.1 % from $ 5.7 million in fiscal 2009 to $ 9.1 million in fiscal 2010. this increase was primarily due to increases in payroll related expenses of $ 2,155,000 , prototype mask expenses of $ 650,000 and lesser increases in facility related expenses , stock-based compensation expense , software maintenance expense and depreciation expense , partially offset by a decrease in outside consulting expenses of $ 547,000. the increase in payroll expenses was related to our low latency dram project and various high speed sram projects . research and development expenses included stock-based compensation expense of $ 686,000 and $ 436,000 , respectively , in fiscal 2010 and fiscal 2009. selling , general and administrative expenses . selling , general and administrative expenses increased 2.6 % from $ 9.3 million in fiscal 2009 to $ 9.5 million in fiscal 2010. this increase was primarily related to increases of $ 316,000 in outside accounting fees and $ 269,000 in payroll related expenses and a smaller increase in legal expenses , partially offset by a decrease in independent sales representative commissions of $ 322,000 and smaller decreases in travel expense and outside consulting expenses . selling , general and administrative expenses in fiscal 2010 included $ 533,000 in legal and accounting fees and changes to the fair value of the contingent consideration related to the sony acquisition . stock-based compensation expense of $ 502,000 and $ 595,000 were included in selling , general and administrative expenses in fiscal 2010 and fiscal 2009 , respectively . interest and other income ( expense ) , net . interest and other income ( expense ) , net increased 44.2 % from $ 1.4 million in fiscal 2009 to $ 2.0 million in fiscal 2010. interest income decreased $ 567,000 in fiscal 2010 compared to the prior year due to lower interest rates received on our cash and short-term and long-term investments . this decrease was offset by a $ 1.1 million bargain purchase gain recorded in connection with the sony acquisition . in addition , we recorded an exchange loss 34 of $ 29,000 in fiscal 2010 compared to an exchange loss of $ 98,000 in fiscal 2009 , related to our taiwan branch operations . provision for income taxes . the provision for income taxes decreased from $ 3.6 million in fiscal 2009 to $ 2.2 million in fiscal 2010. this decrease was due to the decreased effective tax rate resulting from an increased percentage of net revenues in lower tax rate jurisdictions in fiscal 2010. net income . net income increased 11.8 % from $ 9.3 million in fiscal 2009 to $ 10.4 million in fiscal 2010. this increase was primarily due to the increased net revenues and changes in operating expenses and gross profit discussed above . liquidity and capital resources as of march 31 , 2011 , our principal sources of liquidity were cash , cash equivalents and short-term investments of $ 52.0 million compared to $ 46.8 million as of march 31 , 2010 .
| gross profit increased by 53.2 % from $ 29.2 million in fiscal 2010 to $ 44.8 in fiscal 2011. gross margin increased from 43.2 % in fiscal 2010 to 45.8 % in fiscal 2011. the increase in gross profit was primarily related to the increased net revenues.the increase in gross margin was primarily related to a shift in product mix to a higher percentage of higher density , higher margin products , partially offset by a reduction in the percentage of sales of products for military applications and increased depreciation and amortization expense related to assets acquired from sony . research and development expenses . research and development expenses increased 17.2 % from $ 9.1 million in fiscal 2010 to $ 10.6 million in fiscal 2011. this increase was primarily due to increases in payroll related expenses of $ 695,000 , facility related expenses of $ 241,000 and lesser increases in software maintenance expense , stock-based compensation expense and depreciation expense . the increase in payroll expenses was related to increases in headcount to support our low latency dram project and various high speed sram projects . research and development expenses included stock-based compensation expense of $ 834,000 and $ 686,000 , respectively , in fiscal 2011 and fiscal 2010. selling , general and administrative expenses . selling , general and administrative expenses increased 12.5 % from $ 9.5 million in fiscal 2010 to $ 10.7 million in fiscal 2011. this increase was primarily related to increases of $ 710,000 in independent sales representative commissions , $ 521,000 in payroll related expenses and a smaller increase in facility related expenses , partially offset by a decrease in outside consulting expenses . selling , general and administrative expenses in fiscal 2010 included $ 533,000 in legal and accounting fees and changes to the fair value of the contingent consideration related to the sony acquisition , compared to $ 64,000 in such acquisition related expenses in fiscal 2011. stock-based compensation expense of $ 578,000 and $ 502,000 were included in selling , general and administrative expenses in fiscal 2011 and fiscal 2010 , respectively . 33 interest and other income ( expense ) , net .
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during fiscal year 2012 , we experienced an unanticipated decline in energy efficiency program volumes throughout most of our contracts as compared with fiscal year 2011. we believe this was due to economic uncertainty and tighter budgets at electric utilities . seasonality in the recycling segment is due primarily to our utility customers supporting more marketing and advertising during the spring and summer months . our customers tend to promote the recycling programs more aggressively during the warmer months because they believe more people want to clean up their garages and basements during that time of the year . however , the addition of the ge agreement and some customers shifting to marketing their appliance recycling programs year-round has helped to mitigate some seasonality . we are seeing a shift from straight recycling programs to weatherization programs that include replacing old inefficient refrigerators and washers with new energy star ® models and recycling the old appliances . we expect this trend to continue in 2013. we monitor specific economic factors such as retail trends , consumer confidence , manufacturing by the major appliance companies , sales of existing homes and mortgage interest rates as key indicators of industry demand , particularly in our retail segment . competition in the home appliance industry is intense in the four retail markets we serve . this includes competition not only from independent retailers , but also from such major retailers as sears , best buy , the home depot and lowe 's . we also closely 19 monitor the metals and various other scrap markets because of the type of components recovered in our recycling process . this includes monitoring the american metal market and the regions throughout the u.s. where we have recycling centers . we derive revenues from the sale of carbon offsets created by the destruction of ozone-depleting cfcs generated at our arca and aap recycling centers . in 2011 , we sold carbon offsets on the voluntary market and recognized $ 1.2 million in revenues . in 2012 , our carbon offset revenues declined by $ 1.1 million due to uncertainty during 2012 regarding california 's nascent carbon market . we elected to delay the destruction and sale of the majority of our accumulated cfcs until this market stabilized . in january 2013 , the california superior court rejected a major challenge to california 's cap-and-trade program for reducing greenhouse gases . we can not predict the impact of this legal case , nor other pending lawsuits , but we believe this court decision indicates growing momentum and stability in this market . in the future , we believe it will become easier and more profitable to monetize our existing and future inventory of carbon offsets created by the destruction of cfcs . results of operations the following table sets forth our consolidated financial data as a percentage of total revenues for fiscal years 2012 and 2011 : replace_table_token_6_th the following table sets forth the key results of operations by segment for fiscal years 2012 and 2011 ( dollars in millions ) : replace_table_token_7_th 20 our total revenues of $ 114.3 million for 2012 decreased $ 12.4 million or 9.8 % from $ 126.7 million in 2011 . the decrease in revenues was attributed primarily to our recycling segment and the following three factors : 1. a 27 % decline in utility recycling volumes compared with 2011 , resulting in lower revenues of approximately $ 6.3 million . 2. a summer refrigerator replacement initiative in 2011 from a california utility program that resulted in replacing over 10,000 refrigerators that did not occur in 2012 , resulting in lower revenues of approximately $ 2.9 million . 3. a decline in carbon offset revenues of $ 1.1 million compared with 2011. we expect to generate carbon offset revenues in 2013 but can not predict the amount or frequency of carbon offset sales . retail segment revenues accounted for 63 % of total revenues in 2012 compared with 59 % in 2011 . recycling segment revenues and retail segment revenues each include a portion of byproduct revenues . the decline in recycling volumes and lower carbon offset revenues impacted the overall mix of revenues between the retail and recycling segments in 2012 compared with 2011. our operating income ( loss ) of $ ( 3.2 ) million for 2012 decreased $ 10.4 million or 144.4 % compared with $ 7.2 million in 2011 . the change in operating income ( loss ) was attributed to several factors , including the following : 1. the combination of lower retail segment revenues and gross profit percentage compared with 2011 resulted in a $ 1.8 million decline in operating income . 2. an increase in retail segment sales , general and administrative expenses of $ 1.0 million related to operating two new appliancesmart stores that did not exist in 2011 , offset by $ 0.4 million in lower advertising expenses . 3. the combination of lower recycling segment volumes , lower scrap metal prices and higher transportation costs per unit compared with 2011 resulted in a $ 5.8 million decline in operating income . 4. a $ 1.1 million decline of carbon offset revenues in our recycling segment that drop directly to operating income . 5. a $ 1.1 million non-cash goodwill impairment charge related to aap in our recycling segment . revenues . revenues for the fiscal years of 2012 and 2011 were as follows ( dollars in millions ) : replace_table_token_8_th retail revenues . our retail revenues of $ 71.2 million for 2012 decreased $ 1.6 million or 2.1 % from $ 72.8 million in 2011 . comparable store appliance revenues from appliancesmart stores operating during the entire fiscal years of 2012 and 2011 decreased $ 3.8 million compared with 2011 . we believe the decline in comparable store revenues was driven by consumer anxiety about the election , economy and government spending cuts . in november 2011 , we opened an appliancesmart store in st. cloud , minnesota . in august 2012 , we opened a store in eden prairie , minnesota . story_separator_special_tag these two new stores generated $ 3.0 million in revenues that did not occur in 2011. we closed two underperforming stores in our georgia market , one in september 2012 and one in december 2012 , resulting in a $ 0.8 million decline in revenues compared with 2011. we are implementing strategies for addressing our underperforming stores , from right-sizing showroom space to closure . we plan to close another one or two underperforming stores in 2013. the table below illustrates our retail revenues by quarter for fiscal years 2012 and 2011 ( dollars in millions ) : replace_table_token_9_th 21 our stores carry a wide range of innovative , new appliances as well as other affordable options such as close-outs , factory overruns , discontinued models and other special-buy appliances , including out-of-carton merchandise . all of these appliances are new ; we do not sell used appliances . we continue to purchase the majority of our appliances from whirlpool , ge and electrolux . we have no minimum purchase requirements with any of these manufacturers . we believe purchases from these three manufacturers will provide an adequate supply of high-quality appliances for our retail stores ; however , there is a risk that one or more of these sources could be curtailed or lost . recycling revenues . our recycling revenues of $ 25.3 million for 2012 decreased $ 7.8 million or 23.5 % from $ 33.1 million in 2011 . recycling revenues are comprised of two components : ( 1 ) appliance recycling revenues generated by collecting and recycling appliances for utilities and other sponsors of energy efficiency programs and ( 2 ) replacement program revenues generated by recycling and replacing old appliances with new energy efficient models for programs sponsored by utility companies . appliance recycling revenues decreased 26.5 % to $ 13.6 million in 2012 compared with $ 18.6 million in 2011 , due primarily to 27 % decline in recycling volumes . replacement program revenues decreased 19.7 % to $ 11.7 million in 2012 compared with $ 14.5 million in 2011 . the decrease was primarily the result of a summer refrigerator replacement initiative from a california utility program that resulted in replacing over 10,000 refrigerators in 2011 that did not occur in 2012 , resulting in a $ 2.9 million decline in revenues . we are aggressively pursuing new appliance recycling and replacement programs along with renewing our current contracts throughout north america but can not predict if we will be successful in signing new contracts or renewing existing contracts . the table below illustrates our recycling revenues by quarter for fiscal years 2012 and 2011 ( dollars in millions ) : replace_table_token_10_th byproduct revenues . our byproduct revenues of $ 17.8 million for 2012 decreased $ 3.0 million or 14.6 % from $ 20.8 million in 2011 . the decrease in byproduct revenues was primarily the result of a decline in overall recycling volumes , lower carbon offset revenues and lower scrap metal prices . the decline in overall recycling volumes and scrap metal prices resulted in lower byproduct revenues of $ 1.9 million . in 2011 , we recognized $ 1.2 million in carbon offset revenues , of which $ 0.4 million was generated at aap . in 2012 , carbon offset revenues declined by $ 1.1 million compared with 2011. byproduct revenues include all of the revenues generated by aap . revenues from aap of $ 11.3 million was consistent with 2011. in 2012 , aap 's recycling volume increased but was offset by lower scrap metal prices and lower carbon offset revenues . we can not predict byproduct material prices . we expect to generate carbon offset revenues in 2013 but can not predict the amount or frequency of carbon offset sales . the table below illustrates our byproduct revenues by quarter for fiscal years 2012 and 2011 ( dollars in millions ) : replace_table_token_11_th gross profit . our gross profit of $ 28.0 million in 2012 decreased $ 8.7 million or 23.9 % compared with $ 36.7 million in 2011 . gross profit as a percentage of total revenues decreased to 24.5 % in 2012 compared with 29.0 % in 2011 . gross profit for the retail segment decreased to $ 18.5 million in 2012 compared with $ 20.2 million in 2011 . the year-over-year decrease was due primarily to a shift in sales mix . in 2012 , our product sales consisted of 72 % new ( in-the-box ) product compared with 58 % new ( in-the-box ) product in 2011 . new ( in-the-box ) product typically has lower profit margins than special buy ( out-of-the-box ) product . also , in 2012 , we recorded an additional $ 0.6 million non-cash inventory charge related to aged inventory compared with 2011 . 22 our recycling segment gross profit decreased to $ 9.5 million in 2012 compared with $ 16.5 million in 2011 , driven primarily by lower overall recycling volumes , higher transportation costs per unit , lower scrap metal prices and lower carbon offset revenues . the combination of a decline in our overall recycling volumes and increase in utility transportation costs per unit resulted in a $ 5.1 million reduction in gross profit . aap 's gross profit declined by $ 0.8 million compared with 2011 due primarily to lower scrap metal prices . the decline in carbon offset revenue of $ 1.1 million mentioned previously had a direct impact on our decline in gross profit . our gross profit for future periods can be affected favorably or unfavorably by numerous factors , including : 1. the mix of retail products we sell . 2. the prices at which we purchase product from the major manufacturers who supply product to us . 3. the volume of appliances we receive through our recycling contracts . 4. the volume and price of byproduct materials . 5. the volume and price of carbon offset sales created by the destruction of ozone-depleting refrigerants . selling , general and administrative expenses .
| net cash used in investing activities for the year ended december 31 , 2011 , was related primarily to capital expenditures needed to complete the installation of aap 's urt materials recovery system in philadelphia , pennsylvania , that began in 2010. the net cash used in investing activities in 2011 was partially offset by the release of a $ 0.7 million deposit required by our credit card processor in 2009. on december 31 , 2012 , our bankcard processor informed us that it was exercising its rights under the merchant contract and requiring a $ 0.5 million reserve . the reserve will accumulate daily by garnishing 10 % of our daily collections . financing activities . our net cash used in financing activities was $ 1.0 million in 2012 compared with cash provided by financing activities of $ 1.1 million in 2011 . net cash used in financing activities for the year ended december 29 , 2012 , was related primarily to payments on our long-term borrowings and revolving line of credit . net cash provided by financing activities for the year ended december 31 , 2011 , was related primarily to $ 9.4 million in proceeds from issuance of debt offset by the payment of $ 8.3 million on our borrowings . sources of liquidity . our principal sources of liquidity are cash from operations and borrowings under our revolving line of credit . our principal liquidity requirements consist of long-term debt obligations , capital expenditures and working capital . our total capital requirements for the next twelve months will depend upon , among other things , the number and size of appliancesmart stores operating during the period , the recycling volumes generated from recycling contracts during the period and our needs related to aap . currently , we have 19 appliancesmart stores and 11 recycling centers , including aap , in operation . we believe , based on the anticipated sales per retail store , the anticipated revenues from our recycling contracts and our anticipated gross profit , that our cash balance , anticipated funds generated from operations and our revolving line of credit will be sufficient to finance our operations , long-term debt obligations and capital expenditures through at least the next twelve months . see additional information under the section “ status of credit agreement. ” we may also need additional capital to finance our operations if our revenues are lower than anticipated , our expenses are
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our strategic objective is to hedge 50 % to 70 % of our anticipated production on a forward 12-month basis using a combination of swaps , cashless collars and other financial derivative instruments . we currently have hedged approximately 70 % of our expected 2013 production and 30 % of our expected 2014 production at price levels that provide some economic certainty to our capital investments . we focus our efforts on increasing oil and natural gas reserves and production while controlling costs at a level that is appropriate for long-term operations . our future earnings and cash flows are dependent on our ability to manage our revenues and overall cost structure to a level that allows for profitable production . like all oil and gas exploration and production companies , we face the challenge of natural production declines . as initial reservoir pressures are depleted , oil and gas production from a typical well naturally decreases . thus , an oil and gas exploration and production company depletes part of its asset base with each unit of oil or natural gas it produces . we attempt to overcome this natural decline by drilling to find additional reserves and acquiring more reserves than we produce . our future growth will depend on our ability to continue - 49 - to add reserves in excess of production . we will maintain our focus on costs to add reserves through drilling and acquisitions as well as the costs necessary to produce such reserves . our ability to add reserves through drilling is dependent on our capital resources and can be limited by many factors , including our ability to timely obtain drilling permits and regulatory approvals . see trends and uncertainties regulatory trends below . the permitting and approval process has been more difficult in recent years than in the past due to more stringent rules , such as those enacted by the cogcc in 2009 , and increased activism from environmental and other groups , which has extended the time it takes us to receive permits and other necessary approvals . because of our relatively small size and concentrated property base , we can be disproportionately disadvantaged by delays in obtaining or failing to obtain drilling approvals compared to companies with larger or more dispersed property bases . as a result , we may be less able to shift drilling activities to areas where permitting may be easier , and we have fewer properties over which to spread the costs related to complying with these regulations and the costs or foregone opportunities resulting from delays . story_separator_special_tag million from the sale of seismic data . other operating revenues for 2011 primarily consisted of $ 2.9 million of income from gathering , compression and salt-water disposal fees received from third parties and $ 2.0 million in net gains realized from the sale and exchange of properties . lease operating expense . lease operating expense increased to $ 0.62 per mcfe for the year ended december 31 , 2012 from $ 0.53 per mcfe for the year ended december 31 , 2011. the increase in lease operating expense is primarily related to oil producing properties in the uinta and dj basins with inherently higher lifting - 52 - costs per mcfe compared to our natural gas properties . as our development in the uinta oil program continues to grow , we are adding necessary infrastructure and scale to reduce future operating costs on a unit of production basis . gathering , transportation and processing expense . gathering , transportation and processing expense increased to $ 0.91 per mcfe for the year ended december 31 , 2012 from $ 0.87 per mcfe for the year ended december 31 , 2011. the increase for the year ended december 31 , 2012 is primarily related to decreased drilling activity in the west tavaputs area of the uinta basin due to lower gas prices . as a result of decreased drilling in 2012 and future years , we incurred a one-time charge of $ 4.4 million for deferred processing and gathering costs that we do not expect to recover in future years . we have entered into long-term firm transportation agreements for a portion of our natural gas production to guarantee capacity on major pipelines and reduce the risk and impact related to possible production curtailments that may arise due to limited pipeline capacity . the majority of our long-term firm transportation and processing agreements are for gas production in the piceance and uinta basins . included in gathering , transportation and processing expense are $ 0.38 and $ 0.33 per mcfe of firm transportation and gathering expense for the years ended december 31 , 2012 and 2011 , respectively , and $ 0.05 per mcfe of firm processing expense from long-term contracts for both the years ended december 31 , 2012 and 2011. as a result of the sale of 100 % of our powder river basin coalbed methane assets on december 31 , 2012 , our long-term firm transportation agreements related to this area were assumed by the purchaser . production tax expense . total production taxes decreased to $ 25.5 million for the year ended december 31 , 2012 from $ 37.5 million for the year ended december 31 , 2011. production taxes are primarily based on the wellhead values of production , which exclude gains and losses associated with hedging activities . production tax expense decreased during the year ended december 31 , 2012 primarily due to a 9.1 % decrease in wellhead values of production , excluding hedging activities . production taxes as a percentage of oil and natural gas sales before hedging adjustments were 4.1 % for the year ended december 31 , 2012 and 5.5 % for the year ended december 31 , 2011. production tax rates vary across the different areas in which we operate . story_separator_special_tag as the proportion of our production changes from area to area , our average production tax rate will vary depending on the quantities produced from each area and the production tax rates in effect for those areas . the decrease in the overall production tax rate is consistent with our production decrease in states with higher production tax rates . exploration expense . exploration expense increased to $ 8.8 million for the year ended december 31 , 2012 from $ 3.6 million for the year ended december 31 , 2011. exploration expense for the year ended december 31 , 2012 consisted of $ 7.9 million for geological and geophysical seismic programs across several basins and $ 0.9 million for delay rentals across all basins . exploration expense for the year ended december 31 , 2011 consisted of $ 2.7 million for geological and geophysical seismic programs across several basins and $ 0.9 million for delay rentals across all basins . impairment , dry hole costs and abandonment expense . our impairment , dry hole costs and abandonment expense decreased to $ 67.9 million for the year ended december 31 , 2012 from $ 117.6 million for the year ended december 31 , 2011. for the year ended december 31 , 2012 , impairment expense was $ 37.3 million , abandonment expense was $ 9.6 million and dry hole costs were $ 21.0 million . for the year ended december 31 , 2011 , impairment expense was $ 100.3 million , abandonment expense was $ 3.9 million and dry hole costs were $ 13.4 million . we evaluate the impairment of our proved oil and gas properties on a property-by-property basis annually or whenever events or changes in circumstances indicate a property 's carrying amount may not be recoverable . if the carrying amount exceeds the property 's estimated fair value , we will adjust the carrying amount of the property to fair value through a charge to impairment expense . for the year ended december 31 , 2012 , we did - 53 - not record any impairment charges regarding proved oil and gas properties . for the year ended december 31 , 2011 , we recorded a $ 75.2 million impairment charge regarding proved oil and gas properties within the coalbed methane fields of the powder river basin and a $ 7.6 million impairment charge regarding proved oil and gas properties within the wallace creek field of the wind river basin as a result of declining natural gas prices . unproved oil and gas properties are also assessed periodically for impairment on a property-by-property basis based on remaining lease terms , drilling results , reservoir performance , commodity price outlooks or future plans to develop existing acreage . we recorded non-cash impairment charges of $ 37.3 million and $ 17.5 million for the years ended december 31 , 2012 and 2011 , respectively , related to certain unproved oil and gas properties within various exploration and development projects primarily as a result of unfavorable natural gas exploratory results , unfavorable market conditions or discontinuing evaluation of the remaining acreage . we generally expect impairments of unproved properties to be more likely to occur in periods of low commodity prices because we will be less likely to devote capital to exploration activities . we continue to review our acreage position and future drilling plans based on the current price environment . if our attempts to market interests in certain properties to industry partners are unsuccessful , we may record additional leasehold impairments and abandonments in exploration prospects . we account for oil and gas exploration and production activities using the successful efforts method of accounting under which we capitalize exploratory well costs until a determination is made as to whether or not the wells have found proved reserves . exploratory wells that discover potentially economic reserves in areas where a major capital expenditure would be required before production could begin and where the economic viability of that major capital expenditure depends upon the successful completion of further exploratory work in the area remain capitalized if the well finds a sufficient quantity of reserves to justify its completion as a producing well , and we are making sufficient progress assessing the reserves and the economic and operating viability of the project . if proved reserves are not assigned to an exploratory well , the costs of drilling the well are charged to expense . otherwise , the costs remain capitalized and are depleted as production occurs . as of december 31 , 2012 , there were no exploratory well costs included in unproved oil and gas properties that had been capitalized for a period greater than one year since the completion of drilling . dry hole costs of $ 21.0 million for the year ended december 31 , 2012 primarily relate to two unsuccessful exploratory natural gas wells in the paradox basin and one unsuccessful exploratory well in the alberta basin . dry hole costs of $ 13.4 million for the year ended december 31 , 2011 were associated with one uneconomic exploratory well in the mcrae gap prospect of the wind river basin and two unsuccessful exploratory wells within the northern dj basin on acreage acquired prior to our 2011 dj basin acquisition . depreciation , depletion and amortization . dd & a increased to $ 326.8 million for the year ended december 31 , 2012 compared with $ 288.4 million for the year ended december 31 , 2011. the increase of $ 38.4 million was a result of a 10 % increase in production for the year ended december 31 , 2012 compared with the year ended december 31 , 2011 coupled with an increase in the dd & a rate . the increase in production accounted for $ 14.4 million of additional dd & a expense , while the overall increase in the dd & a rate accounted for a $ 24.0 million increase in dd & a expense .
| average costs per mcfe for general and administrative expense , including non-cash stock-based compensation expense , as presented in the consolidated statements of operations , were $ 0.58 and $ 0.63 for the years ended december 31 , 2012 and 2011 , respectively . production revenues and volumes . production revenues decreased to $ 700.6 million for the year ended december 31 , 2012 from $ 780.8 million for the year ended december 31 , 2011 due to a 19 % decrease in oil and natural gas prices on a per mcfe basis after the effects of realized cash flow hedges , offset by a 10 % increase in production . the decrease in average price reduced production revenues by approximately $ 144.6 million , and the net increase in production added approximately $ 64.4 million of production revenues . the year ended december 31 , 2011 included settlements of $ 99.9 million from financial hedging instruments that were designated as cash flow hedges and excluded those that did not qualify , or were not designated , as cash flow hedges such as basis only and ngl swaps . the settlements from hedging instruments that were not designated as cash flow hedges were included in the line item commodity derivative gain ( loss ) within other income in the consolidated statements of operations . see commodity derivative gain ( loss ) below for more information related to the commodity derivative gain ( loss ) line item . we discontinued hedge accounting effective january 1 , 2012. all accumulated gains or losses related to the discontinued cash flow hedges were recorded in accumulated other comprehensive income ( aoci ) effective january 1 , 2012 and will remain in aoci until the underlying transaction occurs . as the underlying transaction occurs , these gains or losses are reclassified from aoci into oil and gas production revenues . the amount reclassified to oil and gas production revenues was a gain of $ 81.2 million for the year ended december 31 , 2012 . - 51 - total production volumes increased to 117.6 bcfe for the year ended december 31 , 2012 from 106.8 bcfe for the year ended december 31 , 2011 , primarily due to an
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buying and occupancy costs related to stores are largely fixed and do not necessarily increase as volume increases . changes in the mix of our products may also impact our overall cost of goods sold , buying and occupancy costs . gross profit/gross margin gross profit is net sales minus cost of goods sold , buying and occupancy costs . gross margin measures gross profit as a percentage of net sales . gross profit/gross margin is impacted by the price at which we are able to sell our merchandise and the cost of our product . we review our inventory levels on an on-going basis in order to identify slow-moving merchandise and generally use markdowns to clear such merchandise . the timing and level of markdowns are driven primarily by seasonality and customer acceptance of our merchandise and have a direct effect on our gross margin . any marked down merchandise that is not sold is marked-out-of-stock . we use third-party vendors to dispose of this marked-out-of-stock merchandise . selling , general , and administrative expenses includes operating costs not included in cost of goods sold , buying and occupancy costs such as : payroll and other expenses related to operations at our corporate offices store expenses other than occupancy costs marketing expenses , including production , mailing , print , and digital advertising costs , among other things with the exception of store payroll , certain marketing expenses , and incentive compensation , selling , general , and administrative expenses generally do not vary proportionally with net sales . as a result , selling , general , and administrative expenses as a percentage of net sales are usually higher in lower volume quarters and lower in higher volume quarters . 26 fiscal year comparisons net sales replace_table_token_5_th net sales decreased by approximately $ 157.6 million , or 7 % , between 2016 and 2015 . comparable sales decreased 9 % in 2016 compared to 2015 . the decrease in comparable sales resulted primarily from a decrease in transactions and in-store average dollar sales per transaction . we attribute these decreases to decreased traffic at our stores due in part to decreases in overall mall traffic , increased markdowns due to the promotional retail landscape , and a lack of fashion clarity in our product assortment , which offered too many choices and was overly targeted at the younger customers in our demographic in the first half of the year . this was partially offset by an increase in e-commerce sales which resulted from more targeted marketing as well as improvements to our website functionality and the online shopping experience . non-comparable sales increased $ 37.5 million , driven primarily by new outlet store openings , and were partially offset by closed retail stores . 27 net sales increased by approximately $ 184.6 million , or 9 % , between 2015 and 2014. comparable sales increased 6 % in 2015 compared to 2014. the increase in comparable sales resulted primarily from an increase in average dollar sales per transaction . we attribute the increase in average dollar sales per transaction to our strong product assortment and reduced promotional activity in 2015. non-comparable sales increased $ 69.9 million , driven primarily by new outlet store openings , partially offset by closed retail stores . gross profit the following table shows cost of goods sold , buying and occupancy costs , gross profit in dollars , and gross margin percentage for the stated periods : replace_table_token_6_th the 360 basis point decrease in gross margin percentage , or gross profit as a percentage of net sales , in 2016 compared to 2015 was comprised of a 210 basis point decrease in merchandise margin and a 150 basis point increase in buying and occupancy costs as a percentage of net sales . the decrease in merchandise margin was driven by increased promotions , including increased markdowns on clearance items in the first half of the year . the increase in buying and occupancy costs as a percentage of sales was primarily the result of the deleveraging effect of the decrease in sales , increased rent expense , and a $ 5.1 million impairment charge related to leasehold improvements at certain underperforming stores in 2016 versus a $ 1.8 million impairment charge in 2015. assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable . the reviews are conducted at the store level , the lowest identifiable level of cash flow . factors used to assess stores for impairment include , but are not limited to , plans for future operations , brand initiatives , recent operating results , and projected future cash flows . significant changes in any of these factors could lead to future impairments . these increases were partially offset by a decrease in incentive compensation . the 330 basis point increase in gross margin , or gross profit as a percentage of net sales , in 2015 compared to 2014 was comprised of a 200 basis point increase in merchandise margin and a 130 basis point decrease in buying and occupancy costs as a percentage of net sales . the increase in merchandise margin was driven by a better product assortment , a reduction in 28 promotional activities , and more disciplined inventory management which led to fewer markdowns . story_separator_special_tag the decrease in buying and occupancy costs as a percentage of sales was primarily the result of the leveraging effect of the increase in sales and the fact that we recognized a $ 1.8 million impairment charge related to store fixed assets in 2015 versus a $ 10.5 million impairment charge in 2014. selling , general , and administrative expenses the following table shows selling , general , and administrative expenses in dollars and as a percentage of net sales for the stated periods : replace_table_token_7_th the $ 28.2 million decrease in selling , general , and administrative expenses in 2016 compared to 2015 was primarily the result of decreased payroll related expenses of approximately $ 34.0 million . the reduction in payroll expenses was primarily related to decreases in incentive compensation and performance-based stock compensation resulting from decreased business performance . the decreases were partially offset by $ 7.8 million in additional depreciation primarily related to new information technology systems and e-commerce technology . the $ 63.7 million increase in selling , general , and administrative expenses in 2015 compared to 2014 was the result of additional payroll related expenses of approximately $ 42.5 million . the additional payroll expenses were primarily related to incentive compensation and store payroll resulting from improved performance and store payroll associated with new outlet stores , partially offset by payroll savings from retail store closures . in addition , there was an increase of $ 10.9 million in information technology expenses primarily related to the previously mentioned upgrades to our systems and processes and an increase of $ 5.3 million in marketing expenses primarily related to increased digital and television marketing . interest expense , net the following table shows interest expense in dollars for the stated periods : year ended 2016 2015 2014 ( in thousands ) interest expense , net $ 13,468 $ 15,882 $ 23,896 the $ 2.4 million decrease in interest expense in 2016 compared to 2015 is primarily related to a loss on extinguishment of debt in connection with the redemption of our 8 3 / 4 % senior notes due 2018 ( the `` senior notes '' ) in the first quarter of 2015 , partially offset by the amortization of the debt discount related to the lease financing obligation associated with the amendment to our times square store lease agreement in the first quarter of 2016. the $ 8.0 million decrease in interest expense in 2015 compared to 2014 is primarily attributable to the reduction in interest expense following the redemption of our senior notes in the first quarter of 2015 , partially offset by a $ 9.7 million loss on extinguishment of debt in connection with such redemption . income tax expense the following table shows income tax expense in dollars for the stated periods : year ended 2016 2015 2014 ( in thousands ) income tax expense $ 33,200 $ 74,171 $ 43,231 29 the effective tax rate was 36.6 % in 2016 compared to 38.9 % in 2015 . the effective tax rate for 2016 includes a net tax benefit of approximately $ 2.9 million attributable to certain discrete items that occurred during the third quarter of 2016. we anticipate our effective tax rate will be approximately 39 % in 2017 excluding the impact of share-based compensation or other discrete items which might occur . the effective tax rate for 2015 was 38.9 % compared to 38.8 % for 2014 . refer to note 7 of the consolidated financial statements included elsewhere in this annual report on form 10-k for additional information regarding the tax rate . adjusted net income the following table presents adjusted net income and adjusted diluted earnings per share , each a non-gaap financial measure , for the stated periods which eliminate certain non-core operating costs : replace_table_token_8_th * no adjustments were made to net income or diluted earnings per share for 2014. we supplement the reporting of our financial information determined under gaap with certain non-gaap financial measures : adjusted net income and adjusted diluted earnings per share . we believe that these non-gaap measures provide additional useful information to assist stockholders in understanding our financial results and assessing our prospects for future performance . management believes adjusted net income and adjusted diluted earnings per share are important indicators of our business performance because they exclude items that may not be indicative of , or are unrelated to , our underlying operating results , and provide a better baseline for analyzing trends in our business . in addition , adjusted diluted earnings per share is used as a performance measure in our executive compensation program for purposes of determining the number of equity awards that are ultimately earned by executives . because non-gaap financial measures are not standardized , it may not be possible to compare these financial measures with other companies ' non-gaap financial measures having the same or similar names . these adjusted financial measures should not be considered in isolation or as a substitute for reported net income and reported diluted earnings per share . these non-gaap financial measures reflect an additional way of viewing our operations that , when viewed with our gaap results and the below reconciliations to the corresponding gaap financial measures , provide a more complete understanding of our business . we strongly encourage investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure . the table below reconciles the non-gaap financial measures , adjusted net income and adjusted diluted earnings per share , with the most directly comparable gaap financial measures , net income and diluted earnings per share .
| 2016 store openings and closures : opened 23 new factory outlet stores in the u.s. , four of which were converted from existing retail locations ; and closed 20 u.s. retail stores , four of which were converted to outlet locations . the remaining 16 stores were permanently closed pursuant to our previously announced plan to close approximately 50 retail stores over a 36 month time period , primarily at lease expiration . expectations for 2017 : open 39 factory outlet stores , 20 of which will be converted from existing retail locations ; and close 30 u.s. retail stores , 20 of which will be converted to outlet locations . e-commerce other initiatives in 2016 , our e-commerce sales increased 5 % compared to 2015. in the first half of the year , we experienced decreased sales due primarily to the transition of our e-commerce fulfillment operations to a new third party . this was more than offset , however , by increased sales in the second half of the year . the increase was primarily driven by : a strong and clear marketing and merchandising message and engagement aimed at our target demographic ; and the launch of several key initiatives , including improved site navigation , continued optimization across search and category pages , and mobile enhancements . e-commerce sales represented 19 % of our total net sales in 2016. systems and processes . in 2016 , we launched several new systems , including a new retail management system , a new enterprise planning system , and a new order management system . together , we believe these systems will lead to improved efficiencies in our business as we begin to fully leverage their capabilities . customer experience and brand . in 2016 , we transitioned our e-commerce fulfillment and call center operations to new third parties , all with the goal of enhancing overall customer experience and giving us the ability to roll-out additional omni-channel capabilities to increase sales and profitability . cost savings initiatives . in 2016 , we announced that we believe we have cost savings opportunities of $ 44 to $ 54 million we expect to realize through 2019. we realized $ 9 million of these savings in 2016 and believe
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however , origination volume improved throughout the year and increased when comparing the fourth quarter of 2017 to the fourth quarter of 2016. revenues from our operations in mexico were negatively impacted by a fluctuation in the exchange rate year over year . the fluctuation in the exchange rate had a negative impact of approximately $ 6.4 million on fiscal 2017 's revenue compared to the prior year . 33 insurance commissions and other income increased by $ 0.6 million , or 1.0 % , over the two fiscal years . insurance commissions decreased by $ 2.5 million , or 5.8 % , when comparing the two fiscal years due to the decrease in loan volume in states where our insurance product is available to our customers . other income increased by $ 3.1 million , or 16.5 % , when comparing the two fiscal years due mainly from an increase in tax return income of $ 2.8 million . the provision for loan losses during fiscal 2017 increased by $ 5.0 million , or 4.0 % , from the previous year . this increase resulted from an increase in the amount of loans charged off as well as an increase in the amount of loans that were fully reserved during the year . net charge-offs for fiscal 2017 amounted to $ 125.4 million , a 1.5 % increase over the $ 123.6 million charged off during fiscal 2016. we believe that the increase in charge-offs is the result of ceasing all in-person visits to delinquent borrowers in december 2015. accounts that were 60 days or more past due were 5.5 % and 4.7 % on a recency basis , and were 7.8 % and 7.1 % on a contractual basis at march 31 , 2017 and march 31 , 2016 , respectively . when excluding the impact of payroll deduct loans in mexico , the accounts contractually delinquent 60 days or more past due were 6.9 % at march 31 , 2017 compared to 6.4 % at march 31 , 2016. during fiscal 2017 the company also had an increase in year-over-year loan loss ratios . net charge-offs as a percentage of average net loans increased from 14.8 % during fiscal 2016 to 15.7 % during fiscal 2017. during fiscal 2017 the company had a charge-off ratio of 15.7 % , which is elevated compared to historical levels . from fiscal 2002 to fiscal 2006 , the charge-offs as a percent of average loans ranged from 14.6 % to 14.8 % . in fiscal 2007 the company experienced a temporary decline to 13.3 % , which was attributed to a change in the bankruptcy law , but returned to 14.5 % in fiscal 2008. in fiscal 2009 the ratio increased to 16.7 % , the highest in the company 's history as a result of the difficult economic environment and higher energy costs that our customers faced . the ratio steadily declined from 15.5 % in fiscal 2010 to 13.9 % in fiscal 2013 and increased to 14.7 % in fiscal 2014. general and administrative expenses during fiscal 2017 decreased by $ 1.5 million , or 0.5 % , over the previous fiscal year . personnel expense only increased $ 2.4 million despite the prior year benefiting from the release of $ 11.4 million of expense previously accrued for long-term equity incentive awards . other expense decreased due to $ 1.2 million of expense related to a planned bond offering that was not completed being recorded in fiscal 2016 as well as a $ 1.5 million decrease in mileage expense . occupancy and equipment expense decreased due to a $ 1.3 million loss taken as a result of the sale of the corporate jet in fiscal 2016. general and administrative expenses , when divided by average open branches , increased 0.4 % when comparing the two fiscal years , and overall , general and administrative expenses as a percent of total revenues increased to 50.3 % in fiscal 2017 from 48.3 % in fiscal 2016. interest expense decreased by $ 5.3 million , or 19.9 % , during fiscal 2017 , as compared to the previous fiscal year as a result of a 3.6 % decrease in the effective rate and a decrease in average debt outstanding of 24.1 % . income tax expense decreased $ 10.1 million , or 20.0 % , primarily from a decrease in pre-tax income . the effective tax rate decreased to 35.4 % for fiscal 2017 compared to 36.6 % for fiscal 2016. the decrease was primarily due to a reduction in state tax expense related to the company 's settlement with a state taxing authority during the current year . regulatory matters mexico investigation as disclosed in part i , item 3 , “ legal proceedings—mexico investigation ” above , the company has retained outside counsel and forensic accountants to conduct an investigation of its operations in mexico , focusing on the legality under the fcpa and certain local laws of certain payments related to loans , the maintenance of the company 's books and records associated with such payments , and the treatment of compensation matters for certain employees . the investigation continues to address whether and to what extent improper payments , which may violate the fcpa and other local laws , were made approximately between 2010 and 2017 by or on behalf of wac de méxico sofom , a subsidiary of the company , to government officials in mexico relating to loans made to unionized employees . the company has voluntarily contacted the sec and the doj to advise both agencies that an investigation is underway and that the company intends to cooperate with both agencies . the sec has issued a formal order of investigation . a conclusion can not be drawn at this time as to what potential remedies these agencies may seek . in addition , the company can not determine at this time the ultimate effect that the investigation or any remedial measures will have on its operations in mexico or its decisions with respect thereto . story_separator_special_tag if violations of the fcpa or other local laws occurred , the company could be subject to fines , civil and criminal penalties , equitable remedies , including profit disgorgement and related interest , and injunctive relief . in addition , any disposition of these matters could adversely impact our ability to collect on outstanding loans and result in further modifications to our business practices and compliance programs , including significant restructuring or curtailment of , or other effects on , our operations in mexico . any disposition could also potentially require that a monitor be appointed to review future business practices with the goal of ensuring 34 compliance with the fcpa and other applicable laws . the company could also face fines , sanctions , and other penalties from authorities in mexico , as well as third-party claims by shareholders and or other stakeholders of the company . in addition , disclosure of the investigation could adversely affect the company 's reputation and its ability to obtain new business or retain existing business from its current customers and potential customers , to attract and retain employees , and to access the capital markets . if it is determined that a violation of the fcpa has occurred , such violation may give rise to an event of default under the company 's credit agreement if such violation were to have a material adverse effect on the company 's business , operations , properties , assets , or condition ( financial or otherwise ) or if the amount of any settlement , penalties , fines or other payments resulted in the company failing to satisfy any financial covenants . additional potential fcpa violations or violations of other laws or regulations may be uncovered through the investigation . see part i , item 1a , “ risk factors-we may be exposed to liabilities under the fcpa , and any determination that the company or any of its subsidiaries has violated the fcpa could have a material adverse effect on our business and liquidity , ” “ —our internal investigation of our operations in mexico may expose the company to other potential liabilities in addition to any potential liabilities under the fcpa and cause the company to incur substantial expenses , ” “ —we depend to a substantial extent on borrowings under our revolving credit agreement to fund our liquidity needs , ” and “ —the terms of our debt limit how we conduct our business ” in this annual report on form 10-k for additional information . cfpb investigation as previously disclosed , on march 12 , 2014 , the company received a civil investigative demand ( “ cid ” ) from the consumer financial protection bureau ( the “ cfpb ” ) . the stated purpose of the cid is to determine whether the company has been or is “ engaging in unlawful acts or practices in connection with the marketing , offering , or extension of credit in violation of sections 1031 and 1036 of the consumer financial protection act , 12 u.s.c . §§ 5531 , 5536 , the truth in lending act , 15 u.s.c . §§ 1601 , et seq. , regulation z , 12 c.f.r . pt . 1026 , or any other federal consumer financial law ” and “ also to determine whether bureau action to obtain legal or equitable relief would be in the public interest. ” the company responded , within the deadlines specified in the cid , to broad requests for production of documents , answers to interrogatories and written reports related to loans made by the company and numerous other aspects of the company 's business . by letter dated january 18 , 2018 , the cfpb informed the company that it had concluded its investigation and would not be proceeding with an enforcement action against the company . see part i , item 1 , “ business - government regulation - federal legislation ” and part i , item 1a , “ risk factors ” in this annual report on form 10-k for a further discussion of these matters and federal regulations to which the company 's operations are subject . cfpb rulemaking initiative on october 5 , 2017 , the cfpb issued a final rule ( the “ rule ” ) imposing limitations on ( i ) short-term consumer loans , ( ii ) longer-term consumer installment loans with balloon payments , and ( iii ) higher-rate consumer installment loans repayable by a payment authorization . the rule requires lenders originating short-term loans and longer-term balloon payment loans to evaluate whether each consumer has the ability to repay the loan along with current obligations and expenses ( “ ability to repay requirements ” ) . the rule also curtails repeated unsuccessful attempts to debit consumers ' accounts for short-term loans , balloon payment loans , and installment loans that involve a payment authorization and an annual percentage rate over 36 % ( “ payment requirements ” ) . the final rule has significant differences from the cfpb 's proposed rules announced on june 2 , 2016 , relating to payday , vehicle title , and similar loans . the company does not believe that the cfpb 's final rule will have a material impact on the company 's existing lending procedures because the company currently does not make short-term consumer loans or longer-term consumer installment loans with balloon payments that would subject the company to the rule 's ability to repay requirements . to the extent that the rule 's payment requirements would apply to the company 's loans , the company does not believe that these requirements would have a material impact on the company 's lending procedures . the cfpb has stated that it expects to conduct separate rulemaking to identify larger participants in the installment lending market for purposes of its supervision program .
| the following table sets forth certain information derived from the company 's consolidated statements of operations and balance sheets , as well as operating data and ratios , for the periods indicated : replace_table_token_9_th _ ( 1 ) average gross loans receivable have been determined by averaging month-end gross loans receivable over the indicated period . ( 2 ) average net loans receivable have been determined by averaging month-end gross loans receivable less unearned interest and deferred fees over the indicated period . ( 3 ) operating income is computed as total revenue less provision for loan losses and general and administrative expenses . comparison of fiscal 2018 versus fiscal 2017 net income for fiscal 2018 was $ 53.7 million , a 27.1 % decrease from the $ 73.6 million earned during fiscal 2017 . operating income ( revenues less provision for loan losses and general and administrative expenses ) decreased $ 15.2 million . the decreases in net income and operating income were primarily driven by increases in personnel expense ( $ 11.0 million ) , advertising expense ( $ 4.4 million ) , and other expense ( $ 12.5 million ) , partially offset by an increase in total revenues of $ 17.0 million . net income was also impacted by a $ 15.4 million increase in income tax expense related to the tax cuts and jobs act ( tcja ) and a $ 2.4 million decrease in interest expense . total revenues increased to $ 548.7 million in fiscal 2018 , a $ 17.0 million , or 3.2 % , increase from the $ 531.7 million in fiscal 2017 . revenues from the 1,127 u.s. branches open throughout both fiscal years increased by 2.1 % . at march 31 , 2018 , the company had 1,308 branches in operation , a decrease of 19 branches from march 31 , 2017 . the decrease was the result of merging 21 branches into existing branches as well as closing 33 branches associated with the payroll deduct business in mexico , partially offset by opening 30 new branches and acquiring 5 branches . interest and fee income during fiscal 2018 increased by $ 13.0 million , or 2.8 % , from fiscal 2017 . the increase was primarily due to a corresponding
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our company and our subsidiary sell products and services primarily throughout north america . in november 2012 , our board of directors approved a one-for-five reverse stock split of all outstanding common shares , which became effective on december 14 , 2012. a proportionate adjustment also was made to our outstanding derivative securities . all share and per share information set forth in this report has been adjusted to reflect such reverse stock split . our sources of revenue we generate revenues through system sales , license fees and separate service fees , including consulting , content development and implementation services , as well as ongoing customer support and maintenance , including product upgrades . we market and sell our software and service solutions primarily through our direct sales force , but we also utilize strategic partnerships and business alliances . our expenses our expenses are primarily comprised of three categories : sales and marketing , research and development and general and administrative . sales and marketing expenses include salaries and benefits for our sales associates and commissions paid on sales . this category also includes amounts spent on the hardware and software we use to prospect new customers , including those expenses incurred in trade shows and product demonstrations . our research and development expenses represent the salaries and benefits of those individuals who develop and maintain our software products including ronincast ® and other software applications we design and sell to our customers . our general and administrative expenses consist of corporate overhead , including administrative salaries , real property lease payments , salaries and benefits for our corporate officers and other expenses such as legal and accounting fees . critical accounting policies and estimates the preparation of financial statements in conformity with accounting principles generally accepted in the u.s. , or gaap , requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period . actual results could differ from those estimates . in recording transactions and balances resulting from business operations , we use estimates based on the best information available . we use estimates for such items as depreciable lives , volatility factors in determining fair value of options and warrants , tax provisions , recognition of revenue under fixed price contracts , provisions for uncollectible receivables and deferred revenue . we revise the recorded estimates when better information is available , facts change or we can determine actual amounts . these revisions can affect operating results . we have identified below the following accounting policies that we consider to be critical . 29 revenue recognition we recognize revenue primarily from these sources : software and software license sales system hardware sales professional service revenue software design and development services implementation services maintenance and hosting support contracts we apply the provisions of accounting standards codification subtopic 605-985 , revenue recognition : software ( or asc 605-35 ) to all transactions involving the sale of software licenses . in the event of a multiple element arrangement , we evaluate if each element represents a separate unit of accounting , taking into account all factors following the guidelines set forth in fasb asc 605-985-25-5. we recognize revenue when ( i ) persuasive evidence of an arrangement exists ; ( ii ) delivery has occurred , which is when product title transfers to the customer , or services have been rendered ; ( iii ) customer payment is deemed fixed or determinable and free of contingencies and significant uncertainties ; and ( iv ) collection is reasonably assured . we assess collectability based on a number of factors , including the customer 's past payment history and its current creditworthiness . if it is determined that collection of a fee is not reasonably assured , we defer the revenue and recognize it at the time collection becomes reasonably assured , which is generally upon receipt of cash payment . if an acceptance period is required , revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period . sales and use taxes are reported on a net basis , excluding them from revenue and cost of revenue . multiple-element arrangements we enter into arrangements with customers that include a combination of software products , system hardware , maintenance and support , or installation and training services . we allocate the total arrangement fee among the various elements of the arrangement based on the relative fair value of each of the undelivered elements determined by vendor-specific objective evidence ( vsoe ) . in software arrangements for which we do not have vsoe of fair value for all elements , revenue is deferred until the earlier of when vsoe is determined for the undelivered elements ( residual method ) or when all elements for which we do not have vsoe of fair value have been delivered . the vsoe for maintenance and support services is based upon the renewal rate for continued service arrangements . the vsoe of installation and training services is established based upon pricing for the services . the vsoe of software and licenses is based on the normal pricing and discounting for the product when sold separately . each element of our multiple element arrangements qualifies for separate accounting . however , when a sale includes both software and maintenance , we defer revenue under the residual method of accounting . under this method , the undelivered maintenance and support fees included in the price of software is amortized ratably over the period the services are provided . we defer maintenance and support fees based upon the customer 's renewal rate for these services . software and software license sales we recognize revenue when a fixed fee order has been received and delivery has occurred to the customer . story_separator_special_tag we assess whether the fee is fixed or determinable and free of contingencies based upon signed agreements received from the customer confirming terms of the transaction . software is delivered to customers electronically or on a cd-rom , and license files are delivered electronically . 30 system hardware sales we recognize revenue on system hardware sales generally upon shipment of the product or customer acceptance depending upon contractual arrangements with the customer . shipping charges billed to customers are included in sales and the related shipping costs are included in cost of sales . professional service revenue included in services and other revenues is revenue derived from implementation , maintenance and support contracts , content development , software development and training . the majority of consulting and implementation services and accompanying agreements qualify for separate accounting . implementation and content development services are bid either on a fixed-fee basis or on a time-and-materials basis . for time-and-materials contracts , we recognize revenue as services are performed . for fixed-fee contracts , we recognize revenue upon completion of specific contractual milestones or by using the percentage-of-completion method . software design and development services revenue from contracts for technology integration consulting services where we design/redesign , build and implement new or enhanced systems applications and related processes for clients are recognized on the percentage-of-completion method in accordance with fasb asc 605-985-25-88 through 107. percentage-of-completion accounting involves calculating the percentage of services provided during the reporting period compared to the total estimated services to be provided over the duration of the contract . estimated revenues for applying the percentage-of-completion method include estimated incentives for which achievement of defined goals is deemed probable . this method is followed where reasonably dependable estimates of revenues and costs can be made . we measure our progress for completion based on either the hours worked as a percentage of the total number of hours of the project or by delivery and customer acceptance of specific milestones as outlined per the terms of the agreement with the customer . estimates of total contract revenue and costs are continuously monitored during the term of the contract , and recorded revenue and costs are subject to revision as the contract progresses . such revisions may result in increases or decreases to revenue and income and are reflected in the financial statements in the periods in which they are first identified . if estimates indicate that a contract loss will occur , a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable . contract losses are determined to be the amount by which the estimated direct and indirect costs of the contract exceed the estimated total revenue that will be generated by the contract and are included in cost of sales and classified in accrued expenses in the balance sheet . our presentation of revenue recognized on a contract completion basis has been consistently applied for all periods presented . we classify the revenue and associated cost on the services and other line within the sales and cost of sales sections of the consolidated statement of operations . in all cases where we apply the contract method of accounting , our only deliverable is professional services , thus , we believe presenting the revenue on a single line is appropriate . costs and estimated earnings recognized in excess of billings on uncompleted contracts are recorded as unbilled services and are included in accounts receivable on the balance sheet . billings in excess of costs and estimated earnings on uncompleted contracts are recorded as deferred revenue until revenue recognition criteria are met . implementation services implementation services revenue is recognized when installation is completed . maintenance and hosting support contracts maintenance and hosting support consists of software updates and support . software updates provide customers with rights to unspecified software product upgrades and maintenance releases and patches released during the term of the support period . support includes access to technical support personnel for software and hardware issues . we also offer a hosting service through our network operations center , or noc , allowing the ability to monitor and support our customers ' networks 7 days a week , 24 hours a day . 31 maintenance and hosting support revenue is recognized ratably over the term of the maintenance contract , which is typically one to three years . maintenance and support is renewable by the customer . rates for maintenance and support , including subsequent renewal rates , are typically established based upon a specified percentage of net license fees as set forth in the arrangement . our hosting support agreement fees are based on the level of service we provide to our customers , which can range from monitoring the health of our customer 's network to supporting a sophisticated web portal . basic and diluted loss per common share basic and diluted loss per common share for all periods presented is computed using the weighted average number of common shares outstanding . basic weighted average shares outstanding include only outstanding common shares . diluted net loss per common share is computed by dividing net loss by the weighted average common and potential dilutive common shares outstanding computed in accordance with the treasury stock method . shares reserved for outstanding stock warrants and options totaling 0.5 million , 0.5 million and 0.8 million for 2012 , 2011 and 2010 , respectively , were excluded from the computation of loss per share as their effect was antidilutive due to our net loss in each of those years . deferred income taxes deferred income taxes are recognized in the financial statements for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates . temporary differences arise from net operating losses , reserves for uncollectible accounts receivables and inventory , differences in depreciation methods , and accrued expenses .
| we received no orders for kiosks for chrysler dealerships during 2012 compared to kiosk orders for 400 chrysler dealerships in 2011. although we have not received any additional ishowroom branded tower orders from chrysler dealers since the second quarter of 2011 , we believe chrysler will further expand the program with further dealership adoption once the inventory we have already delivered and recognized as revenue is deployed from the purchase made in may 2011. however , since we do not have a contract with chrysler requiring it to source all the various components of the solution through us and the purchase of the ishowroom branded towers will remain within the discretion of individual dealerships , we are unable to predict or forecast the timing or value of any future orders . since the start of this program in september 2010 , we have received orders for a total of 661 chrysler and fiat dealerships , substantially all of which has been filled as of december 31 , 2012. the remaining decrease in sales when comparing 2012 to 2011 was due to a decrease in orders from aramark . total sales to aramark in 2012 totaled $ 1.1 million , representing a decrease of 34 % from 2011. although we continued to expand the various aramark branded food concepts to several colleges and universities during 2012 , aramark deployed fewer new food concepts which incorporate our digital menu board solutions in 2012 than in 2011. upon completing the installation for orders received through december 31 , 2012 , the total number of aramark locations being managed through our noc will increase to approximately 299 sites , compared to 250 sites at the end of 2011. partially offsetting the decrease in our revenue when comparing 2012 to 2011 was an increase in revenue generated in 2012 with a new customer , buffalo wild wings . in march 2012 , we rolled out an initial five store deployment of our marketing technology solutions and subsequently received an order for 54 additional stores . the initial five store solution deployed had an emphasis on creating a new guest experience through the interaction of a touchscreen photo booth application , which displays both consumer-generated and client-branded content . additionally , the solution uses unique qr codes and email to allow customers to share their photos with their social networks , extending the content beyond the restaurant 's locations to further promote its brand . in 2012 , we recognized revenue from this customer totaling $ 387,000 which includes the development of
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we believe that this store size is our optimal size operationally and that this size also gives our customers an ideal shopping environment that invites them to shop longer and buy more . in fiscal 2011 , comparable store net sales increased by 6.0 % . the comparable store net sales increase was the result of a 4.8 % increase in the number of transactions and a 1.2 % increase in average ticket . we believe comparable store net sales continued to be positively affected by a number of our initiatives , as debit and credit card penetration continued to increase in 2011 , and we continued the roll-out of frozen and refrigerated merchandise to more of our stores . at january 28 , 2012 we had frozen and refrigerated merchandise in approximately 2,220 stores compared to approximately 1,840 stores at january 29 , 2011. we believe that the addition of frozen and refrigerated product enables us to increase sales and earnings by increasing the number of shopping trips made by our customers . in addition , we accept food stamps ( under the supplemental nutrition assistance program ( “ snap ” ) ) in approximately 3,860 qualified stores compared to 3,500 at the end of 2010. with the pressures of the current economic environment , we have seen continued demand for basic , consumable products in 2011. as a result , we have continued to shift the mix of inventory carried in our stores to more consumer product merchandise which we believe increases the traffic in our stores and has helped to increase our sales even during the current economic downturn . while this shift in mix has impacted our merchandise costs we were able to offset that impact in the current year with decreased costs for merchandise in many of our categories . our point-of-sale technology provides us with valuable sales and inventory information to assist our buyers and improve our merchandise allocation to our stores . we believe that this has enabled us to better manage our inventory flow resulting in more efficient distribution and store operations and increased inventory turnover for each of the last five years . in 2007 , legislation was enacted that increased the federal minimum wage . the last increase to $ 7.25 an hour was effective in july 2009. as a result , our wages increased in the third quarter of 2009 through the first half of 2010 compared with the comparable period in the prior year ; however , we offset the increase in payroll costs through increased productivity and continued efficiencies in product flow to our stores . we must continue to control our merchandise costs , inventory levels and our general and administrative expenses as increases in these line items could negatively impact our operating results . 20 story_separator_special_tag 35.9 % . this increase was due to the net of the following : · occupancy and distribution costs decreased 30 basis points in the current year resulting from the leveraging of the comparable store sales increase . · shrink costs decreased 15 basis points due to improved shrink results in the current year and a lower shrink accrual rate during fiscal 2010 compared to fiscal 2009 . · merchandise costs , including freight , increased 15 basis points due primarily to higher import and domestic freight costs during fiscal 2010 compared to fiscal 2009. selling , general and administrative expenses . selling , general and administrative expenses , as a percentage of net sales , decreased to 24.8 % for 2010 compared to 25.7 % for 2009. the decrease is primarily due to the following : · payroll expenses decreased 45 basis points due to leveraging associated with the increase in comparable store net sales in the current year and lower store hourly payroll . · depreciation decreased 30 basis points primarily due to the leveraging associated with the increase in comparable store net sales in the current year . · store operating costs decreased 20 basis points primarily as a result of lower utility costs as a percentage of sales , due to lower rates in the current year and the leveraging from the comparable store net sales increase in 2010. operating income . operating income margin was 10.7 % in 2010 compared to 9.8 % in 2009. excluding the $ 26.3 million non-cash adjustment to beginning inventory , operating income margin was 11.1 % . due to the reasons noted above , operating income margin , excluding this charge , improved 130 basis points . income taxes . our effective tax rate was 36.9 % in 2010 and 2009. liquidity and capital resources our business requires capital to build and open new stores , expand our distribution network and operate and expand existing stores . our working capital requirements for existing stores are seasonal and usually reach their peak in september and october . historically , we have satisfied our seasonal working capital requirements for existing stores and have funded our store opening and distribution network expansion programs from internally generated funds and borrowings under our credit facilities . 22 the following table compares cash-flow related information for the years ended january 28 , 2012 , january 29 , 2011 and january 30 , 2010 : replace_table_token_10_th net cash provided by operating activities increased $ 167.8 million in 2011 compared to 2010 due to increased earnings before income taxes , depreciation and amortization in the current year , a decrease in cash used to purchase merchandise inventories and an increase in other current liabilities due to increases in sales tax collected and accrued expenses . net cash provided by operating activities decreased $ 62.3 million in 2010 compared to 2009 due to an increase in cash used to purchase merchandise inventories partially offset by increased earnings before income taxes , depreciation and amortization in the current year . net cash used in investing activities decreased $ 288.0 million in 2011 primarily due to an additional $ 170.0 million of proceeds from the sale of short-term investments with minimal purchases of short-term investments compared to $ 157.8 story_separator_special_tag million of purchases in 2010. the proceeds were used to fund the share repurchases in 2011. in addition , in 2010 we used $ 49.4 million to acquire dollar giant . these increased sources of cash were partially offset by a $ 71.4 million increase in capital expenditures in 2011 due to funds for new store projects and the expansion of our distribution center in savannah , georgia . net cash used in investing activities increased $ 161.6 million in 2010 compared with 2009 primarily due to short-term investment activity and the dollar giant acquisition . in 2010 we purchased $ 157.8 million of short-term investments compared to $ 27.8 million in 2009. this was partially offset by an increase in proceeds from the sales of short-term investments of $ 10.8 million in 2010. in 2011 , net cash used in financing activities increased $ 218.9 million as a result of increased share repurchases in 2011. in 2010 , net cash used in financing activities increased $ 243.0 million as a result of increased share repurchases in 2010 and payments of $ 13.8 million for debt acquired from dollar giant . at january 28 , 2012 , our long-term borrowings were $ 265.5 million and our capital lease commitments were $ 0.3 million . we also have $ 110.0 million and $ 75.0 million letter of credit reimbursement and security agreements , under which approximately $ 139.5 million were committed to letters of credit issued for routine purchases of imported merchandise at january 28 , 2012. in february 2008 , we entered into a five-year $ 550.0 million unsecured credit agreement ( the agreement ) . the agreement provides for a $ 300.0 million revolving line of credit , including up to $ 150.0 million in available letters of credit , and a $ 250.0 million term loan . the interest rate on the agreement is based , at our option , on a libor rate , plus a margin , or an alternate base rate , plus a margin . the revolving line of credit also bears a facilities fee , calculated as a percentage , as defined , of the amount available under the line of credit , payable quarterly . the term loan is due and payable in full at the five year maturity date of the agreement . the agreement also bears an administrative fee payable annually . the agreement , among other things , requires the maintenance of certain specified financial ratios , restricts the payment of certain distributions and prohibits the incurrence of certain new indebtedness . as of january 28 , 2012 , the $ 250.0 million term loan is outstanding under the agreement and there were no amounts outstanding under the $ 300.0 million revolving line of credit . 23 we repurchased 8.7 million shares for $ 645.9 million in fiscal 2011. we repurchased 9.3 million shares for $ 414.7 million in fiscal 2010. we repurchased 6.4 million shares for $ 193.1 million in fiscal 2009. at january 28 , 2012 , we have $ 1.2 billion remaining under board authorization . funding requirements overview , including off-balance sheet arrangements we expect our cash needs for opening new stores and expanding existing stores in fiscal 2012 to total approximately $ 205.9 million , which includes capital expenditures , initial inventory and pre-opening costs . our estimated capital expenditures for fiscal 2012 are between $ 330.0 and $ 340.0 million , including planned expenditures for our new and expanded stores , the addition of freezers and coolers to approximately 325 stores and approximately $ 80.0 million to construct a new distribution center in the northeast united states . we believe that we can adequately fund our working capital requirements and planned capital expenditures for the next few years from net cash provided by operations and potential borrowings under our existing credit facility . the following tables summarize our material contractual obligations at january 28 , 2012 , including both on- and off-balance sheet arrangements , and our commitments , including interest on long-term borrowings ( in millions ) : replace_table_token_11_th replace_table_token_12_th 24 lease financing operating lease obligations . our operating lease obligations are primarily for payments under noncancelable store leases . the commitment includes amounts for leases that were signed prior to january 28 , 2012 for stores that were not yet open on january 28 , 2012. long-term borrowings credit agreement . in february 2008 , we entered into a five-year $ 550.0 million unsecured credit agreement ( the agreement ) . the agreement provides for a $ 300.0 million revolving line of credit , including up to $ 150.0 million in available letters of credit , and a $ 250.0 million term loan . the interest rate on the facility will be based , at our option , on a libor rate , plus a margin , or an alternate base rate , plus a margin . the interest rate on the facility was 0.77 % at january 28 , 2012. the revolving line of credit also bears a facilities fee , calculated as a percentage , as defined , of the amount available under the line of credit , payable quarterly . the term loan is due and payable in full at the five year maturity date of the agreement . the agreement also bears an administrative fee payable annually . the agreement , among other things , requires the maintenance of certain specified financial ratios , restricts the payment of certain distributions and prohibits the incurrence of certain new indebtedness . as of january 28 , 2012 , we had the $ 250.0 million term loan outstanding under the agreement and no amounts outstanding under the $ 300.0 million revolving line of credit . revenue bond financing . in may 1998 , we entered into an agreement with the mississippi business finance corporation under which it issued $ 19.0 million of variable-rate demand revenue bonds .
| selling , general and administrative expenses , as a percentage of net sales , decreased to 24.1 % for 2011 compared to 24.8 % for 2010. the decrease is primarily due to the following : · payroll expenses decreased 45 basis points due to leveraging associated with the increase in comparable store net sales in the current year , lower store hourly payroll and lower incentive compensation achievement . · depreciation decreased 25 basis points primarily due to the leveraging associated with the increase in comparable store net sales in the current year . 21 operating income . operating income margin was 11.8 % in 2011 compared to 10.7 % in 2010. excluding the $ 26.3 million non-cash adjustment to beginning inventory , operating income margin was 11.1 % in 2010. due to the reasons noted above , operating income margin excluding this charge , improved 70 basis points . income taxes . our effective tax rate was 37.4 % in 2011 and 36.9 % in 2010. fiscal year ended january 29 , 2011 compared to fiscal year ended january 30 , 2010 net sales . net sales increased 12.4 % , or $ 651.2 million , in 2010 compared to 2009 , resulting from a 6.3 % increase in comparable store net sales and sales in our new stores . comparable store net sales are positively affected by our expanded and relocated stores , which we include in the calculation , and , to a lesser extent , are negatively affected when we open new stores or expand stores near existing ones . the following table summarizes the components of the changes in our store count for fiscal years ended january 29 , 2011 and january 30 , 2010. replace_table_token_9_th of the 2.9 million selling square foot increase in 2010 , approximately 0.4 million was added by expanding existing stores and 0.7 million was the result of the acquisition of the dollar giant stores . gross profit margin was 35.5 % in 2010 and 2009. excluding the effect of
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we generate a substantial majority of our sales through our global channel distribution network , including , as of december 31 , 2020 , approximately 170 distributors that we sell to directly , together with over 9,000 value added resellers and system integrators supplied by these distributors , for further sales to end-users . our channel partners provide lead generation , pre-sales support and product fulfillment , along with professional services for network design , installation , commissioning and on-going field support . although we fulfill sales almost exclusively through our channel partners , through our global sales team we engage directly with network operators in our key vertical markets including service providers , enterprises , industrials , defense and national security entities , and state and local governments . our sales team responds to bids or requests for quotes , typically in collaboration with a channel partner . our distributors carry inventory of our products for resale , and generally have stock rotation rights only if they simultaneously place an off-setting order for product . as such , we generally recognize revenue from sales to distributors on a sell-in basis , and manage our finished goods inventory to plan for distributor demand . we outsource production to third-party manufacturers , who are responsible for purchasing and maintaining inventory of components and raw materials and , in certain cases , we resell third-party products on a white-label basis . we believe that this approach gives us the advantages of relatively low capital investment and significant flexibility in scheduling production , managing inventory levels and providing a comprehensive solution to meet network operator demand . the majority of our products are delivered to us at one of three distribution hubs , where we have outsourced the warehousing and delivery of our products to a third-party logistics provider and from which we manage worldwide fulfillment . trends and the impact of covid-19 although the outbreak of covid-19 has resulted and is likely to continue to result in disruption to our business and operations as well as the operations of our customers and suppliers , the severity of the impact has lessened , and our markets are recovering as the need for additional connectivity grows . we have experienced increases in customer demand , as a result of strong demand for pmp products as the need for connectivity grows , as schools , businesses , and enterprises continue to operate remotely , and increased ptp revenues from improved federal business . in addition , we have seen a strong recovery in enterprise wi-fi solutions driven by improved field deployments and the transition to wi-fi 6 solutions . we also experienced increases in product sales in connection with our wireless broadband solutions for customers accessing the cbrs band . we have benefitted from investments we have made over the past few years in fixed wireless infrastructure technologies in such areas as pmp , including cbrs-compatible products in the u.s. and in new opportunities such as gigabit wireless solutions with our 60 ghz millimeter wave products , our new enterprise wi-fi 6 , and cloud-enabled wireless switching products . our forthcoming 5g 28 ghz millimeter wave products are expected in 2021 , further accelerating this trend as we enter markets demanding higher broadband performance , and in the u.s. the first phase of the rural digital opportunity fund , or rdof , launched by the federal communications commission , or fcc , is expected to accelerate the provision of high-speed broadband service to millions of underserved communities in the u.s. over the next ten years . however , we expect that continued social distancing measures , continuing shutdowns globally that impact the ability of our end user customers to deploy our products , and continued restrictions and even cessation in travel impacting our sales activities , and general business uncertainty will continue to negatively impact demand in several of our markets . in addition , although all of our major suppliers are currently operating , reductions in production due to mandated closures of or labor restrictions as our third-party manufacturers continue to battle the covid-19 pandemic . our supply operations remain impacted by covid-19 . for example , at least one of our mechanical suppliers has ceased operating , causing us to move production to an alternative supplier . in addition , we are experiencing component part shortages , as the global integrated circuit supply is under pressure as demand surpasses supply capacity for certain chipsets , causing foundries to allocate existing supply among their customers . logistics challenges have arisen as container shortages in china lengthen availability times of containers and carriage , resulting in increases in relevant freight costs , all at a time when demand across many of our product lines has increased . as a result , we are experiencing increased lead times for the supply of some of our products . we are working with our suppliers to meet our forecasted demand . our suppliers and third-party manufacturers could continue to be disrupted by parts and component shortages , workers absenteeism , quarantines , office and factory closures , disruptions to ports and other shipping infrastructure , or other travel or health- 41 related restrictions . if our supply chain operations continue to be affected or are curtailed by the outbreak of diseases such as covid-19 , our supply chain , manufacturing , and product shipments will be delayed , which could adversely affect our business , operations and customer relationships . we have and may continue to need to seek alternate sources of supply which may be more expensive , unavailable or may result in delays in shipments to us and from our supply chain and subsequently to our customers . we have experienced and expect to continue to experience an increase in certain costs , particularly transportation and logistics expenses . freight and logistics constraints caused in part by restrictions imposed by governments to combat the covid-19 pandemic , have increased costs and constrained available transport , for us and our channel partners . story_separator_special_tag the pandemic could lead to an extended disruption of economic activity and the impact on our consolidated results of operations , financial position and cash flows could be material . we are focused on making sure our employees are safe and continue to operate with a substantial portion of our workforce working from home . we continue to evaluate our timing to open our offices based on the availability and deployment of vaccines among our workforce . we have extended remote working for the first half of 2021and will monitor conditions for extending this further into 2021. while we continue to significantly reduce travel , with the opening in certain countries and the easing of shutdowns in many locations , we are allowing select travel to meet customer needs . the third parties that perform our manufacturing , assembly , packaging and shipping have generally remained operational . the extent of the impact of the covid-19 pandemic on our operational and financial performance will depend on future developments , including the duration , severity and spread of the pandemic , related restrictions on travel and transportation and other actions that may be taken by governmental authorities and the impact to the business of our suppliers or customers , all of which are uncertain and can not be predicted . in addition , a substantial portion of our wi-fi products are manufactured in china , and we continue to monitor tensions between the u.s. and china and their potential impact on our ability to produce and ship our products . to date , no disruption in production or shipments have occurred since china re-opened facilities following the covid-19 induced shutdown at the end of 2019 , other than capacity constraint caused by component shortages . we have , however , continued to incur costs related to increased tariffs for china-manufactured goods , and should tensions escalate , our ability to manufacture our products in china could be affected , causing disruptions in our supply chain , and requiring us to seek other sources of supply . with respect to liquidity , we believe our balance sheet will provide us the necessary capital to navigate the covid-19 pandemic . in addition , during 2020 , we implemented several initiatives to conserve cash and optimize profitability , including limiting discretionary spending , temporarily reducing personnel costs , eliminating non-essential travel , delaying or reducing hiring activities , deferring certain discretionary capital expenditures . xirrus acquisition in august 2019 , we acquired select assets and assumed select liabilities of the xirrus wi-fi products and cloud services business from riverbed technology , inc. xirrus has a portfolio of high performance enterprise wi-fi access points and subscription services . we paid $ 2.0 million upon closing and the agreement provided for additional $ 3.0 million of contingent consideration subject to xirrus attaining certain booking targets . as of december 31 , 2019 , all booking targets were met and we paid the full $ 3.0 million of consideration through february 2020. this acquisition is intended to enhance and accelerate our existing network service application capabilities . we account for business combinations in accordance with asc 805 , business combinations . we recorded the acquisition using the acquisition method of accounting and recognized assets and liabilities at their fair value as of the date of acquisition . we based the preliminary allocation of the purchase price on estimates and assumptions known at the date of acquisition that are subject to change within the purchase price allocation period , which is generally one year from the acquisition date . our review of the purchase price allocation was completed in the period ended june 30 , 2020. we determined the estimated fair value of identifiable intangible assets acquired primarily using an income approach . basis of presentation revenues our revenues are generated primarily from the sale of our products , which consist of hardware with essential embedded software . our revenues also include limited amounts for software products , extended warranty on hardware products and subscription services . we generally recognize product revenues at the time of shipment , provided that all other revenue recognition criteria have been met . revenues are recognized net of estimated stock returns , volume-based rebates and cooperative marketing allowances that we provide to distributors . we recognize subscription services revenue ratably over the term in which the services are provided and our performance obligation is satisfied . we provide a standard warranty on our hardware products , with the term depending on the product , and record a liability for the estimated future costs associated with potential warranty claims . in addition , we also offer extended warranties for purchase and represents a future performance obligation for us . the extended warranty is included in deferred 42 revenues and is recognized on a straight-line basis over the term of the extended warranty . we provide our cnmaestro , linkplanner and cnarcher applications as supplemental tools to help network operators design , install , and manage their networks , and as a means of driving sales of our hardware products . cost of revenues and gross profit our cost of revenues is comprised primarily of the costs of procuring finished goods from our third-party manufacturers , third-party logistics and warehousing provider costs , freight costs and warranty costs . we outsource our manufacturing to third-party manufacturers located primarily in mexico , china , israel and taiwan . cost of revenues also includes costs associated with supply operations , including personnel related costs , provision for excess and obsolete inventory , third-party license costs and third-party costs related to services we provide . from and after our initial public offering in june 2019 , cost of revenues also includes share-based compensation expense . gross profit has been and will continue to be affected by various factors , including changes in product mix . the margin profile of products within each of our core product categories can vary significantly depending on the operating performance , features and manufacturer of the product .
| complementing this overall trend , revenue growth in 2020 also benefitted from continued expansion of our channel , with total registered channel partners of more than 9,000 as of december 31 , 2020. revenues by product category replace_table_token_6_th point-to-multi-point our pmp product line comprised 58 % of total revenues for 2019 and 62 % of total revenues for 2020. pmp revenue growth was attributable to continued growth in core pmp products from increased network traffic and demand for our cbrs solutions , as well as the benefit from new product introductions . point-to-point ptp revenue decreased due to softer demand in the defense sector . 45 wi-fi wi-fi revenue increased primarily as a result of recent new product introductions , including wi-fi 6 and cnmatrix , as well as a full year of sales of xirrus products and services which was acquired in august 2019. revenues by geography replace_table_token_7_th revenues increased in 2020 compared to 2019 reflecting higher revenue in north america partially offset by decreases in all other regions . north america contributed 53 % of total revenues in 2020 compared with 46 % in 2019 due to increased revenues of 20.2 % in 2020. the increased revenues in north america was driven by higher revenues for pmp , wi-fi and other products , driven mostly by higher pmp revenues due to increased demand for cbrs and robust network traffic , partially offset by decreased ptp revenues due to the softer demand in the defense industry . europe , middle east , africa revenues decreased mostly due to a technology transition resulting in lower pmp sales to a large customer in italy partially offset by increases in revenues of wi-fi products . caribbean and latin america revenues decreased due to lower pmp revenues as a result of adverse economic conditions and currency exchange rates and the impact from business shutdowns and other restrictions due to the covid-19 pandemic . the decrease in asia pacific revenues was driven by lower revenue across all product categories due to softened demand along with the impact of business shutdowns and other restrictions due to the covid-19 pandemic . cost of revenues and gross margin replace_table_token_8_th cost of revenues increased $ 3.2 million , or 2.4 % , from $ 135.8 million for 2019 to $
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on august 3 , 2018 , we acquired storetail , a paris-based pioneering retail media technology platform enabling retailers to monetize native placements on their ecommerce sites . transition to u.s. gaap and change in reporting currency as of june 30 , 2015 , we no longer met the requirements to qualify as a foreign private issuer under the exchange act . as a result , we began reporting as a domestic registrant as of january 1 , 2016 and we are required under current sec rules to prepare our financial statements in accordance with u.s. gaap , rather than ifrs , and to present our financial information in u.s. dollars instead of euros . the transition from consolidated financial statements under ifrs to u.s. gaap only impacted the presentation of our consolidated statement of financial position ( order of liquidity ) and of our consolidated statement of cash flows ( effect of exchange rate changes on cash and cash equivalents ) . the functional currency of the company remains the euro , while our reporting currency changed from the euro to the u.s. dollar . consequently , since we incur portions of our expenses and derive revenues in currencies other than the euro , we are exposed to foreign currency exchange risk as our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates . foreign exchange risk exposure also arises from intra-company transactions and financing with subsidiaries that have a functional currency different than the euro . 73 a. operating results . basis of presentation the key elements of our results of operations include : revenue we sell personalized display advertisements featuring product-level recommendations either directly to clients or to advertising agencies . historically , the criteo model has focused solely on converting our clients ' website visitors into customers , enabling us to charge our clients only when users engage with an ad we deliver , usually by clicking on it . more recently , we have expanded our solutions to address a broader range of marketing goals for our clients . we offer two families of solutions to our commerce and brand clients : criteo marketing solutions allow commerce companies to address multiple marketing goals by engaging their consumers with personalized ads across the web , mobile and offline store environments . criteo retail media solutions allow retailers to generate advertising revenues from consumer brands , and or to drive sales for themselves , by monetizing their data and audiences through personalized ads , either on their own digital property or on the open internet , that address multiple marketing goals . in conjunction with expanding our solutions , we have also started expanding our pricing models to now include a combination of cost-per-install and cost-per-impression for selected new solutions , in addition to cost-per-click . we recognize revenues when we transfer control of promised services directly to our clients or to advertising agencies , which we collectively refer to as our clients , in an amount that reflects the consideration to which we expect to be entitled to in exchange for those services . for campaigns priced on a cost-per-click and cost-per-install basis , we bill our clients when a user clicks on an advertisement we deliver or installs an application by clicking on an advertisement we delivered , respectively . for these pricing models , we recognize revenue when a user clicks on an advertisement or installs an application . for campaigns priced on a cost-per-impression basis , we bill our clients based on the number of times an advertisement is displayed to a user . for this pricing model , we recognize revenue when an advertisement is displayed . we act as principal in our arrangements because ( i ) we control the advertising inventory ( spaces on websites ) before it is transferred to our clients ; ( ii ) we bear sole responsibility for fulfillment of the advertising promise and inventory risks and ( iii ) we have full discretion in establishing prices . therefore , based on these factors , we report revenue earned and the related costs incurred on a gross basis . cost of revenue our cost of revenue primarily includes traffic acquisition costs and other cost of revenue . traffic acquisition costs . traffic acquisition costs consist primarily of purchases of impressions from publishers on a cpm basis . we purchase impressions directly from publishers or third-party intermediaries , such as advertisement exchanges . we recognize cost of revenue on a publisher by publisher basis as incurred . costs owed to publishers but not yet paid are recorded in our consolidated statements of financial position as trade payables . for some solutions within criteo retail media , we pay for the inventory of our retailer partners on a revenue sharing basis , effectively paying the retailers a portion of the click-based revenue generated by user clicks on the sponsored products advertisements displaying the products of our consumer brand clients . for a discussion of the trends we expect to see in traffic acquisition costs , see the section entitled `` - highlights and trends - revenue ex-tac '' in item 7.d - trend information below . other cost of revenue . other cost of revenue includes expenses related to third-party hosting fees , depreciation of data center equipment and the cost of data purchased from third parties . the company does not build or operate its own data centers and none of its research and development employments are dedicated to revenue generating activities . as a result , we do not include the costs of such personnel in other cost of revenue . 74 operating expenses operating expenses consist of research and development , sales and operations , and general and administrative expenses . salaries , bonuses , equity awards compensation , pension benefits and other personnel-related costs are the most significant components of each of these expense categories . we grew from 2,503 employees at january 1 , 2017 to 2,755 employees at december 31 , 2019 . story_separator_special_tag we include equity awards compensation expense in connection with grants of share options , warrants , and restricted share units ( `` rsus '' ) in the applicable operating expense category based on the respective equity award recipient 's function ( research and development , sales and operations , general and administrative ) . research and development expense . research and development expense consists primarily of personnel-related costs for our employees working in the engine , platform , site reliability engineering , scalability , infrastructure , engineering program management , product , analytics and other teams , including salaries , bonuses , equity awards compensation and other personnel related costs . our research and development function was supplemented in january 2013 to include a dedicated product organization following the appointment of a chief product officer . also included are non-personnel costs such as subcontracting , consulting and professional fees to third-party development resources , allocated overhead and depreciation and amortization costs . these expenses are partially offset by the french research tax credit that is conditional upon the level of our expenditures in research and development . our research and development efforts are focused on enhancing the performance of our solution and improving the efficiency of the services we deliver to our clients and publisher partners . all development costs , principally headcount-related costs , are expensed as management determines that technological feasibility is reached , shortly before the release of the developed products or features . as a result , the development costs incurred after the establishment of technological feasibility and before the release of those products or features are not material and , accordingly , are expensed as incurred . capitalized costs mainly relates to internally developed internal-use software and it licenses . the number of employees in research and development functions grew from 603 at january 1 , 2017 to 681 at december 31 , 2019 . on october 7 , 2019 , in connection with the new organization structure , the company announced a plan to restructure its r & d activities with the closing of its r & d operations in palo alto , and we expect our headcount to be slightly reduced upon completion of this restructuring . we expect research and development expenses to slightly decrease as a percentage of our revenue . we believe our continued investment in research and development to be critical to maintaining and improving our technology within the criteo platform , our quality of service and our competitive position . sales and operations expense . sales and operations expense consists primarily of personnel-related costs for our employees working in our sales , account strategy , sales operations , publisher business development , analytics , marketing , technical solutions , creative services and other teams , including salaries , bonuses , equity awards compensation , and other personnel-related costs . additional expenses in this category include travel and entertainment , marketing and promotional events , marketing activities , provisions for doubtful accounts , subcontracting , consulting and professional fees paid to third parties , allocated overhead and depreciation and amortization costs . the number of employees in sales and operations functions declined from 1,489 at january 1 , 2017 to 1,578 at december 31 , 2019 . in order to expand our business , we expect to make targeted investments in our resources in some areas of our sales and operations . yet , we expect sales and operations expenses to remain fairly flat as a percentage of revenue over time as weincrease the productivity of our sales and operations teams . general and administrative expense . general and administrative expense consists primarily of personnel costs , including salaries , bonuses , equity awards compensation , pension benefits and other personnel-related costs for our administrative , legal , information technology , human resources , facilities and finance teams . additional expenses included in this category include travel-related expenses , subcontracting and professional fees , audit fees , tax services and legal fees , as well as insurance and other corporate expenses , along with allocated overhead and depreciation and amortization costs . the number of employees in general and administrative functions grew from 411 at january 1 , 2017 to 496 at december 31 , 2019 . we expect our general and administrative expense to decrease as a percentage of revenue over time as we increase the productivity of our general and administrative teams . 75 financial income ( expense ) financial income ( expense ) primarily consists of : exchange differences arising on the settlement or translation into local currency of monetary balance sheet items labeled in euros ( the company 's functional currency ) . we are exposed to changes in exchange rates primarily in the united states , the united kingdom , japan , korea and brazil . the u.s. dollar , the british pound , the korean won , the japanese yen and the brazilian real are our most significant foreign currency exchange risks . at december 31 , 2019 , our exposure to foreign currency risk was centralized at parent company level and hedged . these exchange differences in euro are then translated into u.s. dollars ( the company 's reporting currency ) according to the average euro/u.s . dollar exchange rate . interest received on our cash and cash equivalents and interest incurred on outstanding borrowings under our debt loan agreements and revolving credit facilities ( `` rcfs '' ) . we monitor foreign currency exposure and look to mitigate exposures through normal business operations and hedging strategies . provision for income taxes we are subject to potential income taxes in france , the united states and numerous other jurisdictions . we recognize tax liabilities based on estimates of whether additional taxes will be due . these tax liabilities are recognized when we believe that certain positions may not be fully sustained upon review by tax authorities , notwithstanding our belief that our tax return positions are supportable .
| growth was driven by the acceleration of our midmarket business driven by larger midmarket clients , as well as continued traction in our criteo retail media business in the u.s. , partly offset by lower retargeting spend by large clients . 81 our revenue in the emea region decreased ( 4 ) % ( or increased 1 % on a constant currency basis ) to $ 806.2 million for 2019 compared to 2018 . this increase at constant currency was largely driven by accelerated growth in our midmarket business and by the positive traction of our new solutions , including retail media , partly offset by softer business with large customers . our revenue in the asia-pacific region decreased ( 1 ) % ( or ( 0.2 ) % on a constant currency basis ) to $ 503.2 million for 2019 compared to 2018 . this slight decrease at constant currency was driven by a slow-down in our large customer business in japan , south-east asia and australia , despite strong growth across client categories in korea and our growing midmarket business across the region . additionally , our $ 2,261.5 million of revenue for 2019 was negatively impacted by $ ( 51.4 ) million of currency fluctuations , particularly as a result of the depreciation of the japanese yen , the british pound , the korean won , the brazilian real and the euro , compared to the u.s. dollar . the year-over-year growth in revenue on a constant currency basis was entirely attributable to an increased number of clicks delivered on the advertising banners displayed by us and the increased number of impressions delivered by us , offsetting the decrease in the average cost-per-click charged to advertisers . 2018 compared to 2017 revenue for 2018 increased $ 3.6 million , or 0.2 % ( or decreased ( 1 ) % on a constant currency basis ) to $ 2,300.3 million , compared to 2017 . revenue was impacted by the discontinuation of certain products over the period . revenue from new clients contributed
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we will not generate revenue from product sales unless and until we successfully commercialize one of our product candidates , after completing clinical development and obtaining regulatory approval . if we obtain regulatory approval for any of our product candidates , we expect to incur significant expenses related to developing our commercialization capability to support product sales , marketing , and distribution . further , we expect to incur additional costs associated with operating as a public company . as a result , we will need substantial additional funding to support our continuing operations and pursue our growth strategy . until such time as we can generate significant revenue from product sales , if ever , we expect to finance our operations through our collaboration agreement with merck and a combination of equity offerings , debt financings and collaborations or licensing arrangements . we may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms , or at all . if we fail to raise capital or enter into such agreements as , and when , needed , we may have to significantly delay , scale back our development or commercialization plans for one or more of our product candidates . because of the numerous risks and uncertainties associated with pharmaceutical product development , we are unable to accurately predict the timing or amount of increased expenses or when , or if , we will be able to achieve or maintain profitability . even if we are able to generate product sales , we may not become profitable . if we fail to become profitable or are unable to sustain profitability on a continuing basis , then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations . covid-19 in march 2020 , covid-19 was declared a global pandemic by the world health organization , and to date the covid-19 pandemic continues to present a substantial public health and economic challenge around the world . the length of time and full extent to which the covid-19 pandemic will directly or indirectly impact our business , results of operations and financial condition will depend on future developments that are highly uncertain , subject to change and are difficult to predict . while we continue to conduct our research and development activities , the covid-19 pandemic may cause disruptions that affect our ability to initiate and complete preclinical studies , ongoing and future clinical trials or to procure items that are essential for our research and development activities . 92 we plan to continue to closely monitor the ongoing impact of the covid-19 pandemic on our employees and our business operations . in an effort to provide a safe work environment for our employees , we have , among other things , increased the cadence of sanitization of our office and lab facilities , implemented various social distancing measures in our office and labs including replacing in-person meetings with virtual interactions , and are providing personal protective equipment for our employees present in our office and lab facilities . we expect to continue to take actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees and other business partners in light of the pandemic . components of our results of operations collaboration revenue to date , we have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products in the near future . if our development efforts for our product candidates are successful and result in regulatory approval or licenses with third parties , we may generate revenue in the future from product sales , milestone payments under our existing collaboration agreement or payments from other license agreements that we may enter into with third parties . in july 2020 , we entered into a strategic research collaboration and license agreement , or the collaboration agreement , with merck , pursuant to which we will apply our proprietary gene traffic control platform to discover and develop novel therapeutics . under the collaboration agreement , we granted merck exclusive global rights to develop and commercialize drugs that target dysregulation of a single transcription factor . under the terms of the collaboration agreement , we received a nonrefundable upfront payment of $ 15.0 million from merck , and are eligible to receive up to $ 245.0 million upon achievement of specified research , development and regulatory milestones by any product candidate generated by the collaboration , and up to $ 165.0 million upon achievement of specified sales-based milestones per approved product from the collaboration , if any , as well as royalties on sales of any approved product from the collaboration . we can not provide assurance as to the timing of future milestone or royalty payments or that we will receive any of these payments at all . we record revenue over the research term as we satisfy our performance obligation under the collaboration agreement . accordingly , the upfront payment of $ 15.0 million is being recognized as revenue using the cost-to-cost method , which we believe best depicts the transfer of control to the customer over time . under the cost-to-cost method , the extent of progress towards completion is measured based on the ratio of actual costs incurred to the total estimated costs expected upon satisfying the identified single performance obligation . we expect revenue to fluctuate as the achievement of milestones becomes probable and as our efforts to satisfy our performance obligation vary from period to period . in estimating the total costs to satisfy our performance obligation pursuant to the collaboration agreement , we are required to make significant estimates including an estimate of the number of transcription factor substitutions and the expected time and expected costs to fulfill the performance obligation . story_separator_special_tag the cumulative effect of revisions to the total estimated costs to complete our performance obligation will be recorded in the period in which the changes are identified , and amounts can be reasonably estimated . while such revisions will have no impact on our cash flows , a significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods . as of december 31 , 2020 , we recorded $ 14.6 million of the upfront payment as deferred revenue and recognized $ 0.4 million of revenue under the collaboration agreement . operating expenses our operating expenses are comprised of research and development expenses and general and administrative expenses . 93 research and development expenses research and development expenses consist primarily of costs incurred for our research activities , including our discovery efforts , and progressing our programs , which include : personnel-related costs , including salaries , benefits and stock-based compensation expense , for employees engaged in research and development functions ; expenses incurred in connection with our research programs and preclinical and clinical development of our product candidates , including under agreements with third parties , such as consultants and contractors and contract research organizations , or cros ; the cost of manufacturing drug substance and drug product for use in our research and preclinical studies and clinical trials under agreements with third parties , such as consultants and contractors and contract development and manufacturing organizations , or cdmos ; laboratory supplies and research materials ; facilities , depreciation and amortization and other expenses , which include direct and allocated expenses for rent and maintenance of facilities and insurance ; and payments made under third-party licensing agreements . we track our direct external research and development expenses on a program-by-program basis . these consist of costs that include fees , reimbursed materials , and other costs paid to consultants , contractors , cdmos , and cros in connection with our preclinical , clinical and manufacturing activities . we do not allocate employee costs , costs associated with our discovery efforts , laboratory supplies , and facilities expenses , including depreciation or other indirect costs , to specific product development programs because these costs are deployed across multiple programs and our platform and , as such , are not separately classified . we expect that our research and development expenses will increase substantially as we advance our programs into clinical development and expand our discovery , research and preclinical activities in the near term and in the future . at this time , we can not accurately estimate or know the nature , timing and costs of the efforts that will be necessary to complete the preclinical and clinical development of any product candidates we may develop . a change in the outcome of any number of variables with respect to product candidates we may develop could significantly change the costs and timing associated with the development of that product candidate . we may never succeed in obtaining regulatory approval for any product candidates we may develop . general and administrative expenses general and administrative expenses consist primarily of personnel-related costs , including salaries , benefits and stock-based compensation , for employees engaged in executive , legal , finance and accounting and other administrative functions . general and administrative expenses also include professional fees for legal , patent , consulting , investor and public relations and accounting and audit services as well as direct and allocated facility-related costs . we anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research activities and development of our programs and platform . we also anticipate that we will continue to incur increased accounting , audit , legal , regulatory , compliance , director and officer insurance costs and investor and public relations expenses associated with operating as a public company . other income ( expense ) interest expense interest expense consists of interest expense associated with outstanding borrowings under our loan agreements as well as the amortization of debt discount associated with such agreements . 94 interest income and other income ( expense ) , net interest income consists of interest earned on our invested cash balances . other income ( expense ) consists of sublease income and miscellaneous expense unrelated to our core operations . income taxes since our inception , we have not recorded any income tax benefits for the net losses we have incurred or for the research and development tax credits earned in each period , as we believe , based upon the weight of available evidence , that it is more likely than not that all of our net operating loss carryforwards and tax credit carryforwards will not be realized . as of december 31 , 2020 , we had federal and state net operating loss carryforwards of $ 147.3 million and $ 132.3 million , respectively , which may be available to offset future taxable income . the federal net operating loss carryforwards include $ 12.5 million which expire at various dates beginning in 2035 and $ 134.8 million which carryforward indefinitely but in some circumstances may be limited to offset 80 % of annual taxable income . the state net operating loss carryforwards expire at various dates beginning in 2036. as of december 31 , 2020 , we also had federal and state research and development tax credit carryforwards of $ 3.4 million and $ 2.0 million , respectively , which may be available to reduce future tax liabilities and expire at various dates beginning in 2036 and 2031 , respectively . due to our history of cumulative net losses since inception and uncertainties surrounding our ability to generate future taxable income , we have recorded a full valuation allowance against our net deferred tax assets at each balance sheet date . critical accounting policies and significant judgments and estimates our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the united states , or gaap .
| the increase in facility-related expenses and other of $ 6.5 million was due to the increased costs of supporting a larger group of research and development personnel and their research efforts , including increased rent expense related to our new facility lease , which commenced in january 2020. general and administrative expenses the following table summarizes our general and administrative expenses for the years ended december 31 , 2020 and 2019 : replace_table_token_3_th general and administrative expenses were $ 11.2 million for the year ended december 31 , 2020 , compared to $ 6.7 million for the year ended december 31 , 2019. the increase in personnel-related costs of $ 2.3 million was a result of an increase in headcount in our general and administrative function to support our business . the increase in professional and consultant fees of $ 1.2 million was primarily due to higher costs associated with 99 operating as a public company . the increase in facility-related expenses and other of $ 1.1 million was due to the increased rent expense related to our new facility lease , which commenced in january 2020 as well as an increase due to directors and officers insurance . other income ( expense ) interest expense was $ 1.0 million for the year ended december 31 , 2020 , compared to $ 0.5 million for the year ended december 31 , 2019. the increase was due primarily to increased borrowings under our loan facility . interest income and other income ( expense ) , net was $ 1.0 million for the year ended december 31 , 2020 and consisted primarily of sublease income of $ 1.0 million related to the sublease that began in july 2020 and $ 0.1 million of interest income . interest income and other income ( expense ) , net of $ 0.5 million for the year ended december 31 , 2019 consisted primarily of $ 0.5 million of interest income . interest income decreased from the year ended december 31 , 2019 to the same period in 2020 primarily due to lower interest rates on invested balances . we recorded a loss on debt extinguishment of $ 0.2
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the accounting estimate related to valuation of inventories is considered a “ critical accounting estimate ” because it is susceptible to changes from period-to-period due to the requirement for management to make estimates relative to each of the underlying factors , ranging from purchasing to sales , production , and after-sale support . if actual demand , market conditions or product life cycles differ from estimates , inventory adjustments to lower market values would result in a reduction to the carrying value of inventory , an increase in inventory write-offs and a decrease to gross margins . the company wrote down to net realizable value all of its component and finished goods inventory related to its iwear video headphones resulting from the decision in 2016 to reduce the suggested retail selling price to a price below the cost . the write down provision totaled $ 1,124,401 and represented the estimated net realizable of such existing inventory , net of the costs of completion of components and work in progress at that time . in 2017 , an additional provision was recorded in the amount of $ 1,151,482. these provisions were included in operating expenses on the consolidated statements of operations . carrying value of long-lived assets if facts and circumstances indicate that a long-lived asset , including a products ' mold tooling and equipment , may be impaired , the carrying value is reviewed in accordance with fasb asc topic 360-10 accounting for the impairment or disposal of long-lived assets . if this review indicates that the carrying value of the asset will not be recovered as determined based on projected undiscounted cash flows related to the asset over its remaining life , the carrying value of the asset is reduced to its estimated fair value . impairment losses are dependent on a number of factors such as general economic trends and major technology advances , and thus could be significantly different than historical results . no impairment charges on tooling and equipment were recorded in 2018 , 2017 or 2016. we perform a valuation of our patents and trademark assets when events or circumstances indicate their carrying amounts may be unrecoverable . there was no impairment charge recorded in 2018 or 2017. we recorded an impairment charge of $ 20,506 representing cost of $ 44,371 , less accumulated amortization of $ 23,865 in 2016 regarding our abandoned patents and trademarks . the value of the remaining intellectual property , such as patents and trademarks , were valued ( net of accumulated amortization ) at $ 1,164,543 as of december 31 , 2018 , because management believes that its value is recoverable . software development costs the company capitalizes the costs of obtaining and developing its software once technological feasibility has been determined by management . such costs are accumulated and capitalized . these projects could take several years to complete . the capitalized costs are then amortized over 3 to 5 years on a straight-line basis . unsuccessful or discontinued software projects are written off and expensed in the fiscal period where the application is abandoned or discontinued . the value of the unamortized software development costs remaining were valued ( net of accumulated amortization ) at $ 200,000 as of december 31 , 2018 , because management believes that its value is recoverable . revenue recognition the company adopted the new guidance on revenue from contracts with customers under topic 606 as of january 1 , 2018. refer to note 2 for further discussion on the impact of this adoption . product sales represent the majority of the company 's revenue . the company recognizes revenue from these product sales as performance obligations are satisfied and transfer of control to the customer has occurred , typically upon physical shipment . revenue is recognized in the amount that the company expects to receive in exchange from the sale of our products . fob shipping point is our standard shipping terms and revenue is recognized as our products ship to customers , as control is transferred at this point in time . all of our standard products sales include a 30-day money back guarantee and expected returns are estimated at each reporting period date and a portion of revenue is deferred for all estimated returns . as of december 31 , 2018 , deferred revenue associated with our expected returns was immaterial . the company collects and remits sales taxes in certain jurisdictions and reports revenue net of any associated sales taxes . revenue from any engineering consulting and other services is recognized at the time the services are rendered . the company accounts for its longer-term development contracts , which to date have all been firm fixed-priced contracts , on the percentage-of-completion method , whereby income is recognized as work on contracts progresses , but estimated losses on contracts in progress are charged to operations immediately . the percentage-of-completion is determined using the cost-to-cost method . to date , all such contracts have been less than one calendar year in duration . product warranty warranty obligations are generally incurred in connection with the sale of our products . the warranty period for these products is generally one year except in certain european countries where it can be two years for some consumer-focused products . warranty costs are accrued , to the extent that they are not recoverable from third-party manufacturers , for the estimated cost to repair or replace products for the balance of the warranty periods . we provide for the costs of expected future warranty claims at the time of product shipment or over-builds to cover replacements . the adequacy of the provision is assessed at each quarter end and is based on historical experience of warranty claims and costs . the costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale . future warranty costs are estimated based on historical performance rates and related costs to repair given products . story_separator_special_tag the accounting estimate related to product warranty is considered a “ critical accounting estimate ” because judgment is exercised in determining future estimated warranty costs . should actual performance rates or repair costs differ from estimates , revision to the estimated warranty liability would be required . derivatives and fair value measurements fasb asc topic 820 fair value measurements and disclosures ( asc 820 ) defines fair value , establishes a framework for measuring fair value in generally accepted accounting principles , and expands disclosures about fair value measurements . asc 820 clarifies that 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 . asc 820 permits an entity to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period . in accordance with asc 815-10-25 derivatives and hedging , we measured the derivative liability using a monte carlo options lattice pricing model at their issuance date and subsequently as they are remeasured . accordingly , at the end of each quarterly reporting date , the derivative fair market value is remeasured and adjusted to current market value . derivatives that have more than one year remaining in their life are shown as long term . significant unobservable inputs are used in the fair value measurement of the company 's derivative liability . the primary input factors driving the economic or fair value of the derivatives warrants and convertible notes are the stock price of the company 's shares , the price volatility of the shares , reset events , and exercise behavior . an important valuation input factor used in determining fair value was the expected volatility of observed share prices and the probability of projected resets in warrant exercise and note conversion prices from financing before each security 's maturity . for exercise behavior , the company assumed that without a target price of two times the projected reset price or higher , the holders of the warrants and convertible notes would hold to maturity . in determining the fair value of the derivative it was assumed that the company 's business would be conducted as a going concern and that holding to maturity was reasonable . further , the january 2 , 2015 series a preferred financing reduced the expected probability to near zero for price resets from financing events . 35 asc 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value . level 1 inputs are quoted prices in active markets for identical assets or liabilities . level 2 inputs are inputs other than quoted prices included in level 1 that are directly or indirectly observable for the asset or liability . such inputs include quoted prices in active markets for similar assets and liabilities , quoted prices for identical or similar assets or liabilities in markets that are not active , inputs other than quoted prices that are observable for the asset or liability , or inputs derived principally from or corroborated by observable market data by correlation or other means . level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value . stock compensation expense our board of directors approves grants of stock awards and options to employees to purchase our common stock . stock compensation expense is recorded based upon the estimated fair value of the stock option or stock award at the date of grant . the company uses the black-scholes merton option pricing model to estimate the fair value of stock options granted pursuant to asc topic 718. the application of this pricing model involves assumptions that are judgmental and sensitive in the determination of compensation expense . the fair market value of our common stock on the date of each option grant is determined based on the most recent quoted sales price on our primary trading stock exchange , currently the nasdaq capital market . income taxes we have historically incurred domestic operating losses from both a financial reporting and tax return standpoint . accordingly , we provide deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws . any future recorded value of our deferred tax assets will be dependent upon our ability to generate taxable income in the jurisdictions in which we operate . these assets consist primarily of credit carry-forwards and net operating loss carry-forwards and the future tax effects of temporary differences between balances recorded for financial statement purposes and for tax return purposes . a valuation allowance is established for deferred tax assets in amounts for which realization is not considered more likely than not to occur . the accounting estimate related to income taxes is considered a “ critical accounting estimate ” because judgment is exercised in estimating future taxable income , including prudent and feasible tax planning strategies , and in assessing the need for any valuation allowance . to date , we have determined a 100 % valuation allowance is required and accordingly no deferred tax asset has been reflected in our consolidated financial statements . in the event that it should be determined that all or part of a deferred tax asset in the future is more likely than not to be realized , an adjustment ( reduction ) of the valuation allowance would increase income to be recognized in the period such determination was made . in addition , the calculation of our deferred taxes involves dealing with uncertainties in the application of complex tax regulations . as a result , we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation .
| there was a loss on inventory revaluation for the year ended december 31 , 2017 of $ 1,151,482 as compared to $ 1,124,401 in the same period in 2016. these write-downs are the result of management 's decision in early 2017 to reduce the suggested retail selling price of its iwear video eyewear inventory on hand and again in september 2017 to a price well below the product 's cost . other income ( expense ) . total other expense was $ 278,956 for the year ended december 31 , 2017 compared to an expense of $ 714,322 in the same period in 2016 , a reduction of $ 435,366. the overall decrease in these other expenses was primarily due to reduced costs of $ 358,170 for the amortization of senior term debt discounts and deferred financing costs for the 2017 period as compared to 2016 period , and a related reduction in interest expense of $ 42,855 and $ 31,837 increase in investment income . all of the senior term debt was converted to common stock prior to its maturity on june 3 , 2017. provision for income taxes . there were no provisions for income taxes in 2017 or 2016 . 44 liquidity and capital resources as of december 31 , 2018 , we had cash and cash equivalents of $ 17,263,643 , an increase of $ 2,374,007 from $ 14,889,636 as of december 31 , 2017. at december 31 , 2018 , we had current assets of $ 27,383,095 compared to current liabilities of $ 4,676,665 , which resulted in a positive working capital position of $ 22,706,430. at december 31 , 2017 , we had a working capital position of $ 15,789,033. our current liabilities are comprised principally of accounts payable and accrued expenses . operating activities . we used $ 22,542,574 of cash for operating activities for the year ended december 31 , 2018 and $ 16,465,706 in the same period in 2017. the net cash operating loss after adding back non-cash adjustments for the year ended december 31 , 2018 was $ 17,979,716 , along with the following changes in operating assets and liabilities for the period : a $ 497,784 decrease in accrued project revenue , a $ 3,429,485 increase in net inventory , a $ 600,502 increase in vendor prepayments , a $ 846,399
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disclosure controls and procedures ( as defined in rules 13a-15 ( e ) and 15d-15 ( e ) ) of the securities exchange act of 1934 , as amended ( the “ exchange act ” ) are designed to ensure that ( 1 ) information required to be disclosed in reports filed or submitted under the exchange act is recorded , processed , summarized and reported within the time periods specified in sec rules and forms ; and ( 2 ) that such information is accumulated and communicated to management , including the principal executive officer and principal financial officer , to allow timely decisions regarding required disclosures . there are inherent limitations to the effectiveness of any system of disclosure controls and procedures , including the possibility of human error and the circumvention or overriding of controls and procedures . accordingly , even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives . the company 's management , including the company 's chief executive officer and chief financial officer , evaluated the effectiveness of the design and operation of the company 's disclosure controls and procedures as of june 30 , 2016 . the company 's management has concluded that the company 's disclosure controls and procedures as of june 30 , 2016 were effective . management 's annual report on internal controls over financial reporting . the company 's management , including its chief executive officer and chief financial officer , is responsible for establishing and maintaining adequate internal control over financial reporting ( as defined in exchange act rules 13a-15 ( f ) and 15d-15 ( f ) ) and designing such internal controls to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the united states of america . there are inherent limitations to the effectiveness of any system of internal control over financial reporting , including the possibility of human error or the circumvention or overriding of controls and procedures . accordingly , even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives . management conducted its evaluation of the effectiveness of its internal control over financial reporting based on the framework in the “ 1992 internal control-integrated framework , ” the 2006 `` internal control over financial reporting - guidance for smaller public companies , '' and the `` 2013 coso framework & sox compliance , '' all issued by the committee of sponsoring organizations of the treadway commission ( “ coso ” ) . in connection with this evaluation , there were no changes in the company 's internal control over financial reporting ( as such term is defined in rule 13a-15 ( f ) and 15d-15 ( f ) of the exchange act ) during the quarter ended june 30 , 2016 that have materially affected , or are reasonably likely to materially affect , the company 's internal control over financial reporting . based on this evaluation , management has concluded that the company 's internal control over financial reporting as of june 30 , 2016 was effective . 16 part iii item 10. directors , executive officers and corporate governance . this information is incorporated by reference to the sections entitled `` information as to the nominees , '' `` board committees - audit committee , '' `` code of ethics , '' `` executive officers , '' and `` section 16 ( a ) beneficial ownership reporting compliance '' from koss corporation 's proxy statement for its 2016 annual meeting of stockholders filed with the commission under regulation 14a within 120 days of the end of the fiscal year covered by this form 10-k. the company adopted a code of ethics , which is a `` code of ethics '' as defined by applicable rules of the sec , which is applicable to its directors , officers and employees . the code of ethics is publicly available on the company 's website at investors.koss.com . if the company makes any substantive amendments to the code of ethics or grants any waiver , including any implicit waiver , from a provision of the code to its principal executive officer , principal financial officer , principal accounting officer or controller or persons performing similar functions , the company will disclose the nature of the amendment or waiver on that website or in a report on form 8-k. item 11. executive compensation . this information is incorporated by reference to the sections entitled `` board committees - compensation committee , '' `` summary compensation table , '' `` outstanding equity awards at fiscal year end , '' and `` director compensation table '' from koss corporation 's proxy statement for its 2016 annual meeting of stockholders filed with the commission under regulation 14a within 120 days of the end of the fiscal year covered by this form 10-k. item 12. security ownership of certain beneficial owners and management and related stockholder matters . this information is incorporated by reference to the sections entitled `` beneficial ownership of company securities '' and `` outstanding equity awards at fiscal year end '' from koss corporation 's proxy statement for its 2016 annual meeting of stockholders filed with the commission under regulation 14a within 120 days of the end of the fiscal year covered by this form 10-k. item 13. certain relationships and related transactions , and director independence . this information is incorporated by reference to the sections entitled `` board committees , '' `` independence of the board '' and `` related party transactions '' from koss corporation 's proxy statement for its 2016 annual meeting of stockholders filed with the commission under regulation 14a within 120 days of the end of the fiscal year covered by this form 10-k. item 14. principal accountant fees and services . this information is incorporated by story_separator_special_tag disclosure controls and procedures ( as defined in rules 13a-15 ( e ) and 15d-15 ( e ) ) of the securities exchange act of 1934 , as amended ( the “ exchange act ” ) are designed to ensure that ( 1 ) information required to be disclosed in reports filed or submitted under the exchange act is recorded , processed , summarized and reported within the time periods specified in sec rules and forms ; and ( 2 ) that such information is accumulated and communicated to management , including the principal executive officer and principal financial officer , to allow timely decisions regarding required disclosures . there are inherent limitations to the effectiveness of any system of disclosure controls and procedures , including the possibility of human error and the circumvention or overriding of controls and procedures . accordingly , even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives . the company 's management , including the company 's chief executive officer and chief financial officer , evaluated the effectiveness of the design and operation of the company 's disclosure controls and procedures as of june 30 , 2016 . the company 's management has concluded that the company 's disclosure controls and procedures as of june 30 , 2016 were effective . management 's annual report on internal controls over financial reporting . the company 's management , including its chief executive officer and chief financial officer , is responsible for establishing and maintaining adequate internal control over financial reporting ( as defined in exchange act rules 13a-15 ( f ) and 15d-15 ( f ) ) and designing such internal controls to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the united states of america . there are inherent limitations to the effectiveness of any system of internal control over financial reporting , including the possibility of human error or the circumvention or overriding of controls and procedures . accordingly , even effective internal control over financial reporting can only provide reasonable assurance of achieving its control objectives . management conducted its evaluation of the effectiveness of its internal control over financial reporting based on the framework in the “ 1992 internal control-integrated framework , ” the 2006 `` internal control over financial reporting - guidance for smaller public companies , '' and the `` 2013 coso framework & sox compliance , '' all issued by the committee of sponsoring organizations of the treadway commission ( “ coso ” ) . in connection with this evaluation , there were no changes in the company 's internal control over financial reporting ( as such term is defined in rule 13a-15 ( f ) and 15d-15 ( f ) of the exchange act ) during the quarter ended june 30 , 2016 that have materially affected , or are reasonably likely to materially affect , the company 's internal control over financial reporting . based on this evaluation , management has concluded that the company 's internal control over financial reporting as of june 30 , 2016 was effective . 16 part iii item 10. directors , executive officers and corporate governance . this information is incorporated by reference to the sections entitled `` information as to the nominees , '' `` board committees - audit committee , '' `` code of ethics , '' `` executive officers , '' and `` section 16 ( a ) beneficial ownership reporting compliance '' from koss corporation 's proxy statement for its 2016 annual meeting of stockholders filed with the commission under regulation 14a within 120 days of the end of the fiscal year covered by this form 10-k. the company adopted a code of ethics , which is a `` code of ethics '' as defined by applicable rules of the sec , which is applicable to its directors , officers and employees . the code of ethics is publicly available on the company 's website at investors.koss.com . if the company makes any substantive amendments to the code of ethics or grants any waiver , including any implicit waiver , from a provision of the code to its principal executive officer , principal financial officer , principal accounting officer or controller or persons performing similar functions , the company will disclose the nature of the amendment or waiver on that website or in a report on form 8-k. item 11. executive compensation . this information is incorporated by reference to the sections entitled `` board committees - compensation committee , '' `` summary compensation table , '' `` outstanding equity awards at fiscal year end , '' and `` director compensation table '' from koss corporation 's proxy statement for its 2016 annual meeting of stockholders filed with the commission under regulation 14a within 120 days of the end of the fiscal year covered by this form 10-k. item 12. security ownership of certain beneficial owners and management and related stockholder matters . this information is incorporated by reference to the sections entitled `` beneficial ownership of company securities '' and `` outstanding equity awards at fiscal year end '' from koss corporation 's proxy statement for its 2016 annual meeting of stockholders filed with the commission under regulation 14a within 120 days of the end of the fiscal year covered by this form 10-k. item 13. certain relationships and related transactions , and director independence . this information is incorporated by reference to the sections entitled `` board committees , '' `` independence of the board '' and `` related party transactions '' from koss corporation 's proxy statement for its 2016 annual meeting of stockholders filed with the commission under regulation 14a within 120 days of the end of the fiscal year covered by this form 10-k. item 14. principal accountant fees and services . this information is incorporated by
| there was also an added distributor for central africa , which added net sales of $ 147,678 for the year ended june 30 , 2016 . in addition , a new oem customer added net sales of $ 969,848 to fiscal 2016 . distributors in russia , belarus and ukraine are still dealing with a combination of weak economies and exchange rate fluctuations causing lower than historical sales . these countries combined for a net sales decrease of $ 449,733. net sales in the domestic market decreased by $ 1,282,549 to $ 15,496,763 . sales to a large mass retailer increased by $ 1,011,367 to $ 2,905,189 due to an additional product being carried in their stores . this increase was offset by reduced sales to some specialty markets ( $ 620,189 ) , certain distributors ( $ 548,421 ) , e-commerce ( $ 454,771 ) , and a drug store chain ( $ 306,937 ) . gross profit as a percent of sales in 2016 was 34.4 % , which was 0.5 % lower than 2015 . the decrease in gross profit percentage was primarily due to the mix of sales across sales channels and products . there is a wide range of gross profit across the products as well as across the sales channels . the company is also in the process of shifting some product manufacturing between contract manufacturers in china which added approximately $ 57,000 of cost for the year ended june 30 , 2016 . selling , general and administrative expenses were higher than the prior fiscal year . the company had increased costs for deferred compensation ( approximately $ 249,000 ) , profit-based compensation ( approximately $ 157,000 ) , 401 ( k ) match ( approximately $ 96,000 ) and travel ( approximately $ 65,000 ) . these increases were mostly offset by lower stock-based compensation ( approximately $ 186,000 ) , the former chairman 's retirement ( approximately $ 140,000 ) , commission expense ( approximately $ 115,000 ) , and legal expense ( approximately $ 73,000 ) . deferred compensation expense increased as
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because of local country regulatory constraints , we may be required to modify our member incentive plans as described above . we also pay reduced royalty overrides with respect to certain products worldwide . consequently , the total royalty override percentage may vary over time and from the percentages noted above . our “ contribution margins ” consist of net sales less cost of sales and royalty overrides . “ selling , general and administrative expenses ” represent our operating expenses , which include labor and benefits , service fees to china service providers , sales events , professional fees , travel and entertainment , member promotions , occupancy costs , communication costs , bank fees , depreciation and amortization , foreign exchange gains and losses and other miscellaneous operating expenses . our “ other operating income ” consists of government grant income related to china and the arbitration award in connection with the re-audit of the company 's 2010 to 2012 financial statements after the resignation of kpmg as the company 's independent registered public accounting firm . our “ other expense , net ” consists of non-operating expenses such as impairments of available-for-sale investments . most of our sales to members outside the united states are made in the respective local currencies . in preparing our financial statements , we translate revenues into u.s. dollars using average exchange rates . additionally , the majority of our purchases from our suppliers generally are made in u.s. dollars . consequently , a strengthening of the u.s. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate foreign currency losses on intercompany transactions . foreign currency exchange rates can fluctuate significantly . from time to time , we enter into foreign currency derivatives to partially mitigate our foreign currency exchange risk as discussed in further detail in item 7a — quantitative and qualitative disclosures about market risk . 44 results of operations our results of operations for the periods below are not necessarily indicative of results of operations for future periods , which depend upon numerous factors , including our ability to recruit new members and retain sales leaders , further penetrate existing markets , introduce new products and programs that will help our members increase their retail efforts and develop niche market segments . the following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated : replace_table_token_11_th ( 1 ) service fees to our independent service providers in china are included in selling , general and administrative expenses while member compensation for all other countries is included in royalty overrides . changes in net sales are directly associated with the retailing of our products , recruitment of members , and retention of sales leaders . our strategies include providing quality products , improved dmos , including daily consumption approaches such as nutrition clubs , easier access to product , systemized training of members on our products and methods , and continued promotion and branding of herbalife products . management 's role , both in-country and at the region and corporate level , is to provide members with a competitive and broad product line , encourage strong teamwork and member leadership and offer leading edge business tools and technology services to make doing business with herbalife simple . management uses the member marketing program coupled with educational and motivational tools and promotions to encourage members to increase retailing , retention , and recruiting , which in turn affect net sales . such tools include company sponsored sales events such as extravaganzas , leadership development weekends and world team schools where large groups of members gather , thus allowing them to network with other members , learn retailing , retention , and recruiting techniques from our leading members and become more familiar with how to market and sell our products and business opportunities . accordingly , management believes that these development and motivation programs increase the productivity of the sales leader network . the expenses for such programs are included in selling , general and administrative expenses . we also use event and non-event product promotions to motivate members to increase retailing , retention , and recruiting activities . these promotions have prizes ranging from qualifying for events to product prizes and vacations . a promotion that we have seen success with and begun to use on a broad basis is the customer acquisition promotion , generally under which new members , who order a modest number of volume points in each of their first three months , earn a prize and hence are incentivized to begin acquiring retail customers . the costs of these promotions are included in selling , general and administrative expenses . 45 dmos are being generated in many of our markets and are globalized where applicable through the combined efforts of members and country , regional and corporate management . while we support a number of different dmos , one of the most popular dmos is the daily consumption dmo . under our traditional dmo , a member typically sells to its customers on a somewhat infrequent basis ( e.g. , monthly ) w hich provides fewer opportunities for interaction with their customers . under a daily consumption dmo , a member interacts with its customers on a more frequent basis which enables the member to better educate and advise customers about nutrition and the pr oper use of the products and helps promote daily usage as well , thereby helping the member grow his or her business . specific examples of dmos include the club concept in mexico , premium herbalife opportunity meetings in korea , the healthy breakfast concep t in russia , and the internet/sampling and weight loss challenge in the u.s. management 's strategy is to review the applicability of expanding successful country initiatives throughout a region , and where appropriate , financially story_separator_special_tag because of local country regulatory constraints , we may be required to modify our member incentive plans as described above . we also pay reduced royalty overrides with respect to certain products worldwide . consequently , the total royalty override percentage may vary over time and from the percentages noted above . our “ contribution margins ” consist of net sales less cost of sales and royalty overrides . “ selling , general and administrative expenses ” represent our operating expenses , which include labor and benefits , service fees to china service providers , sales events , professional fees , travel and entertainment , member promotions , occupancy costs , communication costs , bank fees , depreciation and amortization , foreign exchange gains and losses and other miscellaneous operating expenses . our “ other operating income ” consists of government grant income related to china and the arbitration award in connection with the re-audit of the company 's 2010 to 2012 financial statements after the resignation of kpmg as the company 's independent registered public accounting firm . our “ other expense , net ” consists of non-operating expenses such as impairments of available-for-sale investments . most of our sales to members outside the united states are made in the respective local currencies . in preparing our financial statements , we translate revenues into u.s. dollars using average exchange rates . additionally , the majority of our purchases from our suppliers generally are made in u.s. dollars . consequently , a strengthening of the u.s. dollar versus a foreign currency can have a negative impact on our reported sales and contribution margins and can generate foreign currency losses on intercompany transactions . foreign currency exchange rates can fluctuate significantly . from time to time , we enter into foreign currency derivatives to partially mitigate our foreign currency exchange risk as discussed in further detail in item 7a — quantitative and qualitative disclosures about market risk . 44 results of operations our results of operations for the periods below are not necessarily indicative of results of operations for future periods , which depend upon numerous factors , including our ability to recruit new members and retain sales leaders , further penetrate existing markets , introduce new products and programs that will help our members increase their retail efforts and develop niche market segments . the following table sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated : replace_table_token_11_th ( 1 ) service fees to our independent service providers in china are included in selling , general and administrative expenses while member compensation for all other countries is included in royalty overrides . changes in net sales are directly associated with the retailing of our products , recruitment of members , and retention of sales leaders . our strategies include providing quality products , improved dmos , including daily consumption approaches such as nutrition clubs , easier access to product , systemized training of members on our products and methods , and continued promotion and branding of herbalife products . management 's role , both in-country and at the region and corporate level , is to provide members with a competitive and broad product line , encourage strong teamwork and member leadership and offer leading edge business tools and technology services to make doing business with herbalife simple . management uses the member marketing program coupled with educational and motivational tools and promotions to encourage members to increase retailing , retention , and recruiting , which in turn affect net sales . such tools include company sponsored sales events such as extravaganzas , leadership development weekends and world team schools where large groups of members gather , thus allowing them to network with other members , learn retailing , retention , and recruiting techniques from our leading members and become more familiar with how to market and sell our products and business opportunities . accordingly , management believes that these development and motivation programs increase the productivity of the sales leader network . the expenses for such programs are included in selling , general and administrative expenses . we also use event and non-event product promotions to motivate members to increase retailing , retention , and recruiting activities . these promotions have prizes ranging from qualifying for events to product prizes and vacations . a promotion that we have seen success with and begun to use on a broad basis is the customer acquisition promotion , generally under which new members , who order a modest number of volume points in each of their first three months , earn a prize and hence are incentivized to begin acquiring retail customers . the costs of these promotions are included in selling , general and administrative expenses . 45 dmos are being generated in many of our markets and are globalized where applicable through the combined efforts of members and country , regional and corporate management . while we support a number of different dmos , one of the most popular dmos is the daily consumption dmo . under our traditional dmo , a member typically sells to its customers on a somewhat infrequent basis ( e.g. , monthly ) w hich provides fewer opportunities for interaction with their customers . under a daily consumption dmo , a member interacts with its customers on a more frequent basis which enables the member to better educate and advise customers about nutrition and the pr oper use of the products and helps promote daily usage as well , thereby helping the member grow his or her business . specific examples of dmos include the club concept in mexico , premium herbalife opportunity meetings in korea , the healthy breakfast concep t in russia , and the internet/sampling and weight loss challenge in the u.s. management 's strategy is to review the applicability of expanding successful country initiatives throughout a region , and where appropriate , financially
| 47 china reported net sales of $ 868.8 million for the year ended december 31 , 2016. net sales for china increased $ 22.6 million , or 2.7 % , for the yea r ended december 31 , 2016 , as compared to the same period in 2015. in local currency , net sales increased 8.5 % for the year ended december 31 , 2016 as compared to the same period in 2015 for china . the 2.7 % increase in china net sales for the year ended de cember 31 , 2016 was primarily due to an increase in sales volume , as measured by an increase in volume points , and product mix which increased net sales by approximately 7.4 % and 1.0 % , respectively , partially offset by the unfavorable impact of fluctuation s in foreign currency rates , which reduced net sales by approximately 5.8 % . see the discussion of net sales by geographic region below of the applicable region ( s ) comprising each segment for the underlying explanations of the changes in net sales for each reporting segment for the year ended december 31 , 2016 , as compared to the same period in 2015. contribution margin by reporting segment as discussed above under “ presentation , ” contribution margin consists of net sales less cost of sales and royalty overrides . the primary reporting segment reported contribution margin of $ 1,571.9 million for the year ended december 31 , 2016. contribution margin for the primary reporting segment decreased $ 26.9 million , or 1.7 % , for the year ended december 31 , 2016 , as compared to the same period in 2015. the 1.7 % decrease for the year ended december 31 , 2016 was primarily the result of fluctuations in the foreign currency rates which reduced contribution margin by approximately 10.1 % , partially offset by an increase in volume , as measured by an increase in volume points , and the favorable impact of price increases , which increased contribution margin by approximately 4.9 % and 4.2 % , respectively . china reported contribution margin of $ 789.3 million for the year ended december 31 , 2016. contribution margin for china increased $ 26.5 million , or 3.5 % , for the year ended december 31 , 2016 , as compared
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spectrum and other assets for the deployment of positive train control . executive summary 2012 financial overview in 2012 , the company recognized record-high volumes and revenues . record-breaking revenues of $ 2.2 billion were driven by strong growth in automotive and intermodal traffic . as revenues grew in most of the business units during the year , the company 's continued focus on operating expense control resulted in operating expenses as a percentage of revenues of 68.0 % . revenues in 2012 increased 7 % over 2011 , driven primarily by positive pricing impacts , increased carloads/unit volumes and fuel surcharge , partially offset by the effect of fluctuations in the value of the mexican peso against the u.s. dollar for revenues denominated in mexican pesos . operating expenses increased 2 % compared to the same period in 2011 due primarily to higher diesel fuel prices and volumes . in addition , in 2011 , the company recognized a $ 25.6 million pre-tax gain on 27 insurance recoveries within operating expenses as a result of the settlement of an insurance claim related to the 2010 hurricane damage . these increases were partially offset by a $ 43.0 million net reduction to operating expense due to the elimination of a deferred statutory profit sharing liability as a result of the organizational restructuring in the second quarter of 2012 and the effect of fluctuations in the value of the mexican peso against the u.s. dollar for operating expenses denominated in mexican pesos . kcsm 's revenues and operating expenses are affected by fluctuations in the value of the mexican peso against the u.s. dollar . based on the volume of revenue and expense transactions denominated in mexican pesos , revenue and expense fluctuations generally offset , with insignificant net impacts to operating income . the company reported 2012 earnings of $ 3.43 per diluted share on consolidated net income attributable to kansas city southern and subsidiaries of $ 377.3 million for the year ended december 31 , 2012 , compared to annual earnings of $ 3.00 per diluted share on consolidated net income attributable to kansas city southern and subsidiaries of $ 330.3 million for 2011. during 2012 , the company 's board of directors declared quarterly cash dividends of $ 0.195 per share on its common stock . during the past three years , kcs has consistently focused on opportunities to refinance or repay outstanding debt and strengthen its financial position . these efforts reduced interest expense for the year ended december 31 , 2012 by $ 28.7 million compared to the prior year . additionally during 2012 , the company further strengthened its financial position and flexibility by amending its kcsr and kcsm revolver facilities which extended the maturity dates , eliminated or modified a number of restrictive covenants in its facilities in order to achieve consistency between its facilities and firms with investment grade ratings , and allows for the facilities to convert from secured to unsecured obligations upon attainment of investment grade credit ratings . in the fourth quarter of 2012 , the kcsr credit facility converted from a secured to an unsecured obligation . results of operations year ended december 31 , 2012 , compared with the year ended december 31 , 2011 the following summarizes kcs 's consolidated income statement components ( in millions ) : replace_table_token_5_th 28 revenues the following summarizes revenues ( in millions ) , carload/unit statistics ( in thousands ) and revenue per carload/unit : revenues carloads and units revenue per carload/unit 2012 2011 % change 2012 2011 % change 2012 2011 % change chemical and petroleum $ 410.3 $ 396.3 4 % 246.8 252.1 ( 2 % ) $ 1,662 $ 1,572 6 % industrial and consumer products 551.1 503.6 9 % 336.1 326.6 3 % 1,640 1,542 6 % agriculture and minerals 400.5 415.6 ( 4 % ) 218.9 238.6 ( 8 % ) 1,830 1,742 5 % energy ( i ) 312.8 317.4 ( 1 % ) 292.4 312.0 ( 6 % ) 1,070 1,017 5 % intermodal 306.5 251.8 22 % 914.2 798.8 14 % 335 315 6 % automotive 174.4 139.2 25 % 103.7 85.6 21 % 1,682 1,626 3 % carload revenues , carloads and units 2,155.6 2,023.9 7 % 2,112.1 2,013.7 5 % $ 1,021 $ 1,005 2 % other revenue 83.0 74.4 12 % total revenues ( ii ) $ 2,238.6 $ 2,098.3 7 % ( ii ) included in revenues : fuel surcharge $ 282.1 $ 244.6 ( i ) effective january 1 , 2012 , the company established the energy commodity group , which includes the previous coal commodity group and certain amounts previously included within the agriculture and minerals and chemical and petroleum commodity groups . prior period amounts have been reclassified to conform to the current year presentation . freight revenues include both revenue for transportation services and fuel surcharges . for the year ended december 31 , 2012 , revenues increased $ 140.3 million compared to the prior year , primarily due to positive pricing impacts , increased carloads/unit volumes and fuel surcharge , partially offset by the effect of fluctuations in the value of the mexican peso against the u.s. dollar for revenues denominated in mexican pesos . revenue per carload/unit increased by 2 % for the year ended december 31 , 2012 , compared to the prior year , reflecting commodity mix . kcs 's fuel surcharge is a mechanism to adjust revenue based upon changing fuel prices . fuel surcharges are calculated differently depending on the type of commodity transported . for most commodities , fuel surcharge is calculated using a fuel price from a prior time period that can be up to 60 days earlier . in a period of volatile fuel prices or changing customer business mix , changes in fuel expense and fuel surcharge may differ . the following discussion provides an analysis of revenues by commodity group : revenues by commodity group for 2012 chemical and petroleum . story_separator_special_tag revenues increased $ 14.0 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to increases in pricing and fuel surcharge , partially offset by decreases in volume and fluctuations in the value of the mexican peso against the u.s. dollar . revenues increased due to positive pricing impacts for plastics , gases and chemicals used to manufacture glass and other industrial products . petroleum volumes decreased primarily due to a customer 's lost business . 29 revenues by commodity group for 2012 industrial and consumer products . revenues increased $ 47.5 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to increases in pricing , volume and fuel surcharge . metals and scrap revenues grew primarily due to increases in pricing and high demand for slab and steel coil driven by strength in the automotive and oil and gas industries . paper product revenue increased primarily due to improved pricing . agriculture and minerals . revenues decreased $ 15.1 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to decreases in volume and fluctuations in the value of the mexican peso against the u.s. dollar , partially offset by increases in pricing and fuel surcharge . food products volumes decreased due to lost cross border corn syrup business and lower dried distillers grain volume . in addition , ores and minerals volumes decreased primarily due to a customer 's lost business and grain volumes decreased primarily as a result of the severe drought conditions experienced in the united states . energy . revenues decreased $ 4.6 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to a decrease in volume and fluctuations in the value of the mexican peso against the u.s. dollar , partially offset by increases in pricing and fuel surcharge . utility coal revenues decreased due to a reduction in demand as a result of utility maintenance outages , historic low natural gas prices and a warmer than average winter . frac sand volumes and pricing increased as a result of new business and a strong demand due to higher crude oil prices . crude oil volume increased as a result of higher demand for domestic crude oil delivered by rail . intermodal . revenues increased $ 54.7 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to increases in volume due to strong cross border auto parts business , conversion of truck traffic to rail and trans-pacific imports via the port of lazaro cardenas . automotive . revenues increased $ 35.2 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to increases in volume and pricing , partially offset by fluctuations in the value of the mexican peso against the u.s. dollar . the increase was driven by strong year over year growth in north american automobile sales for original equipment manufacturers , increased import/export volume through the port of lazaro cardenas and increased length of haul through new cross border vehicle routings . 30 operating expenses operating expenses , as shown below ( in millions ) , increased $ 36.0 million for the year ended december 31 , 2012 , when compared to the same period in 2011 , primarily due to the gain on insurance recoveries recognized in 2011 related to the 2010 hurricane damage , higher diesel fuel prices and carload/unit volumes . these increases were partially offset by the elimination of the deferred mexican statutory profit sharing liability as a result of the organizational restructuring in 2012. in addition , increases in operating expenses for the year ended december 31 , 2012 , compared to the same period in 2011 , were partially offset by the fluctuations in the value of the mexican peso against the u.s. dollar for operating expenses denominated in mexican pesos . replace_table_token_6_th compensation and benefits . compensation and benefits increased $ 6.7 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to increased incentive compensation expense , annual salary and benefit rate increases and increased carload/unit volumes . these increases were partially offset by reduced mexican statutory profit sharing expense as a result of the organizational restructuring in the second quarter of 2012 , and the fluctuations in the value of the mexican peso against the u.s. dollar . purchased services . purchased services increased $ 15.0 million for the year ended december 31 , 2012 , compared to 2011 , due to higher joint facility income recognized in the second half of 2011 as a result of non-recurring usage of certain trackage rights and increases in volume-sensitive costs , primarily joint facility expenses and security services . fuel . fuel expense increased $ 13.1 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to higher diesel fuel prices and higher consumption . these increases were partially offset by the fluctuations in the value of the mexican peso against the u.s. dollar and improved fuel efficiency . the net average fuel price per gallon increased by approximately 4 % in 2012 as compared to 2011. equipment costs . equipment costs decreased $ 4.9 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to lower locomotive lease expense due to the acquisition of 75 locomotives during the third quarter of 2011 , which were previously leased by the company under an operating lease agreement . this decrease was partially offset by an increase in the use of other railroads ' freight cars due to increased traffic volumes . depreciation and amortization . depreciation and amortization increased $ 12.6 million for the year ended december 31 , 2012 , compared to 2011 , primarily due to a larger asset base . materials and other .
| net investing cash outflows for 2011 increased $ 198.9 million as compared to 2010 , primarily due to an increase in capital expenditures , partially offset by the insurance proceeds relating to the 2010 hurricane damage and the acquisition of an intermodal facility in 2010 . 38 financing cash flows . financing cash inflows were generated from the issuance of long-term debt , proceeds from common stock offerings and proceeds from the issuance of common stock under employee stock plans . financing cash outflows were used for the repayment of debt , the payment of dividends and the payment of debt costs . financing cash flows for 2012 , 2011 , and 2010 are discussed in more detail below : net financing cash outflows for 2012 were $ 121.1 million . during 2012 , the company paid dividends of $ 86.1 million , repaid $ 375.9 million of outstanding debt and paid $ 22.1 million in debt costs . during the same period , the company received net proceeds of $ 329.6 million from additional term loan advances and financing completed in 2012 for locomotives purchased in the fourth quarter of 2011. net financing cash outflows for 2011 were $ 140.6 million . during 2011 , the company repaid $ 653.3 million of outstanding debt and paid $ 36.6 million in debt costs . during the same period , the company received net proceeds of $ 550.0 million from the issuance of the kcsm 6 1 / 8 % senior notes , refinancing of the kcsr term loan facility and borrowings under the kcsr revolving credit facility . net financing cash outflows for 2010 were $ 216.9 million . during 2010 , the company repaid $ 839.7 million of outstanding debt and paid $ 65.1 million in debt costs . during the same period , the company received net proceeds of $ 214.9 million from a common stock offering and $ 480.7 million from the issuance of the kcsm 8.0 % and 6 5 / 8 % senior notes . contractual obligations . the following table outlines
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our technology is supported by a substantial intellectual property portfolio that we have built through internal development and , to a lesser extent , acquisitions and license agreements . as of december 31 , 2011 , we had 603 issued and pending patents worldwide . we have exclusively licensed from our development partner , cercacor , the right to oem rainbow ® technology and incorporate rainbow ® technology into our products intended to be used by professional caregivers , including , but not limited to , hospital caregivers and alternate care market , facility caregivers . antitrust litigation proceeds during the year ended january 1 , 2011 , we completed negotiations to resolve the merits of our antitrust litigation with covidien . as a result , we retained a total of $ 30.8 million from two payments from covidien following the ninth circuit court of appeals ' october 2009 affirmance of a federal district court decision that tyco healthcare , now covidien , violated the antitrust laws through anticompetitive business practices related to the sale of its pulse oximetry products . the gross payment amount from covidien was $ 59.0 million , but excluding reimbursement of legal fees , costs and interest , the net amount was $ 43.5 million . of this amount , we retained $ 30.1 million and the remainder was paid to the law firm that handled the trial for us . subsequently , we received a second payment of $ 1.3 million from covidien that related to our appeal attorneys ' fees and related expenses . of this second amount , we retained $ 0.8 million , with the remainder paid to our attorneys . dividend payments our board of directors continuously evaluates a variety of options to return value to shareholders , including acquisition opportunities , stock buy-back programs and dividends . in 2010 , after considering all available options at that time , the board concluded that the best and most direct way to reward shareholders for their continued investment and confidence in masimo was through the declaration of two cash dividends . in february 2010 , the board declared a special dividend of $ 2.00 per share , or $ 117.5 million , which was paid in march 2010. in november 2010 , the board declared a second special dividend of $ 0.75 per share , or $ 44.5 million , which was paid in december 2010. the 2010 special dividends represented only a portion of our cash reserves , which the board believed was sufficient to cover our current operational needs , and to fund continued research and development investments and current strategic initiatives . stock repurchase program in august 2011 , our board of directors authorized us to repurchase up to 3.0 million shares of our common stock under a repurchase program . the stock repurchase program may be carried out at the discretion of a committee comprised of our chief executive officer and chief financial officer through open market purchases , rule 10b5-1 trading plans , block trades and in privately negotiated transactions . we have paid for prior repurchases , and expect to continue to pay for any future repurchases , of stock with available cash and cash equivalents . during the year ended december 31 , 2011 , 1.8 million shares were repurchased , at an average price of $ 19.61 per share . the repurchase program is expected to continue until august 2013 unless we repurchase the full 3.0 million shares prior to that time or the program is terminated earlier by our board of directors . cercacor cercacor is an independent entity spun off from us to our stockholders in 1998. joe kiani and jack lasersohn , members of our board of directors , are also members of the board of directors of cercacor . joe kiani , our chairman and chief executive officer , is also the chairman and chief executive officer of cercacor . we are a party to a cross-licensing agreement with cercacor , or the cross-licensing agreement , which was amended and restated effective january 1 , 2007 , that governs each party 's rights to certain intellectual property held by the two companies . under the cross-licensing agreement , we granted cercacor an exclusive , perpetual and worldwide license , with sublicense rights to use all masimo set ® owned by us , including all improvements on this technology , for the monitoring of non-vital signs measurements and to develop and sell devices incorporating masimo set ® for monitoring non-vital signs measurements in any product market in which a product is intended to be used by a patient or pharmacist , which we refer to as the cercacor market , rather than a professional medical caregiver . we also granted cercacor a non-exclusive , perpetual and worldwide license , with sublicense rights to use all masimo set ® for the measurement of vital signs in the cercacor market . 53 we exclusively license from cercacor the right to make and distribute products in the professional medical caregiver markets , referred to as the masimo market , that utilize rainbow ® technology for the measurement of carbon monoxide , methemoglobin , fractional arterial oxygen saturation and hemoglobin , which includes hematocrit . to date , we have developed and commercially released devices that measure carbon monoxide , methemoglobin and hemoglobin using licensed rainbow ® technology . we also have the option to obtain the exclusive license to make and distribute products that utilize rainbow ® technology for the monitoring of other non-vital signs measurements , including blood glucose , in product markets where the product is intended to be used by a professional medical caregiver . in february 2009 , in order to accelerate the product development of an improved hemoglobin spot-check measurement device , pronto-7 ® , we agreed to fund additional cercacor 's engineering expenses . story_separator_special_tag specifically , these expenses included third party engineering materials and supplies expense , as well as 50 % of total cercacor 's engineering and engineering related payroll expenses from april 2009 through june 2010 , the original anticipated completion date of this product development effort . during the year ended december 31 , 2011 , and until both parties agree to end these services , cercacor has and will continue to assist us with continuing productization efforts of the new handheld noninvasive multi-parameter testing device , that provides spot-check hemoglobin testing . during the year ended december 31 , 2011 , the total expenses for these additional services , material and supplies totaled $ 2.5 million . pursuant to authoritative accounting guidance , cercacor is consolidated within our financial statements for all periods presented . for the foreseeable future , we anticipate that we will continue to consolidate cercacor pursuant to the current authoritative accounting guidance ; however , in the event that cercacor is no longer considered a variable interest entity , or vie , or in the event that we are no longer the primary beneficiary of cercacor , we may discontinue consolidating the entity . for additional discussion of cercacor , see note 3 to the consolidated financial statements . sedline , inc. sedline , inc. , or sedline , a privately held entity that was formed in the fourth quarter of 2009 , is a company that designs , manufactures , markets and sells brain function monitoring technology into the hospital marketplace . during 2009 , we made loans to sedline totaling $ 3.0 million . these loans carried an interest rate of 7 % and could be converted into equity upon certain predetermined conditions . concurrently with the loans , we entered into a merger agreement with sedline , whereby we could acquire sedline at certain predetermined valuations . pursuant to authoritative accounting guidance , it was determined that sedline was a vie and that we were the primary beneficiary during 2009 and the first six months of 2010. as a result , beginning in december 2009 , we were required to consolidate sedline 's assets , liabilities and equity as a vie . on july 2 , 2010 , upon conversion of our $ 3.0 million note receivable and the related accrued interest due from sedline into 100 % of the authorized common stock of sedline , sedline became a wholly-owned subsidiary of ours . for additional discussion of sedline , see note 3 to the consolidated financial statements . story_separator_special_tag apportionment , the change in geographic composition of pre-tax income in jurisdictions in which we do business and the decrease in uncertain tax liabilities as a result of an expiring statute of limitations . our future effective income tax rate will depend on various factors , including profits ( losses ) before taxes , changes to tax law , and the geographic composition of pre-tax income . comparison of the year ended january 1 , 2011 to the year ended january 2 , 2010 revenue . total revenue increased $ 56.3 million , or 16.1 % , to $ 405.4 million for the year ended january 1 , 2011 from $ 349.1 million for the year ended january 2 , 2010. product revenue increased $ 56.3 million , or 18.8 % , to $ 356.4 million in the year ended january 1 , 2011 from $ 300.1 million in the year ended january 2 , 2010. this increase was primarily due to an increase in our installed base of pulse oximeter circuit boards and pulse oximeters to 855,000 units at january 1 , 2011 , from 724,000 units at january 2 , 2010 , based on an estimated 10 year field life assumption . contributing to the increase in our product revenue was our rainbow ® technology product revenues which increased $ 13.4 million , or 69.0 % , to $ 32.9 million in the year ended january 1 , 2011 from $ 19.5 million in the year ended january 2 , 2010. product revenue generated by our direct and distribution sales channels increased $ 41.9 million , or 17.3 % , to $ 283.6 million in the year ended january 1 , 2011 from $ 241.7 million in the year ended january 2 , 2010 , while revenues from our oem channel increased $ 14.3 million , or 24.6 % , to $ 72.8 million in the year ended january 1 , 2011 from $ 58.5 million in the year ended january 2 , 2010. our u.s. product revenue increased $ 34.3 million , or 15.4 % , to $ 257.0 million in the year ended january 1 , 2011 from $ 222.7 million in the year ended january 2 , 2010. additionally , our non-u.s. product revenue increased $ 22.1 million , or 28.4 % , to $ 99.5 million in the year ended january 1 , 2011 , from $ 77.4 million for the year ended january 2 , 2010. our royalty revenue was $ 49.0 million for the years ended january 1 , 2011 and january 2 , 2010. these amounts were based upon actual royalties received for the first nine months of each year , and an estimate of covidien 's u.s. pulse oximeter sales for the last three months of each year , at the contractual royalty rate as prescribed by the 2006 settlement agreement . cost of goods sold .
| december 31 , 2011 and january 1 , 2011 , respectively . our royalty revenue was $ 32.5 million for the year ended december 31 , 2011 and $ 49.0 million for the year ended january 1 , 2011. these amounts were based upon actual royalties received for the first nine months of each year , and an estimate of covidien 's u.s. pulse oximeter sales for the last three months of each year , at the contractual royalty rate as prescribed by the 2006 settlement agreement and second amendment to the settlement agreement . cost of goods sold . cost of goods sold increased $ 25.1 million , or 20.9 % , to $ 144.9 million for the year ended december 31 , 2011 from $ 119.8 million for the year ended january 1 , 2011. our gross margin decreased to 67.0 % for the year ended december 31 , 2011 from 70.4 % for the year ended january 1 , 2011. excluding royalties , product gross profit margins decreased by 2.0 % to 64.4 % for the year ended december 31 , 2011 from 66.4 % for the year ended january 1 , 2011. this decrease was primarily due to increased amortization costs associated with increased equipment placed at hospitals and selected inventory charge-offs related to product redesign and transition activities . we incurred $ 5.0 million in cercacor 's royalty expenses for each of the years ended december 31 , 2011 and january 1 , 2011 , respectively , which have been eliminated in our consolidated financial results for the periods presented . had these royalty expenses not been eliminated , our reported product gross profit margin would have been 63.1 % and 65.0 % for the years ended december 31 , 2011 and january 1 , 2011 , respectively . selling , general and administrative . selling , general and administrative expenses decreased $ 4.9 million , or 2.8 % , to $ 169.2 million for the year ended december 31 , 2011 from $ 174.1 million for the year ended
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cohorts 1- 4 are each independently powered for a pre-specified statistical hypothesis and the primary endpoint is objective response rate ( orr ) . cohort 5 includes previously treated or treatment-naïve nsclc patients with egfr or her2 exon 20 insertion mutations . cohort 6 includes nsclc patients with classical egfr mutations who progressed while on treatment with first-line osimertinib and developed an additional egfr mutation . cohort 7 includes nsclc patients with a variety of less common mutations in egfr or her2 exons 18-21 or the extracellular or transmembrane domains . on december 26 , 2019 , we announced that the pre-specified primary endpoint in its phase 2 clinical trial evaluating poziotinib in previously treated nsclc patients with egfr exon 20 insertion mutations was not met in cohort 1 of the zenith20 trial . cohort 1 enrolled a total of 115 patients who received 16 mg/day of poziotinib . the intent-to-treat analysis showed that 17 patients had a response ( by recist ) and 62 patients had stable disease for a 68.7 % disease control rate ( dcr ) . the confirmed objective response rate ( orr ) was 14.8 % ( 95 % confidence interval ( ci ) 8.9 % -22.6 % ) . the median duration of response was 7.4 months and progression free survival was 4.2 months . the safety profile was in-line with other second-generation egfr tyrosine kinase inhibitors . the results for this cohort have been accepted for a podium presentation at the 39 11th annual congress on pulmonary and respiratory medicine in amsterdam in march 2020. we expect to announce topline results for cohort 2 in mid-2020 and for cohort 3 by the end of 2020. in addition , a basket study has been initiated to investigate poziotinib in patients with egfr or her2 mutation-positive malignant solid tumors in an investigator-led study , with the first patient enrolled by md anderson in late 2019. in-license of anti-cd20-ifná , an antibody-interferon fusion molecule : in april 2019 , we executed an asset transfer , license , and sublicense agreement for an exclusive license for anti-cd20-ifná , an antibody-interferon fusion molecule directed against cd20 that is in phase 1 development for treating relapsed or refractory non-hodgkin 's lymphoma patients ( including diffuse large b-cell lymphoma ) , representing a considerable unmet medical need . characteristics of our revenue and expenses the below summarizes the nature of our revenue and operating expense line items within our consolidated statements of operations : revenue on march 1 , 2019 , we completed the commercial product portfolio transaction . in accordance with applicable gaap , the revenue-deriving activities of our sold commercial operation are separately classified as “ discontinued ” for all periods presented within the accompanying consolidated statements of operations . the majority of our revenue was derived from sales of our drug products to large pharmaceutical wholesalers and distributors , which we recognized upon title transfer ( which is typically at time of delivery ) , provided our other revenue recognition criteria have been met . we expect that this revenue source and recognition will persist upon the potential fda approval of rolontis and poziotinib . to a lesser extent we also derived revenue from ( i ) upfront license fees , ( ii ) milestone receipts from our licensees ' sales or regulatory achievements , and royalties from out-licensing our licensees ' sales in applicable territories , and ( iii ) service revenue from third-parties under certain arrangements for our research and development activities , sales and marketing activities , clinical trial management , and supply chain services conducted for the benefit of third parties . we expect that this revenue source and recognition will persist from our current and future out-license arrangements . our revenue recognition criteria are described in greater detail below and in note 2 ( i ) to the accompanying consolidated financial statements . cost of sales ( excluding amortization of intangible assets ) cost of sales includes production and packaging materials , contract manufacturer fees , allocated personnel costs ( including stock-based compensation expense ) , shipping expenses , and royalty fees . selling , general and administrative selling , general and administrative expenses primarily consist of compensation ( including stock-based compensation ) and benefits for our sales force and personnel that support our sales and marketing operations , and our general operations such as information technology , executive management , financial accounting , and human resources . it also includes costs attributable to marketing our products to our customers and prospective customers , patent and legal fees , financial statement audit fees , insurance coverage fees , bad debt expense , personnel recruiting fees , and other professional services . research and development our research and development activities primarily relate to the clinical development of new drugs and costs associated with at-risk manufacture of drug products prior to fda approval . these clinical development expenses specifically consist of ( i ) compensation ( including stock-based compensation ) and benefits for research and development and clinical and regulatory personnel , ( ii ) materials and supplies for each project , ( iii ) consultants , and ( iv ) associated regulatory and clinical site expenses . our research and development manufacture expenses are recognized in the period which the activity occurs and includes ( i ) our technology transfer costs for production , ( ii ) fda qualification costs of our contract manufacturers ' sites , and ( iii ) 40 material and service costs associated with our inventory build in anticipation of fda approval and subsequent commercial launch . critical accounting policies and estimates the preparation and presentation of financial statements in conformity with generally accepted accounting principles in the united states of america ( “ u.s . gaap ” ) , requires management to establish policies and make estimates and assumptions that affect ( i ) the amounts of assets and liabilities as of the date presented on the accompanying consolidated balance sheets and ( ii ) the amounts of revenue and expenses for each year presented in the accompanying consolidated statements of operations . story_separator_special_tag our management believes its estimates and assumptions are supportable , reasonable , consistently applied , and in accordance with u.s. gaap . nonetheless , estimates are inherently uncertain . as a result , our financial position and operating results could materially differ from the amounts reported within the accompanying consolidated financial statements if management 's estimates require prospective adjustment . our critical accounting policies and estimates arise in conjunction with the following accounts : revenue recognition ; income taxes ; stock-based compensation ; and litigation accruals ( as required ) . revenue recognition on march 1 , 2019 , we completed our commercial product portfolio transaction -- see note 1 ( b ) . in accordance with applicable gaap ( asc 205-20 , presentation of financial statements ) , the revenue-deriving activities of our sold commercial operation are separately classified as “ discontinued ” for all periods presented within the accompanying consolidated statements of operations -- see note 12 . required elements of our revenue recognition : revenue from our ( a ) product sales , ( b ) out-license arrangements , and ( c ) service arrangements is recognized under asu no . 2014-09 , revenue from contracts with customers ( asc 606 ) in a manner that reasonably reflects the delivery of our goods and or services to customers in return for expected consideration and includes the following elements : ( 1 ) we ensure that we have an executed contract ( s ) with our customer that we believe is legally enforceable ; ( 2 ) we identify the “ performance obligations ” in the respective contract ; ( 3 ) we determine the “ transaction price ” for each performance obligation in the respective contract ; ( 4 ) we allocate the transaction price to each performance obligation ; and ( 5 ) we recognize revenue only when we satisfy each performance obligation . these five elements , as applied to each of our revenue categories , are summarized below : ( a ) product sales : we sell our products to pharmaceutical wholesalers/distributors or to our product licensees ( i.e. , our customers ) . our wholesalers/distributors in turn sell our products directly to clinics , hospitals , and private oncology-based practices . revenue from our product sales is recognized as physical delivery of product occurs ( when our customer obtains control of the product ) , in return for agreed-upon consideration . our gross product sales ( i.e. , delivered units multiplied by the contractual price per unit ) are reduced by our corresponding gross-to-net ( “ gtn ” ) estimates using the “ expected value ” method , resulting in our reported “ product sales , net ” that reflects the amount we ultimately expect to realize in net cash proceeds , taking into account our current period gross sales and related cash receipts , and the subsequent cash disbursements on these sales that we estimate for the various gtn categories discussed below . these estimates are based upon information received from external sources ( such as written or oral information obtained from our customers with respect to their period-end inventory levels and sales to end-users during the period ) , in combination with management 's informed judgments . due to the inherent uncertainty of these estimates , the actual amount incurred ( of some , or all ) of product returns , government chargebacks , prompt pay discounts , commercial rebates , 41 medicaid rebates , and distribution , data , and gpo administrative fees may be materially above or below the amount estimated , then requiring prospective adjustments to our reported net product sales . these gtn estimate categories are each discussed below : product returns allowances : our customers are contractually permitted to return certain purchased products within the contractual allowable time before/after its applicable expiration date . returns outside of this aforementioned criteria are not customarily allowed . we estimate expected product returns using our historical return rates . returned products are typically destroyed since substantially all returns are due to their imminent expiry and can not be resold . government chargebacks : our products are subject to pricing limits under certain federal government programs ( e.g. , medicare and 340b drug pricing program ) . qualifying entities ( i.e. , end-users ) purchase products from our customers at their qualifying discounted price . the chargeback amount we incur represents the difference between our contractual sales price to our customer , and the end-user 's applicable discounted purchase price under the government program . there may be significant lag time between our reported net product sales and our receipt of the corresponding government chargeback claims from our customers . prompt pay discounts : discounts for prompt payment are estimated at the time of sale , based on our eligible customers ' prompt payment history and the contractual discount percentage . commercial rebates : commercial rebates are based on ( i ) our estimates of end-user purchases through a group purchasing organization ( “ gpo ” ) , ( ii ) the corresponding contractual rebate percentage tier we expect each gpo to achieve , and ( iii ) our estimates of the impact of any prospective rebate program changes made by us . medicaid rebates : our products are subject to state government-managed medicaid programs , whereby rebates are issued to participating state governments . these rebates arise when a patient treated with our product is covered under medicaid , resulting in a discounted price for our product under the applicable medicaid program . our medicaid rebate accrual calculations require us to project the magnitude of our sales , by state , that will be subject to these rebates . there is a significant time lag in our receiving rebate notices from each state ( generally several months or longer after our sale is recognized ) . our estimates are based on our historical claim levels by state , as supplemented by management 's judgment .
| total other ( expense ) income replace_table_token_6_th total other ( expense ) income decreased by $ 13.1 million primarily due to $ 12.7 million of unrealized loss for the mark-to-market of our casi equity securities in the current period ( see note 3 ( a ) to the accompanying consolidated financial statements ) , as compared to $ 10.5 million of unrealized gain in the prior year period . the recognized expense from this decline in casi stock value was partially offset in the current period by ( i ) $ 2.7 million of realized gain from the sale of 1.5 million shares of casi through a forward-sales contract that settled in april 2019 ( see note 8 ) , ( ii ) $ 3.3 million interest expense decrease due to the december 2018 maturity of our 2013 convertible notes ( see note 9 ) , ( iii ) $ 2.0 million increase in interest income on our other marketable securities , ( iv ) $ 1.1 million increase in the value of our deferred compensation plan assets ( see notes 3 ( f ) ) , and ( v ) $ 0.7 million of billable services rendered to acrotech as part of a transition services agreement that expired in may 2019 ( see note 13 ) . income taxes replace_table_token_7_th we reported pre-tax losses from continuing operations and pre-tax income from discontinued operations on the consolidated statements of operations for the years ended december 31 , 2019 and 2018. under applicable intraperiod tax allocation guidance ( see note 11 to the accompanying consolidated financial statements ) we are required to allocate income taxes between continuing operations and other categories of earnings . due to the required allocation , we recorded an income tax benefit of $ 7.7 million and $ 1.9 million from continuing operations ( though such amounts are not indicative of income tax refunds due to us ) , income tax expense of $ 7.5 million and $ 1.9 million within income from discontinued operations , net of income taxes , and income tax expense of $ 0.2 million and $ 0 within other comprehensive income ( loss ) on the consolidated statements of comprehensive loss for the years ended december 31 , 2019 and 2018 , respectively . 45 our net tax benefit for the year
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any acquisitions that we might make are subject to various risks and uncertainties and could have a negative impact on our results of operations . in addition , we may contractually obligate ourselves to contingent consideration or acquisition related compensation payments in conjunction with such acquisitions , which could have a negative impact on our cash flow and results of operations . see item 7. `` management 's discussion and analysis of financial condition and results of operations - liquidity and capital resources - contractual obligations and commitments `` for additional information . basis of presentation composition of sales sales from : product sales : consist of sales of performance-defining products and systems to customers worldwide . sales are measured based on the consideration specified in a contract with a customer . we recognize sales when a performance obligation is satisfied by transferring control of a product to a customer , generally at the time of shipment . contracts are generally in the form of purchase orders and are governed by standard terms and conditions . for larger oems , we may also enter into master agreements ; and shipping and handling fees : consists of shipping and handling fees billed to customers . net of : rebates : consists of incentives we provide to customers based on sales of eligible products ; and sales returns allowances : consists of an estimate of our sales returns . this allowance is based upon estimates of the projected returns in future periods based on our experience with returns recorded in previous periods . sales returns have not been significant to date . we attribute our past growth in sales predominantly to continued higher demand for on and off-road suspension products , acquisitions , and the success of our current product lines including new products within those lines . cost of sales the cost of sales includes the cost of purchased parts and manufactured products ( raw materials consumed , the cost to procure materials , labor costs , including wages , and employee benefits , and factory overhead to produce finished good products ) , including : the costs to inspect and repair products ; shipping costs associated with inbound freight . these costs are capitalized as part of inventory and included in cost of sales as the inventory is sold ; royalty expenses , including payments to certain parties for our use of licensed technology incorporated into our products ; freight expenses incurred for certain shipments to customers ; warranty costs associated with the repair or replacement of products under warranty ; and reductions in the cost of inventory to its net realizable value , if required , for estimated excess , obsolescence or impaired balances . gross profit/gross margin our gross profit equals our sales minus cost of sales . our gross margin measures our gross profit as a percentage of sales . our gross margins fluctuate based on production volumes , product , customer and channel mix and overall supply chain and manufacturing efficiencies . generally , we earn higher gross margins on our products sold to the aftermarket channel . operating expenses our operating expenses consist of the following : sales and marketing ; research and development ; general and administrative ; 40 amortization of purchased intangibles ; and fair value adjustment of contingent consideration and acquisition-related compensation . our sales and marketing expenses include costs related to our sales , customer service and marketing personnel , including their wages , employee benefits and related stock-based compensation , and occupancy related expenses . other significant sales and marketing expenses include race support and sponsorships of events and athletes , advertising and promotions related to trade shows , travel and entertainment , commissions paid to outside sales representatives , promotional materials and products and our sales office costs . our research and development expenses consist primarily of salaries and personnel costs , including wages , employee benefits and related stock-based compensation for our engineering , research and development teams , occupancy related expenses , fees for third party consultants , service fees , and expenses for prototype tooling and materials , travel , and supplies . we expense research and development costs as incurred and such costs are included as research and development expenses on our consolidated statements of income . our general and administrative expenses include costs related to our executive , finance , legal , information technology , business development , human resources and administrative personnel , including wages , employee benefits and related stock-based compensation expenses . we record professional and contract service expenses , occupancy related expenses associated with corporate locations and equipment , and legal expenses in general and administrative expenses . our amortization of purchased intangibles includes amortization over their respective useful lives of our purchased intangible assets , such as customer lists and our core technology . our intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable . no impairments of intangible assets were identified in the years ended january 1 , 2021 , january 3 , 2020 and december 28 , 2018. income from operations we define income from operations as gross profit less our operating expenses . we use income from operations as an indicator of the profitability of our business and our ability to manage costs . interest and other expense , net interest expense consists of interest charged to us under our credit facility . other expense , net , consists of foreign currency transaction gains and losses , gains and losses on the disposal of fixed assets , and other miscellaneous items . income taxes we are subject to income taxes in the u.s. ( federal and state ) and various other foreign jurisdictions . story_separator_special_tag our effective tax rate could be affected by numerous factors such as change in our business operations , acquisitions , investments , entry into new businesses and geographies , intercompany transactions , the relative amount of our foreign earnings , losses incurred in jurisdictions for which we are not able to realize related tax benefits , changes in our deferred tax assets and liabilities and their valuation , changes in the laws , regulations , administrative practices , principles , and interpretations related to tax , including changes to the global tax framework and other laws and accounting rules in various jurisdictions . for the years ended january 1 , 2021 , january 3 , 2020 and december 28 , 2018 , we had effective tax rates of 12.2 % , 13.0 % and 6.1 % , respectively . we have concluded our international restructuring in response to the tax cuts jobs act ( the `` tcja '' ) , and expect that certain other operational changes will be carried out over a number of years . the tcja significantly changed how the u.s. taxes corporations . as a result of the enactment of the tcja in december 2017 , our unremitted earnings became subject to a transition tax , which we paid with existing foreign tax credits . we therefore no longer consider our unremitted earnings to be permanently reinvested . as of january 1 , 2021 , our deferred tax assets included foreign tax credits of approximately $ 41.2 million , which begin to expire in 2025 unless utilized . valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized . as of january 1 , 2021 , we recorded a valuation allowance of $ 7.2 million , as we anticipate that the tcja will partially limit our ability to utilize our foreign tax credits . in the future , our effective tax rate could vary as we update our assessment of valuation allowances for our deferred tax assets , including those associated with credit carryforwards . it is reasonably possible that we could record a material adjustment to the valuation allowance in the next 12 months as we assess the progress and outcome of our plans to alter the generation and utilization of foreign tax credits . 41 we also have federal and state research credit carryforwards of approximately $ 1.3 million and $ 2.3 million , respectively . the federal research credits will begin to expire in 2036 unless utilized ; the state research credits do not expire . stock-based compensation gives rise to deferred tax assets to the extent of the compensation expense recognized on non-qualified stock options that have not been exercised or expired and restricted stock awards that have not vested . as of january 1 , 2021 , our deferred tax assets included $ 1.2 million associated with stock-based compensation expense . the difference between the deferred tax asset and the actual tax deduction for stock-based compensation is recorded as a component of our income tax expense . our effective tax rate will vary based on such differences . we are subject to examination of our income tax returns by the u.s. internal revenue service ( `` irs '' ) and other tax authorities . we regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax liabilities and expense . should actual events or results differ from our current expectations , charges or credits to our income tax expense may become necessary . any such adjustments could have a significant impact on our effective tax rate . in 2018 , we received a no change letter from the irs related to the audit of our 2015 federal tax return . additionally , we entered into a closing agreement with the irs that resolved the uncertainty about the deductibility of amortization and depreciation arising from the compass group diversified holdings llc 's acquisition of us in 2008 ( the `` compass acquisition '' ) for all open tax years . the favorable conclusion resulted in a decrease in the unrecognized tax benefits of $ 6.2 million , of which $ 5.6 million favorably impacted the effective tax rate . including the reversal of the amounts presented as net of deferred tax assets and accrued interest and penalties , the favorable conclusion resulted in a benefit of $ 9.8 million to the provision for income tax for the year ended december 28 , 2018. the deductibility of acquisition-related amortization and depreciation for state tax purposes remains uncertain . story_separator_special_tag style= '' color : # 000000 ; font-family : 'times new roman ' , sans-serif ; font-size:10pt ; font-weight:400 ; line-height:120 % '' > 46 income from operations replace_table_token_16_th as a result of the factors discussed above , income from operations for the fiscal year ended january 3 , 2020 increased approximately $ 18.3 million , or 19.4 % , compared to income from operations in the same period in 2018. interest and other expense , net replace_table_token_17_th interest and other expense , net for the fiscal year ended january 3 , 2020 increased by approximately $ 0.6 million to $ 4.2 million compared to $ 3.6 million for the fiscal year ended december 28 , 2018. the increase in interest and other expense , net is primarily due to a $ 0.5 million increase in foreign exchange losses in the fiscal year ended january 3 , 2020. income taxes replace_table_token_18_th income tax expense for the fiscal year ended january 3 , 2020 increased by approximately $ 8.6 million to $ 14.1 million compared to income tax expense of $ 5.5 million in the same period in 2018. the increase in expense resulted primarily from the non-recurring compass acquisition uncertain tax position which was reflected in 2018 , partially offset by the benefit of u.s. foreign derived earnings and the benefit of excess deductions on stock-based compensation .
| operating expenses replace_table_token_8_th total operating expenses for the year ended january 1 , 2021 increased approximately $ 45.5 million , or 35.0 % , over the comparable period in 2019. when expressed as a percentage of sales , operating expenses increased to 19.7 % of sales for the year ended january 1 , 2021 compared to 17.3 % of sales in 2019. within operating expenses , our sales and marketing expense increased by approximately $ 9.4 million primarily due to costs related to sca of $ 8.5 million . additionally , we incurred higher personnel and commission expenses of $ 2.8 million , which were partially offset by reduced spending on trade shows and race events . research and development expenses increased approximately $ 2.5 million primarily due to headcount and facility-related expenses , partially offset by reductions in supplies , equipment , and other various expenses across our organization . general and administrative expenses increased approximately $ 22.3 million due to acquisition-related costs of approximately $ 14.1 million and the inclusion of sca operating costs of $ 5.9 million , and higher headcount costs including incentive compensation , partially offset by lower patent-related legal costs . amortization of purchased intangible assets for the year ended january 1 , 2021 increased by approximately $ 11.3 million as compared to the year ended january 3 , 2020 , due to the amortization of sca 's intangible assets . 44 income from operations replace_table_token_9_th as a result of the factors discussed above , income from operations for the year ended january 1 , 2021 increased approximately $ 1.3 million , or 1.2 % , compared to income from operations in the same period in 2019. interest and other expense , net replace_table_token_10_th interest and other expense , net for the year ended january 1 , 2021 increased by approximately $ 5.4 million to $ 9.6 million compared to $ 4.2 million for the year ended january 3 , 2020. the increase in interest and other expense , net is primarily due to interest expense on additional borrowings in connection
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in addition , eskata and rhofade , and our drug candidates if approved , may not achieve commercial success . we also expect to incur significant expenses and operating losses for the foreseeable future as we advance our drug candidates from discovery through preclinical development and clinical trials . in addition , if we obtain marketing approval for any of our drug candidates , we expect to incur significant commercialization expenses related to product manufacturing , marketing , sales and distribution . we may also incur expenses in connection with the in-license or acquisition of additional drug candidates . furthermore , we have incurred and expect to continue to incur significant costs associated with operating as a public company , including legal , accounting , investor relations and other expenses . as a result , we will need substantial additional funding to support our continuing operations and pursue our growth strategy . we have historically financed our operations primarily with sales of our convertible preferred stock , as well as net proceeds from our initial public offering , or ipo , in october 2015 , subsequent public offerings , and a private placement of our common stock . until such time as we can generate significant revenue from product sales , if ever , we expect to finance our operations through the sale of equity , debt financings or other capital sources , including potential collaborations with other companies or other strategic transactions . we may be unable to raise additional funds or enter into such other agreements or arrangements when needed on commercially acceptable terms , or at all . if we fail to raise capital or enter into such agreements as , and when , needed , we may have to significantly delay , scale back or discontinue the development and commercialization of one or more of our products or drug candidates or delay our pursuit of potential in-licenses or acquisitions . license agreement with rigel in august 2015 , we entered into an exclusive , worldwide license and collaboration agreement with rigel pharmaceuticals , inc. , or rigel , for the development and commercialization of products containing two specified jak inhibitors , ati-501 and ati-502 , or the rigel license agreement . under this agreement , we intend to develop these jak inhibitors for the treatment of aa and other dermatological conditions . we paid rigel an upfront nonrefundable payment of $ 8.0 million in september 2015. in addition , we have agreed to make aggregate payments of up to $ 80.0 million upon the achievement of specified pre-commercialization milestones , such as clinical trials and regulatory approvals . further , we have agreed to pay up to an additional $ 10.0 million to rigel upon the achievement of a second set of development milestones . with respect to any products we commercialize under the rigel license agreement , we will pay rigel quarterly tiered royalties on our annual net sales of each product at a high single digit percentage of annual net sales , subject to specified reductions until the date that all of the patent rights for that product have expired , as determined on a country-by-country and product-by-product basis or , in specified countries under specified circumstances , 10 years from the first commercial sale of such product . the rigel license agreement terminates on the date of expiration of all royalty obligations unless earlier terminated by either party for a material breach . we may also terminate the rigel license agreement without cause at any time upon advance written notice to rigel . rigel , after consultation with us , will be responsible for maintaining and prosecuting the patent rights , and we will have final decision-making authority regarding such patent rights for a product in the united states and the european union . to the extent that we jointly develop intellectual property , we will confer and decide which party will be responsible for filing , prosecuting and maintaining those patent rights . the rigel license agreement also establishes a joint steering committee composed of an equal number of representatives for each party , which will monitor progress in the development of products . 72 stock purchase agreement with vixen pharmaceuticals , inc. and license agreement with columbia university in march 2016 , we entered into a stock purchase agreement , or the vixen agreement , with vixen , and jak1 , llc , jak2 , llc and jak3 , llc , or together , the selling stockholders , and shareholder representative services llc as the representative of the selling stockholders . pursuant to the vixen agreement , we acquired all shares of vixen 's capital stock from the selling stockholders , or the vixen acquisition . following the vixen acquisition , vixen became a wholly-owned subsidiary of us . pursuant to the vixen agreement , we paid $ 0.6 million upfront and issued an aggregate of 159,420 shares of our common stock to the selling stockholders . we are obligated to make annual payments of $ 0.1 million through march 2022 , with such amounts being creditable against specified future payments that may be paid under the vixen agreement . under the vixen agreement we are obligated to make aggregate payments of up to $ 18.0 million to the selling stockholders upon the achievement of specified pre-commercialization milestones for three products in the united states , the european union and japan , and aggregate payments of up to $ 22.5 million upon the achievement of specified commercial milestones . with respect to any commercialized products covered by the vixen agreement , we are obligated to pay low single-digit royalties on net sales , subject to specified reductions , limitations and other adjustments , until the date that all of the patent rights for that product have expired , as determined on a country-by-country and product-by-product basis or , in specified circumstances , ten years from the first commercial sale of such product . story_separator_special_tag if we sublicense any of vixen 's patent rights and know-how acquired pursuant to the vixen agreement , we will be obligated to pay a portion of any consideration we receive from such sublicenses in specified circumstances . as a result of the vixen acquisition , we became party to the exclusive license agreement , by and between vixen and the trustees of columbia university in the city of new york , or columbia , dated as of december 31 , 2015 , or , as amended , the columbia license agreement . under the columbia license agreement , we are obligated to pay columbia an annual license fee of $ 10,000 subject to specified adjustments for patent expenses incurred by columbia and creditable against any royalties that may be paid under the columbia license agreement . we are also obligated to pay up to an aggregate of $ 11.6 million upon the achievement of specified commercial milestones , including specified levels of net sales of products covered by columbia patent rights and or know-how , and royalties at a sub-single-digit percentage of annual net sales of products covered by columbia patent rights and or know-how , subject to specified adjustments . if we sublicense any of columbia 's patent rights and know-how acquired pursuant to the columbia license agreement , we will be obligated to pay columbia a portion of any consideration received from such sublicenses in specified circumstances . the royalties , as determined on a country-by-country and product-by-product basis , are payable until the date that all of the patent rights for that product have expired , the expiration of any market exclusivity period granted by a regulatory body or , in specified circumstances , ten years from the first commercial sale of such product . the columbia license agreement terminates on the date of expiration of all royalty obligations thereunder unless earlier terminated by either party for a material breach , subject to a specified cure period . we may also terminate the columbia license agreement without cause at any time upon advance written notice to columbia . agreement and plan of merger with confluence in august 2017 , we entered into an agreement and plan of merger , or the confluence agreement , with confluence , aclaris life sciences , inc. , our wholly-owned subsidiary , or merger sub , and fortis advisors llc , as representative of the equity holders of confluence . pursuant to the terms of the confluence agreement , the merger sub merged with and into confluence , with confluence surviving as our wholly-owned subsidiary . we paid $ 10.3 million in cash and issued 349,527 shares of our common stock with a fair value of $ 9.7 million to the confluence equity holders . in november 2018 , we achieved a development milestone specified in the confluence agreement . the milestone payment to the former confluence equity holders was comprised of $ 2.5 million in cash and 253,208 shares of our common stock with a fair value of $ 2.2 million . we also agreed to pay the former confluence equity holders aggregate additional contingent consideration of up to $ 75.0 million , based upon the achievement of certain regulatory and commercial milestones set forth in the confluence agreement . in addition , we have agreed to pay the former confluence equity holders specified future royalty payments calculated as a low single-digit percentage of annual net sales , subject to specified reductions , limitations and other adjustments , until the date that all of the patent rights for that product have expired , as determined on a country-by-country and product-by-product basis or , in specified circumstances , ten years from the first commercial sale of such product . in addition , if we sell , license or transfer any of the intellectual property acquired from confluence pursuant to the confluence agreement to a third party , we will be obligated to pay the former 73 confluence equity holders a portion of any incremental consideration ( in excess of the development and milestone payments described above ) that we receive from such sale , license or transfer in specified circumstances . license , development and commercialization agreement with cipher pharmaceuticals inc. in april 2018 , we entered into an exclusive license agreement with cipher pharmaceuticals inc. , or cipher , for the rights to obtain regulatory approval of and commercialize a-101 40 % topical solution , which we market under the brand name eskata in the united states , in canada for the treatment of sk , or the cipher license agreement . under the cipher license agreement , cipher is responsible for obtaining marketing approval in canada for a-101 40 % topical solution . we will supply cipher with finished product , and , if regulatory approval is obtained , cipher will be responsible for distribution and commercialization of a-101 40 % topical solution in canada . additionally , cipher is responsible for all expenses related to regulatory and commercial activities for a-101 40 % topical solution in canada . we received an upfront payment of $ 1.0 million upon signing of the cipher license agreement and $ 0.5 million upon the achievement of a specified regulatory milestone . pursuant to the cipher license agreement , we can earn a remaining payment of $ 0.5 million upon the achievement of a specified regulatory milestone , and aggregate payments of $ 1.75 million upon the achievement of specified commercial milestones . cipher will also be required to pay us a low double-digit percentage royalty on net sales of a-101 40 % topical solution in canada . the term of the cipher license agreement expires on the later of the expiration of applicable patents in canada or the 15 th anniversary of the first commercial sale of licensed product in canada .
| 82 research and development expenses the following table summarizes our research and development expenses : replace_table_token_2_th the decrease in expenses associated with the development of eskata resulted primarily from the filing of our nda in february 2017 following the completion of clinical trials . expenses related to a-101 45 % topical solution increased primarily due to the initiation of our phase 3 clinical trials for the treatment of common warts during the third quarter of 2018. development expenses for our jak inhibitors increased due to continued growth in both preclinical and clinical trial expenses as we continue to conduct multiple phase 2 clinical trials of ati-501 and ati-502 . the increase in personnel expenses was primarily the result of increased headcount . the increase in stock-based compensation expense was primarily the result of new awards granted during 2018. the change in contingent consideration was the result of updates to our assumptions related to our soft-jak inhibitors that reflected the achievement of a specified development milestone in november 2018 under the confluence agreement . other research and development expenses primarily included expenses for medical affairs activities related to eskata , and expenses related to drug discovery performed by confluence , which we acquired in august 2017 ; we did not incur similar drug discovery expenses prior to that acquisition . the increase in other research and development expenses was also driven by preclinical development of ati-450 , our mk-2 inhibitor , and research expenses related to our itk inhibitor . sales and marketing expenses the following table summarizes our sales and marketing expenses : replace_table_token_3_th direct marketing and professional fees , as well as other sales and marketing expenses , increased as a result of the commercial launch of eskata , which occurred in may 2018. personnel and stock-based compensation expenses have increased due to increased headcount , including the hiring of our field sales force during the year ended december 31 , 2018. other sales and marketing expenses included sales operations , travel costs , depreciation and other miscellaneous expenses . other sales and marketing
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internal data includes historical redemption rates and pricing data . at december 31 , 2014 , abbott had wic business in 23 states . historically , adjustments to prior years ' rebate accruals have not been material to net income . abbott employs various techniques to verify the accuracy of claims submitted to it , and where possible , works with the organizations submitting claims to gain insight into changes that might affect the rebate amounts . for government agency programs , the calculation of a rebate involves interpretations of relevant regulations , which are subject to challenge or change in interpretation . income taxes abbott operates in numerous countries where its income tax returns are subject to audits and adjustments . because abbott operates globally , the nature of the audit items are often very complex , and the objectives of the government auditors can result in a tax on the same income in more than one country . abbott employs internal and external tax professionals to minimize audit adjustment amounts where possible . in accordance with the accounting rules relating to the measurement of tax contingencies , in order to recognize an uncertain tax benefit , the taxpayer must be more likely than not of sustaining the position , and the measurement of the benefit is calculated as the largest amount that is more than 50 percent likely to be realized upon resolution of the benefit . application of these rules requires a significant amount of judgment . in the u.s. , abbott 's federal income tax returns through 2011 are settled except for four items , and the income tax returns for years after 2011 are open . abbott does not record deferred income taxes on earnings reinvested indefinitely in foreign subsidiaries . pension and post-employment benefits abbott offers pension benefits and post-employment health care to many of its employees . abbott engages outside actuaries to assist in the determination of the obligations and costs under these programs . abbott must develop long-term assumptions , the most significant of which are the health care cost trend rates , discount rates and the expected return on plan assets . the discount rates used to measure liabilities were determined based on high-quality fixed income securities that match the duration of the expected retiree benefits . the health care cost trend rates represent abbott 's expected annual rates of change in the cost of health care benefits and is a forward projection of health care costs as of the measurement date . a difference between the assumed rates and the actual rates , which will not be known for decades , can be significant in relation to the obligations and the annual cost recorded for these programs . low interest rates have significantly increased actuarial losses for these plans . at december 31 , 2014 , pretax net actuarial losses and prior service costs and ( credits ) recognized in accumulated other comprehensive income ( loss ) for abbott 's defined benefit plans and medical and dental plans were losses of $ 3.2 billion and $ 161 million , respectively . actuarial losses and gains are amortized over the remaining service attribution periods of the employees under the corridor method , in accordance with the rules for accounting for post-employment benefits . differences between the expected long-term return on plan assets and the actual annual return are amortized over a five-year period . note 13 to the consolidated financial statements describes the impact of a one-percentage point change in the health care cost trend rate ; however , there can be no certainty that a change would be limited to only one percentage point . valuation of intangible assets abbott has acquired and continues to acquire significant intangible assets that abbott records at fair value . transactions involving the purchase or sale of intangible assets occur with some frequency between companies in the health care field and valuations are usually based on a discounted cash flow analysis . the discounted cash flow model requires assumptions about the timing and amount of future net cash flows , risk , cost of capital , terminal values and market participants . each of these factors can significantly affect the value of the intangible asset . abbott engages independent valuation experts who review abbott 's critical assumptions and calculations for acquisitions of significant intangibles . abbott reviews definite-lived intangible assets for impairment each quarter using an undiscounted net cash flows approach . if the undiscounted cash flows of an intangible asset are less than 26 the carrying value of an intangible asset , the intangible asset is written down to its fair value , which is usually the discounted cash flow amount . where cash flows can not be identified for an individual asset , the review is applied at the lowest group level for which cash flows are identifiable . goodwill and indefinite-lived intangible assets , which relate to in-process research and development acquired in a business combination , are reviewed for impairment annually or when an event that could result in impairment occurs . at december 31 , 2014 , goodwill amounted to $ 10.1 billion and intangibles amounted to $ 6.2 billion , and amortization expense in continuing operations for intangible assets amounted to $ 555 million in 2014 , $ 588 million in 2013 and $ 595 million in 2012. there were no impairments of goodwill in 2014 , 2013 or 2012. in 2012 , abbott recorded impairment charges of $ 69 million for certain research and development assets due to changes in the projected development and regulatory timelines for the projects . litigation abbott accounts for litigation losses in accordance with fasb accounting standards codification no . 450 , `` contingencies . '' under asc no . 450 , loss contingency provisions are recorded for probable losses at management 's best estimate of a loss , or when a best estimate can not be made , a minimum loss contingency amount is recorded . story_separator_special_tag these estimates are often initially developed substantially earlier than the ultimate loss is known , and the estimates are refined each accounting period as additional information becomes known . accordingly , abbott is often initially unable to develop a best estimate of loss , and therefore the minimum amount , which could be zero , is recorded . as information becomes known , either the minimum loss amount is increased , resulting in additional loss provisions , or a best estimate can be made , also resulting in additional loss provisions . occasionally , a best estimate amount is changed to a lower amount when events result in an expectation of a more favorable outcome than previously expected . abbott estimates the range of possible loss to be from approximately $ 70 million to $ 85 million for its legal proceedings and environmental exposures . accruals of approximately $ 80 million have been recorded at december 31 , 2014 for these proceedings and exposures . these accruals represent management 's best estimate of probable loss , as defined by fasb asc no . 450 , `` contingencies . '' 27 results of operations sales the following table details the components of sales growth by reportable segment for the last three years : replace_table_token_3_th the increases in total net sales in 2014 and 2013 reflect unit growth , partially offset by the impact of unfavorable foreign exchange . the price declines related to vascular products sales in 2014 and 2013 primarily reflect pricing pressure on drug eluting stents and other coronary products as a result of market competition in the u.s. and other major markets . the impact of reimbursement reductions by the centers for medicare and medicaid services on abbott 's diabetes care business also contributed to the overall 3.9 % price decline in the u.s. in 2014 . 28 a comparison of significant product and product group sales is as follows . percent changes are versus the prior year and are based on unrounded numbers . replace_table_token_4_th ( 1 ) other coronary products include primarily guidewires and balloon catheters . endovascular includes vessel closure , carotid stents and other peripheral products . replace_table_token_5_th ( 2 ) other coronary products include primarily guidewires and balloon catheters . endovascular includes vessel closure , carotid stents and other peripheral products . 29 excluding the unfavorable effect of exchange , total established pharmaceutical products sales increased 14.9 percent in 2014 and 7.5 percent in 2013. the established pharmaceutical products segment is focused on several key emerging markets including india , russia , china and brazil . excluding the effect of exchange , sales in these key emerging markets increased 7.7 percent in 2014 and 6.0 percent in 2013. excluding the effect of exchange , sales in established pharmaceuticals ' other emerging markets increased 43.1 percent in 2014 and increased 14.4 percent in 2013. the increase in 2014 includes the impact of the acquisition of cfr pharmaceuticals in september 2014. excluding sales from cfr and the effects of exchange , revenues increased 7.9 % in 2014. excluding the unfavorable effect of exchange , total nutritional products sales increased 5.0 percent in 2014 and 5.4 percent in 2013. international pediatric nutritional sales increased in 2014 and 2013 due primarily to volume growth in developing countries . a supplier 's recall of product in august 2013 in certain international markets negatively impacted international pediatric nutritional sales in the third and fourth quarters of 2013 , as well as the first two quarters of 2014. while there were no health issues associated with this supplier recall and the supplier subsequently determined that the product had been safe for consumption , this event created significant disruption in these markets . the decline in 2014 u.s. pediatric nutritional sales primarily reflects lower infant formula revenue . u.s. pediatric sales were flat in 2013 due to lower formula share , partially offset by higher sales of toddler products . the 2014 and 2013 increases in international adult nutritional sales are due primarily to volume growth in developing countries and were negatively impacted by the effect of the relatively stronger u.s. dollar . the decrease in 2014 u.s. adult nutritional sales reflects a decline in performance nutrition , as well as weakness in the institutional market segment . the 3.1 percent decline in 2013 u.s. adult nutritional sales reflects abbott 's exit from certain non-core business lines as part of the business ' margin improvement initiative ; most of the sales decline resulting from this exit was offset by higher ensure revenues . excluding the unfavorable effect of exchange , total diagnostic products sales increased 6.4 percent in 2014 and 8.3 percent in 2013. the sales increases reflect unit growth across geographical regions . 2014 and 2013 sales of immunochemistry products , the largest category in this segment , reflect continued execution of abbott 's strategy to deliver integrated solutions to large healthcare customers . excluding the unfavorable effect of exchange , total vascular products sales were virtually flat in 2014 and 2013. in 2014 , growth of abbott 's mitraclip structural heart product and endovascular business , including supera peripheral stent , as well as increased penetration of the absorb bioresorbable vascular scaffold in various international markets , was offset by decline in sales of des products due to year-over-year decreases in the u.s. des market and in market share . in 2013 , growth in international markets , driven by continued share gains in key geographies of xience xpedition and absorb , was offset by declines in the u.s. market due to the negative impact of pricing pressure and a decline in procedures due to market conditions , as well as the expected decline of certain royalty revenues . abbott has periodically sold product rights to non-strategic products and has recorded the related gains in net sales in accordance with abbott 's revenue recognition policies as discussed in note 1 to the consolidated financial statements .
| over the last three years , sales growth and margin improvement was driven primarily by the nutritional and diagnostics businesses . sales in emerging markets , which represent nearly 50 percent of total company sales , increased 12.5 percent in 2014 and 10.8 percent in 2013 , excluding the impact of foreign exchange . ( emerging markets include all countries except the united states , western europe , japan , canada , australia and new zealand . ) abbott expanded its operating margin by 200 basis points in 2014 and 380 basis points in 2013. abbott 's sales , costs , and financial position over the same period were impacted by a challenging economic and fiscal environment in several emerging economies and the strengthening of the u.s. dollar relative to several international currencies during 2013 and 2014. in abbott 's worldwide nutritional products business , sales over the last three years were positively impacted by demographics such as an aging population and an increasing rate of chronic disease in developed markets and the rise of a middle class in many emerging markets , as well as by numerous new product introductions that leveraged abbott 's strong brands . at the same time , manufacturing and distribution process changes and other cost reductions drove margin improvements across the business . operating margins for this business increased from 15.7 percent in 2012 to 21.0 percent in 2014. in the second half of 2013 and the first two quarters of 2014 , sales growth in international pediatric nutrition was affected by a product recall initiated in august 2013 in china and two other markets for certain pediatric nutritional products supplied to abbott by a third-party manufacturer . while there were no health issues associated with the recalled products , and the supplier subsequently determined that the products had been safe for consumption , the recall created significant disruption in these markets . as a result , international pediatric nutrition sales were significantly lower than abbott 's previous expectations for this business for the second half of 2013. abbott initiated investments in
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the combined financial statements were derived from the accounting records of archrock and reflect the combined historical results of operations , financial position and cash flows of archrock 's international services and product sales businesses . the combined financial statements were presented as if such businesses had been combined for periods prior to november 4 , 2015. all intercompany transactions and accounts within these statements have been eliminated . affiliate transactions between the international services and product sales businesses of archrock and the other businesses of archrock have been included in the combined financial statements , with the exception of product sales within our wholly owned subsidiary , exterran energy solutions , l.p. ( “ eeslp ” ) . prior to the closing of the spin-off , eeslp also had a fleet of compression units used to provide compression services in the u.s. services business of archrock . revenue has not been recognized in the combined statements of operations for the sale of compressor units by us that were used by eeslp to provide compression services to customers of the u.s. services business of archrock . see note 15 to the financial statements for further discussion on transactions with affiliates . the combined financial statements include certain assets and liabilities that have historically been held at the archrock level but are specifically identifiable or otherwise attributable to us . the assets and liabilities in the combined financial statements have been reflected on a historical cost basis , as immediately prior to the spin-off all of the assets and liabilities of exterran corporation were wholly owned by archrock . third party debt of archrock , other than debt attributable to capital leases , was not allocated to us for any of the periods presented as we were not the legal obligor of the debt and archrock 's borrowings were not directly attributable to our business . the combined statements of operations also include expense allocations for certain functions historically performed by archrock and not allocated to its operating segments , including allocations of expenses related to executive oversight , accounting , treasury , tax , legal , human resources , procurement and information technology . see note 15 to the financial statements for further discussion regarding the allocation of corporate expenses . we refer to the consolidated and combined financial statements collectively as “ financial statements , ” and individually as “ balance sheets , ” “ statements of operations , ” “ statements of comprehensive income , ” “ statements of stockholders ' equity ” and “ statements of cash flows ” herein . industry conditions and trends our business environment and corresponding operating results are affected by the level of energy industry spending for the exploration , development and production of oil and natural gas reserves . 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 . although we believe our contract operations business is typically less impacted by commodity prices than certain other energy products and service providers , changes in oil and natural gas exploration and production spending normally result in changes in demand for our products and services . natural gas consumption in the u.s. for the twelve months ended november 30 , 2015 increased by approximately 2 % compared to the twelve months ended november 30 , 2014 . the u.s. energy information administration ( “ eia ” ) forecasts that total u.s. natural gas consumption will increase by 1.4 % in 2016 compared to 2015 and increase by an average of 0.7 % per year thereafter until 2040 . the eia estimates that the u.s. natural gas consumption level will be approximately 30 trillion cubic feet in 2040 , or 16 % of the projected worldwide total of approximately 185 trillion cubic feet . the eia forecasts that total worldwide natural gas consumption will increase by an average of 1.7 % per year between 2016 and 2040 . natural gas marketed production in the u.s. for the twelve months ended november 30 , 2015 increased by approximately 6 % compared to the twelve months ended november 30 , 2014 . the eia forecasts that total u.s. natural gas marketed production will increase by 0.7 % in 2016 compared to 2015 and u.s. natural gas production will increase by an average of 1.5 % per year thereafter until 2040 . the eia estimates that the u.s. natural gas production level will be approximately 33 trillion cubic feet in 2040 , or 18 % of the projected worldwide total of approximately 187 trillion cubic feet . the eia forecasts that total worldwide natural gas production will increase by an average of 1.7 % per year between 2016 and 2040 . global oil and u.s. natural gas prices have declined significantly since the third quarter of 2014 , which led to declines in u.s. and worldwide capital spending for drilling activity in 2015. in 2016 , given the current market environment , we expect continued declines in worldwide capital spending for drilling activity . 34 our performance trends and outlook our revenue , earnings and financial position are affected by , among other things , market conditions that impact demand and pricing for natural gas compression and oil and natural gas production and processing and our customers ' decisions among using our products and services , using our competitors ' products and services or owning and operating the equipment themselves . historically , oil and natural gas prices in north america have been volatile . story_separator_special_tag for example , the henry hub spot price for natural gas was $ 2.28 per mmbtu at december 31 , 2015 , which was approximately 27 % and 47 % lower than prices at december 31 , 2014 and 2013 , respectively , and the u.s. natural gas liquid composite price was approximately $ 4.72 per mmbtu for the month of november 2015 , which was approximately 16 % and 56 % lower than prices for the months of december 2014 and 2013 , respectively . these lower prices led to reduced drilling of gas wells in north america in 2015. in addition , the west texas intermediate crude oil spot price as of december 31 , 2015 was approximately 31 % and 62 % lower than prices at december 31 , 2014 and 2013 , respectively , which led to reduced drilling of oil wells in 2015. more recently , west texas intermediate crude oil prices continued to decline during 2016 , represented by a spot price decrease of 9 % at january 31 , 2016 compared to december 31 , 2015. during periods of lower oil or natural gas prices , our customers typically decrease their capital expenditures , which generally results in lower activity levels . as a result of the low oil and natural gas price environment in north america , our customers have sought to reduce their capital and operating expenditure requirements , and as a result , the demand and pricing for the equipment we manufacture in north america have been adversely impacted . third party booking activity levels for our manufactured products in north america during the year ended december 31 , 2015 were $ 390.5 million , which represents a decline of approximately 63 % and 46 % compared to the years ended december 31 , 2014 and 2013 , respectively , and our north america product sales backlog as of december 31 , 2015 was $ 223.8 million , which represents a decline of approximately 58 % and 24 % compared to december 31 , 2014 and 2013 , respectively . we believe these booking levels reflect both our customers ' reduced activity levels in response to the decline in commodity prices and caution on the part of our customers as they reset capital budgets and seek to reduce costs . similarly , in international markets , lower oil and gas prices have had a negative impact on the amount of capital investment by our customers in new projects . however , we believe the impact will be less than we expect to experience in north america for two reasons : first , the longer-term fundamentals influencing our international customers ' demand and , second , the long-term contracts we have in place with some of those international customers , including for our contract operations services . growth in our international markets depends in part on international infrastructure projects , many of which are based on longer-term plans of our customers that can be driven by their local market demand and local pricing for natural gas . as a result , we believe our international customers make decisions based on longer-term fundamentals that can be less tied to near term commodity prices than our north american customers . therefore , we believe the demand for our services and products in international markets will continue , and we expect to have opportunities to grow our international businesses over the long term . in the short term , however , our customers have sought to reduce their capital and operating expenditure requirements due to lower oil and natural gas prices . as a result , the demand and pricing for our services and products in international markets have been adversely impacted . third party booking activity levels for our manufactured products in international markets during the year ended december 31 , 2015 were $ 226.6 million , which represents a decrease of approximately 54 % and 59 % compared to the years ended december 31 , 2014 and 2013 , respectively , and our international market product sales backlog as of december 31 , 2015 was $ 228.6 million , which represents a decrease of approximately 45 % and 41 % compared to december 31 , 2014 and 2013 , respectively . aggregate third party booking activity levels for our manufactured products in north america and international markets during the year ended december 31 , 2015 were $ 617.1 million , which represents a decrease of approximately 60 % and 52 % compared to the years ended december 31 , 2014 and 2013 , respectively . the aggregate product sales backlog for our manufactured products in north america and international markets as of december 31 , 2015 was $ 452.4 million , which represents a decrease of approximately 53 % and 33 % compared to december 31 , 2014 and 2013 , respectively . in late 2015 , we received a customer notice of early termination on a contract operations project in the eastern hemisphere that had been operating since the third quarter of 2009. based on the january 2016 end date specified in the notice , we recorded additional depreciation expense of $ 10.8 million and contract operations revenue of $ 2.8 million in the fourth quarter of 2015. the additional depreciation expense recognized primarily related to capitalized installation costs . capitalized installation costs , included , among other things , civil engineering , piping , electrical instrumentation and project management costs . the additional revenue recognized related to the recognition of accelerated deferred revenue . additionally , during the first quarter of 2016 , we expect to record additional depreciation expense of approximately $ 21.5 million and contract operations revenue of approximately $ 5.6 million related to this terminated contract . furthermore , as a result of the contract early termination , we expect to incur approximately $ 6.5 million to demobilize the facility in the first half of 2016 that will be reflected in our statement of operations as cost of sales ( excluding depreciation and amortization expense ) .
| gross margin percentage during the year ended december 31 , 2015 compared to the year ended december 31 , 2014 increased primarily due to a reduction in operating expenses in latin america driven by our cost reduction plan during the current year period and the devaluation of the brazilian real in 2015 which had a positive impact on gross margin percentage , partially offset by the revenue decrease explained above . while our gross margin during the year ended december 31 , 2014 benefited from the start-up of a brazilian project , our contract operations business is capital intensive , and as such , we did have additional costs in the form of depreciation expense , which is excluded from gross margin . additionally , excluded from cost of sales and recorded to restructuring and other charges in our statements of operations during the year ended december 31 , 2015 were non-cash inventory write-downs of $ 4.2 million associated with the spin-off primarily related to the decentralization of shared inventory components between archrock 's north america contract operations business and our international contract operations business . gross margin , a non-gaap financial measure , is reconciled , in total , to net income ( loss ) , its most directly comparable financial measure calculated and presented in accordance with gaap in part ii , item 6 ( “ selected financial data — non-gaap financial measures ” ) of this report . 39 aftermarket services ( dollars in thousands ) replace_table_token_7_th the decrease in revenue during the year ended december 31 , 2015 compared to the year ended december 31 , 2014 was primarily due to decreases in revenue in the eastern hemisphere and latin america of $ 24.6 million and $ 10.8 million , respectively . the decrease in revenue in the eastern hemisphere was primarily caused by a decrease in revenue of $ 9.3 million as a result of the sale of our australian business in december 2014 , an $ 8.0 million decrease in revenue in gabon driven by our cessation of activities in the gabon market in the current year period and a decrease of $ 4.4 million in part sales in china . the decrease in revenue in latin america was primarily caused by a decrease of $ 8.3 million in bolivia primarily driven by the termination of parts , services
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we face , including but not limited to , failures , interruptions , or security breaches ( cyber-attacks ) , which could increase as a result of covid-19 related changes in our operating environment ; and our ability to attract and retain skilled employees . these risk factors are not exhaustive . new risk factors emerge from time to time . we can not predict such new risk factors nor can we assess the impact , if any , of such new 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 implied by any forward-looking statements . executive summary for the year ended december 31 , 2020 , net income decreased to $ 120.3 million , compared with net income of $ 190.7 million for the same period in 2019. the $ 70.5 million decrease was the result of a decrease of $ 74.4 million in net interest income after provision for credit losses , an increase of $ 51.1 million in net losses on derivatives and hedging activities , and an increase of $ 13.2 million in net unrealized losses on trading securities . these decreases to net income were offset by an increase of $ 66.0 million in gains on sales of securities . the covid-19 pandemic , which began to affect businesses and the economy in march 2020 and continues , and the response of the u.s. government and the federal reserve through changes in monetary policy and implementation of fiscal stimulus programs , led to interest rates that remain historically low and substantially elevated deposits reported by depository member institutions . our overall results of operations are influenced by the economy and financial markets , and in particular , by members ' demand for advances and our ability to maintain sufficient access to funding at relatively favorable costs . elevated deposit balances at member institutions , however , have resulted in increased liquidity at members and reduced demand for advances and have been the primary cause of the significant decline in advances balances beginning in the second quarter of 2020. in addition , mortgage purchases by the federal reserve aimed at supporting the housing market through the pandemic have increased refinancing activity and , thus , prepayments of mortgage-related assets we hold have reduced outstanding balances and have tightened yield spreads we earn on new mortgage acquisitions . these developments led to decreased net income for the year ended december 31 , 2020. generally , investor demand for high credit quality , fixed-income investments , including cos , continued to be strong relative to other investments . our flexibility in utilizing various funding tools , in combination with a diverse investor base and our status as a government-sponsored enterprise , have helped provide reliable market access and demand for consolidated obligations throughout fluctuating market environments and regulatory changes affecting dealers of and investors in cos. the bank has continued to meet all funding needs during the year ended december 31 , 2020. coronavirus pandemic : covid-19 the economic effects of the covid-19 pandemic in the united states continue to evolve , and the full impact and duration of the virus , despite the arrival of vaccines , are unknown . covid-19 and the resulting shut-down or significant slowing of large parts of the economy in 2020 and into 2021 have strained and severely taxed healthcare systems , businesses , and economies worldwide and induced a response of unprecedented fiscal and monetary policy support from the federal government . these policies have sharply reduced interest rates and have increased bank and credit union deposits , depressing the demand for wholesale funding , including advances . the effects of covid-19 and the response to the virus have negatively impacted 33 financial markets and overall economic conditions and have resulted in significant changes in interest rates , credit spreads , and asset prices which have had adverse impacts on us . the financial effects of covid-19 have increased credit risks to our investment portfolios , including money market investments , and our mpf loans , among others . decreased interest rates have had a negative impact on our net income , including on our money market assets and through accelerated prepayment of mortgage-related assets that we hold . possible additional economic effects of covid-19 and related governmental policies may include , among other things , disruption to our members and counterparties , uncertainties in the credit markets , operational incidents because of a remote work force , and a decline in the fair value of assets . given the high number of infections throughout the u.s. and uncertainties around the timing of vaccine distribution for covid-19 , as well as the depth of the recent economic decline , we believe it is likely that our earnings will remain lower for the next few years compared to our earnings of recent years . governmental and public actions taken in response to the covid-19 pandemic ( such as shelter-in-place or similar orders , travel restrictions , and business shutdowns ) , significantly reduced economic activity and created substantial uncertainty about the future economic environment , although there was substantial recovery of economic activity in the second half of 2020. unemployment insurance claims initially increased dramatically as employers laid off workers , but unemployment numbers , while still high , have fallen by more than half of what they were in april 2020. in response to covid-19 developments , the federal reserve responded with a series of monetary policy adjustments in march 2020 , including rapid reductions to the targeted federal funds rate totaling 1.50 percentage points , an increase in its daily repurchase agreement offerings , announced purchases of u.s. treasury securities and u.s. agency mortgage-backed securities , and the establishment of multiple liquidity facilities . valuations for agency mbs began to improve in april and have continued to improve and stabilize , partly as a result of increased investment by the federal reserve . story_separator_special_tag on march 27 , 2020 , the coronavirus aid , relief , and economic security act ( cares act ) was signed into law , and funding for the paycheck protection program ( ppp ) , which was created by the cares act , was increased with the enactment of subsequent laws . among other things , the cares act provided relief to american workers and their families in the forms of economic impact payments , rebates and other income tax relief measures , and expanded eligibility for unemployment , all of which contributed to an increase in deposits among our members . on march 11 , 2021 , the american rescue plan act was signed into law , providing for additional relief for businesses , states , municipalities , and individuals . also in response to covid-19 , the fhfa has taken certain actions to provide various forms of relief and guidance regarding the financial , operational , credit market , and other effects of the pandemic . in february 2021 , the u.s. treasury announced plans to reduce its cash held at the federal reserve to more normal levels , which is expected to increase liquidity further and to reduce short-term interest rates , perhaps to negative rates . additional information is provided in legislative and regulatory developments . demand for advances increased in march 2020 but has since significantly decreased . among other things , high member deposit balances have limited additional demand for advances in the second , third and fourth quarters of 2020 and are continuing . in addition , the federal reserve 's lending facility to support the ppp of the cares act , which provides loans to businesses , may have decreased demand for advances as members have been able to borrow under that facility at lower rates than are offered for advances . future forgiveness of ppp loans could lead to a further increase in member deposit balances . the risk of credit losses has increased , but we have not experienced a significant impact at this time . we are continuing to monitor credit and collateral conditions and make adjustments as needed . the cares act contains mortgage loan forbearance for borrowers . the continued inability of borrowers to make payments on mortgage loans post-forbearance may affect our results of operations through an increase in delinquency and loss performance in our mpf loan portfolio . we also monitor credit risk of our counterparties , who could be impacted by the economic effects of covid-19 . we continue to help our members support small business and nonprofit organizations through low interest-rate funding and grants . our jne recovery grant program , which launched in september 2020 , allows members to access funding to make grants to eligible small businesses or nonprofit organizations to assist with covid-19 related impacts . in march 2020 , the bank required employees who were not operationally critical to work remotely , and except for specific , limited needs of short duration , all staff ( including operationally critical employees ) have worked remotely from late march 2020 continuing to the present . we have remained fully operational with minimal impact on services to our members and other counterparties . at this time , we can not predict when our employees will return to work in our offices . we could experience significant operational difficulties or disruptions , which could impair our ability to conduct and manage our business effectively . while we have deployed modern , secure virtual private network and remote terminal solutions , a remote workforce can be more vulnerable to operational disruption than a workforce on a closed , closely monitored corporate network . for example , because our staff is working remotely , we are partially , though not fully , reliant on regional home utility and internet service providers . a disruption in service from one of these providers could require us to implement additional business continuity plans and procedures . our reliance on operationally critical vendors increases risk because those vendors may 34 themselves , because of remote work requirements , be operating in a less secure manner . for further details of the potential impact of these events on the bank , see the risk factors set forth in part i — item 1a — risk factors . additional information is provided in economic conditions . net interest income net interest income after provision for credit losses for the year ending december 31 , 2020 , was $ 194.6 million , compared with $ 268.9 million for 2019. the $ 74.4 million decrease in net interest income after provision for credit losses was due to the compression of net interest margin as further discussed below , a $ 5.3 billion decrease in the average balance of advances , partially offset by a $ 3.1 billion increase in the average balance of trading securities , and the associated $ 61.6 million increase in interest income from trading securities . net interest spread was 0.32 percent for the year ended december 31 , 2020 , a four basis point decrease from 2019 , and net interest margin was 0.39 percent , a ten basis point decrease from 2019. the decrease in net interest spread reflects a 111 basis point decrease in the average yield on earning assets and a 107 basis point decrease in the average yield on interest-bearing liabilities . the decreases in both net interest spread and net interest margin mainly reflect several factors , including the following : lower returns from investing the bank 's capital and short-term borrowings in a sharply reduced interest-rate environment ; accelerated net premium amortization on agency mbs and mortgage loans held due to higher projected and actual mortgage refinancing activity ; an $ 18.2 million decrease in accretion of significant improvement in projected cash flows resulting from sales of previously impaired private-label mbs , as further discussed below ; and an $ 11.0 million decline in prepayment fees on advances .
| table 6 presents major categories of average balances , related interest income/expense , and average yields/rates for interest-earning assets and interest-bearing liabilities . our primary source of earnings is net interest income , which is the interest earned on advances , mortgage loans , and investments less interest paid on cos , deposits , and other sources of funds . 37 table 6 - net interest spread and margin ( dollars in thousands ) replace_table_token_6_th _ ( 1 ) the average balances are reflected at amortized cost . ( 2 ) non-accrual loans are included in the average balances used to determine average yield . rate and volume analysis changes in both average balances ( volume ) and interest rates influence changes in net interest income and net interest margin . table 7 summarizes changes in interest income and interest expense for the years ended december 31 , 2020 and 2019. changes in interest income and interest expense that are not identifiable as either volume-related or rate-related , but are equally attributable to both volume and rate changes , have been allocated to the volume and rate categories based upon the proportion of the absolute value of the volume and rate changes . 38 table 7 - rate and volume analysis ( dollars in thousands ) replace_table_token_7_th average balance of advances outstanding the average balance of total advances decreased $ 5.3 billion , or 16.1 percent , for the year ended december 31 , 2020 , compared with the same period in 2019. we believe it is likely that advances balances will remain for some time at a level that is significantly lower than that of the past several years , or could decline further . for the year ended december 31 , 2020 and 2019 , net prepayment fees on advances were $ 24.0 million and $ 35.0 million , respectively . prepayment-fee income is unpredictable and inconsistent from period to period , occurring only when advances and investments are prepaid prior to the scheduled maturity or repricing dates , and
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53 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 . when we prepare these consolidated financial statements , we are required 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 and the reported amounts of revenue and expenses during the reporting period . some of our accounting policies require that we make subjective judgments , including estimates that involve matters that are inherently uncertain . our most critical estimates include those related to revenue recognition , inventories and reserves for excess and obsolescence , self-insured liabilities , accounting for stock-based awards , and income taxes . we base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances , the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources . our actual results may differ from these estimates under different assumptions or conditions . we believe the following critical accounting estimates affect our more significant judgments and estimates used in preparing our consolidated financial statements . see note 1 of the notes to consolidated financial statements for our organization and significant accounting policies . there have been no material changes made to the critical accounting estimates during the periods presented in the consolidated financial statements . revenue recognition significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period . material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management 's estimates change on the basis of development of the business or market conditions . the substantial majority of our revenue is generated pursuant to written contractual arrangements to design , develop , manufacture and or modify complex products , and to provide related engineering , technical and other services according to customer specifications . these contracts may be fixed price or cost-reimbursable . we consider all contracts for treatment in accordance with authoritative guidance for contracts with multiple deliverables . revenue from product sales not under contractual arrangement is recognized at the time title and the risk and rewards of ownership pass , which typically occurs when the products are shipped and collection is reasonably assured . revenue and profits on fixed-price contracts are recognized using percentage-of-completion methods of accounting . revenue and profits on fixed-price production contracts , whose units are produced and delivered in a continuous or sequential process , are recorded as units are delivered based on their selling prices , or the units-of-delivery method . revenue and profits on other fixed-price contracts with significant engineering as well as production requirements are recorded based on the ratio of total actual incurred costs to date to the total estimated costs for each contract , or the cost-to-cost method . under percentage-of-completion methods of accounting , a single estimated total profit margin is used to recognize profit for each contract over its entire period of performance , which can exceed one year . accounting for revenue and profits on a fixed-price contract requires the preparation of estimates of ( 1 ) the total contract revenue , ( 2 ) the total costs at completion , which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete the contract 's statement of work and ( 3 ) the measurement of progress towards completion . the estimated profit or loss at completion on a contract is equal to the difference between the total estimated contract revenue and the total estimated cost at completion . under the units-of-delivery 54 method , sales on a fixed-price type contract are recorded as the units are delivered during the period based on their contractual selling prices . under the cost-to-cost method , sales on a fixed-price type contract are recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion , multiplied by ( a ) the total estimated contract revenue , less ( b ) the cumulative sales recognized in prior periods . the profit recorded on a contract in any period using either the units-of-delivery method or cost-to-cost method is equal to ( x ) the current estimated total profit margin multiplied by the cumulative sales recognized , less ( y ) the amount of cumulative profit previously recorded for the contract . in the case of a contract for which the total estimated costs exceed the total estimated revenue , a loss arises , and a provision for the entire loss is recorded in the period that it becomes evident . the unrecoverable costs on a loss contract that are expected to be incurred in future periods are recorded in the program cost . revenue and profits on cost-reimbursable type contracts are recognized as costs are incurred on the contract , at an amount equal to the costs plus the estimated profit on those costs . the estimated profit on a cost-reimbursable contract is generally fixed or variable based on the contractual fee arrangement . we review cost performance and estimates to complete at least quarterly and in many cases more frequently . adjustments to original estimates for a contract 's revenue , estimated costs at completion and estimated profit or loss are often required as work progresses under a contract , as experience is gained and as more information is obtained , even though the scope of work required under the contract may not change , or if contract modifications occur . story_separator_special_tag the impact of revisions in profit estimates for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made . amounts representing contract change orders or claims are included in revenue only when they can be reliably estimated and their realization is probable . incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue and profit rates , and are recorded when there is sufficient information to assess anticipated contract performance . inventories and reserve for excess and obsolescence our policy for valuation of inventory , including the determination of obsolete or excess inventory , requires us to perform a detailed assessment of inventory at each balance sheet date , which includes a review of , among other factors , an estimate of future demand for products within specific time horizons , valuation of existing inventory , as well as product lifecycle and product development plans . inventory reserves are also provided to cover risks arising from slow-moving items . we write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions . we may be required to record additional inventory write-downs if actual market conditions are less favorable than those projected by our management . self-insured liability we are self-insured for employee medical claims , subject to individual and aggregate stop-loss policies . we estimate a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by us . we perform an annual evaluation of this policy and have determined that for all prior years during which this policy has been in effect there have been cost advantages to this policy , as compared to obtaining commercially available employee medical insurance . however , actual results may differ materially from those estimated and could have a material impact on our consolidated financial statements . 55 impairment of long-lived assets we review the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable . the estimated future cash flows are based upon , among other things , assumptions about expected future operating performance , and may differ from actual cash flows . if the sum of the projected undiscounted cash flows ( excluding interest ) is less than the carrying value of the assets , the assets will be written down to the estimated fair value in the period in which the determination is made . long-term incentive awards we grant long-term incentive awards and we establish a target payout at the beginning of each performance period . the actual payout at the end of the performance period is calculated based upon our achievement of revenue and operating profit growth . payouts are made in cash and restricted stock units . upon vesting of the restricted stock units , we have the discretion to settle the restricted stock units in cash or stock . the cash component of the award is accounted for as a liability . the equity component is accounted for as a stock-based liability as the restricted stock units may be settled in cash or stock . at each reporting period , we reassess the probability of achieving the performance targets . the estimation of whether the performance targets will be achieved requires judgment , and to the extent actual results or updated estimates differ from our current estimates , the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised . upon settlement of these awards , the total compensation expense recorded over the vesting period of the awards will equal the settlement amount , which is based on our stock price on the vesting date . income taxes we are required to estimate our income taxes , which includes estimating our current income taxes as well as measuring the temporary differences resulting from different treatment of items for tax and accounting purposes . we currently have significant deferred assets , which are subject to periodic recoverability assessments . realizing our deferred tax assets principally depends on our achieving projected future taxable income . we may change our judgments regarding future profitability due to future market conditions and other factors , which may result in recording a valuation allowance against those deferred tax assets . fiscal periods our fiscal year ends on april 30. due to our fixed year end date of april 30 , our first and fourth quarters each consist of approximately 13 weeks . the second and third quarters each consist of 13 weeks . our first three quarters end on a saturday . 56 story_separator_special_tag 2 '' > selling , general and administrative . sg & a expense for the fiscal year ended april 30 , 2010 was $ 42.4 million , or 17 % of revenue , compared to sg & a expense of $ 34.2 million , or 14 % of revenue , for the fiscal year ended april 30 , 2009. sg & a expense increased primarily due to higher bid and proposal activity , selling and marketing expenses , and administrative costs . research and development . r & d expense for the fiscal year ended april 30 , 2010 was $ 24.5 million , or 10 % of revenue , compared to r & d expense of $ 21.8 million , or 9 % of revenue , for the fiscal year ended april 30 , 2009. r & d expense increased primarily due to increased investment in development initiatives for industrial electrical vehicle charging systems infrastructure . interest income .
| cost of sales for the fiscal year ended april 30 , 2011 was $ 175.4 million , as compared to $ 152.7 million for the fiscal year ended april 30 , 2010 , representing an increase of $ 22.7 million , or 15 % , including an impairment charge of $ 2.0 million on certain long-lived assets related to the global observer contract . for additional information regarding the impairment charge , please see note 5 to our consolidated financial statements , which are included in item 8 , `` financial statements and supplementary data '' of this form 10-k. the increase in cost of sales was caused by higher uas cost of sales of $ 11.2 million and ees cost of sales of $ 11.4 million . gross margin . gross margin for the fiscal year ended april 30 , 2011 was $ 117.2 million , as compared to $ 96.8 million for the fiscal year ended april 30 , 2010 , representing an increase of $ 20.4 million , or 21 % . as a percentage of revenue , gross margin increased from 39 % to 40 % . uas gross margin increased $ 14.4 million , or 17 % , to $ 99.5 million for the fiscal year ended april 30 , 2011 , primarily due to increased sales volume . as a percentage of revenue , gross margin for uas increased from 38 % to 40 % , primarily due to a higher amount of fixed-price contract revenue compared to cost-reimbursable contract revenue . ees gross margin increased $ 6.0 million , or 51 % , to $ 17.6 million for the fiscal year ended april 30 , 2011 , primarily due to increased sales volume . as a percentage of revenue , ees gross margin decreased from 46 % to 41 % , primarily due to higher manufacturing and engineering support overhead costs . selling , general and administrative . sg & a expense for the fiscal year ended april 30 , 2011 was $ 47.4 million , or 16 % of revenue , compared to sg & a expense of $ 42.4 million , or 17 % of revenue , for the fiscal year ended april 30 , 2010. sg & a expense increased primarily due to higher bid and proposal costs , selling and marketing expenses and administrative costs . research and development . r & d expense for the fiscal year ended april
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there have been no material changes to customer payment terms due to the covid-19 pandemic . the covid-19 pandemic , and the volatile regional and global economic conditions stemming from it , could also exacerbate the risk factors identified in this form 10-k. the covid-19 pandemic may also materially adversely affect our results in a manner that is either not currently known or that we do not currently consider to be a significant risk to our business . investment in joint venture on october 2 , 2019 , hep cushing llc ( “ hep cushing ” ) , a wholly-owned subsidiary of hep , and plains marketing , l.p. , a wholly-owned subsidiary of plains , formed a 50/50 joint venture , cushing connect pipeline & terminal llc ( the “ cushing connect joint venture ” ) , for ( i ) the development , construction , ownership and operation of a new 160,000 barrel per day common carrier crude oil pipeline ( the “ cushing connect pipeline ” ) that will connect the cushing , oklahoma crude oil hub to the tulsa , oklahoma refining complex owned by a subsidiary of hfc and ( ii ) the ownership and operation of 1.5 million barrels of crude oil storage in cushing , oklahoma ( the “ cushing connect jv terminal ” ) . the cushing connect jv terminal went in service during the second quarter of 2020 , and the cushing connect pipeline is expected to be placed in service during the second quarter of 2021. long-term commercial agreements have been entered into to support the cushing connect joint venture assets . the cushing connect joint venture has contracted with an affiliate of hep to manage the construction and operation of the cushing connect pipeline and with an affiliate of plains to manage the operation of the cushing connect jv terminal . the total cushing connect joint venture investment will generally be shared equally among hep and plains , and hep estimates its share of the cost of the cushing connect jv terminal contributed by plains and cushing connect pipeline construction costs are approximately $ 65 million . however , any cushing connect pipeline construction costs exceeding 10 % of the budget are borne solely by us . agreements with hfc we serve hfc 's refineries under long-term pipeline , terminal , tankage and refinery processing unit throughput agreements expiring from 2021 to 2036. under these agreements , hfc agrees to transport , store , and process throughput volumes of refined product , crude oil and feedstocks on our pipelines , terminal , tankage , loading rack facilities and refinery processing units that result in minimum annual payments to us . these minimum annual payments or revenues are subject to annual rate adjustments on july 1st each year based on the ppi or the ferc index . on december 17 , 2020 , ferc established a new price index for the five-year period commencing july 1 , 2021 and ending june 30 , 2026 , in which common carriers charging indexed rates are permitted to adjust their indexed ceilings annually by producer price index plus 0.78 % . ferc has received requests for rehearing of its december 17 , 2020 order , which remain pending in ferc docket no . rm20-14-000 . as of december 31 , 2020 , these agreements with hfc required minimum annualized payments to us of $ 351.1 million . however , as previously disclosed , subsequent to year end , our agreements with hfc were modified to account for the conversion of the cheyenne refinery to renewable diesel production as discussed below , and as of january 1 , 2021 , require minimum annualized payments to us of $ 341.9 million . if hfc fails to meet its minimum volume commitments under the agreements in any quarter , it will be required to pay us the amount of any shortfall in cash 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 . a significant reduction in revenues under the hfc agreements could have a material adverse effect on our results of operations . on june 1 , 2020 , hfc announced plans to permanently cease petroleum refining operations at its cheyenne refinery and to convert certain assets at that refinery to renewable diesel production . hfc subsequently began winding down petroleum refining operations at its cheyenne refinery on august 3 , 2020. the net book value of our cheyenne related net assets as of december 31 , 2020 was approximately $ 50.0 million , including $ 24.2 million of long-lived assets and $ 33.1 million of goodwill . we evaluated the recoverability of long-lived assets based on estimated future cash flows noting the assets were recoverable . therefore , no impairment of our cheyenne long-lived assets was required during 2020. our annual goodwill impairment testing was performed during the third quarter of 2020. the estimated fair value of our reporting units were derived using a combination of both income and market approaches . the income approach reflects expected future cash flows based on anticipated gross margins , operating costs , and capital expenditures . the market approach includes both the guideline public company and guideline transaction methods . both market approach methods use pricing multiples derived from historical market transactions of other like-kind assets . these fair value measurements involve significant unobservable inputs ( level 3 inputs ) . see note 5 for further discussion of level 3 inputs . story_separator_special_tag - 52 - our annual testing of goodwill did not identify any impairments other than our cheyenne reporting unit , which reported a goodwill impairment charge of $ 35.7 million in the third quarter of 2020. hep and hfc reached an agreement to terminate the existing minimum volume commitments for hep 's cheyenne assets and enter into new agreements , which were finalized and executed on february 8 , 2021 , with the following terms , in each case effective january 1 , 2021 : ( 1 ) a ten-year lease with two five-year renewal option periods for hfc 's use of certain hep tank and rack assets in the cheyenne refinery to facilitate renewable diesel production with an annual lease payment of approximately $ 5 million , ( 2 ) a five-year contango service fee arrangement that will utilize hep tank assets inside the cheyenne refinery where hfc will pay a base tariff to hep for available crude oil storage and hfc and hep will split any profits generated on crude oil contango opportunities and ( 3 ) a $ 10 million one-time cash payment from hfc to hep for the termination of the existing minimum volume commitment . under certain provisions of an omnibus agreement that we have with hfc ( “ omnibus agreement ” ) , we pay hfc an annual administrative fee ( $ 2.6 million in 2020 ) , 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 hfc who perform services for us on behalf of hls 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 . under hls 's secondment agreement with hfc , certain employees of hfc are seconded to hls to provide operational and maintenance services for certain of our processing , refining , pipeline and tankage assets , and hls reimburses hfc for its prorated portion of the wages , benefits , and other costs of these employees for our benefit . we have a long-term strategic relationship with hfc that has historically facilitated our growth . our future growth plans include organic projects around our existing assets and select investments or acquisitions that enhance our service platform while creating accretion for our unitholders . while in the near term , any acquisitions would be subject to economic conditions discussed in “ overview - impact of covid-19 on our business ” above , we also expect over the longer term to continue to work with hfc on logistic asset acquisitions in conjunction with hfc 's refinery acquisition strategies . furthermore , we plan to continue to pursue third-party logistic asset acquisitions that are accretive to our unitholders and increase the diversity of our revenues . results of operations ( unaudited ) income , distributable cash flow and volumes the following tables present income , distributable cash flow and volume information for the years ended december 31 , 2020 , 2019 and 2018 . - 53 - replace_table_token_10_th - 54 - replace_table_token_11_th - 55 - ( 1 ) earnings before interest , taxes , depreciation and amortization ( “ ebitda ” ) is calculated as net income attributable to holly energy partners plus ( i ) interest expense , net of interest income , ( ii ) state income tax and ( iii ) depreciation and amortization . adjusted ebitda is calculated as ebitda plus ( i ) loss on early extinguishment of debt , ( ii ) goodwill impairment , ( iii ) pipeline tariffs not included in revenues due to impacts from lease accounting for certain pipeline tariffs minus ( iv ) gain on sales-type leases , ( v ) hep 's pro-rata share of gain on business interruption settlement and ( vi ) pipeline lease payments not included in operating costs and expenses . portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases . these pipeline tariffs were previously recorded as revenues prior to the renewal of the throughput agreement , which triggered sales-type lease accounting . similarly , certain pipeline lease payments were previously recorded as operating costs and expenses , but the underlying lease was reclassified from an operating lease to a financing lease , and these payments are now recorded as interest expense and reductions in the lease liability . ebitda and adjusted ebitda are not calculations based upon generally accepted accounting principles ( `` gaap '' ) . however , the amounts included in the ebitda and adjusted ebitda calculations are derived from amounts included in our consolidated financial statements . ebitda and adjusted ebitda should not be considered as alternatives to net income attributable to holly energy partners or operating income , as indications of our operating performance or as alternatives to operating cash flow as a measure of liquidity . ebitda and adjusted ebitda are not necessarily comparable to similarly titled measures of other companies . ebitda and adjusted ebitda are presented here because they are widely used financial indicators used by investors and analysts to measure performance . ebitda and adjusted ebitda are 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. ” ( 2 ) 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 exception of maintenance capital expenditures . 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 .
| revenues from our refined product pipelines were $ 116.9 million , a decrease of $ 15.4 million , on shipments averaging 161.5 mbpd compared to 195.5 mbpd for the year ended december 31 , 2019. the volume and revenue decreases were mainly due to lower volumes on pipelines servicing hfc 's navajo refinery , delek 's big spring refinery and our unev pipeline largely as a result of demand destruction associated with the covid-19 pandemic as well as the recording of certain pipeline tariffs as interest income as the related throughput contract renewals were determined to be sales-type leases . - 56 - revenues from our intermediate pipelines were $ 30.0 million , an increase of $ 0.5 million , on shipments averaging 137.1 mbpd compared to 140.6 mbpd for the year ended december 31 , 2019. revenues from our crude pipelines were $ 118.9 million , a decrease of $ 11.8 million , on shipments averaging 387.7 mbpd compared to 501.2 mbpd for the year ended december 31 , 2019. the decreases were mainly attributable to decreased volumes on our crude pipeline systems in the permian basin , wyoming and utah largely as a result of demand destruction associated with the covid-19 pandemic . revenues from terminal , tankage and loading rack fees were $ 151.7 million , a decrease of $ 8.8 million compared to the year ended december 31 , 2019. refined products and crude oil terminalled in the facilities averaged 442.2 mbpd compared to 483.2 mbpd for the year ended december 31 , 2019. the revenue and volume decreases were mainly as a result of demand destruction associated with the covid-19 pandemic across many of our facilities . revenues from refinery processing units were $ 80.3 million , an increase of $ 0.6 million on throughputs averaging 61.4 mbpd compared to 68.8 mbpd for the year ended december 31 , 2019. the decrease in volumes was mainly due to reduced throughput for both our woods cross and el dorado processing units largely as a result of demand destruction associated with the covid-19 pandemic . revenues remained relatively constant due to contractual minimum volume guarantees . operations expense operations ( exclusive of depreciation and amortization )
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of a change in business models and contract terms on the profitability of our connectivity agreements with airline partners , including as a result of changes in accounting standards ; our ability to engage suppliers of equipment components and network services ; continued demand for connectivity and proliferation of wi-fi enabled devices , including smartphones , tablets and laptops ; changes in domestic or foreign laws , regulations or policies that affect our business or the business of our customers and suppliers ; changes in laws , regulations and interpretations affecting telecommunications services , including those affecting our ability to maintain our licenses for atg spectrum in the united states , obtain sufficient rights to use additional atg spectrum and or other sources of broadband connectivity to deliver our services , expand our service offerings and manage our network ; and changes in laws , regulations and interpretations affecting aviation , including , in particular , changes that impact the design of our equipment and our ability to obtain required certifications for our equipment . our financial statements beginning in 2018 will be impacted by the transition of certain existing airlines from the turnkey model to the airline-directed model ( primarily in ca-na ) and by additional airlines coming online under the airline-directed model . additionally , our financial statements beginning in 2018 will be further impacted by the adoption of the new revenue recognition standard asc 606 ( primarily in ca-na and ca-row ) . see , key components of consolidated statements of operations for further information on how we account for turnkey and airline-directed activity . 57 the transition to the airline-directed model will result in : higher equipment revenue and related equipment costs since equipment transactions will be treated as a sale ; lower service revenue , partially offset by reductions in revenue share payments made to the airline , which is reported within cost of service revenue ; higher cost of service revenue due to the elimination of the amortization of deferred airborne lease incentives ; lower depreciation and amortization expense due to the elimination of depreciation expense for the associated equipment ; and lower cash used in investing activities due to decreased capital expenditures and related deferred airborne lease incentives , offset by an increase in operating cash outflows from operating activities due to equipment purchases being treated as inventory purchases . the adoption of the new revenue recognition standard ( asc 606 ) will result in : higher equipment revenue and related equipment costs , as these will be recognized upon installation , as compared to the historical revenue accounting standard ( asc 605 ) , which required us to defer equipment revenues and related costs over the life of the airline agreement ; lower service revenue , as certain costs that were previously expensed , including penalties and certain other payments provided to airline customers , will be accounted for as a reduction of revenue ; and lower engineering , design and development expenses , as certain costs incurred to fulfill our airline agreements , including stcs , will now be deferred and amortized over the life of the airline agreement rather than expensed as incurred . see note 2 , summary of significant accounting policies , in our consolidated financial statements for additional information . 58 key business metrics our management regularly reviews financial and operating metrics , including the following key operating metrics for the ca-na , ca-row and ba segments , to evaluate the performance of our business and our success in executing our business plan , make decisions regarding resource allocation and corporate strategies , and evaluate forward-looking projections . replace_table_token_4_th replace_table_token_5_th aircraft online . we define aircraft online as the total number of commercial aircraft on which our equipment is installed and service has been made commercially available as of the last day of each period presented . we assign aircraft to ca-na or ca-row at the time of contract signing as follows : ( i ) all aircraft operated by north american airlines and under contract for atg or atg-4 service are assigned to ca-na , ( ii ) all aircraft operated by north american airlines and under a contract for satellite service are assigned to ca-na or ca-row based on whether the routes flown by such aircraft under the contract are anticipated to be predominantly within or outside of north america at the time the contract is signed , and ( iii ) all aircraft operated by non-north american airlines and under a contract are assigned to ca-row . aircraft equivalents . we define aircraft equivalents for a segment as the number of commercial aircraft online ( as defined above ) multiplied by the percentage of flights flown by such aircraft within the scope of that segment , rounded to the nearest whole aircraft and expressed as an average of the month end figures for each month in the period . this methodology takes into account the fact that during a particular period certain aircraft may fly routes outside the scope of the segment to which they are assigned for purposes of the calculation of aircraft online . annualized average monthly service revenue per aircraft equivalent ( arpa ) . we define annualized arpa as the aggregate service revenue plus monthly service fees , some of which are reported as a reduction to cost of service revenue for that segment for the period , divided by the number of months in 59 the period , and further divided by the number of aircraft equivalents ( as defined above ) for that segment during the period , which is then annualized and rounded to the nearest thousand . annualized satellite arpa is calculated based on satellite revenue and satellite aircraft equivalents , within that segment . annualized atg arpa is calculated based on atg revenue and atg aircraft equivalents . gross passenger opportunity ( gpo ) . we define gpo as the aggregate number of passengers who board commercial aircraft on which gogo service has been available at any time during the period presented . story_separator_special_tag when actual passenger counts are available directly from our airline partners , we aggregate such counts across flights on gogo-equipped aircraft . when not available directly from our airline partners , we estimate gpo . estimated gpo is calculated by first estimating the number of flights occurring on each gogo-equipped aircraft , then multiplying by the number of seats on that aircraft , and finally multiplying by a seat factor that is determined from historical information provided to us in arrears by our airline partners . the estimated number of flights is derived from real-time flight information provided to our front-end systems by air radio inc. ( arinc ) , direct airline feeds and supplementary third-party data sources . these aircraft-level estimates are then aggregated with any available airline-provided passenger counts to obtain total gpo . total average revenue per session ( arps ) . we define arps as revenue from passenger connectivity , excluding non-session related revenue , divided by the total number of sessions during the period . a session , or a use of passenger connectivity , is defined as the use by a unique passenger of passenger connectivity on a flight segment . multiple logins or purchases under the same user name during one flight segment count as only one session . connectivity take rate . we define connectivity take rate as the number of sessions during the period expressed as a percentage of gpo . included in our connectivity take-rate calculation are sessions for which we did not receive revenue , including those provided pursuant to free promotional campaigns and , to a lesser extent , as a result of complimentary passes distributed by our customer service representatives for unforeseen technical issues . for the periods listed above , the number of sessions for which we did not receive revenue was not material . replace_table_token_6_th satellite aircraft online . we define satellite aircraft online as the total number of business aircraft for which we provide satellite services as of the last day of each period presented . atg aircraft online . we define atg aircraft online as the total number of business aircraft for which we provide atg services as of the last day of each period presented . average monthly service revenue per satellite aircraft online . we define average monthly service revenue per satellite aircraft online as the aggregate satellite service revenue for the period divided by 60 the number of months in the period , divided by the number of satellite aircraft online during the period ( expressed as an average of the month end figures for each month in such period ) . average monthly service revenue per atg aircraft online . we define average monthly service revenue per atg aircraft online as the aggregate atg service revenue for the period divided by the number of months in the period , divided by the number of atg aircraft online during the period ( expressed as an average of the month end figures for each month in such period ) . units sold . we define units sold as the number of satellite or atg units for which we recognized revenue during the period . for the year ended december 31 , 2017 , we recognized revenue on twelve avance ( formerly gogo biz 4g ) units that were previously deferred . average equipment revenue per satellite unit sold . we define average equipment revenue per satellite unit sold as the aggregate equipment revenue earned from all satellite units sold during the period , divided by the number of satellite units sold . average equipment revenue per atg unit sold . we define average equipment revenue per atg unit sold as the aggregate equipment revenue from all atg units sold during the period , divided by the number of atg units sold . key components of consolidated statements of operations the following briefly describes certain key components of revenue and expenses for the ca-na , ba and ca-row segments , as presented in our consolidated statements of operations . revenue : we generate two types of revenue through each of our operating segments : service revenue and equipment revenue . commercial aviation north america and rest of world : service revenue . service revenue , which currently represents substantially all of ca-na 's and ca-row 's segment revenue , is derived from passenger connectivity , passenger entertainment and connected aircraft services ( cas ) related revenue . passenger connectivity revenue includes connectivity services paid for by passengers , airlines and third parties . passenger paid revenue represents purchases of individual sessions ( which may be flight or time-based and include multiple individual session packages ) and monthly and annual subscriptions . airline paid revenue includes sponsorship revenue ( passenger connectivity sold to airlines who sponsor free or discounted access to passengers ) and our wholesale channel ( passenger connectivity sold to airlines who in turn make passenger connectivity available through customer loyalty programs or as incentives directly to their customers ) . airline paid revenue also includes passenger connectivity purchased for the use of airline pilots and flight crews and connectivity sold directly to the airlines for their passengers ' use . third party paid revenue includes sponsorship revenue ( passenger connectivity sold to third parties who sponsor free or discounted access to passengers ) and our wholesale channel ( passenger connectivity sold to third parties who in turn make passenger connectivity available through customer loyalty programs or as incentives directly to their customers ) . third party paid revenue also includes revenue generated through our enterprise channel ( such as passenger connectivity sold through travel management companies ) , our roaming channel ( passenger connectivity sold to ground based wi-fi internet providers or gateways who resell to their customers ) , advertising fees and e-commerce revenue share arrangements . 61 passenger entertainment offerings include business-to-consumer and business-to-business models . under the business-to-consumer model , we provide our entertainment service directly to airline passengers .
| total annualized arpa increased slightly to $ 140 thousand for the year ended december 31 , 2017 as compared with $ 137 thousand for the prior year . total annualized arpa is comprised of annualized satellite arpa of $ 226 thousand and annualized atg arpa of $ 132 thousand for the year ended december 31 , 2017 . 67 a summary of the components of ca-na 's service revenue for the years ended december 31 , 2017 and 2016 is as follows ( in thousands , except for percent change ) : replace_table_token_9_th ( 1 ) includes non-session related revenue of $ 6.7 million and $ 15.7 million for the years ended december 31 , 2017 and 2016 , respectively , primarily included within third party-paid revenue . ca-na passenger connectivity revenue increased to $ 368.9 million for the year ended december 31 , 2017 as compared with $ 341.1 million for the prior year due to increases in third party-paid , airline-paid and passenger-paid revenue . third party-paid revenue increased primarily due to increases in sponsorship , roaming , enterprise and wholesale revenue . our airline-paid revenue increased due to new agreements with certain airline partners under which the airlines pay us for specified data usage , including data used by passengers and by airline crew members using connectivity services while inflight . passenger-paid revenue also increased due to higher demand , but was somewhat limited by growth in third party-paid and airline-paid revenue , in line with our multiple payer strategy . the increase in passenger entertainment and cas revenue to $ 24.6 million for the year ended december 31 , 2017 as compared with $ 16.1 million for the prior year was due to increased usage of passenger entertainment services under business-to-business arrangements with our airline partners , as all passenger entertainment arrangements transitioned to business-to-business arrangements during the year , and increased use of cas operational applications during 2017. ca-na revenue was partially offset by a decrease in equipment revenue to $ 7.1 million for the year ended december 31 , 2017 , as
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if it is determined that the estimated future undiscounted cash flows are less than the carrying value of the property , a write-down to the estimated fair value will then be reported in our consolidated statement of income/ ( loss ) for the period . where estimates of future net cash flows are not determinable and where other conditions indicate the potential for impairment , management uses available market information and or third-party valuation experts to assess if the carrying value can be recovered and to estimate fair value . impairment carrying values of long-lived assets , other than mineral properties , are evaluated for impairment at such time that information becomes available indicating that the carrying value may not be recoverable . if it is determined that the fair value is less than the carrying value an impairment charge equal to the difference between the fair value and the carrying value will be recorded in our consolidated statements of income/ ( loss ) . stock-based compensation under our stock option , long-term incentive , and deferred share unit plans , the company can grant stock incentive options , restricted share units , and deferred share units to executives , employees , consultants and non-employee directors as applicable . compensation expense for such grants is recorded in the consolidated statements of income/ ( loss ) as a component of exploration , property evaluation and holding costs and corporate administration , with a corresponding increase to common shares in the consolidated balance sheets . the fair value of option grants is calculated using the black-scholes option pricing model . the fair value of restricted and deferred share units is based on the closing price of our common shares on the grant date , and in certain cases , adjusted by a brownian motion price model . the expense is based on the fair value of the grant on the grant date and is recognized over the vesting period specified for each grant . forfeitures of unvested awards for all stock-based compensation result in expense reversal upon forfeiture . financial instruments accounting standards codification topic 820 , fair value measurements and disclosures ( “ asc 820 ” ) of the financial accounting standards board ( “ fasb ” ) requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value . asc 820 establishes a fair value hierarchy based on the level of independent , objective evidence surrounding the inputs used to measure fair value . a financial instrument 's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement . asc 820 prioritizes the inputs into three levels that may be used to measure fair value : ● level 1 – unadjusted quoted prices in active markets that are accessible at the measurement date for identical , unrestricted assets or liabilities . ● level 2 – observable inputs other than quoted prices included within level 1 that are observable for the asset or liability , either directly or indirectly , including quoted prices for similar assets and liabilities in active markets ; quoted prices for identical or similar assets and liabilities in markets that are not active ; or other inputs that are observable or can be corroborated by observable market data by correlation or other means . ● level 3 – prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable . 59 our financial instruments include cash and cash equivalents , marketable securities , short-term investments , accounts payable and certain other current assets and liabilities . due to the short-term nature of our cash and cash equivalents , short-term investments , accounts payable and certain other current assets and liabilities , we believe that their carrying amounts approximate fair value . our other investments are accounted for at fair value based on quoted market prices in an active market and are included in level 1 of the fair value hierarchy . recent accounting pronouncements no recent accounting pronouncements are applicable to vista at this time . non-u.s. gaap financial measures in this report , we have provided information prepared or calculated according to u.s. gaap , as well as provided some non-u.s. gaap prospective financial performance measures . because the non-u.s. gaap performance measures do not have any standardized meaning prescribed by u.s. gaap , they may not be comparable to similar measures presented by other companies . these measures should not be considered in isolation or as substitutes for measures of performance prepared in accordance with u.s. gaap . there are limitations associated with the use of such non-u.s. gaap measures . since these measures do not incorporate revenues , changes in working capital and non-operating cash costs , they are not necessarily indicative of potential operating profit or loss , or cash flow from operations as determined in accordance with u.s. gaap . the non-u.s. gaap measures total cash costs , cash costs per ounce and all-in sustaining costs ( “ aisc ” ) per ounce are not , and are not intended to be , presentations in accordance with u.s. gaap . as referenced in the 2019 pfs , these measures represent , respectively , our prospective cash costs and all-in sustaining costs related to our project . we believe that these metrics help investors understand the economics of the project . we present the non-u.s. gaap financial measures for our project in the tables below . actual u.s. gaap results may vary from the amounts disclosed . other companies may calculate these measures differently . total cash costs and all-in sustaining costs total cash costs , cash costs per ounce , and aisc per ounce are non-u.s. gaap metrics developed by the world gold council to provide story_separator_special_tag if it is determined that the estimated future undiscounted cash flows are less than the carrying value of the property , a write-down to the estimated fair value will then be reported in our consolidated statement of income/ ( loss ) for the period . where estimates of future net cash flows are not determinable and where other conditions indicate the potential for impairment , management uses available market information and or third-party valuation experts to assess if the carrying value can be recovered and to estimate fair value . impairment carrying values of long-lived assets , other than mineral properties , are evaluated for impairment at such time that information becomes available indicating that the carrying value may not be recoverable . if it is determined that the fair value is less than the carrying value an impairment charge equal to the difference between the fair value and the carrying value will be recorded in our consolidated statements of income/ ( loss ) . stock-based compensation under our stock option , long-term incentive , and deferred share unit plans , the company can grant stock incentive options , restricted share units , and deferred share units to executives , employees , consultants and non-employee directors as applicable . compensation expense for such grants is recorded in the consolidated statements of income/ ( loss ) as a component of exploration , property evaluation and holding costs and corporate administration , with a corresponding increase to common shares in the consolidated balance sheets . the fair value of option grants is calculated using the black-scholes option pricing model . the fair value of restricted and deferred share units is based on the closing price of our common shares on the grant date , and in certain cases , adjusted by a brownian motion price model . the expense is based on the fair value of the grant on the grant date and is recognized over the vesting period specified for each grant . forfeitures of unvested awards for all stock-based compensation result in expense reversal upon forfeiture . financial instruments accounting standards codification topic 820 , fair value measurements and disclosures ( “ asc 820 ” ) of the financial accounting standards board ( “ fasb ” ) requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value . asc 820 establishes a fair value hierarchy based on the level of independent , objective evidence surrounding the inputs used to measure fair value . a financial instrument 's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement . asc 820 prioritizes the inputs into three levels that may be used to measure fair value : ● level 1 – unadjusted quoted prices in active markets that are accessible at the measurement date for identical , unrestricted assets or liabilities . ● level 2 – observable inputs other than quoted prices included within level 1 that are observable for the asset or liability , either directly or indirectly , including quoted prices for similar assets and liabilities in active markets ; quoted prices for identical or similar assets and liabilities in markets that are not active ; or other inputs that are observable or can be corroborated by observable market data by correlation or other means . ● level 3 – prices or valuation techniques requiring inputs that are both significant to the fair value measurement and unobservable . 59 our financial instruments include cash and cash equivalents , marketable securities , short-term investments , accounts payable and certain other current assets and liabilities . due to the short-term nature of our cash and cash equivalents , short-term investments , accounts payable and certain other current assets and liabilities , we believe that their carrying amounts approximate fair value . our other investments are accounted for at fair value based on quoted market prices in an active market and are included in level 1 of the fair value hierarchy . recent accounting pronouncements no recent accounting pronouncements are applicable to vista at this time . non-u.s. gaap financial measures in this report , we have provided information prepared or calculated according to u.s. gaap , as well as provided some non-u.s. gaap prospective financial performance measures . because the non-u.s. gaap performance measures do not have any standardized meaning prescribed by u.s. gaap , they may not be comparable to similar measures presented by other companies . these measures should not be considered in isolation or as substitutes for measures of performance prepared in accordance with u.s. gaap . there are limitations associated with the use of such non-u.s. gaap measures . since these measures do not incorporate revenues , changes in working capital and non-operating cash costs , they are not necessarily indicative of potential operating profit or loss , or cash flow from operations as determined in accordance with u.s. gaap . the non-u.s. gaap measures total cash costs , cash costs per ounce and all-in sustaining costs ( “ aisc ” ) per ounce are not , and are not intended to be , presentations in accordance with u.s. gaap . as referenced in the 2019 pfs , these measures represent , respectively , our prospective cash costs and all-in sustaining costs related to our project . we believe that these metrics help investors understand the economics of the project . we present the non-u.s. gaap financial measures for our project in the tables below . actual u.s. gaap results may vary from the amounts disclosed . other companies may calculate these measures differently . total cash costs and all-in sustaining costs total cash costs , cash costs per ounce , and aisc per ounce are non-u.s. gaap metrics developed by the world gold council to provide
| for the years ended december 31 , 2020 and 2019 our fixed exploration , property evaluation and holding costs totaled $ 3,266 and $ 3,028 , respectively . these costs included expenditures necessary to ensure that we preserve our property rights and meet our safety , regulatory and environmental responsibilities . the principal components of the increase in 2020 included greater direct involvement by corporate personnel on specific mt todd activities , offset by lower environmental monitoring costs and lower care and maintenance costs . mt todd 2020 discretionary costs totaled $ 1,279. discretionary programs during 2020 included geotechnical and exploration drilling , activities to support the government 's review of vista 's operational mmp , modification of our agreement with the jawoyn association aboriginal corporation ( the “ jawoyn association ” ) and the strategic initiative to secure a development partner for mt todd . the 2019 discretionary programs totaled $ 1,065. the 2019 discretionary programs included additional ore sorting testing and an update of the mt todd preliminary feasibility study . 54 included in the 2020 and 2019 exploration , property evaluation and holding costs were non-cash stock-based compensation of $ 332 and $ 172 , respectively . corporate administration corporate administration costs were $ 3,777 and $ 3,940 during the years ended december 31 , 2020 and 2019 , respectively . included in the 2020 and 2019 corporate administration costs is non-cash stock-based compensation of $ 581 and $ 593 , respectively . costs were generally lower during 2020 due to reduced travel as a result of the covid-19 pandemic , partially offset by higher costs for legal services and insurance . non-operating income and expenses gain/ ( loss ) on other investments gain/ ( loss ) on other investments was $ 2,405 and $ ( 1,643 ) for the years ended december 31 , 2020 and 2019 , respectively . these amounts are the net result of changes in fair value of our marketable securities , mainly midas gold shares , and the realized gain upon sale of midas gold shares . the company sold all of its remaining 6,882,115 midas gold
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non-credit related write-downs to fair value must be recorded as decreases to accumulated other comprehensive income as long as the company has no intent or requirement to sell an impaired security before a recovery of amortized cost basis . 26 index management of credit risk management considers credit risk to be an important risk factor affecting the financial condition and operating results of greene county bancorp , inc. the potential for loss associated with this risk factor is managed through a combination of policies approved by greene county bancorp , inc. 's board of directors , the monitoring of compliance with these policies , and the periodic reporting and evaluation of loans with problem characteristics . policies relate to the maximum amount that can be granted to a single borrower and such borrower 's related interests , the aggregate amount of loans outstanding by type in relation to total assets and capital , loan concentrations , loan-to-collateral value ratios , approval limits and other underwriting criteria . policies also exist with respect to the rating of loans , determination of when loans should be placed on a nonperforming status and the factors to be considered in establishing greene county bancorp , inc. 's allowance for loan losses . management also considers credit risk when evaluating potential and current holdings of securities . credit risk is a critical component in evaluating corporate debt securities . greene county bancorp , inc. has purchased municipal securities as part of its strategy based on the fact that such securities can offer a higher tax-equivalent yield than other similar investments . management of interest rate risk while greene county bancorp , inc. 's loan portfolio is subject to risks associated with the local economy , greene county bancorp , inc. 's most significant form of market risk is interest rate risk because most of greene county bancorp , inc. 's assets and liabilities are sensitive to changes in interest rates . greene county bancorp , inc. 's assets consist primarily of mortgage loans , which have longer maturities than greene county bancorp , inc. 's liabilities , which consist primarily of deposits . greene county bancorp , inc. does not engage in any derivative-based hedging transactions , such as interest rate swaps and caps . due to the complex nature and additional risk often associated with derivative hedging transactions , such as counterparty risk , it is greene county bancorp , inc. 's policy to continue its strategy of mitigating interest rate risk through balance sheet composition . greene county bancorp , inc. 's interest rate risk management program focuses primarily on evaluating and managing the composition of greene county bancorp , inc. 's assets and liabilities in the context of various interest rate scenarios . tools used to evaluate and manage interest rate risk include measuring net interest income sensitivity ( “ nii ” ) , economic value of equity ( “ eve ” ) sensitivity and gap analysis . these standard interest rate risk measures are described more fully below . factors beyond management 's control , such as market interest rates and competition , also have an impact on interest income and interest expense . in recent years , greene county bancorp , inc. has followed the following strategies to manage interest rate risk : ( i ) maintaining a high level of liquid interest-earning assets such as short-term interest-earning deposits and various investment securities ; ( ii ) maintaining a high concentration of less interest-rate sensitive and lower-costing core deposits ; ( iii ) originating consumer installment loans that have up to five-year terms but that have significantly shorter average lives due to early prepayments ; ( iv ) originating adjustable-rate commercial real estate mortgage loans and commercial loans ; and ( v ) where possible , matching the funding requirements for fixed-rate residential mortgages with lower-costing core deposits . by investing in liquid securities , which can be sold to take advantage of interest rate shifts , and originating adjustable rate commercial real estate and commercial loans with shorter average durations , greene county bancorp , inc. believes it is better positioned to react to changes in market interest rates . investments in short-term securities , however , generally bear lower yields than longer-term investments . thus , these strategies may result in lower levels of interest income than would be obtained by investing in longer-term fixed-rate investments . net interest income analysis . one of the most significant measures of interest risk is net interest income sensitivity ( “ nii ” ) . nii is the measurement of the sensitivity of greene county bancorp , inc. 's net interest income to changes in interest rates and is computed for instantaneous rate shocks and a series of rate ramp assumptions . the net interest income sensitivity can be viewed as the exposure to changes in interest rates in the balance sheet as of the report date . the net interest income sensitivity measure does not take into account any future change to the balance sheet . greene county bancorp , inc. has a relatively low level of nii sensitivity and is well within policy limits in all positive rate shock scenarios . this means that greene county bancorp , inc. 's income exposure to rising rate is projected to be relatively low . the analysis of nii sensitivity is limited by the fact that it does not take into account any future changes in the balance sheet . therefore , greene county bancorp , inc. also performs dynamic modeling which utilizes a projected balance sheet and income statement based on budget and planning assumptions and then stress tests those projections in various economic environments and interest rate scenarios . in each economic scenario that is modeled , assumptions pertaining to growth volumes , income , expenses and asset quality are adjusted based on what the likely impact of the economic scenario will be . story_separator_special_tag by incorporating the company 's financial projections into the analysis , greene county bancorp , inc. can better understand the impact that the implementation of those plans would have on its overall interest rate risk , and thereby better manage its interest rate risk position . 27 index eve analysis . economic value of equity ( “ eve ” ) is defined as the present value of all future asset cash flows less the present value of all future liability cash flows , or an estimate of the value of the entire balance sheet . the eve measure is limited in that it does not take into account any future change to the balance sheet . the following table presents greene county bancorp , inc. 's eve . the eve table indicates the market value of assets less the market value of liabilities at each specific rate shock environment . these calculations were based upon assumptions believed to be fundamentally sound , although they may vary from assumptions utilized by other financial institutions . the information set forth below is based on data that included all financial instruments as of june 30 , 2015. assumptions made by greene county bancorp , inc. relate to interest rates , loan prepayment rates , core deposit duration , and the market values of certain assets and liabilities under the various interest rate scenarios . actual maturity dates were used for fixed rate loans and certificate accounts . securities were scheduled at either maturity date or next scheduled call date based upon judgment of whether the particular security would be called based upon the current interest rate environment , as it existed on june 30 , 2015. variable rate loans were scheduled as of their next scheduled interest rate repricing date . additional assumptions made in the preparation of the eve table include prepayment rates on loans and mortgage-backed securities . for each interest-bearing core deposit category , a discounted cash flow based upon the decay of each category was calculated and a discount rate applied based on the fhlb fixed rate advance term nearest the average life of the category . the noninterest-bearing category does not use a decay assumption , and the 24 month fhlb advance rate was used as the discount rate . the eve at “ par ” represents the difference between greene county bancorp , inc. 's estimated value of assets and value of liabilities assuming no change in interest rates . the eve for a decrease of 100 , 200 and 300 basis points have been excluded since they would not be meaningful in the interest rate environment as of june 30 , 2015. the following sets forth greene county bancorp , inc. 's eve as of june 30 , 2015. replace_table_token_4_th 1 calculated as the estimated eve divided by the present value of total assets . 2 calculated as the excess ( deficiency ) of the eve ratio assuming the indicated change in interest rates over the estimated eve ratio assuming no change in interest rates . the prolonged low rate environment continues to increase eve sensitivity across the industry , as the decreasing yield on assets increases price sensitivity to large rate shocks . eve sensitivity will increase further as rates rise and loans and investments lose value and move out the sensitivity curve . greene county bancorp , inc. 's eve modeling projects that the eve will decrease in instantaneous rate shocks , however , the level of sensitivity resulting from these rate shocks is within the company 's policy limits and regulatory guidance . in anticipation of rising interest rates from the current historical low rate environment , greene county bancorp , inc. has implemented several strategies to help mitigate the negative impact on eve that would result from rising interest rates . these strategies include shortening the average duration of assets and lengthening the average duration of its liabilities . certain shortcomings are inherent in the methodology used in the above interest rate risk measurements . modeling changes in eve require the making of certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates . gap analysis . the matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “ interest rate sensitive ” and by monitoring a company 's interest rate sensitivity “ gap. ” an asset or liability is deemed to be interest rate sensitive within a specific time period if it will mature or reprice within that time period . the interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period . a gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities . a gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets . accordingly , during a period of rising interest rates , an institution with a negative gap position generally would not be in as favorable a position , compared with an institution with a positive gap , to invest in higher yielding assets . the resulting yield on the institution 's assets generally would increase at a slower rate than the increase in its cost of interest-bearing liabilities . conversely , during a period of falling interest rates , an institution with a negative gap would tend to experience a repricing of its assets at a slower rate than its interest-bearing liabilities which , consequently , would generally result in its net interest income growing at a faster rate than an institution with a positive gap position .
| summary of significant accounting policies of this report . 43 index unaudited quarterly financial data the following table sets forth a summary of selected financial data at and for the years ended june 30 , 2015 and 2014 and quarter ends within those years . replace_table_token_20_th item
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volatility in crude oil and natural gas prices negatively impacted our oilfield services segment , with a 48 % decrease in the average u.s. land-based rig count during the full-year 2016 ; however there was an increase in rig count of approximately 23 % on average in the fourth quarter 2016 compared to the third quarter 2016. we anticipate that 2017 will remain challenging for the segment , and we expect to continue to adapt our cost structure to market conditions , which we believe will position us favorably if the market ultimately recovers . a further decline in market prices of crude oil , refined products or continued narrow product margins may negatively impact the results of our operations which could result in further asset impairments . for example , we recorded a $ 113.9 million loss on the sale of dakota prairie refining , llc ( “ dakota prairie ” ) , our joint venture with mdu resources , inc. ( “ mdu ” ) , a goodwill impairment charge of $ 33.4 million related to our great falls and san antonio fuels refineries in the second quarter 2016 and a goodwill impairment charge of $ 1.4 million related to our missouri facility in the fourth quarter 2016. story_separator_special_tag basis . fuel products segment adjusted ebitda was $ ( 10.1 ) million in 2016 , a decrease of 112.3 % versus the prior year . gross profit per barrel for our fuel products segment was $ 1.16 per barrel in 2016 , versus $ 4.51 per barrel in the prior year . 2016 results were impacted by reduced renewable fuel standard ( “ rfs ” ) compliance costs , a $ 36.9 million favorable lcm inventory 58 adjustment and a $ 19.7 million loss related to the liquidation of lifo inventory layers . in 2016 , production within our fuel products segment reached a record high , as did our total annual fuel product sales volumes which was primarily driven by the completion of the great falls refinery expansion . fuel products represented approximately 80 % of total production during the year . total fuel products segment sales volumes increased 12.6 % during 2016 , when compared to the full-year 2015. for benchmarking purposes , we compare our per barrel refined fuel products margin to the u.s. gulf coast 2/1/1 crack spread ( “ gulf coast crack spread ” ) . the gulf coast crack spread represents the approximate gross margin per barrel that results from processing two barrels of crude oil into one barrel of gasoline and one barrel of ultra-low sulfur diesel fuel . the gulf coast crack spread is calculated using the near-month futures price of nymex wti crude oil , the price of u.s. gulf coast pipeline 87 octane conventional gasoline and the price of u.s. gulf coast pipeline ultra-low sulfur diesel ( “ ulsd ” ) . during 2016 , the gulf coast crack spread averaged approximately $ 12 per barrel , versus approximately $ 18 per barrel in 2015 , an approximate 33 % decline . the gulf coast ulsd crack spread averaged approximately $ 12 per barrel during 2016 , compared to approximately $ 17 per barrel in the prior year . the gulf coast gasoline crack spread averaged approximately $ 13 per barrel during 2016 , compared to approximately $ 19 per barrel in the prior year . between 2015 and 2016 , the average wcs discount versus nymex wti widened from $ 12 per barrel to $ 13 per barrel . although the 2016 average gulf coast crack spread was below 2015 levels , the average gulf coast crack spread and the average ulsd crack spread increased in the fourth quarter 2016. during the fourth quarter 2016 , the gulf coast crack spread averaged approximately $ 13 per barrel , versus approximately $ 11 per barrel in the same period in 2015. the market ulsd crack spread averaged approximately $ 15 per barrel during the fourth quarter 2016 , compared to approximately $ 12 per barrel in the prior year period . the market gasoline crack spread averaged approximately $ 12 per barrel during the fourth quarter 2016 , compared to approximately $ 10 per barrel in the prior year period . between the fourth quarters of 2015 and 2016 , the average wcs discount versus nymex wti widened from $ 13 per barrel to $ 14 per barrel . we refer to our fuel products segment gross profit per barrel divided by the gulf coast crack spread as the “ capture rate. ” the capture rate is a means of measuring refinery system gross profit per barrel against the benchmark crack spread . during 2016 , our capture rate was approximately 10 % , versus approximately 25 % in 2015. included within our fuel products segment gross profit per barrel calculation are the realized cost of crude oil and other feedstocks and other production-related expenses , the most significant portion of which includes labor , plant fuel , utilities , contract services , maintenance , depreciation and process materials . our gross profit per barrel calculation may not be comparable to similar calculations published by our competitors . there are several factors that impact our refined product margin when compared to the benchmark crack spread . for example , several of our fuel products refineries produce asphalt and other residual products that may carry an average sales price below that of u.s. gulf coast gasoline or u.s. gulf coast ulsd . alternatively , many of our fuel products refineries purchase select quantities of crude oil at a discount to nymex wti , which helps support a higher capture rate , relative to the crack spread benchmark . story_separator_special_tag finally , some of our facilities , such as our shreveport and san antonio refineries , produce both fuel and specialty products ; given that our specialty products facilities generally operate at lower utilization rates than our fuel products facilities , facilities producing specialty products may incur higher operating expenses when compared to refineries that produce fuels exclusively , such as our great falls and superior refineries . based on our system-wide crude purchasing behaviors and overall production slate , we believe the gulf coast crack spread remains a meaningful indicator in tracking directional shifts in our refined product margins . oilfield services segment adjusted ebitda was $ ( 20.6 ) million in 2016 , an improvement of 20.5 % versus the prior year . while the average u.s. land-based rig count declined 48 % on a year-over-year basis , it improved by approximately 23 % on average in the fourth quarter 2016. additionally , our oilfield services segment had a $ 0.8 million favorable lcm inventory adjustment in 2016. we anticipate that 2017 will again be challenging , and we plan to continue to align our cost structure with market conditions , which we believe will position us favorably when the market ultimately recovers . 2017 capital spending forecast we currently anticipate total capital expenditures to range between $ 120 million and $ 140 million in 2017. liquidity update on december 31 , 2016 , we had availability under our revolving credit facility of approximately $ 360.8 million , based on a $ 453.1 million borrowing base , $ 82.1 million in outstanding standby letters of credit and $ 10.2 million in outstanding borrowings . in addition , we had $ 4.2 million of cash on hand as of december 31 , 2016 . we believe we will continue to have sufficient liquidity from cash on hand , cash flow from operations , borrowing capacity and other means by which to meet our financial commitments , debt service obligations , contingencies and anticipated capital expenditures . on a continuous basis , we focus on various initiatives , including working capital initiatives , to further enhance our liquidity over time , given current market conditions . 59 renewable fuel standard update we , along with the broader refining industry , remain subject to compliance costs under the rfs . under the regulation of the environmental protection agency ( “ epa ” ) , the rfs provides annual requirements for the total volume of renewable transportation fuels which are mandated to be blended into finished petroleum fuels . if a refiner does not meet its required annual renewable volume obligation ( “ rvo ” ) , the refiner can purchase blending credits in the open market , referred to as rins . for the year ended december 31 , 2016 , our gain from rins was $ 5.5 million , as compared to a rins expense for the years ended december 31 , 2015 and 2014 , of approximately $ 38.8 million and $ 9.4 million , respectively . our gross rins obligation , which includes rins that are required to be secured through either blending or through the purchase of rins in the open market , was 112 million rins in 2016. for the full-year 2017 , we anticipate our gross rins obligation will increase to 128 million rins , given recent production capacity expansion at our great falls refinery . during 2016 , the epa granted certain of our refineries a “ small refinery exemption ” under the rfs for the full year 2014 and 2015 as provided for under the federal clean air act , as amended ( “ caa ” ) . in granting those exemptions , the epa determined that for the full year 2014 and 2015 , compliance with the rfs would represent a “ disproportionate economic hardship ” for these refineries . in february 2017 , the epa granted certain of our refineries a “ small refinery exemption ” under the rfs for the full year 2016 , as provided for under the caa . in granting those exemptions , the epa determined that for the full year 2016 , compliance with the rfs would represent a “ disproportionate economic hardship ” for these refineries . we continue to anticipate that expenses related to rfs compliance have the potential to remain a significant expense for our fuel products segment , assuming current market prices for rins . estimated rins obligations remain subject to fluctuations in fuels production volumes during the full year 2017. chief financial officer appointment on january 5 , 2017 , we announced the appointment of david west griffin as executive vice president and chief financial officer of our general partner , effective january 5 , 2017. prior to joining the company , mr. griffin , 55 , was a founder of , and served as the chief financial officer of , energy xxi ( bermuda ) limited ( also known as energy xxi ltd. ) from 2005 to 2014 , and previously was the chief financial officer for alon usa in 2004 , and was chief financial officer for intergen north america from 1999 to 2002. mr. griffin graduated from dartmouth college in 1983 with a b.e . and received his m.b.a from dartmouth college 's amos tuck school of business in 1985. strategic update in early 2016 , we introduced a revised vision designed to position our organization as the premier specialty petroleum products company in the world . as part of this vision , we have commenced a multi-year initiative that emphasizes a combination of operational excellence , opportunistic investments in “ self-help , ” high-return internal projects and a targeted acquisition strategy that seeks to support the purchase of complementary , competitively advantaged assets in the global specialty products market . by year-end 2018 , the program is projected to generate an incremental $ 150 million to $ 200 million of annualized adjusted ebitda per year as compared to 2015. for information on forward-looking non-gaap ebitda , please read “ — non-gaap financial measures. ” operational excellence .
| please read item 6 “ selected financial data — non-gaap financial measures ” for a reconciliation of ebitda , adjusted ebitda and distributable cash flow to net income ( loss ) , our most directly comparable financial performance measure , and for a reconciliation of distributable cash flow , adjusted ebitda and ebitda to net cash provided by operating activities , our most directly comparable financial liquidity measure , both calculated and presented in accordance with u.s. gaap . commodity markets remained volatile in 2016 , contributing to fluctuations in refined product margins . the average price of nymex wti crude oil averaged approximately $ 43 per barrel in 2016 compared to $ 49 per barrel in 2015. in 2016 , with respect to the average price differential per barrel between wcs and nymex wti , wcs averaged $ 13 per barrel below nymex wti , versus $ 12 per barrel below nymex wti in 2015. given our access to cost-advantaged , heavy canadian crude oil in our northern refining system , we have embarked on a multi-year plan to increase our ability to process this crude oil grade . in the full-year 2016 , we processed 35,000 bpd of heavy canadian crude oil , versus 23,500 bpd in the full-year 2015. our full-year performance benefited from stable contributions in our specialty products segment , however , these contributions were more than offset by weaker performance in our fuel products segment and oilfield services segments . total facility production increased to a record 135,000 bpd in 2016 , versus 123,000 bpd in 2015 , while total sales volume increased to 140,000 bpd in 2016 , versus 126,000 bpd in 2015 . specialty products segment adjusted ebitda was $ 188.9 million in 2016 , a decrease of 6.3 % versus the prior year . gross profit per barrel for our specialty products segment was $ 34.57 in 2016 , versus $ 40.24 in the prior year . 2016 results were impacted by a $ 13.7 million favorable lcm inventory adjustment and an $ 8.8 million loss related to the liquidation of lifo inventory layers . specialty products represented approximately 20 % of total production in 2016 , compared to 21 % in 2015. during 2016 , the decrease in the average selling price per barrel of specialty products
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this increase is attributable to the recognition of add-on saas contracts and upgrade contracts signed by current clients , conversions of clients from licensed locally-installed systems to saas , and incremental revenues from operations acquired from interpoint of approximately $ 2,782,000. revenues from remarketing partners — total revenues from ge healthcare or ge healthcare source clients in fiscal year 2012 was $ 3,033,000 or 13 % of total revenue ; as compared to $ 5,197,000 , or 30 % of total revenue in fiscal 2011 . revenue by type and source is as follows ( in thousands ) : replace_table_token_6_th in fiscal 2012 , four clients ended their direct relationship with ge healthcare , however these clients were retained as direct clients to the company . in fiscal 2011 , two clients ended their direct relationship with ge healthcare , and these clients continue to be retained . the company no longer shares revenue or pays any royalties on these revenues to ge healthcare . 10 index to financial statements revenues from these clients are as follows ( in thousands ) : replace_table_token_7_th replace_table_token_8_th the company relies on ge healthcare for a significant amount of its revenues , the loss of which would have a material adverse effect on future results of operations . during the fourth quarter of fiscal 2010 , the company learned that ge healthcare was shifting its organizational focus to upgrading its current clients to their latest version software to assist its clients in meeting meaningful use criteria under the hitech act . this understanding continues through january 31 , 2013. the company 's remarketing agreement with ge healthcare remains in effect , however the company did not obtain any net new clients from the relationship in fiscal 2012 or 2011. the opportunity to sell into ge healthcare 's current client base that does not have the company 's solutions remains , as well as the continuing ability to sell additional solutions and services into the existing jointly owned client base through the remarketing agreement . all signed contracts or purchase orders with ge healthcare to purchase proprietary software , saas , professional services , and maintenance , are expected to be fully honored . cost of sales replace_table_token_9_th cost of systems sales includes amortization and impairment of capitalized software expenditures , royalties , and the cost of third-party hardware and software . cost of systems sales , as a percentage of systems sales , varies from period-to-period depending on hardware and software configurations of the systems sold . the relatively fixed cost of the capitalized software amortization , without the addition of any impairment charges , compared to the variable nature of system sales causes these percentages to vary dramatically . the increase in fiscal 2012 cost of sales is primarily the result of amortization of software acquired as part of the meta acquisition of $ 467,000. the cost of professional services includes compensation and benefits for personnel , and related expenses . the increase in expense is primarily due to additional costs associated with the interpoint and meta acquisitions . the cost of maintenance and support includes compensation and benefits for client support personnel and the cost of third party maintenance contracts . these increases are primarily due to additional maintenance and support costs as part of the meta acquisition . the cost of software as a service is relatively fixed , but subject to inflation for the goods and services it requires . the increase is related to depreciation of new equipment and new third party maintenance contracts from infrastructure spending as 11 index to financial statements the company added new or add-on saas contracts , as well as the inclusion of interpoint operations and amortization of the acquired software development costs for a full year . selling , general and administrative expense replace_table_token_10_th general and administrative expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the company 's executive and administrative staff , general corporate expenses , amortization of intangible assets , and occupancy costs . the increase over the prior year is primarily due to transaction costs associated with the meta acquisition of $ 1,306,000 as well as additional general and administrative expenses associated with the meta operations . amortization of intangible assets added incremental expense to fiscal 2012 due to the amortization of assets acquired as part of the acquisition of interpoint and meta . we recognized approximately $ 584,000 in amortization expense in fiscal 2012 for acquired intangible assets as compared to $ 2,000 in the fiscal 2011. sales and marketing expenses consist primarily of compensation and related benefits and reimbursable travel and living expenses related to the company 's sales and marketing staff ; advertising and marketing expenses , including trade shows and similar type sales and marketing expenses . the slight increase in sales and marketing expense reflects an increase in total compensation for sales staff . product research and development replace_table_token_11_th product research and development expenses consist primarily of compensation and related benefits ; the use of independent contractors for specific near-term development projects ; and an allocated portion of general overhead costs , including occupancy . research and development expense increased due to higher support for newly released software versions , which also decreased the number of hours available to be capitalized , which is reflected in the capitalized research and development costs . research and development expenses in fiscal 2012 and 2011 , as a percentage of revenues , were 12 % and 8 % , respectively . other income ( expense ) interest expense in fiscal 2012 was $ 1,957,010 , compared to $ 179,000 in fiscal 2011 . story_separator_special_tag interest expense consists of interest and commitment fees on the line of credit , interest ( including accruals for success fees ) on the term loans entered into in conjunction with the interpoint and meta acquisitions , interest on the convertible note entered into in conjunction with the interpoint acquisition , and is inclusive of $ 219,000 in deferred financing cost amortization . interest expense increased during 2012 primarily because of the increases from the term loan interest and success fees , and deferred financing costs related to the meta acquisition . the company recorded losses on the conversion of the convertible subordinated notes of $ 57,000 and $ 5,913,000 , related to the interpoint and private placement investment , respectively . the company also recorded a valuation adjustment to its warrants liability , recorded as miscellaneous income of $ 489,000 , using assumptions made by management to adjust to the current fair market value of the warrants at january 31 , 2013. provision for income taxes the company recorded a tax benefit of $ 2,889,000 at january 31 , 2013 which is comprised of current state and local taxes payable of approximately $ 47,000 , and deferred tax benefit of approximately $ 2,936,000. the deferred tax benefit comprised of the tax benefit recorded for the release of the deferred tax asset valuation allowance and the related reduction in 12 index to financial statements income tax expense of approximately $ 3,000,000 , as a result of deferred tax liabilities recorded related to the meta acquisition , and the effect of temporary differences during fiscal 2012. the tax provision of $ 24,000 for fiscal 2011 consists of state and local taxes , and alternative minimum tax . the company determined it was more likely than not that the deferred tax amount will not be realized . backlog replace_table_token_12_th at january 31 , 2013 the company had master agreements and purchase orders from clients and remarketing partners for systems and related services which have not been delivered or installed which , if fully performed , would generate future revenues of approximately $ 50,986,000 compared with $ 27,366,000 at january 31 , 2012 . the company 's proprietary software backlog consists of signed agreements to purchase software licenses and term licenses . typically , this is software that is not yet generally available , or the software is generally available and the client has not taken possession of the software . third party hardware and software consists of signed agreements to purchase third party hardware or third party software licenses that have not been delivered to the client . these are products that the company resells as components of the solution a client purchases . the increase in backlog is primarily due to three clients which have made purchases for future systems implementations . these items are expected to be delivered in the next twelve months as implementations commence . professional services backlog consists of signed contracts for services that have yet to be performed . typically backlog is recognized within twelve months of the contract signing . the increase in backlog is due to several clients that signed contracts during fiscal 2012 for add-on solutions , upgrades , or expansion of services at additional locations for which contracted services have not yet been performed . maintenance and support backlog consists of maintenance agreements for licenses of the company 's proprietary software and third party hardware and software with clients and remarketing partners for which either an agreement has been signed or a purchase order under a master agreement has been received . the company includes in backlog the signed agreements through their respective renewal dates . typical maintenance contracts are for a one year term and are renewed annually . clients typically prepay maintenance and support which is billed 30-60 days prior to the beginning of the maintenance period . the company does not expect any significant client attrition over the next 12 months . maintenance and support backlog at january 31 , 2013 was $ 22,504,000 as compared to $ 10,504,000 at january 31 , 2012 . the company expects to recognize approximately $ 11,998,000 out of january 31 , 2013 backlog in fiscal 2013 . a significant portion of this increase is due to backlog added by meta maintenance contracts . additionally , as part of renewals contracts are typically subject to an annual increase in fees based on market rates and inflationary metrics . at january 31 , 2013 , the company had entered into software as a service agreements , which are expected to generate revenues of $ 20,439,000 through their respective renewal dates in fiscal years 2013 through 2018. the company expects to recognize approximately $ 6,843,000 out of january 31 , 2013 backlog in fiscal 2013 . typical saas terms are one to seven years in length . saas backlog and terms are as follows ( in thousands ) : 13 index to financial statements replace_table_token_13_th the commencement of revenue recognition for saas varies depending on the size and complexity of the system ; the implementation schedule requested by the client and ultimately the official go-live on the system . therefore , it is difficult for the company to accurately predict the revenue it expects to achieve in any particular period . all of the company 's master agreements are generally non-cancelable but provide that the client may terminate its agreement upon a material breach by the company , or may delay certain aspects of the installation . there can be no assurance that a client will not cancel all or any portion of a master agreement or delay portions of the agreement .
| the fair value of the common stock at the date of issuance was $ 3.82. as of october 31 , 2012 the company had acquired 100 % of meta 's outstanding shares . the purchase price is subject to certain adjustments related principally to the delivered working capital level , which will be settled in third quarter of fiscal 2013 , and or indemnification provisions . under the acquisition method of accounting , the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date . the operations of meta are consolidated with the results of the company from august 16 , 2012. please refer to the audited financial statements and related footnotes for further details . statement of operations for the fiscal years ended ( amounts in thousands ) : replace_table_token_3_th _ ( 1 ) non-gaap measure meaning earnings before interest , tax , depreciation , amortization , stock-based compensation expense , transactional and one-time costs . see “ use of non-gaap financial measures ” below for additional information and reconciliation . 8 index to financial statements the following table sets forth , for each fiscal year indicated , certain operating data as percentages : statement of operations ( 1 ) replace_table_token_4_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 operations nor are they necessarily indicative of the future operations 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 . comparison of fiscal year 2012 with 2011 revenues revenues consisted of the
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we accept limited returns and may request that a customer return a product if we feel the customer has an excess of any style that we have identified as being a poor performer for that customer or geographic location . we monitor returns and maintain a provision for estimated returns based upon historical experience and any specific issues identified . while returns have historically been within our expectations and the provisions established , future return rates may differ from those experienced in the past . in the event that our products are performing poorly in the retail market and or we experience product damages or defects at a rate significantly higher than our historical rate , the resulting returns could have an adverse impact on the operating results for the period or periods in which such returns occur . if our allowance for product returns were to change by 10 % , the result would have been a $ 2.7 million change to net income , net of taxes . inventories . inventories are stated at the lower of average cost , including any applicable duty and freight charges , or market . we account for estimated obsolescence or unmarketable inventory equal to the difference between the average cost of inventory and the estimated market value based upon assumptions about future demand , market conditions and available liquidation channels . if actual future demand or market conditions are less favorable than those projected by management , or if liquidation channels are not readily available , additional inventory valuation reductions may be required . we assess our off-price sales on an ongoing basis and update our estimates accordingly . revenue from sales of our products that are subject to inventory consignment agreements is recognized when title and risk of loss transfers , delivery has occurred , the price to the buyer is determinable and collectability is reasonably assured . inventory held at consignment locations is included in our finished goods inventory . long-lived asset impairment . we test for asset impairment of property , plant and equipment and other long-lived assets whenever events or conditions indicate that the carrying value of an asset might not be recoverable based on expected undiscounted cash flows related to the asset . in evaluating long-lived assets for recoverability , we calculate fair value using our best estimate of future cash flows expected to result from the use of the asset and its eventual disposition . when undiscounted cash flows 45 estimated to be generated through the operations of our company-owned retail stores are less than the carrying value of the underlying assets , the assets are impaired . if it is determined that assets are impaired , an impairment loss is recognized for the amount the asset 's book value exceeds its fair value . impairment losses are recorded in selling , general and administrative expenses . should actual results or market conditions differ from those anticipated , additional losses may be recorded . we recorded impairment losses on long-lived assets of approximately $ 9.3 million , $ 5.8 million and $ 1.2 million in fiscal years 2014 , 2013 and 2012 , respectively . an increase of 100 basis points to the discount rate used in our impairment testing would have increased impairment expense by $ 0.3 million . a 10 % decrease in future expected cash flows would have increased impairment expense by $ 0.2 million . impairment of goodwill and trade names . we evaluate goodwill for impairment annually as of the end of the fiscal year by comparing the fair value of the reporting unit to its recorded value . additionally , if events or conditions were to indicate the carrying value of a reporting unit may not be recoverable , we would evaluate goodwill for impairment at that time . we have three reporting units for which we evaluate goodwill for impairment , north america wholesale , europe wholesale and asia pacific wholesale . the fair value of each reporting unit is estimated using market comparable information and discounted cash flows . if the estimated fair value of a reporting unit exceeds its carrying value , no impairment charge is recorded . as of january 3 , 2015 , the fair value of each of these reporting units exceeded their carrying value by over 200 % . we evaluate trade names by comparing the fair value of the asset to its recorded value annually as of the end of the fiscal year and whenever events or conditions indicate that the carrying value of the trade name may not be recoverable . the fair value of the asset is estimated using discounted cash flow methodologies . the michele trade name represented approximately 22 % of our total trade name balances at the end of fiscal years 2014 , 2013 and 2012. the skagen trade name represented approximately 77 % of our total trade name balance at the end of fiscal years 2014 , 2013 and 2012. we performed the required annual impairment test and recorded no impairment charges in fiscal years 2014 , 2013 and 2012. as of january 3 , 2015 , the fair values of the michele and skagen trade names exceeded their carrying values by approximately 86 % and 47 % , respectively . if we were to increase our discount rate 100 basis points , or if we were to decrease forecasted cash flows by 10 % , no additional impairment charges would have resulted from our impairment test . due to the inherent uncertainties involved in making the estimates and assumptions used in the fair value analysis , actual results may differ which could alter the fair value of the trade names and possibly cause impairment charges to occur in future periods . judgments and assumptions are inherent in our estimate of future cash flows used to determine the estimate of the reporting unit 's fair value . the most significant assumptions associated with the fair value calculations include net sales growth rates and discount rates . story_separator_special_tag if the actual future sales results do not meet the assumed growth rates , future impairments of goodwill and trade names may be incurred . income taxes . we record valuation allowances against our deferred tax assets , when necessary , in accordance with asc 740 , income taxes ( `` asc 740 '' ) . realization of deferred tax assets is dependent on future taxable earnings and is therefore uncertain . at least quarterly , we assess the likelihood that our deferred tax asset balance will be recovered from future taxable income . to the extent we believe that recovery is not likely , we establish a valuation allowance against our deferred tax asset , increasing our income tax expense in the period such determination is made . in addition , we have not recorded u.s. income tax expense for foreign earnings that we have determined to be indefinitely reinvested outside the u.s. our continuing practice is to recognize interest and penalties related to income tax matters in income tax expense . we accrue an amount for our estimate of additional income tax liability which we believe we are more likely than not to incur as a result of the ultimate resolution of tax audits ( `` uncertain tax positions '' ) . we review and update the estimates used in the accrual for uncertain tax 46 positions as more definitive information becomes available from taxing authorities , upon completion of tax audits , upon expiration of statutes of limitation , or upon occurrence of other events . the results of operations and financial position for future periods could be impacted by changes in assumptions or resolutions of tax audits . warranty costs . our fossil watch products sold in the u.s. are covered by a limited warranty against defects in materials or workmanship for a period of 11 years from the date of purchase . relic watch products sold in the u.s. are covered by a comparable 12 year limited warranty , while all other watch brands sold in the u.s. are covered by a comparable two year limited warranty . skagen branded watches are covered by a lifetime warranty against defects due to faulty material or workmanship , subject to normal conditions of use . generally , all of our watch products sold in canada , asia and europe are covered by a comparable two year limited warranty . we determine our warranty liability using historical warranty repair experience . as changes occur in sales volumes and warranty experience , the warranty accrual is adjusted as necessary . the year-end warranty liability for fiscal years 2014 , 2013 and 2012 was $ 13.5 million , $ 15.7 million and $ 13.4 million , respectively . hedge accounting . we operate in foreign countries , which exposes us to market risk associated with foreign currency exchange rate fluctuations . we have entered into certain foreign exchange forward contracts ( `` forward contracts '' ) to hedge the risk of foreign currency rate fluctuations . our main objective is to hedge the variability in forecasted cash flows due to the foreign currency risks primarily associated with certain anticipated inventory purchases . changes in the fair value of forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income ( cumulative translation adjustment ) within stockholders ' equity , and are recognized in other income-net in the period which the intercompany cash payment for inventory is made . to reduce exposure to changes in currency exchange rates adversely affecting our investment in a euro-denominated subsidiary , in fiscal year 2014 , we entered into a forward contract designated as a net investment hedge . changes in the fair value of the net investment hedge were recorded as a component of accumulated other comprehensive income and will be recognized in other income-net when the subsidiary is sold or dissolved . also , the company has entered into an interest rate swap agreement to effectively convert a portion of variable rate debt obligations from a floating rate to a fixed rate . changes in the fair value of the interest rate swap are recorded as a component of accumulated other comprehensive income within stockholders ' equity , and are recognized in interest expense in the period in which the payment is settled . we have elected to apply the hedge accounting rules as required by asc 815 , derivatives and hedging , for these hedges . stock-based compensation . we utilize the black-scholes model to determine the fair value of stock options and stock appreciation rights on the date of grant . the model requires us to make assumptions concerning ( i ) the length of time employees will retain their vested stock options and stock appreciation rights before exercising them ( `` expected term '' ) , ( ii ) the volatility of our common stock price over the expected term and ( iii ) the number of stock options and stock appreciation rights that will be forfeited . changes in these assumptions can materially affect the estimate of fair value of stock-based compensation and , consequently , the related expense amounts recognized on our consolidated statements of income and comprehensive income . if the fair value of our stock-based compensation were to change by 10 % , the result would have been a $ 1.3 million change to net income , net of taxes . results of operations story_separator_special_tag inc. '' , dn= '' 1 '' , chk=161674 , folio='49 ' , file='disk134 : [ 14zdi1.14zdi41301 ] dm41301a . ; 9 ' , user='fstreet ' , cd='19-feb-2015 ; 21:23 ' -- > europe wholesale net sales . during fiscal 2014 , europe wholesale net sales rose $ 103.1 million or 12.5 % ( $ 100.5 million or 12.1 % in constant currency ) , representing sales gains across nearly all markets in which we operate . in europe , we continue to benefit from our scale , as we leverage our extensive european infrastructure and distribution to drive growth .
| our multi-brand global watch portfolio grew 9 % during fiscal year 2014 , which included growth across multiple brands , with the strongest gains occurring internationally . additionally , we advanced our swiss initiative with the spring launch of emporio armani swiss made and with the launch of the tory burch assortment in the last six months of fiscal 2014. our direct to consumer business grew during fiscal year 2014 primarily as a result of store expansion and a modest increase in our global comparable store sales in our owned retail stores . positive comparable store sales results in europe and asia were partially offset by a very slight decline in north america , primarily as a result of traffic declines in the u.s. that were only partially offset by higher conversion rates . gross profit increased during fiscal year 2014 , while the gross margin rate was relatively consistent with the prior fiscal year . during fiscal 2014 , our gross margin rate was favorably impacted by our regional distribution mix given the growth in international markets . however , this benefit was offset by increased promotional activity in our retail channel , primarily in our u.s. outlet stores . our operating margin contracted during fiscal year 2014 primarily due to planned operating expense deleveraging in the first half of the year as we invested in retail and concession expansion and infrastructure to support growth and global initiatives . these reductions in operating expense leverage were partially offset by increased operating expense leverage in the back half of the year as we managed infrastructure spending tightly and drove leverage in more mature areas of our business , redeploying some of the capacity to invest in growth initiatives and customer facing activities . during fiscal year 2014 , we invested $ 435 million to repurchase 4.1 million shares of our common stock . our financial performance combined with our repurchase activity resulted in earnings of $ 7.10 per diluted share . fiscal year 2014 compared to fiscal year 2013 consolidated net sales . net sales
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research and development expenses . research and development expenses consist primarily of personnel expenses related to the creation of new software products , enhancements and engineering changes to existing products . general and administrative expenses . general and administrative expenses include the costs of corporate and support functions , such as executive leadership and administration groups , finance , legal , human resources and corporate communications , and other costs , such as outside professional and consultant fees and provision for bad debts . other income and expenses interest income . interest income is recorded for financing components under accounting standards update ( asu ) no . 2014-09 , revenue from contracts with customers ( `` topic 606 '' ) . when a contract includes a significant financing component , we generally receive the majority of the customer consideration after the recognition of a substantial portion of the arrangement fee as license revenue . as a result , we decrease the amount of revenue recognized and increase interest income by a corresponding amount . interest income also includes the accretion of interest on investments in short-term money market instruments . interest ( expense ) . interest ( expense ) is primarily related to our credit agreement . other income ( expense ) , net . other income ( expense ) , net is comprised primarily of foreign currency exchange gains ( losses ) generated from the settlement and remeasurement of transactions denominated in currencies other than the functional currency of our operating units . during fiscal 2017 , other income ( expense ) , net also included a $ 0.7 million litigation related recovery receipt . provision for ( benefit from ) income taxes . provision for ( benefit from ) income taxes is comprised of domestic and foreign taxes . we record interest and penalties related to income tax matters as a component of income tax expense . our effective income tax rate may fluctuate between fiscal years and from quarter to quarter due to items arising from discrete events , such as tax benefits from the disposition of employee equity awards , settlements of tax audits and assessments and tax law changes . our effective income tax rate is also impacted by , and may fluctuate in any given period because of , the composition of income in foreign jurisdictions where tax rates differ . key business metrics background 25 we utilize key business measures to track and assess the performance of our business . we have identified the following set of appropriate business metrics in the context of our evolving business : annual spend total contract value bookings we also use the following non-gaap business metrics in addition to gaap measures to track our business performance : free cash flow non-gaap operating income we make these measures available to investors and none of these metrics should be considered as an alternative to any measure of financial performance calculated in accordance with gaap . annual spend annual spend is an estimate of the annualized value of our portfolio of term license arrangements , as of a specific date . management believes that this measure is a useful metric to investors as it provides insight into the growth component of license bookings during a fiscal period . annual spend is calculated by summing the most recent annual invoice value of each of our active term license contracts . annual spend also includes the annualized value of standalone sms agreements purchased in conjunction with term license agreements . comparing annual spend for different dates can provide insight into the growth and retention rates of our business , and since annual spend represents the estimated annualized billings associated with our active term license agreements , it provides insight into the future value of subscription and software revenue . annual spend increases as a result of new term license agreements with new or existing customers , renewals or modifications of existing term license agreements that result in higher license fees due to price escalation or an increase in the number of tokens ( units of software usage ) or products licensed , and escalation of annual payments in our active term license contracts . annual spend is adversely affected by term license and standalone sms agreements that are renewed at a lower entitlement level or not renewed and , to a lesser extent , by customer contracts that are terminated during the contract term due to the customer 's business ceasing operations . we estimate that annual spend grew by approximately 10.6 % during fiscal 2019 , from $ 489.3 million as of june 30 , 2018 to $ 541.0 million as of june 30 , 2019 . we estimate that annual spend grew by approximately 6.4 % during fiscal 2018 , from $ 459.6 million as of june 30 , 2017 to $ 489.3 million as of june 30 , 2018 . total contract value total contract value ( `` tcv '' ) is the aggregate value of all payments received or to be received under all active term license agreements , including maintenance and escalation . tcv was $ 2.6 billion as of june 30 , 2019 . bookings bookings is the total value of customer term license contracts signed in the current period , less the value of such contracts signed in the current period where the initial licenses are not yet deemed delivered , plus term license contracts signed in a previous period for which the initial licenses are deemed delivered in the current period . bookings increased to $ 651.8 million during fiscal 2019 , compared to $ 502.3 million and $ 490.4 million during fiscal 2018 and 2017 , respectively . 26 free cash flow we use a non-gaap measure of free cash flow to analyze cash flows generated from our operations . management believes that this financial measure is useful to investors because it permits investors to view our performance using the same tools that management uses to gauge progress in achieving our goals . story_separator_special_tag we believe this measure is also useful to investors because it is an indication of cash flow that may be available to fund investments in future growth initiatives or to repay borrowings under the credit agreement , and it is a basis for comparing our performance with that of our competitors . the presentation of free cash flow is not meant to be considered in isolation or as an alternative to cash flows from operating activities as a measure of liquidity . free cash flow is calculated as net cash provided by operating activities adjusted for the net impact of ( a ) purchases of property , equipment and leasehold improvements , ( b ) capitalized computer software development costs , ( c ) excess tax benefits from stock-based compensation , ( d ) non-capitalized acquired technology , and ( e ) other nonrecurring items , such as acquisition and litigation related payments . the following table provides a reconciliation of gaap cash flow from operating activities to free cash flow for the indicated periods : replace_table_token_5_th excess tax benefits are related to stock-based compensation tax deductions in excess of book compensation expense and reduce our income taxes payable . we have included the impact of excess tax benefits within free cash flow in fiscal 2017 to be consistent with the treatment of other tax benefits . as a result of adopting asu no . 2016-09 , effective july 1 , 2017 , excess tax benefits from stock-based compensation are now reflected in the consolidated statements of operations as a component of the provision for income taxes , whereas they were previously a component of stockholders ' equity . in fiscal 2018 and 2017 , we have excluded payments of $ 0.1 million , and $ 2.2 million , respectively , for non-capitalized acquired technology ( including $ 0.1 million and $ 0.5 million in fiscal 2018 and 2017 , respectively , of final payments related to non-capitalized acquired technology from prior fiscal years ) from free cash flow to be consistent with the treatment of other transactions where the acquired technology assets were capitalized . in fiscal 2018 we have excluded litigation related payments of $ 4.5 million . in fiscal 2017 , we have excluded a $ ( 0.7 ) million litigation related recovery receipt . fiscal 2019 compared to fiscal 2018 total free cash flow increased $ 24.7 million during fiscal 2019 as compared to the prior fiscal year primarily due to changes in working capital . for a more detailed description of these changes refer to `` liquidity and capital resources . '' fiscal 2018 compared to fiscal 2017 total free cash flow increased $ 24.8 million during fiscal 2018 as compared to the prior fiscal year primarily due to changes in working capital . for a more detailed description of these changes refer to `` liquidity and capital resources . '' non-gaap operating income 27 non-gaap operating income excludes certain non-cash and non-recurring expenses , and is used as a supplement to operating income presented on a gaap basis . we believe that non-gaap operating income is a useful financial measure because removing certain non-cash and other items provides additional insight into recurring profitability and cash flow from operations . the following table presents our net income , as adjusted for stock-based compensation expense , non-capitalized acquired technology , amortization of intangibles , and other items , such as the impact of litigation judgments and acquisition related fees , for the indicated periods , as adjusted for the adoption of topic 606 : replace_table_token_6_th in fiscal 2017 , we acquired technology that did not meet the accounting requirements for capitalization and therefore the cost of the acquired technology was expensed as research and development . we have excluded the expense of the acquired technology from non-gaap operating income to be consistent with transactions where the acquired assets were capitalized . in fiscal 2018 , we incurred an expense associated with a litigation judgment in the amount of $ 1.7 million . 28 story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; '' > $ 1.8 million during fiscal 2019 as compared to the prior fiscal year primarily due to higher headcount related costs . cost of maintenance revenue increased by $ 0.6 million during fiscal year 2018 as compared to the prior fiscal year primarily due to higher headcount related costs . maintenance gross profit margin was 88.4 % in fiscal 2019 and was consistent with 89.2 % and 89.3 % in fiscal years 2018 and 2017 , respectively . cost of services and other revenue replace_table_token_13_th cost of services and other revenue increased by $ 3.5 million during fiscal 2019 as compared to the prior fiscal year primarily due to higher cost of professional services revenue . cost of services and other revenue increased by $ 1.6 million during fiscal 2018 as compared to the prior fiscal year primarily due to higher cost of professional services revenue . services and other gross profit margin was ( 9.6 ) % in fiscal 2019 , compared to 10.4 % and 12.4 % in fiscal years 2018 and 2017 , respectively . the timing of revenue and expense recognition on professional service arrangements can impact the comparability of cost and gross profit margin of professional services revenue from year to year . for example , revenue from fixed-price 31 engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs . gross profit replace_table_token_14_th for further discussion of subscription and software gross profit and services and other gross profit , please refer to the “ cost of license revenue , '' `` cost of maintenance revenue , '' and “ cost of services and other revenue ” sections above . fiscal 2019 compared to fiscal 2018 gross profit increased by $ 72.3 million during fiscal 2019 as compared to the prior fiscal year and gross profit margin remained consistent at 90.3 % in fiscal 2019 compared to 90.2 % in fiscal 2018 .
| maintenance revenue replace_table_token_9_th fiscal 2019 compared to fiscal 2018 the increase in maintenance revenue of $ 4.4 million during fiscal 2019 as compared to the prior fiscal year was primarily due to growth of our base of arrangements , which include maintenance , being recognized on a ratable basis . we expect maintenance revenue to increase as a result of : ( i ) having a larger base of arrangements recognized on a ratable basis ; ( ii ) increased customer usage of our software ; ( iii ) adding new customers ; and ( iv ) escalating annual payments . fiscal 2018 compared to fiscal 2017 the increase in maintenance revenue of $ 4.1 million during fiscal 2018 as compared to the prior fiscal year was primarily due to growth of our base of arrangements , which include maintenance , being recognized on a ratable basis . services and other revenue replace_table_token_10_th we recognize professional services revenue for our time-and-materials ( `` t & m '' ) contracts based upon hours worked and contractually agreed-upon hourly rates . revenue from fixed-price engagements is recognized using the proportional performance method based on the ratio of costs incurred to the total estimated project costs . fiscal 2019 compared to fiscal 2018 services and other revenue decrease d by $ 2.5 million during fiscal 2019 as compared to the prior fiscal year primarily due to the timing of professional services engagements . 30 fiscal 2018 compared to fiscal 2017 services and other revenue increase d by $ 1.1 million during fiscal 2018 as compared to the prior fiscal year primarily due to the timing of professional services engagements . cost of revenue cost of license revenue replace_table_token_11_th cost of license revenue increased by $ 1.8 million during fiscal 2019 as compared to the prior fiscal year primarily due to higher amortization of intangibles of $ 2.3 million . cost of license revenue increased by $ 1.0 million during fiscal year 2018 as compared to the prior fiscal year primarily due to higher amortization of intangibles of $ 1.3 million . license gross profit margin was 98.3 % in fiscal 2019 and was consistent with 98.4 % and 98.6 % in fiscal
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declining production from several of the company 's properties in western oklahoma and the texas panhandle as well as from the southeastern oklahoma woodford also contributed to the decrease . l ower production volumes were partially offset by production increases in the anadarko basin woodford of western and southern oklahoma and the eagle ford shale in s outh texas . production by quarter for 2015 and 2014 was as follows ( mcfe ) : replace_table_token_14_th lease bonus and rentals lease bonuses and rentals increased $ 1,587,067 in 2015 . the increase was mainly due to the company leasing 2,407 net mineral acres in andrews and winkler counties , texas , for $ 1.2 million . there were no significant leases of the company 's mineral acreage in 2014. gains ( losses ) on derivative contracts gains on derivative contracts increased $ 13,575,092 in 2015 . the increase in gains was mainly due to the oil and natural gas collars and fixed price swaps being more beneficial in 2015 , as nymex oil and natural gas futures had fallen further below the floor of the collars and the fixed prices of the swaps . as of september 30 , 2015 , the company 's natural gas costless collar contracts have expiration dates of october and december 2015 ; the oil costless collar contracts and the oil fixed price swaps have an expiration date of december 2015 . lease operating expenses ( loe ) loe increased $ 3,559,616 or 26 % in 2015 . loe costs per mcfe of production increased from $ 0.99 in 2014 to $ 1.27 in 2015 . the total loe increase is primarily due to increased field operating costs of $ 3,598,103 in 2015 compared to 2014. field operating costs increased mainly due to the acquisition of the eagle ford shale properties and additional wells drilled in late 2014 and during 2015. field operating costs were $ .78 per mcfe in 2015 compare d to $ .50 per mcfe in 2014 , a 56 % increase . this increase in rate is principally the result of the significant number of oil and ngl rich wells drilled in recent years . these wells have higher lifting costs than our overall well population , which is and has been heavily gas weighted for several years . the increase in loe related to field operating costs was partially offset by a decrease in handling fees ( primarily gathering , transportation and marketing costs ) on natural gas of $ 38,487 in 2015 , as compared to 2014. on a per mcfe basis , these fees increased $ .01 due to increased fees in areas that are currently being drilled . natural gas sales bear the large majority of the handling fees . handling fees are charged either as a percent of sales or based on production volumes . ( 28 ) production taxes production taxes decreased $ 991,816 or 37 % in 2015 as compared to 2014 . the decrease in amount is primarily the result of decreased oil , ngl and natural gas sales of $ 28,312,614 during 2015. production taxes as a percentage of oil , ngl and natural gas sales decreased slightly from 3.3 % in 2014 to 3.1 % in 2015. the low overall production tax rate is due to a large proportion of the company 's oil and natural gas revenues coming from horizontally drilled wells , which are eligible for reduced oklahoma and arkansas production tax rates . depreciation , depletion and amortization ( dd & a ) dd & a increased $ 1,924,237 in 2015 . dd & a per mcfe was $ 1.74 in 2015 , compared to $ 1.55 in 2014 . dd & a increased $ 2,496,240 as the result of a $ .1 9 increase in the dd & a rate . this rate increase was principally due to higher per mcfe finding costs experienced in oil and liquids rich areas where the company has added production , as well as much lower oil , ngl and natural gas prices utilized in the reserve calculations during 2015 , as compared to 2014 , story_separator_special_tag style= '' margin:0pt ; text-indent:36pt ; text-align : left ; font-family : times new roman ; font-size : 12pt '' > ( 30 ) lease operating expenses ( loe ) loe increased $ 2,051,389 or 17 % in 2014. loe costs per mcfe of production increased from $ 0.92 in 2013 to $ 0.99 in 2014. the total loe increase is primarily due to increased field operating costs of $ 1,900,168 in 2014 compared to 2013. field operating costs increased due to the acquisition of the eagle ford shale properties and additional wells drilled in 2014. field operating costs were $ .50 per mcfe in 2014 compared to $ .40 per mcfe in 2013 , a 25 % increase . this increase in rate is principally the result of the significant number of oil and ngl rich wells drilled in recent years . these wells have higher lifting costs than our overall well population . the increase in loe related to field operating costs was also coupled with an increase in handling fees ( primarily gathering , transportation and marketing costs ) on natural gas of $ 151,221 in 2014 , as compared to 2013. on a per mcfe basis , these fees were down $ .03 due to significant increases in oil and ngl production , while natural gas production was essentially flat . natural gas sales bear the large majority of the handling fees . handling fees are charged either as a percent of sales or based on production volumes . depreciation , depletion and amortization ( dd & a ) dd & a decreased $ 48,866 in 2014. dd & a per mcfe was $ 1.55 in 2014 , compared to $ 1.69 in 2013. dd & a increased $ 1,922,964 due to oil , ngl and natural gas production volumes increasing 9 % collectively in the 2014 period , compared to the 2013 period . story_separator_special_tag an offsetting decrease of $ 1,971,830 was the result of a $ .14 decrease in the dd & a rate . this rate decrease was principally due to higher oil , ngl and natural gas prices utilized in the reserve calculations during 2014 as compared to 2013 resulting in higher projected remaining reserves on a significant number of wells . provision for impairment the provision for impairment increased $ 565,406 in 2014 , as compared to 2013. during 2014 , impairment of $ 1,096,076 was primarily recorded on ten small fields in oklahoma and texas . these fields have one to a few wells and are more susceptible to impairment when a well in the field experiences downward reserve revisions , or when a newly completed well with low reserves is added to one of these fields . during 2013 , impairment of $ 530,670 was recorded on five small fields in oklahoma and texas . loss ( gain ) on asset sales and other loss ( gain ) on asset sales and other was a net loss of $ 8,378 in 2014 , as compared to a net gain of $ 942,959 in 2013. the gain in 2013 was mainly the result of a class action lawsuit settlement of approximately $ 604,000 related to the underpayment of royalty revenues and gains on asset sales of $ 208,749. interest expense interest expense increased $ 304,738 in 2014 , as compared to 2013. the increase was primarily due to a larger outstanding debt balance that was used to purchase the eagle ford shale properties in the third quarter of 2014. general and administrative costs ( g & a ) g & a increased $ 631,187 or 9 % in 2014. the increase is primarily related to increases in the following expense categories : legal $ 275,286 , personnel $ 123,586 and audit and tax $ 112,745. the increase in legal expenses was primarily the result of additional fees for legal services associated with the ( 31 ) eagle ford shale acquisition and a property rights dispute in 2014. the increase in 2014 personnel related expenses was largely the result of compensation increases of $ 100,406. the increase in audit and tax fees in 2014 was principally due to increased fees for services associated with the eagle ford shale acquisition . provision ( benefit ) for income taxes the 2014 provision for income taxes of $ 11,820,000 was based on a pre-tax income of $ 36,821,462 , as compared to a provision for income taxes of $ 6,730,000 in 2013 , based on a pre-tax income of $ 20,690,049. the effective tax rate for 2014 was 32 % , compared to an effective tax rate for 2013 of 33 % . the company 's utilization of excess percentage depletion , which is a permanent tax benefit , decreased the provision for income taxes and reduced the effective tax rate below the statutory rate for both years . liquidity and capital resources at september 30 , 2015 , the company had positive working capital of $ 8,907,437 , as compared to positive working capital of $ 9,919,037 at september 30 , 2014 . liquidity cash and cash equivalents were $ 603,915 as of september 30 , 2015 , compared to $ 509,755 at september 30 , 2014 , an increase of $ 94,160 . cash flows for the 12 months ended september 30 are summarized as follows : replace_table_token_16_th operating activities : net cash provided by operating activities decreased $ 7,051,588 during 2015 , as compared to 2014 , the result of the following : · receipts of oil , ngl and natural gas sales ( net of production taxes and gathering , transportation and marketing costs ) and other decreased $ 17,147,678 . · decreased income tax payments of $ 2,467,208 . · increased net receipts on derivative contracts of $ 12,742,814 . · increased payments for interest expense of $ 1,178,434 . · increased payments for field operating expenses of $ 3,945,491 . ( 32 ) investing activities : net cash used in investing activities decreased $ 92,362,510 during 2015 , as compared to 2014 , due to : · a decrease in cash used to acquire properties of $ 83,002,022 . · lower drilling and completion activity during 2015 decreased capital expenditures by $ 7,812,163 . · high er proceeds from mineral leasing and asset sales of $ 1,576,756 . financing activities : 2015 net cash used in financing activities was $ 15,888,369 , as compared to net cash provided by financing activities in 2014 of $ 66,970,977 , result ing in a net decrease of $ 82,859,346 of cash provided by financing activities . this change is the result of the following : · during 2015 , net borrowings decreased $ 13,000,000 . d uring 2014 , net borrowings increased $ 69,737,744 . increased borrowings during 2014 were used to finance the acquisition of properties . capital resources capital expenditures to drill and complete wells decreased $ 7,812,163 ( 20 % ) in 2015 , as compared to 2014 . this decrease was primarily due to the suspension of drilling activity in the texas eagle ford shale oil play late in the 2015 first quarter , combined with a significant decrease in well proposals to the company in all of its other plays . of the well proposals received , many did not meet our participation criteria . however , due to completion cost reductions , expenditures were made during the 2015 third quarter to complete five north dakota bakken shale oil wells and during the 2015 fourth quarter to complete five eagle ford shale wells . completion of these 10 wells had previously been suspended by the operators awaiting higher oil prices and or completion cost reductions . other notable drilling and completion expenditures were made during 2015 on the company 's mineral acreage in the scoop woodford shale and springer plays in south central oklahoma and the arkansas fayetteville shale .
| the effective tax rate for 2015 was 34 % , compared to an effective tax rate for 2014 of 32 % . the company 's utilization of excess percentage depletion , which is a permanent tax benefit , decrease d the provision for income taxes and reduced the effective tax rate below the statutory rate for both years . ( 29 ) fiscal year 20 1 4 compared to fiscal year 20 1 3 overview the company recorded net income of $ 25,001,462 , or $ 1.49 per share , in 2014 , compared to net income of $ 13,960,049 , or $ 0.84 per share , in 2013. revenues increased in 2014 primarily due to higher oil and ngl sales volumes and higher natural gas sales prices , partially offset by decreased gains on derivative contracts and decreased lease bonuses received . expenses increased in 2014 due to higher loe , production taxes and g & a coupled with an increase in the provision for impairment and a decrease in other miscellaneous income . oil , ngl and n atural g as sales oil , ngl and natural gas sales increased $ 22,240,650 or 37 % for 2014 , as compared to 2013. the increase was due to increased oil and ngl volumes of 48 % and 86 % , respectively , and increased oil , ngl and natural gas prices of 2 % , 17 % and 22 % , respectively , in 2014. the oil and ngl production increase is primarily the result of the company 's acquisition of producing properties in the eagle ford shale in south texas and the associated horizontal drilling on that leasehold , as well as horizontal drilling in the marmaton , hogshooter and granite wash in western oklahoma and horizontal woodford shale drilling in the anadarko basin in western and southern oklahoma . to a lesser extent , horizontal drilling in the mississippian in northern oklahoma and horizontal cleveland drilling in the texas panhandle contributed to
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23 consolidated operations ( operating statement dollars in thousands ) replace_table_token_6_th 2015 compared to 2014 total revenues increased $ 41.1 million , or 8.4 % , in fiscal 2015 , as compared to revenue growth of 5.3 % in fiscal 2014 , principally as a result of ( i ) revenue growth from dealerships that operated a full twelve months in both fiscal years ( $ 13.7 million ) , ( ii ) revenue growth from dealerships opened during the fiscal year ended april 30 , 2014 ( $ 20.4 million ) , and ( iii ) revenue from dealerships opened after april 30 , 2014 ( $ 7.0 million ) . the increase in revenue for fiscal 2015 is attributable to ( i ) a 9.9 % increase in retail unit volumes , and ( ii ) a 5.6 % increase in interest and other income . cost of sales , as a percentage of sales , remained flat at 57.7 % in fiscal 2015 from 57.8 % in fiscal 2014. the average retail sales price for fiscal 2015 was $ 9,680 , an $ 88 decrease over the prior fiscal year . the company will continue to focus efforts on minimizing the average retail sales price in order to help keep the contract terms shorter , which helps customers to maintain appropriate equity in their vehicles . the consumer demand for vehicles the company purchases for resale remains high . this high demand has been exacerbated by the recent increases in funding to the used vehicle financing market and by the overall decrease in new car sales during the recession when compared to pre-recession levels . both the supply of vehicles as well as the availability of funding to the used vehicle finance market can result in higher purchase costs for the company . however , recent increases in new car sales have had a positive effect on purchase costs . average selling prices and top line sales levels in relation to wholesale volumes , resulting from credit loss experience , can have a significant effect on gross margin percentages . 24 selling , general and administrative expenses , as a percentage of sales , decreased 0.4 % to 17.7 % in fiscal 2015 from 18.1 % in fiscal 2014. selling , general and administrative expenses are , for the most part , more fixed in nature . in dollar terms , overall selling , general and administrative expenses increased $ 5.2 million from fiscal 2014 , which consisted primarily of increased payroll costs , incremental costs related to new dealerships and higher infrastructure costs to support our growth , primarily in technology and compliance . provision for credit losses as a percentage of sales decreased to 25.5 % for fiscal 2015 compared to 27.4 % ( 25.7 % excluding the effect of the increase in the allowance for credit losses made in the third quarter ) for fiscal 2014. net charge-offs as a percentage of average finance receivables were 27.8 % for fiscal 2015 compared to 28.2 % for the prior year . the decrease primarily resulted from a lower frequency of losses , partially offset by an increase in the severity of losses . the higher severity of losses primarily resulted from lower wholesale values at time of repossession . the company has implemented several operational initiatives ( including credit reporting and installing gps units on vehicles ) for the collections area and continually pushes for improvements and better execution of its collection practices . however , the extended challenging macro-economic and competitive pressures are expected to continue to put pressure on our customers and the resulting collections of our finance receivables . the company believes that the proper execution of its business practices remains the single most important determinant of its long-term credit loss experience and that the negative impact on credit losses in both the current and prior year periods resulting from challenging macro-economic and competitive pressure has been somewhat mitigated by the improvements in oversight and accountability provided by the company 's investments in our corporate infrastructure within the collections area . interest expense for fiscal 2015 as a percentage of sales decreased slightly to 0.6 % compared 0.7 % for fiscal 2014. lower average borrowings during the fiscal year 2015 ( $ 102.2 million compared to $ 103.0 million in the prior year ) were partially offset by higher interest rates on the company 's variable rate debt . 2014 compared to 2013 total revenues increased $ 24.5 million , or 5.3 % , in fiscal 2014 , as compared to revenue growth of 8.0 % in fiscal 2013 , principally as a result of ( i ) revenue growth from dealerships opened during the fiscal year ended april 30 , 2013 ( $ 17.8 million ) and ( ii ) revenue from dealerships opened after april 30 , 2013 ( $ 10.1 million ) , offset by ( iii ) a revenue decrease from dealerships that operated a full twelve months in both periods ( $ 3.4 million decrease , or 0.8 % ) . the challenging competitive environment put pressure on the sales volumes especially at the older dealerships . the increase in revenue for fiscal 2014 is attributable to ( i ) a 4.5 % increase in retail unit volumes together with a 0.5 % increase in the average unit sales price , ( ii ) an 11.7 % increase in interest and other income , partially offset by ( iii ) a 4.2 % decrease in wholesale sales . cost of sales , as a percentage of sales , increased to 57.8 % in fiscal 2014 from 57.5 % in fiscal 2013. the in crease from the prior year period relates primarily to higher claims under the payment protection plan and higher inventory repair costs resulting from continued efforts to help our customers succeed and to meet competitive pressures . the average retail sales price for fiscal 2014 was $ 9,768 , a $ 47 increase over the prior fiscal year . story_separator_special_tag wholesale sales decreased during fiscal 2014 as compared to the prior fiscal year due to a lower average wholesale price combined with fewer repossessed units being sold at wholesale in the current year . a significant effort was made to recondition and re-retail more repossessed vehicles in fiscal 2014 in order to offer a lower priced vehicle to our customers . selling , general and administrative expenses , as a percentage of sales , increased 0.5 % to 18.1 % in fiscal 2014 from 17.6 % in fiscal 2013. selling , general and administrative expenses are , for the most part , more fixed in nature . in dollar terms , overall selling , general and administrative expenses increased $ 5.4 million from fiscal 2013 , which consisted primarily of increased payroll costs , incremental costs related to new dealerships , higher marketing and advertising costs as well as the increased costs related to the gps implementation . 25 provision for credit losses as a percentage of sales increased to 27.4 % ( 25.7 % excluding the effect of the increase in the allowance for credit losses made in the third quarter ) for fiscal 2014 compared to 23.1 % for fiscal 2013. the increase as a percentage of sales was partially the result of the lower collections as a percentage of average finance receivables , as well as higher charge-offs and lower wholesale sales levels . net charge-offs as a percentage of average finance receivables were 28.2 % for fiscal 2014 compared to 25.2 % for the prior year . the increase primarily resulted from the frequency of losses largely due to competitive pressures , although the severity of losses increased slightly as well . the company began implementing several operational initiatives ( including credit reporting and installing gps units on vehicles ) for the collections area and continually pushes for improvements and better execution of its collection practices . however , the extended macro-economic challenges and competitive pressures continued to put pressure on our customers and the resulting collections of our finance receivables . as a result , management increased the allowance for credit losses to 23.5 % from 21.5 % in the third quarter of fiscal 2014. this increase to the allowance for credit losses resulted in a $ 7.7 million ( $ 4.9 million after tax effect ) charge to the provision for credit losses in fiscal 2014. the company believes that the proper execution of its business practices remains the single most important determinant of its long-term credit loss experience and that the negative impact on credit losses in both the current and prior year periods resulting from challenging macro-economic and competitive pressure has been somewhat mitigated by the improvements in oversight and accountability provided by the company 's investments in our corporate infrastructure within the collections area . interest expense for fiscal 2014 as a percentage of sales remained constant at 0.7 % compared to fiscal 2013. higher average borrowings during the fiscal year 2014 ( $ 103.0 million compared to $ 93.3 million in the prior year ) were partially offset by lower interest rates on the company 's variable rate debt . financial condition the following table sets forth the major balance sheet accounts of the company at april 30 , 2015 , 2014 and 2013 ( in thousands ) : replace_table_token_7_th historically , finance receivables has tended to grow slightly faster than revenue . this has been due , to a large extent , to an increasing weighted average term necessitated by increases in the average retail sales price over recent years . the following table shows receivables growth compared to revenue growth . the average term for installment sales contracts at april 30 , 2015 was 30.2 months compared to 29.8 months at april 30 , 2014. benefits related to software and operational changes made in an effort to shorten relative terms by maximizing up-front equity and scheduling payments to coincide with anticipated income tax refunds have helped maintain the overall term length in the face of the increasing average retail sales prices . however , in response to current competitive and economic conditions , the company has made and is continuing to make some structural changes to its customer contracts which include increases to the overall length of contract terms , mitigated somewhat due to declines in the average retail sales price in fiscal 2015. revenue growth results from same store revenue growth and the addition of new dealerships . the decreased sales in the fourth quarter of fiscal 2014 compared to the prior year fourth quarter and the increase in the allowance for credit losses made in the third quarter of fiscal 2014 contributed to a lower growth in finance receivables , net , compared to revenue growth . the lower fourth quarter sales resulted to a large extent from efforts to improve more current deal structures in light of recent higher charge-off levels . the company currently anticipates going forward that the growth in finance receivables will be slightly higher than overall revenue growth on an annual basis due to the overall term length increases partially offset by improvements in underwriting and collection procedures . 26 replace_table_token_8_th in fiscal 2015 , inventory increased 13.8 % ( $ 4.2 million ) as compared to revenue growth of 8.4 % . the increase resulted primarily from the increase in the number of dealerships and efforts to offer a broad selection of vehicles for our customers . the company will continue to manage inventory levels in the future to ensure adequate supply of vehicles , in volume and mix , and to meet sales demand . property and equipment , net , increased slightly by $ 50,000 in fiscal 2015 as compared to fiscal 2014. the company incurred $ 4.0 million in expenditures related to new dealerships as well as to refurbish and expand a number of existing locations , offset by depreciation expense .
| revenues can be affected by our level of competition , which is influenced to a large extent by the availability of funding to the sub-prime automobile industry , together with the availability and resulting purchase cost of the types of vehicles the company purchases for resale . revenues can also be affected by the macro-economic environment . at the point of sale , down payments , contract term lengths and proprietary credit scoring are monitored closely by corporate management and are critical to helping customers succeed . after the sale , collections , delinquencies and charge-offs are important in the company 's evaluation of its financial condition and results of operations and are monitored and reviewed on a continuous basis . management believes that developing and maintaining a relationship with its customers and earning their repeat business is critical to the success and growth of the company and can serve to offset the effects of increased competition and negative macro-economic factors . a challenging competitive environment puts pressure on sales volumes especially at older dealerships which tend to have higher overall sales volumes and more repeat customers , potential targets for competition . additionally , as the company attempts to attract and retain target customers , increased competition can contribute to lower down payments and longer contract terms which can have a negative effect on collection percentages , liquidity and credit losses . management believes that the ultra-low interest rate environment combined with a lack of other investment alternatives is attracting excess capital into the sub-prime automobile market and increasing competition . in an effort to combat the increased competition the company will continue to focus on the benefits of excellent customer service and the “ local ” face to face offering to the market in an effort to help customers succeed . the company has also focused additional attention on selling lower priced vehicles to increase affordability for customers , to address sales volume challenges and to improve credit performance in the future by improving the equity position of customers who may be tempted to default on
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we believe the following accounting policies are critical in the portrayal of our financial condition and results of operations and require management 's most significant judgments and estimates in the preparation of our consolidated financial statements . for additional accounting policies , see note 2 to the consolidated financial statements for the year ended december 31 , 2019 included in this annual report on form 10-k. revenue recognition our accounting policies relating to the recognition of revenue require management to make estimates , determinations and judgments based on historical experience and on various other assumptions , which include ( i ) the existence of a contract with the customer , ( ii ) the identification of the performance obligations in the contract , ( iii ) the value of any variable consideration in the contract , ( iv ) the standalone selling price of multiple obligations in the contract , for the purpose of allocating the consideration in the contract , and ( v ) determining when a performance obligation has been met . our revenue recognition policies are set forth in section ( i ) of note 2 , summary of significant accounting policies , to the consolidated financial statements for the year ended december 31 , 2019 included in this annual report on form 10-k. recognition of revenue based on incorrect judgments , including an erroneous allocation of the estimated sales price between the units of accounting , could result in inappropriate recognition of revenue , or incorrect timing of revenue recognition , which could have a material effect on our financial condition and results of operations . inventory—provision for excess and obsolescence and lower of cost or net realizable value we record a provision for estimated excess and obsolete inventory and lower of cost or net realizable value . the provision is determined using management 's assumptions of materials usage , based on estimates of forecasted and historical demand and market conditions . specifically , our assumptions of forecasted system sales and the size and utilization of the installed base of systems may have a significant effect on estimated materials usage . if actual market conditions become less favorable than those projected by management , additional inventory write‑downs may be required . although we make every effort to ensure the accuracy of our forecasts or product demand and pricing assumptions , any significant unanticipated changes in demand , pricing , or technical developments would significantly impact the value of our inventory and our reported operating results . in the future , if we determine that inventory needs to be written down , we will recognize such costs in our cost of revenue at the time of such determination . if we subsequently sell product that has previously been written down , our gross margin in that period will be favorably impacted . product warranty we generally offer a one year warranty for all of our systems , the terms and conditions of which vary depending upon the product sold . for all systems sold , we accrue a liability for the estimated cost of standard warranty at the time of system shipment and defer the portion of systems revenue attributable to the relative fair value of non‑standard warranty . costs for non‑standard warranty are expensed as incurred . factors that affect our warranty liability include the number of 20 installed units , historical and anticipated product failure rates , material usage and service labor costs . we periodically assess the adequacy of our recorded liability and adjust the amount as necessary . income taxes we record income taxes using the asset and liability method . deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax basis , and net operating loss and tax credit carryforwards . our consolidated financial statements contain certain deferred tax assets which have arisen primarily as a result of operating losses , as well as other temporary differences between financial and income tax accounting . we establish a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized . significant management judgment is required in determining our provision for income taxes , the deferred tax assets and liabilities and any valuation allowance recorded against those net deferred tax assets . we evaluate the weight of all available evidence such as historical losses , the expected timing of the reversals of existing temporary differences and projected future taxable income to determine whether it is more likely than not that some portion or all of the net deferred income tax assets will not be realized . our income tax expense includes the largest amount of tax benefit for an uncertain tax position that is more likely than not to be sustained upon audit based on the technical merits of the tax position . settlements with tax authorities , the expiration of statutes of limitations for particular tax positions , or obtaining new information on particular tax positions may cause a change to the effective tax rate . we recognize accrued interest related to unrecognized tax benefits as interest expense and penalties as operating expense . 21 story_separator_special_tag roman , times , serif ; font-size : 10pt ; '' > 24 gross profit / gross margin the following table sets forth our gross profit : replace_table_token_3_th 2019 compared with 2018 product gross margin from product revenue was 45.0 % for the twelve months ended december 31 , 2019 , compared to 43.2 % for the twelve months ended december 31 , 2018. the increase in gross margin of 1.8 % resulted from improved margins on purion systems . story_separator_special_tag services gross margin from services revenue was 1.6 % for the twelve months ended december 31 , 2019 , compared to 0.6 % for the twelve months ended december 31 , 2018. the increase in gross margin is attributable to changes in the mix of service contracts . 2018 compared with 2017 product gross margin from product revenue was 43.2 % for the twelve months ended december 31 , 2018 , compared to 39.3 % for the twelve months ended december 31 , 2017. the increase in gross margin of 3.9 % resulted from improved margins on purion systems and a lower excess reserve for inventory due to a $ 6.2 million write-down of legacy inventory in 2017. services gross margin from services revenue was 0.6 % for the twelve months ended december 31 , 2018 , compared to ( 8.3 ) % for the twelve months ended december 31 , 2017. the increase in gross margin in the recent period is primarily attributable to decreased costs on service contracts . 25 operating expenses the following table sets forth our operating expenses : replace_table_token_4_th our operating expenses consist primarily of personnel costs , including salaries , commissions , bonuses , stock-based compensation and related benefits and taxes ; project material costs related to the design and development of new products and enhancement of existing products ; and professional fees , travel and depreciation expenses . personnel costs are our largest expense , representing $ 70.2 million , or 58.5 % of our total operating expenses , for the year ended december 31 , 2019 ; $ 74.3 million , or 62.1 % , of our total operating expenses for the year ended december 31 , 2018 ; and $ 64.5 million , or 63.0 % , of our total operating expenses for the year ended december 31 , 2017. research and development replace_table_token_5_th our ability to remain competitive depends largely on continuously developing innovative technology , with new and enhanced features and systems and introducing them at competitive prices on a timely basis . accordingly , based on our strategic plan , we establish annual r & d budgets to fund programs that we expect will drive competitive advantages . 2019 compared with 2018 research and development expense was $ 53.9 million in 2019 , an increase of $ 2.1 million , or 4.0 % , compared with $ 51.9 million in 2018. the increase was primarily due to increased project costs to support development of new purion products and extensions and increased depreciation associated with capital additions , partially offset by a reduction in variable incentive plan expense . 2018 compared with 2017 research and development expense was $ 51.9 million in 2018 , an increase of $ 8.8 million , or 20.4 % , compared with $ 43.1 million in 2017. the increase was primarily due to increased headcount and to project costs to support development of new purion products and extensions . 26 sales and marketing replace_table_token_6_th our sales and marketing expenses result primarily from the sale of our equipment and services through our direct sales force . 2019 compared with 2018 sales and marketing expense was $ 34.3 million in 2019 , relatively flat when compared with $ 34.6 million in 2018 . 2018 compared with 2017 sales and marketing expense was $ 34.6 million in 2018 , an increase of $ 6.1 million , or 21.3 % , compared with $ 28.5 million in 2017. the increase was primarily due to increased headcount . general and administrative replace_table_token_7_th our general and administrative expenses result primarily from the costs associated with our executive , finance , information technology , legal and human resource functions . 2019 compared with 2018 general and administrative expense was $ 31.7 million in 2019 , a decrease of $ 1.5 million , or 4.4 % compared with $ 33.2 million in 2018. the decrease was primarily due to lower variable incentive plan expense . 2018 compared with 2017 general and administrative expense was $ 33.2 million in 2018 , an increase of $ 2.4 million , or 7.8 % compared with $ 30.8 million in 2017. the increase was primarily due to increases in professional and consulting fees and to a lesser extent , increased headcount . other ( expense ) income other ( expense ) income consists primarily of interest expense relating to the lease obligation we incurred in connection with the 2015 sale of our headquarters facility ( “ sale leaseback ” ) and other financing obligations , foreign exchange gains and losses attributable to fluctuations of the u.s. dollar against the local currencies of certain of the countries in which we operate , as well as interest earned on our invested cash balances . 27 replace_table_token_8_th 2019 compared with 2018 other expense for the year ended december 31 , 2019 was $ 3.3 million , which includes $ 5.2 million of interest expense related to our sale leaseback obligation , $ 0.6 million of foreign currency translation losses and other miscellaneous expense of $ 0.5 million , partially offset by interest income of $ 3.0 million . other expense for the year ended december 31 , 2018 was $ 5.3 million , which includes $ 5.1 million of interest expense related to our sale leaseback obligation , $ 1.3 million of foreign currency translation losses and other miscellaneous expense of $ 1.2 million , partially offset by interest income of $ 2.3 million . 2018 compared with 2017 other expense for the year ended december 31 , 2018 was $ 5.3 million , which includes $ 5.1 million of interest expense related to our sale leaseback obligation , $ 1.3 million of foreign currency translation losses and other miscellaneous expense of $ 1.2 million , partially offset by interest income of $ 2.3 million .
| the increase was primarily due to the increased number of systems sold in the current year . services services revenue was $ 26.7 million , or 6.0 % of revenue for 2018 , compared with $ 23.4 million , or 5.7 % of revenue for 2017. revenue categories used by management in addition to the line item revenue categories discussed above , management also uses revenue categorizations which break down revenue into other groupings . management regularly disaggregates revenue in the following categories , which it finds relevant and useful : · ion implant revenue separate from revenue from legacy non-implant product lines , given that ion implantation systems are critical to our growth and strategic objectives ; · systems and aftermarket revenues , in which “ aftermarkets ” is a. the portion of product revenue relating to spare parts , product upgrades and used systems combined with b. service revenue , which is the labor component of aftermarket revenues ; aftermarket purchases reflect current fab utilization as opposed to system purchases which reflect capital investment decisions by our customers , which have differing economic drivers ; 23 · revenue by geographic regions , since economic factors impacting customer purchasing decisions may vary by geographic region ; and · revenue by our customers ' end markets , since they tend to be subject to different economic environments at different periods of time , impacting a customer 's likelihood of purchasing capital equipment during any particular period ; currently , management uses three end market categories : memory , mature technology processes and leading edge foundry and logic . the ion implant and aftermarket revenue categories for recent periods are discussed below . 2019 compared with 2018 ion implant revenue from sales of ion implantation products and related service was $ 326.0 million , or 95.1 % of total revenue in 2019 , compared with $ 421.7 million , or 95.3 % , of total revenue in 2018. aftermarket we refer to the business of selling spare parts , product upgrades , and
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our critical accounting policies include the following : 26 revenue recognition the company has no pharmaceutical products approved for sale at this point , and all of our revenue to date has been research revenue from third-party collaborations and government grants . the company is expected to generate future revenue from license agreements and collaborative arrangements , which may include upfront payments for licenses or options to obtain a license , payment for research and development services and milestone payments , in the form of cash or non-cash consideration . revenue related to research collaborations and agreements : the company typically performs research and development services as specified in each respective agreement on a best efforts basis , and recognizes revenue from research funding under collaboration agreements in accordance with the 5-step process outlined in asc topic 606 ( “ topic 606 ” ) : ( i ) identify the contract ( s ) with a customer ; ( ii ) identify the performance obligations in the contract ; ( iii ) determine the transaction price ; ( iv ) allocate the transaction price to the performance obligations in the contract ; and ( v ) recognize revenue when ( or as ) the entity satisfies a performance obligation . we recognize revenue when we satisfy a performance obligation by transferring control of the service to a customer in an amount that reflects the consideration that we expect to receive . since the performance obligation under our collaboration agreements is generally satisfied over time , we elected to use the input method under topic 606 to measure the progress toward complete satisfaction of a performance obligation . under the input method , revenue will be recognized on the basis of the entity 's efforts or inputs to the satisfaction of a performance obligation ( e.g. , resources consumed , labor hours expended , costs incurred , or time elapsed ) relative to the total expected inputs to the satisfaction of that performance obligation . the company believes that the cost-based input method is the best measure of progress to reflect how the company transfers its performance obligation to a customer . in applying the cost-based input method of revenue recognition , the company uses actual costs incurred relative to budgeted costs to fulfill the performance obligation . these costs consist primarily of full-time equivalent effort and third-party contract costs . revenue will be recognized based on actual costs incurred as a percentage of total budgeted costs as the company completes its performance obligations . a cost-based input method of revenue recognition requires management to make estimates of costs to complete the company 's performance obligations . in making such estimates , significant judgment is required to evaluate assumptions related to cost estimates . the cumulative effect of revisions to estimated costs to complete the company 's performance obligations will be recorded in the period in which changes are identified and amounts can be reasonably estimated . a significant change in these assumptions and estimates could have a material impact on the timing and amount of revenue recognized in future periods . revenue related to grants : the company may receive grants from governments , agencies , and other private and not-for-profit organizations . these grants and funding are intended to be used to partially or fully fund the company 's research collaborations , including opportunities arising in connection with covid-19 that the company is pursuing with certain collaborators . however , most , if not all , of such potential grant revenues , if received , is expected to be earmarked for third parties to advance the research required , including preclinical and clinical trials for sars-cov-2 vaccines and or antibodies candidates . revenue related to sublicensing agreements : if the sublicense to the company 's intellectual property is determined to be distinct from the other performance obligations identified in the arrangement , the company recognizes revenue allocated to the license when technology is transferred to the customer and the customer is able to use and benefit from the license . milestone payments : at the inception of each arrangement that includes development , commercialization , and regulatory milestone payments , the company evaluates whether the achievement of the milestones is considered probable and estimates the amount to be included in the transaction price . if the milestone payment is in exchange for a sublicense and is based on the sublicensee 's subsequent sale of product , the company recognizes milestone payment by applying the accounting guidance for royalties . to date , the company has not recognized any milestone payment revenue resulting from any of its sublicensing arrangements . royalties : with respect to licenses deemed to be the predominant item to which the sales-based royalties relate , including milestone payments based on the level of sales , the company recognizes revenue at the later of ( i ) when the related sales occur or ( ii ) when the performance obligation to which some or all of the royalty has been allocated has been satisfied ( or partially satisfied ) . to date , the company has not recognized any royalty revenue resulting from any of its sublicensing arrangements . we invoice customers based on our contractual arrangements with each customer , which may not be consistent with the period that revenues are recognized . when there is a timing difference between when we invoice customers and when revenues are recognized , we record either a contract asset ( unbilled accounts receivable ) or a contract liability ( deferred research and development obligations ) , as appropriate . if upfront fees or considerations related to sublicensing agreement are received prior to the technology transfer , the company will record the amount received as deferred revenue from licensing agreement . story_separator_special_tag 27 we are not required to disclose the value of unsatisfied performance obligations for ( i ) contracts with an original expected length of one year or less and ( ii ) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed . the company adopted a practical expedient to expense sales commissions when incurred because the amortization period would be one year or less . provision for contract losses the company assesses the profitability of our collaboration agreements to provide research services to our contracted business partners and identifies those contracts where current operating results or forecasts indicate probable future losses . if the anticipated contract cost exceeds the anticipated contract revenue , a provision for the entire estimated loss on the contract is recorded and then accreted into the statement of operations over the remaining term of the contract . the provision for contract losses is based on judgment and estimates , including revenues and costs , where applicable , the consideration of our business partners ' reimbursement , and when such loss is deemed probable to occur and is reasonable to estimate . accrued research and development expenses in order to properly record services that have been rendered but not yet billed to the company , we review open contracts and purchase orders , communicate with our personnel and we estimate the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost . the majority of our service providers invoice us monthly or quarterly in arrears for services performed or when contractual milestones are met . we make estimates of our accrued expenses as of each balance sheet date in our consolidated financial statements based on facts and circumstances known to us at that time . we periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary . examples of accrued research and development expenses include amounts owed to contract research organizations , to service providers in connection with commercialization and development activities . stock-based compensation we have granted stock options and restricted stock to employees , directors and consultants . the fair value of each option award is estimated on the date of grant using the black-scholes option-pricing model . the black-scholes model considers volatility in the price of our stock , the risk-free interest rate , the estimated life of the option , the closing market price of our stock and the exercise price . for purposes of the calculation , we assumed that no dividends would be paid during the life of the options and restricted stock and applied a discount to reflect the lack of marketability due to the holding period restriction of its shares under rule 144 prior to the company 's april 2019 uplisting to nasdaq . we also used the weighted-average vesting period and contractual term of the option as the best estimate of the expected life of a new option except in the case of our ceo , 5 or 10 years and in the case of contractors , 2 or 3 years . the company performs a review of assumptions used in the black-scholes option-pricing model on an annual basis . during the company 's annual review of its volatility assumption in 2018 and 2019 , the company determined that it would be appropriate to use the company 's historical volatility since 2016 , as the dupont transaction resulted in significant changes in the company 's business and capital structure . the change in assumption was effective january 1 , 2018 and only impacts new options granted in 2018 and thereafter . the estimates utilized in the black-scholes calculation involve inherent uncertainties and the application of management judgment . these estimates are neither predictive nor indicative of the future performance of our stock . as a result , if other assumptions had been used , our recorded share-based compensation expense could have been materially different from that reported . in addition , because some of the options and restricted stock issued to employees , consultants and other third-parties vest upon the achievement of certain milestones , the total ultimate expense of share-based compensation is uncertain . in connection with board member and employee terminations , the company may modify certain terms to outstanding share-based awards . we have recorded charges related to these modifications based on the estimated fair value of the share-based options immediately prior to and immediately after the modification occurs , with any incremental value being charged to expense . we have used the black-scholes pricing model in this valuation process , and this requires management to use various assumptions and estimates . future modifications to share-based compensation transactions may result in significant expenses being recorded in our consolidated financial statements . accounting for income taxes the company accounts for income taxes under the asset and liability method in accordance with asc topic 740 , “ income taxes ” . under this method , income tax expense / ( benefit ) is recognized for : ( i ) taxes payable or refundable for the current year and ( ii ) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity 's financial statements or tax returns . deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled . the effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date . a valuation allowance is provided to reduce the deferred tax assets reported if based on the weight of the available positive and negative evidence , it is more likely than not some portion or all the deferred tax assets will not be realized .
| research and development expenses - related party , for the year ended december 31 , 2020 , were none compared to approximately $ 869,000 for the year ended december 31 , 2019. the decrease was due to the completion of the research service agreement with bdi in june 2019. general and administrative expenses general and administrative expenses for the year ended december 31 , 2020 , increased 10.2 % to approximately $ 6,085,000 compared to $ 5,520,000 for the year ended december 31 , 2019. the increase principally reflected increases in non-cash share-based compensation expenses of $ 397,000 , insurance premiums and other outside services of $ 216,000 , legal and sec registration expenses of $ 193,000 , business development and investor relations costs of $ 191,000 , offset by reductions in executive compensation costs and accrued incentives of $ 216,000 , trade show and travel expenses of $ 143,000 and other decreases of $ 73,000. foreign currency exchange foreign currency exchange loss for the year ended december 31 , 2020 , was approximately $ 62,000 compared to $ 28,000 for the year ended december 31 , 2019. the increase reflected the currency fluctuation of the euro in comparison to the u.s. dollar . interest income interest income for the year ended december 31 , 2020 , decreased 54.6 % to approximately $ 447,000 compared to $ 985,000 for the year ended december 31 , 2019. the decrease was primarily due to a decrease in interest rate and yield on the company 's investment grade securities , which are classified as held-to-maturity . investment in alphazyme for the year ended december 31 , 2020 , the company recorded a gain from its investment in alphazyme resulting from a third-party capital contribution . as of december 31 , 2020 , the fair market value of the company 's investment in alphazyme was $ 284,709. income taxes the company had net operating loss ( “ nol ” ) carryforwards available in 2020 that will begin to expire in 2038. as of december 31 , 2020 , and 2019 , the company had nols in the amount of approximately $ 27.3 million and $ 19.7 million , respectively . the company 's revenues generated in india are subject to indian tax deducted at source ( “ tds ” ) . as a result , the company recorded a provision for income taxes of approximately $ 31,000 and $ 10,000 for the years ended december 31 , 2020 and 2019 , respectively . 30 net loss net loss for the year ended december 31 , 2020 was
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24 earnings per share eps is as follows : replace_table_token_12_th diluted eps decreased $ 7.57 in 2020 compared with 2019 primarily due to lower sales as a result of covid-19 , higher markdowns and shipping costs , partially offset by permanent reductions in overhead costs and a tax benefit from the cares act . covid-19 related charges reduced diluted eps by $ 1.22 per share . 2021 outlook we are focused on increasing total shareholder returns through four key financial objectives : accelerating revenue growth , expanding operating profit margin , improving return on invested capital and generating cash flow . while the timing of recovery of customer demand remains uncertain , we have provided the following financial expectations for fiscal 2021 , which assume stores remain open during the year : revenue , including retail sales and credit card revenues , is expected to grow more than 25 % , with digital representing approximately 50 % of sales ebit margin is expected to be approximately 3 % of sales income tax rate is expected to be approximately 27 % our leverage ratio is expected to be approximately 3x by year-end for the first half of the year , ebit is expected to be approximately breakeven , reflecting approximately 45 % of total year sales nordstrom , inc. and subsidiaries 25 adjusted roic ( non-gaap financial measure ) we believe that adjusted roic is a useful financial measure for investors in evaluating the efficiency and effectiveness of the capital we have invested in our business to generate returns over time . in addition , we have incorporated it in our executive incentive measures and we believe it is an important indicator of shareholders ' return over the long term . adjusted roic is not a measure of financial performance under gaap and should be considered in addition to , and not as a substitute for , return on assets , net earnings , total assets or other gaap financial measures . our method of calculating non-gaap financial measures may differ from other companies ' methods and therefore may not be comparable to those used by other companies . the financial measure calculated under gaap which is most directly comparable to adjusted roic is return on assets . the following is a reconciliation of return on assets to adjusted roic : replace_table_token_13_th 1 we add back the operating lease interest to reflect how we manage our business . operating lease interest is a component of operating lease cost recorded in occupancy costs . 2 for leases with property incentives that exceed the rou assets , we reclassify the amount from assets to other current liabilities and other liabilities and reduce average total assets , as this better reflects how we manage our business . 3 for fiscal year 2020 , covid-19 related charges negatively impacted return on assets by approximately 200 basis points and adjusted roic by approximately 280 basis points . integration charges , primarily related to trunk club , of $ 32 in fiscal 2019 , were primarily non-cash related and negatively impacted return on assets by approximately 30 basis points and adjusted roic by approximately 30 basis points . 26 liquidity and capital resources in response to the uncertainty related to the covid-19 pandemic , we took action to provide further liquidity and flexibility during these unprecedented times . our stores were temporarily closed in the first half of the year . we continue to review state and local legal requirements and conditions and may need to close some or all of the stores currently open as covid-19 and other uncertainties continue to unfold . no matter how customers choose to shop , we are committed to delivering superior services , products and experiences and are ready to serve our customers online , through our applications and other digital means , including virtual styling and selling tools , online order pickup and contactless curbside services . we have taken the following actions in 2020 to increase our cash position and preserve financial flexibility : drew down $ 800 on our revolver , of which we subsequently repaid $ 800 by the end of fiscal 2020 , and issued $ 600 in 8.750 % senior secured notes suspended quarterly cash dividends beginning in the second quarter of 2020 and share repurchases achieved expense savings in excess of $ 400 and further net cash savings in capital expenditures and working capital we ended fiscal year 2020 with $ 681 in cash and cash equivalents and $ 800 of additional liquidity available on our revolver . in march 2021 , subsequent to year end and consistent with the seasonal cash needs of our business , we drew down $ 200 on our revolver , which we expect to repay before the end of the first half of the year . with our financial position strengthened , we are prioritizing market share gains and profitable sales growth . in 2021 , we expect to receive approximately $ 500 in income tax refunds in the second or third quarter . we strive to maintain a level of liquidity sufficient to allow us to cover our seasonal cash needs and to maintain appropriate levels of short-term borrowings . our ongoing working capital requirements are generally funded primarily through cash flows generated from operations . in addition , we have access to the commercial paper market and can draw on our revolving credit facilities for working capital , capital expenditures and general corporate purposes . in 2020 , due to covid-19 impacts , the incremental financing we drew on in the first quarter of 2020 aided in the funding of our cash requirements . we believe our operating cash flows are sufficient to meet our cash requirements for the next 12 months and beyond . over the long term , we manage our cash and capital structure to maximize shareholder return , maintain our financial position , manage refinancing risk and allow flexibility for strategic initiatives . story_separator_special_tag we regularly assess our debt and leverage levels , capital expenditure requirements , debt service payments , dividend payouts , potential share repurchases and other future investments . the following is a summary of our cash flows by activity : replace_table_token_14_th operating activities the majority of our operating cash inflows are derived from sales . we also receive cash payments for property incentives from developers . our operating cash outflows generally consist of payments to our merchandise vendors ( net of vendor allowances ) and shipping carriers , payments to our employees for wages , salaries and other employee benefits and payments to our landlords for rent . operating cash outflows also include payments for income taxes and interest payments on our short-term and long-term borrowings . cash from operating activities decreased by $ 1,584 between 2020 and 2019 primarily due to a reduction in net earnings from the impacts of covid-19 and temporary store closures in the first half of the year , partially offset by the benefits of the cares act . investing activities our investing cash outflows include payments for capital expenditures , including stores , supply chain improvements and technology costs . our investing cash inflows are generally from proceeds from sales of property and equipment . net cash used in investing activities decreased by $ 562 between 2020 and 2019 due to a decrease in capital expenditures as the prior period included investments in our nordstrom nyc store , as well as supply chain costs related to our market strategy . we also reduced non-critical store reinvestment in 2020. nordstrom , inc. and subsidiaries 27 capital expenditures our capital expenditures , net are summarized as follows : replace_table_token_15_th 1 deferred property incentives are included in our cash provided by operations in our consolidated statements of cash flows in item 8. we operationally view the property incentives we receive from our developers and vendors as an offset to our capital expenditures . replace_table_token_16_th 1 rates represent 2021 forecasted amounts . capital expenditures as a percentage of net sales were higher in 2016 through 2019 as we made investments in nordstrom nyc , nrhl , canada and our supply chain network . going forward , we expect to maintain our capital expenditure requirement at 3 % to 4 % of net sales primarily to support investments in technology and our supply chain network . financing activities the majority of our financing activities include repurchases of common stock , long-term debt proceeds and or payments and dividend payments . cash from financing activities increased $ 961 between 2020 and 2019 primarily due to the net proceeds from the 8.750 % senior secured notes . borrowing activity during 2020 , we issued $ 600 aggregate principle amount of 8.750 % senior secured notes due may 2025. during 2019 , we issued $ 500 aggregate principal amount of 4.375 % senior unsecured notes due april 2030. we recorded debt issuance costs incurred as a result of the issuance in other financing activities , net in the consolidated statements of cash flows . with the proceeds of these new notes , we retired our $ 500 senior unsecured notes in 2019 that were due may 2020 ( see note 8 : debt and credit facilities in item 8 ) . additionally , in the first quarter of 2020 , we drew down $ 800 on our revolver and paid down $ 800 during the second through fourth quarters . in 2018 , we fully repaid $ 47 outstanding on our puerto rican unsecured borrowing facility . share repurchases in august 2018 , our board of directors authorized a new program to repurchase up to $ 1,500 of our outstanding common stock , with no expiration date . as a result of uncertainties from covid-19 impacts , we repurchased no shares of our common stock in 2020 , compared with 4.1 shares for an aggregate purchase price of $ 186 during 2019. we had $ 707 remaining in share repurchase capacity as of january 30 , 2021. the actual timing , price , manner and amounts of future share repurchases , if any , will be subject to the discretion of the board of directors , contractual commitments , market and economic conditions and applicable sec rules . dividends in 2020 , we paid dividends of $ 58 , or $ 0.37 per share , compared with $ 229 , or $ 1.48 per share , in 2019 ( see note 11 : shareholders ' equity in item 8 ) . in determining the dividends to pay , we analyze our dividend payout ratio and dividend yield , while taking into consideration our current and projected operating performance and liquidity . 28 free cash flow ( non-gaap financial measure ) free cash flow is one of our key liquidity measures , and when used in conjunction with gaap measures , we believe it provides investors with a meaningful analysis of our ability to generate cash from our business . free cash flow is not a measure of financial performance under gaap and should be considered in addition to , and not as a substitute for , operating cash flows or other financial measures prepared in accordance with gaap . our method of calculating non-gaap financial measures may differ from other companies ' methods and therefore may not be comparable to those used by other companies . the financial measure calculated under gaap which is most directly comparable to free cash flow is net cash ( used in ) provided by operating activities . the following is a reconciliation of net cash ( used in ) provided by operating activities to free cash flow : replace_table_token_17_th adjusted ebitda and adjusted ebitdar ( non-gaap financial measures ) adjusted ebitda is one of our key financial metrics to reflect our view of cash flow from net earnings . adjusted ebitda excludes significant items which are non-operating in nature in order to evaluate our core operating performance against prior periods .
| home , active and beauty were the top-performing merchandise categories in 2020. credit card revenues , net credit card revenues , net include our portion of the ongoing credit card revenue , net of credit losses , pursuant to our program agreement with td . td is the exclusive issuer of our consumer credit cards and we perform the account servicing functions . credit card revenues , net were $ 358 in 2020 , compared with $ 392 in 2019. this decrease was primarily a result of lower finance charges and late fee revenues throughout the year driven by changes in customer behavior resulting from the covid-19 pandemic and lower interchange revenue from lower spend on our credit cards at other merchants . gross profit the following table summarizes gross profit : replace_table_token_6_th gross profit decreased $ 2,443 primarily due to lower sales volume , and the rate decreased 780 basis points compared with 2019 due to deleverage from lower sales volume and higher markdowns . ending inventory as of january 30 , 2021 decreased 3.0 % compared with prior year . while inventory levels were above our expectations , the majority of the overage reflected current receipts and non-seasonal merchandise and we are taking actions to clear excess seasonal and underperforming categories . nordstrom , inc. and subsidiaries 23 selling , general and administrative expenses sg & a is summarized in the following table : replace_table_token_7_th sg & a decreased $ 646 in 2020 compared with 2019 primarily from lower variable expenses associated with lower sales volume and the permanent reductions in overhead costs , partially offset by covid-19 charges related primarily to asset impairment from store closures and restructuring charges . sg & a rate increased 840 basis points primarily as a result of deleverage on lower sales volume and higher labor and shipping expenses associated with covid-19 , partially offset by the reduced overhead costs . earnings ( loss ) before interest and income taxes ebit is summarized in the
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during 2011 , the company continued to focus its marketing and other resources on acquiring new subscribers who use smartphones , which led to an increase of smartphone postpaid subscribers of 10 % to 106,000 subscribers at december 31 , 2011 compared to 96,000 subscribers at december 31 , 2010. smartphone subscribers now represent 34 % of the company 's postpaid subscribers and have contributed to increased data revenue per subscriber ( e.g. , text messaging , emails , and internet service ) , which partly offset a decline in voice revenue . the company earned $ 14.54 per month on average from postpaid subscribers for data service in 2011 compared to $ 11.69 in 2010. wireless operating income of $ 3.3 million declined by $ 53.0 million compared to 2010. the decrease in operating income is primarily the result of a goodwill impairment charge of $ 50.3 million . it services and hardware sales of telecom and it equipment totaled $ 206.0 million during 2011 , an 18 % increase from 2010. this increase was primarily due to increased capital spending by business customers as the economy continued to improve in 2011. professional and managed service revenues increased by $ 14.7 million in 2011 as customers continued to expand upon it outsourcing and consulting projects . operating income increased by $ 5.5 million in 2011 , as a result of margin on higher revenues , lower restructuring charges , and cost reductions . story_separator_special_tag higher depreciation and amortization was incurred in 2010 due to tangible and intangible assets acquired with cyrusone . 30 form 10-k part ii cincinnati bell inc. restructuring charges were $ 13.7 million in 2010 and $ 12.6 million in 2009. in both periods , restructuring activities consisted of actions to reduce operating costs and to integrate certain operations . employee separation costs and special termination benefits were $ 8.7 million in 2010 and $ 12.6 million in 2009. lease abandonment costs were $ 3.5 million and costs to terminate contracts in conforming the sales commission plans in our data center business were $ 1.4 million in 2010 , with no such costs in 2009. in 2009 , a curtailment gain was recognized due to changes in the management pension and postretirement plans . acquisition costs of $ 9.1 million in 2010 represent costs incurred due to the acquisition of cyrusone . during 2009 , the company sold almost all of its owned wireless licenses for areas outside of its cincinnati and dayton , ohio operating territories . these licenses , which were primarily for the indianapolis , indiana region , were sold for $ 6.0 million , resulting in a loss on sale of the spectrum assets of $ 4.8 million . interest expense increased to $ 185.2 million in 2010 compared to $ 130.7 million in 2009. the increase compared to the prior year is primarily attributable to higher debt balances to fund the acquisition of cyrusone and higher interest rates on recently refinanced debt . the loss on extinguishment of debt of $ 46.5 million in 2010 was due to the redemption of the company 's 8 3 / 8 % senior subordinated notes due 2014 and the repayment of the tranche b term loan . the loss on extinguishment of debt of $ 10.3 million for 2009 was primarily due to the redemption of the company 's 7 1 / 4 % senior notes due 2013 and was partially offset by a gain on extinguishment of a portion of the company 's 7 1 / 4 % senior notes due 2023 and cincinnati bell telephone notes at an average discount of 24 % . see note 7 to the consolidated financial statements for further details . income tax expense decreased from $ 64.7 million in 2009 to $ 38.9 million in 2010 primarily due to lower pretax income and a $ 7.0 million tax benefit associated with a change in valuation allowance on state deferred tax assets that are expected to be utilized as a result of the cyrusone acquisition . these decreases were partially offset by a $ 6.5 million charge related to tax matters associated with the refinancing of the 8 3 / 8 % subordinated notes and an approximate $ 4 million charge related to a tax law change that now requires the application of federal income taxes against the retiree medicare drug subsidy received by the company . discussion of operating segment results the company manages its business based upon products and service offerings . at december 31 , 2011 , we operated four business segments : wireline , wireless , data center colocation , and it services and hardware . certain corporate administrative expenses have been allocated to our business segments based upon the nature of the expense and the relative size of the segment . intercompany transactions between segments have been eliminated . 31 form 10-k part ii cincinnati bell inc. wireline the wireline segment provides local voice telephone service and custom calling features , and data services , including high-speed internet access , dedicated network access , atm — gig-e based data transport , and dial-up internet access to customers in southwestern ohio , northern kentucky , and southeastern indiana through the operations of cbt , an ilec in its operating territory of an approximate 25-mile radius of cincinnati , ohio . cbt 's network has full digital switching capability and can provide data transmission services to approximately 96 % of its in-territory access lines via dsl . outside of the ilec territory , the wireline segment provides these services through cbet , which operates as a clec in the communities north of cbt 's operating territory including the dayton , ohio market . cbet provides voice and data services for residential and business customers on its own network and by purchasing unbundled network elements from the ilec . the wireline segment links the cincinnati and dayton , ohio geographies through its sonet , which provides route diversity via two separate paths . story_separator_special_tag in 2011 , the company continued to expand its fioptics product suite of services , which are fiber-based entertainment , high-speed internet and voice services . fioptics now passes 134,000 addresses , about 20 % of greater cincinnati , and has 39,600 fioptics entertainment customers . the wireline segment also includes long distance , audio conferencing , other broadband services including private line and mpls , and payphone services . 32 form 10-k part ii cincinnati bell inc. replace_table_token_5_th 2011 compared to 2010 revenues voice local service revenue includes local service , value added services , digital trunking , switched access , and information services . voice local service revenue was $ 280.3 million in 2011 , down $ 31.6 million , or 10 % , compared to 2010. these revenues have declined primarily due to fewer local access lines in use . access lines were 621,300 at december 31 , 2011 , down 52,800 , or 8 % , compared to a year earlier . the decline in access lines resulted from several factors , including customers electing to solely use wireless service in lieu of traditional local wireline service , company-initiated disconnections of customers with credit problems , and customers electing to use service from other providers . data revenue consists of fioptics high-speed internet access , dsl high-speed internet access , dial-up internet access , data transport , and lan interconnection services . data revenue was $ 291.5 million in 2011 , up $ 8.2 million , or 3 % , compared to 2010. revenue from fioptics high-speed internet service increased to $ 15.8 million in 2011 , up from $ 10.2 million in the prior year . as of december 31 , 2011 , high-speed internet fioptics customers were 39,300 , which is 44 % higher than a year ago . lan service revenue also increased by $ 5.6 million on a year-over-year basis . lower dsl revenue partially offset these increases . dsl subscribers of 218,000 at the end of 2011 decreased by 5 % from 2010. long distance and voip revenue was $ 111.3 million in 2011 , an increase of $ 6.9 million , or 7 % , compared to 2010. in 2011 , both audio conferencing and voip services increased due to a larger number of subscribers and higher usage . partially offsetting this favorable trend , long distance residential revenue declined by $ 4.1 million in 2011. as of december 31 , 2011 , 33 form 10-k part ii cincinnati bell inc. long distance subscriber lines were 447,400 , a 7 % decrease compared to a year earlier . long distance subscriber lines have declined as consumers opt to utilize wireless and voip services . entertainment revenue was $ 26.6 million in 2011 , up $ 9.9 million , or 59 % , compared to the prior year due to growth in fioptics subscribers . as of december 31 , 2011 , fioptics entertainment subscribers were 39,600 , up 41 % from a year ago . the company continues to expand its fioptics service area as there is strong consumer demand for this service . other revenue was $ 22.4 million in 2011 , down $ 3.8 million compared to the prior year . the sale of the company 's home security monitoring business decreased revenues by $ 2.1 million in 2011. fewer wire installation jobs also contributed to lower revenues compared to the prior year . costs and expenses cost of services and products was $ 270.0 million in 2011 , an increase of $ 13.2 million , or 5 % , compared to 2010. payroll related costs and contract services were up $ 6.6 million and $ 2.7 million , respectively , primarily due to overtime associated with the start-up of fioptics iptv , as well as higher volumes of repair work resulting from record rainfall in our operating territory . network costs also increased by $ 6.0 million in 2011 compared to last year as a result of growth in audio conferencing , voip , and fioptics services . sg & a expenses were $ 126.7 million in 2011 , down $ 13.4 million , or 10 % compared to the prior year . payroll and other employee related costs were down $ 10.1 million due to lower headcount . contract services and advertising costs were down $ 2.8 million and $ 1.5 million , respectively , compared to 2010. partially offsetting these favorable variances , legal and consulting costs and non-employee commissions were higher in 2011. depreciation and amortization was $ 102.4 million in 2011 , which was down $ 1.5 million compared to the prior year . restructuring charges were $ 7.7 million in 2011 compared to $ 8.2 million in the prior year . the company continues to manage the cost structure of this business . employee separation costs were $ 3.5 million in 2011 and $ 4.9 million in 2010. lease abandonment costs were $ 2.5 million and $ 3.3 million in 2011 and 2010 , respectively . contract termination costs were $ 1.7 million in 2011 , with no such costs incurred in the prior year . the sale of substantially all the assets associated with our home security monitoring business in 2011 resulted in a gain of $ 8.4 million . curtailment losses of $ 4.2 million were recognized from the reduction of future pension benefits for certain bargained employees . asset impairment losses were $ 1.0 million in 2011 , with no such losses in 2010. asset impairment losses arose from abandoned leasehold improvements related to vacated office space and the write-down to fair value of certain assets held for sale . capital expenditures capital expenditures are incurred to maintain the wireline network , expand the company 's fioptics product suite , and upgrade its dsl network .
| this increase resulted from higher sales of telecommunications and it hardware in 2011 . 29 form 10-k part ii cincinnati bell inc. selling , general and administrative ( `` sg & a '' ) expenses were $ 263.1 million in 2011 , a decrease of $ 7.8 million , or 3 % , compared to 2010. lower payroll expense , contract services , advertising and bad debt expense were incurred in 2011 compared to the prior year . partially offsetting these savings were higher legal and consulting costs and non-employee commissions . also , the release of a previously established indemnification liability lowered 2011 sg & a costs by $ 1.2 million . depreciation and amortization was $ 199.5 million in 2011 , an increase of $ 20.0 million compared to the prior year . higher depreciation and amortization was incurred in 2011 due to tangible and intangible assets acquired with cyrusone in june 2010 , as well as the expansion of several data center facilities . restructuring charges were $ 12.2 million in 2011 compared to $ 13.7 million in the prior year . in both years , restructuring charges included costs associated with employee separations , lease abandonments and contract terminations . in 2011 , pension curtailment losses of $ 4.2 million resulted from reductions in future pension service credits which arose from a new contract with bargained employees . in 2011 , the sale of assets associated with our home security monitoring business resulted in a gain of $ 8.4 million . in 2011 , goodwill impairment losses of $ 50.3 million were recorded related to the wireless segment . asset impairment losses , excluding goodwill , were $ 2.1 million in 2011 , resulting from abandonment of certain facilities , equipment , and capital projects . no asset impairment losses were recorded in 2010. acquisition costs of $ 2.6 million were incurred in 2011 , as acquisition opportunities were investigated in 2011 , but none were completed . in 2010 , acquisition costs of $ 9.1 million
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32 factors and trends that affect our operations and financial results in reading our financial statements , you should be aware of the following factors and trends that our management believes are important in understanding our financial performance . covid-19 update . global demand trends have been impacted adversely by the ongoing covid-19 pandemic and therefore remain uncertain at this time . economic indicators show some improvement from the severe contraction experienced earlier in 2020 , which has led to an improvement in the recent demand environment in certain regions . it is difficult to predict whether the improvement in some macro-economic indicators will be sustained if there are additional restrictions imposed as a result of a resurgence in covid-19 infections . this uncertainty continues to make forecasting our business challenging in the near to medium-term . currently , our four major production facilities in united states , germany , russia and belarus remain open and are operating normally . we have implemented employee safety and sanitization protocols that have impacted productivity and efficiency . we have vertically integrated manufacturing , and many of the components one facility supplies to another facility are single sourced internally and not available from third party suppliers , for example our semiconductor diodes manufactured in oxford , massachusetts . while we have attempted to build safety stock of critical components at our various locations , if government restrictions to address covid-19 become more severe than we have experienced to date or if there was significant absenteeism as a result of covid-19 or resurgence in the places where we operate , it could impact our internal supply chain . if our revenues are reduced for an extended period or if our production output falls because of government restrictions or absenteeism , we may be required to reduce payroll-related costs and other expenses in the future through layoffs , furloughs or reduced hours , even though we have not done so to date . we have not experienced significant supply disruption from third party component suppliers ; however , we may face some supply chain restraints related to logistics , including available air cargo space and higher freight rates if there is a covid-19 resurgence . we may experience delays in the future if resurgences are experienced and governments implement new restrictions . we believe we have the ability to meet the near-term demand for our products , but the situation is fluid and subject to change . we continue to monitor the rapidly evolving conditions and circumstances as well as guidance from international and domestic authorities , including public health authorities , and we may need to take additional actions based on their recommendations . the measures implemented by various authorities related to the covid-19 outbreak have caused us to change our business practices including those related to where employees work , the distance between employees in our facilities , limitations on in-person meetings between employees and with customers , suppliers , service providers , and stakeholders as well as restrictions on business travel to domestic and international locations or to attend trade shows , investor conferences and other events . to date , we have been able to accommodate these changes to our business operations and continue to meet customer demand . if guidelines from relevant authorities becomes more restrictive due to a resurgence of covid-19 in a particular region , the effect on our operations could be more significant . the covid-19 pandemic has increased economic uncertainty and decreased demand for our products in many markets we serve and could continue for an unknown period of time . in these circumstances , there may be developments outside of our control , including the length and extent of the covid-19 outbreak and government-imposed measures that may require us to adjust our operating plans . as such , given the dynamic nature of this situation , we can not reasonably estimate the future impacts of covid-19 on our financial condition , results of operations or cash flows . net sales . our annual revenue growth rates have varied from year to year . net sales decreased by 9 % and 10 % in 2020 and 2019 , respectively , and increased by 4 % in 2018. in 2020 , the decline in net sales was driven by decreased demand for our products related to the covid-19 pandemic that extended and deepened the weak macroeconomic environment prevailing at the end of 2019. in 2019 , the decline in net sales was driven by decreased demand for our products related to the trade war between the u.s. and china that weakened macroeconomic conditions in the second half of 2019. in addition to these factors , sales were affected by declines in average sales prices related to competition . these reductions in sales were partially offset by the introduction of new products , including high power and ultra-fast pulsed lasers , optical heads and other accessories and the development of new applications for our products some of which displace non-laser technologies . our business depends substantially upon capital expenditures by end users , particularly by manufacturers using our products for materials processing , which includes general manufacturing , automotive , other transportation , aerospace , heavy industry , consumer , semiconductor and electronics . approximately 90 % of our revenues in 2020 were from customers using our products for materials processing . although applications within materials processing are broad , the capital equipment market in general is cyclical and historically has experienced sudden and severe downturns . for the foreseeable future , our operations will continue to depend upon capital expenditures by end users of materials processing equipment and will be subject to the broader fluctuations of capital equipment spending . 33 our net sales have historically fluctuated from quarter to quarter . story_separator_special_tag the increase or decrease in sales from a prior quarter can be affected by the timing of orders received from customers , the shipment , installation and acceptance of products at our customers ' facilities , the mix of oem orders and one-time orders for products with large purchase prices , competitive pressures , acquisitions , economic and political conditions in a certain country or region and seasonal factors such as the purchasing patterns and levels of activity throughout the year in the regions where we operate . net sales can be affected by the time taken to qualify our products for use in new applications in the end markets that we serve . our sales cycle varies substantially , ranging from a period of a few weeks to as long as one year or more , but is typically several months . the adoption of our products by a new customer or qualification in a new application can lead to an increase in net sales for a period , which may then slow until we penetrate new markets or obtain new customers . in the recent years , our net sales have been negatively impacted by tariffs and trade policies . new tariffs and other changes in u.s. trade policy could trigger retaliatory actions by affected countries , and certain foreign governments . we are also susceptible to global or regional disruptions such as political instability , geopolitical conflicts , acts of terrorism , significant fluctuations in currency values , natural disasters , macroeconomic concerns and particularly the impact of the covid-19 outbreak that affect the level of capital expenditures or global commerce . with respect to the covid-19 outbreak specifically , our 2020 financial results were negatively impacted . in addition , as of the time of this annual report on form 10-k , we expect that covid-19 could continue to negatively impact our businesses beyond 2020 , but the extent and duration of such impacts over the longer term remain uncertain and dependent on future developments that can not be accurately predicted at this time , such as the severity and transmission rate of the coronavirus , the extent and effectiveness of containment actions taken , the approval , effectiveness , timing and widespread inoculation of the global population with new vaccines , and the impact of these and other factors on our customer base and general commercial activity . the average selling prices of our products generally decrease as the products mature . these decreases result from factors such as increased competition , decreased manufacturing costs and increases in unit volumes . we may also reduce selling prices in order to penetrate new markets and applications . furthermore , we may negotiate discounted selling prices from time to time with certain customers that place high unit volume orders . the secular shift to fiber laser technology in large materials processing applications , such as cutting applications , had a positive effect on our sales trends in the past such that our sales trends were often better than other capital equipment manufacturers in both positive and negative economic cycles . as the secular shift to fiber laser technology matures in such applications , our sales trends are more susceptible to economic cycles which affect other capital equipment manufacturers . gross margin . our total gross margin in any period can be significantly affected by total net sales in any period , by competitive factors , by product mix , and by other factors such as changes in foreign exchange rates relative to the u.s. dollar , some of which are not under our control . for instance , as our products mature , we can experience additional competition which tends to decrease average selling prices and affects gross margin ; our gross margin can be significantly affected by product mix . within each of our product categories , the gross margin is generally higher for devices with greater average power . these higher power products often have better performance , more difficult specifications to attain and fewer competing products in the marketplace ; higher power lasers also use a greater number of optical components , improving absorption of fixed overhead costs and enabling economies of scale in manufacturing ; the gross margin for certain specialty products may be higher because there are fewer or sometimes no equivalent competing products ; customers that purchase devices in greater unit volumes generally are provided lower prices per device than customers that purchase fewer units . in general , lower selling prices to high unit volume customers reduce gross margin although this may be partially offset by improved absorption of fixed overhead costs associated with larger product volumes , which drive economies of scale in manufacturing ; and finally , gross margin on systems and communication components can be lower than margins for our laser and amplifier sources , depending on the configuration , volume and competitive forces , among other factors . we expect that some new technologies , products and systems will have returns above our cost of capital but may have gross margins below our corporate average . if we are able to develop opportunities that are significant in size , competitively advantageous or leverage our existing technology base and leadership , our current gross margin levels may not be maintained . instead , we aim to deliver industry-leading levels of gross margins by growing sales , by taking market share in existing 34 markets , or by developing new applications and markets we address , by reducing the cost of our products and by optimizing the efficiency of our manufacturing operations . for instance , despite the decreases in sales in 2020 and 2019 , manufacturing levels remained high and our facilities increased production as we manufactured more optical power products at lower average selling prices . we invested $ 87.7 million , $ 133.5 million and $ 160.3 million in capital expenditures in 2020 , 2019 and 2018 , respectively .
| laser and non-laser systems sales decreased due to lower demand primarily as a result of covid-19 . the reduction of revenue in laser systems was attributable to lower demand for cutting and welding applications . the reduction of revenue in non-laser systems was attributable to lower demand in the transportation and aerospace sectors . other revenue for materials processing decreased due to lower parts and service revenue . other applications sales from other applications increased due to increased demand for lasers used for directed energy , semiconductor , scientific and instrument applications , as well as lasers used in medical procedures , partially offset by lower sales of telecom products . 39 our net sales were derived from customers in the following geographic regions : replace_table_token_5_th ( 1 ) the substantial majority of sales in north america are to customers in the united states . cost of sales and gross margin . cost of sales decreased by $ 46.7 million , or 6.6 % , to $ 661.7 million in 2020 from $ 708.4 million in 2019. our gross margin decreased to 44.9 % in 2020 from 46.1 % in 2019. gross margin decreased mainly due to increased manufacturing costs as a percentage of sales due to lower sales , particularly in the first half of the year resulting from the impact of the covid-19 pandemic . in addition , provisions for inventory reserves and freight costs were higher . the increase in freight costs is also primarily attributable to covid-19 . expenses related to provisions for excess or obsolete inventory and other valuation adjustments increased by $ 6.5 million to $ 45.4 million , or 3.8 % of sales , for the year ended december 31 , 2020 , as compared to $ 38.9 million , or 3.0 % of sales , for the year ended december 31 , 2019. sales and marketing expense . sales and marketing expense decreased by $ 7.1 million , or 9.1 % , to $ 70.6 million in 2020 from $
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in december 2018 , we entered into such an agreement with google , under which we receive revenue share payments based on our customers ' search advertising spend on google and certain other eligible search engines . in exchange , we will reinvest a percentage of these revenue share payments to drive our technology platform innovation . this agreement and the related revenue recognition considerations are described more fully in note 3 of the accompanying consolidated financial statements . the majority of our revenues are derived from advertisers based in the united states . advertisers from outside of the united states represented 30 % , 34 % and 31 % of total revenues for 2018 , 2017 and 2016 , respectively . we were incorporated in 2006 and initially focused on building the core elements of our cloud-based platform , which we currently use to service our customers . in september 2007 , we launched marin search , which targets large advertisers and agencies . in june 2018 , we launched marinone , the next generation of our cross-channel advertising platform . we have an iterative development process and we typically release new features every month . 25 components of results of operations revenues , net we generate revenues principally from subscription contracts under which we provide advertisers with access to our search , social , ecommerce and display advertising management platform , either directly or through the advertiser 's relationship with an agency with whom we have a contract . our search subscription contracts are generally one year or less in length , while social and display contracts may vary in duration . under subscription contracts with most of our direct advertisers and some independent agencies , we charge fees generally based on the amount of advertising spend that these customers manage through our platform or a contractual minimum monthly platform fee , whichever is greater . certain of these customers are charged only a fixed monthly platform fee . most of our subscription contracts with our network agency customers do not include a committed minimum monthly platform fee , and we charge fees based upon the amount of advertising spend that these customers manage through our platform . due to the nature of the platform and the services performed under the subscription agreements , revenues are typically recognized in the amount billable to the advertiser . our long-term strategic agreements have historically included multiple-year terms , and are invoiced quarterly . in the case of our largest agreement with google , it includes both a fixed baseline amount , as well as a variable portion based on a percentage of relevant advertising search spend above the baseline threshold that runs through our technology platform . we recognize the entire contract price under this agreement ratably over the initial minimum two-year term . our other long-term strategic agreements are generally variable in nature , based on a percentage of relevant search advertising spend that runs through our technology platform . consideration received under these agreements is allocated to the period in which we have the contractual right to bill . we expect that in the future , revenues from these strategic agreements will continue to grow as a percentage of our total revenues , net . refer to note 3 of the accompanying consolidated financial statements for further discussion of our revenue recognition considerations . cost of revenues cost of revenues primarily includes personnel costs , consisting of salaries , benefits , bonuses and stock-based compensation expense for employees associated with our cloud infrastructure and global services for implementation and ongoing customer service . other costs of revenues include fees paid to contractors who supplement our support and data center personnel , expenses related to third-party data centers , depreciation of data center equipment , amortization of internally developed software , amortization of intangible assets and allocated overhead . we expect that , in the future , cost of revenues will decrease year-over-year in absolute dollars as we seek to realign our cost structure with our future revenues . sales and marketing sales and marketing expenses consist primarily of personnel costs , including salaries , benefits , stock-based compensation expense and bonuses , as well as sales commissions and other costs including travel and entertainment , marketing and promotional events , lead generation activities , public relations , marketing activities , professional fees , amortization of intangible assets and allocated overhead . all of these costs are expensed as incurred , except sales commissions and the related payroll taxes , which are capitalized and amortized over a three year expected period of benefit in accordance with the relevant authoritative accounting guidance ( refer to note 3 of the accompanying consolidated financial statements ) . our commission plans provide that commission payments to our sales representatives are paid based on the key components of the applicable customer contract , including the minimum or fixed monthly platform fee during the initial contract term . we expect that , in the future , sales and marketing expenses will decrease year-over-year in absolute dollars as we seek to realign our cost structure with our future revenues . research and development research and development expenses consist primarily of personnel costs for our product development and engineering employees and executives , including salaries , benefits , stock-based compensation expense and bonuses . also included are non-personnel costs such as professional fees payable to third-party development resources , amortization of intangible assets and allocated overhead . our research and development efforts are focused on enhancing our software architecture , adding new features and functionality to our platform and improving the efficiency with which we deliver these services to our customers , including the development of marinone . we expect that research and development expenses may decrease year-over-year in absolute dollars as we seek to realign our cost structure with our future revenues . story_separator_special_tag general and administrative general and administrative expenses consist primarily of personnel costs , including salaries , benefits , stock-based compensation expense and bonuses for our administrative , legal , human resources , finance and accounting employees and executives . also included are non-personnel costs , such as audit fees , tax services and legal fees , as well as professional fees , insurance and other corporate expenses , including allocated overhead . we expect our general and administrative expenses to decrease year-over-year in absolute dollars as we seek to align our cost structure with our future revenues . other income ( expenses ) , net other income ( expenses ) , net , primarily consists of sublease income and foreign currency transaction gains and losses , as well as interest income earned on our cash equivalents offset by the interest expense related to our capital lease obligations . provision for income taxes the provision for income taxes consists of federal , state and foreign income taxes . due to recent losses , we maintain a valuation allowance against our united states deferred tax assets as of december 31 , 2018. we consider all available evidence , both positive and negative , in assessing the extent to which a valuation allowance should be applied against our deferred tax assets . 26 results of operations the following table is a summary of our consolidated statements of operations for the specified periods and results of operations as a percentage of revenues for those periods . the period-to-period comparisons of results are not necessarily indicative of results for future periods . percentage of revenues figures are rounded and therefore may not subtotal exactly . replace_table_token_7_th ( 1 ) stock-based compensation expense included in the consolidated statements of operations data above was as follows : replace_table_token_8_th ( 2 ) amortization of intangible assets included in the consolidated statements of operations data above was as follows : replace_table_token_9_th ( 3 ) restructuring related expenses included in the consolidated statements of operations data above was as follows : replace_table_token_10_th the following table sets forth our consolidated revenues by geographic area , as well as the related percentages of total revenues , for the specified periods . replace_table_token_11_th 27 adjusted ebitda adjusted ebitda is a financial measure not calculated in accordance with generally accepted accounting principles in the united states , or gaap . we define adjusted ebitda as net loss , adjusted for stock-based compensation expense , depreciation , the amortization of internally developed software , intangible assets and deferred costs to obtain and fulfill contracts , the capitalization of internally developed software costs , the deferral of costs to obtain and fulfill contracts , the impairment of goodwill and long-lived assets , the benefit from or provision for income taxes , other income or expenses , net and the non-recurring costs associated with acquisitions and restructurings . adjusted ebitda should not be considered as an alternative to net loss , operating loss or any other measure of financial performance calculated and presented in accordance with gaap . we prepare adjusted ebitda to eliminate the impact of items that we do not consider indicative of our core operating performance . investors are encouraged to evaluate these adjustments and the reasons we consider them appropriate . we believe adjusted ebitda is useful to investors in evaluating our operating performance for the following reasons : ● adjusted ebitda is widely used by investors and securities analysts to measure a company 's operating performance without regard to items , such as stock-based compensation expense , depreciation and amortization , capitalized software development costs , deferred costs associated with contracts , benefit from or provision for income taxes , other income or expenses , net and costs associated with acquisitions and restructurings , that can vary substantially from company to company depending upon their financing , capital structures and the method by which assets were acquired ; ● our management uses adjusted ebitda in conjunction with gaap financial measures for bonus compensation and planning purposes , including the preparation of our annual operating budget , as a measure of operating performance and the effectiveness of our business strategies and in communications with our board of directors concerning our financial performance ; and ● adjusted ebitda provides consistency and comparability with our past financial performance , facilitates period-to-period comparisons of operations and also facilitates comparisons with other peer companies , many of which use similar non-gaap financial measures to supplement their gaap results . we understand that , although adjusted ebitda is frequently used by investors and securities analysts in their evaluations of companies , it has limitations as an analytical tool , and investors should not consider it in isolation or as a substitute for analysis of our results of operations as reported under gaap . these limitations include : ● depreciation and amortization are non-cash charges , and the assets being depreciated or amortized will often have to be replaced in the future ; adjusted ebitda does not reflect any cash requirements for these replacements ; ● adjusted ebitda does not reflect changes in , or cash requirements for , our working capital needs or contractual commitments ; ● adjusted ebitda does not reflect cash requirements for income taxes and the cash impact of other income or expense ; and ● other companies may calculate adjusted ebitda differently than we do , limiting its usefulness as a comparative measure . the following table presents a reconciliation of net loss , the most comparable gaap measure , to adjusted ebitda for each of the periods indicated : replace_table_token_12_th 28 comparison of the years ended december 31 , 2018 and 2017 revenues , net years ended december 31 , change 2018 2017 $ % ( dollars in thousands ) revenues , net $ 58,631 $ 74,991 $ ( 16,360 ) ( 22 ) % revenues , net in 2018 decreased by $ 16.4 million , or 22 % , as compared to 2017. during 2018 , we experienced ongoing customer turnover , which was not fully offset by new customer bookings .
| cash used in operating activities in 2017 of $ 4.9 million was primarily the result of a net loss of $ 31.5 million , adjusted for non-cash expenses of $ 20.9 million , which primarily included impairment of goodwill , depreciation , amortization , unrealized foreign currency losses , stock-based compensation expense , provision for bad debts and deferred income tax benefits . this was further increased by a $ 5.7 million net change in working capital items , most notably ( 1 ) a decrease in accounts receivable of $ 4.8 million due to the timing of related collections ; ( 2 ) an increase in prepaid expenses and other assets ( both current and non-current ) of $ 0.3 million related to the timing of related disbursements ; and ( 3 ) an increase in accounts payable and accrued expenses and other liabilities ( both current and non-current ) of $ 1.3 million due to the timing of related disbursements and customer advances . 34 cash provided by operating activities in 2016 of $ 6.1 million was primarily the result of a net loss of $ 16.5 million , adjusted for non-cash expenses of $ 24.0 million , which primarily included depreciation , amortization , unrealized foreign currency gains , stock-based compensation expense and deferred income tax benefits . this was further offset by $ 0.1 million in contingent consideration paid for the socialmoov acquisition from 2015 , and a $ 1.4 million net change in working capital items , most notably ( 1 ) a decrease in accounts receivable of $ 0.8 million due to the timing of related collections ; ( 2 ) a decrease in prepaid expenses and other assets ( both current and non-current ) of $ 0.2 million related to the timing of related disbursements ; and ( 3 ) a net decrease in accounts payable and accrued expenses and other current and non-current liabilities of $ 2.4 million due to the timing of related disbursements and customer advances . investing activities during 2018 , 2017 and 2016 , investing activities primarily consisted of purchases of property and equipment , including leasehold
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revenue recognition our performance obligations primarily arise from manufacturing and delivering universal control , sensing and automation products and av accessories , which are sold through multiple channels , and intellectual property that is embedded in these products or licensed to others . these performance obligations are satisfied at a point in time or over time , as described below . payment terms are typically on open credit terms consistent with industry practice and do not have significant financing components . some contracts contain early payment discounts , which are recognized as a reduction to revenue if the customer typically meets the early payment conditions . consideration may be variable based on indeterminate volumes . effective january 1 , 2018 , revenue is recognized over time when the customer simultaneously receives and consumes the benefits provided by our performance , our performance creates or enhances an asset that the customer controls , or when our performance creates an asset with no alternative use to us ( custom products ) and we have an enforceable right to payment for performance completed to date , such as a firm order or other contractual commitment from the customer . an asset does not have an alternative use if we are unable to redirect the asset to another customer in the foreseeable future without significant rework . the method for measuring progress towards satisfying a performance obligation for a custom product is based on the costs incurred to date ( cost-to-cost method ) . we believe that the costs associated with production are most closely aligned with the revenue associated with those products . we recognize revenue at a point in time if the criteria for recognizing revenue over time are not met , the title of the goods has transferred , and we have a present right to payment . we typically recognize revenue for the sale of tooling at a point in time , which is generally upon completion of the tooling and , if applicable , acceptance by the customer . a provision is recorded for estimated sales returns and allowances and is deducted from gross sales to arrive at net sales in the period the related revenue is recorded . these estimates are based on historical sales returns and allowances , analysis of credit memo data and other known factors . actual returns and claims in any future period are inherently uncertain and thus may differ from our estimates . if actual or expected future returns and claims are significantly greater or lower than the reserves that we have established , we will record a reduction or increase to net revenue in the period in which we make such a determination . we accrue for discounts and rebates based on historical experience and our expectations regarding future sales to our customers . accruals for discounts and rebates are recorded as a reduction to sales in the same period as the related revenue . changes in such accruals may be required if future rebates and incentives differ from our estimates . we license our intellectual property including our patented technologies , trademarks , and database of control codes . when license fees are paid on a per-unit basis , we record license revenue when our customers manufacture or ship a product incorporating our intellectual property and we have a present right to payment . when a fixed up-front license fee is received in exchange for the delivery of a particular database of infrared codes or the contract contains a minimum guarantee provision , we record revenue when delivery of the intellectual property has occurred . tiered royalties are recorded on a straight-line basis according to the forecasted per-unit fees taking into account the pricing tiers . contract assets represent revenue which has been recognized based on our accounting policies but for which the customer has not yet been invoiced and thus an account receivable has not yet been recorded . 30 under prior accounting standards , prior to january 1 , 2018 , we recognized revenue on the sale of products when title of the goods had transferred , there was persuasive evidence of an arrangement ( such as a purchase order from the customer ) , the sales price was fixed or determinable and collectability was reasonably assured . revenue for term license fees were recognized on a straight-line basis over the effective term of the license when we could not reliably predict in which periods , within the term of the license , the licensee would benefit from the use of our patented inventions . allowance for doubtful accounts we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make payments for products sold or services rendered . the allowance for doubtful accounts is estimated based on a variety of factors , including credit reviews , historical experience , length of time receivables are past due , current economic trends and changes in customer payment behavior . we also record specific provisions for individual accounts when we become aware of a customer 's inability to meet its financial obligations to us , such as in the case of bankruptcy filings or deterioration in the customer 's operating results or financial position . our historical reserves have been sufficient to cover losses from uncollectible accounts . however , because we can not predict future changes in the financial stability of our customers , actual future losses from uncollectible accounts may differ from our estimates and may have a material effect on our consolidated financial position , results of operations and cash flows . inventories our finished good , component part , and raw material inventories are valued at the lower of cost or net realizable value . cost is determined using the first-in , first-out method . we write down our inventory for the estimated difference between cost and estimated net realizable value based upon our best estimates of future demand and market conditions . story_separator_special_tag we carry inventory in amounts necessary to satisfy our customers ' inventory requirements on a timely basis . we continually monitor our inventory status to control inventory levels and write down any excess or obsolete inventories on hand . if actual market conditions are less favorable than those projected by management , additional inventory write-downs may be required which may have a material impact on our financial statements . such circumstances may include , but are not limited to , the development of new competing technology that impedes the marketability of our products or the occurrence of significant price decreases in our raw material or component parts , such as integrated circuits . each percentage point change in the ratio of excess and obsolete inventory reserve to inventory would impact cost of sales by approximately $ 1.5 million . valuation of long-lived assets and intangible assets we assess long-lived and intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable . factors considered important which may trigger an impairment review , if significant , include the following : underperformance relative to historical or projected future operating results ; changes in the manner of use of the assets ; changes in the strategy of our overall business ; negative industry or economic trends ; a decline in our stock price for a sustained period ; and a variance between our market capitalization relative to net book value . if the carrying value of the asset is larger than its projected undiscounted future cash flows , the asset is impaired . the impairment is measured as the difference between the net book value of the asset and the asset 's estimated fair value . fair value is estimated utilizing the asset 's projected discounted future cash flows . in assessing fair value , we must make assumptions regarding estimated future cash flows , the discount rate and other factors . goodwill we evaluate the carrying value of goodwill on december 31 of each year and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount . such circumstances may include , but are not limited to : ( 1 ) a significant adverse change in legal factors or in business climate , ( 2 ) unanticipated competition or ( 3 ) an adverse action or assessment by a regulator . to evaluate whether goodwill is impaired , we conduct a two-step quantitative goodwill impairment test . in the first step we compare the estimated fair value of our single reporting unit to the reporting unit 's carrying amount , including goodwill . we estimate the fair value of our reporting unit based on income and market approaches . under the income approach , we calculate the fair value based on the present value of estimated future cash flows . under the market approach , we estimate the fair value based on market multiples of enterprise value to ebitda for comparable companies . if the carrying value of the net assets assigned to the reporting 31 unit exceeds the fair value of the reporting unit , then we perform the second step of the impairment test in order to determine the implied fair value of the reporting unit 's goodwill . to calculate the implied fair value of the reporting unit 's goodwill , the fair value of the reporting unit is first allocated to all of the other assets and liabilities of that unit based on their fair values . the excess of the reporting unit 's fair value over the amount assigned to its other assets and liabilities is the implied fair value of goodwill . an impairment loss would be recognized equal to the amount by which the carrying value of goodwill exceeds its implied fair value . determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions . these estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows , risk-adjusted discount rates , future economic and market conditions and the determination of appropriate market comparables . in addition , we make certain judgments and assumptions in determining our reporting units . we base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain . actual future results may differ from those estimates . business combinations we allocate the purchase price of acquired businesses to the tangible and intangible assets and the liabilities assumed based on their estimated fair values on the acquisition date . the excess of the purchase price over the fair value of net assets acquired is recorded as goodwill . we engage independent third-party appraisal firms to assist us in determining the fair values of assets acquired and liabilities assumed . such valuations require management to make significant fair value estimates and assumptions , especially with respect to intangible assets and contingent consideration . management estimates the fair value of certain intangible assets and contingent consideration by utilizing the following ( but not limited to ) : future cash flow from customer contracts , customer lists , distribution agreements , acquired developed technologies , trademarks , trade names and patents ; expected costs to complete development of in-process technology into commercially viable products and cash flows from the products once they are completed ; brand awareness and market position as well as assumptions regarding the period of time the brand will continue to be used in our product portfolio ; and discount rates utilized in discounted cash flow models . in those circumstances where an acquisition involves a contingent consideration arrangement , we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date . we re-measure this liability at each reporting period and record changes in the fair value within operating expenses .
| these decreases in net sales were partially offset by increased net sales to consumer electronics companies in asia and increased net sales of our home security products . net sales in our consumer lines ( one for all ® retail and private label ) were 8.9 % of net sales in 2018 compared to 7.7 % in 2017 . net sales in our consumer lines in 2018 increased by 13.2 % to $ 60.7 million from $ 53.6 million in 2017 driven primarily by growth in north america and europe , partially offset by decreased sales in latin america and asia . gross profit . gross profit in 2018 was $ 141.8 million compared to $ 165.7 million in 2017 . gross profit as a percent of sales decreased to 20.8 % in 2018 from 23.8 % in 2017 . the gross margin percentage was unfavorably impacted by inflation in the cost of certain components ; the strengthening of the chinese yuan renminbi relative to the u.s. dollar ; factory underutilization associated with ceasing manufacturing activities while transitioning our asia operations onto our new global erp system , which went live in asia in april 2018 ; and asset write-downs associated with the closure and sale of our guangzhou factory . in addition , 34 in the fourth quarter of 2018 , our gross margin percentage was unfavorably impacted by the transition of manufacturing activities from our china factories to our mexico factory in an effort to mitigate the effect of increased u.s. tariffs on certain products manufactured in china and imported into the united states . in connection with this transition , we incurred direct costs relating to the movement of factory equipment and materials and duplicative labor efforts as well as indirect costs including unabsorbed duplicative overhead and manufacturing inefficiencies . we expect our gross margin rate to continue to be negatively impacted by the increased u.s. tariffs until the majority of products that are destined for the united states are manufactured outside of china . we expect this manufacturing transition to be completed by the summer
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our redevelopment and development opportunities are subject to various factors , including market conditions and may not ultimately come to fruition . we continue to review acquisition opportunities in our primary markets that would complement our portfolio and provide long-term growth opportunities . some of our acquisitions do not initially contribute significantly to earnings growth ; however , we believe they provide long-term re-leasing growth , redevelopment opportunities and other strategic opportunities . any growth from acquisitions is contingent on our ability to find properties that meet our qualitative standards at prices that meet our financial hurdles . changes in interest rates may affect our success in achieving earnings growth through acquisitions by affecting both the price that must be paid to acquire a property , as well as our ability to economically finance a property acquisition . generally , our acquisitions are initially financed by available 39 cash , mortgage loans and or borrowings under our second amended and restated credit facility , which may be repaid later with funds raised through the issuance of new equity or new long-term debt . same-store we have provided certain information on a total portfolio , same-store and redevelopment same-store basis . information provided on a same-store basis includes the results of properties that we owned and operated for the entirety of both periods being compared except for properties for which significant redevelopment or expansion occurred during either of the periods being compared , properties under development , properties classified as held for development and properties classified as discontinued operations . information provided on a redevelopment same-store basis includes the results of properties undergoing significant redevelopment for the entirety or portion of both periods being compared . same-store and redevelopment same-store is considered by management to be an important measure because it assists in eliminating disparities due to the development , acquisition or disposition of properties during the particular period presented , and thus provides a more consistent performance measure for the comparison of the company 's stabilized and redevelopment properties , as applicable . additionally , redevelopment same-store is considered by management to be an important measure because it assists in evaluating the timing of the start and stabilization of our redevelopment opportunities and the impact that these redevelopments have in enhancing our operating performance . while there is judgment surrounding changes in designations , we typically reclassify significant development , redevelopment or expansion properties to same-store properties once they are stabilized . properties are deemed stabilized typically at the earlier of ( 1 ) reaching 90 % occupancy or ( 2 ) four quarters following a property 's inclusion in operating real estate . we typically remove properties from same-store properties when the development , redevelopment or expansion has or is expected to have a significant impact on the property 's annualized base rent , occupancy and operating income within the calendar year . acquired properties are classified to same-store properties once we have owned such properties for the entirety of comparable period ( s ) and the properties are not under significant development or expansion . in our determination of same-store and redevelopment same-store properties , waikele center has been identified as a same-store redevelopment property due to significant construction activity . retail same-store net operating income increased approximately 4.5 % for the year ended december 31 , 2019 , respectively , compared to the same periods in 2018 . retail redevelopment same-store net operating income increased approximately 1.5 % for the year ended december 31 , 2019 , respectively , compared to the same periods in 2018 . below is a summary of our same-store composition for the years ended december 31 , 2019 , 2018 and 2017 . for the year ended december 31 , 2019 , when compared to the designations for the year ended december 31 , 2018 , pacific ridge apartments and gateway marketplace were reclassified to same-store properties when compared to the designations for the year ended december 31 , 2018 as the entities were acquired on april 28 , 2017 and july 6 , 2017 , respectively , and are comparable for the year ended december 31 , 2019 . waikiki beach walk retail and embassy suites hotel was reclassified to non-same-store properties when compared to the designation for the year ended december 31 , 2018 due to spalling repair activity disrupting the hotel portion of the properties operations . waikele center was classified as a non-same-store property due to significant redevelopment activity during the year ended december 31 , 2018. torrey point was placed into operations and became available for occupancy in august 2018 and will be classified as a non-same-store property until it becomes stabilized and comparable . la jolla commons is classified as a non-same-store property , as it was acquired on june 20 , 2019. for the year ended december 31 , 2018 , when compared to the designations for the year ended december 31 , 2017 , torrey reserve campus , hassalo on eighth - retail and hassalo on eighth - multifamily were reclassified to same-store properties when compared to the designations for the year ended december 31 , 2017 as the entities became stabilized after their respective construction periods . pacific ridge apartments and gateway marketplace were classified as non-same-store properties as they were acquired on april 28 , 2017 and july 6 , 2017 , respectively , when compared to the designations for the year ended december 31 , 2018. additionally , waikele center was transferred out of same-store properties due to significant redevelopment activity for the year ended december 31 , 2018. torrey point was placed into operations and became available for occupancy in august 2018 and will be classified as a non-same-store property until it becomes stabilized and comparable . 40 replace_table_token_13_th revenue base rental income consists of scheduled rent charges , straight-line rent adjustments and the amortization of above market and below market rents acquired . story_separator_special_tag we also derive revenue from tenant recoveries and other property revenues , including parking income , lease termination fees , late fees , storage rents and other miscellaneous property revenues . office leases . our office portfolio included nine properties with a total of approximately 3.4 million rentable square feet available for lease as of december 31 , 2019 . as of december 31 , 2019 , these properties were 95.0 % leased . for the year ended december 31 , 2019 , the office segment contributed 39.5 % of our total revenue . historically , we have leased office properties to tenants primarily on a full service gross or a modified gross basis and to a limited extent on a triple-net lease basis . we expect to continue to do so in the future . a full-service gross or modified gross lease has a base year expense stop , whereby the tenant pays a stated amount of certain expenses as part of the rent payment , while future increases in property operating expenses ( above the base year stop ) are billed to the tenant based on such tenant 's proportionate square footage of the property . the increased property operating expenses billed are reflected as operating expenses and amounts recovered from tenants are reflected as rental income in the statements of operations . during the year ended december 31 , 2019 , we signed 71 office leases for 504,335 square feet with an average rent of $ 49.70 per square foot during the initial year of the lease term . of the leases , 45 represent comparable leases where there was a prior tenant , with an increase of 17.2 % in cash basis rent and an increase of 34.1 % in straight-line rent compared to the prior leases . retail leases . our retail portfolio included twelve properties with a total of approximately 3.1 million rentable square feet available for lease as of december 31 , 2019 . as of december 31 , 2019 , these properties were 97.8 % leased . for the year ended december 31 , 2019 , the retail segment contributed 29.3 % , of our total revenue . historically , we have leased retail properties to tenants primarily on a triple-net lease basis , and we expect to continue to do so in the future . in a triple-net lease , the tenant is responsible for all property taxes and operating expenses . as such , the base rent payment does not include any operating expense , but rather all such expenses , to the extent they are paid by the landlord , are billed to the tenant . the full amount of the expenses for this lease type , to the extent they are paid by the landlord , is reflected in operating expenses , and the reimbursement is reflected as rental income in the statements of operations . during the year ended december 31 , 2019 , we signed 67 retail leases for 296,457 square feet with an average rent of $ 34.56 per square foot during the initial year of the lease term , including leases signed for the retail portion of our mixed-use property . of the leases , 52 represent comparable leases where there was a prior tenant , with an increase of 2.0 % in cash basis rent and an increase of 11.4 % in straight-line rent compared to the prior leases . multifamily leases . our multifamily portfolio included six apartment properties , as well as an rv resort , with a total of 2,112 units ( including 122 rv spaces ) available for lease as of december 31 , 2019 . as of december 31 , 2019 , these properties were 92.8 % leased . for the year ended december 31 , 2019 , the multifamily segment contributed 13.9 % of our total revenue . our multifamily leases , other than at our rv resort , generally have lease terms ranging from 7 to 15 months , with a majority having 12-month lease terms . tenants normally pay a base rental amount , usually quoted in terms of a monthly rate for the respective unit . spaces at the rv resort can be rented at a daily , weekly , or monthly rate . the average monthly base rent per leased unit as of december 31 , 2019 was $ 2,099 , compared to $ 2,046 at december 31 , 2018 . mixed-use property revenue . our mixed-use property consists of approximately 97,000 rentable square feet of retail space and a 369-room all-suite hotel . revenue from the mixed-use property consists of revenue earned from retail leases , and revenue earned from the hotel , which consists of room revenue , food and beverage services , parking and other guest services . as of december 31 , 2019 , the retail portion of the property was 97.9 % leased , and for the year ended december 31 , 2019 , the hotel had an average occupancy of 91.7 % . for the year ended december 31 , 2019 , the mixed-use segment contributed 17.3 % , 41 of our total revenue . we have leased the retail portion of such property to tenants primarily on a triple-net lease basis , and we expect to continue to do so in the future . as such , the base rent payment under such leases does not include any operating expenses , but rather all such expenses , to the extent they are paid by the landlord , are billed to the tenant . rooms at the hotel portion of our mixed-use property are rented on a nightly basis . leasing our same-store growth is primarily driven by increases in rental rates on new leases and lease renewals and changes in portfolio occupancy . over the long-term , we believe that the infill nature and strong demographics of our properties provide us with a strategic advantage , allowing us to maintain relatively high occupancy and increase rental rates .
| total property revenue consists of rental revenue and other property income . total property revenue increased $ 35.9 million , or 11 % , to $ 366.7 million for the year ended december 31 , 2019 , compared to $ 330.9 million for the year ended december 31 , 2018 . the percentage leased was as follows for each segment as of december 31 , 2019 and 2018 : replace_table_token_16_th ( 1 ) the percentage leased includes the square footage under lease , including leases which may not have commenced as of december 31 , 2019 or december 31 , 2018 , as applicable . ( 2 ) includes the retail portion of the mixed-use property only . the increase in total property revenue was attributable primarily to the factors discussed below . 49 rental revenues . rental revenue includes minimum base rent , cost reimbursements , percentage rents and other rents . rental revenue increased $ 34.3 million , or 11 % , to $ 343.9 million for the year ended december 31 , 2019 , compared to $ 309.5 million for the year ended december 31 , 2018 . rental revenue by segment was as follows ( dollars in thousands ) : replace_table_token_17_th ( 1 ) for this table and tables following , the same-store portfolio includes the 830 building at lloyd district portfolio which was placed into operations on august 1 , 2019 after renovating the building . the same-store portfolio excludes : ( i ) waikele center due to significant redevelopment activity ; ( ii ) torrey point , which was placed into operations and became available for occupancy in august 2018 ; ( iii ) la jolla commons as it was acquired on june 20 , 2019 ; ( iv ) waikiki beach walk retail and embassy suites tm hotel due to significant spalling repair activity ; and ( v ) land held for development . total office rental revenue increased $ 34.8 million for the year ended december 31 , 2019 compared to the year ended december 31 ,
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our 12-month plan of operations also includes the pursuit and evaluation of additional strategic relationships , including our recently announced relationship with veolia and the licensing of our technology and the provision of equipment and services to other potential strategic partners . however , there can be no assurance that we will be able to effect any of these additional partnerships in the future on commercially reasonable terms , or at all . results of operations for the fiscal year ended december 31 , 2018 compared to the fiscal year ended december 31 , 2017 we were formed on june 20 , 2014 and did not commence revenue producing operations until january 2017. during the second quarter of 2017 , we began shipments of lead compounds and plastics to customers . during the second quarter of 2018 , we began shipments of lead bullion in addition to lead compounds and plastics to customers . the following table summarizes results of operations with respect to the items set forth below for the year ended december 31 , 2018 and 2017 together with the percentage change in those items ( in thousands ) . replace_table_token_4_th as mentioned above , product sales , consisting of lead compounds and plastics began in april 2017. cost of product sales consists of all operating costs incurred at tric following the commencement of product sales . costs incurred at tric prior to commencement of sales are included in research and development costs . cost of product sales includes raw materials , supplies and related costs , salaries and benefits , consulting and outside services costs , depreciation and amortization costs and insurance , travel and overhead costs . revenue for the year ended december 31 , 2018 doubled compared to the year ended december 31 , 2017. this increase is due to increased sales of aquarefined lead in our product mix as well as having a full year of operations in 2018 versus approximately eight months during 2017. aquarefined lead sales comprised 16 % and 9 % of total revenue during the three and twelve months ended december 31 , 2018 , respectively . at full capacity , we expect aquarefined lead sales to reach approximately 50 % of total revenue . prior to the increased sales of aquarefined lead , including during the three months ended march 31 , 2018 , we ran the balance of the plant at a high level to pressure test the non-aquarefining infrastructure and sold the constituent components of labs , lead compounds and plastics , with little or no additional processing . 27 cost of product sales remains high and can be attributed to a number of items , including but not limited to the cost of filling the aquarefining system with electrolyte for our aquarefining process , greater loss of electrolyte in the process than we expect to achieve following certain additional process improvements expected to be brought on-line over the next 12 months , increase in maintenance costs as we continue to adjust the modules as we increase operating time and hiring and training of personnel to run continuous operations of all 16 modules in advance of reaching continuous operations . at december 31 , 2018 , we had 61 employees in the tric facility versus 41 at december 31 , 2017 due to increased level of operations and commissioning of our plant . research and development cost in 2017 included tric operating cost prior to the commencement of product sales , including the cost incurred to prepare our tric plant for operations . during the year ended december 31 , 2018 , research and development costs decreased by 44 % over the comparable period in 2017. the decline in research and development expense is primarily associated with the cost of the tric facility being included in cost of product sales rather than research and development subsequent to the commencement of product sales during the second quarter of 2017 as well as an overall shift to production and commercial activities by the company . general and administrative expense has increased for the year ended december 31 , 2018 versus december 31 , 2017 , primarily due to a $ 2.5 million accrual of key man penalties associated with our interstate battery credit agreement and johnson controls investor rights agreement due to the resignations of dr. clarke and mr. mould ; $ 0.6 million increased legal fees associated with shareholder lawsuits ; $ 0.9 million in legal , proxy and solicitation fees associated with the efforts to address activist investors ; $ 0.3 million in patent related legal fees ; a $ 0.9 million severance accrual for our former chief executive officer ; a $ 0.9 million severance accrual for our former chief operating officer ; a net $ 0.4 million non-cash charge associated with modifying a warrant for 702,247 shares of common stock in connection with our settlement agreement with interstate battery ( see note 13 in the consolidated financial statements for a more detailed description ) ; a $ 0.8 million non-cash write-off of leasehold improvements at our former california location ; as well as other increases in other professional fees . general and administrative expense during the year ended december 31 , 2017 included a $ 0.6 million accrual for estimated costs to resolve a claim of breach of a negative covenant in our convertible loan agreement with interstate battery . as described in note 6 to the consolidated financial statements , in april 2017 , we acquired all of the capital shares of ebonex ipr limited for consideration of $ 2.5 million , consisting of cash , transaction costs and 123,776 shares of our common stock . the principal asset of ebonex ipr limited consisted of a patent portfolio with an independent fair value of $ 112,000. included in the purchase were certain fixed assets that have been determined by management to have no immediate value and were not considered in the valuation of ebonex ipr . story_separator_special_tag due to the fair value of the patent portfolio being significantly less than total consideration , the early development stage of the technology acquired and the uncertainties inherent in research and development , we recorded a non-cash impairment charge of $ 2.4 million during the year ended december 31 , 2017. the following table summarizes our other income and interest expense for the year ended december 31 , 2018 and 2017 together with the percentage change in those items ( in thousands ) . replace_table_token_5_th interest during the year ended december 31 , 2018 and 2017 relates primarily to the $ 5.0 million interstate battery convertible note and the $ 10.0 million notes payable , amortization of debt issuance costs incurred in connection with both of these notes , as well as an accrual for the usda guarantee fee on the $ 10.0 million note to green bank . the note discount associated with the interstate battery convertible note is amortized using the effective interest method over the three-year term of the note , maturing on may 24 , 2019. using the effective interest method results in higher expense in later periods . thus , non-cash interest expense associated with the note discount amortization was $ 0.4 million in 2017 , $ 2.0 million in 2018 and will be $ 2.6 million in 2019. results of operations for the fiscal year ended december 31 , 2017 compared to the fiscal year ended december 31 , 2016 28 as mentioned above , we did not commence revenue producing operations until january 2017. during the second quarter of 2017 , we began shipments of lead compounds and plastics to customers . prior to that , our operations consisted of the development and limited testing of our aquarefining process , the development of our business plan , the raise of our working capital and the development of our initial lead acid battery , or lab , recycling facility near reno , nevada . the following table summarizes our results of operations with respect to the items set forth below for the years ended december 31 , 2017 and 2016 together with the percentage change in those items ( in thousands ) . replace_table_token_6_th as mentioned above , product sales , consisting of lead compounds and plastics began in april 2017. cost of product sales consists of all operating costs incurred at tric following the commencement of product sales . costs incurred at tric prior to commencement of sales are included in research and development costs . cost of product sales includes raw materials , supplies and related costs , salaries and benefits , consulting and outside services costs , depreciation and amortization costs and insurance , travel and overhead costs . there are no comparatives for the previous periods . research and development cost included tric operating cost prior to the commencement of product sales , including cost incurred to prepare our tric plant for operations . during the year ended december 31 , 2017 , research and development costs increased by 28 % over the comparable period in 2016. at december 31 , 2016 , we had 30 employees in the tric facility and we focused on building the plant ( cost included in research and development expense ) . at december 31 , 2017 , we had 41 employees at the tric facility and were focused on recycling lead operations as well as continuing to commission various processes within the plant ( cost included in research and development expense until product sales began , at which point forward they were included in cost of product sales ) . the increase in research and development cost during the year ended december 31 , 2017 versus the prior period is due to increased level of operations and commissioning of our plant in tric . general and administrative expense was relatively consistent during the years ended december 31 , 2017 and december 31 , 2016. the small increase is primarily due to our $ 0.6 million accrual for estimated costs to resolve a claim of breach of a negative covenant in our convertible loan agreement with interstate battery . as described above and in note 6 to the consolidated financial statements , in april 2017 , we recorded a non-cash impairment charge of $ 2.4 million on our ebonex ipr limited acquisition during the year ended december 31 , 2017. the following table summarizes our other income and interest expense for the year ended december 31 , 2017 and 2016 together with the percentage change in those items ( in thousands ) . replace_table_token_7_th interest during the year ended december 31 , 2017 relates primarily to the $ 5.0 million interstate battery convertible note and the $ 10.0 million notes payable , amortization of debt issuance costs incurred in connection with both of these notes , as well as an 29 accrual for the usda guarantee fee on the $ 10.0 million note to green bank . interest relating to the $ 10.0 million notes payable during the year ended december 31 , 2016 and 2015 was capitalized as part of the building cost of the tric facility in the amount of $ 0.5 million and $ 0.1 million , respectively . interest capitalization ceased upon completion of the building in november 2016. the note discount associated with the interstate battery convertible note is amortized using the effective interest method over the three-year term of the note , maturing on may 24 , 2019. using the effective interest method results in higher expense in later periods . thus , non-cash interest expense associated with the note discount amortization was $ 0.4 million in 2017. liquidity and capital resources as of december 31 , 2018 , we had total assets of $ 71.4 million and working capital of $ 11.0 million , which gives no effect to a january 2019 public offering of our common shares from which we received approximately $ 9.1 million of net proceeds .
| as of december 2017 , we had installed 16 aquarefining modules at tric . to date , we have operated the first four of the 16 modules and have made continuous improvements which have led to individual modules running in a steady state producing 100kg/hour for several days at a time . as we bring the modules into commercial operation , we expect to continue to adjust the modules to further enhance operation . although we staffed the facility and ran one or two aquarefining modules on a 24x7 basis from october to december of 2018 , we are currently running one or two modules 24-hours a day , four days a week to allow safe times for some of the key work to be completed for our contribution margin improvement projects . subject to key work being completed in the first quarter of 2019 , we intend to re-instate 24‑hour , seven days a week , continuous operations shortly thereafter and scale to running all four of the initial four modules before bringing the next four modules on line . in addition , we believe this operational strategy will allow us to maximize lead production , while enabling the remaining components of the plant to be synchronized in support of increased aquarefining . once we are satisfied with the operation of the first four modules , additional modules will be brought into production . this process will be repeated until full production is reached with all 16 modules . our goal is to operate all 16 modules on a 24/7 continuous basis by the end of 2019. however , due to the delays and unforeseen issues in the completion of the aquarefining production line we have experienced to date , there can be no assurance that we will not encounter additional delays and issues . upon completing and commissioning the infrastructure and operational improvements already underway in the facility which are intended to result in positive contribution margin for
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the budget also provides for $ 51 billion in additional war spending . we anticipate there will continue to be a significant debate within the u.s. government over defense spending throughout the budget process for gfy 2016 and beyond . the outcome of these debates could have long-term consequences for our industry and company as described below . however , we continue to believe that our portfolio of products and services will continue to be well supported in a strategically focused allocation of budget resources . potential impacts of budget reductions while recent budget actions provide a more measured and strategic approach to addressing the u.s. government 's fiscal challenges , sequestration remains a long-term concern . if not further modified , sequestration could have significant negative impacts on our industry and company in future periods . there may be disruption of ongoing programs , impacts to our supply chain , contractual actions ( including partial or complete terminations ) , potential facilities closures , and thousands of personnel reductions across the industry that will severely impact advanced manufacturing operations and engineering expertise , and accelerate the loss of skills and knowledge . sequestration , or other budgetary cuts in lieu of sequestration , could have a material negative effect on our company . despite the continued uncertainty surrounding u.s. government budgets , the investments and acquisitions we have made in recent years have sought to align our businesses with what we believe are the most critical national priorities and mission areas . additionally , we are seeking to lessen our dependence on contracts with the u.s. government by focusing on expanding into adjacent markets close to our core capabilities and growing international sales but we may not be successful in this strategy . the possibility remains , however , that our programs could be materially reduced , extended , or terminated as a result of the u.s. government 's continuing assessment of priorities , changes in government priorities , or budget reductions , including sequestration ( particularly in those circumstances where sequestration is implemented across-the-board without regard to national priorities ) . additionally , decreases in production volume associated with budget cuts , including sequestration , will increase unit costs making our products less affordable for both our u.s. and international customers . in particular , sequestration may also result in significant rescheduling or termination activity with our supplier base . such activity could result in claims from our suppliers , which may include the amount established in any settlement agreements , the costs of evaluating the supplier settlement proposals , and the costs of negotiating settlement agreements . budget cuts , including sequestration , could result in restructuring charges , impairment of assets , including goodwill , or other charges . we expect costs associated with claims from our suppliers and restructuring charges will be recovered from our customers . generally , we expect that the impact of budget reductions on our operating results will lag in certain of our businesses with longer cycles such as our aeronautics and space systems business segments , and our products businesses within our mfc and mst business segments , due to our production contract backlog . however , our businesses with smaller , short-term contracts are the most susceptible to the impacts of budget reductions , such as our is & gs business segment and certain services businesses within our mfc and mst business segments . we have also experienced increased market pressures in these services businesses including lower in-theater support as troop levels are drawn down and increased re-competition on existing contracts coupled with the fragmentation of large contracts into multiple smaller contracts that are awarded primarily on the basis of price . additionally , our services businesses across most of our business segments have experienced lower volume due to improved product field performance that require less service support . 26 other business considerations international business a key component of our strategic plan is to grow our international sales . to accomplish this growth , we continue to focus on expanding our in-country presence and strengthening our relationships internationally through partnerships and local production joint technology offices . since 2013 , we have acquired amor group , a united kingdom-based company , and we have opened new in-country offices including israel , united kingdom , the united arab emirates ( uae ) and saudi arabia that will enable development of partnerships to create products and enhance our offerings in technology , aerospace and security sectors . we conduct business with international customers primarily through our aeronautics , mfc and mst business segments . in our aeronautics business segment , there remains strong international interest in the f-35 program . the f-35 program includes commitments from eight international partner countries and three international customers ; as well as expressions of interest from other countries . the u.s. government and the eight partner countries continue to work together on the design , testing , production and sustainment of the f-35 . the international role on the program is growing as we installed the autonomic logistics information system central point of entry kit at the final assembly and checkout facility in italy . we also delivered the first two australian f-35 aircraft in 2014. the number of f-35 aircraft for international customers in recent low-rate initial production ( lrip ) contracts continues to increase , with the recent lrip 8 contract including aircraft orders for israel and japan . other areas of international expansion at our aeronautics business segment include the f-16 and c-130j programs . the award from iraq in 2013 for 18 additional f-16 aircraft extends production into 2017. also , we delivered 11 c-130j super hercules aircraft to various international customers in 2014. our mfc business segment produces the patriot advanced capability-3 ( pac-3 ) and terminal high altitude area defense ( thaad ) air and missile defense systems , which continue to generate significant international interest . the pac-3 is an advanced missile defense system designed to intercept incoming airborne threats . story_separator_special_tag during 2014 , we received an award to provide pac-3 missile defense equipment to qatar . other international customers include japan , germany , the netherlands , taiwan , kuwait and the uae . other countries in the middle east and the asia-pacific region have also expressed interest in our air and missile defense systems . additionally , we continue to see international demand for our tactical missile and fire control products . in our mst business segment , we continue to experience international interest in the aegis ballistic missile defense system . we perform activities in the development , production , ship integration and test and lifetime support for ships of international customers such as japan , spain , korea and australia . we have an ongoing program in canada for combat systems equipment upgrades on 13 halifax-class frigates . in our training and logistics solutions portfolio , we have active programs and pursuits in united kingdom , saudi arabia , canada , singapore , qatar , and australia . also , we integrate mission avionics on the mh-60 program for australia and denmark . status of the f-35 program the f-35 program consists of a development contract and multiple production contracts , including sustainment activities . the development contract is being performed concurrent with the production contracts . concurrent performance of development and production contracts is used for complex programs to test aircraft , shorten the time to field systems , and achieve overall cost savings . we expect the development portion of the f-35 program will be substantially complete in 2017 , with less significant efforts continuing into 2019. production of the aircraft is expected to continue for many years given the u.s. government 's current inventory objective of 2,443 aircraft for the air force , marine corps , and navy ; commitments from our eight international partners and three international customers ; as well as expressions of interest from other countries . the u.s. government continues to complete various operational tests , including ship trials , mission system evaluations , and weapons testing , with the f-35 aircraft fleet recently surpassing 25,000 flight hours . in november 2014 , the u.s. government successfully completed testing of the carrier variant at sea aboard the uss nimitz . progress continues to be made on the production of aircraft . as of december 31 , 2014 , we have delivered 109 production aircraft to our u.s. and international partners including delivery of the final lrip contract 5 aircraft , and have 100 production aircraft in backlog , including orders from our international partners . 27 given the size and complexity of the f-35 program , we anticipate that there will be continual reviews related to aircraft performance , program schedule , cost , and requirements as part of the dod , congressional , and international partners ' oversight and budgeting processes . current program challenges include , but are not limited to , supplier and partner performance , software development , level of cost associated with life cycle operations and sustainment and warranties , receiving funding for production contracts on a timely basis , executing future flight tests , findings resulting from testing , and operating the aircraft . portfolio shaping activities we continuously strive to strengthen our portfolio of products and services to meet the current and future needs of our customers . we accomplish this in part by our independent research and development activities and through acquisition , divestiture and internal realignment activities . internal realignments are designed to more fully leverage existing capabilities and enhance development and delivery of products and services . we selectively pursue the acquisition of businesses and investments at attractive valuations that will expand or complement our current portfolio and allow access to new customers or technologies . we have made a number of niche acquisitions of businesses and investments in affiliates during the past several years . we also may explore the divestiture of businesses . in pursuing our business strategy , we routinely conduct discussions , evaluate targets and enter into agreements regarding possible acquisitions , divestitures , ventures and equity investments . acquisitions in 2014 , we paid $ 898 million for acquisitions of businesses and investments in affiliates , net of cash acquired , primarily related to the acquisitions of systems made simple , zeta associates , inc. ( zeta ) and industrial defender , inc. ( industrial defender ) . systems made simple provides solutions that leverage information technology in the healthcare domain to improve , increase , enable and ensure the exchange and interoperability of information between patients , providers and payers and has been included in our is & gs business segment . zeta designs systems that enable collection , processing , safeguarding and dissemination of information for intelligence and defense communities and has been included in our space systems business segment . industrial defender is a provider of cyber security solutions for control systems in the oil and gas , utility and chemical industries and has been included in our is & gs business segment . in 2013 , we paid $ 269 million for acquisitions of businesses and investments in affiliates , net of cash acquired , primarily related to the acquisition of amor group , a united kingdom-based company specializing in information technology , civil government services and the energy market . this acquisition is aligned with our strategy to grow international sales and has been included in our is & gs business segment . in 2012 , we paid $ 259 million for acquisitions of businesses and investments in affiliates , net of cash acquired , primarily related to the acquisitions of chandler/may , inc. ( chandler/may ) , cdl systems ltd. ( cdl ) and procerus technologies , l.c . ( procerus ) . these companies specialize in the design , development , manufacturing , control and support of advanced unmanned systems , which expand our offerings in support of our customers ' increased emphasis on advanced unmanned systems and are consistent with our strategy to maintain a portfolio of advanced technology options .
| product sales our product sales represent about 80 % of our total sales for both 2014 and 2013. product sales increased $ 402 million , or 1 % , in 2014 compared to 2013. higher product sales of about $ 815 million at aeronautics and approximately $ 280 million at mfc were partially offset by lower product sales of about $ 570 million at is & gs and approximately $ 125 million at space systems . the increase in product sales at aeronautics was attributable to higher volume on f-35 production contracts 29 and sustainment activities , increased aircraft deliveries ( f-16 program ) and increased risk retirements ( f-22 program ) . product sales at mfc increased as a result of increased volume on air and missile defense systems programs ( primarily thaad ) , and increased deliveries on fire control programs ( including the apache fire control system ( apache ) ) . lower product sales at is & gs were primarily due to the wind-down or completion of certain programs , driven by reductions in direct warfighter support and defense budgets tied to command and control programs . the decline at space systems was due to lower volume for government satellite programs ( primarily advanced extremely high frequency ( aehf ) , global positioning system iii ( gps-iii ) , and mobile user objective system ( muos ) ) , partially offset by the orion program due to increased volume ( primarily the first unmanned test flight of the orion multi-purpose crew vehicle ( mpcv ) ) . our product sales represent about 80 % of our total sales for both 2013 and 2012. product sales decreased $ 2.1 billion , or 6 % , in 2013 compared to 2012 primarily due to lower volume and deliveries . product sales decreased about $ 915 million at aeronautics primarily due to fewer aircraft deliveries ( primarily f-16 and c-130 ) and lower volume and risk retirements on f-22 due to completion of aircraft deliveries in 2012 , partially offset by
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we market and sell our products and services through our direct global sales force , supported by sales agents , and through resellers . a majority of our revenue is derived from direct sales , which generate higher gross margins than sales made through resellers . our sales organization includes systems engineers with deep technical expertise that provide pre-sales technical support . these systems engineers also assist with post-sales support . our resellers receive an order from an end customer prior to placing an order with us , and we confirm the identification of or are aware of the end customer prior to accepting such orders . we use sales agents to assist our direct global sales force in the sales process with certain customers primarily located in latin america and asia-pacific . if a sales agent is engaged in the sales process , we receive the order directly from and sell the products and services directly to the end customer , and we pay a commission to the sales agent , calculated as a percentage of the related customer payment . each of our sales teams is responsible for a geographic territory and or has responsibility for a number of major direct end-customer accounts . we have a diverse , global customer base and our revenue by geographic region fluctuates from period to period based on the timing of customer projects . the percentages of our revenue derived from customers in each geographic region were as follows : replace_table_token_1_th the increase in percentage of revenues in the asia-pacific region from the year ended december 31 , 2019 to the year ended december 31 , 2020 is attributed to the full-year contribution of netcomm wireless and fixed telco device sales . our growth strategy focuses on the following key areas : continue to innovate and extend technology leadership through r & d investment we believe that we offer market-leading broadband infrastructure products today . we intend to continue to enhance our existing products and develop new products in both our current and adjacent markets . for example , we have invested in and launched virtual ccap solutions and distributed access architecture solutions to allow our cable customers to densify their networks , providing higher bandwidth , which enhances user experience . additionally , we have been investing in , and have been recognizing revenue from , our core , access and customer premise technology products for 4g/lte and 5g wireless networks . further penetrate existing customers our customers often deploy our products in a specific region or for a specific application , which may only account for a portion of their overall network infrastructure needs . we plan to expand our footprint within the networks of existing customers as they realize the technological and financial benefits of our solutions , as well as sell our new products to them as they offer new broadband services to their subscribers . 52 expand our customer base by expanding the breadth of solutions sold to customers we intend to sell additional products and solutions to our growing installed base of csps , particularly as they increasingly offer converged services to their subscribers . while we initially focused on providing broadband solutions for cable service providers due to our founders ' experience in the cable industry , since our ipo we have expanded our products to include wireless and fixed telco solutions that we sell to cable operators , mobile network operators and diversified communications service providers globally . invest in our platform through selective acquisitions we may selectively pursue acquisitions that are consistent with our overall growth strategy . for example , on july 1 , 2019 , we acquired netcomm for cash consideration of approximately $ 162.0 million australian dollars , or aud ( $ 112.7 million united states dollars , or usd ) , based on an exchange rate of usd $ 0.700 per aud $ 1.00 on july 1 , 2019 ) . this acquisition has enabled us to expand our customer base , enhance our global footprint , extend our product portfolio to the customer premise networking technology and further diversify our revenue sources . as discussed in further detail below , the netcomm acquisition had a material impact on our business and is expected to have a material impact on our future performance . key components of our results of operations revenue we generate product revenue from sales of next-generation physical , virtual and cloud-native architectures for cable broadband , fixed-line broadband and wireless broadband networks . our products enable our service provider customers to cost-effectively deliver ultra-broadband services to their consumer and enterprise customers . our acquisition of netcomm on july 1 , 2019 expanded our product offerings to include fixed wireless access , fixed broadband and fttdp devices . the results for the year ended december 31 , 2020 included a full year of incremental revenues as compared to the year ended december 31 , 2019 , which included such revenues only for the six-month period from july 1 , 2019 through december 31 , 2019. we generate service revenue from sales of initial maintenance and support services contracts , which are typically purchased by end customers in conjunction with our products , and from our customers ' subsequent annual renewals of those contracts . we offer maintenance and support services under renewable , fee-based contracts , which include telephone support and unspecified software upgrades and updates provided on a when-and-if-available basis . to a lesser extent , we generate service revenue from sales of professional services , such as installation and configuration , and extended warranty services . the sale of our products generally includes a 90-day warranty on the software and a one-year warranty on the hardware component of the products , which includes repair or replacement of the applicable hardware . we record a warranty accrual for the initial software and hardware warranty included with our product sales and do not defer revenue . story_separator_special_tag in addition , in conjunction with customers ' renewals of maintenance and support services contracts , we offer an extended warranty for periods typically of one to three years for agreed-upon fees , which we record as service revenue . cost of revenue our cost of product revenue consists primarily of the costs of procuring goods , such as ccap chassis , cable access products , line cards embedded with field programmable gate arrays ( or fpgas ) and components for our fixed wireless access and fttdp devices . in addition , cost of product revenue includes salary and benefit expenses , including stock-based compensation , for manufacturing and supply-chain management personnel , allocated facilities-related costs , estimated warranty costs , third-party logistics costs , and estimated costs associated with excess and obsolete inventory . our cost of service revenue includes salary and benefit expenses , including stock-based compensation , for our maintenance and support services and professional services personnel , fees incurred for subcontracted professional services provided to our customers , and allocated facilities-related costs . 53 gross profit our product gross profit and gross margin have been , and may in the future be , influenced by several factors , including changes in the volume of our software products sold , product configuration , sales of capacity expansions , geographic location of our customers , pricing due to competitive pressure , estimated warranty costs , inventory obsolescence , and favorable and unfavorable changes in inventory production volume and component costs . as some products mature , the average selling prices of those products may decline . in addition , gross margins on customer premise devices are lower than on our legacy broadband hardware products . our service gross profit and gross margin have been , and may in the future be , influenced by the amount and timing of renewals of maintenance and support services contracts by customers , pricing due to competitive pressure and , to a lesser extent , the amount of professional services ordered by customers and performed by us . we expect that our gross margin will decline for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 due to higher sales volumes of lower margin customer premise products and changes in the percentage of revenue attributable to our software products and capacity expansions . operating expenses our operating expenses consist of research and development and selling , general and administrative expenses . research and development expenses research and development expenses consist primarily of salary and benefit expenses , including stock-based compensation , for our employees engaged in research , design and development activities . research and development expenses also include project-specific engineering services purchased from external vendors , prototype costs , depreciation expense , amortization of purchased intellectual property , allocated facilities-related costs and travel expenses . we expect that our research and development costs may increase in the near term as we continue to make investments to enhance our existing products , develop new products and technologies , including our new wireless and fixed telco solutions , and in the event that any expense reductions related to covid-19 cease . selling , general and administrative expenses selling , general and administrative expenses include salary and benefit expenses , including stock-based compensation , for employees and costs for contractors engaged in sales , marketing , general and administrative activities . selling , general and administrative expenses also include commissions , calculated as a percentage of the related customer payment , to sales agents that assist us in the sales process with certain customers primarily located in the latin america and asia-pacific regions . these sales agent commissions fluctuate from period to period based on the amount and timing of sales to the customers subject to sales agent commissions . selling , general and administrative expenses also include marketing activities , such as travel expenses , trade shows , marketing programs and promotional materials , as well as allocated facilities-related costs . we expect that our selling , general and administrative expenses may increase in the near term as we continue to make investments in our sales and marketing organizations , expand our marketing programs and efforts to increase the market awareness and sales of our products and services , and in the event that any expense reductions related to covid-19 cease . other income ( expense ) , net other income ( expense ) , net consists of interest income from our investments in short-term financial instruments , such as certificates of deposit and money market mutual funds , and interest expense associated with our term loan and revolving credit facilities and debt maintenance costs related to our revolving credit facility . other income ( expense ) , net also includes realized and unrealized gains and losses from foreign currency transactions . we hedge certain significant transactions denominated in currencies other than the u.s. dollar , and we expect to continue to do so to minimize our exposure to foreign currency fluctuations . ( benefit from ) provision for income taxes we are subject to income taxes in the united states and the foreign jurisdictions in which we do business . these foreign jurisdictions have statutory tax rates different from those in the united states . our effective tax rates will vary depending on the relative proportion of foreign to u.s. income , the utilization of foreign tax credits and research and development tax credits , changes in corporate structure , the amount and timing of certain employee stock-based 54 compensation transactions , changes in the valuation of our deferred tax assets and changes in tax laws and interpretations . we plan to regularly assess the likelihood of outcomes that could result from the examination of our tax returns by the u.s. internal revenue service and other tax authorities to determine the adequacy of our income tax reserves and expense . should actual events or results differ from our then-current expectations , charges or credits to our provision for income taxes may become necessary .
| 57 research and development replace_table_token_9_th the increase in research and development expense was primarily due to the acquisition of netcomm , including a $ 0.3 million increase in personnel-related costs , net of the impact of headcount reductions made in the three months ended december 31 , 2019 and reduced employee travel in 2020 due to covid-19 . in addition , there was an increase in purchases of research and development materials of $ 1.0 million and increased professional services of $ 0.2 million also due to the acquisition of netcomm , net of a decrease in depreciation expense of $ 0.5 million as fully-depreciated items were not replaced in 2020. selling , general and administrative replace_table_token_10_th the increase in selling , general and administrative expense was primarily due to a $ 4.1 million increase in personnel-related costs , mainly from the acquisition of netcomm , in addition to increased commissions due to increased revenue , and increased variable compensation in 2020 , net of the impact of headcount reductions made in the three months ended december 31 , 2019 and reduced travel in 2020 due to covid-19 . in addition , there was an increase in facilities costs of $ 1.1 million and depreciation and amortization of $ 1.8 million also due to the netcomm acquisition . the increases were partially offset by a decrease in professional services of $ 0.5 million due to acquisition-related costs in 2019 , decreased trade show expense of $ 1.7 million due to covid-19 , a $ 0.4 million reduction in bad debt expense and a decrease of $ 0.7 million in other taxes . other income ( expense ) , net replace_table_token_11_th the change in other income ( expense ) was primarily due to a $ 3.4 million decrease in interest income due to a decrease in our portfolio of cash equivalents following our acquisition of netcomm in july 2019 , offset by a $ 3.6 million decrease in interest expense due to decreases in both the outstanding principal and the interest rate on our term loan facility .
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we seek to establish all reserves at the most likely ultimate liability based on our historical claims experience . it is typical for certain claims to take several years to settle and we revise our estimates as we receive additional information on such claims . our ability to estimate loss and lae accurately at the time of pricing our insurance policies is a critical factor affecting our profitability . commission expenses and other underwriting expenses : other underwriting expenses include policy acquisition costs and other expenses related to the underwriting of policies . policy acquisition costs represent the costs of originating new insurance policies that vary with , and are primarily related to , the production of insurance policies ( principally commissions , premium taxes and certain underwriting salaries ) . policy acquisition costs are deferred and recognized as expense as the related premiums are earned . other underwriting expenses represent general and administrative expenses of our insurance business and are comprised of other costs associated with our insurance activities such as regulatory fees , telecommunication and technology costs , occupancy costs , employment costs , and legal and auditing fees . other operating expenses : other operating expenses include the corporate expenses of our holding company , kingstone companies , inc. , and operating expenses of cosi . these expenses include executive employment costs , legal and auditing fees , and other costs directly associated with being a public company . cosi operating expenses primarily include employment costs , occupancy costs and consulting costs . stock-based compensation : non-cash equity compensation includes the fair value of stock grants issued to our directors , officers and employees , and amortization of stock options issued to the same . depreciation and amortization : depreciation and amortization includes the amortization of intangibles related to the acquisition of kico , depreciation of the real estate used in kico 's operations , as well as depreciation of capital expenditures for information technology projects , office equipment and furniture . interest expense : interest expense represents amounts we incur on our outstanding indebtedness at the applicable interest rates . interest expense also includes amortization of debt discount and issuance costs . income tax expense : we incur federal income tax expense on our consolidated statement of operations as well as state income tax expense for our non-insurance underwriting subsidiaries . product lines our product lines include the following : personal lines : our largest line of business is personal lines , consisting of homeowners , dwelling fire , cooperative/condominium , renters , and personal umbrella policies . commercial liability : through july 2019 , we offered businessowners policies , which consist primarily of small business retail , service , and office risks , with limited property exposures . we also wrote artisan 's liability policies for small independent contractors with smaller sized workforces . in addition , we wrote special multi-peril policies for larger and more specialized businessowners risks , including those with limited residential exposures . further , we offered commercial umbrella policies written above our supporting commercial lines policies . 33 in may 2019 , due to the poor performance of this line we placed a moratorium on new commercial lines and new commercial umbrella submissions while we further reviewed this business . in july 2019 , due to the continuing poor performance of these lines , we made the decision to no longer underwrite commercial lines or commercial umbrella risks . in-force policies as of july 31 , 2019 for these lines were non-renewed at the end of their annual terms . as of december 31 , 2020 there are no commercial liability policies in-force . for the year ended december 31 , 2020 , these expired policies represent approximately 2.5 % of net premiums earned and 33.7 % of loss and lae reserves net of reinsurance recoverables . see discussion below under “ additional financial information ” . livery physical damage : we write for-hire vehicle physical damage only policies for livery and car service vehicles and taxicabs . these policies insure only the physical damage portion of insurance for such vehicles , with no liability coverage included . other : we write canine legal liability policies and have a small participation in mandatory state joint underwriting associations . key measures we utilize the following key measures in analyzing the results of our insurance underwriting business : net loss ratio : the net loss ratio is a measure of the underwriting profitability of an insurance company 's business . expressed as a percentage , this is the ratio of net losses and lae incurred to net premiums earned . net underwriting expense ratio : the net underwriting expense ratio is a measure of an insurance company 's operational efficiency in administering its business . expressed as a percentage , this is the ratio of the sum of acquisition costs ( the most significant being commissions paid to our producers ) and other underwriting expenses less ceding commission revenue less other income to net premiums earned . net combined ratio : the net combined ratio is a measure of an insurance company 's overall underwriting profit . this is the sum of the net loss and net underwriting expense ratios . if the net combined ratio is at or above 100 percent , an insurance company can not be profitable without investment income , and may not be profitable if investment income is insufficient . underwriting income : underwriting income is net pre-tax income attributable to our insurance underwriting business before investment activity . it excludes net investment income , net realized gains from investments , and depreciation and amortization ( net premiums earned less expenses included in combined ratio ) . underwriting income is a measure of an insurance company 's overall operating profitability before items such as investment income , depreciation and amortization , interest expense and income taxes . distribution channels during 2019 , we initiated an alternative distribution program through cosi ( “ alternative distribution ” ) . story_separator_special_tag the goal of this program is to enhance our personal lines distribution channel to include nationally recognized name-brand carriers along with nationwide call center and digital insurance agencies . while still in early stages of development , the impact of this initiative can be measured by the amount of new premiums written compared to total premiums written , which includes renewals from our independent agency network . the table below shows premiums written by distribution channel for our homeowners and dwelling fire components of personal lines . 34 replace_table_token_6_th ( 1 ) outside of new york ( percent components may not sum to totals due to rounding ) for the years ended december 31 , 2020 and 2019 , alternative distribution made up 4.5 % and 3.2 % , respectively , of direct written premiums for our homeowners and dwelling fire components of personal lines . as discussed above , on july 10 , 2020 , kico 's a.m. best financial strength rating was downgraded from a- ( excellent ) to b++ ( good ) . this action has resulted in and will continue to result in a decrease in the business from cosi , a multi-state licensed general agent that had partnered with name-brand carriers , some of which require an a.m. best rating of a- ( excellent ) from its partners . critical accounting policies and estimates our consolidated financial statements include the accounts of kingstone companies , inc. and all majority-owned and controlled subsidiaries . the preparation of financial statements in conformity with gaap requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes . in preparing these consolidated financial statements , our management has utilized information including our past history , industry standards , and the current economic environment , and other factors , in forming its estimates and judgments of certain amounts included in the consolidated financial statements , giving due consideration to materiality . it is possible that the ultimate outcome as anticipated by our management in formulating its estimates in these financial statements may not materialize . application of the critical accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and , as a result , actual results could differ from these estimates . in addition , other companies may utilize different estimates , which may impact comparability of our results of operations to those of similar companies . we believe that the most critical accounting policies relate to the reporting of reserves for loss and lae , including losses that have occurred but have not been reported prior to the reporting date , amounts recoverable from third party reinsurers , deferred ceding commission revenue , deferred policy acquisition costs , deferred income taxes , the impairment of investment securities , intangible assets and the valuation of stock-based compensation . see note 2 to the consolidated financial statements following item 16 of this annual report . 35 story_separator_special_tag excess of loss reinsurance treaties an increase in written premiums will increase the premiums ceded under our excess of loss treaties . in year ended 2020 , our ceded excess of loss reinsurance premiums increased by $ 128,000 over the comparable ceded premiums for year ended 2019. the increase was due to an increase in premiums subject to excess of loss reinsurance . catastrophe reinsurance treaty most of the premiums written under our personal lines policies are also subject to our catastrophe treaties . an increase in our personal lines business gives rise to more property exposure , which increases our exposure to catastrophe risk ; therefore , our premiums ceded under catastrophe treaties will increase . this results in an increase in premiums ceded under our catastrophe treaties provided that reinsurance rates are stable or are increasing . in year ended 2020 , our premiums ceded under catastrophe treaties increased by $ 4,624,000 over the comparable ceded premiums in year ended 2019. the change was due to an increase in our catastrophe limit purchased through june 30 , 2020 , partially offset by a decrease in our limit effective july 1 , 2020and an increase in reinsurance rates effective july 1 , 2019. through june 30 , 2020 , our ceded catastrophe premiums were paid based on the total direct written premiums subject to the catastrophe reinsurance treaty . effective july 1 , 2020 , and continuing through june 30 , 2021 , our ceded catastrophe premiums will be paid based on the total insured value of our risks calculated as of august 31 , 2021 . 38 net premiums earned net premiums earned decreased $ 19,543,000 , or 15.3 % , to $ 108,081,000 in year ended 2020 from $ 127,624,000 in year ended 2019. the decrease was due to the inception of the 2019/2020 treaty on december 15 , 2019 and the decrease in commercial lines premiums , which are not subject to a quota share treaty . the expired 2017/2019 treaty under the 2018/2019 treaty year was in run-off through june 30 , 2020. ceding commission revenue the following table summarizes the changes in the components of ceding commission revenue ( in thousands ) for the periods indicated : replace_table_token_10_th ceding commission revenue was $ 14,202,000 in year ended 2020 compared to $ 4,651,000 in year ended 2019. the increase of $ 9,551,000 , or 205.4 % , was due to an increase in both provisional ceding commissions earned and contingent ceding commissions earned . the increase in provisional ceding commissions occurred due to the increase in quota share reinsurance rates effective december 15 , 2019 ( see below for discussion of provisional ceding commissions earned and contingent ceding commissions earned ) . provisional ceding commissions earned we receive a provisional ceding commission based on ceded written premiums .
| direct written premiums from our expansion business were $ 33,914,000 in year ended 2020 , an increase of $ 8,267,000 , or 32.2 % compared to $ 25,647,000 in year ended 2019. net written premiums and net premiums earned through june 30 , 2019 , our quota share reinsurance treaties were on a july 1 through june 30 fiscal year basis . effective december 15 , 2019 , we entered into a quota share reinsurance treaty for our personal lines business covering the period from december 15 , 2019 through december 30 , 2020 ( “ 2019/2020 treaty ” ) . our personal lines quota share reinsurance treaty in effect for year ended 2019 was covered through june 30 , 2019 ( together with the run-off period ) under a treaty covering a two-year period from july 1 , 2017 through june 30 , 2019 ( “ 2017/2019 treaty ” ) . the treaty in effect during year ended 2019 was covered through june 30 , 2019 ( together with the run-off period ) under the july 1 , 2018 through june 30 , 2019 treaty year ( “ 2018/2019 treaty year ” ) . the following table describes the quota share reinsurance ceding rates in effect for each treaty year during year ended 2020 and year ended 2019 under the 2019/2020 treaty and the 2017/2019 treaty , respectively . this table should be referred to in conjunction with the discussions for net written premiums , net premiums earned , ceding commission revenue and net loss and loss adjustment expenses that follow . 37 replace_table_token_9_th ( 1 ) the 2018/2019 treaty year , covered under the 2017/2019 treaty , expired on a run-off basis effective july 1 , 2019 through june 30 , 2020 ( the “ 2019 run-off ” ) . ( 2 ) the 2019/2020 treaty was effective december 15 , 2019 with a quota share reinsurance rate of 25 % . see “ reinsurance ” below for changes to our personal lines quota share treaty effective december 15 , 2019 , and july 1 , 2019 and 2018. net written premiums increased $ 1,484,000 , or 1.2 % ,
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provision for income taxes replace_table_token_16_th as of december 31 , 2020 , we had a california research and development ( `` r & d '' ) credit carryforward of $ 250 million , which can be carried forward indefinitely . on june 29 , 2020 , california enacted legislative changes that impose an annual cap of $ 5 million on the amount of business incentive tax credits we can utilize in california effective for tax years 2020 through 2022. as a result , we evaluated our ability to realize the california r & d credit , and considered all available positive and negative evidence , including operating results , ongoing tax planning , and forecasts of future taxable income and determined it is more likely than not that the pre-2020 credits and a portion of the current year r & d credit would not be realized . in the twelve months ended december 31 , 2020 we recorded a valuation allowance of $ 250 million . we will monitor our business strategies , weighing positive and negative evidence in assessing the realization of this asset in the future and in the event there is a need to release the valuation allowance , a tax benefit will be recorded . the increase in our effective tax rate for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 is primarily due to the establishment of a valuation allowance on the california r & d credit , partially offset by the recognition of excess tax benefits of stock-based compensation . in 2020 , the difference between our 14 % effective tax rate and the federal statutory rate of 21 % was primarily due to the recognition of excess tax benefits of stock-based compensation and federal and california r & d credits , partially offset by the establishment of a valuation allowance on the california r & d credit . 26 liquidity and capital resources replace_table_token_17_th cash , cash equivalents and restricted cash increased $ 3,195 million in the year ended december 31 , 2020 primarily due to cash provided by operations coupled with the issuance of debt . debt , net of debt issuance costs , increased $ 1,550 million primarily due to the issuance of debt in april 2020 coupled with the remeasurement of our euro-denominated notes . the amount of principal and interest due in the next twelve months is $ 1,264 million . as of december 31 , 2020 , no amounts had been borrowed under our $ 750 million revolving credit agreement . see note 6 debt in the accompanying notes to our consolidated financial statements . as our cash provided by operating activities improved in 2020 , we anticipate that our future capital needs from the debt market will be more limited compared to prior years . our ability to obtain this or any additional financing that we may choose to , or need to , obtain will depend on , among other things , our development efforts , business plans , operating performance and the condition of the capital markets at the time we seek financing . we may not be able to obtain such financing on terms acceptable to us or at all . if we raise additional funds through the issuance of equity or debt securities , those securities may have rights , preferences or privileges senior to the rights of our common stock , and our stockholders may experience dilution . as our cash provided by operating activities grows and exceeds our minimum cash needs , our future capital allocation may include stock repurchase programs . the timing and magnitude of such programs will depend on , among other things , our development efforts , business plans and operating performance . our primary uses of cash include the acquisition , licensing and production of content , streaming delivery , marketing programs and personnel-related costs . cash payment terms for non-original content have historically been in line with the amortization period . investments in original content , and in particular content that we produce and own , require more cash upfront relative to licensed content . for example , production costs are paid as the content is created , well in advance of when the content is available on the service and amortized . we expect to continue to significantly increase our investments in global content , particularly in original content , which will impact our liquidity . we currently anticipate that cash flows from operations , available funds and access to financing sources , including our revolving credit facility , will continue to be sufficient to meet our cash needs for at least the next twelve months . free cash flow we define free cash flow as cash provided by ( used in ) operating activities less purchases of property and equipment and change in other assets . we believe free cash flow is an important liquidity metric because it measures , during a given period , the amount of cash generated that is available to repay debt obligations , make strategic acquisitions and investments and for certain other activities like share repurchases . free cash flow is considered a non-gaap financial measure and should not be considered in isolation of , or as a substitute for , net income , operating income , cash flow provided by ( used in ) operating activities , or any other measure of financial performance or liquidity presented in accordance with gaap . in assessing liquidity in relation to our results of operations , we compare free cash flow to net income , noting that the major recurring differences are excess content payments over amortization , non-cash stock-based compensation expense , non-cash remeasurement gain/loss on our euro-denominated debt , and other working capital differences . working capital differences include deferred revenue , excess property and equipment purchases over depreciation , taxes and semi-annual interest payments on our outstanding debt . our receivables from members generally settle quickly . story_separator_special_tag 27 replace_table_token_18_th while we and our partners have resumed productions and related operations in many parts of the world , our ability to produce content remains affected by the pandemic . as a result , the timing of certain production payments has been and will continue to be delayed until productions can resume and may be shifted to future years . net cash provided by operating activities increased $ 5,314 million from the year ended december 31 , 2019 to $ 2,427 million for the year ended december 31 , 2020 primarily driven by a $ 4,840 million or 24 % increase in revenues coupled with a decrease in cash payments for content assets . the payments for content assets decreased $ 2,074 million , from $ 14,611 million to $ 12,537 million , or 14 % , as compared to the increase in the amortization of content assets of $ 1,591 million , from $ 9,216 million to $ 10,807 million , or 17 % . in addition , we had increased payments associated with higher operating expenses , primarily related to increased headcount to support our continued improvements in our streaming service and our international expansion . net cash used in investing activities increased $ 118 million , primarily due to an increase in purchases of property and equipment . net cash provided by financing activities decreased $ 3,268 million primarily due to a decrease in the proceeds from the issuance of debt of $ 3,431 million from $ 4,433 million in the year ended december 31 , 2019 to $ 1,002 million in the year ended december 31 , 2020 , partially offset by an increase in the proceeds from the issuance of common stock of $ 163 million . free cash flow was $ 840 million lower than net income for the year ended december 31 , 2020 primarily due to $ 1,730 million of cash payments for content assets over amortization expense and $ 308 million in other non-favorable working capital differences , partially offset by $ 533 million of non-cash remeasurement loss on our euro-denominated debt , $ 415 million of non-cash stock-based compensation expenses , and a $ 250 million non-cash valuation allowance for deferred taxes due to recent legislation which imposed an annual cap on research and development credits . free cash flow was $ 5,141 million lower than net income for the year ended december 31 , 2019 primarily due to $ 5,394 million of cash payments for streaming content assets over streaming amortization expense , $ 46 million non-cash remeasurement gain on our euro-denominated debt , and $ 106 million in other non-favorable working capital differences , partially offset by $ 405 million of non-cash stock-based compensation expense . contractual obligations for the purpose of this table , contractual obligations for purchases of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms , including : fixed or minimum quantities to be purchased ; fixed , minimum or variable price provisions ; and the approximate timing of the transaction . the expected timing of the payment of the obligations discussed below is estimated based on information available to us as of december 31 , 2020. timing of payments and actual amounts paid may be different depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations . the following table summarizes our contractual obligations at december 31 , 2020 : 28 replace_table_token_19_th ( 1 ) as of december 31 , 2020 , content obligations were comprised of $ 4.4 billion included in `` current content liabilities '' and $ 2.6 billion of `` non-current content liabilities '' on the consolidated balance sheets and $ 12.2 billion of obligations that are not reflected on the consolidated balance sheets as they did not then meet the criteria for recognition . content obligations include amounts related to the acquisition , licensing and production of content . an obligation for the production of content includes non-cancelable commitments under creative talent and employment agreements and other production related commitments . an obligation for the acquisition and licensing of content is incurred at the time we enter into an agreement to obtain future titles . once a title becomes available , a content liability is recorded on the consolidated balance sheets . certain agreements include the obligation to license rights for unknown future titles , the ultimate quantity and or fees for which are not yet determinable as of the reporting date . traditional film output deals , or certain tv series license agreements where the number of seasons to be aired is unknown , are examples of these types of agreements . the contractual obligations table above does not include any estimated obligation for the unknown future titles , payment for which could range from less than one year to more than five years . however , these unknown obligations are expected to be significant and we believe could include approximately $ 1 billion to $ 4 billion over the next three years , with the payments for the vast majority of such amounts expected to occur after the next twelve months . the foregoing range is based on considerable management judgments and the actual amounts may differ . once we know the title that we will receive and the license fees , we include the amount in the contractual obligations table above . ( 2 ) debt obligations include our notes consisting of principal and interest payments . see note 6 debt in the accompanying notes to our 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 . ( 3 ) see note 5 balance sheet components in the accompanying notes to our consolidated financial statements for further details regarding leases .
| our other partners have similarly had their operations disrupted , including those partners that we use for our operations as well as development , production , and post-production of content . while we and our partners have resumed productions and related operations in many parts of the world , our ability to produce content remains affected by the pandemic . in an effort to contain covid-19 or slow its spread , governments around the world have also enacted various measures , some of which have been subsequently rescinded , modified or reinstated , including orders to close all businesses not deemed “ essential , ” isolate residents to their homes or places of residence , and practice social distancing . we anticipate that these actions and the global health crisis caused by covid-19 , including any resurgences , will continue to negatively impact business activity across the globe . we will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal , state , local or foreign authorities , or that we determine are in the best interests of our employees , customers , 22 partners and stockholders . it is not clear what the potential effects any such alterations or modifications may have on our business , including the effects on our customers , suppliers or vendors , or on our financial results . streaming revenues we derive revenues from monthly membership fees for services related to streaming content to our members . we offer a variety of streaming membership plans , the price of which varies by country and the features of the plan . as of december 31 , 2020 , pricing on our plans ranged from the u.s. dollar equivalent of $ 2 to $ 24 per month . we expect that from time to time the prices of our membership plans in each country may change and we may test other plan and price variations . the following tables summarize streaming revenue and other streaming membership information by region for the years ended
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story_separator_special_tag style='font-family : `` times new roman '' , times , serif ; font-size : 10pt ' > liquidity and capital resources sources and uses of cash our principal sources of liquidity generally include operating cash flows and the amended credit agreement . from time to time our long-term capital needs may be met through the issuance of long-term debt or additional equity . our principal uses of liquidity generally include capital expenditures , working capital , and debt service . information regarding our cash flows for the years ended december 31 , 2019 , 2018 , and 2017 are presented in our consolidated statements of cash flows contained in part ii — item 8 . “ financial statements and supplementary data ” of this 2019 form 10-k , and are further discussed below . as of december 31 , 2019 , our working capital ( current assets minus current liabilities ) was $ 153.5 million compared to $ 128.0 million as of december 31 , 2018. cash and cash equivalents totaled $ 31.0 million and $ 6.7 million as of december 31 , 2019 and 2018 , respectively . fluctuations in our working capital accounts result from timing differences between production , shipment , invoicing , and collection , as well as changes in levels of production and costs of materials . we typically have a relatively large investment in working capital , as we generally pay for materials , labor , and other production costs in the initial stages of a project , while payments from our customers are generally received after finished product is delivered . our revenues are recognized over time as the manufacturing process progresses ; therefore , cash receipts typically occur subsequent to when revenue is recognized and the elapsed time between when revenue is recorded and when cash is received can be significant . as such , our payment cycle is a significantly shorter interval than our collection cycle , although the effect of this difference in the cycles may vary by project , and from period to period . there were no borrowings under the credit agreement as of december 31 , 2019 compared to $ 11.5 million as of december 31 , 2018. net cash provided by ( used in ) operating activities from continuing operations net cash provided by ( used in ) operating activities from continuing operations was $ 42.9 million in 2019 compared to $ ( 18.4 ) million in 2018. net income , adjusted for non-cash items , generated $ 45.7 million of operating cash flow in 2019 compared to $ 3.7 million in 2018. the net change in working capital resulted in a decrease to net cash provided by operations of $ 2.8 million in 2019 compared to $ 22.1 million in 2018. net cash used in investing activities from continuing operations net cash used in investing activities from continuing operations was $ 6.4 million in 2019 compared to $ 32.4 million in 2018. capital expenditures were $ 8.6 million in 2019 compared to $ 3.8 million in 2018 , which was primarily standard capital replacement and in 2019 , replacement of fire damaged property and equipment at our saginaw facility . net cash used in investing activities in 2019 was reduced by $ 2.1 million of insurance proceeds related to the fire at our saginaw facility . any further insurance recoveries associated with these costs will be recorded as they are received in future quarters as we work with our insurer to settle the remaining claim . net cash used in investing activities in 2018 also includes the acquisition of ameron for $ 37.2 million , net of cash acquired , offset by $ 8.5 million in net proceeds from the sale of facilities in houston , texas and monterrey , mexico . total capital expenditures in 2020 are expected to be approximately $ 14 million to $ 15 million for standard capital replacement . net cash provided by ( used in ) financing activities from continuing operations net cash provided by ( used in ) financing activities from continuing operations was $ ( 12.1 ) million in 2019 compared to $ 9.3 million in 2018. net borrowings ( repayments ) on the line of credit were $ ( 11.5 ) million in 2019 compared to $ 11.5 million in 2018. finance lease payments were $ 0.4 million in 2019 and 2018. payment of debt issuance costs were $ 0.2 million in 2019 compared to $ 0.4 million in 2018. net cash provided by financing activities in 2018 was reduced by tax withholdings of $ 1.3 million related to net share settlements of restricted stock awards vested . 21 we anticipate that our existing cash and cash equivalents , cash flows expected to be generated by operations , and amounts available under the amended credit agreement will be adequate to fund our working capital and capital expenditure requirements for at least the next twelve months . to the extent necessary , we may also satisfy capital requirements through additional bank borrowings , senior notes , term notes , subordinated debt , and finance and operating leases , if such resources are available on satisfactory terms . we have from time to time evaluated and continue to evaluate opportunities for acquisitions and expansion . any such transactions , if consummated , may use a portion of our working capital or necessitate additional bank borrowings or other sources of funding . as previously discussed , we acquired geneva in january 2020 which was funded by working capital and borrowings on the line of credit . on september 15 , 2017 , our registration statement on form s-3 ( registration no . 333-216802 ) covering the potential future sale of up to $ 120 million of our equity and or debt securities or combinations thereof , was declared effective by the sec . this registration statement provides another potential source of capital , in addition to other alternatives already in place . we can not be certain that funding will be available on favorable terms or available at all . story_separator_special_tag to the extent that we raise additional funds by issuing equity securities , our shareholders may experience significant dilution . as of the date of this 2019 form 10-k , we have not yet sold any securities under this registration statement , nor do we have an obligation to do so . please refer to the factors discussed in part i – item 1a . “ risk factors ” of this 2019 form 10-k. borrowings on line of credit as of december 31 , 2019 , we had no outstanding borrowings and $ 1.6 million of outstanding letters of credit under the credit agreement . the amended credit agreement expires on october 25 , 2024 and provides for revolving loans and letters of credit in the aggregate amount of up to $ 74 million , subject to a borrowing base ( “ revolver commitment ” ) . as of january 31 , 2020 , we had approximately $ 19 million of outstanding borrowings under the amended credit agreement and additional borrowing capacity of approximately $ 39 million . based on our business plan and forecasts of operations , we expect to have sufficient credit availability to support our operations for at least the next twelve months . borrowings under the amended credit agreement bear interest at rates related to the daily three month libor plus 1.5 % to 2.0 % . the amended credit agreement requires the payment of an unused line fee of between 0.25 % and 0.375 % , based on the amount by which the revolver commitment exceeds the average daily balance of outstanding borrowings ( as defined in the amended credit agreement ) during any month . such fee is payable monthly in arrears . the amended credit agreement provides the right to request , at any time prior to march 30 , 2020 , a delayed draw term loan ( as defined in the amended credit agreement ) ( “ term loan ” ) of up to approximately $ 16 million bearing interest at the daily three month libor plus 2.0 % to 2.5 % . if drawn , the term loan would be subject to monthly principal payments in the amount of 1/60th of the original principal amount of the term loan , with the remaining outstanding unpaid principal and accrued interest due on the maturity date . we will be obligated to prepay the term loan to the extent that the outstanding principal balance at any time exceeds 60 % of the fair market value of specified real property securing the loan . there is also a provision that would require prepayment of the obligations ( as defined in the amended credit agreement ) in an amount equal to 20 % of excess cash flow ( as defined in the amended credit agreement ) . subject to certain limitations , we may also voluntarily prepay the balance upon ten business days ' written notice . the amended credit agreement contains customary representations and warranties , as well as customary affirmative and negative covenants , events of default , and indemnification provisions in favor of the lender . the negative covenants include restrictions regarding the incurrence of liens and indebtedness and certain acquisitions and dispositions of assets and other matters , all subject to certain exceptions . the amended credit agreement also requires us to regularly provide financial information to wells fargo . under the terms of the amended credit agreement , mandatory prepayments may be required to the extent the revolving loans exceed the borrowing base or the maximum revolver amount ( as defined in the amended credit agreement ) , or in the event we or our named affiliates receive cash proceeds from the sale or disposition of assets ( including proceeds of insurance or arising from casualty losses ) , subject to certain limitations and exceptions , including sales of assets in the ordinary course of business . the amended credit agreement imposes financial covenants requiring us to maintain a senior leverage ratio ( as defined in the amended credit agreement ) not greater than 3.00 and a fixed charge coverage ratio ( as defined in the amended credit agreement ) of at least 1.10 to 1.00. the amended credit agreement also provides a mechanism for determining an alternative benchmark rate to the libor . 22 in connection with the execution and delivery of the credit agreement , we and certain of our subsidiaries also entered into a guaranty and security agreement with wells fargo . pursuant to the amended credit agreement , our obligations under the amended credit agreement are secured by a security interest in certain of the real property owned by us and our subsidiaries and substantially all of our and our subsidiaries ' other assets . off-balance sheet arrangements we do not have any off-balance sheet arrangements that are reasonably likely to have a current or future material effect on our financial position , results of operations , or cash flows . contractual obligations and commitments the following table sets forth our scheduled contractual commitments that will affect our future liquidity as of december 31 , 2019 ( in thousands ) : replace_table_token_6_th ( 1 ) these amounts represent estimated future interest payments related to our finance and operating leases . ( 2 ) excludes liabilities associated with our pension and our deferred compensation plan as we are unable to reasonably estimate the ultimate amount or timing of settlement of such obligations . as of december 31 , 2019 , liabilities associated with our pension and deferred compensation plan are $ 1.7 million and $ 5.2 million , respectively , and are recorded in other long-term liabilities in the consolidated balance sheets . ( 3 ) due to the uncertainty with respect to the timing of future cash flows associated with our unrecognized tax benefits as of december 31 , 2019 , we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities .
| gross profit increased 290.1 % to $ 47.2 million ( 16.9 % of net sales from continuing operations ) in 2019 compared to $ 12.1 million ( 7.0 % of net sales from continuing operations ) in 2018. the increase in gross profit was primarily due to increased production volume coupled with the addition of the ameron operations . this increase was partially offset by $ 6.6 million in incremental production costs in 2019 resulting from the fire at our saginaw facility , which were partially offset by $ 5.0 million of business interruption insurance proceeds recorded in 2019. any further insurance recoveries associated with these costs will be recorded as they are received in future quarters as we work with our insurer to settle the remaining claim . selling , general , and administrative expense . selling , general , and administrative expense increased 11.0 % to $ 18.5 million ( 6.6 % of net sales from continuing operations ) in 2019 compared to $ 16.7 million ( 9.6 % of net sales from continuing operations ) in 2018. the increase in selling , general , and administrative expense was primarily due to $ 3.7 million in higher incentive compensation-related expense offset by $ 1.8 million in lower professional and other fees , primarily related to acquisition costs . gain on sale of facilities . in december 2018 , we sold our monterrey , mexico facility for net proceeds of $ 2.7 million , resulting in a gain of $ 0.2 million . in august 2018 , we sold property in houston , texas for net proceeds of $ 5.8 million , resulting in a gain of $ 2.8 million . restructuring expense . in march 2018 , we announced our plan to close our leased manufacturing facility in salt lake city , utah and move the production to our facility in st. louis , missouri , which was completed during the second quarter of 2018. also in march 2018 , we announced our plan to close our manufacturing facility in monterrey , mexico . production ceased early in the second quarter of 2018 , and the facility was sold in december 2018. we incurred restructuring
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significant improvements or betterments are capitalized and depreciated over the estimated life of the asset . 28 goodwill goodwill is recorded at cost and is tested annually for impairment . management monitors events and changes in circumstances that could indicate goodwill may not be recoverable . whenever events and changes in circumstances indicate that the carrying amount of goodwill may not be recoverable , an impairment loss is recorded . we recorded no impairment of goodwill during the year ended december 31 , 2015. purchased intangibles and other long-lived assets we amortize intangible assets with finite lives over their estimated useful lives , which range between two years and ten years as follows : customer relationships 2 to 3 years permits , licenses and lease acquisition costs 10 years noncompetition and non-solicitation agreements 2 to 5 years . intangible assets are periodically reviewed for impairment . management monitors events and changes in circumstances that could indicate long-lived assets , including intangible assets , may not be recoverable . whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable , an impairment loss is recorded . we recorded no impairment on our long-lived assets during the year ended december 31 , 2015. investments in unconsolidated entities we account for investments in less than 50 % owned and more than 20 % owned entities using the equity method of accounting . in accordance with asc 323-30 , we account for investments in limited partnerships and limited liability companies using the equity method of accounting when its investment is more than minimal . our share of earnings ( loss ) of such entities is recorded as a single amount as equity ( loss ) in earnings of unconsolidated entities . dividends , if any , are recorded as a reduction of the investment . use of estimates the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities 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 more significant areas requiring the use of management estimates relate to allocation of asset acquisition price between tangible and intangible assets , useful lives for depreciation and amortization , and the valuation of deferred tax assets . accordingly , actual results could differ from those estimates . revenue recognition we recognize revenue from consulting services when earned , according to the accrual basis of accounting . we generate revenue from outdoor advertising through the leasing of billboards . the terms of the operating leases range from less than one month to three years and are generally billed monthly . revenue for advertising space rental is recognized ratably over the term of the contract . advertising revenue is reported net of agency commissions . agency commissions are calculated based on a stated percentage applied to gross billing revenue for operations . payments received in advance of being earned are recorded as deferred revenue . earnings per share basic loss per common share is computed by dividing the net income ( loss ) available to common stockholders and class a common stockholders by the weighted average number of shares of common stock and class a common stock outstanding during the year . diluted earnings per share reflect the potential dilution of securities that could share in earnings of an entity . in a loss year , dilutive common equivalent shares are excluded from the loss per share calculation as the effect would be anti-dilutive . for the year ended december 31 , 2015 , we had potentially dilutive securities in the form of stock warrants . however , such securities were excluded due to their anti-dilutive effect . 29 story_separator_special_tag td style= '' width : 12 % ; vertical-align : bottom ; text-align : right ; background-color : # ffffff '' valign= '' bottom '' > ( 12,674 ) equity in loss of tag sw 1 ( 31 ) this equity in income of unconsolidated affiliate represents a $ 19,618 increase from the equity in loss of unconsolidated affiliate in the amount of $ 15,805 during fiscal 2014 as ananda 's financial performance improved as a result of increased rental income . during fiscal 2015 , we also recorded a one-time gain on the sale of investment in the amount of $ 78,150 , resulting from the gain recognized on the exchange of the note payable to richard church for our interest in ananda . during fiscal 2015 , we incurred interest expense in the amount of $ 22,508 , compared to interest expense of $ 28,132 during fiscal 2014. all of this interest expense was due to loans issued to boulderado and magnolia ( either from loans previously issued by us to richard church and subsequently assigned by mr. church to boulderado and magnolia or from loans issued by boulderado and magnolia to us in april 2015 in the aggregate principal amount of $ 200,000 ) , and a prior loan issued by us to richard church . net loss . the revenues generated primarily from the billboard businesses acquired in fiscal 2015 were offset by costs and expenses , including one-time charges for professional fees associated with the acquisitions we completed in 2015 and non-cash amortization and depreciation charges , resulting in a net loss of $ 1,047,423 for fiscal 2015 , compared to a loss of $ 66,778 for fiscal 2014. net loss per share . story_separator_special_tag during fiscal 2015 , we conducted a 1:7 reverse stock split and then issued additional shares in connection with our sale of class a common stock offering in june 2015 and our subsequent common stock offering in july 2015 , resulting in an increase in our basic and diluted weighted average shares outstanding from 266,954 shares at the end of fiscal 2014 to 1,481,310 shares at the end of fiscal 2015. our basic and diluted net loss per share was $ .71 for fiscal 2015 compared to a net per-share loss of $ .25 for fiscal 2014. liquidity and capital requirements currently , we operate a billboard business operating in four states , have invested in four separate real estate businesses involved in the brokerage acquisition , holding , operation , management , financing and sale of residential and commercial real estate , and have established a subsidiary to sell insurance products . acquisitions and investments . billboards . in 2015 , we acquired billboards in alabama , florida and georgia . in 2016 , we also acquired billboards and directional signs located in wisconsin and florida . currently , we operate approximately over 500 billboard faces and 50 operational signs and hold options to build an additional billboard location on the florida state fairground authority land in tampa , florida adjacent , interstate highway . our strategy is to continue to acquire other billboard locations as well as acquire other service-related businesses which we believe can generate consistent and significant positive cash flows . we currently expect to finance any future acquisition primarily with cash . in the future , we may also finance future acquisitions with seller or third party financing . in the future , we may also be able to satisfy a portion of the purchase price for a property with the company 's equity securities . on june 19 , 2015 , one of our subsidiaries entered into a purchase agreement with bell media , llc for the purchase of 35 billboard structures with 70 faces and related personal property in alabama from bell media , llc . the assets acquired are located in alabama . the cash purchase price was $ 6,684,604. on july 23 , 2015 , one of our subsidiaries entered into a purchase agreement with fair outdoor , llc for the purchase of one billboard structures with two digital displays and related personal property with options to build two billboard structures in tampa , florida . the assets acquired are located in florida . the cash purchase price was $ 1,945,061 . 31 on august 31 , 2015 , one of our subsidiaries entered into a purchase agreement with i-85 advertising , llc for the purchase of five static billboards with 10 faces and related personal property in georgia from i-85 advertising , llc . the cash purchase price was $ 1,294,900. on february 16 , 2016 , one of our subsidiaries entered into an asset purchase agreement with jag , inc. and the sole voting shareholder of jag , inc. , by which our subsidiary acquired billboards with 422 faces , 50 directional signs and other related assets in wisconsin from jag , inc. the purchase price for the acquired assets was $ 6,954,246 , of which $ 687,500 was placed in escrow and the remainder was paid at closing . the purchase price is subject to certain post-closing working capital adjustments . also on february 16 , 2016 , one of our subsidiaries acquired a digital display with two faces and related personal property in florida from rose city outdoor of florida , llc . the cash purchase price for the acquired assets was $ 287,320. other investments . on september 11 , 2015 , we formed general indemnity group llc , a delaware limited liability company ( `` gig '' ) for the purpose of holding our future insurance operations . in october 2015 , we hired michael scholl as president of gig and began establishing the infrastructure for future operations , including submitting approvals for licensing in the district of columbia . on october 16 , 2015 , we acquired an 8.33 % interest in dfh leyden , llc ( `` dfh '' ) , a florida limited liability company , whose business is to manage the acquisition , holding , operation , management , financing and sale of residential real estate . our equity contribution was $ 377,732. dfh was formed during 2015 and had no operations for the period ended december 31 , 2015 on december 7 , 2015 , we acquired a 30 % interest in logic real estate companies , llc ( `` logic '' ) , a delaware limited liability company , whose business is to engage in property management , and in the brokerage and capital market industries . our equity contribution was $ 195,000. logic was formed on august 18 , 2015. in february 2016 , brendan j. keating , the principal member of logic , joined our board of directors . on december 8 , 2015 , we acquired a 15 % interest in tag sw1 , llc ( `` tag '' ) , a nevada limited liability company , whose business is to invest in retail centers . at december 31 , 2015 , tag had acquired investments in two retail centers located in las vegas , nevada . our equity contribution was $ 97,500. in addition to our equity interest in tag , logic manages both the brokerage and property management services of the assets owned by tag and is compensated for such services . mr. keating also serves as a principal member of tag . on january 12 , 2016 , we purchased a 7.15 % interest in dfh leyden 2 , llc , a florida limited liability company , whose business is to manage the acquisition , holding , operation , management , financing and sale of residential real estate and all matters incidental to or related thereto .
| in addition , during fiscal 2015 , we incurred depreciation and amortization expenses , primarily associated with the three billboard operations which we acquired from june through august 2015 , of $ 457,803. during fiscal 2014 we had no depreciation or amortization expenses as we did not acquire the billboard properties until fiscal 2015. we amortize intangible assets with finite lives over their estimated useful lives , which range between two and 10 years . intangible assets include customer relationships , permits license and lease acquisition costs and non-competition and non-solicitation agreements . property and equipment are carried at cost and depreciation and amortization are provided principally on a straight-line method over the estimated useful lives of these assets , which range from three years to 15 years . maintenance and repair costs are charged against income as incurred and significant improvements or betterments are capitalized and depreciated over the estimated useful life of the asset . during fiscal 2015 , we incurred other costs and expenses of $ 634,536. this consisted of our other cost of operations , including our employees as well as leased employees and ground rents , which together accounted for approximately 49.1 % of this amount , followed by administrative expenses . during fiscal 2015 , each of alex rozek and adam peterson , received compensation at the rate of $ 24,000 per annum . commencing in january 2016 , each of messrs. rozek and peterson are entitled to receive a base salary in the amount of $ 275,000 per year , together with the right to participate in a bonus plan based upon any growth in our book value based on certain operating profit metrics . however , each of messrs. rozek and peterson has agreed to delay implementation of this compensation increase until at least the third quarter of the current fiscal year . net loss from operations . because of the professional costs and the depreciation and amortization expenses associated with these acquisitions , we had a net loss from operations in the amount of $ 1,106,878 during fiscal 2015 , compared to a net loss
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the cares act includes tax relief provisions such as : ( a ) an amt credit refund , ( b ) a 5-year nol carryback from years 2018-2020 and ( c ) delayed payment of employer payroll taxes . pursuant to the cares act , aep , apco and opco requested and in july received refunds of amt credit of $ 20 million , $ 7 million and $ 9 million , respectively . in the third quarter of 2020 , aep also requested a $ 95 million refund of taxes paid in 2014 under the 5-year nol carryback provision of the cares act . aep carried back a nol generated on the 2019 federal income tax return at a 21 % federal corporate income tax rate to the 2014 federal income tax return at a 35 % corporate income tax rate . as a result of the change in the corporate income tax rates between the two periods , aep realized a tax benefit of $ 48 million primarily at the generation & marketing segment . management will continue to monitor potential legislation and any impacts to the amt credit and nol refunds that were filed in 2020 pursuant to the cares act . the registrants deferred payments of the employer share of payroll taxes for the period march 27 , 2020 through december 31 , 2020 and will pay 50 % of the obligation by december 31 , 2021 and the remaining 50 % by december 31 , 2022. as of december 31 , 2020 , the registrants have deferred $ 55 million of the employer share of payroll taxes . in december 2020 , the caa of 2021 was signed into law . the caa of 2021 includes : ( a ) covid-19 tax relief and tax extender provisions including extensions of time to begin construction on and placed in-service assets generating ptcs and itcs , ( b ) 100 % deductibility of business meals in 2021 and 2022 and ( c ) an extension of the work opportunity tax credit . the itc percentage has been increased for projects starting construction through 2023 and placed in-service by the end of 2025. the ptc has been extended for an additional year , to include projects started in 2021 and completed in 2025. these provisions provide time and flexibility on the construction start and in-service dates . the registrants have taken steps to mitigate the potential risks to customers , suppliers and employees posed by the spread of covid-19 . the registrants have updated and implemented a company-wide pandemic plan to address specific aspects of covid-19 . this plan guides emergency response , business continuity and the precautionary measures aep is taking on behalf of its employees and the public . the registrants have taken extra precautions for employees who work in the field and for employees who work in their facilities , and have work from home policies where appropriate . the registrants will continue to monitor developments affecting both their workforce and customers , and will take additional precautions that management determines are necessary in order to mitigate the impacts . aep continues to focus on providing safe , uninterrupted service to its customers , which includes the implementation of strong physical and cyber-security measures to ensure that its systems remain functional with a partially remote workforce . as of december 31 , 2020 , there has been no material adverse impact to the registrants ' business operations and customer service due to remote work . management will continue to review and modify plans as conditions change . despite efforts to manage these impacts to the registrants , the ultimate impact of covid-19 also depends on factors beyond management 's knowledge or control , including the duration and severity of this outbreak as well as third-party actions taken to contain its spread and mitigate its public health effects . therefore , management can not estimate the potential future impact to financial position , results of operations and cash flows , but the impacts could be material . customer demand aep 's weather-normalized retail sales volumes for the year ended december 31 , 2020 decreased by 2.2 % from the year ended december 31 , 2019. weather-normalized residential sales increased 3.2 % for the year ended december 31 , 2020 compared to the year ended december 31 , 2019. aep 's 2020 industrial sales volumes decreased 5.7 % compared to 2019. the decline in industrial sales was spread across many industries . weather-normalized commercial sales decreased by 4.2 % in 2020 compared to 2019 . 59 in 2021 , aep anticipates weather-normalized retail sales volumes will increase by 0.2 % . the industrial class is expected to increase by 1.9 % in 2021 , while weather-normalized residential sales volumes are projected to decrease by 1.1 % . finally , aep projects weather-normalized commercial sales volumes to decrease by 0.5 % . ( a ) percentage change for the year ended december 31 , 2020 as compared to the year ended december 31 , 2019 . ( b ) forecasted percentage change for the year ended december 31 , 2021 compared to the year ended december 31 , 2020. regulatory matters aep 's public utility subsidiaries are involved in rate and regulatory proceedings at the ferc and their state commissions . depending on the outcomes , these rate and regulatory proceedings can have a material impact on results of operations , cash flows and possibly financial condition . aep is currently involved in the following key proceedings . see note 4 - rate matters for additional information . 2017-2019 virginia triennial review - in march 2020 , apco submitted its 2017-2019 virginia triennial earnings review filing and base rate case with the virginia scc as required by state law . apco requested a $ 65 million annual increase in base rates based upon a proposed 9.9 % roe . story_separator_special_tag triennial reviews are subject to an earnings test , which provides that 70 % of any earnings in excess of 70 basis points above apco 's virginia scc authorized roe would be refunded to customers . in such case , the virginia scc could also lower apco 's virginia retail base rates on a prospective basis . virginia law provides that costs associated with asset impairments of retired coal generation assets , or automated meters , or both , which a utility records as an expense , shall be attributed to the test periods under review in a triennial review proceeding , and be deemed recovered . in 2015 , apco retired the sporn plant , the kanawha river plant , the glen lyn plant , clinch river unit 3 and the coal portions of clinch river units 1 and 2 ( collectively , the retired coal-fired generation assets ) . the net book value of the virginia jurisdictional share of these plants was $ 93 million before cost of removal , including materials and supplies inventory and aro balances . based on management 's interpretation of virginia law and more certainty regarding apco 's triennial revenues , expenses and resulting earnings upon reaching the end of the three-year review period , apco recorded a pretax expense of $ 93 million related to its previously retired coal-fired generation assets in december 2019. as a result , management deemed these costs to be substantially recovered by apco during the triennial review period . inclusive of the virginia jurisdictional share of the $ 93 million expense associated with apco 's retired coal-fired generation assets , apco calculated its 2017-2019 virginia earnings for the triennial period to be below the authorized roe range . 60 in november 2020 , the virginia scc issued an order concluding that apco earned above its authorized roe but within its roe band for the 2017-2019 period , resulting in no refund to customers and no change to apco base rates on a prospective basis . the virginia scc also disagreed with apco 's treatment of the retired coal-fired generation assets for regulatory purposes , and instead adopted the virginia scc staff 's recommendation to treat the remaining unrecovered costs of the retired coal-fired generation assets as a regulatory asset to be amortized over 10 years as of the june 2015 retirement date . the virginia scc 's adoption of the staff 's recommended regulatory treatment of the coal-fired generation assets resulted in a net $ 40 million increase to apco 's 2020 pretax income . in addition , the virginia scc 's order also included : ( a ) implementation of the staff-modified apco 2017 depreciation study effective january 1 , 2018 and ( b ) implementation of the staff-modified apco 2019 depreciation study effective january 1 , 2020. the adoption of these depreciation studies resulted in an approximate $ 47 million reduction to apco 's 2020 pretax income comprised of a $ 44 million reduction to revenues for amounts recognized in advance of the recording of depreciation expense for the periods january 2018 through october 2020 and a $ 3 million increase in depreciation expense for the periods november and december 2020. a corresponding regulatory liability was recorded for the $ 44 million reduction to revenues . also in november 2020 , apco filed a notice of appeal of the virginia scc 's order with the virginia supreme court . in december 2020 , an intervenor filed a petition at the virginia scc requesting reconsideration of : ( a ) the failure of the virginia scc to apply a threshold earnings test to the approved regulatory asset for apco 's closed coal-fired generation assets , ( b ) the virginia scc 's use of a 2011 benchmark study to measure the replacement value of capacity for purposes of apco 's 2017 – 2019 earnings test and ( c ) the reasonableness and prudency of apco 's investments in ami meters . also in december 2020 , apco filed a petition at the virginia scc requesting reconsideration of : ( a ) certain issues related to apco 's going-forward rates and ( b ) the virginia scc 's decision to deny apco tariff changes that align rates with underlying costs . for apco 's going-forward rates , apco requested that the virginia scc clarify its final order and whether apco 's current rates will allow it to earn a fair return . if the virginia scc 's order did conclude on apco 's ability to earn a fair return through existing base rates , apco further requested that the virginia scc clarify whether it has the authority to also permit an increase in base rates . if the virginia scc did not conclude on apco 's ability to earn a fair return , apco requested the virginia scc provide such a conclusion . in january 2021 , as requested by the virginia scc , apco filed briefs related to the petition for reconsideration . 2020 ohio base rate case - in june 2020 , opco filed a request with the puco for a $ 42 million annual increase in base rates based upon a proposed 10.15 % roe net of existing riders . in november 2020 , puco staff filed testimony supporting an annual revenue decrease ranging from $ 102 million to $ 123 million based upon an roe of 8.76 % to 9.78 % . the staff 's proposal included a disallowance of plant in-service which could result in a write-off of up to $ 27 million . in addition , the staff recommended that capitalized incentives be excluded from base rates prospectively and also recommended annual revenue caps for the dir of $ 57 million in 2021 , $ 78 million in 2022 , $ 96 million in 2023 and $ 46 million for the first five months of 2024. in december 2020 , opco and intervenors filed objections . a procedural schedule for the case is pending due to ongoing settlement discussions .
| these restrictions significantly disrupted economic activity in aep 's service territory and reduced demand for energy , particularly from commercial and industrial customers in 2020. although aep can not predict the severity or duration of the impact of the covid-19 pandemic , aep currently anticipates a 0.2 % increase in weather-normalized retail sales volume in 2021 as compared to 2020. for the year ended december 31 , 2020 , aep experienced a reduction in weather-normalized retail sales volume of 2.2 % as compared to the same period in 2019 primarily driven by a 5.7 % decrease in the industrial customer class and a 4.2 % decrease in the commercial customer class offset by an increase in demand of 3.2 % from the residential customer class . the reduction in weather-normalized retail sales volume of 2.2 % did not result in a significant decrease in the corresponding retail margins for the year ended december 31 , 2020 as the increase in higher margin residential sales volumes partially offset the decreases in the industrial and commercial sales volumes . furthermore , the rate design for certain industrial customers includes demand provisions designed to cover the fixed portion of utility costs minimizing the impact of the fluctuations in usage on revenues . aep 's load forecast is highly dependent on many factors including , but not limited to , the speed and strength of economic recovery and the extent and duration of the next wave of covid-19 infection . if the severity of the economic disruption increases , aep 's future results of operations , financial condition , and cash flows could be further adversely impacted . see customer demand for additional information . during the first quarter of 2020 , aep 's electric operating companies informed both retail customers and state regulators that disconnections for non-payment were temporarily suspended . shortly thereafter , aep 's state regulators also imposed temporary moratoria on customary disconnection practices . during the third and the fourth quarters of 2020 , most state regulators began to lift restrictions on disconnects . as of december 31 , 2020 , aep had resumed disconnections in its regulated jurisdictions with the exception of virginia , kentucky and arkansas . disconnections resumed in kentucky during january 2021. aep continues to work with regulators and stakeholders in virginia and arkansas and management currently anticipates resuming customary disconnection practices in the first half of 2021. however , this timing could change if there is new legislation or other regulatory directives issued in the future . continuing adverse economic conditions may result in the inability of customers to pay for electric service , which could affect revenue recognition and the collectability of accounts receivable .
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our customers are primarily large global and regional resellers of our products including traditional office supply resellers , wholesalers , on-line retailers and other retailers . mass merchandisers and retail channels primarily sell to individual consumers but also to small businesses . we also sell to office supply retailers , commercial contract dealers , wholesalers , distributors and independent dealers who primarily serve commercial end-users . over half of our product sales by our customers are to commercial end-users , who generally seek premium products that have added value or ease-of-use features and a reputation for reliability , performance and professional appearance . some of our binding and laminating equipment products are sold directly to high-volume end-users and commercial reprographic centers . we also sell directly to consumers . computer products group our computer products group designs , sources , distributes , markets and sells accessories for laptop and desktop computers and tablets . these accessories primarily include security products , input devices such as presenters , mice and trackballs , ergonomic aids such as foot and wrist rests , docking stations , and other pc and tablet accessories . we sell these products mostly under the kensington ® , microsaver ® and clicksafe ® brand names , with the majority of revenue coming from the u.s. and northern europe . our computer products are manufactured by third-party suppliers , principally in asia , and are distributed from our regional facilities . our computer products are sold primarily to consumer electronics retailers , information technology value-added resellers , original equipment manufacturers , and office products retailers , as well as directly to consumers on-line . story_separator_special_tag style= '' font-family : inherit ; font-size:10pt ; color : # 000000 ; text-decoration : none ; '' > $ 1,032.0 million in the prior-year period . the pa acquisition contributed $ 47.7 million to increased cost of products sold . foreign currency translation reduced cost of products sold by $ 13.3 million , or 1 % . the underlying decline was due to lower sales volume , cost savings and productivity improvements , partially offset by foreign-exchange-related inflationary increases in certain foreign markets ' cost of products sold . gross profit management believes that gross profit and gross profit margin provide enhanced shareholder appreciation of underlying profit drivers . gross profit increased $ 36.7 million , or 8 % , to $ 515.1 million , from $ 478.4 million in the prior-year period . the pa acquisition increased gross profit by $ 30.8 million . foreign currency translation reduced gross profit by $ 3.6 million , or 1 % . the underlying increase was due to higher pricing , cost savings and productivity improvements , which were partially offset by foreign-exchange-related inflationary increases in certain foreign markets ' costs of products sold . 28 gross profit margin increased to 33.1 % from 31.7 % . the increase was primarily due to cost savings and productivity improvements , higher pricing and the positive impact of the pa acquisition . advertising , selling , general and administrative expenses advertising , selling , general and administrative expenses ( `` sg & a '' ) include advertising , marketing , selling ( including commissions ) , research and development , customer service , depreciation related to assets outside the manufacturing and distribution processes and all other general and administrative expenses outside the manufacturing and distribution functions ( e.g. , finance , human resources , information technology and corporate expenses ) . sg & a increased $ 25.1 million , or 8 % , to $ 320.8 million from $ 295.7 million in the prior-year period . the pa acquisition increased sg & a by $ 16.6 million , including $ 3.6 million of costs related to the pa acquisition . foreign currency translation reduced sg & a by $ 4.8 million , or 2 % . the underlying increase was driven by higher professional fees , including $ 9.2 million related to the recently announced esselte acquisition . additionally , the prior year benefited from a one-time $ 2.3 million benefit from the recovery of an indirect tax in brazil . as a percentage of sales , sg & a increased to 20.6 % from 19.6 % in the prior-year period , for the reasons mentioned above . restructuring charges ( credits ) the company initiated cost reduction plans related to the consolidation and integration of pelikan artline with our already existing australian and new zealand businesses , and as a result incurred $ 4.2 million in charges , primarily related to severance . in addition , the company initiated additional cost reduction plans and incurred $ 1.2 million in severance charges related to the consolidation of certain functions in the north america segment . operating income operating income increased $ 3.8 million , or 2 % , to $ 167.3 million , from $ 163.5 million in the prior-year period . foreign currency translation increased operating income by $ 1.6 million , or 1 % . the underlying increase was due to the pa acquisition , partially offset by increased sg & a and restructuring charges . interest expense and other expense , net interest expense increased $ 4.8 million , or 11 % , to $ 49.3 million from $ 44.5 million in the prior-year period . the increase was primarily due to additional debt incurred to finance the pa acquisition and the early refinancing of our existing notes , in which the company incurred $ 2.5 million of incremental interest expense . also contributing to the increase was the accelerated amortization of debt issuance cost related to the prepayment of $ 70 million on our u.s. dollar senior secured term loan a. other expense , net decreased by $ 0.7 million to $ 1.4 million from $ 2.1 million in the prior-year period . the current year included charges associated with the refinancing of our existing notes . story_separator_special_tag the charges consisted of $ 25.0 million in a `` make-whole '' call premium and a $ 4.9 million charge for the write-off of debt issuance costs , which were offset by a $ 28.9 million gain arising from the pa acquisition due to the revaluation of the company 's previously held equity interest to fair value and a $ 1.0 million gain on the settlement of an intercompany loan , previously deemed permanently invested . in the prior year we wrote-off $ 1.9 million of debt issuance costs related to the refinancing completed in 2015. income taxes income tax expense was $ 29.6 million on income before taxes of $ 125.1 million , with an effective tax rate of 23.7 % . for the prior-year period , income tax expense was $ 45.5 million on income before taxes of $ 131.4 million , with an effective tax rate of 34.6 % . the lower effective tax rate in the current year period was primarily due to the following : 1 ) the $ 28.9 million gain from the pa acquisition due to the revaluation of the previously held equity interest to fair value , which was not subject to tax , and 2 ) tax losses on foreign exchange on the repayment of intercompany loans , for which the pre-tax effect was recorded in equity . net income net income increased $ 9.6 million , or 11 % , to $ 95.5 million or $ 0.87 per diluted share , from $ 85.9 million , or $ 0.78 per diluted share in the prior-year period . the underlying increase was primarily due to the lower effective tax rate in the current year . 29 segment discussion replace_table_token_9_th ( 1 ) segment operating income excludes corporate costs ; `` interest expense ; '' `` interest income ; '' `` equity in earnings of joint-venture `` and `` other expense , net . '' see `` note 16. information on business segments `` to the consolidated financial statements contained in item 8. of this report for a reconciliation of total `` segment operating income `` to `` income before income tax . '' acco brands north america acco brands north america net sales decreased $ 7.8 million , or 1 % , to $ 955.5 million from $ 963.3 million in the prior-year period . foreign currency translation reduced sales by $ 3.9 million , or 0.4 % . the underlying sales decrease was primarily due to declines at certain wholesalers and an office products superstore due to inventory destocking and consumers purchasing in different channels . this was partially offset by strong back-to-school sales , notably with mass-market customers and on-line retailers , due to increased product placements and broadened product offerings . acco brands north america operating income increased $ 3.0 million , or 2 % , to $ 150.6 million from $ 147.6 million in the prior-year period , and operating income margin increased to 15.8 % from 15.3 % . foreign currency translation reduced operating income by $ 0.3 million , or 0.2 % . the underlying improvement was driven by cost savings and productivity improvements . acco brands international acco brands international net sales increased $ 58.1 million , or 14 % , to $ 485.0 million from $ 426.9 million in the prior-year period . the pa acquisition contributed sales of $ 78.5 million , or 18 % . foreign currency translation reduced sales by $ 11.8 million , or 3 % . the underlying sales decrease was due to lower volume as a result of the ongoing channel destocking , most notably in europe , as well as lost share with some customers and lower consumer demand . partially offsetting the sales decline was price increases , which benefited sales by 8 % . price increases were implemented to recover gross margins following foreign-exchange-related cost of products sold increases , particularly in mexico as well as to offset paper related inflation in brazil . acco brands international operating income increased $ 12.3 million , or 30 % , to $ 53.1 million from $ 40.8 million in the prior-year period , and operating income margin increased to 10.9 % from 9.6 % . the pa acquisition contributed operating income of $ 6.9 million , net of $ 4.2 million of restructuring charges and $ 2.3 million of integration expenses . foreign currency translation increased operating income by $ 1.7 million , or 4 % , due to the recovery of the brazilian real , which occurred in the seasonally stronger fourth quarter . the underlying increase was due to higher pricing and productivity improvements , partially offset by lower volumes . in addition , the prior year results included a one-time $ 2.3 million recovery of an indirect tax and $ 1.3 million of severance charges , both in brazil . 30 computer products group computer products group net sales decreased $ 3.6 million , or 3 % , to $ 116.6 million from $ 120.2 million in the prior-year period . foreign currency translation reduced sales by $ 1.2 million , or 1 % . increased sales of pc accessory products were offset by lower sales of tablet accessories . computer products group operating income increased $ 1.3 million , or 13 % , to $ 11.6 million from $ 10.3 million in the prior-year period , and operating margin increased to 9.9 % from 8.6 % . foreign currency translation increased operating income by $ 0.2 million , or 2 % . operating income and margin increased due to higher pricing in international markets and a favorable product mix driven by lower sales of tablet accessories . the prior-year period also included $ 0.3 million in restructuring charges . fiscal 2015 versus fiscal 2014 the following table presents the company 's results for the years ended december 31 , 2015 and 2014 . replace_table_token_10_th net sales net sales decreased $ 178.8 million , or 11 % , to $ 1,510.4 million from $ 1,689.2 million in the prior-year period . foreign currency translation reduced sales by $ 123.9
| 26 foreign currency translation increased operating income by $ 1.6 million , or 1 % , due to the seasonality of our brazilian business , which earns most of its income in the fourth quarter when the brazilian real strengthened . with respect to the transaction impact , in response to the strengthening of the u.s. dollar during both the second half of 2015 and into 2016 , we implemented price increases in 2016 in certain foreign markets in an effort to recover our lost gross margin . due to competitive pressures and the timing of these price increases relative to changes in currency exchange rates , we were not able to increase our prices enough to fully offset the cumulative impact of the foreign exchange related inflation on our cost of products sold in these markets . the annual average foreign exchange rates have moved as follows for our major currencies relative to the u.s. dollar : replace_table_token_7_th fluctuations in the currency exchange rates can also have a material impact on our consolidated balance sheet . the strengthening of the u.s. dollar has reduced the value of our reported assets and liabilities by $ 16.8 million versus december 31 , 2015 . therefore , our reported shareholders ' equity has decreased by this amount . we expect the adverse effects from the strong u.s. dollar to continue to impact us in 2017. see also `` part i , item 1a . risk factors - risks associated with currency volatility could adversely affect our sales , profitability , cash flow and results of operations , `` `` item 6. selected financial data - supplemental non-gaap financial measures `` and `` note 13. derivative financial instruments `` to the consolidated financial statements contained in item 8. of this report . senior unsecured notes on december 22 , 2016 , the company completed a private offering of $ 400.0 million in aggregate principal amount of 5.25 % senior unsecured notes due december 2024 ( the `` new notes '' ) which were issued under an indenture , dated december 22 , 2016 ( the `` new indenture '' ) , among the company , as issuer , the guarantors named
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the primary reason for our acquisition of symmedrx , a business with a track record of analyzing and reducing costs for health systems through the innovative use of data , was to continue to strengthen our ability to drive improvement in member cost savings . see note 4 - business acquisitions and note 25 - subsequent events to the audited consolidated financial statements contained herein for more information regarding our acquisition activities . gain on sale of investment on march 11 , 2014 , a subsidiary of thoma bravo llc , a private equity firm , acquired all the outstanding membership interests of global healthcare exchange ( `` ghx '' ) , in which we owned a 13 % interest . upon completion of the sale , we received proceeds of approximately $ 38.4 million , resulting in a gain on sale of investment of an equal amount . we expect to continue our business relationship with ghx . market and industry trends and outlook we expect that certain trends and economic or industry-wide factors will continue to affect our business , both in the short-term and long-term . we have based our expectations described below on assumptions made by us and on information currently available to us . to the extent our underlying assumptions about , or interpretation of , available information prove to be incorrect , our actual results may vary materially from our expected results . see `` cautionary note regarding forward-looking statements . '' trends in the u.s. healthcare market affect our revenues in the supply chain services and performance services segments . the trends we see affecting our current healthcare business include the implementation of healthcare reform legislation , expansion of insurance coverage , intense cost pressure , payment reform , provider consolidation , shift in care to the alternate site market and increased data availability and transparency . to meet the demands of this environment , there will be increased focus on scale and cost containment and healthcare providers will need to measure and report on , and bear financial risk for , outcomes . we believe these trends will result in increased demand for our supply chain services and performance services solutions in the areas of cost management , quality and safety , population health management and premierconnect ® enterprise , a cloud-based data warehousing , collaboration and content management solution that allows our members to aggregate and share information on one common platform that is both payer and supplier neutral . key components of our results of operations net revenue net revenue consists of ( i ) service revenue , which includes net administrative fees revenue and other services and support revenue and ( ii ) product revenue . net administrative fees revenue consists of gpo administrative fees in our supply chain services segment . other services and support revenue consists primarily of fees generated by our performance services segment in connection with our saas informatics products subscriptions , advisory services and performance improvement collaborative subscriptions . product revenue consists of specialty pharmacy and direct sourcing product sales , which are included in the supply chain services segment . supply chain services supply chain services revenue consists of gpo net administrative fees ( gross administrative fees received from suppliers , reduced by the amount of any revenue share paid to members ) , specialty pharmacy revenue and direct sourcing revenue . the success of our supply chain services ' revenue streams are influenced by the following factors : 55 net administrative fee revenue - the number of members that utilize our gpo supplier contracts and the volume of their purchases . specialty pharmacy revenue - the number of members that utilize our specialty pharmacy , as well as the impact of changes in the defined allowable reimbursement amounts determined by medicare , medicaid and other managed care plans . direct sourcing revenue - the number of members that purchase products through our direct sourcing activities and the impact of competitive pricing . performance services performance services revenue consists of saas informatics products subscriptions , performance improvement collaborative and other service subscriptions , professional fees for advisory services , and insurance services management fees and commissions from endorsed commercial insurance programs . our performance services growth will depend upon the expansion of our saas informatics products , performance improvement collaboratives and advisory services to new and existing members and the renewal of existing subscriptions to our saas informatics products . cost of revenue cost of service revenue includes expenses related to employees ( including compensation and benefits ) and outside consultants who directly provide services related to revenue-generating activities , including advisory services to members and implementation services related to saas informatics products . cost of service revenue also includes expenses related to hosting services , related data center capacity costs , third-party product license expenses and amortization of the cost of internal use software . cost of product revenue consists of purchase and shipment costs for specialty pharmaceuticals and direct sourced medical products . our cost of product revenue will be influenced by the cost and availability of specialty pharmaceuticals and the manufacturing and transportation costs associated with direct sourced medical products . operating expenses selling , general and administrative expenses consist of expenses directly associated with selling and administrative employees and indirect costs associated with employees that primarily support revenue-generating activities ( including compensation and benefits ) and travel-related expenses , as well as occupancy and other indirect costs , insurance costs , professional fees , and other general overhead expenses . general and administrative expenses have increased as a result of being a public company , including stock-based compensation expense related to the equity incentive plan established in connection with the reorganization and ipo . research and development expenses consist of employee-related compensation and benefits expenses , and third-party consulting fees of technology professionals , incurred to develop , support and maintain our software-related products and services . amortization of purchased intangible assets includes the amortization of all identified intangible assets resulting from acquisitions . story_separator_special_tag other income , net other income , net , consists primarily of equity in net income of unconsolidated affiliates that is generated from our 50 % ownership interest in innovatix . a change in the number of , and use by , members that participate in our gpo programs through innovatix could have a significant effect on the amounts earned from this investment . other income , net , also includes interest income , net , and realized gains and losses on our marketable securities as well as gains or losses on disposal of assets . income tax expense income tax expense includes the income tax expense attributable to premier , phsi and psci . the low effective tax rate is attributable to the flow through of premier lp income , which is not subject to federal and state income taxes to premier . for federal and state income tax purposes , income realized by premier lp is taxable to its partners . net income attributable to noncontrolling interest as of june 30 , 2014 , we owned an approximate 22 % controlling general partner interest in premier lp through premier gp and a 60 % voting and economic interest in s2s global and therefore consolidate their operating results . net income attributable 56 to noncontrolling interest represents the portion of net income attributable to the limited partners of premier lp ( 78 % ) and the portion of net income or loss attributable to the noncontrolling equity holders of s2s global ( 40 % ) . our noncontrolling interest attributable to limited partners of premier lp was reduced from 99 % to approximately 78 % upon the reorganization . other key business metrics the other key business metrics we consider are adjusted ebitda , segment adjusted ebitda and adjusted fully distributed net income . we define ebitda as net income before interest and investment income , net , income tax expense , depreciation and amortization and amortization of purchased intangible assets . we define adjusted ebitda as ebitda before merger and acquisition related expenses and non-recurring , non-cash or non-operating items , and including equity in net income of unconsolidated affiliates . for all non-gaap financial measures , we consider non-recurring items to be expenses that have not been incurred within the prior two years and are not expected to recur within the next two years . such expenses include certain strategic and financial restructuring expenses . non-operating items include gain or loss on disposal of assets . we define segment adjusted ebitda as the segment 's net revenue less operating expenses directly attributable to the segment excluding depreciation and amortization , amortization of purchased intangible assets , merger and acquisition related expenses and non-recurring or non-cash items , and including equity in net income of unconsolidated affiliates . operating expenses directly attributable to the segment include expenses associated with sales and marketing , general and administrative and product development activities specific to the operation of each segment . general and administrative corporate expenses that are not specific to a particular segment are not included in the calculation of segment adjusted ebitda . we define adjusted fully distributed net income as net income attributable to premier ( i ) excluding income tax expense , ( ii ) excluding the effect of non-recurring and non-cash items , ( iii ) assuming the exchange of all the class b common units into shares of class a common stock , which results in the elimination of noncontrolling interest in premier lp and ( iv ) reflecting an adjustment for income tax expense on pro forma fully distributed net income before income taxes at our estimated effective income tax rate . adjusted fully distributed net income is a non-gaap financial measure because it represents net income attributable to premier before merger and acquisition related expenses and non-recurring or non-cash items and the effects of noncontrolling interests in premier lp . adjusted ebitda is a supplemental financial measure used by us and by external users of our financial statements . we consider adjusted ebitda an indicator of the operational strength and performance of our business . adjusted ebitda allows us to assess our performance without regard to financing methods and capital structure and without the impact of other matters that we do not consider indicative of the operating performance of our business . segment adjusted ebitda is the primary earnings measure we use to evaluate the performance of our business segments . we use adjusted ebitda , segment adjusted ebitda and adjusted fully distributed net income to facilitate a comparison of our operating performance on a consistent basis from period to period that , when viewed in combination with our results prepared in accordance with gaap , provides a more complete understanding of factors and trends affecting our business than gaap measures alone . we believe adjusted ebitda and segment adjusted ebitda assist our board of directors , management and investors in comparing our operating performance on a consistent basis from period to period because they remove the impact of our asset base ( primarily depreciation and amortization ) and items outside the control of our management team ( taxes ) , as well as other non-cash ( impairment of intangible assets , purchase accounting adjustments and stock-based compensation ) and non-recurring items ( strategic and financial restructuring expenses ) , from our operations .
| ( b ) represents legal , accounting and other expenses related to acquisition activities . ( c ) represents legal , accounting and other expenses directly related to strategic and financial restructuring expenses . ( d ) represents the gain on sale of ghx . ( e ) represents adjustment to tax receivable agreement liability for the premier lp change in tax accounting method approved by the internal revenue service subsequent to the original recording of the tra liability . ( f ) represents gains and losses on investments and other assets . ( g ) corporate consists of general and administrative corporate expenses that are not specific to either of our segments . 60 ( 2 ) the table that follows shows the reconciliation of net income attributable to shareholders to pro forma adjusted fully distributed net income for the periods presented ( in thousands ) : replace_table_token_8_th ( a ) represents legal , accounting and other expenses related to acquisition activities . ( b ) represents legal , accounting and other expenses directly related to the reorganization and ipo . ( c ) represents the gain on sale of ghx . ( d ) reflects the elimination of the noncontrolling interest in premier lp as if all member owners of premier lp had fully exchanged their class b common units for shares of class a common stock . ( e ) reflects income tax expense at an estimated effective income tax rate of 40 % of income before income taxes assuming the conversion of all class b common units into shares of class a common stock and the tax impact of excluding strategic and financial restructuring expenses . net revenue the following table summarizes our actual net revenue for the year ended june 30 , 2014 and 2013 , respectively , and our pro forma net revenue for the years then ended , indicated both in dollars ( in thousands ) and as a percentage of net revenue : replace_table_token_9_th total net revenue for the year ended june 30 , 2014 was $ 910.5 million , an increase of $
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in addition , the company hired three nsena persons as employees ( including moeller ) ( “ key employees ” ) and retained two nsena consultants ( “ consultants ” ) . wrap reality paid nsena cash consideration of $ 210,000 and agreed to pay $ 100,000 on march 15 , 2021 , $ 100,000 on june 15 , 2021 and $ 75,000 on september 15 , 2021. in addition , wrap reality assumed $ 15,000 of liabilities related to funds received by nsena but unearned on existing revenue related contract arrangements . as additional earn-out consideration , wrap reality has agreed to pay nsena 10 % of net revenues ( or a lesser amount equal to 50 % of direct profit ) from specific identified prospects that become revenue customers ( “ nsena earn-out consideration ” ) before september 30 , 2021 , but only on amounts collected between consummation of the acquisition and june 30 , 2022. each of the key employees executed an at-will employment , confidential information , non-compete/non-solicitation , invention assignment , and arbitration agreement and the key employees were issued service-based stock options exercisable for an aggregate of 150,000 shares of the company 's common stock exercisable for ten years at $ 5.46 per share , vesting over two years unless accelerated by certain events . mr. moeller was granted an additional ten-year performance-based stock option exercisable at $ 5.46 per share on 100,000 shares of common stock based on achieving certain virtual reality revenue targets by december 1 , 2024. each of the two consultants were granted service-based stock options exercisable for 20,000 shares of the company 's common stock for five years at $ 5.46 per share , vesting over two years unless accelerated under the terms of the stock options . business outlook and challenges our products and solutions continue to gain worldwide awareness and recognition through social media , media exposure , trade shows , product demonstrations and word of mouth as a result of positive responses from agencies and early adoption and deployment success . we believe the wrap is gaining traction as a recognized global brand , with innovative technology and an initial product foundation achieved through aggressive marketing and public relations . we believe that we have strong market opportunities for our remote restraint solution throughout the world in the law enforcement and security sectors as a result of increasing demands for less lethal policing and increasing threats posed by non-compliant subjects . we grew our business in 2020 with revenues increasing 460 % and continue to expand our business in 2021 , both domestically and internationally , through direct and distributor sales . we have a robust and growing pipeline of opportunities and are pursuing large business prospects internationally and also pursuing business with large police agencies in the u.s. it is difficult to anticipate how long it will take to close these opportunities , or if they will ultimately come to fruition . to support our increased sales and distribution activities we have developed and offer robust training and class materials that certify law enforcement officers and trainers as bolawrap instructors in the use and limitations of the bolawrap in conjunction with modern policing tactics for de-escalation of encounters . over 520 agencies have received bolawrap training with over 1,550 training officers at those agencies certified as bolawrap instructors qualified to train the rest of their departments . -30- at december 31 , 2020 , we had backlog of approximately $ 120,000 expected to be delivered in the next twelve months . distributor and customer orders for future deliveries are generally subject to modification , rescheduling or in some instance 's cancellation in the normal course of business . since inception in march 2016 , we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future . we believe that we have adequate financial resources to sustain our operations for the next year . we expect that we will need to continue to innovate new applications for our public safety technology , develop new products and technologies to meet diverse customer requirements and identify and develop new markets for our products . covid-19 impact we face significant challenges in operating and growing our business related to the outbreak of the novel coronavirus ( “ covid-19 ” ) which continues to spread throughout the united states and the world . the outbreak of covid-19 has resulted in travel restrictions , quarantines , “ stay-at-home ” and “ shelter-in-place ” orders and extended shutdown of certain businesses around the world . we are monitoring the outbreak of covid-19 and the related business and travel restrictions and changes to behavior intended to reduce its spread , in addition to the impact on our employees . we continued to operate with some modifications , and we took actions intended to protect our employees and our customers that adversely affected our results by increasing costs during a period of stalled sales and production activity . starting during the second quarter of 2020 our customers experienced staffing issues limiting our ability to demonstrate and train . we believe we made an important transition during the second quarter including remote sales and training through webinars and expect this to be an ongoing aspect of our business . we curtailed most sales and training travel and reduced our production personnel until late in the second quarter when some customer locations domestically and internationally eased restrictions and we began to again close business prospects . in the third quarter we continued to face some domestic and substantial international restrictions that affected our ability to travel and train customers . we believe this had an adverse effect on our sales in the third and fourth quarters . severe international travel restrictions persist and impact the timing of future international orders . it is uncertain when these restrictions will ease allowing our sales and training personnel to travel to many international destinations . story_separator_special_tag the magnitude and the duration of the pandemic and the extent and duration of the pandemic 's adverse effect on economic and social activity , consumer confidence , customer spending and preferences , labor and healthcare costs , and unemployment rates is uncertain as of the date of this report . our ability to sell , train and service our products and conduct our business may be adversely impacted as a result of continuing or future pandemic related travel restrictions , mandatory business closures , and stay-at home or similar orders ; temporary reductions in our workforce , closures of our offices and facilities and the ability of our customers and suppliers to continue their operations as a result of the pandemic . while there could ultimately be a material impact on operations and liquidity of the company , at the time of issuance of this report , the impact can not be determined . critical accounting policies and estimates the preparation of financial statements in accordance with accounting principles generally accepted in the united states ( “ u.s. gaap ” ) requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenue and expense , and related disclosure of contingent assets and liabilities . we evaluate our estimates , on an on-going basis , including those estimates related to recognition and measurement of contingencies and accrued costs . we base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances . actual results may differ from these estimates under different assumptions or conditions . as part of the process of preparing our financial statements , we are required to estimate our provision for income taxes . significant management judgment is required in determining our provision for income taxes , deferred tax assets and liabilities , tax contingencies , unrecognized tax benefits , and any required valuation allowance , including taking into consideration the probability of the tax contingencies being incurred . management assesses this probability based upon information provided by its tax advisers , its legal advisers and similar tax cases . if at a later time our assessment of the probability of these tax contingencies changes , our accrual for such tax uncertainties may increase or decrease . our effective tax rate for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized are settled at an amount which differs from our estimates . -31- some of our accounting policies require higher degrees of judgment than others in their application . these include share-based compensation and contingencies and areas such as revenue recognition , allowance for doubtful accounts , valuation of inventory and intangible assets , operating lease liabilities , warranty liabilities and impairments . revenue recognition . we sell our products to customers including law enforcement agencies , domestic distributors and international distributors and revenue from such transactions is recognized in the periods that products are shipped ( free on board ( “ fob ” ) shipping point ) or received by customers ( fob destination ) , when the fee is fixed or determinable and when collection of resulting receivables is reasonably assured . we identify customer performance obligations , determine the transaction price , allocate the transaction price to the performance obligations and recognize revenue as we satisfy the performance obligations . our primary performance obligations are products/accessories and virtual reality software licensing or sale . our customers do not have the right to return product unless the product is found to be defective . share-based compensation . we follow the fair value recognition provisions issued by the financial accounting standards board ( “ fasb ” ) in accounting standards codification ( “ asc ” ) topic 718 , stock compensation ( “ asc 718 ” ) and we adopted accounting standards update ( “ asu ” ) 2018-07 for share-based transactions with non-employees . share-based compensation expense recognized during 2020 and 2019 includes stock option and restricted stock unit compensation expense . the grant date fair value of stock options is determined using the black-scholes option-pricing model . the grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a share-based payment award . the black-scholes option-pricing model requires inputs including the market price of the company 's common stock on the date of grant , the term that the stock options are expected to be outstanding , the implied stock volatilities of several publicly-traded peers over the expected term of stock options , risk-free interest rate and expected dividend . each of these inputs is subjective and generally requires significant judgment to determine . the grant date fair value of restricted stock units is based upon the market price of the company 's common stock on the date of the grant . we determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur . the fair value of share-based compensation is amortized to compensation expense over the vesting term . allowance for doubtful accounts . our products are sold to customers in many different markets and geographic locations . we estimate our bad debt reserve on a case-by-case basis due to a limited number of customers mostly government agencies or well-established distributors . we base these estimates on many factors including customer credit worthiness , past transaction history with the customer , current economic industry trends and changes in customer payment terms . our judgments and estimates regarding collectability of accounts receivable have an impact on our financial statements . valuation of inventory . our inventory is comprised of raw materials , assemblies and finished products . we must periodically make judgments and estimates regarding the future utility and carrying value of our inventory . the carrying value of our inventory is periodically reviewed and impairments , if any , are recognized when the expected future benefit from our inventory is less than carrying value .
| while we plan for increased revenues in 2021 , there can be no assurance , especially given the uncertainties of the covid-19 pandemic , that we can achieve revenue growth . at december 31 , 2020 , we had backlog of $ 120,260 expected to be delivered in the next twelve months . distributor and customer orders for future deliveries are generally subject to modification , rescheduling or in some instance 's cancellation in the normal course of business . gross profit our cost of revenue for fiscal 2020 was $ 2,601,323 resulting in a gross margin of 34 % . we curtailed production for ten weeks during the second quarter of fiscal 2020 due to the covid-19 restrictions in arizona and this down time negatively impacted our gross margin . the gross margin for fiscal 2019 of 40 % was assessed on a small revenue base . due to our limited history of revenue and startup costs incurred to establish volume manufacturing , historical margins may not be indicative of future margins . in addition , our margins vary based on the sales channels through which our products are sold and product mix . due to timing of international orders our mix of cartridges was higher during fiscal 2020 than fiscal 2019. currently , our cartridges have lower margins than bolawrap devices , however , late in 2020 we implemented initiatives to improve gross margins attributable to our cartridges . we continue to implement product updates and revisions , including raw material and component changes that may impact product costs . with such product updates and revisions , we have limited warranty cost experience and estimated future warranty costs can impact our gross margins . -34- in september 2019 we relocated manufacturing operations and commenced production at our new facility in tempe , arizona . while this significantly increases our capacity , we continue to implement production and process changes targeted to improve efficiency . selling , general and administrative expense selling , general and administrative expense increased by $ 4,977,179 during fiscal 2020 ,
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the $ 14.5 million decrease in loans classified as substandard was driven by $ 9.8 million in principal payments received , $ 1.3 million in migration to oreo , $ 9.2 million in loans upgraded from substandard , and $ 2.4 million in charge-offs , offset by $ 8.1 million in loans moved to substandard during 2016 . ● foreclosed properties were $ 6.8 million at december 31 , 2016 , compared with $ 19.2 million at december 31 , 2015. during the year ended december 31 , 2016 , the company acquired $ 1.3 million and sold $ 12.7 million of oreo . we incurred oreo losses totaling $ 1.2 million during the year ended december 31 , 2016 , reflecting fair value write-downs for reductions in listing prices for certain properties , updated appraisals , and certain properties liquidated through auctions , and $ 222,000 in net gain on sales of oreo . ● our non-performing assets decreased to $ 16.0 million or 1.70 % of total assets at december 31 , 2016 , compared with $ 33.3 million or 3.51 % of total assets at december 31 , 2015. in addition , accruing troubled debt restructurings declined to $ 5.4 million at december 31 , 2016 from $ 17.4 million at december 31 , 2015 . ● non-interest income decreased $ 2.9 million in 2016 to $ 4.8 million compared with $ 7.7 million for the year ended december 31 , 2015. the difference was driven primarily by gains on the sales of securities totaling $ 216,000 in 2016 , compared to $ 1.8 million for 2015 , as well as a decrease in oreo rental income of $ 890,000 between the two periods as a result of income producing properties being sold . the results for 2015 were also positively impacted by an $ 883,000 gain on extinguishment of junior subordinated debt . ● non-interest expense decreased $ 5.4 million in 2016 to $ 39.6 million compared with $ 45.0 million for 2015 , due to a decrease in oreo expenses of $ 10.8 million , partially offset by an increase in litigation and loan collection expense of $ 7.7 million . the latter increased primarily due to the accrual of the punitive damages and statutory interest totaling $ 8.0 million following the adverse kentucky court of appeals decision in 2016 . ● deposits decreased $ 28.1 million or 3.2 % to $ 849.9 million at december 31 , 2016 compared with $ 878.0 million at december 31 , 2015. certificate of deposit balances decreased $ 55.2 million during 2016 to $ 444.6 million at december 31 , 2016 , from $ 499.8 million at december 31 , 2015. demand deposits increased $ 4.4 million or 3.6 % during 2016 to $ 124.4 million compared with $ 120.0 million at december 31 , 2015 . ● on april 15 , 2016 , we completed a private placement of common shares and non-voting common shares to accredited investors for a total purchase price of $ 5.0 million . the investors in the private placement directed a portion of purchase price to pay all deferred interest payments on our junior subordinated debentures , bringing our interest payments current through the second quarter of 2016. the remaining proceeds from the private placement totaled approximately $ 2.2 million and were retained for general corporate purposes and to support the bank . ● on june 29 , 2016 , we notified the trustees of our election to again defer our interest payments effective with the third quarter 2016 payment . we have the ability to defer distributions on our trust preferred securities for 20 consecutive quarters or through the second quarter of 2021 . ● the consent order requires the bank to obtain the written consent of both the fdic and the kdfi before declaring or paying any future dividends to the company , which are the company 's principal source of revenue . since the bank is unlikely to be able to pay dividends to the company until the consent order is lifted or modified , the company 's sources of cash are limited to issuing new debt or capital securities . the company 's liquid assets were $ 2.0 million as of december 31 , 2016. ongoing operating expenses of the company are forecast at approximately $ 800,000 for the next twelve months . ● on december 16 , 2016 , we completed a 1-for-5 reverse stock split of our issued and outstanding common and non-voting common shares . the reverse stock split was intended to increase the trading price per share of the common shares , with the objective to make the common shares a more attractive and cost effective investment and enhance liquidity for our shareholders . as a result of the reverse stock split , all share and per share data has been adjusted in this report . preferred shares were not affected by the 1-for-5 reverse stock split . these items are discussed in further detail throughout this item 7 . 23 application of critical accounting policies our accounting and reporting policies comply with gaap and conform to general practices within the banking industry . we believe that the following significant accounting policies may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or underlying circumstances were to change . allowance for loan losses – the bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred credit losses existing in the loan portfolio . the board of directors evaluates the adequacy of the allowance for loan losses on a quarterly basis . we evaluate the adequacy of the allowance using , among other things , historical loan loss experience , known and inherent risks in the portfolio , adverse situations that may affect the borrower 's ability to repay , estimated value of the underlying collateral and current economic conditions and trends . story_separator_special_tag the allowance may be allocated for specific loans or loan categories , but the entire allowance is available for any loan that , in management 's judgment , should be charged off . the allowance consists of specific and general components . the specific component relates to loans that are individually evaluated and measured for impairment . the general component is based on historical loss experience adjusted for qualitative environmental factors . we develop allowance estimates based on actual loss experience adjusted for current economic conditions and trends . allowance estimates are a prudent measurement of the risk in the loan portfolio that we apply to individual loans based on loan type . if the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination , we may be required to materially increase our allowance for loan losses and provision for loan losses , which could adversely affect our results . other real estate owned – oreo is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure . it is classified as real estate owned until such time as it is sold . when property is acquired as a result of foreclosure or by deed in lieu of foreclosure , it is recorded at its fair market value less estimated cost to sell . any write-down of the property at the time of acquisition is charged to the allowance for loan losses . costs incurred in order to perfect the lien prior to foreclosure may be capitalized if the fair value less the cost to sell exceeds the balance of the loan at the time of transfer to oreo . examples of eligible costs to be capitalized are payments of delinquent property taxes to clear tax liens or payments to contractors and subcontractors to clear mechanics ' liens . fair value of oreo is determined on an individual property basis . to determine the fair value of oreo for smaller dollar single family homes , we consult with internal real estate sales staff and external realtors , investors , and appraisers . if the internally evaluated market price is below our underlying investment in the property , appropriate write-downs are taken . for larger dollar residential and commercial real estate properties , we obtain a new appraisal of the subject property or have staff from our special assets group or in our centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to other real estate owned . we typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent . subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraised amount . stock-based compensation – compensation cost is recognized for restricted stock awards issued to employees , based on the fair value of these awards at the date of grant . the market price of the company 's common shares at the date of grant is used for restricted stock awards . compensation cost is recognized over the required service period , generally defined as the vesting period . for awards with graded vesting , compensation cost is recognized on a straight-line basis over the requisite service period for the entire award . valuation of deferred tax asset – we evaluate deferred tax assets for impairment on a quarterly basis . we established a 100 % deferred tax valuation allowance in december 2011 based upon the analysis of our past performance and our expected future performance . when evaluating our deferred tax assets for realizability during 2016 and 2015 , we concluded that although trend improvements were noted , a full valuation allowance was still necessary at december 31 , 2016 and 2015 , due to the additional losses incurred during those years . a return to profitability would enable us to reduce the valuation allowance and thereby offset income tax expense that would otherwise be recognized . examinations of our income tax returns or changes in tax law may impact our deferred tax assets and liabilities as well as our provision for income taxes . contingencies – we are defendants in various legal proceedings . we record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable . assessing probability of loss and estimating probable losses requires analysis of multiple factors , including in some cases judgments about the potential actions of third party claimants and courts . recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain . 24 story_separator_special_tag million for the same period in 2014. net interest spread and margin were 3.18 % and 3.27 % , respectively , for 2015 , compared with 2.98 % and 3.09 % , respectively , for 2014. average nonaccrual loans were $ 29.0 million and $ 63.1 million in 2015 and 2014 , respectively . the decrease in net interest income was primarily the result of lower average earning assets coupled with lower rates on those assets . in addition , net interest income and net interest margin were adversely affected by $ 1.7 million and $ 3.3 million of interest lost on nonaccrual loans during 2015 and 2014 , respectively . our average interest-earning assets were $ 917.5 million for 2015 , compared with $ 979.2 million for 2014 , a 6.3 % decrease , primarily attributable to lower average loans , investment securities and interest bearing deposits with financial institutions . average loans were $ 635.9 million for 2015 , compared with $ 662.4 million for 2014 , a 4.0 % decrease . average investment securities were $ 194.6 million for 2015 , compared with $ 220.5 million for 2014 , an 11.7 % decrease .
| for loan losses expense for 2014. non-interest income improved $ 1.9 million during 2015 due to an increase in oreo rental income of $ 1.1 million and an $ 883,000 gain on extinguishment of junior subordinated debt . non-interest expense increased $ 5.5 million during 2015 due to increased oreo expense of $ 6.5 million , offset by a reduction in loan collection expense of $ 1.9 million . 25 a tax benefit was recognized in 2014 due to gains in other comprehensive income that are presented in current operations . the calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income , or oci , which is a component of stockholders ' equity on the balance sheet . however , an exception is provided in certain circumstances , such as when there is a full valuation allowance against net deferred tax assets , there is a loss from continuing operations and there is income in other components of the financial statements . in such a case , pre-tax income from other categories , such as changes in oci , must be considered in determining a tax benefit to be allocated to the loss from continuing operations . the tax benefit recorded in 2014 was entirely due to gains in other comprehensive income that are presented in current operations in accordance with applicable accounting standards . no tax benefit was recorded during the 2015. net loss attributable to common shareholders was $ 2.9 million for the year ended december 31 , 2015 , as compared to net income attributable to common shareholders of $ 19.4 million for 2014. this decrease was primarily attributable to the $ 36.1 million effect of the exchange of preferred shares for common shares recorded during 2014. net interest in come – our net interest income was $ 29.6 million
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sales in 2013 decreased 4 % to $ 737.4 million from $ 771.5 million in 2012. the decrease was primarily due to the timing of program ramps and product transitions as well as market uncertainty in the global economy , which led to lower demand from our existing customers . industrial control equipment . sales in 2013 increased 10 % to $ 712.4 million from $ 648.4 million in 2012 primarily as a result of new customers , new programs and the impact of the acquisitions of suntron and cts . telecommunication equipment . sales in 2013 decreased 9 % to $ 579.8 million from $ 637.9 million in 2012. the decrease was primarily due to lower demand from our customers and timing of program ramps and transitions somewhat offset by the impact of the cts acquisition . in addition , in 2012 , our telecommunication sector had a strong rebound as a result of the recovery from the thailand flooding . medical devices . sales in 2013 increased 15 % to $ 281.7 million from $ 244.1 million in 2012 primarily as a result of new programs and the impact of the suntron and cts acquisitions . testing and instrumentation products . sales in 2013 increased 17 % to $ 195.2 million from $ 166.2 million in 2012 as a result of improvement in the semiconductor industry and the impact of the suntron and cts acquisitions . during 2013 and 2012 , 51 % and 50 % , respectively , of our sales were from our international operations . we had a backlog of approximately $ 1.7 billion at december 31 , 2013 , as compared to the 2012 year-end backlog of $ 1.5 billion . gross profit gross profit increased 6 % to $ 186.5 million for 2013 from $ 176.7 million in 2012 due primarily to an increase in sales . our 2013 gross profit as a percentage of sales increased to 7.4 % from 7.2 % in 2012 primarily due to changes in the mix of programs and the impact of the acquisitions . 33 selling , general and administrative expenses selling , general and administrative expenses increased to $ 99.3 million in 2013 from $ 90.0 million in 2012. selling , general and administrative expenses , as a percentage of sales , were 4.0 % and 3.6 % , respectively , for 2013 and 2012. the increase in selling , general and administrative expenses is primarily associated with the suntron and cts acquisitions . restructuring charges we recognized $ 9.3 million in restructuring charges and integration and acquisition-related costs during 2013 primarily related to the closure of our brazil and singapore facilities and the acquisitions of suntron and cts . thailand flood-related items during 2013 , thailand flood related items resulted in a gain of $ 41.3 million including $ 41.2 million of insurance proceeds . asset impairment charge and other we recognized a non-cash asset impairment charge of $ 3.8 million related to our facility in tianjin , china in 2013. also in 2013 , we disposed of a non-manufacturing facility in thailand for $ 1.6 million resulting in a gain of $ 1.2 million . income tax expense income tax expense of $ 5.0 million represented an effective tax rate of 4.3 % for 2013 , compared with $ 18.8 million that represented an effective tax rate of 25.0 % for 2012. in 2013 , we recorded a discrete u.s. tax benefit of $ 17.5 million related to reduced valuation allowance on u.s. net operating losses and other deferred tax assets and a discrete tax benefit of approximately $ 0.8 million related to the american taxpayer relief act of 2012 ( atra ) consisting of research and experimentation credits and decreases in u.s. taxable income related to previously taxed foreign transactions . the atra retroactively restored the research and experimentation credit and other u.s. income tax benefits for 2012 and extends these provisions through the end of 2013. in 2012 , we recorded a $ 0.5 million tax expense related to changes in tax rates in foreign jurisdictions . excluding these tax items , the effective tax rate would have been 20.1 % in 2013 compared to 24.3 % in 2012. the decrease in the effective tax rate is primarily a result of higher taxable income in thailand as a result of the flood related items . see note 9 to the consolidated financial statements in item 8 of this report . net income we reported net income of $ 111.2 million , or $ 2.03 per diluted share for 2013 , compared with net income of $ 56.6 million , or $ 1.00 per diluted share for 2012. the net increase of $ 54.6 million in 2013 was due to the factors discussed above . 34 liquidity and capital resources we have historically financed our growth and operations through funds generated from operations and proceeds from the sale and maturity of our investments . cash and cash equivalents totaled $ 427.4 million at december 31 , 2014 and $ 345.6 million at december 31 , 2013 , of which $ 333.3 million at december 31 , 2014 and $ 307.3 million at december 31 , 2013 was held outside the u.s. in various foreign subsidiaries . substantially all of the amounts held outside of the u.s. are intended to be permanently reinvested in foreign operations . under current tax laws and regulations , if cash and cash equivalents held outside the u.s. were to be distributed to the u.s. in the form of dividends or otherwise , we would be subject to additional u.s. income taxes and foreign withholding taxes . cash provided by operating activities was $ 136.7 million in 2014 , which included $ 1.1 million of thailand flood insurance recoveries . the cash provided by operations during 2014 consisted primarily of $ 82.4 million of net income adjusted for $ 46.4 million of depreciation and amortization , and a $ 37.9 million decrease in accounts receivable , offset by a $ 36.6 million decrease in accounts payable . story_separator_special_tag the decrease in accounts receivable was primarily driven by the decline in fourth quarter sales from 2013 to 2014. the decrease in accounts payable in 2014 is a result of lower fourth quarter activity in 2014 compared to 2013. working capital was $ 1.0 billion at december 31 , 2014 and $ 0.9 billion at december 31 , 2013. we are continuing the practice of purchasing components only after customer orders or forecasts are received , which mitigates , but does not eliminate , the risk of loss on inventories . supplies of electronic components and other materials used in operations are subject to industry-wide shortages . in certain instances , suppliers may allocate available quantities to us . if shortages of these components and other material supplies used in operations occur , vendors may not ship the quantities we need for production and we may be forced to delay shipments , which would increase backorders and therefore impact cash flows . cash used in investing activities was $ 27.5 million in 2014 primarily due to the purchases of additional property , plant and equipment totaling $ 44.2 million offset by $ 10.3 million from the redemption of investments . purchases of additional property , plant and equipment were primarily of machinery and equipment in the americas . cash used in financing activities was $ 24.9 million in 2014. share repurchases totaled $ 43.8 million , and we received $ 18.9 million from the exercise of stock options . under the terms of a credit agreement ( the credit agreement ) , we have a $ 200.0 million five-year revolving credit facility to be used for general corporate purposes with a maturity date of july 30 , 2017. the credit agreement includes an accordion feature under which total commitments under the facility may be increased by an additional $ 100 million , subject to satisfaction of certain conditions and lender approval . as of december 31 , 2014 and 2013 , we had no borrowings outstanding under the credit agreement , $ 1.2 million and $ 0.8 million , respectively , in outstanding letters of credit and $ 198.8 million and $ 199.2 million , respectively , was available for future borrowings . see note 6 to the consolidated financial statements in item 8 of this report for more information regarding the terms of the credit agreement . our operations , and the operations of businesses we acquire , are subject to certain foreign , federal , state and local regulatory requirements relating to environmental , waste management , health and safety matters . we believe we operate in substantial compliance with all applicable requirements and we seek to ensure that newly acquired businesses comply or will comply substantially with applicable requirements . to date , the costs of compliance and workplace and environmental remediation have not been material to us . however , material costs and liabilities may arise from these requirements or from new , modified or more stringent requirements in the future . in addition , our past , current and future operations , and the operations of businesses we have or may acquire , may give rise to claims of exposure by employees or the public , or to other claims or liabilities relating to environmental , waste management or health and safety concerns . as of december 31 , 2014 , we had cash and cash equivalents totaling $ 427.4 million and $ 198.8 million available for 35 borrowings under the credit agreement . during the next twelve months , we believe our capital expenditures will be approximately $ 45 million to $ 55 million , principally for machinery and equipment to support our ongoing business around the globe . on both december 4 , 2014 and june 13 , 2012 , our board of directors approved the repurchase of up to $ 100 million of our outstanding common shares ( the 2014 repurchase program and the 2012 repurchase program , respectively ) . as of december 31 , 2014 , we have $ 100.0 million and $ 3.1 million , respectively , remaining under the 2014 and 2012 repurchase programs to repurchase additional shares . we are under no commitment or obligation to repurchase any particular amount of common shares . management believes that our existing cash balances and funds generated from operations will be sufficient to permit us to meet our liquidity requirements over the next twelve months . management further believes that our ongoing cash flows from operations and any borrowings we may incur under our credit facilities will enable us to meet operating cash requirements in future years . should we desire to consummate significant acquisition opportunities , our capital needs would increase and could possibly result in our need to increase available borrowings under our credit agreement or access public or private debt and equity markets . there can be no assurance , however , that we would be successful in raising additional debt or equity on terms that we would consider acceptable . critical accounting policies and estimates management 's discussion and analysis of 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 united states of america . our significant accounting policies are summarized in note 1 to the consolidated financial statements in item 8 of this report . the preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets , liabilities , revenues and expenses , and related disclosure of contingent assets and liabilities . on an ongoing basis , we evaluate our estimates , including those related to accounts receivable , inventories , income taxes , long-lived assets , stock-based compensation and contingencies and litigation .
| in 2013 , sales to international business machines corporation , the only customer to account for more than 10 % of our net sales , represented 17 % of our sales . sales to this customer decreased to $ 312.6 million in 2014 compared to $ 430.2 million in 2013 primarily due to the timing of new program ramps and product transitions , as well as market uncertainty in the global economy , which reduced demand . our international operations are subject to the risks of doing business abroad . see item 1a for factors pertaining to our international sales and fluctuations in the exchange rates of foreign currency and for further discussion of potential adverse effects in operating results associated with the risks of doing business abroad . during 2014 and 2013 , 53 % and 51 % , respectively , of our sales were from our international operations . we had a backlog of approximately $ 1.6 billion at december 31 , 2014 , as compared to the 2013 year-end backlog of $ 1.7 billion . backlog consists of purchase orders received , including , in some instances , forecast requirements released for production under customer contracts . although we expect to fill substantially all of our backlog at december 31 , 2014 during 2015 , we do not have long-term agreements with all of our customers and customer orders can be canceled , changed or delayed by customers . the timely replacement of canceled , changed or delayed orders with orders from new customers can not be assured , nor can there be any assurance that any of our current customers will continue to utilize our services . because of these factors , backlog is not a meaningful indicator of future financial results . gross profit gross profit increased 18 % to $ 219.9 million for 2014 from $ 186.5 million in 2013 due primarily to an increase in sales . our 2014 gross profit as a percentage of sales increased to 7.9 % from 7.4 %
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accordingly , our future financial performance may be affected by our ability to drive cost of revenue savings as we scale production over time . seasonality . historically , we have experienced the highest levels of revenue in the first fiscal quarter of the year , coinciding with the holiday shopping season . for example , revenue in the first quarter of fiscal 2019 accounted for 39.4 % of our revenue for fiscal 2019 . our promotional discounting activity is higher in the first fiscal quarter as well , which negatively impacts gross margin during this period . for example , gross margin in the first quarter of fiscal 2019 was 39.3 % , compared to gross margin 30 of 41.8 % for all of fiscal 2019 . however , our higher sales volume in the holiday shopping season has historically resulted in a higher operating margin in the first fiscal quarter due to positive operating leverage . ability to sell additional products to existing customers . as our customers add sonos to their homes and listen to more audio content , they typically increase the number of our products in their homes . in fiscal 2019 , follow-on purchases represented approximately 37 % of new product registrations . as we execute on our product roadmap to address evolving consumer preferences , we believe we can expand the number of products in our customers ' homes . our ability to sell additional products to existing customers is a key part of our business model , as follow-on purchases indicate high customer engagement and satisfaction , decrease the likelihood of competitive substitution and result in higher customer lifetime value . we will continue to innovate and invest in product development in order to enhance customer experience and drive sales of additional products to existing customers . expansion of partner ecosystem . expanding and maintaining strong relationships with our partners will remain important to our success . we believe our partner ecosystem improves our customer experience , attracting more customers to sonos , which in turn attracts more partners to the platform further enhancing our customer experience . we believe partners choose to be part of the sonos platform because it provides access to a large , engaged customer base on a global scale . we look to partner with a wide variety of streaming music services , voice assistants , connected home integrators , content creators and podcast providers . to date , our agreements with these partners have all been on a royalty-free basis . as competition increases , we believe our ability to give users the freedom to choose across the broadest set of streaming services and voice control partners will be a key differentiating factor . our product roadmap is largely focused on delivering products with voice control . our ability to develop , manufacture and sell voice-enabled speakers that deliver differentiated consumer experiences will be a critical driver of our future performance , particularly as we compete in a larger market with an expanding number of competitors . we currently compete with , and will continue to compete with , companies that have greater resources than we do , many of which have already brought voice-enabled speakers to market . we are also partnering with certain of these companies in the development of our own voice-enabled products . our competitiveness in the voice-enabled speaker market will depend on successful investment in research and development , market acceptance of our products and our ability to maintain and benefit from these technology partnerships . channel strategy . we are focused on reaching and converting prospective customers through third-party retail stores , e-commerce retailers , custom installers of home audio systems and our website sonos.com . we are investing in our e-commerce capabilities and in-app experience to drive direct sales . sales through sonos.com represented 12.2 % of our revenue in fiscal 2019 and 11.5 % of our revenue in fiscal 2018 and we believe the growth of our own e-commerce channel will be important to supporting our overall growth and profitability as consumers continue the shift from physical to online sales channels . our physical retail distribution relies on third-party retailers , as our company-owned stores do not materially contribute to our revenue . while we seek to increase sales through our direct-to-consumer sales channel , we expect that our future sales will continue to be substantially dependent on our third-party retailers . we will continue to seek retail partners that can deliver differentiated in-store experiences to support customer demand for product demonstrations . international expansion . our products are sold in over 50 countries and in fiscal 2019 , 50.0 % of our revenue was generated outside the united states . our international growth will depend on our ability to generate sales from the global population of consumers , develop international distribution channels and diversify our partner ecosystem to appeal to a more global audience . we are committed to strengthening our brand in global markets and our future success will depend in part on our growth in international markets . investing in product and software development . our investments in product and software development consist primarily of expenses in personnel who support our research and development efforts and capital expenditures for new tooling and production line equipment to manufacture and test our products . we believe that our financial performance will significantly depend on the effectiveness of our investments to design and introduce innovative new products and services and enhance existing products and software . if we fail to innovate and expand our product and software offerings or fail to maintain high standards of quality in our products , our brand , market position and revenue will be adversely affected . further , if our development efforts are not successful , we will not recover the investments made . investing in sales and marketing . we intend to invest resources in our marketing and brand development efforts . story_separator_special_tag our marketing investments are focused on increasing brand awareness through advertising , public relations and brand promotion activities . while we maintain a base level of investment throughout the year , significant increases in spending are highly correlated with the holiday shopping season , new product launches and software introductions . we also invest in capital expenditures on 31 product displays to support our retail channel partners . sales and marketing investments are typically incurred in advance of any revenue benefits from these activities . components of results of operations revenue we generate substantially all of our revenue from the sale of wireless speakers , home theater speakers and components . we also generate revenue from other sources , such as module revenue , the sale of sonos and third–party accessories like speaker stands and wall mounts , as well as licensing revenue . module revenue is comprised of sales of hardware and embedded software that is integrated into final products that are manufactured and sold by our partners . our revenue is recognized net of allowances for returns , discounts , sales incentives and any taxes collected from customers . we also defer a portion of our revenue that is allocated to unspecified software upgrades and cloud-based services . our revenue is subject to fluctuation based on the foreign currency in which our products are sold , principally for sales denominated in the euro and the british pound . for a description of our revenue recognition policies , see the section titled `` —critical accounting policies and estimates . '' cost of revenue cost of revenue consists of product costs , including costs of our contract manufacturers for production , component costs , shipping and handling costs , tariffs , duty costs , warranty replacement costs , packaging , fulfillment costs , manufacturing and tooling equipment depreciation , warehousing costs , hosting costs and excess and obsolete inventory write-downs . in addition , we allocate certain costs related to management and facilities , personnel-related expenses and other expenses associated with supply chain logistics . personnel-related expenses primarily consist of salaries , bonuses , benefits and stock-based compensation expense . gross profit and gross margin our gross margin may in the future fluctuate from period to period based on a number of factors , including the mix of products we sell , the channel through which we sell our products , the foreign currency in which our products are sold and tariffs and duty costs implemented by governmental authorities . we have historically seen that the gross margin for our newly released products are lowest at launch and have tended to increase over time as we realize cost efficiencies . in addition , our ability to reduce the cost of our products is critical to increasing our gross margin over the long term . operating expenses operating expenses consist of research and development , sales and marketing and general and administrative expenses . research and development . research and development expenses consist primarily of personnel-related expenses , consulting and contractor expenses , tooling , test equipment and prototype materials and overhead costs . to date , software development costs have been expensed as incurred , because the period between achieving technological feasibility and the release of the software has been short and development costs qualifying for capitalization have been insignificant . we expect our research and development expenses to increase in absolute dollars as we continue to make significant investments in developing new products and enhancing existing products . sales and marketing . sales and marketing expenses consist primarily of advertising and marketing promotions of our products and personnel-related expenses , as well as trade show and event costs , sponsorship costs , consulting and contractor expenses , travel , product display expenses and related depreciation , customer care costs and overhead costs . general and administrative . general and administrative expenses consist of personnel-related expenses for our finance , legal , human resources and administrative personnel , as well as the costs of professional services , any overhead , information technology , litigation expenses , patent costs and other administrative expenses . we expect our general and administrative expenses to increase in absolute dollars due to the growth of our business and related infrastructure as well as legal , accounting , insurance , investor relations and other costs associated with operating as a public company . other income ( expense ) , net interest income . interest income consists primarily of interest income earned on our cash and cash equivalents balances . interest expense . interest expense consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs . 32 other expense , net . other expense , net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in currencies other than the u.s. dollar . we expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates . provision for income taxes we are subject to income taxes in the united states and foreign jurisdictions in which we operate . our provision for income taxes includes income tax in our foreign operations . foreign jurisdictions have statutory tax rates different from those in the united states . accordingly , our effective tax rates will vary depending on the relative proportion of foreign to u.s. income , the utilization of foreign tax credits and changes in tax laws . deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes . a valuation allowance is provided when it is more likely than not that the deferred tax assets will not be realized .
| the increase in the americas revenue was driven primarily by growth in sales of home theater speakers and components and partially offset by a decline in wireless speaker sales . revenue from emea increased $ 6.3 million , or 1.3 % , from $ 478.5 million for fiscal 2018 to $ 484.8 million for fiscal 2019 . emea revenue increased due to growth in sales of home theater speakers and components and offset by a decline in wireless speaker sales . revenue from apac increased $ 42.8 million , or 77.7 % , from $ 55.0 million for fiscal 2018 to $ 97.8 million for fiscal 2019 . apac growth was driven primarily by module sales associated with the launch of the ikea relationship . in constant u.s. dollars , total revenue increased by 13.4 % for fiscal 2019 compared to fiscal 2018 , which excludes the impact of foreign currency fluctuations against the u.s. dollar . we calculate constant currency growth percentages by translating our prior-period financial results using the current period average currency exchange rates and comparing these amounts to our current period reported results . 34 cost of revenue and gross profit replace_table_token_10_th cost of revenue increased $ 85.8 million , or 13.2 % , from $ 647.7 million for fiscal 2018 to $ 733.5 million for fiscal 2019 . the increase was primarily due to the increase in revenue , which increased 10.9 % . gross margin decreased to 41.8 % for fiscal 2019 from 43.0 % for fiscal 2018 . the decrease was primarily due to product mix , unfavorable foreign currency impact and the launching of a new distribution channel , partially offset by product and material cost reductions . research and development replace_table_token_11_th research and development expenses increased $ 29.1 million , or 20.5 % , from $ 142.1 million for fiscal 2018 to $ 171.2 million for fiscal 2019 . the increase was primarily due to higher personnel-related expenses of
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our lead product candidate , gencaro ( bucindolol hydrochloride ) , is an investigational , pharmacologically unique beta-blocker and mild vasodilator that we are developing for the potential treatment of patients with chronic heart failure with reduced left ventricular ejection fraction , or hfref , who also have atrial fibrillation , or af , or at risk of developing af . hfref constitutes an estimated 50-60 % of the total heart failure , or hf , population , with the remainder comprised of hf with preserved ejection fraction , or hfpef . we believe that gencaro 's efficacy is enhanced in a specific genotype that is present in approximately fifty percent of the general population in the united states , and can be identified by a genetic test . we believe that with this genetic test , we may be able to predict individual patient response to gencaro , potentially improving the efficacy of treatment for af in hfref patients with this particular genotype . we believe that gencaro , if approved , could potentially be a safer and more effective therapy for treating or preventing af in patients with hfref and could be the first genetically-targeted af treatment . we also believe that gencaro may have market exclusivity based on patents and new chemical entity status , if approved in the united states , europe or other markets . in february 2018 , we reported the results of our phase 2b clinical superiority trial , known as genetic-af , in which we evaluated gencaro for the treatment and prevention of af in patients with hfref . the genetic-af trial only enrolled patients with the beta‑1 389 arginine homozygous genotype . in our trial , hfref is defined as a left ventricular ejection fraction , or lvef , of less than 50 % . genetic-af compared gencaro to toprol-xl ( metoprolol succinate ) , a drug approved for treating hfref that is also prescribed , but not approved , for treating af in patients with hfref . overall , gencaro demonstrated a similar treatment benefit compared to the active comparator , metoprolol succinate ( toprol-xl ) . in u.s. patients ( 127 of 267 total patients ) , a trend for potential superior benefit in favor of gencaro ( approximately 30 % risk reduction over toprol-xl ) , was observed for the primary endpoint of time to recurrence of af . additionally , in u.s. patients , gencaro demonstrated a trend for potential superior benefit in favor of gencaro ( approximately 51 % risk reduction over toprol-xl ) in a subset of patients who underwent continuous heart rhythm monitoring with medtronic implanted devices . safety data indicated that gencaro was generally safe and well-tolerated in the af/hf population investigated with a safety profile similar to toprol-xl . genetic-af enrolled 267 patients from the united states , canada and europe . the primary analysis was conducted to evaluate the evidence of safety and superior efficacy of gencaro versus an active comparator , toprol-xl . the primary endpoint of the trial was time to recurrent af , atrial flutter , or afl , or all-cause mortality , or acm . the trial was not powered to conventional significance for this endpoint and utilized bayesian statistical modeling of predictive probability of success , or ppos , of the primary endpoint to estimate outcome if the trial had enrolled 620 patients with 330 primary events . overall , gencaro demonstrated a similar treatment benefit compared to the active comparator , toprol-xl ( 143 total events , hazard ratio of 1.01 [ 95 % confidence interval : 0.71 , 1.42 ] ) , which was associated with a ppos of 14 % . in the u.s. patient cohort of 127 patients ( approximately 50 % of all patients and events ) , a trend for potential superior benefit in favor of gencaro over toprol-xl was observed ( 73 events , hazard ratio 0.70 , [ 95 % confidence interval : 0.41 , 1.19 ] ) , with a ppos of 61 % , which was greater than the prespecified criteria set by us to proceed to phase 3 development . we believe the difference in treatment effects between the overall and u.s. patient cohorts was primarily due to results in two non-u.s. countries exhibiting hazard ratios > 1.0 . the differences between patients enrolled at these sites versus the united states and other country cohorts are being investigated . a subgroup of patients underwent continuous ( 24/7 ) heart rhythm monitoring via medtronic implanted loop recorders or other medtronic implanted therapeutic devices ( e.g. , icds , crts ) to evaluate daily af burden . af burden was defined as the amount of time per day a patient experienced af , as measured by an implanted device . a prespecified time-to-first event analysis was conducted using a total af burden of at least 6 hours per day to define an event of af recurrence . in this analysis , hazard ratios of 0.75 ( 0.43 , 1.32 ) and 0.49 ( 0.24 , 1.04 ) were observed in the overall ( n=69 ) and u.s. patient ( n=42 ) cohorts , respectively . gencaro was generally safe and well-tolerated , with 84 % of patients attaining their target dose compared to 72 % of patients receiving toprol-xl . the most frequently reported adverse events were similar in both groups and consistent with the known safety profile of the beta-blocker class of drugs . adverse events assessed as related to study drug by the investigator occurred in 23.8 % of patients in the gencaro group and in 30.1 % of patients in the toprol-xl group . of note , adverse events of bradycardia were less frequently 40 reported in the gencaro group ( 3.7 % ) compared to patients receiving toprol-xl ( 12.0 % ) . story_separator_special_tag during the 24-week efficacy follow-up period there were three deaths ( acm ) in the toprol-xl group and none in the gencaro group . three patients died in the long-term treatment extension period after receiving gencaro for more than a year . our current development of gencaro is , in part , based on a prospectively designed dna substudy of adrenergic receptor polymorphisms in the best trial , a previous phase 3 study of 2,708 hf patients . based on data from the best trial , gencaro showed potential evidence of enhanced efficacy in treating af and in reducing mortality and hospitalizations in hf patients with the beta‑1 389 arginine homozygous genotype . in 2015 , the u.s. food and drug administration , or fda , designated the investigation of gencaro for the prevention of af in a genetically targeted heart failure population ( hf patients with reduced lvef ) as a fast track development program . af , the most common sustained cardiac arrhythmia , is a potentially serious disorder in which the normally regular and coordinated contraction pattern of the heart 's two small upper chambers , or the atria , becomes irregular , rapid and uncoordinated . af commonly occurs together with hfref , with af being both a cause and a result of hfref . by increasing heart rate and producing irregular cycle lengths , af may contribute to the disease processes that leads to the progression of hfref and worsening clinical outcomes . af is considered an epidemic cardiovascular disease and a major public health burden . the estimated number of individuals with af globally in 2015 was 33.3 million . according to the 2017 american heart association report on cardiovascular disease , approximately 5.2 million people in the united states had atrial fibrillation in 2015. hospitalization rates for af increased by 23 % among u.s. adults from 2000 to 2010 and hospitalizations account for the majority of the economic cost burden associated with af . in a global registry of af patients , the rates of heart failure ( of all types ) ranged from 33 % in patients with paroxysmal ( episodes lasting 7 days or less ) to 56 % in patients with permanent af . we believe there is a significant need for drug therapies that are safe and effective for hfref patients with af or at risk of developing it , as the existing drug therapies for the treatment or prevention af have certain safety disadvantages in hfref patients , such as toxic or cardiovascular adverse effects . most of the approved drugs for af are contra indicated or have warnings in their prescribing information for such patients . consequently , in the treatment and prevention of af in hfref patients , we believe there is an unmet medical need for new treatments that have fewer side effects and are more effective than currently available therapies . we believe that data from the best trial indicate that gencaro may have a genetically regulated effect in reducing or preventing af in hfref patients . a retrospective analysis of data from the best trial shows that all patients in the trial treated with gencaro had a 41 % reduction in the risk of new onset af ( time-to-event ) compared to placebo ( p = 0.0004 ) . in a substudy in the trial , which considered only patients with the genotype believed to enhance gencaro 's efficacy ( known as the beta-1 389 arginine homozygous genotype ) , patients treated with gencaro experienced a 74 % ( p = 0.0003 ) reduction in risk of af , based on the same analysis . in addition , the best study , the beta-1 389 arginine homozygous genotype gencaro demonstrated enhanced efficacy in reducing mortality , hospitalizations , and ventricular tachycardia /ventricular fibrillation , or vt/vf . furthermore , patients with a beta‑1 389 arginine homozygous genotype who entered the trial in af had statistically significant reductions in major cardiovascular or hf mortality/hospitalization composite endpoints , which we believe is the first and thus far only demonstration of effectiveness of a beta-blocker in reducing major hf events in hfref patients with permanent af . the beta-1 389 arginine homozygous genotype was present in about 50 % of the patients screened and all enrolled patients in the genetic-af trial and 47 % of the patients in the best pharmacogenetic substudy , and we estimate it is present in about 50 % of the north american and european general populations . genetic-af was completed as a phase 2b , multi-center , randomized , double-blind , clinical superiority trial comparing the safety and efficacy of gencaro against an active comparator , the beta-blocker toprol-xl ( metoprolol succinate ) , that enrolled 267 patients . eligible patients had hfref , a history of paroxysmal af ( episodes lasting 7 days or less ) or persistent af ( episodes lasting more than 7 days and less than 1 year ) in the past 6 months , and the beta-1 389 arginine homozygous genotype that we believe responds most favorably to gencaro . we believe that gencaro may be potentially unique in the beta-blocker class of drugs due to its apparent pharmacologic interaction with the beta-1 adrenergic receptor polymorphism . we received guidance from the fda regarding the genetic-af clinical trial prior to initiation of the trial . the trial enrolled patients in the united states , canada and europe and completed enrollment in august 2017. in august 2017 , the genetic-af data and safety monitoring board , or dsmb , conducted a pre-specified interim analysis of unblinded efficacy and recommended completing the phase 2b trial with no changes to the trial design .
| the increase in expenses during 2017 was comprised primarily of costs incurred to acquire aeolus ' minority membership interest in cpec and higher consulting costs and professional fees , partially offset by decreased non-cash , stock-based compensation expense in 2017 , as compared to the corresponding period in 2016. g & a expenses in 2018 are expected to be consistent with those in 2017 as we maintain administrative activities to support our ongoing operations . interest and other income interest and other income was $ 167,000 for the year ended december 31 , 2017 as compared to $ 169,000 for 2016 , resulting in an decrease of $ 2,000. this decrease was due lower marketable securities balances as we funded our operations . we expect interest income to be lower in 2018 than in 2017 , as we continue to use our cash , cash equivalents and marketable securities to fund our operations . interest expense interest expense was $ 6,000 for the year ended december 31 , 2017. we had no interest expense during the year ended december 31 , 2016. the amounts were nominal to our overall operations . based on our current capital structure , interest expense is expected to be negligible in 2018 . 42 income tax benefit income tax benefit was $ 61,000 for the year ended december 31 , 2017 , related to the protecting americans from tax hikes act of 2015 , or path act , which allows qualified small businesses to monetize up to $ 250,000 of research and experimentation tax credits through payroll tax refunds . we had no income tax benefit during the year ended december 31 , 2016 , as the path act refunds were not effective until 2017. liquidity and capital resources cash , cash equivalents and marketable securities replace_table_token_4_th as of december 31 , 2017 , we had total cash , cash equivalents and marketable securities of approximately $ 11.8 million , as compared to $ 23.5 million as of december 31 , 2016. the net decrease of $ 11.8 million during the year primarily reflects the
| 11,077 |
such agencies may require the bank to recognize additions to the allowance based on judgments different from those of management . in the opinion of management , and in accordance with the credit loss allowance methodology , the present allowance is considered adequate to absorb estimable and probable credit losses . additions and reductions to the allowance are reflected in current operations . charge-offs to the allowance are made when specific assets are considered uncollectible or are transferred to oreo and the fair value of the property is less than the loan 's recorded investment . recoveries are credited to the allowance . although management uses the best information available to make these estimates , future adjustments to the allowance may be necessary due to economic , operating , regulatory and other conditions that may be beyond the company 's control . for further information on the alll , see notes 1 and 5 to the consolidated financial statements in item 8 hereof . business combinations we account for acquisitions under the acquisition method . all identifiable assets acquired and liabilities assumed are recorded at fair value . any excess of the purchase price over the fair value of net assets and other identifiable intangible assets acquired is recorded as goodwill . identifiable intangible assets include core deposit intangibles , which have a definite life . core deposit intangibles ( `` cdi '' ) are subsequently amortized over the 36 index estimated life up to 10 years and are tested for impairment annually . goodwill generated from business combinations is deemed to have an indefinite life and is not subject to amortization , and instead is tested for impairment at least annually . as part of the estimation of fair value , we review each loan or loan pool acquired to determine whether there is evidence of deterioration in credit quality since inception and if it is probable that the company will be unable to collect all amounts due under the contractual loan agreements . we consider expected prepayments and estimated cash flows including principal and interest payments at the date of acquisition . if a loan is determined to be a purchased credit impaired ( `` pci '' ) loan , the amount in excess of the estimated future cash flows is not accreted into earnings . the amount in excess of the estimated future cash flows over the book value of the loan is accreted into interest income over the remaining life of the loan ( accretable yield ) . the company records these loans on the acquisition date at their net realizable value . thus , an allowance for estimated future losses is not established on the acquisition date . losses or a reduction in cash flow which arise subsequent to the date of acquisition are reflected as a charge through the provision for loan losses . an increase in the expected cash flows adjusts the level of the accretable yield recognized on a prospective basis over the remaining life of the loan . income taxes deferred tax assets and liabilities are recorded for the expected future tax consequences of events that have been recognized in the company 's financial statements or tax returns using the asset liability method . in estimating future tax consequences , all expected future events other than enactments of changes in the tax laws or rates are considered . the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date . deferred tax assets are to be recognized for temporary differences that will result in deductible amounts in future years and for tax carryforwards if , in the opinion of management , it is more likely than not that the deferred tax assets will be realized . see also note 14 of the consolidated financial statements in item 8 hereof this form 10-k. fair value of financial instruments we use fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures . investment securities available-for-sale are financial instruments recorded at fair value on a recurring basis . additionally , from time to time , we may be required to record at fair value other financial assets on a non-recurring basis , such as impaired loans and oreo . these non-recurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets . further , we include in note 18 to the consolidated financial statements information about the extent to which fair value is used to measure assets and liabilities , the valuation methodologies used and its impact to earnings . additionally , for financial instruments not recorded at fair value we disclose the estimate of their fair value . story_separator_special_tag style= '' vertical-align : bottom ; padding-left:2px ; padding-top:2px ; padding-bottom:2px ; padding-right:2px ; '' > interest average yield/cost ( dollars in thousands ) assets interest-earning assets : cash and cash equivalents $ 180,185 $ 762 0.42 % $ 141,454 $ 310 0.22 % $ 81,290 $ 141 0.17 % investment securities 334,283 7,908 2.37 299,767 6,949 2.32 244,854 5,447 2.22 loans receivable , net ( 1 ) 2,900,379 157,935 5.45 2,061,788 111,097 5.39 1,424,727 75,751 5.32 total interest-earning assets 3,414,847 166,605 4.88 % 2,503,009 118,356 4.73 % 1,750,871 81,339 4.65 % noninterest-earning assets 184,354 118,536 76,680 total assets $ 3,599,201 $ 2,621,545 $ 1,827,551 liabilities and equity interest-bearing deposits : interest checking $ 176,508 $ 200 0.11 % $ 141,962 $ 165 0.12 % $ 134,056 $ 161 0.12 % money market 1,003,861 3,641 0.36 696,747 2,426 0.35 469,123 1,443 0.31 savings 98,224 151 0.15 88,247 141 0.16 75,068 110 0.15 retail certificates of deposit 416,232 3,084 0.74 390,797 3,209 0.82 353,532 3,171 0.90 wholesale/brokered certificates of deposit 180,209 1,315 0.73 102,950 689 0.67 23,801 152 0.64 total interest-bearing deposits 1,875,034 8,391 0.45 % 1,420,703 6,630 0.47 % 1,055,580 5,037 0.48 % fhlb advances and other borrowings 107,546 1,295 1.20 188,032 1,490 0.79 117,694 1,124 0.96 subordinated debentures 69,347 3,844 5.54 69,199 3,937 5.69 30,474 1,543 5.06 story_separator_special_tag total borrowings 176,893 5,139 2.91 % 257,231 5,427 2.11 % 148,168 2,667 1.80 % total interest-bearing liabilities 2,051,927 13,530 0.66 % 1,677,934 12,057 0.72 % 1,203,748 7,704 0.64 % noninterest-bearing deposits 1,086,791 646,931 415,983 other liabilities 32,530 22,678 18,161 total liabilities 3,171,248 2,347,543 1,637,892 stockholders ' equity 427,953 274,002 189,659 total liabilities and equity $ 3,599,201 $ 2,621,545 $ 1,827,551 net interest income $ 153,075 $ 106,299 $ 73,635 net interest rate spread 4.22 % 4.01 % 4.01 % net interest margin 4.48 % 4.25 % 4.21 % ratio of interest-earning assets to interest-bearing liabilities 166.42 % 149.17 % 145.45 % ( 1 ) average balance includes loans held for sale and nonperforming loans and is net of deferred loan origination fees , unamortized discounts and premiums . 39 index changes in our net interest income are a function of changes in both volumes and rates of interest-earning assets and interest-bearing liabilities . the following table presents the impact the volume and rate changes have had on our net interest income for the years indicated . for each category of interest-earning assets and interest-bearing liabilities , we have provided information on changes to our net interest income with respect to : changes in volume ( changes in volume multiplied by the prior period rate ) ; changes in interest rates ( changes in interest rates multiplied by the prior period volume ) ; and the change or the combined impact of volume and rate changes allocated proportionately to changes in volume and changes in interest rates . replace_table_token_4_th provision for loan losses . for 2016 , we recorded an $ 8.8 million provision for loan losses compared to the $ 6.4 million recorded in 2015 . the $ 2.4 million increase in the provision for loan losses was primarily attributable to the growth in our loan portfolio during the year and , to a lesser extent , the change in our loan composition and net charge-offs . net loan charge-offs for 2016 amounted to $ 4.8 million , an increase from $ 1.3 million in 2015 . for 2015 , we recorded a $ 6.4 million provision for loan losses compared to the $ 4.7 million recorded in 2014 . the $ 1.7 million increase in the provision for loan losses was primarily attributable to the growth in our loan portfolio during the year and , to a lesser extent , the change in our loan composition . net loan charge-offs for 2015 amounted to $ 1.3 million , which increased from $ 684,000 in 2014 . noninterest income . for 2016 , non-interest income totaled $ 19.6 million , an increase of $ 5.1 million or 35.6 % from 2015 . the increase was primarily related to an increase of $ 1.6 million on gain on sale of loans from $ 8.0 million in 2015 to $ 9.5 million in 2016. during 2016 , we sold $ 110 million of sba loans at an overall premium of 8.3 % and $ 2.6 million in commercial and industrial loans at an overall premium of 17.4 % , compared to 2015 in which we sold $ 79.3 million of sba loans at an overall premium of 9 % and $ 69.1 million in commercial real estate and multifamily loans at an overall premium of 1 % . gain on sale of investments increased $ 1.5 million as the bank sold a limited number of securities being sold during 2015. deposit related fees and loan servicing fees grew by a combined $ 1.5 million in 2015 , as growth in core transaction deposit accounts from both organic growth and the acquisition of scaf contributed to the increase in deposit fees from $ 2.5 million in 2015 to $ 3.4 million in 2016 and loan servicing fees from $ 371,000 in 2015 to $ 1.0 million in 2016. finally , other income increased 40 index $ 735,000 as the bank saw higher recoveries of $ 1.7 million from pre-acquisition charge-offs , partially offset by a $ 641,000 decrease in other loans fees and asset write-offs of $ 366,000. for 2015 , non-interest income totaled $ 14.4 million , an increase of $ 1.1 million or 8.0 % from 2014 . the increase was primarily related to an increase of $ 1.7 million on gain on sale of loans from $ 6.3 million in 2014 to $ 8.0 million . during 2015 , we sold $ 79.3 million of sba loans at an overall premium of 9 % and $ 69.1 million in commercial real estate and multifamily loans at an overall premium of 1 % , compared to 2014 in which we sold $ 54.1 million in sba loans at an overall premium of 10 % and $ 37.5 million in commercial real estate and multifamily loans at an overall premium of 2.5 % . the increase from gain-on-sale of loans was offset by a $ 1.3 million decline in gain on sale of investments , as the bank sold a limited number of securities during 2015. finally , deposit related fees grew by $ 723,000 or 40.0 % in 2015 , as growth in core transaction deposit accounts from both the acquisition of idpk and organic growth contributed to the increase in deposit fees from $ 1.8 million in 2014 to $ 2.5 million in 2015. replace_table_token_5_th noninterest expense . for 2016 , noninterest expense totaled $ 98.6 million , an increase of $ 25.0 million or 33.9 % from 2015 . the increase in noninterest expense was primarily due to higher compensation and benefits of $ 15.7 million , primarily related to an increase in staff from our acquisition of scaf and internal growth in staff to support our growth . occupancy expense grew by $ 2.0 million in 2016 , mostly due to the acquisition of scaf and the additional branches retained from the merger .
| the 23 bps expansion in net interest margin was a result of the increase in the yield on earning assets coupled with a 6 bps decrease in the cost of interest bearing liabilities , as well as the $ 440 million increase in non-interest bearing deposits . the increase in interest-earning assets was primarily related to organic loan growth , the acquisition of scaf in early 2016 , and the purchase of $ 265 million of multifamily loans in 2016. for 2015 , net interest income totaled $ 106 million , an increase of $ 32.7 million or 44.4 % over 2014 . the increase reflected an increase in average interest-earning assets of $ 752 million and an increase in the average yield of 8 bps , partially offset by an increase in interest-bearing liabilities of $ 474 million and 8 bps increase in the average cost of interest-bearing liabilities . the net interest margin expanded by 4 bps as a result of the yield on earning assets increasing by more than the increase in the cost of interest bearing liabilities , as well as the $ 231 million increase in non-interest bearing deposits . the increase in interest-earning assets was primarily related to our organic loan growth and our acquisition of independence bank in early 2015. the increase in interest-bearing liabilities was also due primarily to our acquisition of independence bank , as well as the impact of having $ 60 million of subordinated debt issued in august of 2014 at a fixed rate of 5.75 % outstanding for a full year . 38 index the following table presents for the periods indicated the average dollar amounts from selected balance sheet categories calculated from daily average balances and the total dollar amount , including adjustments to yields and costs , of : interest income earned from average interest-earning assets and the resultant yields ; and interest expense incurred from average interest-bearing liabilities and resultant costs , expressed as rates . the table also sets forth our net interest income , net
| 11,078 |
ethanol group our ethanol business holds investments in four ethanol production facilities organized as separate limited liability companies , three of which are accounted for under the equity method ( the `` unconsolidated ethanol llcs '' ) and one that is consolidated ( `` the andersons denison ethanol llc '' or `` tade '' ) . the company holds an 85 % interest in tade . the business purchases and sells ethanol , offers facility operations , risk management , and ethanol , corn oil and distillers dried grains ( “ ddg ” ) marketing to the ethanol plants in which it invests and operates . ethanol volumes shipped for the year ended december 31 , 2013 and 2012 were as follows : replace_table_token_8_th ( a ) the sales volumes are less than the total produced by the llcs , as a portion is sold directly to one of its other investors the ethanol llcs performed well in 2013 as a result of favorable margins due primarily to the significant decrease in corn costs caused by the large 2013 corn crop . looking ahead , production and required inputs have been contracted for january 2014 at positive margins but there is the potential for volatility in the market beyond then . another large corn planting in the spring should have positive benefits for our ethanol group . of course , this is dependent on numerous external factors , such as favorable weather during the growing season . plant nutrient group our plant nutrient group is a leading manufacturer , distributor and retailer of agricultural and related plant nutrients and pelleted lime and gypsum products in the u.s. corn belt , florida and puerto rico . the plant nutrient group provides warehousing , packaging and manufacturing services to basic manufacturers and other distributors . the business also manufactures and distributes a variety of industrial products throughout the u.s. and puerto rico including nitrogen reagents for air pollution control systems used in coal-fired power plants and water treatment products . the major nutrient products sold by the business principally contain nitrogen , phosphate , potassium and sulfur . storage capacity at our wholesale nutrient and farm center facilities was approximately 485,000 tons for dry nutrients and approximately 403,000 tons for liquid nutrients at december 31 , 2013. fertilizer tons shipped ( including sales and service tons ) for the years ended december 31 , 2013 and 2012 were 1.9 million tons and 2.1 million tons , respectively . while the fourth quarter was stronger than prior year in regards to volume , margins were weak due to the effects of world demand on nutrient prices . looking ahead , corn acres planted in 2014 are anticipated to be around 93 million acres , which should support good nutrient demand moving into the next crop cycle , although prices are uncertain at this time due to uncertainty of corn prices . we plan to monitor the market and take a conservative position going into the spring until we can get a better read on both the nutrient and grain markets . rail group our rail business buys , sells , leases , rebuilds and repairs various types of used railcars and rail equipment . the business also provides fleet management services to fleet owners . rail has a diversified fleet of car types ( boxcars , gondolas , covered and open top hoppers , tank cars and pressure differential cars ) and locomotives . 22 railcars and locomotives under management ( owned , leased or managed for financial institutions in non-recourse arrangements ) at december 31 , 2013 were 22,700 compared to 23,278 at december 31 , 2012. the average utilization rate ( railcars and locomotives under management that are in lease service , exclusive of railcars managed for third party investors ) is 86.1 % for the year ended december 31 , 2013 which is nearly 2 % higher than prior year . for the year ended december 31 , 2013 , rail had gains on sales of railcars and related leases in the amount of $ 19.4 million compared to $ 23.7 million of gains on sales of railcars and related leases for the year ended december 31 , 2012. in early 2013 , our rail group completed construction of a 27,300 square-foot railcar blast and paint facility in maumee , ohio . the facility is now class c certified which will generate additional repair business . in addition , on august 5 , 2013 we completed the purchase of substantially all of the assets of mile rail , llc and a sister entity for a purchase price of $ 7.8 million . the operations consist of a railcar repair and cleaning facility headquartered in kansas city , missouri , with 2 satellite locations in nebraska and indiana . the acquired assets give our rail group additional connections to several u.s. class i railroads , from which we anticipate future growth and capacity to generate gross profit . a focus of the group in 2014 will be to strategically grow the rail fleet and continue to look for opportunities to open new repair facilities . we also anticipate future business related to mandated modifications in the tank car industry . turf & specialty group our turf & specialty group is one of a very limited number of processors of corncob-based products in the united states . corncob-based products are manufactured for a variety of uses including laboratory animal bedding , private-label cat litter , as well as absorbents , blast cleaners , carriers and polishers . corncob-based products are sold throughout the year . turf & specialty also produces granular fertilizer products for the professional lawn care and golf course markets . it also sells consumer fertilizer and weed and turf pest control products for “ do-it-yourself ” application to mass merchandisers , small independent retailers and other lawn fertilizer manufacturers and performs contract manufacturing of fertilizer and weed and turf pest control products . story_separator_special_tag these products are distributed throughout the united states and canada and into europe and asia . the turf products industry is highly seasonal , with the majority of sales occurring from early spring to early summer . on december 9 , 2013 , we completed the purchase of the assets of cycle group , inc. for $ 4.2 million . the operation consists of one granulated products facility in mocksville , north carolina . during the year , the group also invested a significant amount of capital and made improvements at the corncob processing facilities in central illinois that were acquired from mt . pulaski products in the fourth quarter of 2012. the improvements are anticipated to increase throughput and create other efficiencies for the cob business . in addition , pricing and continuous improvement decisions related to cost savings benefited the group in 2013. our strategy is to grow the lawn and cob businesses by adding new products and technology , as well as looking for opportunities to acquire new businesses . retail business our retail business includes large retail stores operated as “ the andersons ” and a specialty food market operated as “ the andersons market ” . it also operates a sales and service facility for outdoor power equipment . the retail concept is more for your home ® and the conventional retail stores focus on providing significant product breadth with offerings in home improvement and other mass merchandise categories , as well as specialty foods , wine and indoor and outdoor garden centers . the retail business is highly competitive . our stores compete with a variety of retail merchandisers , including home centers , department and hardware stores , as well as local and national grocers . the retail group continues to work on new departments and products to maximize the profitability . in the first quarter of 2013 , the group closed its woodville , ohio retail store and in the fourth quarter incurred impairment charges related to certain assets in two stores ( see operating results discussion for more information ) . other our “ other ” business segment represents corporate functions that provide support and services to the operating segments . the results contained within this segment include expenses and benefits not allocated back to the operating segments , including our erp project . in 2011 , the ohio tax credit authority approved job retention tax credits and job creation tax credits for the company in relation to in process capital projects . to earn these credits , the company has committed to invest a minimum amount in new 23 machinery and equipment and property renovations/improvements in the city of maumee and surrounding areas . in addition to the capital investment , the company will retain 636 and create a minimum of 20 full-time equivalent positions . the projected benefit is estimated to be approximately $ 10 million over 8 to 10 years . story_separator_special_tag car sales increased $ 1 million , repairs and fabrication increased $ 3.9 million and leasing revenues increased $ 3.5 million . the increase in leasing revenues is attributable to higher lease rates , as well as having more cars in service , while the remaining increases were driven by higher volume of activity . cost of sales and merchandising revenues increased $ 6.2 million as a result of higher volume of activity . rail gross profit increased $ 2.1 million compared to prior year primarily due to higher gross profit in the leasing business which is attributed to favorable lease rates . operating expenses increased by $ 2.0 million from prior year mainly due to higher labor and benefits related to growth and higher performance incentives . interest expense was higher due to a greater amount of car financings and debt related to the new blast and paint facility opened in 2013. other income was slightly higher in 2013 due to income from the settlement of two nonperforming railcar leases . turf & specialty group replace_table_token_14_th operating results for the turf & specialty group increased $ 2.5 million compared to its 2012 results . sales increased $ 9.5 million and is due to an increase in sales within the cob business year over year . this increase is primarily attributable to the acquisition of mt . pulaski in the fourth quarter of 2012 which more than doubled the group 's cob supply . for the total group , volume increased over 15 % and was partially offset by a decrease in the average price per ton sold . cost of sales and merchandising revenues increased $ 7.2 million due to volume as the average cost per ton was lower year over year . gross profit increased $ 2.3 million due to favorable product mix . operating expenses decreased as a result of continuous improvement efforts that led to greater process efficiencies . interest expense and other income were fairly stable year over year . 26 retail group replace_table_token_15_th the operating loss for the retail group was $ 7.5 million compared to its 2012 loss of $ 4.0 million . sales decreased $ 10.3 million from 2012 due to a decline in both the average sale per customer and customer count , as well as closure of the woodville store in the first quarter of 2013. cost of sales decreased $ 5.5 million due to lower sales volume . as a result of the lower store traffic , gross profit decreased $ 4.8 million . operating expenses for the group decreased $ 1.2 million and is primarily due to lower labor and benefits , partly attributable to the closing of the woodville store . the group also incurred asset impairment charges in the amount of $ 3.9 million in the fourth quarter of 2013. there were no significant changes in interest expense or other income .
| sales and merchandising and service fee revenues increased $ 89 million due to an increase in both volume of ethanol gallons shipped ( including a full year of the denison , iowa plant acquired in may 2012 ) as well as the higher average price per gallon of ethanol sold . ethanol co-product ( corn oil and ddg ) sales also contributed to the significant increase in revenues over the prior year . the increase in cost of sales primarily relates to the increase in volume as corn costs were down considerably during 2013. the increase in gross profit is mostly attributable to improvement in denison 's margins from declining corn costs and higher ethanol demand and price . operating expenses increased $ 2.1 million primarily due to higher labor related expenses , including performance incentives and a full year of denison plant expenses . equity in earnings of affiliates increased $ 48.2 million from prior year and represents income from investments in three unconsolidated ethanol llcs . throughout the year , the llcs performance improved due to higher ethanol margins resulting from the decreased corn costs and higher demand for ethanol . income attributable to noncontrolling interests was also impacted in a similar manner . there were no significant changes in interest expense or other income . plant nutrient group replace_table_token_12_th operating results for the plant nutrient group were $ 12.0 million lower than 2012 results . sales were $ 88.4 million lower due to a decrease in both the average price per ton sold and volume for the year in the wholesale nutrient business . cost of sales and merchandising revenues decreased $ 76.8 million due primarily to lower product cost . gross profit decreased $ 11.6 million as a result of lower margin per ton sold as well as the decline in volume year over year . operating expenses were slightly lower in 2013 primarily due to lower performance incentive expense . other income
| 11,079 |
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